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EVANS & SUTHERLAND COMPUTER CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 0-8771

EVANS & SUTHERLAND
COMPUTER CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

        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 ý    No o

        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. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        The aggregate market value of the voting and non-voting Common Stock held by non-affiliates of the registrant as of June 27, 2003, the last business day of the registrant's most recently completed second fiscal quarter was approximately $27,165,816 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 February 27, 2004 was 10,486,637.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders to be held on May 18, 2004, are incorporated by reference into Part III hereof.

EVANS & SUTHERLAND COMPUTER CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003

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PART I

ITEM 1. BUSINESS

        The financial data in this Annual Report on Form 10-K for the first three quarters of 2003 has been restated from amounts previously reported. A discussion of the restatement in relation to the affected quarters of 2003 is provided in Note 3 of the Notes to Consolidated Financial Statements. An overview of the restatement is also provided in Management's Discussion and Analysis of Financial Condition and Results of Operations.

General

        Evans & Sutherland Computer Corporation ("Evans & Sutherland", "E&S®", "we", "our", or "the Company") produces high-quality visual systems used to display computer-generated images of the real world rapidly and accurately. With a 35-year history in computer graphics, E&S is widely regarded as both a pioneer and leader in providing the world's most realistic visual systems. We design, manufacture, market and support visual systems to provide simulation training for a wide range of military and commercial applications. We also provide visual systems for planetariums, science centers, and entertainment venues. Our products use a wide range of hardware, from desktop personal computers (PCs) to what we believe are the most advanced image generation and display components in the world.

        E&S was incorporated in the state of Utah on May 10, 1968. Our principal offices are located at 600 Komas Drive, Salt Lake City, Utah 84108, and our telephone number is (801) 588-1000. Through a link on our Web site, www.es.com, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. We make our Web site content available for informational purposes only. The information provided on our Web site is not incorporated by reference into this Form 10-K. The above reports and other information are available, free of charge, at www.sec.gov. Alternatively, the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

        For more than 30 years, we have had a significant share of the overall market for visual systems. We believe our market share has ranged from 20% to 50%. The market for simulation visual systems varies from year to year, but we have estimated that it is generally in the range of $300 million to $500 million annually. Many visual system providers serve this market, but our most significant competitors are companies that build the entire simulator. These companies sometimes choose to follow a strategy of vertical integration by providing their own visual systems. Other competitors include a number of smaller companies that generally offer components rather than complete visual systems. In addition, large contractors and system integrators sometimes build visual systems from components available in the open market.

        E&S visual systems are extremely important components of a complete simulator because the visual system is the most critical element in creating a realistic immersive environment—the visual system is, by definition, "what you see." Most E&S visual systems are used as part of vehicle simulators, which are models of actual vehicles, such as aircraft cockpits. These simulators are used for training operators as well as for practicing tactics or strategy, which may require the coordinated operation of multiple simulators. Simulators are used in both commercial and military settings and include all types of vehicles operating in space, air, ground, sea or undersea locations. The simulator itself may be built by one of many companies, often the same company that built the actual vehicle.

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        We also produce digital planetarium systems, which are based on the same technology as our products for simulation. These systems are essentially simulators of the larger universe, and can create simulated trips through other worlds, or through parts of our own world not accessible to real vehicles.

        Visual systems are made of three major components: a visual computer, a display and a visual database. E&S designs and manufactures all of these components at varying prices and performance levels.

        The computer portion of an E&S visual system is made of hardware and software, which is either designed and manufactured by us or is based on commercially available components. The hardware may be as simple as a standard PC with a commercial graphics card, or as complex as a connected system of multiple racks of sophisticated electronics. The software takes advantage of commercially available programs (such as Microsoft Windows) where possible, augmenting them with E&S-designed software to achieve the required image quality, functionality, and system performance.

        The displays offered by E&S also cover a broad range, from standard computer monitors, to domes (as large as 24 meters in diameter), to cockpit-type displays with complex mirrors and other optics. The image may be projected by different types of equipment, including multiple projector types.

        Visual databases are an important and growing part of our business. The visual database is the "content" that the system will display. Most customers have a desire for more content (visual databases) to enhance the richness and variety of their training and simulations. In addition, visual databases are finding new applications in mission planning, damage assessment, intelligence and other highly-time-sensitive defense and homeland security initiatives. We have developed a sophisticated set of tools to make the development of databases more efficient and less costly, whether built by E&S or by others. E&S has an extensive library of databases, including airports, vehicles, large geographic areas, oceans, and seas with accurate wave dynamics, and special effects.

        All E&S products are supported by an extensive R&D program as well as innovative, customer-tailored service and support. These programs, as well as specific E&S products, are discussed in the Description of Products section of this report.

Description of Products

        E&S offers a full range of visual system products for simulation, strategic visualization and digital theaters. These products are available either as complete systems or subsystems and can include system integration and installation service and support.

Image Generators

        Image generators (IGs) create computer-generated real-time images and send these images to display devices, such as projectors or computer monitors. Primary IG offerings span the full range of price and performance, and simulation of all types of sensors is available, often configured as a separate IG, for nearly all E&S IG products. IGs are used for military and commercial training simulation, strategic visualization and digital theater applications.

        Our high-end products include, EP™-1000CT, EPX™-5000, Harmony® 2 and ESIG® products. EP-1000CT and EPX-5000 are based on E&S's Environment Processor™ (EP) software. EP offers a revolutionary approach to the way visual databases are created, updated, and stored, and it is equipped with a whole-earth database model as part of the standard offering. Unlike traditional systems that use separate databases of specific, contained areas, this whole-earth model provides customers with a trainable database of the entire world, an excellent advantage for long-range flight training. EP-1000CT, introduced in 2002, is designed for commercial airline training and other simulation applications that require turnkey visual systems. EP-1000CT was certified Level D by the Joint Aviation Authority ("JAA") in 2003. EPX-5000, introduced in late 2003, is the top of the line of our EPX (Environment

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Processor Technology with Military Extensions) products. EPX-5000 has all the features of the EP-1000CT along with additional functionality required for military training, such as sensor simulation. EPX-5000 shares a common hardware platform with the other E&S high-end image generators, the Pixel Engine™-1. Harmony 2, another of our high-end offerings, operates on our Integrator software but uses the same hardware as the EPX-5000. Typical applications include fast jet and helicopter training.

        The ESIG image generator family has been sold worldwide in both the military and commercial markets for more than a decade. The ESIG product line was one of the most popular IGs in the history of the simulation industry, and continues to operate successfully in thousands of applications, often with E&S service and support. We still supply ESIGs to allow our customers to maintain compatibility with installed systems.

        Our mid-range products include EPX-500 and RenderBeast™. EPX-500, based on the same EPX technology as the EPX-5000, runs on our simFUSION value-added PC IG. EPX-500 is extremely scalable, allowing customers a variety of configurations and price points. RenderBeast, introduced in 2003, is aimed at the design visualization market. RenderBeast is made of a rack of simFUSION® image generators and application specific software that allows engineers and designers to create immersive visualizations of their designs.

        Our low-cost IGs include the simFUSION product family and the EPX-50. The simFUSION value-added PC IG family of products was introduced in 1999. The product's newest version, the simFUSION 6500, we believe offers the best simulation performance for its price. EPX-50 was designed for price-sensitive simulation applications and offers the features of EPX software running on a commercially available PC and a commercially available graphics accelerator board. A true image generator, EPX-50 provides customers with the most realistic scene fidelity, image quality, and performance available using consumer graphics boards.

        Our Digital Theater products include Digistar® 3, Digistar 3 SP, and Digistar II. Digistar 3 is designed for planetariums and domed theaters. It combines a complete color star projection and astronomy package with a fully interactive, real-time 3D computer graphics system (image generator) adding all-dome video playback and digital surround sound. Digistar 3 offers planetariums another unique advantage—it can interact in real time with large audiences. Digistar 3 SP uses the same hardware and software as Digistar 3 projected through a single DLP projector at lower resolution for domes 30 feet in diameter and smaller. Digistar II, a monochrome digital planetarium system, is still offered and supported.

Display Systems

        Display systems consist of projectors, display screens, computer monitors and specialized optics. We offer these display systems in a broad range of configurations, from onboard instrument displays to domes offering a 360-degree field of view, depending on the application. Our fully integrated systems include full dome mosaics, collimated displays, rear projection systems, and retrofits and upgrades. Our display system products include the ESCP® family of calligraphic projectors, the TargetView® family of target projectors, and the VistaView® head-tracked area-of-interest projector. In addition E&S offers supplemental display functions, such as head trackers, night vision goggles, distortion correction and edge blending.

        In 2003, we delivered the first-generation prototypes of our new laser based projector. This projector uses lasers and grating light valves to create images with unprecedented resolution, brightness, contrast and color. In 2004, we plan to build the next generation of prototypes as well as plan to begin delivery of production laser projectors. The first deliveries will go to the United States Air Force and to customers in the digital theater market, then to our other markets in 2005.

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Visual Databases, Tools, and Content

        We offer a full complement of database (often referred to as synthetic environments) products and services. In addition to development of new databases, we will update existing databases created by E&S or other companies. We offer a complete set of correlated databases in a variety of industry-standard formats. In addition, E&S has an extensive library of models and textures that includes the majority of the world's major airports and military airfields. We also provide database training and support. In addition, we have an extensive library of shows and show content for our digital theater market. These databases and shows constitute a significant competitive advantage for us.

