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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

| **x** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2008**

 

**or**

 

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

** **

**For the transition period from                         to                        **

 

**Commission file number 0-8771**

 

**EVANS & SUTHERLAND COMPUTER CORPORATION**

(Exact name of registrant asspecified in its charter)

 

| **Utah**                                  | ** ** | **87-0278175**      |
|-------------------------------------------|------------|---------------------|
| (State or other jurisdiction of           |       | (I.R.S. Employer    |
| incorporation or organization)            |       | Identification No.) |
|                                      |       |                |
| **770 Komas Drive, Salt Lake City, Utah** |       | **84108**           |
| (Address of principal executive offices)  |       | (Zip Code)          |

 

Registrant’s telephone number, including area code:**801-588-1000**

 

Securities registered pursuant to Section 12(b) of the Act:

 

**NONE**

 

Securities registered pursuant to Section 12(g) of the Act:

 

| **Title of Each Class**       | ** ** | **Name of Exchange on Which Registered** |
|-------------------------------|------------|------------------------------------------|
| Common Stock, $0.20 par value |       | The NASDAQ Capital Market                |

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. o Yes  x No

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or 15(d) of the Act.  oYes  x No

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.       x Yes       o No

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany.  See definition of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

Large accelerated filer o      Accelerated filer o                 Non-accelerated filer o                       Smaller reporting companyx

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (asdefined by Rule 12b-2 of the Act).  o Yes    x No

 

The aggregate market value of the voting and non-voting common stock ofthe registrant held by non-affiliates of the registrant as of June 27,2008, the last business day of the registrant’s most recently completed secondfiscal quarter was approximately $4,803,071 based on the closing market price of the common stock on such date as reported byThe Nasdaq Stock Market.

 

The number of shares of the registrant’s Common Stock outstanding as of March 2,2009 was 11,089,199.

 

 

 

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**EVANS & SUTHERLANDCOMPUTER CORPORATION**

**FORM 10-K**

**FOR THE YEAR ENDED DECEMBER 31,2008**

** **
| **PART I**   |
|-------------------|
| ** **        | ** ** | ** ** |
| **ITEM 1.**       | **BUSINESS** | **3** |
| **ITEM 2.**       | **PROPERTIES** | **6** |
| **ITEM 3.**       | **LEGAL PROCEEDINGS** | **6** |
| **ITEM  4.**      | **SUBMISSIONS OF MATTERS TO A  VOTE OF SECURITY HOLDERS** | **6** |
| ** **        | ** ** | ** ** |
| **PART II**  |
| ** **        | ** ** | ** ** |
| **ITEM  5.**      | **MARKET  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES** | **7** |
| **ITEM 7.**       | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** | **8** |
| **ITEM 8.**       | **FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA** | **17** |
| **ITEM 9.**       | **CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND FINANCIAL DISCLOSURE** | **38** |
| **ITEM 9A.**      | **CONTROLS  AND PROCEDURES** | **38** |
| ** **        | ** ** | ** ** |
| **PART III** |
| ** **        | ** ** | ** ** |
| **ITEM 10.**      | **DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE** | **39** |
| **ITEM 11.**      | **EXECUTIVE  COMPENSATION** | **39** |
| **ITEM 12.**      | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS** | **40** |
| **ITEM 13.**      | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE** | **40** |
| **ITEM 14.**      | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES** | **40** |
| ** **        | ** ** | ** ** |
| **PART IV**  |
| ** **        | ** ** | ** ** |
| **ITEM 15.**      | **EXHIBITS AND  FINANCIAL STATEMENT SCHEDULES** | **41** |
| ** **        | ** ** | ** ** |
| **SIGNATURES**    | ** ** | **45** |

 

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** **

**PART I**

 

**ITEM 1.          BUSINESS**

 

Throughout this documentEvans & Sutherland Computer Corporation may be referred to as“Evans & Sutherland,” “E&S,” “we,” “us,” “our” or the“Company.”  All dollar amounts are inthousands unless otherwise indicated.

 

Evans & Sutherlandwas incorporated in the state of Utah on May 10, 1968.  Our principal offices are located at 770Komas Drive, Salt Lake City, Utah 84108, and our telephone number is (801)588-1000.  Through a link on our website,www.es.com, we make available, free of charge, our annual report onForm 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K, and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Exchange Act as soon as reasonablypracticable after such material is electronically filed with or furnished tothe Securities and Exchange Commission (the “SEC”).  We make our website content available forinformational purposes only.  Theinformation provided on our website is not incorporated by reference into thisForm 10-K and our website address is not intended to be a hyperlink.  The above reports and other information arealso available, free of charge, at www.sec.gov.  Alternatively, the public may read and copyany materials we file with the SEC at the SEC’s Public Reference Room at100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may beobtained by calling the SEC at 1-800-SEC-0330.

 

**General**

** **

Evans & Sutherland focuses on theproduction of high-quality visual systems, advanced displays including theEvans & Sutherland Laser Projector (“ESLP”), dome projection screens,dome architectural treatments, and unique content for planetariums, science centers,other educational institutions, and entertainment venues.  With a 40-year history in computer graphics,we are widely regarded as both a pioneer and a leader in providing the world’smost compelling visual systems.  With oursubsidiary, Spitz, Inc., and its over 60-year history as a leading supplier ofplanetarium systems and other dome displays, E&S supplies premier totalsystem solutions for its digital theater markets as well as customized domesand other curved structures in the architectural market.

 

Wecontinue to maintain a significant share of the overall planetarium and digitaltheater market. We estimate that our market share has ranged from 35% to 70%,depending on the specific market and time period.  We estimate that thesize of the market for digital theater and planetarium systems is approximately$65 million annually.

 

**Description ofProducts**

** **

E&S offers a range ofproducts and services for digital theater, planetarium, and educationalinstitutions.  These products includestate of the art image generators, domes, and display systems some of whichfeature our ESLP that provides a seamless high resolution display from a singleprojector.  Additionally, we produceunique content both for our own library which we license to customers and forspecific customer requirements.

 

**Description ofMarkets**

** **

We are an industry leader in providing visual systems to aninternational customer base in the digital theater, planetarium, andeducational markets. We also supply dome projection screens and domearchitectural treatments to major theme parks, casinos, world expositions, andmilitary defense contractors.  In each ofthese markets we face highly competitive conditions.  In all our markets we compete on features,performance, and responsiveness to customer needs as well as on price.  E&S is unique among its competitors byvirtue of its capability as a single source that can directly supply andintegrate all of the equipment in the planetarium theater, including theprojection system, sound, lighting, computer control system and domedprojection screen.  We believe our range of visual systems andservices at various price and performance levels, our research and developmentinvestments and capabilities, our responsiveness to customers, and our ability todesign and manufacture value-added visual systems enable us to competeeffectively.

 

***Digital Theater***

*** ***

In the digital theatermarket our products compete with traditional optical-mechanical products anddigital display systems offered by GOTO Optical Mfg. Co., Konica-MinoltaPlanetarium Co. Ltd., Carl Zeiss Inc., and Sky-Skan, Inc. The Company’sdigital display systems can be configured with the proprietary ESLP or standard

 

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commercial projectors similarto systems sold by our competitors.  Ourproprietary image generator, the Digistar 4 (“D4”), along with other customizedsoftware tools differentiates our digital theater systems and competesfavorably with competitive digital display systems.

 

***Advanced Displays***

*** ***

We began workin 1997 to build a new generation of projection technology with specificationsbeyond any other technology either available or likely in the foreseeablefuture.  This goal evolved into theproduction of a revolutionary projector using lasers for illumination andmicro-electro-mechanical systems (MEMS) to modulate the laser light and createan image.  The result is our ESLPSystems, which were first delivered late in 2005, with additional unitsdelivered in each year since.  The firstunits have been supplied to our traditional simulation and digital theatercustomers who continue to order systems with the new projectiontechnology.  We believe that the ESLPalso has application to other markets in the future where ultra-highresolution, high efficiency, excellent image quality, and low life-cycle costare important considerations.

 

***Domed Structures***

*** ***

Our Spitzsubsidiary is the world’s leading producer of domed projection screens. Spitzdesigns, manufactures, and installs domed projection screens used inplanetarium theaters and a variety of other applications such as ridesimulators, special or large format film theaters, simulation training systemsand architectural treatments. Spitz’s experience enables it to advise on thearchitectural integration of domed projection screens and solve complex opticalproblems involving reflectivity and image distortion on compound curvedsurfaces. The Company believes that these skills are important to buyers ofdomed projection screens. The principal customers in our dome business areentities in the entertainment, educational and commercial and militarysimulation markets. Customers include major theme parks, casinos, worldexpositions, museums, schools, and military defense contractors. There iscurrently one known domestic competitor that manufactures domed projectionscreens. In addition, construction or metal fabrication contractors willoccasionally supply domed projection screens, particularly in foreign markets.

 

**IntellectualProperty**

 

**We own asignificant number of patents and trademarks and we are a licensee underseveral others.  Our portfolio of patents and trademarks is, as a whole,material to our business.  However, no one piece of intellectual propertyis critical to our business, thus no individual piece of our intellectualproperty is separately discussed.  In the U.S. and internationally, wehold active patents that cover many aspects of our visualizationtechnology.  Several patent applications are presently pending in theU.S., Japan and several European countries, and other patent applications arein preparation. We actively pursue patents on our new technology and we intendto vigorously protect our patent rights.  We often trademark key productnames and brand names to protect our equity in the marketplace. We routinelycopyright software, documentation and chip masks designed by us and institutecopyright registration when appropriate. Currently we retain a total of 33 active U.S. patents, and have licensesto an additional 25 U.S. patents.**

** **

**Research &Development**

** **

Weconsider the timely development and improvement of our technology to beessential to maintain our competitive position and to capitalize on marketopportunities.  We continue to fund essentially all research anddevelopment (“R&D”) efforts internally.

 

Asignificant focus for our R&D in 2008 was the continued development of ourlaser projector, the ESLP.  We firstdelivered ESLP’s in the fourth quarter of 2005 to the Air Force and have sincedelivered the ESLP to planetariums. Efforts to improve production process, performance and reliability ofthe laser projector continue. In addition we are exploring the potentialapplication of the ESLP technology in new markets through partnering andlicensing arrangements.

 

R&Defforts continue to improve the D4, the current generation of our popular imagegenerator and a key component to our digital display systems.  We are also exploring the possibility ofother commercial applications for D4 technology.

 

**Dependenceon Suppliers**

 

Most of our current partsand assemblies are readily available through multiple sources in the openmarket; however, a limited number are available only from a singlesource.  In these cases, we either stock adequate inventory to coverfuture product demands, obtain the agreement of the vendor to maintain adequatestock for future 

 

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demands, or develop alternativecomponents or sources where appropriate. As a result of the challenges inproducing a key component of the ESLP, we have made a considerable effort todevelop other components using alternative techniques and technology.

 

**Employees**

** **

As of December 31,2008, Evans & Sutherland and its subsidiaries employed a total of 126persons of which 120 were employed fulltime.

 

**Environmental Standards**

 

We believe ourfacilities and operations are within standards fully acceptable to theEnvironmental Protection Agency and that all facilities and procedures areoperated in accordance with environmental rules and regulations, andinternational, federal, state and local laws.

 

**Strategic Relationships**

** **

In the normalcourse of business we develop and maintain various types of relationships withkey customers and technology partners. The teaming agreements are with industry partners and are intended toimprove our overall competitive position. The product development agreements enhance our products by thecooperative development of new features and capabilities necessary to maintainour industry leading position.

 

**Forward-Looking Statements and Associated Risks**

** **

This annualreport, including all documents incorporated herein by reference, includescertain “forward-looking statements” within the meaning of that term in Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the ExchangeAct of 1934, as amended, including, among others, those statements preceded by,followed by or including the words “estimates,” “believes,” “expects,” “anticipates,”“plans,” “projects,” “intends,” “predicts,” “may,” “will,” “could,” “would,” “potential”and similar expressions or the negative of such terms.  See Item 7 “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included in Part IIof this annual report on Form 10-K for a list of some of theforward-looking statements included in this Form 10-K.

 

**EXECUTIVE OFFICERS OF THEREGISTRANT**

** **

The followingsets forth certain information regarding the executive officers of E&S asof December 31, 2008.

 
| **Name**         | ** ** | **Age** | ** ** | **Position**                                               | ** ** |
|------------------|------------|---------|------------|------------------------------------------------------------|------------|
|             |       |    |       |                                                       |       |
| David H. Bateman |       | 66      |       | President  and Chief Executive Officer                     |       |
|             |       |    |       |                                                       |       |
| Paul L. Dailey   |       | 52      |       | Chief  Financial Officer and Corporate Secretary           |       |
|             |       |    |       |                                                       |       |
| Bob Morishita    |       | 57      |       | Vice  President Human Resources                            |       |
|             |       |    |       |                                                       |       |
| Kirk D. Johnson  |       | 47      |       | Vice  President and General Manager of Digital Theater     |       |
|             |       |    |       |                                                       |       |
| Bret Winkler     |       | 47      |       | General  Manager of Advanced Displays                      |       |
|             |       |    |       |                                                       |       |
| Jonathan A. Shaw |       | 52      |       | President  and Chief Executive Officer of Spitz, Inc. |       |

 

David H. Bateman was appointed President and Chief Executive Officer ofE&S in February 2007.  Mr. Batemanjoined E&S as Director of Business Operations in May 1998. He wasappointed Vice President — Business Operations in March 2000 and InterimPresident and Chief Executive Officer and a member of the Board of Directors inJune 2006.

 

Paul L. Dailey was appointed Chief Financial Officer and CorporateSecretary of E&S in February 2007. He became an executive officer of E&S in August 2006 when hewas appointed Acting Chief Financial Officer and Corporate Secretary.  Prior to his appointments at E&S, Mr. Daileyserved as Executive Vice President, Chief Financial Officer and CorporateSecretary of E&S’s subsidiary, Spitz, Inc., where he started asController in 1983. Mr. Dailey is a Certified Public Accountant.

 

Bob Morishita was appointed Vice President of Human Resources in2000.  He joined E&S as CompensationManager in 1982 and was appointed Human Resources Director in 1997.

 

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Kirk Johnson was appointed Vice President and General Manager ofDigital Theater in January 2002.  He joined E&S in April 1990and has held various engineering and management positions throughout hisservice at E&S.

 

Brett Winkler was appointed General Manager of Advanced Displays in September 2007. He has held various engineering and management positions throughout hisservice at E&S since 1996.

 

Jonathan A. Shaw was appointed President and Chief Executive Officer ofE&S’s subsidiary, Spitz, Inc. in November 2001 where he heldvarious management positions since 1985.

 

**ITEM 2.          PROPERTIES**

** **

Our principalexecutive, engineering, manufacturing and operations facilities are located inthe University of Utah Research Park in Salt Lake City, Utah, where we ownthree buildings totaling approximately 68,000 square feet.  The buildings are located on land leased fromthe University of Utah with an initial term of 40 years or longer.

 

Spitz owns andoccupies an approximately 47,000 square-foot building on approximately 15.2acres in Chadds Ford, Pennsylvania. The property serves as collateral underSpitz’s debt agreements through a mortgage granted to First Keystone Bank.

 

**ITEM 3.          LEGAL PROCEEDINGS**

** **

In the normalcourse of business, we may have various legal claims and other contingent matters.  We know of no legal claims or othercontingent matters outstanding that would have a material adverse effect on ourconsolidated financial condition, liquidity or results of operations.

 

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

** **

No matterswere submitted to a vote of security holders during the fourth quarter offiscal year 2008.

 

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**PART II**

 
| **ITEM 5.** | ** ** | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS  AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------|

** **

Our commonstock trades on the Nasdaq Stock Market under the symbol “ESCC.”  On March 4, 2009 there were 617 holdersof record of our common stock.  Becausebrokers and other institutions hold many of our shares on behalf ofshareholders, we are unable to estimate the total number of shareholdersrepresented by these record holders.

 

We have neverpaid a cash dividend on our common stock and have used retained earnings forthe operation and expansion of our business. Currently we have an accumulated deficit.  For the foreseeable future, we intend tofollow our policy of retaining any future earnings to finance the developmentand growth of our business.

 

Additionalinformation required by this item is incorporated by reference to the tablecaptioned *Securities Authorized for Issuance Under EquityCompensation Plans as of December 31, 2008* in Item 12 “SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters” of Part III of this annual report on Form 10-K.

 

The tablebelow presents the high and low sales prices per share on the Nasdaq StockMarket by quarter for 2008 and 2007. The quotations reflect inter-dealerprices, without retail mark-up, mark-down, or commission and may notnecessarily represent actual transactions.

 
| ** **     | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 1.60       |     | $          | 0.60 |   | $ | 4.73 |   | $ | 2.88 |   |
| Second Quarter |       | 1.69     |       | 0.75     |       | 3.44 |   | 2.24 |   |
| Third Quarter  |       | 1.65     |       | 0.77     |       | 2.57 |   | 1.65 |   |
| Fourth Quarter |       | 1.35     |       | 0.24     |       | 2.07 |   | 1.01 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

**ITEM 6.  NOT APPLICABLE**

 

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**ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

The followingdiscussion and analysis provides information which management believes isrelevant to an assessment and understanding of our consolidated results ofoperations and financial condition.  Thediscussion should be read in conjunction with our consolidated financialstatements and notes included in Item 8 “Financial Statements and SupplementaryData” of this annual report on Form 10-K. Information set forth in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” includes forward-lookingstatements that involve risks and uncertainties.  Many factors could cause actual results todiffer materially from those contained in the forward-looking statements.  See “Forward-Looking Statements” below foradditional information concerning these items. All dollar amounts are in thousands unless otherwise indicated.

 

**ExecutiveSummary**

** **

Revenue and gross profit contributions from our digital theater anddome products continued to increase through 2008.  The increased revenue and gross profitimproved the 2008 results of operations but were not enough to cover operatingexpenses which included our continued investment in the development of theEvans & Sutherland Laser Projector (“ESLP”) and increased pension planexpenses. Although this resulted in a loss reported for 2008, the improvementsachieved nearly breakeven results with positive cash flow before changes inworking capital for the fourth quarter of 2008.

 

Development of our laser projector products continues with theobjective of improving key components that will facilitate more efficientproduction and performance reliability. Although development efforts haveimproved the performance of the ESLP, further advances will be required and areexpected in 2009 in order to facilitate the delivery and acceptance of more customerprojects with corresponding revenue. Also, the exploration of potentialopportunities for our laser technology in new markets will continue in2009.  Our success in the development ofthese new opportunities is the critical element in our plan to profitably growour business.

 

The 2008 improvement in revenue and gross profit was driven byincreased demand for digital planetarium products and special dome displaysystems for retail and entertainment venues. The increased demand forplanetarium products is attributable to theater conversions replacing oldmechanical projections systems and the growth of new science and technologymuseums in developing foreign countries. Retail and entertainment venuescontinue to show interest in special dome display systems to create uniqueexhibits to differentiate themselves from competing visitor attractions.

 

We are monitoring our business to determine the effects of the currentglobal economic turmoil. Most of the projects that generate sales of ourproducts are of a long term nature with significant investments made in advanceof ordering our products. We believe this may help insulate our sales from theeconomic downturn at least in the short term and that worldwide governmentstimulus spending for education will minimize the effect on our sales throughthe longer term recovery. However, many of our digital theater customers’projects depend on funding by financially stressed local governments and, insome cases, charitable donations.  Thereis also an element of our revenue source dependent upon discretionary demandfor entertainment attractions. These issues may negatively affect demand forour products.  We believe the timing ofthe economic recovery along with the size and direction of larger governmentstimulus spending will influence our ability to overcome any negative effectson demand for our products resulting from the economic downtown.