        In 2003, we introduced our EP and EPX software technology (described below). An extremely important part of this software is the way the software handles the visual databases used to depict the real world. In the past, simulation systems (including those built by E&S) prepared the visual database by first collecting all the needed source data (such as imagery, elevation data, features such as roads and buildings, moving models, etc.), then compiling all this data into a single database to be used by the image generator. The compilation step was difficult and generally lengthy, and resulted in a form that was proprietary to the specific hardware for which it was designed. It was difficult to make any changes in this database, since a change would require that the entire process of compilation be started again.

        In contrast, with EP and EPX, we have launched a revolutionary new way to build and distribute the visual database. As before, the first step is still to collect source data. However, these source materials are not compiled into a single final form. Instead, the individual source elements are kept in their original form and stored in separate files. The EP or EPX software, running on IG hardware, then assembles the source components in real time to create the image just as it is being viewed. In using this method, a "database" is actually a correlated set of source data, not a single, pre-assembled entity.

        We believe this approach provides several significant benefits to our customers. First, it is very easy to make changes and update data, since new information can simply be inserted into the relevant files. The EP or EPX system will identify the new information and use it in the simulation as needed. Second, our customers receive the actual source data, and with appropriate licensing can use it with other systems that they may already have, since it is delivered in standard open formats.

        Finally, all EP and EPX systems are shipped with a whole-earth database already in place. Customers can begin using this database immediately. Later, they can add inserts with more details or with special qualities for any geography of special interest or training value. Each additional area of interest simply adds to the whole-earth background already in place with the system. Airports, military landing sites, mission-rehearsal zones and other items of interest can be added quite simply as inserts in this way.

Complete Training Solutions

        We develop complete custom training solutions, such as the Mission Command Trainer (MCT™) now in training for the United Kingdom's School of Army Aviation (Aviation Command and Tactics Trainer, ACTT). 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.

Customer Support Services

        Customer support services are offered to prime contractors, system integrators and military and commercial end-users. Our service and support product offerings include a customized support package, called Encore^SM, which provides complete maintenance, spares and round-the-clock technical support; SimTech™ Training, which provides training to customers' simulation technicians and engineers; and computer-based training.

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Description of Markets

        We operate as one business; providing visual simulation solutions to an international customer base. Our customer base can be categorized into four customer markets: military simulation, commercial simulation, digital theater and strategic visualization.

Military Simulation

        We are an industry leader in providing visual systems to government simulation customers, offering tailored solutions to meet a full range of training requirements. We offer a complete line of products, from low-cost desktop solutions to highly advanced visual systems, to the domestic and international military simulation market. In addition, we offer complete training solutions for tactical command and air traffic control, database development services, custom display systems, and long-term service and support.

        The military simulation market has continued to shrink as funds have been and continue to be diverted to immediate military requirements. As a result, we project this market to remain flat at least for the next year, and then expect to see growth in 2005.

        During 2003, we launched a new visual system product line for military simulation, EPX. EPX is Environment Processor (EP) Technology with Military Extensions. Already in training for commercial aviation applications, EP offers customers unprecedented value, flexibility and reliability. EPX is available in our high-end, mid-range and low cost IG products, EPX-5000, EPX-500 and EPX-50. The EP and EPX systems are the only software products in the simulation industry that can run across a full range of hardware platforms, using the same software and the same databases. This commonality offers customers the significant capability to exactly match hardware performance and cost to their specific application, and to mix different platforms in a total system while maintaining software, database and training commonality.

        EPX features rapid database creation and update, a whole-earth model with high-resolution insets, host compatibility with our ESIG system, revolutionary environment creation tools, legacy database compatibility, and a common sensor architecture. EPX is already gaining market acceptance worldwide.

        Early in 2004, we announced that the U.S. Army has chosen the EPX-50 system for the Close Combat Tactical Trainer (CCTT) visual upgrade program. CCTT is one of the largest simulation programs ever fielded, using the E&S ESIG image generator for nearly 450 simulators for ground warfare operations. The EPX-50 will offer the U.S. Army increased performance and lower cost, while assisting in their transformation objectives to use standardized hardware to reduce costs over time.

        We continue to market and sell other visual systems products in this market, including Harmony 2, simFUSION and ESIG, along with a variety of display systems solutions.

Commercial Simulation

        E&S supplies visual systems to the world's commercial airlines, airframe manufacturers, and independent training providers for pilot training. Developed to meet the exacting statutory requirements of the world's civil aviation authorities, we believe our commercial simulation products have an excellent reputation for quality, reliability and innovation.

        During 2003, commercial airlines reduced their purchases of new aircraft compared to prior years. This resulted in a reduction in the number of new simulators required for training. However, many airlines are upgrading their installed simulators as a cost-effective way to improve training at minimal additional cost. Due to our large share of the installed base of visual systems in this market and because our EP products provide an attractive upgrade path, we have benefited from significant upgrade activity. In 2003, we were successful in securing contracts for both new simulators and

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upgrades from customers that include Lufthansa, Air France, Southwest Airlines, Emirates, Federal Express, GECAT, Alteon and CHC. We project this market to remain flat with expected market recovery to occur sometime in 2005.

        EP-1000CT received its first JAA Level D certification in May of 2003, and an additional nine systems were certified before the year ended. In 2003, we received an order for an EP-1000CT visual system for a helicopter simulator. This will be the first application of EP-1000CT for this very demanding form of pilot training.

Digital Theater

        E&S uses state-of-the-art visual simulation technology to provide one of the world's most advanced digital theater systems for planetariums, science centers and themed entertainment venues. During 2003, the digital theater market grew and our products gained market share. We expect a rebounding worldwide economy and project funding increases to continue to drive the digital theater market growth into 2004. We believe that the Digistar 3 Laser now being introduced to this market also has the potential to broaden the market and increase our market share.

        Sales of Digistar 3 products in 2003 were strong, with Digistar 3 now sold to or installed in 25 locations around the world. Key wins for Digistar 3 included new installations at planetariums in Hamburg and Kiel, Germany and the Eugenides Foundation in Athens, Greece, which will be open for the 2004 Summer Olympics.

        E&S continues to produce and license show content for Digistar customers. E&S also introduced the Digistar 3 Laser™ to the science center and planetarium community late in 2003. This product was well received, and we expect to receive orders for the first Digistar 3 Laser systems early in 2004.

Strategic Visualization

        In 2002, we began leveraging our simulation technologies and capabilities to address the emerging market for defense, intelligence and homeland security visualization applications. Using our EP technology, we are developing strategic databases, which are special forms of visual databases built to allow visualization of a geographic area for mission planning, mission preview, damage assessment and other time-sensitive applications.

        In 2003, we received a 3-year contract from the Navy's Defense Modeling and Simulation Office to conceptualize, create, and test an architecture and process that will enable imagery and sensor data from disparate sources to be rapidly validated, correlated, distributed and displayed in a standard format. In addition, we provided this visualization technology to ABC News for its coverage of the war in Iraq.

Competitive Conditions

        The primary competitive factors for our visual simulation products in the military, commercial and strategic visualization markets are performance, price, service, and product availability. Many of our competitors in the military and commercial simulation markets, not only provide visual systems, they also build entire simulators and may sometimes choose to follow a strategy of vertical integration by providing their own visual system. Such competitors include Boeing, CAE and Lockheed Martin. Other prime contractors that offer competing visual systems are Flight Safety International and Thales Training and Simulation. Due to these competitive forces, we constantly strive to improve our products in order to offer the best performance possible at a competitive price. We believe our range of products at different price points and performance points, our research and development investments and our ability to design and manufacture value-added parts when not available as commercial parts enable us to compete effectively in this environment and will continue to do so in the foreseeable

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future. In the military simulation market, we compete primarily with Lockheed Martin Training Systems, CAE and Quantum 3D. In the low-cost, PC-based market, our simFUSION product competes against companies that focus on PC simulation using graphics accelerator cards. In the commercial simulation market we compete primarily with CAE. In the strategic visualization market we compete primarily with General Dynamics, BAE and Northrop Grumman.

        The primary competitive factors in the digital theater market 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 Konica-Minolta Planetarium Co. Ltd., GOTO Optical Mfg. Co., Carl Zeiss Inc., Spitz, Inc. and Sky-Skan, Inc.

Backlog

        On December 31, 2003, our backlog was $65 million compared with $60 million on December 31, 2002. The 2003 ending backlog contains $9.8 million of government firm, unfunded orders. All government orders included in the 2002 year ending backlog were firm and funded orders. We anticipate that approximately two-thirds of the 2003 backlog will be converted to sales in 2004.

Significant Customers

        Worldwide customers using E&S products include U.S. and international armed forces, aerospace companies, most major airlines, laboratories, museums, planetariums, and science centers. We measure and identify our significant customers based on direct sales. We no longer measure significant customers based on indirect sales through subcontractors or prime contractors. While we no longer measure indirect sales, the U.S. government and the United Kingdom Ministry of Defence have been considered significant customers based on indirect sales in prior years.

        In 2003, direct sales to the U.S. government totaled $15.2 million or 18% of total sales, sales to Thales Training & Simulation Ltd. totaled $7.2 million or 9% of total sales, and sales to The Boeing Company totaled $3.3 million or 4% of total sales.

        In 2002, direct sales to the U.S. government totaled $35.4 million or 29% of total sales, sales to Thales Training & Simulation Ltd. totaled $19.8 million or 16% of total sales, sales to The Boeing Company totaled $17.1 million or 14% of total sales, and sales to Lockheed Martin Corporation totaled $2.9 million or 2% of sales.

        In 2001, sales to the U.S. government totaled $35.1 million or 24% of total sales, sales to Thales Training & Simulation Ltd. totaled $23.9 million or 16% of total sales, sales to The Boeing Company totaled $15.1 million or 10% of total sales, and sales to Lockheed Martin Corporation totaled $1.8 million or 1% of sales.