 

  Liquidity and capital resourceshave been pressured by the recent economic downturn. The drop in globalinvestment markets has produced significant unrealized losses on theinvestments in our pension trusts which fund our pension obligations. As aresult, accumulated other comprehensive loss has pushed stockholders’ equity toa deficit position. The actuarial analysis indicates that, based on currentregulations, 2009 liquidity will not be affected by the pension obligations ascash contributions to the pension trusts can be deferred until 2010. Ourability to satisfy the pension obligations in 2010 and beyond will depend onthe recovery of investment performance and profitable growth from the existingand new company products.  Otherwise, theadequacy of current liquidity sources to fund operations will depend on asufficient stream of new orders with adequate customer progress paymentsthrough 2009. Much progress has been made to reduce the absorption of cash byoperations; however, our ability to continue to book new orders required tosustain sufficient revenue to cover operating expenses could be adverselyaffected by economic conditions.  We areclosely monitoring this situation and exploring possible sources 

 

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for liquidity and capital which could supplement the funding of ouroperations until new laser products can contribute to revenue and grossprofits.

 

**Results of Operations**

** **

***ConsolidatedSales and Backlog***

*** ***

The following tablesummarizes our consolidated sales for fiscal year:

 
| ** **  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| ***Sales*** |       | $        | 37,659     |     | $          | 26,219 |   |
|             |            |          |            |          |            |  |  |

 

Salesincreased 44% from 2007 to 2008 due to an increase in the volume of orders anddeliveries, primarily due to increasing sales of our Digistar and SciDomeplanetarium systems, domes and the successful delivery and acceptance of anESLP system.  Sales in 2008 also included$1,050 related to the settlement of an agreement for the development andsupply of laser based products. The introduction of our new Digistar 4platform contributed to the increased order volume.  Sales were especially strong for the DigistarSP2HD and SciDome systems which are planetarium systems for smaller theatersgenerally sold to smaller museums and schools. We anticipate continued strongsales of the SP2HD and SciDome systems as planetarium theaters replace theirolder analog systems and as institutions take advantage of the expandedcapabilities of our digital planetarium products.  The increase in domesales was attributable to domes sold with planetarium systems as well asspecial display applications for retail shopping centers and theme park ridesimulators. Efforts continue to resolve the development challenges related tothe ESLP. We expect continuing progress on the development of the ESLP to helpsustain higher sales in 2009, although there is no assurance that we willachieve the desired results.

 

 On December 31, 2008, our revenue backlogwas $20,432 compared with $28,509 at December 31, 2007.  We anticipate that approximately 92% of the2008 backlog will be converted to sales in 2009.  The lower backlog as of December 31,2008 results in a higher dependency on new bookings to sustain 2008 saleslevels in 2009.  E&S believes thatsufficient sales prospects exist to meet this goal; however, much may depend onhow economic conditions affect our customer orders as discussed in theexecutive summary above.

 

***Gross Profit***

 

The following tablesummarizes our gross profit and the percentage to total sales during fiscalyear:

 
| ** **              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Gross profit            |       | $        | 15,109     |     | $          | 8,456 |   |
| Gross profit percentage |       | 40       | %          | 32       | %          |
|                         |            |          |            |          |            |  |  |

 

The increasein gross profit from 2007 to 2008 was driven primarily by favorable contractperformance and the high margin from sales recognized for the $1,050 of sales relatedto the settlement of an agreement for the development and supply of laser basedproducts.

 

***Selling,General & Administrative Expenses***

 
| ** **                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Selling, general and administrative  excluding pension expense    |       | $        | 8,105      |     | $          | 8,155 |   |
| Pension expense – general and  administrative                |       | 1,436    |       | 49       |       |
| Total selling, general and administrative  (“SG&A”) |       | $        | 9,541      |     | $          | 8,204 |   |

 

SG&Aexpenses increased 16% from 2007 compared to 2008 primarily due to an increasein pension expense of $1,387 over 2007 due to settlement charges that occurredin 2008 which were driven by lump sum payouts to pension participants as wellas by poor performance of pension assets during 2008.  Otherwise, SG&A

 

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expense for 2008 was comparable to 2007. We expect SG&A expense,exclusive of pension expense, to remain at similar levels in 2009.

 

***Research andDevelopment Expenses***

 
| ** **                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Research and development (“R&D”) |       | $        | 9,301      |     | $          | 9,361 |   |
|                                                |            |          |            |          |            |  |  |

 

R&D expense for 2008 wascomparable to 2007.  We expect R&Dexpense to remain at a similar level in 2009 due to continued developmentefforts on our laser projection technology and our D4 product with the goal ofreaching new markets.

 

***Other Incomeand Expense***

*** ***

The following tablesummarizes our other income and expense during fiscal year:

 
| ** **                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Interest income                   |       | $        | 165        |     | 686        |   |
| Interest expense                  |       | (230     | )          | (270     | )          |
| Other expense                     |       | (116     | )          | (9       | )          |
| Total other income (expense), net |       | $        | (181       | )        | $          | 407 |   |
|                                   |            |          |            |          |            |  |  |

 

Interest income in 2008decreased compared to 2007 due to the reduction in our average cash balancesearning interest during 2008.  Otherexpense increased over 2007 due to realized losses on foreign exchange transactionsduring 2008.

 

***Income Taxes***

*** ***

Income tax benefit (expense) consisted of the following:

 
| ** **                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Income tax (expense) benefit from  continuing operations         |       | $        | (22        | )        | $          | 853 |   |
| Income tax expense from gain on sale of  discontinued operations |       | —   |       | (760     | )          |
| Income tax (expense) benefit                                     |       | $        | (22        | )        | $          | 93 |   |

 

Income tax expense of $22 in 2008 included the release of $97 ofaccrued tax contingency offset by state income tax expense of $153. The incometax benefit of $93 in 2007 was a decrease to the estimated 2006 income taxexpense from the gain on sale of our commercial and military simulationbusinesses and related service operations.

 

**Liquidity and Capital Resources**

 

***Outlook***

 

In 2008, newcustomer contracts continued to provide progress payments.  These funds strengthen our liquidity positionas we enter 2009 and help fund our working capital needs.

 

Circumstancesthat could materially affect liquidity in 2009 include, but are not limited to:(i) successfully delivering new technologies and products, (ii) meeting2009 forecasted sales levels with favorable payment terms, and (iii) continuingto contain costs and expenses.

 

As discussedin the executive summary above, economic conditions could adversely affect oursales levels and customer payment terms. Also poor investment returns haveincreased our pension obligations which will result in increased liquiditypressures beyond 2009. We are exploring new potential sources of liquidity inthe form of financing or capital investments to supplement our current cashbalances to help ensure we can sufficiently fund our 

 

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operations through 2010. In December 2008, independent appraisalson our real estate interests indicate fair market value totals in excess of$12,000. Currently our only debt consists of the $3,200 in mortgage notes onthe Spitz properties.   We expect thatthe current cash balance and cash generated from the sale of our products,supplemented by new external sources of secured financing or capitalinvestments, will be sufficient to fund our planned needs in the short term aswe continue to invest heavily in research and development.  For the long term, we believe that improvedcash from operations will fund our planned needs.  However, we operate in a rapidly evolving andoften unpredictable business environment that may change the timing or amountof expected future cash receipts and expenditures. Continued poor investmentperformance may increase the funding requirements for our pension obligationsin 2010 and beyond.  Accordingly, therecan be no assurance that our sources of funds will be sufficient to meet ourliquidity needs or that we will be able to raise additional funds to meet thoseneeds, including future business expansion, through the sale of equity or debtsecurities or from credit facilities with lending institutions.

 

***Cash Flow***

 
| ** **                            | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| Net cash provided by (used in):       | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Operating activities                  |       | $                                           | (4,770     | ) | $ | (2,675 | ) |
| Investing activities                  |       | (1,154                                      | )          | (804 | ) |
| Financing activities                  |       | 405                                         |       | (794 | ) |
| Decrease in cash and cash equivalents |       | $                                           | (5,519     | ) | $ | (4,273 | ) |

 

Cash and cashequivalents decreased $5,519 to $5,757 during 2008, primarily as a result ofcash used in operating activities.  Cashand cash equivalents decreased $4,273 to $11,276 during 2007, primarily as aresult of cash used in operating activities.

 

Operating Activities

 

Operatingactivities used $4,770 of cash during 2008. Net cash used in continuing operating activities was $4,721, which wasprimarily attributable to $1,462 absorbed by the net loss from continuingoperations after the effect of $2,474 of non-cash items, as well as by cashused from changes in working capital of $3,259. Significant changes in working capital that used cash included anincrease in accounts receivable and inventories. These items reflect the highervolume of sales orders that occurred in 2008. Significant changes in working capital that provided cash included adecrease in costs and estimated earnings in excess of billings on uncompletedcontracts and an increase in pension and retirement liabilities.

 

Operatingactivities used $2,675 of cash during 2007. Net cash used in continuing operating activities was $4,237, which wasprimarily attributable to $5,696 absorbed by the net loss from continuingoperations after the effect of $2,153 for non-cash items. This was partiallyoffset by cash provided from changes in working capital of $1,459.  Significant changes in working capital thatprovided cash included a decrease in accounts receivable and an increase in netbillings in excess of cost and profit along with customer deposits.  Together these items represent the favorablepayment terms on new customer projects booked in 2007.  Significant changes in working capital thatused cash included a decrease in accrued liabilities primarily due to paymentof accrued severance for the former CEO.

 

Investing Activities

 

Investingactivities used $1,154 of cash during 2008 primarily due to purchases ofproperty, plant and equipment.

 

Investingactivities used $804 of cash during 2007 primarily due to purchases ofproperty, plant and equipment.

 

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Financing Activities

 

Financingactivities provided $405 of cash during 2008 which reflected $500 of proceedsfrom an addition to long-term debt that was used to fund improvements to anexisting building owned by the company.

 

Financingactivities used $794 of cash during 2007 primarily due to $700 of repayment onthe Spitz line of credit agreement and $94 of payments on long-term debt andcapital leases.

 

***Credit Facilities***

*** ***

On August 24, 2007 the Company entered into an agreement toreinstate, under modified terms, a Line of Credit Agreement (the “CreditAgreement”) which had matured on June 30, 2007. The Credit Agreementpermits borrowings of up to $1,100 to fund Spitz’ working capital requirements.The primary modifications to the previous terms consist of a reduction in theper annum interest rate from one-half percent (0.5%) above the Wall StreetJournal Prime Rate to the amount equal to the Wall Street Journal Prime Rate,the elimination of minimum balance deposit requirements and the removal of thelimitation placed on borrowings by an asset based formula. Borrowings under theCredit Agreement are secured by Spitz real and personal property and all of theoutstanding shares of Spitz common stock. As of December 31, 2007 and 2008there were no borrowings outstanding under the Credit Agreement.