Seasonality

        We believe there is no inherent seasonal pattern to our business. Sales volume fluctuates quarter-to-quarter due to relatively large and nonrecurring individual sales and customer driven shipping dates.

Intellectual Property

        We own a number of patents and trademarks and we are a licensee under several others. Our portfolio of patents and trademarks is, as a whole, material to our business. However, no one piece of intellectual property is critical to our business, thus no individual piece of our intellectual property is discussed on its own. In the U.S. and internationally, we hold active patents that cover many aspects of our visualization technology. Several patent applications are presently pending in the U.S., Japan and several European countries, and other patent applications are in preparation. We actively pursue

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patents on our new technology and we intend to vigorously protect our patent rights. We routinely copyright software, documentation and chip masks designed by us and institute copyright registration for such software, documentation and masks when appropriate.

Research & Development

        We consider the timely development and introduction of new products to be essential to maintain a competitive position and to capitalize on market opportunities. Our research and development expenses were $21.7 million, $26.0 million and $32.8 million, in 2003, 2002 and 2001, respectively. As a percentage of sales, research and development expenses were 26%, 21% and 23%, in 2003, 2002 and 2001, respectively. We continue to fund essentially all research and development efforts internally. We anticipate that high levels of research and development will be needed to continue to ensure that we maintain our technical excellence, leadership and market competitiveness.

        As planned, E&S completed the next-generation civil airline product, EP-1000CT, enhanced the simFUSION PC image generator product line, and completed the development of an improved in-line calligraphic projector in 2003. We also leveraged our EP technology for military applications, resulting in the EPX product line. This development included the development of our PC image generator products EPX-50 and EPX-500, which are based on the EPX software architecture. Also, the associated toolset to complement these products, Environment Creation Tool (ECT™), was initiated in 2003. We anticipate completion of these products and toolset in 2004.

        Another focus for our R&D over the past five years has been the development of what we believe is a revolutionary new type of projector. This projector uses lasers and grating light valves to create images with unprecedented resolution, brightness, contrast and color. We developed several prototypes of the laser projector in 2003, including deliveries to the U.S. Air Force. The prototypes used first-generation components to provide proof-of-concept and allowed us to gather data on the applications and reliability of the grating light valves, the lasers, and the electronic components. In 2004, we anticipate we will complete the second generation of the laser projector, and plan to begin delivery of production-ready laser projectors. In addition, in 2004 we anticipate we will develop additional display applications for the laser projector, including planetariums and wide displays used in commercial airline and military simulation applications.

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 either stock adequate inventory to cover the future product demands, 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.

International Sales

        International sales are calculated based on the location of the purchasing customer and were $45.2 million, $48.4 million, and $49.5 million in 2003, 2002 and 2001, respectively. International sales represented 53%, 39% and 34% of total sales in 2003, 2002 and 2001, respectively. We believe that any inherent risk that may exist in our foreign operations is not material. For additional information on our international sales and long-lived assets by location, see Note 21 of Notes to Consolidated Financial Statements included in Part II of this annual report.

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Employees

        As of February 27, 2004, Evans & Sutherland and its subsidiaries employed a total of 364 persons compared to 500 employees as of February 28, 2003. 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.

Strategic Relationships

        In the normal course of business E&S develops and maintains various types of relationships with key customers and technology partners. These relationships include joint technology and product development agreements, research and development agreements, joint marketing agreements, teaming and joint venture agreements, value-added reseller agreements and original equipment manufacturer agreements. These agreements are of necessity somewhat dynamic in nature to enable us to rapidly address changes in market and customer needs and leverage key trends in related technology areas. It is anticipated that this philosophy will continue in 2004, and agreements will be continued or consummated as necessary to maintain our industry leading position.

Acquisitions and Dispositions

        Pursuant to our most recent quarterly report filed on November 7, 2003, we announced our execution of an agreement to sell one of our buildings for $8 million. The agreement required that we close on the sale no later than December 29, 2003; however, pursuant to the terms of the agreement, the potential buyer elected to terminate the agreement on December 2, 2003, and we did not sell the building. We continue to market the property to prospective buyers.

Business Subject to Government Contract Renegotiation

        A significant portion of the visual simulation 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 lack of performance. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed; work performed, but not completed; allowable termination or cancellation costs; and a negotiated profit for work performed, but not completed. Depending on the contract, if such an event was to occur, it could materially affect our sales, profits, and cash flow. Historically, our experience indicates that termination for convenience is a rare occurrence.

        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 or restructuring if appropriations for subsequent performance periods become unavailable or are reduced from planned levels. 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, a contract may be partially funded, and Congress determines the annual appropriations and authorizations for subsequent fiscal-years in a multi-year contract.

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Restructuring

        In the first quarter of 2003, we restructured to reduce our operating costs in line with anticipated sales. As part of this restructuring, we recorded a charge of $1.3 million related to a reduction in force of approximately 50 full-time equivalent employees. In the third quarter of 2003, we restructured to reduce our operating costs in order to operate profitably going forward based on projected sales and expenses. As part of this restructuring, we recorded a total charge of $2.1 million, related primarily to a reduction in force of approximately 70 full-time equivalent employees. We estimate that these restructurings will reduce expenses approximately $7.5 million per year going forward

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. See Item 7 Management's Discussion and Analysis of Financial Condition and Results from Operations, included in Part II of this annual report, for a list of some of the forward-looking statements included, in this Form 10-K, and factors that may affect these forward-looking statements.

ITEM 2. PROPERTIES

        Evans & Sutherland's principal executive, engineering, manufacturing and operations facilities are located in the University of Utah Research Park, in Salt Lake City, Utah, where we own five buildings totaling approximately 350,000 square feet. We occupy four buildings and the remaining building is vacant. We plan to sell the building 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. All of the buildings are on land leases that expire in 2030, with a ten-year renewal option. All of our interests in the U of U Property are subject to a lien held by Wells Fargo Foothill to secure repayment of the borrowing facility as set forth in Note 12 of the Notes to Consolidated Financial Statements in Part II of this Form 10-K. We hold leases, including our subsidiaries, 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. We believe that these properties are suitable for our immediate needs and we do not currently plan to expand our facilities or relocate.

ITEM 3. LEGAL PROCEEDINGS

        In May 2003, a claim was made against the Company by RealVision, Inc. relative to matters arising from the sale of a business unit to RealVision, Inc. in 2001. The parties entered mediation in the fourth quarter of 2003, and continued discussions into 2004. In March 2004, an agreement was reached under which RealVision will receive a settlement in the amount of $2.4 million of which E&S will pay approximately $0.9 million to resolve this claim, with the remainder of the settlement amount being paid by E&S's insurance carrier. The Company has accrued its portion of the settlement.

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

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 2003.

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EXECUTIVE OFFICERS OF THE REGISTRANT

        The following sets forth certain information regarding the executive officers of E&S as of February 27, 2004:

        James R. Oyler was appointed President and Chief Executive Officer of Evans & Sutherland and a member of the Board of Directors in November 1994. Before joining Evans & Sutherland, Mr. Oyler served as a Senior Vice President for Harris Corporation. He has nine years of service with E&S.

        E. Thomas Atchison was appointed Chief Financial Officer and Corporate Secretary in July 2003. He joined Evans & Sutherland in 1998 as a Director, when E&S acquired Silicon Reality, Inc., and was appointed Vice President of Manufacturing, Service, and Support in October 2001. At Silicon Reality, Mr. Atchison was Vice President, Operations, Chief Operating Officer, and Chief Financial Officer from October 1997 to June 1998. He has five years of service with E&S.

        Bob Morishita is Vice President of Human Resources. He joined Evans & Sutherland as Compensation Manager in 1982 and was appointed Human Resources Director in 1997 and Human Resources Vice President in 2000. He has 22 years of service with E&S.

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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 bids per share of our common stock for the fiscal quarters indicated, as reported by The Nasdaq Stock Market. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Approximate Number of Equity Security Holders

        On February 27, 2004, there were 613 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, as previous retained earnings were used for the operation and expansion of our business. Currently, we have an accumulated deficit. For the foreseeable future, we intend to follow our policy of retaining any future earnings to finance the development and growth of our business. The payment of dividends is restricted under the terms of our credit facilities. See Note 12 of the Notes to Consolidated Financial Statements in Part II of this Form 10-K.

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Securities Authorized For Issuance Under Equity Compensation Plans

As of December 31, 2003:

        Stock Purchase Plan—We have an employee stock purchase plan whereby qualified employees are allowed to have up to 10% of their gross pay withheld each pay period to purchase our common stock at 85% of the market value of the stock at the time of the sale. During the period of December 24, 2002, through February 18, 2003, the Employee Stock purchase Plan was inadvertently oversubscribed in the amount of 10,373 shares. On February 27, 2003, our Board of Directors increased the number of shares available under this plan from 500,000 to 800,000 shares, and ratified all prior issuances of shares under the plan. We filed an S-8 Registration Statement registering these shares on April 25, 2003. As of December 31, 2003, 265,751 shares of our Common Stock remain available for future purchase under the Stock Purchase Plan. Our shareholders approved the Stock Purchase Plan on May 24, 2001. Information regarding the employee Stock Purchase Plan is not included in the above table.

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ITEM 6. SELECTED FINANCIAL DATA

        The following selected financial data for the five fiscal years ended December 31 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."

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Quarterly Financial Data (Unaudited)

        The financial data in this Annual Report on Form 10-K for the first three quarters of 2003 has been restated from amounts previously reported on Forms 10-Q. A discussion of the restatement in relation to the affected quarters of 2003 is provided in Note 3 of the Notes to Consolidated Financial Statements. An overview of the restatement is provided in the introduction to Management's Discussion and Analysis of Financial Condition and Results of Operations.