 

The ability to issue letters of credit and bank guarantees is importantto our business as sales in countries other than in North America and WesternEurope have increased. In many countries, letters of credit and bank guaranteesare required as part of all sales contracts. Letters of credit and bankguarantees are issued to ensure our performance to third parties.

 

The Companyhas finance arrangements which facilitate the issuance of letters of credit andbank guarantees. Under the terms of the arrangements, we are required tomaintain a balance in a specific cash account equal to or greater than theoutstanding value of all letters of credit or bank guarantees issued, plusother amounts necessary to adequately secure our obligations with the financialinstitution. As of December 31,2008, we had outstanding letters of credit and bank guarantees of $1,642.  Letters of credit that expire in 2009and 2010 were $1,622 and $20, respectively.

 

***Mortgage Notes***

 

The first mortgage note payable represents the balance on a $3,200 note(“First Mortgage Note”) issued on January 14, 2004 by Spitz. The FirstMortgage Note requires repayment in monthly installments of principal andinterest over twenty years.  On eachthird anniversary of the First Mortgage Note, the interest rate is adjusted tothe greater of 5.75% or 3% over the Three-Year Constant Maturity Treasury Ratepublished by the United States Federal Reserve (“3YCMT”).  The monthly installment is recalculated onthe first month following a change in the interest rate. The recalculatedmonthly installment is equal to the monthly installment sufficient to repay theprincipal balance, as of the date of the change in the interest rate, over theremaining portion of the original twenty-year term.  The monthly installment for the first threeyears was $23 and included interest at 5.75% per annum. On January 14,2007, the 3YCMT was 4.81% and the interest rate on the First Mortgage Noteadjusted to 7.81% per annum. As a result of the interest rate adjustment, themonthly installment amount was adjusted to $26.

 

The second mortgage note payable represents the balance on a $500 note(“Second Mortgage Note”) issued on September 11, 2008 by Spitz. The SecondMortgage Note requires repayment in monthly installments of principal andinterest over twenty years.  On eachfifth anniversary of the Second Mortgage Note, the interest rate is adjusted tothe greater of 5.75% or 3% over 3YCMT. The monthly installment is recalculated on the first month following achange in the interest rate. The recalculated monthly installment is equal tothe monthly installment sufficient to repay the principal balance, as of thedate of the change in the interest rate, over the remaining portion of theoriginal twenty-year term.  The monthlyinstallment for the first three years is $4 and includes interest at 5.75% perannum.

 

The index used to compute the future change in the interest rate forThe First Mortgage Note and the Second Mortgage Note (the “ Mortgage Notes”),the 3YCMT, was 1.00% as of December 31, 2008. The Mortgage Notes aresecured by the real property occupied by Spitz pursuant to a Mortgage andSecurity Agreements; the real property had a carrying value of $4,925 as of December 31,2008. The Mortgage Notes and Credit Agreement 

 

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contain cross defaultprovisions whereby the default of either agreement will result in the defaultof both agreements. The Mortgage Notes are guaranteed by the Company.

 

***Other***

*** ***

In 2009, weexpect capital expenditures similar to 2008. There were no material capital expenditure commitments at the end of2008, nor do we anticipate any over the next several years.

 

Our Board ofDirectors has authorized the repurchase of 1,600,000 shares of our commonstock.  As of March 6, 2009, 463,500shares remained available for repurchase under the plans approved by the Boardof Directors.  No shares were repurchased during 2008 or 2007.  Stockmay be acquired on the open market or through negotiated transactions dependingon market conditions, share price and other factors.

 

We alsomaintain trade credit arrangements with certain suppliers.  Theunavailability of a significant portion of, or the loss of, these trade creditarrangements from suppliers would have a material adverse effect on ourfinancial condition and operations.

 

If we wereunable to make timely deliveries of products pursuant to the terms of variousagreements with third parties or certain of our contracts were adverselyimpacted for failure to meet delivery requirements, we may be unable to meetour anticipated working capital needs, routine capital expenditures, andcurrent debt service obligations on a short-term and long-term basis.

 

At December 31,2008, our total indebtedness was $3,249 due on the mortgage notes.  Our cash and restricted cash, subject tovarious restrictions set forth in this annual report on Form 10-K, areavailable for working capital needs, capital expenditures, strategicinvestments, mergers and acquisitions, stock repurchases and other potentialcash needs as they may arise.

 

***Effects of Inflation***

*** ***

The effects ofinflation were not considered material during fiscal years ended 2008 and 2007,and are not expected to be material for the fiscal year ending 2009.

 

**Application ofCritical Accounting Estimates**

** **

Theapplication of the accounting estimates discussed below is considered bymanagement to be critical to an understanding of our consolidated financialstatements.  Their application placessignificant demands on management’s judgment, with financial reporting resultsrelying on estimates about the effect of matters that are inherentlyuncertain.  Specific risks for thesecritical accounting estimates are described in the following paragraphs.  A summary of significant accounting policiescan be found in Note 1 “Nature of Operations and Summary of SignificantAccounting Policies” of Item 8 “Financial Statements and Supplementary Data” inthis annual report on Form 10-K. For all of these policies, management cautions that future resultsrarely develop exactly as forecast, and the best estimates routinely requireadjustment.

 

***Revenue Recognition***

*** ***

Revenue fromlong-term contracts requiring significant production, modification andcustomization is recorded using the percentage-of-completion method.  This method uses the ratio of costs incurredto management’s estimate of total anticipated costs.  Our estimates of total costs includeassumptions, such as man-hours to complete, estimated materials cost, andestimates of other direct and indirect costs. Actual results may vary significantly from our estimates.  If the actual costs are higher thanmanagement’s anticipated total costs, then an adjustment is required to reducethe previously recognized revenue as the ratio of costs incurred to management’sestimate was overstated.  If actual costsare lower than management’s anticipated total costs, then an adjustment isrequired to increase the previously recognized revenue as the ratio of costsincurred to management’s estimate is understated.  Adjustments for revisions of previousestimates are made in the period they become known.

 

***Costs and Estimated Earnings in Excess ofBillings on Uncompleted Contracts and Billings in Excess of Costs and EstimatedEarnings on Uncompleted Contracts***

*** ***

Billings onuncompleted long-term contracts may be greater than or less than incurred costsand estimated earnings.  As a result,these differences are recorded as an asset or liability on the balance sheet.  Since revenue recognized on these long-termcontracts includes management’s estimates of total anticipated costs, theamounts in 

 

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costs and estimated earnings inexcess of billings on uncompleted contracts and billings in excess of costs andestimated earnings on uncompleted contracts also include these estimates.

 

***Inventories***

*** ***

Inventoryincludes materials at standard costs, which approximates average costs, as wellas inventoried costs on programs (including material, labor, subcontractingcosts, as well as an allocation of indirect costs).  We periodically review inventories for excesssupply, obsolescence, and valuations above estimated realizable amounts, andthen provide a reserve we consider sufficient to cover these items.  Reserve adequacy is based on estimates offuture sales, product pricing, and requirements to complete projects.  Revisions of these estimates would result inadjustments to our operating results.

 

***Allowance for Doubtful Accounts***

*** ***

Wespecifically analyze accounts receivable and consider historical experience,customer creditworthiness, facts and circumstances specific to outstandingbalances, current economic trends, and payment term changes when evaluatingadequacy of the allowance for doubtful accounts.  Changes in these factors could result inmaterial adjustments to the expense recognized for bad debts.

 

***Income Taxes***

*** ***

As part of theprocess of preparing our consolidated financial statements we are required toestimate our actual income taxes in each of the jurisdictions in which weoperate.  This involves estimating ouractual current tax exposure together with assessing temporary differencesresulting from differing treatments of items, such as accrued liabilities, fortax and accounting purposes.  Thesedifferences result in deferred income tax assets and liabilities, which areincluded in our consolidated balance sheets. We must then assess the likelihood that our deferred income tax assetswill be recovered from future taxable income and, to the extent we believe thatrecovery is not likely, we must establish a valuation allowance.  To the extent we establish a valuationallowance or increase or decrease this allowance in a period, we must include acorresponding adjustment within the income tax provision in the statement ofoperations.  Significant judgment bymanagement is required to determine our provision for income taxes, our deferredincome tax assets and liabilities and any valuation allowance recorded againstour net deferred income tax assets.

 

***Impairment of Long- Lived Assets***

*** ***

Long-livedassets are reviewed for impairment when events or changes in circumstancesindicate the book value of an asset may not be fully recoverable. When thisoccurs, we review the value assigned to long-lived assets by analyzing theanticipated, undiscounted cash flows they generate.  When the expected future undiscounted cashflows from these assets do not exceed their carrying balances, we determine theestimated fair value of such assets. The amount of impairment recognized is theamount by which the carrying amount of the assets exceeds their estimated fairvalue.  Assets held for sale are reportedat the lower of their carrying amount or fair value less costs to sell.

 

***Straight Line Rent and Contingent Obligation***

*** ***

We recognizescheduled rent increases on a straight-line basis over the lease term, whichmay include optional lease renewal terms, and deferred rent income and expenseis recognized to reflect the difference between the rent paid or received inthe current period and the calculated straight-line amount.

 

**RecentAccounting Pronouncements**

** **

In March 2008,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 161, “Disclosures about DerivativeInstruments and Hedging Activities, an Amendment of FASB Statement No. 133”(“SFAS 161”).  SFAS 161 amends andexpands the disclosure requirements of SFAS No. 133, “Accounting for DerivativeInstruments and hedging Activities” (“SFAS 133”),  with the intent to provide users of financialstatements with an enhanced understanding of how and why an entity usesderivative instruments, how derivative instruments and related hedged items areaccounted for under SFAS 133 and its related interpretations, and howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows.  SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. The Company believes that the futurerequirements of SFAS 161 will not have a material effect on its consolidatedfinancial statements.

 

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In April 2008,the FASB issued Staff Position No. FAS 142-3, “Determination of the UsefulLife of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under SFAS No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”). The intent of the position is to improve theconsistency between the useful life of a recognized intangible asset under SFAS142 and the period of expected cash flows used to measure the fair value of theasset under SFAS No. 141(R), “Business Combinations,” and other generallyaccepted accounting principles. FSP FAS 142-3 is effective for fiscal yearsbeginning after December 15, 2008. FSP FAS 142-3 is effective for us on January 1,2009. The Company believes that the adoption of FSP FAS 142-3 will not have amaterial effect on its consolidated financial statements.

 

**Forward-Looking Statements**

 

The foregoingcontains “forward-looking statements” within the meaning of that term in Section 27Aof the Securities Act of 1933, as amended, and section 21E of the SecuritiesExchange Act of 1934, as amended, including among others, those statementspreceded by, followed by or including the words “estimates,” “believes,” “expects,”“plans,” “projects,” and similar expressions.

 

These forwardlooking statements include, but are not limited to, the following statements:

 
| · |   | Our belief that our range of visual systems and  services at various price and performance levels, our research and  development investments and capabilities, and our ability to design and  manufacture value-added visual systems will enable us to compete effectively.            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that the ESLP will also have  future application to other markets where ultra-high resolution, high  efficiency, excellent image quality, and low life-cycle cost are important  considerations, which will ultimately result in future revenues from those  other markets. |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that our products are performing  well, that we will meet all our delivery requirements, and as a result we  will incur no damages or penalties for late deliveries in 2009.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that capital expenditures during  2009 will be similar to the capital expenditures incurred during 2008.                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that there is no consistent,  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 properties are suitable  for our immediate needs.                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that the ultimate disposition of  any legal claims asserted against us or other contingent matters will not  have a material adverse effect on our consolidated financial condition,  liquidity or results of operations.                                                   |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that we will perform under the  conditions of our letters of credit and therefore incur no losses with  respect to these letters of credit in 2009 or future years.                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that the effects of inflation  will not be material for fiscal year 2009.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that most of our backlog will be  converted to sales in 2009.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that our 2009 orders will  continue at a level sufficient to sustain sales in 2009 comparable to 2008.                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that our SG&A expenses,  exclusive of pension expense, will be similar to 2008 levels.                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that existing cash balances and  cash generated from the sale of our products, supplemented by new external  sources of secured financing or capital investments will be sufficient to  fund our planned needs through 2010.                                                |
|   |   |                                                                                                                                                                                                                                                                                   |
| · |   | Our belief that improved cash from  operations will fund our planned needs for the long term subject to  reasonable recovery of long term investment performance of pension trust  assets.                                                                                             |

 

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| · |   | Our belief that the long term nature of our  customer projects may help insulate our sales from the economic downturn at  least in the short term and that worldwide government stimulus spending for  education will minimize the effect on our sales through the longer term  recovery. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                      |
| · |   | Our belief that the timing of the economic  recovery along with the size and direction of larger government stimulus  spending will influence our ability to overcome any negative effects on  demand for our products resulting from the economic downtown.                              |

 

Forward-lookingstatements are inherently subject to risks and uncertainties, some of whichcannot be predicted or quantified. Future events and actual results could differ materially from those setforth in, contemplated by, or underlying the forward-looking statements.  Our actual results could differ materiallyfrom these forward-looking statements. Important factors to consider in evaluating such forward-lookingstatements include risks of product demand, market acceptance, economicconditions, competitive products and pricing, difficulties in productdevelopment, and product delays.  Inlight of these risks and uncertainties, there can be no assurance that theevents contemplated by the forward-looking statements contained in this annualreport will, in fact, occur.

 

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**ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

** **

**CONSOLIDATED BALANCE SHEETS**

** **

*(Inthousands, except share data)*

 
| ** **                                                                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                |       |                  |       |   |   |
| Cash and cash equivalents                                                                      |       | $                     | 5,757      |   | $ | 11,276 |   |
| Restricted cash                                                                                |       | 1,642                 |       | 1,312 |   |
| Accounts receivable, net                                                                       |       | 5,778                 |       | 3,525 |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts                   |       | 1,977                 |       | 2,375 |   |
| Inventories, net                                                                               |       | 9,070                 |       | 7,360 |   |
| Prepaid expenses and deposits                                                                  |       | 1,512                 |       | 1,652 |   |
| Total current assets                                                                           |       | 25,736                |       | 27,500 |   |
| Property, plant and equipment, net                                                             |       | 11,533                |       | 12,010 |   |
| Prepaid retirement expenses                                                                    |       | 3,122                 |       | 5,568 |   |
| Goodwill                                                                                       |       | 635                   |       | 635 |   |
| Intangible assets, net                                                                         |       | 621                   |       | 766 |   |
| Other assets                                                                                   |       | 439                   |       | 130 |   |
| Total assets                                                                                   |       | $                     | 42,086     |   | $ | 46,609 |   |
| ** **                                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                       |       |                  |       |   |   |
| Current liabilities:                                                                           |       |                  |       |   |   |
| Accounts payable                                                                               |       | $                     | 2,236      |   | $ | 2,126 |   |
| Accrued liabilities                                                                            |       | 4,062                 |       | 4,510 |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts                   |       | 6,150                 |       | 5,055 |   |
| Customer deposits                                                                              |       | 4,171                 |       | 5,039 |   |
| Current portion of retirement obligations                                                      |       | 655                   |       | 589 |   |
| Current portion of long-term debt                                                              |       | 113                   |       | 92 |   |
| Total current liabilities                                                                      |       | 17,387                |       | 17,411 |   |
| Deferred rent obligation                                                                       |       | 1,829                 |       | 1,785 |   |
| Long-term debt                                                                                 |       | 3,136                 |       | 2,752 |   |
| Pension and retirement obligations                                                             |       | 22,135                |       | 9,528 |   |
| Total liabilities                                                                              |       | 44,487                |       | 31,476 |   |
| Commitments and contingencies                                                                  |       |                  |       |   |   |
| Stockholders’ equity (deficit):                                                           |       |                  |       |   |   |
| Preferred stock, no par value: 10,000,000  shares authorized; no shares issued and outstanding |       | —                |       | — |   |
| Common stock, $0.20 par value: 30,000,000  shares authorized; 11,441,666 shares issued         |       | 2,288                 |       | 2,288 |   |
| Additional paid-in-capital                                                                     |       | 54,260                |       | 54,109 |   |
| Common stock in treasury, at cost, 352,467  shares                                             |       | (4,709                | )          | (4,709 | ) |
| Accumulated deficit                                                                            |       | (32,147               | )          | (28,162 | ) |
| Accumulated other comprehensive loss                                                           |       | (22,093               | )          | (8,393 | ) |
| Total stockholders’ equity (deficit)                                                      |       | (2,401                | )          | 15,133 |   |
| Total liabilities and stockholders’ equity  (deficit)                                     |       | $                     | 42,086     |   | $ | 46,609 |   |

 

See notes to consolidated financialstatements.

 

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**CONSOLIDATED STATEMENTS OFOPERATIONS**

 

*(In thousands, except per share data)*

 
| ** **                                                     | ** ** | **Year ended December 31** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                  | ** ** | **2007** | ** ** |
| Sales                                                          |       | $                                         | 37,659     |   | $ | 26,219 |   |
| Cost of sales                                                  |       | 22,550                                    |       | 17,763 |   |
| Gross profit                                                   |       | 15,109                                    |       | 8,456 |   |
| Expenses:                                                      |       |                                      |       |   |   |
| Selling, general and administrative  excluding pension expense |       | 8,105                                     |       | 8,155 |   |
| Research and development                                       |       | 9,301                                     |       | 9,361 |   |
| Pension expense – general and  administrative             |       | 1,436                                     |       | 49 |   |
| Operating expenses                                             |       | 18,842                                    |       | 17,565 |   |
| Operating loss                                                 |       | (3,733                                    | )          | (9,109 | ) |
| Interest income                                                |       | 165                                       |       | 686 |   |
| Interest expense                                               |       | (230                                      | )          | (270 | ) |
| Other expense                                                  |       | (116                                      | )          | (9 | ) |
| Total other income (expense)                                   |       | (181                                      | )          | 407 |   |
| Loss from continuing operations before  income taxes           |       | (3,914                                    | )          | (8,702 | ) |
| Income tax benefit (expense)                                   |       | (22                                       | )          | 853 |   |
| Net loss from continuing operations                            |       | (3,936                                    | )          | (7,849 | ) |
| Income (loss) from discontinued operations,  net of tax        |       | (49                                       | )          | 323 |   |
| Gain on sale of discontinued operations,  net of tax           |       | —                                    |       | 1,239 |   |
| Net income (loss) from discontinued  operations                |       | (49                                       | )          | 1,562 |   |
| Net loss                                                       |       | $                                         | (3,985     | ) | $ | (6,287 | ) |
|                                                           |       |                                      |       |   |   |
| Net loss per common share – basic and  diluted:           |       |                                      |       |   |   |
| Loss per common share from continuing  operations              |       | $                                         | (0.36      | ) | $ | (0.71 | ) |
| Income per common share from discontinued  operations          |       | 0.00                                      |       | 0.14 |   |
| Net loss per common share                                      |       | $                                         | (0.36      | ) | $ | (0.57 | ) |
|                                                           |       |                                      |       |   |   |
| Basic and diluted weighted average common  shares outstanding  |       | 11,089                                    |       | 11,089 |   |

 

See notes to consolidated financialstatements.