(1)

The effects of the restatement, depicted as increases (decreases) to the amounts previously reported, for each quarter restated are detailed below:

(2)

Net income (loss) per share is computed independently for each of the quarters presented and therefore may not sum to the total for the year.

(3)

In the fourth quarter of 2003, we reversed $0.5 million in restructure charges that were originally charged as a result of our restructure in the third quarter of 2003. This charge was related to a liability for a license agreement for a certain software tool that we determined to be of no future value to us as a result of the restructure. However, in the fourth quarter of 2003, we were able to negotiate out of the liability related to this software tool license.

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

        The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with our Consolidated Financial Statements and notes thereto, included herein under Item 8 of this Annual Report. Information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to differ materially from those contained in the forward-looking statements below. See "Forward Looking Statements" and "Factors That May Affect Future Results," below.

Executive Overview

Business

        Evans & Sutherland Computer Corporation ("Evans & Sutherland", "E&S", "we", "our", or "the Company") produces high-quality visual systems used to display images of the real world rapidly and accurately. E&S is widely regarded as both a pioneer and a leader in providing the world's most realistic visual systems. We design, manufacture, market and support visual systems for simulation with solutions that meet the training requirements for a wide range of military and commercial applications. We also provide this leading-edge visual system technology and experience to planetariums, science centers, and entertainment venues. We develop and deliver a complete line of image generators, displays, databases, services and support products that match technology to customer requirements. Our products and solutions range from the desktop PC to what we believe are the most advanced visual systems in the world.

2003 Highlights and 2004 Outlook

        2003 was an important year for E&S. We made substantial progress resolving many problems from prior years, and achieved initial success with new products and strategies. This combination enabled us to achieve profitable operations in the final quarter of the year and lay the foundation for a return to sustained profitability in the future.

        The problems from past years were in two general categories: large military programs with cost overruns, and declining sales for our products.

        The large military programs, which we refer to in this report as the "Big Six programs", involved the delivery of advanced visual systems in the US and Europe between 1997 and 2003. The total value was over $130 million, which made up a substantial portion of our sales in those years. The programs were complex in many ways, both contractually and technically, and for various reasons we fell behind and incurred large excess costs and penalties, creating losses which we were not able to offset in other parts of the business. While these programs were extremely difficult for us and caused major financial stress, we nevertheless successfully completed and delivered all requirements, with the exception of a few remaining items which we expect to complete in early 2004.

        Declining sales for our products occurred both for external and internal reasons. The primary external reason was a drastic shrinkage in our markets following the events of September 11, 2001. Commercial airlines suffered severe financial disruptions and generally reduced purchases of equipment. In the United States military market, funds were diverted to operational requirements and purchases of simulation equipment fell sharply. Overall, our markets shrank to half their former size, a significant decline in any industry. Internally, we suffered from difficulties with our scheduling systems related to very complex programs and development.

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        Our response was to shrink the size of our company in accordance with the size of our markets and with the completion of the Big Six programs, and to install new management and systems. Overall, we reduced employment by about 60% from the peak in 2000, while revenue has fallen by about 50% from the same year. We reduced other recurring costs similarly. In addition, such a drastic reduction in the size of the company led us to reduce excess inventories procured for previously higher sales projections, as well as to recognize other restructuring charges.

        To address the problems that we encountered with the Big Six programs and related development, we installed sophisticated new hardware and software infrastructure to provide more accurate and timely management of information. These systems reached maturity in 2003 in our military market, and we have since had no further problems of the types encountered in earlier military programs such as the Big Six programs. We had scheduled the installation of these same systems in 2004 in our United Kingdom subsidiary, where we manage our commercial airline business. However, prior to their installation we encountered problems there, arising from the incorrect recognition of costs, revenue, and profit on percent-complete contracts. To correct the errors, we restated the first three quarters of 2003 condensed consolidated financial statements, which were previously unaudited. As a result, revenues were reduced and losses were increased for the quarters restated. Despite these actions, our transition to profitability in the fourth quarter was still achieved.

        Throughout this very difficult period, we steadfastly maintained investment in new products as the primary pathway to rebuilding the company once our markets stabilize. We believe that these efforts have now begun to bear fruit, and will do so increasingly during 2004 and the years beyond. In 2003, we introduced new products in both our simulation and digital theater businesses, and delivered first prototypes of our new laser projector. In 2004, we anticipate we will continue to introduce new products in all these markets, with special emphasis on the delivery of the first production-level model of the laser projector. All of the new products have enjoyed enthusiastic acceptance from our customers, enabling us to gain market share in a down market. We believe that our EP (Environment Processor) software is, in fact, revolutionary in its structure and impact on rapid development of databases for training and mission rehearsal, and we believe that the laser projector will revolutionize the market for large-format, high-accuracy displays. We have already received patents on the laser projector, with a large number of additional patents in process but not yet awarded.

        We expect the continued success of our new products to return the company to profitability for the full year 2004, although the pattern of our current order book suggests we are likely to operate moderately below break-even in the first half. Beyond this year, we anticipate a modest recovery in our markets in 2005. In addition, we believe the laser projector will start to ship in higher volumes in 2005 and beyond, contributing a substantial new revenue stream to the company and potentially opening entirely new markets.

        Because of the major cost reductions which we have already completed, and because of our major investment in systems and software for internal operations, our infrastructure is capable of meeting substantially higher sales requirements with very little increase in overhead or fixed costs. Therefore, we believe revenue growth will produce accelerating profit growth.

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Results of Operations

Results of Operations Summary

        Our 2003 sales significantly decreased primarily as a result of current conditions in the military market as military customers diverted funds to more pressing requirements. Deliveries to commercial customers also declined because of cutbacks by airline customers after the terrorist attacks in 2001. We did achieve sales growth in both our PC-based image generators and planetarium systems as a result of strong demand for our new simFUSION and Digistar 3 products.

        Our gross margins also declined in 2003. This was due primarily to a $14.6 million inventory impairment caused by customer order cancellations as the military realigned its spending priorities. However, offsetting the impairment charges was improvement due to essentially completing the six large Harmony programs ("Big Six programs") which have driven significant losses or extremely low margins in prior years. We also saw a decrease in our commercial gross margins, but expect improvements in 2004.

        To offset current market conditions, we executed two restructuring plans in 2003 and reduced our headcount by approximately 120 employees to reduce operating costs and create a cost structure in line with our anticipated sales. These actions were the primary cause of our $4.6 million reduction in our operating expenses from 2002 to 2003.

        We achieved strong reductions in our other expenses as we reduced interest expenses and debt levels in 2003, and reduced income tax expenses.

        More detailed explanations of our 2003 results are provided below.

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Consolidated Sales and Gross Profit

        Our total sales were $84.8 million in 2003, compared with $122.6 million in 2002 and $145.3 million in 2001. The 2003 sales decrease was driven mainly by a reduction in sales in the military market. Sales to the military market decreased in 2003 primarily because 2002 contained two large programs with significant final product deliveries. No new programs of this magnitude were awarded during 2003 to produce replacement sales. Also contributing to a decrease in sales to the military market was that approximately 85% of the remaining sales from our Big Six programs were recognized in 2002, while approximately 10% was recognized in 2003. Four of these Big Six programs are now 100% complete and the remaining two are 99.9% complete. Sales to the commercial market also declined in 2003. While orders increased significantly in 2003 from this market, a significant portion of those 2003 orders will routinely be delivered in 2004. In addition, we experienced a slight decrease in service and support sales. Sales of our PC-based image generator increased 70% in 2003 as a result of a strong demand for our new simFUSION products. Sales of our planetarium systems also increased significantly in 2003, 129%, as a result of strong demand for our new Digistar 3 product.

        From 2001 to 2002 sales to the military market decreased primarily as a result of a significant drop in orders over a period of these two years. Orders decreased approximately 35% in 2002 and 24% in 2001. Sales of our PC-based image generator declined approximately 50% in 2002 because the updated simFUSION product line was not launched until the third quarter of 2002 and customers were waiting for the release of this enhanced PC-based image generator. The new simFUSION product generated orders and sales in the third and fourth quarters of 2002. In 2002, sales of our planetarium systems declined 60% as customers delayed their orders of existing products in anticipation of our next generation products, which have now been launched and are producing growth in orders and sales. Sales were also impacted by a worldwide slowdown of demand for planetarium equipment in 2002. In 2001, we also sold our REALimage business and discontinued the operations of our RAPIDsite business; therefore, losing related sales in 2002. These 2002 decreases in sales were partially offset by a slight increase in service and support sales.

        Trends in the commercial and military markets remained unchanged in 2003, and are expected to continue through 2004. In the commercial market, commercial airlines have reduced purchases of new aircraft compared to prior years. This has resulted in a reduction in the number of new simulators they require for training. However, many commercial airlines are upgrading their currently installed simulators. As a result, we have benefited from this change because we had a large share of the installed base of visual systems and because our newly introduced EP-1000CT product provides an attractive upgrade path due to its compatibility with the installed base. Military markets have continued to shrink as funds are diverted to more pressing military requirements. We believe this diversion of funds will continue during 2004, but may result in some pent-up demand in 2005. In the military and commercial markets some large prime contractors, with whom we may subcontract with, are moving the high-margin database and software work in-house instead of subcontracting out to other companies in order to protect their revenues and margins. If this trend continues in future years it could negatively affect our revenues and profitability.

        Our gross margin percentages were 20.0% in 2003, compared with 35.2% in 2002 and 20.3% in 2001. Our 2003 gross margins primarily decreased as a result of a $14.6 million inventory impairment loss. During 2003 certain significant orders that we had expected to receive as of December 31, 2002, and into early 2003 were cancelled by customers. These cancellations were primarily the result of a re-alignment of military spending priorities during the first part of 2003. Accordingly, the future demand for our Harmony 1, ESIG, and TargetView products significantly decreased compared to our prior projections because of these cancellations. As a result, we recorded a $14.6 million impairment to specific inventory during 2003. Note 4 of the Notes to Condensed Consolidated Financial Statements of this annual report on Form 10-K contains a detailed description of this impairment.

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        From 2002 to 2003 gross margins percentages on sales to the military market decreased significantly as a result of a majority of the $14.6 million of inventory impairment consisting mainly of products sold in the military market. Offsetting this was a significant reduction in the negative impact that the Big Six programs had. Gross margin percentages on sales to commercial airline customers decreased significantly in 2003 as a result of pricing pressure that is currently in the commercial market and due to cost overruns. In addition, we experienced higher than normal warranty and support costs due to part failures and an increase in our warranty provision for anticipated future warranty costs. These decreases were slightly offset by a small increase in our service & support gross margin percentages.

        From 2001 to 2002 our gross margins increased significantly because the Big Six programs had less of a negative impact in 2002 than in 2001. These six programs heavily contributed either losses or small positive gross margins to 2001's overall gross profit. Additionally, gross margins on sales to commercial airline customers were up as 2002 included both positive adjustments for completing programs below cost estimates and improved overall cost performance. In 2002 gross margin improvements were offset by an inventory impairment loss of $1.4 million related to our restructuring plan decision to exit the simFUSION 4000 product line. The $1.4 million charge encompassed the total value for the simFUSION 4000 inventory on hand. We took this impairment write-off because we anticipated reduced demand for simFUSION 4000 products as a result of customer migration to the updated simFUSION products.

Operating Expenses, Other Items and Taxes

        Our operating expenses were $53.3 million in 2003, compared with $57.9 million in 2002 and $67.3 million in 2001. Selling, general, and administrative ("SG&A") expenses decreased $0.1 million during 2003. We achieved significant SG&A expense reductions primarily as a result of lower headcount and reductions in expenditures for travel, consultants, and facilities costs. However, SG&A expenses remained near the 2002 level because in 2002 we reversed previous bad debt accruals of $0.7 million as a result of improved collection experience. Additionally, our SG&A expenses in 2003 increased as a result of reductions in our rental income, which affect our rent expense. Research and development ("R&D") expenses decreased $4.2 million in 2003 as a result of lower headcount and reduced development expenditures for materials and software.

        SG&A expenses decreased $2.9 million during 2002 as a result of lower headcount, lower labor costs, reduced use of consultants, and lower overheads. Additionally, due to improved collection experience, previous bad debt accruals were reversed, which lowered 2002 SG&A expenses. SG&A also decreased $1.3 million in 2002 compared to 2001 as a result of our sale of the REALimage Solutions Group in 2001. R&D expenses decreased $2.9 million in 2002 as a result of lower headcount, decreased effort on our Integrator software product as it neared completion, and reduced overhead costs. R&D also decreased $4.0 million in 2002 compared to 2001 as a result of our sale of the REALimage Solutions Group in 2001. These R&D decreases were partly offset by one-time material purchases for the development of both our EP-1000 line of new visual systems for commercial simulation and our new PC-based products.

        During 2003, we recorded restructuring charges of $3.4 million related to reductions in force of approximately 120 full-time equivalent employees to reduce operating costs as well as to create a cost structure in line with anticipated sales. We estimate that this restructuring will reduce expenses by approximately $7.5 million per year going forward. We are continuing cost reduction actions in order to further reduce operating expenses to return to profitable performance.

        During 2002, we recorded a restructuring charge of $4.5 million related to a reduction in force of approximately 230 employees in an attempt to reduce the operating cost structure as well as to create a cost structure in line with future sales. We estimate that this restructuring reduced expenses by

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approximately $14 million per year going forward. During 2001, we recorded a restructuring charge of $2.8 million relating to a reduction in force of approximately 92 employees.

        During 2003, we recognized an impairment loss of $1.2 million on certain fixed assets specifically used to build, test, and demonstrate our Harmony 1 product. During 2002, we recognized an impairment loss of $0.3 million on software licenses that were used by employees who were terminated as a result of the 2002 reduction-in-force actions. During 2001, we recognized an impairment loss of $0.2 million related to the write-off of goodwill acquired in the E&S acquisition of AccelGraphics, Inc. and Silicon Reality, Inc. in 1998.

        During 2002, we recognized a gain on the amendment of our pension plan of $3.6 million. In order to match current market practices, the pension plan was amended to curtail accrual of future benefits. At the same time, the E&S 401(k) plan was amended to permit the Board of Directors to grant additional discretionary matching contributions based on profitability as well as other financial and operational considerations.

        During 2003, E&S recognized a gain on assets held for sale of $1.4 million on the sale of a building. During 2002, we recognized a gain on assets held for sale of $1.2 million on the sale of a building. During 2001, we recognized a gain on the sale of assets held for sale of $9.0 million due to the sale of certain 3D-graphics patents and a gain on the sale of a business unit of $0.8 million as a result of the sale of our REALimage Solutions Group.

        Our other income (expense) was $2.0 million in net expense in 2003, $2.5 million in net expense in 2002, and $2.6 million in net expense in 2001. Interest expense decreased to $1.4 million in 2003 from $1.8 million in 2002 and from $2.5 million in 2001 due to our continued reduction of debt. During 2003 we also benefited from an increase in interest income; however this was offset primarily by a $0.5 million write-down of a nonmarketable investment in Quantum Vision, Inc. Based on our analysis and meeting with Quantum Vision, Inc. in the first part of 2003, we determined this technology would not enhance our own technology or strategic direction.

        Our income tax benefits were $1.0 million in 2003 compared to $0.5 million in 2002 and $3.2 million in 2001. The income tax benefits in 2003 and 2001 were primarily due to the favorable resolution of certain potential tax liabilities of our foreign subsidiaries. The 2002 income tax benefit was the result of a change in the U.S. tax law, which allows us to use additional net operating losses to offset taxable income.

Liquidity and Capital Resources

Overview

        Summary information about our financial position as of December 31, 2003 and December 31, 2002, is presented in the following table (in thousands):

        During 2003 we continued to take actions to adjust our business in order to reach profitability, to complete certain Harmony 1 programs, and to market two of our Salt Lake City buildings for sale. In

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addition, to bring costs in line with projected sales, we completed two restructurings during the year. We moved closer to completion of the Big Six programs, with only two remaining for final completion at the end of 2003. This allowed us to collect $11.6 million related to these programs. We sold one of the two buildings we had for sale, with cash proceeds of $4.8 million. These events allowed us rely less on our credit facilities during 2003 than in 2002. Our average balance outstanding on the credit facilities was $3.1 million in 2003 compared to $12.3 million in 2002.

        In the first quarter of 2003 we were able to finalize the renewal of both of our lines of credit providing a maximum borrowing capability of $28.0 million. In addition, as discussed under Credit Facilities below, we were in breach of one of the covenants at the end of the first quarter of 2003 that resulted in a waiver and an amended agreement, changing our financial covenants and increasing our interest rates on borrowings. Both line of credit agreements expire in December 2004.

        For 2004, we foresee decreasing reliance on our credit facilities, helped by the expected sale of our last building that remains for sale, to provide cash to fund our operating activities. Over the past three years we have taken actions to reduce our operating cash requirements and our capital expenditure requirements. While these actions have significantly reduced our total operating cash requirements, our current operations may not yield positive cash flow. Circumstances that could materially affect liquidity in 2004 include, but are not limited to, the following: (i) our ability to successfully develop and produce new technologies and products, (ii) our ability to meet our forecasted sales levels during 2004, (iii) our ability to reduce costs and expenses, and (iv) our ability to favorably negotiate a sale agreement related to the one building that is for sale.

        For years beyond 2004, if our projections are broadly correct and our markets start to recover in 2005, we believe that cash from operations will be sufficient for our planned needs. If our projections are incorrect, then we may need to continue to supplement cash from operations with borrowing facilities. In addition, we have the option to use our remaining buildings that are currently not for sale to finance our operations by selling these buildings or using other options available at the time that decision is made. Also, we believe that long-term our investment in research and development and our current product strategy will allow our business to grow; thus future funding requirements are anticipated to be provided from our operating activities.

        We believe that existing cash, restricted cash, borrowings available under our various borrowing facilities, the sale of the one building currently held for sale, 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. At December 31, 2003, our total indebtedness was $25.7 million. Both of our lines of credit expire in December 2004. If we continue to need these credit facilities, we may attempt to replace them; 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 restricted cash, subject to various restrictions previously set forth below, are available for working capital needs, capital expenditures, strategic investments, mergers and acquisitions, stock repurchases and other potential cash needs as they may arise.

Impact of Big Six Programs

        We have six Harmony 1 programs that have had a negative impact on our overall financial condition in prior years. Our work is essentially complete on these programs and we are awaiting final acceptance by end users in two of these programs in order to invoice our last remaining milestones. Four of the Big Six programs are fully invoiced and collected.

        At the end of 2002, costs and estimated earnings in excess of billings on uncompleted contracts relating to the Big Six programs were $8.1 million. Our collections in 2003 were $11.6 million. The Big Six programs balance of cost and estimated earnings in excess of billings on uncompleted contracts at

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the end of 2003 was $3.3 million. We expect to convert this amount to invoicing and collections in 2004.