 

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** **

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’**

**EQUITY (DEFICIT) ANDCOMPREHENSIVE LOSS**

 

*(In thousands)*

 
| ** **                                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-----------------|------------|-------------------|------------|-----------------|------------|------------|------------|
| ** **                                 | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **      | ** ** | ** **        | ** ** | **Other**       | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Treasury**   | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **      | ** ** |
| ** **                                 | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Stock**       | ** ** | **Deficit**       | ** ** | **Loss**        | ** ** | **Total**  | ** ** |
| Balance at December 31, 2006          |       | 11,442                |       | $           | 2,288      |           | $          | 53,759          |       | $                 | (4,709     | )               | $          | (21,875    | )          | $ | (7,081 | ) | $ | 22,382 |   |
| Components of comprehensive loss:          |       |                  |       |        |       |           |       |            |       |              |       |            |       |       |       |
| Net loss                                   |       | —                |       | —      |       | —         |       | —          |       | (6,287            | )          | —          |       | (6,287     | )          |
| Unrealized losses on marketable securities |       | —                |       | —      |       | —         |       | —          |       | —            |       | (107            | )          | (107       | )          |
| Increase in minimum pension liability      |       | —                |       | —      |       | —         |       | —          |       | —            |       | (1,205          | )          | (1,205     | )          |
| Total comprehensive loss                   |       |                  |       |        |       |           |       |            |       |              |       |            |       | (7,599     | )          |
|                                       |       |                  |       |        |       |           |       |            |       |              |       |            |       |       |       |
| Stock-based compensation                   |       | —                |       | —      |       | 350            |       | —          |       | —            |       | —          |       | 350        |       |
| Balance at December 31, 2007          |       | 11,442                |       | 2,288       |       | 54,109         |       | (4,709          | )          | (28,162           | )          | (8,393          | )          | 15,133     |       |
| Components of comprehensive loss:          |       |                  |       |        |       |           |       |            |       |              |       |            |       |       |       |
| Net loss                                   |       | —                |       | —      |       | —         |       | —          |       | (3,985            | )          | —          |       | (3,985     | )          |
| Unrealized losses on marketable securities |       | —                |       | —      |       | —         |       | —          |       | —            |       | (1,868          | )          | (1,868     | )          |
| Increase in minimum pension liability      |       | —                |       | —      |       | —         |       | —          |       | —            |       | (11,832         | )          | (11,832    | )          |
| Total comprehensive loss                   |       |                  |       |        |       |           |       |            |       |              |       |            |       | (17,685    | )          |
|                                       |       |                  |       |        |       |           |       |            |       |              |       |            |       |       |       |
| Stock-based compensation                   |       | —                |       | —      |       | 151            |       | —          |       | —            |       | —          |       | 151        |       |
| Balance at December 31, 2008          |       | 11,442                |       | $           | 2,288      |           | $          | 54,260          |       | $                 | (4,709     | )               | $          | (32,147    | )          | $ | (22,093 | ) | $ | (2,401 | ) |

 

See notes to consolidated financialstatements.

 

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** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

*(Inthousands)*

 
| ** **                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Net loss from continuing operations                                                           |       | $                                           | (3,936     | ) | $ | (7,849 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                  |       |                                        |       |   |   |
| Depreciation and amortization                                                                 |       | 1,723                                       |       | 1,681 |   |
| Stock compensation                                                                            |       | 151                                         |       | 350 |   |
| Provision for (recovery of) losses on  accounts receivable                                    |       | 128                                         |       | (36 | ) |
| Provision for excess and obsolete inventory                                                   |       | 213                                         |       | 338 |   |
| (Gain) loss on sale of investments                                                            |       | 32                                          |       | (332 | ) |
| Other                                                                                         |       | 227                                         |       | 152 |   |
| Changes in assets and liabilities:                                                            |       |                                        |       |   |   |
| Increase in restricted cash                                                                   |       | (237                                        | )          | (791 | ) |
| Decrease (increase) in accounts receivable                                                    |       | (2,381                                      | )          | 2,209 |   |
| Increase in inventories                                                                       |       | (1,923                                      | )          | (1,075 | ) |
| Decrease in costs and estimated earnings in  excess of billings on uncompleted contracts, net |       | 1,493                                       |       | 2,070 |   |
| Decrease (increase) in prepaid expenses and  other assets                                     |       | (262                                        | )          | 172 |   |
| Decrease in prepaid retirement expenses                                                       |       | 546                                         |       | 488 |   |
| Increase (decrease) in accounts payable                                                       |       | 110                                         |       | (121 | ) |
| Decrease in accrued liabilities                                                               |       | (578                                        | )          | (1,768 | ) |
| Increase (decrease) in accrued pension and  retirement liabilities                            |       | 841                                         |       | (530 | ) |
| Increase (decrease) in customer deposits                                                      |       | (868                                        | )          | 805 |   |
| Net cash used in continuing operating  activities                                             |       | (4,721                                      | )          | (4,237 | ) |
| Net cash provided by (used in) discontinued  operating activities                             |       | (49                                         | )          | 1,562 |   |
| Net cash used in operating activities                                                         |       | (4,770                                      | )          | (2,675 | ) |
|                                                                                          |       |                                        |       |   |   |
| Cash flows from investing activities:                                                         |       |                                        |       |   |   |
| Purchases of property, plant and equipment                                                    |       | (1,241                                      | )          | (818 | ) |
| Proceeds from sale of property, plant and  equipment                                          |       | 87                                          |       | 14 |   |
| Net cash used in investing activities                                                         |       | (1,154                                      | )          | (804 | ) |
|                                                                                          |       |                                        |       |   |   |
| Cash flows from financing activities:                                                         |       |                                        |       |   |   |
| Net repayments on line of credit agreement                                                    |       | —                                      |       | (700 | ) |
| Principal payments on long-term debt and  capital leases                                      |       | (95                                         | )          | (94 | ) |
| Proceeds from issuance of long-term debt                                                      |       | 500                                         |       | — |   |
| Net cash provided by (used in) financing  activities                                          |       | 405                                         |       | (794 | ) |
|                                                                                          |       |                                        |       |   |   |
| Net change in cash and cash equivalents                                                       |       | (5,519                                      | )          | (4,273 | ) |
| Cash and cash equivalents at beginning of  year                                               |       | 11,276                                      |       | 15,549 |   |
| Cash and cash equivalents at end of year                                                      |       | $                                           | 5,757      |   | $ | 11,276 |   |
|                                                                                          |       |                                        |       |   |   |
| Supplemental Disclosure of Cash Flow  Information                                             |       |                                        |       |   |   |
| Cash paid during the year for:                                                                |       |                                        |       |   |   |
| Interest                                                                                      |       | $                                           | 263        |   | $ | 252 |   |
| Income taxes                                                                                  |       | 458                                         |       | 179 |   |

 

See notes to consolidated financialstatements.

 

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**notes to consolidated financial statements**

** **

***All dollar amounts are inthousands except per share information or unless otherwise indicated.***

** **

**Note 1 -Nature of Operations and Summary of Significant Accounting Policies**

** **

***Nature of Operations***

*** ***

Evans & Sutherland ComputerCorporation, referred to in these notes as “Evans & Sutherland,” “E&S,”“we,” “us,” “our” or the “Company,” produces visual systems used to rapidly andaccurately display images.  We design, manufacture, market and supportour visual systems for various applications, including planetariums, sciencecenters and entertainment venues.  Our products and solutions rangefrom the visual systems generated by a desktop PC to what we believe are themost advanced visual systems in the world. The Company operates as one segment, which is the visual simulationmarket.

 

***Basis of Presentation***

*** ***

Evans & Sutherland’s fiscal yearends on December 31.  Theconsolidated financial statements include the accounts of Evans &Sutherland and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated inconsolidation.

 

***Use of Estimates***

*** ***

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the amounts reportedin the consolidated financial statements and accompanying notes.  The accounting estimates that requiremanagement’s most difficult and subjective judgments include revenuerecognition based on the percentage-of-completion method, inventory reserves,allowance for doubtful accounts, income tax valuation allowance, impairment oflong-lived assets, pension and retirement obligations and useful lives ofdepreciable assets.  Actual results coulddiffer from those estimates.

 

***Cash and Cash Equivalents***

*** ***

The Company considers all highly liquidinvestments with original maturities of three or fewer months to be cashequivalents.  The Company maintains cashbalances in bank accounts that, at times, may exceed federally insuredlimits.  The Company has not experiencedany losses in these accounts and believes it is not exposed to any significantrisk with respect to cash.  As of December 31,2008, cash deposits, including restricted cash, exceeded the federally insuredlimits by approximately $6,846.

 

***Restricted Cash***

*** ***

Restricted cash that guarantees issuedletters of credit that mature or expire within one year is reported as acurrent asset.  Restricted cash thatguarantees issued letters of credit that mature or expire in more than one yearare reported as long-term other assets. Long-term restricted cash at December 31, 2008 and 2007 was $20 and$112, respectively, included in other assets.

 

***Trade Accounts Receivable***

*** ***

In the normal course of business, we provideunsecured credit terms to our customers. Accordingly, we maintain an allowance for doubtful accounts for possiblelosses on uncollectible accounts receivable. We routinely analyze accountsreceivable and costs and estimated earnings in excess of billings, and considerhistory, customer creditworthiness, facts and circumstances specific tooutstanding balances, current economic trends, and payment term changes whenevaluating adequacy of the allowance for doubtful accounts.  Changes in these factors could result inmaterial differences to bad debt expense. Past due balances are determined based on contractual terms and arereviewed individually for collectability. Uncollectible accounts receivable arecharged against the allowance for doubtful accounts only after exhaustiveefforts have been made to collect and with management’s approval.

 

The table below represents changes in our allowancefor doubtful receivables during fiscal year:

 
| ** **                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                                           |       | $        | 292        |     | $          | 328 |   |
| Provision for (reduction in) losses on  accounts receivable |       | 128      |       | (36      | )          |
| Ending balance                                              |       | $        | 420        |     | $          | 292 |   |

 

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**notes to consolidated financialstatements**

 

***Inventories***

 

Inventory includes materials at standardcosts, which approximate average costs, as well as inventoried costs onprograms and long-term contracts. Inventoried costs include material, direct engineering and productioncosts, and applicable overhead, not in excess of estimated realizable value.   Spare parts and general stock materials arestated at cost not in excess of realizable value.  We periodically review inventories for excesssupply, obsolescence, and valuations above estimated realizable amounts, andprovide a reserve we consider sufficient to cover these items.  Revisions of these estimates could result inthe need for adjustments.

 

Inventories net of reserves at fiscalyear-end were as follows:

 
| ** **             | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Raw materials          |       | $        | 5,934      |     | $          | 4,794 |   |
| Work-in-process        |       | 1,679    |       | 2,537    |       |
| Finished goods         |       | 1,457    |       | 29       |       |
| Total inventories, net |       | $        | 9,070      |     | $          | 7,360 |   |

** **

***Property, Plant and Equipment***

*** ***

Property, plant and equipment are stated atcost.  Depreciation is computed using thestraight-line method based on the estimated useful lives of the relatedassets.  Expenditures that materiallyincrease values or capacities or extend useful lives of property and equipmentare capitalized.  Routine maintenance,repairs and renewal costs are expensed as incurred.  When property is retired or otherwisedisposed of, the book value of the property is removed from the fixed assetsand the related accumulated depreciation accounts.  Depreciation is included in cost of sales,research and development or selling, general and administrative expensesdepending on the nature of the asset.  Thecost and estimated useful lives of property, plant and equipment and the totalaccumulated depreciation and amortization were as follows at December 31:

 
| ** **                                      | ** ** | **Estimated**         | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **useful lives** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
| Land                                            |       | n/a                   |       | $          | 2,250      |       | $          | 2,250 |   |
| Buildings and improvements                      |       | 5 - 40 years          |       | 11,600     |       | 11,077     |       |
| Manufacturing machinery and equipment           |       | 3 - 8 years           |       | 6,258      |       | 6,031      |       |
| Office furniture and equipment                  |       | 3 - 8 years           |       | 788        |       | 808        |       |
| Total                                           |       |                  |       | 20,896     |       | 20,166     |       |
| Less accumulated depreciation and  amortization |       |                  |       | (9,363     | )          | (8,156     | )          |
| Total property, plant and equipment, net        |       |                  |       | $          | 11,533     |       | $          | 12,010 |   |

 

***Software Development Costs***

*** ***

Software development costs, if material, arecapitalized from the date technological feasibility is achieved until theproduct is available for general release to customers.  Such costs have not been material during theperiods presented.

 

***Investments***

*** ***

We classify our marketable debt and equitysecurities as available-for-sale. Available-for-sale securities are recorded at fair value. Unrealizedholding gains and losses, net of the related tax effect, are excluded fromearnings and are reported as a component of accumulated other comprehensiveloss until realized.  Dividend andinterest income are recognized when earned. Realized gains and losses from the sale of securities are included inresults of operations and are determined on the specific identificationbasis.  A decline in the market valuethat is deemed other than temporary results in a charge to other income (expense)and the establishment of a new cost basis for the investment.

 

***Impairment of Long- Lived Assets***

*** ***

Long-lived assets are reviewed for impairment whenevents or changes in circumstances indicate the book value of an asset may notbe fully recoverable. When this occurs, we review the value assigned tolong-lived assets by 

 

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**notes to consolidated financial statements**

 

analyzing the anticipated,undiscounted cash flows they generate. When the expected future undiscounted cash flows from these assets donot exceed their carrying balances, the Company determines the estimated fairvalue of such assets. An impairment is recognized to the extent the carryingamount of the assets exceeds their estimated fair value.  Assets held for sale are reported at thelower of their carrying amount or fair value less costs to sell.

 

***Warranty Reserve***

*** ***

We provide a warranty reserve for estimatedfuture costs of servicing products under warranty agreements extending forperiods from 90 days to one year. Anticipated costs for product warranties are based upon estimatesderived from experience factors and are recorded at the time of sale or overthe period revenues are recognized for long-term contracts.  Warranty reserves are classified as accruedliabilities in the accompanying consolidated balance sheets.

 

***Revenue Recognition***

*** ***

Our sales include revenue from systemhardware, software, database products and service contracts.  The following table provides information onrevenue by recognition method applied during fiscal years:

 
| ** **               | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Percentage-of-completion |       | $        | 22,154     |     | $          | 14,770 |   |
| Completed contract       |       | 13,164   |       | 10,047   |       |
| Other                    |       | 2,341    |       | 1,402    |       |
| Total sales              |       | $        | 37,659     |     | $          | 26,219 |   |

 

*Percentage-of-Completion.*In arrangements that are longer in term and requiresignificant production, modification or customization, revenue is recognized inaccordance with the provisions of Statement of Position 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts” (“SOP81-1”), using the percentage-of-completion method.  In applying the provisions of SOP 81-1, weutilize cost-to-cost methodology whereby we estimate the percent complete bycalculating the ratio of costs incurred (consisting of material, labor andsubcontracting costs, as well as an allocation of indirect costs) to management’sestimate of total anticipated costs.   This ratio is then utilized to determine the amount of gross profitearned based on management’s estimate of total estimated gross profit atcompletion.  We routinely reviewestimates related to percentage-of-completion contracts and adjust for changes in the period revisions are made.  Billings on uncompleted percentage-of-completioncontracts may be greater than or less than incurred costs and estimatedearnings and are recorded as an asset or liability in the accompanyingconsolidated balance sheets.

 

In those arrangements where software is asignificant component of the contract, the Company applies the guidance ofStatement of Position 97-2 “Software Revenue Recognition,” which allows for useof the percentage-of-completion method as described above.

 

*Completed Contract.*Contractarrangements which typically require a relatively short period of time tocomplete the production, modification, and customization of our products areaccounted for using the completed contract method.  Accordingly, revenue is recognized upon deliveryof the completed product, provided persuasive evidence of an arrangementexists, title and risk of loss has transferred, the fee is fixed anddeterminable, and collection is reasonably assured.

 

*Other.*  Other revenue consists primarily of amountsearned under maintenance contracts that are generally sold as a single elementto our customers.  Revenue from productmaintenance contracts, including separately priced extended warranty contracts,is deferred and recognized over the period of performance under the contract.

 

*Anticipated Losses. *For contracts with anticipated losses atcompletion, a provision is recorded when the loss becomes known.  After an anticipated loss is recorded,subsequent revenue and cost of sales are recognized in equal, offsettingamounts as contract costs are incurred and do not generate further grossprofits (losses).

 

*Multiple Element Arrangements*.  Some of our contracts includemultiple elements.  Revenue earned onelements such as products, services and maintenance contracts are allocated toeach element based on the relative fair values of the elements.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

***Net Income (Loss) per Common Share***

 

Net income(loss) per common share is computed based on the weighted-average number ofcommon shares and, as appropriate, dilutive common stock equivalentsoutstanding during the period.  Stockoptions are potentially common stock equivalents.

 

Basic incomeor loss per common share is based upon the average number of shares of commonstock outstanding during the period. There were no dilutive shares in 2007 or2008. Potentially dilutive securities from stock options are discussed in Note10.

 

***Income Taxes***

*** ***

We use the asset and liability method ofaccounting for income taxes.  Under the assetand liability method, deferred income tax assets and liabilities are recognizedfor the future income tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective income tax bases and operating loss and income tax creditcarry-forwards.  Deferred income taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred income tax assetsand liabilities of a change in income tax rates is recognized in the periodthat includes the enactment date.

 

***Other Comprehensive Loss***

*** ***

We have applied the provisions of Statementof Financial Accounting Standards (“SFAS”) SFAS No. 109, “Accounting forIncome Taxes,” (“SFAS 109”) to our gains and losses included in othercomprehensive loss but excluded them from our net income or loss.  On a net basis for 2008 and 2007, there was adeferred income tax asset as a result of the items reflected in comprehensiveloss.  However, in applying SFAS 109 wedetermined that it is more likely than not that we will not realize such netdeferred income tax assets and have therefore established a valuation allowanceagainst the full amount of the net deferred income tax asset.  Accordingly, the net income tax effect of theitems included in other comprehensive loss is zero.  Therefore, we have included no income taxexpense or benefit in relation to items reflected in other comprehensive loss.

 

The components of accumulated othercomprehensive loss were as follows as of December 31:

 
| ** **                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Additional minimum pension liability                  |       | $        | (20,390    | )        | $          | (8,558 | ) |
| Net unrealized holding gains (losses) on  investments |       | (1,703   | )          | 165      |       |
| Total accumulated other comprehensive loss            |       | $        | (22,093    | )        | $          | (8,393 | ) |

 

***Leases***

 

We recognize scheduled rent increases on astraight-line basis over the lease term, which may include optional leaserenewal terms, and deferred rent income and expense are recognized to reflectthe difference between the rent paid or received in the current period and thecalculated straight-line amount.

 

***Goodwill***

*** ***

In accordance with the provisions of SFAS No. 142,“Goodwill and Other Intangible Assets,” the Company tests its recorded goodwillfor impairment on an annual basis during the fourth quarter, or more often ifindicators of potential impairment exist, by determining if the carrying valueof each reporting unit exceeds its estimated fair value. Factors that couldtrigger impairment include, but are not limited to, underperformance relativeto historical or projected future operating results, significant changes in themanner of use of the acquired assets or the Company’s overall business andsignificant negative industry or economic trends. Future impairment reviews mayrequire write-downs in the Company’s goodwill and could have a material adverseimpact on the Company’s operating results for the periods in which suchwrite-downs occur.

 

***Fair Value of FinancialInstruments***

*** ***

The carrying amount of cash and cashequivalents, receivables, accounts payable and accrued expenses approximatesfair value because of their short maturity. The carrying value of the long-term debt discussed in Note 7approximates its fair value because the interest rates of the debt approximatemarket interest rates at the reporting periods. The fair value of investments classified as prepaid retirement expensesare discussed in Note 6.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

***Recent Accounting Pronouncements***

*** ***

In March 2008, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 161, “Disclosures about Derivative Instruments and Hedging Activities,an Amendment of FASB Statement No. 133” (“SFAS 161”).  SFAS 161 amends and expands the disclosurerequirements of SFAS No. 133, “Accounting for Derivative Instruments andhedging Activities” (“SFAS 133”),  withthe intent to provide users of financial statements with an enhancedunderstanding of how and why an entity uses derivative instruments, howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations, and how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows.  SFAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged. The Companybelieves that the future requirements of SFAS 161 will not have a materialeffect on its consolidated financial statements.