Cash Flow

        In 2003 and 2002 our overall liquidity improved as we were able to reduce the magnitude of our reliance on our credit facilities. As a result, in 2003 we were able to maintain much lower borrowing balances compared to prior years, and in 2002 we effectively reduced our borrowings on our lines of credit $12.8 million.

        We were able to accomplish this in three ways. First, the Big Six programs were a significant drain on our cash flow during 2001. In 2002, we made significant progress and neared completion on most of these programs and were able to convert a significant portion of the related costs and estimated earnings in excess of billings on uncompleted contracts into invoicing and then into collections. This trend continued in 2003, where we ended the year with only two of the Big Six programs awaiting final completion. Second, over the last two years we have been selling unneeded facilities in Salt Lake City. In 2003 this provided $4.8 million and in 2002, $2.9 million in cash. Third, in each of the last three years we have taken actions to restructure our business several times, mainly through reductions in force and the sale of non-core businesses, which significantly reduced cash requirements.

        At December 31, 2003, we had working capital of $22.8 million, including cash and restricted cash of $10.5 million, compared to working capital of $56.0 million at December 31, 2002, including cash and restricted cash of $10.3 million. During 2003, we used $0.8 million in our operating activities, generated $1.0 million from our investing activities, and generated $2.1 million from our financing activities.

        In 2003 cash used in our operating activities was mainly attributable to a $36.0 million net loss, offset by non-cash changes primarily consisting of $15.7 million related to asset impairments and $6.8 million related to depreciation and amortization, and decreases in accrued expenses and accounts payables of $3.3 million and $1.2 million, respectively. Accrued expenses decreased as a result of a reduction in our compensation and benefits accruals. This reduction is a result of our headcount reductions during 2003 and 2002. Accounts payables decreased as a result of our improved liquidity in 2003 as well as a result of an overall shrinkage of our business. Cash from our operating activities was provided by an $11.6 million decrease in the net costs and estimated earnings in excess of billings on uncompleted contracts and a $2.4 million increase in customer deposits. Costs and estimated earnings in excess of billings on uncompleted contracts decreased $11.1 million due to the completion and billings of all but two of the Big Six programs. Customer deposits increased due to strong fourth quarter orders from both the commercial simulation and digital theater customer markets.

        In 2002, cash provided by our operating activities was mainly attributable to decreases of $11.9 million in net costs and estimated earnings in excess of billings on uncompleted contracts, $8.8 million in accounts receivables and $3.9 million in inventory. While the $11.7 million loss had a negative impact on cash, it was mainly offset by $9.3 million in depreciation and amortization. Net costs and estimated earnings in excess of billings on uncompleted contracts decreased as a result of a decrease in costs and estimated earnings in excess of billings on uncompleted contracts of

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approximately $25.7 million primarily due to successful near completion of the Big Six programs and a decrease in billings in excess of costs and estimated earnings on uncompleted contracts of approximately $14.0 million due primarily to $6.0 million in deliveries made in 2002 related to commercial simulation customer orders booked in 2001 and $3.6 million in deliveries made in 2002 related to military simulation product orders in 2001. Also contributing to cash from operations was an $8.8 million decrease in accounts receivable due primarily to collections on the Big Six programs and improved collections overall. The inventory decrease was mainly due to a decrease in raw material requirements as our sales decreased and due to converting work-in-process inventory related to the Big Six programs into cost of sales as these contracts moved further towards completion.

        Cash provided by our investing activities was $1.0 million in 2003. The primary source was the sale of one of our buildings, which provided $4.8 million. This was offset by investments in property, plant and equipment, which used $3.8 million. This is a continuation of our cost reduction plan associated with our restructuring efforts. Investments in property, plant, and equipment were $3.4 million in 2002, $6.6 million in 2001, and $13.9 million in 2000.

        Cash provided by our financing activities was $2.1 million in 2003. This was primarily due to a change in restricted cash that generated $2.1 million. In 2002, we used cash provided from operating activities to mainly reduce our credit facility borrowings by $12.9 million.

Credit Ratings

        Our credit ratings were lowered by Moody's Investor Services ("Moody's") on multiple occasions during 2003. Our 6% Convertible Subordinated Debentures due in 2012 credit ratings were lowered from B2 to Caa2. Our Senior Implied Rating was downgraded from Ba to B3. These credit rating downgrades may affect our future ability to renew our credit facilities, negotiate new credit facilities, and issue debt and equity securities.

        With respect to Moody's, issuers with a Ba rating are judged to have speculative elements and are subject to substantial credit risk. Issuers with a B rating are judged to have speculative elements and are subject to high credit risk. Issuers with Caa ratings are in poor standing with Moody's and subject to very high credit risk. These issuers may be in default, according to Moody's, or there may be present elements of danger with respect to principal and interest. The "1,2,3" modifiers show relative standing within the major categories, 1 being the highest, or best, modifier in terms of credit quality.

        Moody's Senior Implied Ratings are generally employed for speculative grade corporate issuers. The Senior Implied Rating is an opinion of a corporate family's ability to honor its financial obligations and is assigned to a corporate family as if it had a single class of debt and a single consolidated legal entity structure.

Credit Facilities

        We have in place two lines of credit that allow us to bridge the gap between our daily cash requirements and the cash we have on hand, as well as provide for the ability to issue letters of credit. We require access to these lines of credit, or others, in order to operate.

        The ability to issue letters of credit has become more important to our business as sales in countries other than North America and Western Europe have grown and become a larger percentage of our gross sales. Letters of credit in many of these countries are required as part of any final contract.

        In December 2000, E&S entered into a secured credit facility (the "Foothill Facility") with Foothill Capital Corporation ("Foothill") that provided for borrowings and the issuance of letters of credit up to $30.0 million. In December 2002, E&S and Foothill renegotiated and renewed the terms of the Foothill Facility, providing for borrowings and the issuance of letters of credit up to $25.0 million. The

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Foothill Facility, among other things, (i) requires E&S to maintain certain financial ratios and covenants, including a combined cash and borrowing availability financial covenant that adjusts each quarter 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. The Foothill Facility expires in December 2004.

        Borrowings under the Foothill Facility bear interest at the Wells Fargo Bank National Association prevailing prime rate plus 3.0% to 4.5%, 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 $25 million and the sum of the average undrawn portion of the 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.

        In March 2003, we were not in compliance with the tangible net worth financial covenant of our Foothill Facility. In July 2003, the Foothill Facility was amended and the March 2003 covenant breach was waived. The amendments deleted the tangible net worth covenant from the Foothill Facility and replaced it with a combined cash and borrowing availability financial covenant that went into effect on June 27, 3003, and is in effect until the Foothill Facility expires. In addition, the interest rate that borrowings bear interest at was amended, from a range of 1.5% to 3.0% to a range of 3.0% to 4.5% over the Wells Fargo Bank, N.A. prevailing prime rate, depending on the amount outstanding. Also, at no time will borrowings under the Foothill Facility bear interest at a rate less than 10.25%. As of December 31, 2003, we were in compliance with all covenants.

        As of December 31, 2003, E&S had $3.7 million in outstanding borrowings and $3.6 million in outstanding letters of credit under the Foothill Facility. Our customers can draw against these letters of credit if we fail to meet the performance requirements contained within the terms of each letter of credit. As of December 31, 2003, no amounts have been accrued for any estimated losses under the obligations, as we believe it is probable that we will perform as required under our contracts. As of February 27, 2004, there were no outstanding borrowings and the outstanding letters of credit were $4.3 million.

        Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans & Sutherland Computer Corporation, had a $3.0 million overdraft facility (the "Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). At the discretion of Lloyds, the maximum amount borrowed against the Overdraft Facility can be increased for a short period of time that is predetermined by Lloyds. Borrowings under the Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75% per annum. As of December 31, 2003, there were $4.0 million in outstanding borrowings. The Overdraft Facility is subject to reduction or demand repayment for any reason at any time at Lloyds' discretion. The Overdraft Facility expired on December 31, 2003. We have renewed the Overdraft Facility with essentially the same terms, except that the borrowing limit is $2.5 million and it expires on December 31, 2004. 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 required maintenance of certain financial covenants. In addition, at December 31, 2003, we had $0.8 million on deposit with Lloyds in a restricted cash collateral amount to support certain obligations that the bank guarantees. As of February 27, 2004, there were not outstanding borrowings.

6% Convertible Subordinated Debentures due in 2012

        As of December 31, 2003, 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.

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Other

        In 2004, we expect capital expenditures to be similar to 2003, spending approximately $3.0 million. There were no material capital expenditure commitments at the end of 2003, nor do we anticipate any over the next several years.

        On February 18, 1998, E&S's 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. On February 27, 2004, 463,500 shares remained available for repurchase. No shares were repurchased during 2003, 2002, or 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.

Effects of Inflation

        The effects of inflation were not considered material during fiscal years 2003, 2002, and 2001, and are not expected to be material for fiscal year 2004.

Off-Balance Sheet Arrangements

        As part of our ongoing business, we normally do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which can be established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

        In July 2000, we formed a joint venture with Quadrant Group plc ("Quadrant") known as Quest Flight Training Limited ("Quest"). Quest provides certain equipment, software, training and other goods and services to the U.K. Ministry of Defence ("U.K. MoD") and other related governmental entities with regard to an upgrade of the U.K. MoD E-3D Facility and E-3D Sentry Aircrew Training Services. We have a 50% interest in Quest which is accounted for as an investment under the equity method and therefore is not consolidated in our financial statements. The financial position and operating results of Quest are immaterial to our financial results.

        In connection with the services of Quest to the U.K. MoD, during 2000 we entered into guarantees of various obligations of Quest. As of December 31, 2003, we had four guaranties outstanding related to Quest. Pursuant to the first guaranty, we have guarantied, jointly and severally with Quadrant, the performance of Quest in relation to its contract with the U.K. MoD. If Quest fails to meet its obligations under the contract then we (and Quadrant) are required to perform under the terms of the contract. Due to the length of the contract and the uncertainty of performance for which we would be liable if Quest fails to perform, we cannot estimate the maximum amount of possible future payments. This guaranty is in place until 2030. Pursuant to the second guaranty, we have guarantied, jointly and severally with Quadrant, up to a maximum amount of £1.0 million ($1.8 million as of December 31,

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2003), the performance of Quest, where not subcontracted, and the performance of Quest where subcontracted, and the subcontractor is not liable to meet its obligation due to any limitation of liability in the sub-contract agreement, thus preventing Quest from meeting its obligation under its contract with the U.K. MoD. This guaranty is in place until 2020. Pursuant to the third guaranty, we have pledged our equity shares in Quest to guaranty payment by Quest of a loan agreement executed by Quest. The loan agreement terminates in 2020. The pledge of our equity shares in Quest will expire at such time as Quest's obligations under the loan agreement are satisfied or the date on which the loan agreement is otherwise terminated. In the event of default on this loan agreement, the lending institution can request that the trustee holding such equity shares surrender them to the lending institution in order to satisfy all amounts then outstanding under the loan agreement. Pursuant to the fourth guaranty, we have guarantied payment, up to a maximum of £0.13 million ($0.2 million as of December 31, 2003), in the event that Quest has a default event, as defined by its loan agreement. This guaranty is in place until 2020. As of December 31, 2003, no amounts have been accrued for any estimated losses under these guaranties because we believe that Quest will meet all of its performance and financial obligations in relation to its contract with the U.K. MoD. However, if we are required to perform under any or all of the four guaranties, it could have a material adverse impact on our operating results and liquidity.

Contractual Obligations

        The impact that our contractual obligations as of December 31, 2003, are expected to have on our liquidity and cash flow in future periods is as follows:

(1)

Amounts represent the expected cash payments of our long-term debt and our credit facilities, and do not include any fair value adjustments or bond premiums or discounts.

(2)

Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on E&S and that specify all significant terms, including: fixed or minimum quantities to be purchased and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

(3)

We estimate that we will make no contributions to any of our pension and post-retirement plans in fiscal year 2004, and we currently have no plans to make contributions beyond fiscal year 2004, unless required to by statutory funding requirements.

Restatement of 2003 Quarterly Financial Statements

        The financial data in this Annual Report on Form 10-K for the first three quarters of 2003 has been restated from amounts previously reported for the correction of certain accounting errors. A discussion of the restatement in relation to the affected quarters of 2003 is provided in Note 3 of the Notes to Consolidated Financial Statements. All information presented in this Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the restatement.

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Management Overview

        Restatement of Financial Information.    We restated certain of our previously filed unaudited condensed consolidated financial statements for the three fiscal quarters ended March 28, 2003, June 27, 2003 and September 26, 2003 for the correction of accounting errors identified by management.

        The aggregate effect of the restatement decreased sales previously reported for the first three quarters of 2003 by an aggregate of $8.9 million, increased net loss previously reported for these periods by an aggregate of $5.7 million and increased the loss per share by $0.12, $0.24 and $0.18 for the fiscal quarter ended March 28, June 27 and September 26, 2003, respectively.

        Background on the Restatement.    During our 2003 year-end close process and review, we discovered certain errors that affected our previously issued quarterly unaudited condensed consolidated financial statements of the first three quarters of 2003. Accordingly, our 2003 quarterly unaudited, condensed consolidated financial statements have been restated.

        The adjustments reflected in the restatement resulted from the incorrect application of certain accounting principles at our wholly-owned subsidiary, Evans & Sutherland Computer Limited, that we determined were in error as a result of our in depth review of all aspects of the matter.

        Management and the Audit Committee took a leadership role in assessing these issues and in taking corrective action. Management performed an in depth review into several accounting issues that arose in connection with the restatement, as more specifically described in Note 3 of the Notes to Consolidated Financial Statements included in this Form 10-K. Following our in depth review, we concluded that while there were material weaknesses in our control environment, we cannot conclude that there was misconduct or that our employees intentionally used improper accounting practices to manipulate earnings or that there was any fraud or intentional misconduct on the part of our officers or employees. Item 9A of this Annual Report on Form 10-K provides a description of actions we have taken to improve our internal controls and procedures based on our review of our accounting and reporting policies.

Critical Accounting Policies

        The policies discussed below are considered by management to be critical to an understanding of E&S's financial statements. Their application places significant demands on management's judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. A summary of significant accounting policies can be found in Note 2 of the Notes to Consolidated Financial Statements. For all of these policies, management cautions that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue Recognition

        Revenue from long-term contracts requiring significant production, modification or customization is recorded using the percentage-of-completion method. This method uses the ratio of costs incurred to management's estimate of total anticipated costs. Our estimates of total costs include assumptions, such as man-hours to complete, estimated materials cost, 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 is understated.

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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. As a result, these differences are recorded as an asset or liability on the balance sheets. Since 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 includes materials at standard costs, which approximates average costs, as well as inventoried costs on programs (including material, labor, subcontracting costs, as well as an allocation of indirect costs). We periodically review inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and then provide a reserve we consider sufficient to cover these items. Reserve adequacy is based on estimates of future sales, product pricing, and requirements to complete projects. Revisions of these estimates would result in adjustments to our operating results.

Accrued Expenses

        Accrued expenses include amounts for liquidated damages and late delivery penalties (See Note 10 of the Notes to Consolidated Financial Statements). While current contracts could include additional liquidated damages and late delivery penalties, we have included all amounts management believes E&S is liable for as of December 31, 2003. These liquidated damages are based primarily on estimates of project completion dates. To the extent completion dates are not consistent with our estimates, these damage and penalty accruals may require additional adjustments.

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 receivables and consider historic experience, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and payment term changes when evaluating adequacy of the allowance for doubtful accounts. Changes in these factors could result in material adjustments to the expense recognized for bad debts.

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 sheets. 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.

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Recent Accounting Pronouncements

        In December 2003, the Financial Accounting Standards Board ("FASB") issued a revised Financial Accounting Standard No. 132 ("SFAS 132 (revised)"), "Employer's Disclosures about Pension and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106." SFAS 132 (revised) revises employer's disclosure about pension plans and other post retirement benefits. SFAS 132 (revised) does not change the recognition or measurement of those plans required by SFAS Nos. 87, 88, and 106. It retains the disclosure requirements of the original SFAS 132 as well as requires additional disclosures about the assets, obligations, cash flow, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Certain of the additional disclosure are required for fiscal years ending after December 15, 2003, and are included in the notes to these consolidated financial statements as applicable.

        In December 2003, the FASB issued a revision to Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN46R"). FIN46R clarifies the application of ARB No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN46R requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual returns, or both. Among other changes, the revisions of FIN46R (a) clarified some requirements of the original FIN46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN46R deferred the effective date of the Interpretation for public companies, to the end of the first reporting period ending after March 15, 2004. Under these guidelines, we will adopt FIN46R in the first quarter of fiscal 2004. The adoption of this interpretation is not expected to have a material effect on our business, results of operations, financial position, or liquidity.

        In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on our financial statements.

        In May 2003, FASB's Emerging Issues Task Force (EITF) finalized EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, this EITF Issue 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF Issue 00-21 applies to all deliverables within contractually binding arrangements in all industries under which a vendor will perform multiple revenue-generating activities, except as noted in the Issue. EITF Issue 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue 00-21 did not have a material impact on our financial statements.

        In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149 ("SFAS 149"), "Amendment to Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of this statement did not have a material impact on our financial statements.

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Forward Looking Statements

        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:

•

Our belief that the 2003 restructurings will reduce expenses approximately $7.5 million per year going forward.



•

Our belief that the 2002 restructurings did reduce expenses by approximately $14 million per year going forward.



•

Our belief that we will make no contributions to any of our pension and post-retirement plans in fiscal year 2004, unless required to by statutory funding requirements.



•

Our belief that a settlement agreement we entered into in 2003 with one of our customers will result in no more than $1.2 million in additional costs in 2004.



•

Our belief that our properties are suitable for our immediate needs.



•

Our belief that the ultimate disposition of various legal claims and other contingent matters will not have a material adverse effect on our consolidated financial condition, liquidity or results of operations.



•

Our belief that our newest PC image generator, the simFUSION 6500, offers the best simulation performance for its price.



•

Our belief that the Digistar 3 Laser has the potential to broaden the market and increase our market share.



•

"Our belief that our range of products at different price points and performance points, our research and development investments and our ability to design and manufacture value-added parts when not available as commercial parts will continue to enable us to compete effectively in this environment in the foreseeable future.



•

Our belief there is no inherent seasonal pattern to our business.



•

Our belief that any inherent risk that may exist in our foreign operations is not material.



•

Our belief that our relations with our employees are good.



•

Our belief that our continued strategy of investment in new products and product development as the primary pathway to rebuilding the company will continue to be successful during 2004 and the years beyond.



•

Our belief that our laser projector, when fully developed, will revolutionize the market for large-format, high accuracy displays.



•

Our belief that customers in the military market will continue to divert funds to more pressing military requirements during 2004 resulting in this market showing no growth, and that this may result in pent up demand and growth in 2005.



•

Our belief that, cash from operations will be sufficient for our planned needs in 2005 and later, and that our business will grow, if our markets recover in 2005 and we maintain our long-term investment in research and development and our current product strategy.

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•

Our belief that existing cash, restricted cash, borrowings available under our various borrowing facilities, the sale of the one building currently held for sale, 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.



•

Our belief we will perform under the conditions of our letters of credit and therefore incur no losses in 2004 or future years.



•

Our belief that Quest will meet all of its performance and financial obligation in relation to its contract with the U.K. MoD and we will therefore incur no losses as a result of our guarantees.



•

Our belief that based upon our current level of operations and anticipated growth, that available cash flow, together with available credit, will be adequate to meet our financial needs.



•

Our belief that our internal controls and procedures and our disclosure controls and procedures have now been improved due to the scrutiny of such controls and procedures and that they will continue to improve as we complete the implementation of the actions described in Item 9A.



•

Our belief that the commercial simulation market will remain flat in 2004 and start to recover and grow in 2005.



•

Our belief that we will see a rebounding worldwide economy and project funding increases to continue to drive the digital theater market growth into 2004.



•

Our belief we will receive orders for the Digistar 3 Laser systems in early 2004.



•

Our belief that we will complete the remaining two Big Six programs in early 2004.



•

Our belief that the continued success of our new products will result in a return of profitability for the full year 2004, although the pattern of our current order book suggests we are likely to operate moderately below break-even in the first half.



•

Our belief that our commercial simulation products gross margins will increase in 2004.



•

Our belief that 2003 trends in the commercial and military markets will continue in 2004.



•

Our belief that we will convert the December 31, 2003, $3.3 million balance of cost and estimated earnings in excess of billings on uncompleted contracts related to the Big Six programs to invoicing and collections in 2004.



•

Our belief that capital expenditures in 2004 will be similar to capital expenditures in 2003.



•

Our belief that the effects of inflation will not be material for fiscal year 2004.



•

Our belief that we will continue to see increased competition in the markets we operate in.



•

Our belief that we will continue to have a limited number of customers to account for a substantial portion of our sales in the foreseeable future.



•

Our belief that international sales will continue to be a significant portion of our overall business in the foreseeable future.



•

Our belief that approximately two-thirds of the 2003 backlog will be converted to sales in 2004.



•

Our belief that high levels of research and development will be needed to continue to ensure that we maintain our technical excellence, leadership and market competitiveness.

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•

Our expectation that we will complete development of certain products and related toolsets in 2004.



•

Our philosophy related to certain strategic relationships we enter with certain key customers and technology partners will continue in 2004, and agreements will be continued or consummated as necessary to maintain our industry leading position.



•

Our expectation that there will be no material capital expenditure commitments over the next several years.



•

Our belief we will begin delivery of our next generation of laser projector prototypes, as well as begin to delivery of production laser projectors in 2004.



•

Our belief we will sell the building we do not occupy in 2004.



•

Our expectation that we will continue to make significant investment in research and development



•

Our expectation that the first deliveries of the laser projector will go to the United States Air Force and to customers in the digital theater market, then to our other markets in 2005.



•

Our belief that visual databases are an important and growing part of our business.



•

Our expectation that we will continue to introduce new products in our markets, with special emphasis on the delivery of the first production-level model of the laser projector in 2004.



•

Our expectation that our laser projector will start to ship in higher volume in 2005 and beyond, contributing a substantial new revenue stream to the company and potentially opening entirely new markets.



•

Our belief that our infrastructure is capable of meeting substantially higher sales requirements with very little increase in overhead or fixed costs, thus resulting in accelerating profit growth as revenue grows.



•

Our expectation that we will have a decreasing reliance on our credit facilities, helped by the expected sale of our last building that remains for sale, to provide cash to fund our operating activities in 2004.



•

Our belief that we can use our remaining buildings that are currently not for sale to finance operations or use other options that may be available to us in future years.



•

Our belief that our anticipated revenue growth will produce accelerated profit growth.



•

Our belief that our recent progress resolving historical problems and our initial successes with new product and strategies has laid the foundation for a return to sustainable profitability in the future.

        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.

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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.

Cash Flow May Be Insufficient to Guarantee Access to Capital and Retire Existing Debt

        If the company does not generate sufficient earnings to increase its cash position, then our ability to obtain future capital and to repay existing debt will be reduced. While we have significantly reduced our debt in the last two years, we still have both short term and long term debt.

        The long term debt is in the form of convertible preferred bonds due in 2012. A portion of our short term debt bears interest at variable rates. Any increase in interest rates will reduce funds available to us for our operations and future business opportunities.

Our Business Model Is Changing and May Not Produce Consistent Earnings

        Our 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. In most market areas in which we operate we are experiencing increased competition, and we expect this trend to continue.

        When new systems are ordered, prices are below similar systems in the past. This condition requires a new business model to be successful in the market for visual systems. The new business model emphasizes smaller systems and associated hardware revenue, with more dependence on software, databases, and support services.

        While E&S has made significant progress in adapting to this business model by introducing products emphasizing the new factors for success, there is no assurance that this model will achieve its full objectives and ensure profitability in the future.

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 combined cash and borrowing availability financial covenant that adjusts each quarter 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. Due to Foothill's amendments and waivers on July 16, 2003 and July 25, 2003, of E&S's noncompliance with financial covenants on March 28, 2003, we were in compliance with our

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financial covenants as of December 31, 2003. 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.

Competitors May Infringe Our Intellectual Property

        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.

        Specifically, 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.

        These factors all become more important as we rely more on software and other forms of intellectual property that are more difficult to control than hardware.

Military Markets May Not Recover, Depressing Our Revenue and Earnings

        Since September 11, 2001 both commercial and military markets for our products have declined significantly. The size of this decline was unprecedented in our industry, and has created a condition of gross oversupply and extreme competition. This condition has put intense pressure on prices and margins, as well as forcing every company to significantly reduce costs and operating expenses used in the production of visual systems.

        While commercial markets have begun to recover, military markets have not yet produced significant new revenue. In the US, the reduction in military spending for visual systems is generally due to the demands of overseas deployments, while in Europe defense budgets have been under pressure for a number of years.

        There is no assurance that military spending will recover in the years ahead, leading to continued pressure on our revenue and earnings.

The Market for Visual Systems May Not Support Our Current R&D Spending

        In a very fragmented market, there may be insufficient business to support current Research and Development. The market for visual systems is unusual in that it is a small market that requires specialized and expensive R&D to achieve optimal results.

        Unless there is significant consolidation among competitors, the market may be too small to support any company large enough to invest in the necessary R&D. Currently, only two companies are significantly investing in visual system R&D—E&S, which invests its own funds, and CAE, whose R&D is supported by Canadian government subsidies.

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        E&S has addressed this situation by sharply targeting its R&D. We believe our R&D is highly efficient at this time, but we have no assurance that the market will provide sufficient earnings in the future to continue this program.

Prime Contractors May Bring Workshare into Their Own Company and Decrease the Demand for E&S Products

        Large prime contractors in the defense and aerospace industry have encountered the same competitive pressures described earlier for simulation and training revenue. To protect their own revenue and margins, most have responded by putting pressure on smaller suppliers, as well as bringing work in-house to protect established engineering organizations wherever possible.

        This trend has, in effect, created new competitors for E&S's traditional business. These in-house engineering groups attempt to do only the most profitable work, such as software and databases, and leave hardware to others. Often the costs of these efforts are not visible to the end customer because they are part of a much larger contract.

        If these trends continue and the end customers accept the results, they could reduce demand for the most profitable future portions of our revenue stream and business model, software and databases.

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 the market demands.

        The process of planning and managing production, inventory levels, and delivery schedules also is increasingly complex. There is no assurance that acceptance of and demand for our new products will not be affected by delays in this process.

Changes in Government Priorities May Impact the Military Simulation Market

        During the last several years significant changes have been taking place in budget priorities for both US and international government spending, especially military spending. Some of these changes have resulted in delays or reductions of purchases of visual systems. While we have downsized our company in accordance with these changes, we have no assurance that such delays will not continue to occur or accelerate and cause further declines in our revenue from this market.

We Depend on Several Significant Customers and our Net Sales Could Suffer if Their Purchases Decline

        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 five of our non-U.S. government customers for approximately 25% of our consolidated sales in 2003. 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.

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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 2003, $20.0 million, or 24% of our total revenue generated 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 dependent 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.

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 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.

We May Face Risks Related to an SEC Investigation and Securities Litigation in Connection with the Restatement of our Financial Statements.

        We are not aware that the SEC has begun any formal or informal investigation in connection with accounting errors requiring restatement of 2003 quarterly financial statements for the first three quarters, or that any laws have been violated. However, if the SEC makes a determination that the Company has violated Federal securities laws, the Company may face sanctions, including, but not limited to, monetary penalties and injunctive relief. In addition, the Company or its officers and directors could be named defendants in civil proceedings arising from the restatement. We are unable to estimate what our liability in either event might be.

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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 53% of our total sales in 2003, are concentrated in the United Kingdom, continental Europe and Asia. Foreign currency purchase and sale contracts may be 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, 2003, we had nine material sale or purchase contracts in currencies other than U.S. dollars. As of December 31, 2003, we had no foreign currency derivative 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, 2003, 70% of our total debt was in fixed-rate instruments. Had we fully drawn on our $25 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, 2003. 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 12 of the Notes to Consolidated Financial Statements in Part II of this annual report.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

•

Consolidated Balance Sheets as of December 31, 2003 and 2002



•

Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2003



•

Consolidated Statements of Comprehensive Loss for each of the years in the three-year period ended December 31, 2003



•

Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2003



•

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2003



•

Notes to Consolidated Financial Statements for each of the years in the three-year period ended December 31, 2003

        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, 2003

        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.

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

        We conducted our audits in accordance with 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, 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 12, 2004

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

See accompanying Notes to the Consolidated Financial Statements

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

See accompanying Notes to the Consolidated Financial Statement

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)