 

In April 2008, the FASB issued StaffPosition No. FAS 142-3, “Determination of the Useful Life of IntangibleAssets” (“FSP FAS 142-3”).  FSP FAS 142-3amends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).The intent of the position is to improve the consistency between the usefullife of a recognized intangible asset under SFAS 142 and the period of expectedcash flows used to measure the fair value of the asset under SFAS No. 141(R),“Business Combinations,” and other generally accepted accounting principles.FSP FAS 142-3 is effective for fiscal years beginning after December 15,2008. FSP FAS 142-3 is effective for us on January 1, 2009. The Companybelieves that the adoption of FSP FAS 142-3 will not have a material effect onits consolidated financial statements.

 

***Reclassifications***

*** ***

Certain amounts in the prior year’s consolidated financial statementshave been reclassified to conform to the current year’s presentation.

 

**Note 2 - Discontinued Operations**

** **

The activity recorded for discontinued operations in 2007 and 2008represents remaining transactions related to our commercial and militarysimulation businesses and related service operations (the “Simulation Business”)which we sold to Rockwell Collins, Inc. (“Rockwell”) in 2006.

 

Thegain on the sale of the Simulation Business was recorded as follows:

 
| Cash consideration under Asset Purchase  Agreement                                |   |   |   | $       | 66,500 |   |
|-----------------------------------------------------------------------------------|--------|--------|--------|---------|--------|--------|
| Adjustment to Asset Purchase Price due to  Closing Net Asset computation          |   | (4,800 | )      |    |   |
| Transaction costs                                                                 |   | (607   | )      |    |   |
| Net proceeds                                                                      |   |   |   | 61,093  |   |
| Book value of assets acquired by Rockwell  Collins                                |   |   |   | (33,115 | )      |
| Book value of liabilities assumed by  Rockwell Collins                            |   |   |   | 18,722  |   |
| Gain before income taxes                                                          |   |   |   | 46,700  |   |
| Income taxes                                                                      |   |   |   | (9,818  | )      |
| Total net gain recorded from  January 1, 2006 through December 31, 2008 |   |   |   | $       | 36,882 |   |

 

Thenet gain on the sale of the Simulation Business was recorded in the followingperiods:

 
| Net gain on the sale for the year ended  December 31, 2006               |   |   |   | $      | 35,643 |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Net gain on the sale for the year ended  December 31, 2007               |   |   |   | 1,239  |   |
| Net gain on the sale for the year ended  December 31, 2008               |   |   |   | — |   |
| Total net gain on sale for years ended  December 31, 2006, 2007 and 2008 |   |   |   | $      | 36,882 |   |

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Summarizedresults of operations for the Simulation Business included as income (loss)from discontinued operations, net of tax, in the accompanying consolidatedstatements of operations for the years ended December 31 2008 and 2007consisted of operating income (expense) of $(49) and $323, respectively.

 

Inconjunction with the sale of the Simulation Business, the Company also enteredinto a series of agreements (the “Laser Agreements”) with Rockwell related tothe development and supply of laser based products.  The Laser Agreements provided that theCompany be paid up to $5,000 upon the achievement of certain milestones relatedto the development of certain laser based products and provided Rockwell withexclusive distribution rights in certain markets.  The achievement of the milestones and theobligations under the Laser Agreements were disputed in 2007 and 2008.  On June 9, 2008, we entered into anagreement (the “Settlement Agreement”) with Rockwell that provided for acomplete settlement of all the related agreements.  The Settlement Agreement required thatE&S receive $1,050.  The SettlementAgreement also released both parties from all claims and further obligationsunder the Laser Agreements. We received the $1,050 of proceeds in the secondquarter of 2008 and recorded the proceeds as sales in the accompanyingconsolidated financial statements.

 

**Note 3 –Intangible Assets and Goodwill**

 

Intangible assets and goodwill consisted ofthe following as of December 31, 2008 and 2007:

 
| ** **                       | ** ** | **December 31,**                                           | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Class**                        | ** ** | **Weighted Avg.  Amortization  Period in Years** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Maintenance and legacy customers |       | 10                                                              |       | $ | 350 |   | $ | (111 | ) | $ | 350 |   | $ | (72 | ) |
| Planetarium shows                |       | 10                                                              |       | 280 |   | (97 | ) | 280 |   | (61 | ) |
| Intellectual property rights     |       | 5                                                               |       | 350 |   | (151 | ) | 350 |   | (81 | ) |
| Total                            |       | 8.4                                                             |       | $ | 980 |   | $ | (359 | ) | $ | 980 |   | $ | (214 | ) |

 

Amortizationexpense for the years ended December 31, 2008 and 2007 was $144 and $184,respectively.

 

Maintenanceand legacy customers and planetarium shows represent the value ofdefinite-lived intangibles that were identified in the acquisition of Spitz, Inc.(“Spitz”) in 2006.  In November 2006,the Company acquired certain intellectual property rights to protect theapplication of certain processes in the use of its products for cash paymentstotaling $350.

 

Estimated future amortization expense is as follows:

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| **Class**                        | ** ** | **2009**              | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** |
| Maintenance and legacy customers |       | $                     | 39         |   | $ | 35 |   | $ | 35 |   | $ | 30 |   | $ | 30 |   | $ | 70 |   |
| Planetarium shows                |       | 34                    |       | 31 |   | 25 |   | 25 |   | 22 |   | 46 |   |
| Intellectual property rights     |       | 70                    |       | 70 |   | 59 |   | — |   | — |   | — |   |
| **Total**                        |       | $                     | 143        |   | $ | 136 |   | $ | 119 |   | $ | 55 |   | $ | 52 |   | $ | 116 |   |

 

Goodwillof $635 resulted from the acquisition of our wholly-owned subsidiary, Spitz,and was measured as the excess of the $2,884 purchase consideration paid overthe fair value of the net assets acquired. The Company has made its annualassessment of impairment of goodwill and has concluded that goodwill is notimpaired as of December 31, 2008.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 4 -Costs and Estimated Earnings on Uncompleted Contracts**

 

Comparativeinformation with respect to uncompleted contracts at fiscal year-end:

 
| ** **                                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Total accumulated costs and estimated  earnings on uncompleted contracts |       | $        | 32,801     |     | $          | 22,339 |   |
| Less total billings on uncompleted  contracts                            |       | (36,974  | )          | (25,019  | )          |
|                                                                     |       | $        | (4,173     | )        | $          | (2,680 | ) |

 

The above amounts are reportedin the consolidated balance sheets as follows:

 
| ** **                                                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Costs and estimated earnings in excess of  billings on uncompleted contracts |       | $        | 1,977      |     | $          | 2,375 |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts |       | (6,150   | )          | (5,055   | )          |
|                                                                         |       | $        | (4,173     | )        | $          | (2,680 | ) |

 

**Note 5 -Leases**

 

We occupy real property and usecertain equipment under lease arrangements that are accounted for as operatingleases.  Our real property leases containescalation clauses.  Rental expense forall operating leases for 2008 and 2007 was $300 and $364, respectively.

 

Future minimum lease paymentsunder operating leases that have initial or remaining non-cancelable leaseterms in excess of one year are as follows:

 
| **Fiscal year** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2009                 |       | $          | 186        |   |
| 2010                 |       | 186        |       |
| 2011                 |       | 197        |       |
| 2012                 |       | 197        |       |
| 2013                 |       | 211        |       |
| Thereafter           |       | 4,680      |       |
| Total                |       | $          | 5,657      |   |

 

**Note 6 -Employee Retirement Benefit Plans**

 

***Pension Plan***

*** ***

The Pension Plan is a qualifieddefined benefit pension plan funded by Company contributions.  Our funding policy is to contribute amountssufficient to satisfy regulatory funding standards, based upon independentactuarial valuations. The Pension Plan was frozen in 2002.  Benefits at normal retirement age (65) arebased upon the employee’s years of service as of the date of the curtailmentfor employees not yet retired, and the employee’s compensation prior to thecurtailment.

 

***Supplemental Executive Retirement Plan***

 

We maintain an unfundedSupplemental Executive Retirement Plan (“SERP”).  The SERP provides eligible executives definedpension benefits, outside our pension plan, based on average salary, years ofservice and age at retirement.  The SERPwas amended in 2002 to discontinue further SERP gains from future salaryincreases and close the SERP to new participants.

 

***401(k) Deferred Savings Plan***

 

We have a deferred savings planthat qualifies under Section 401(k) of the Internal RevenueCode.  The 401(k) plan covers allemployees of the Company who have at least one year of service and who are age18 or older.  We make matchingcontributions on employee contributions after the employee has achieved oneyear of service.  We may also make extramatching contributions based on our profitability and other financial andoperational considerations.  No extramatching contributions have been made to date. Our contributions to the 401(k) plan for 2008 and 2007 were $216and $210, respectively.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

***Executive Savings Plan***

 

The Executive Savings Plan (“ESP”) is anunfunded deferred compensation plan that allows tax-deferred retirement savingsbeyond the amount that can be contributed to the 401(k) plan.  The ESP, a nonqualified plan that does nothave the same protections as a qualified 401(k) plan, covers a portion ofthe management employees.  Participantsearn matching amounts on their contributions with the same percentage limit asthe qualified 401(k) plan. Consistent with the curtailment of the SERP, the ESP was amended in 2002to permit the Board of Directors to grant additional discretionarycontributions.

 

We purchase Company-owned lifeinsurance policies insuring the lives of participants in the ESP.  The policies accumulate asset values andexist to cover the cost of employee supplemental retirement benefit liabilities.  At December 31, 2008 and 2007, prepaidexpenses and deposits included our investments in the policies of $711 and$953, respectively.

 

***Obligations and Funded Status***

 

E&S uses a December 31measurement date for both the Pension Plan and SERP.

 

Information concerning the obligations, planassets and funded status of employee retirement defined benefit plans areprovided below:

 
| ** **                                         | ** ** | **Pension Plan** | ** ** | **SERP**   | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                         | ** ** | **2008**              | ** ** | **2007**   | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Changes in benefit obligation**                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Projected benefit obligation at beginning  of year |       | $                     | 39,986     |       | $          | 39,948 |   | $ | 5,895 |   | $ | 6,084 |   |
| Service cost                                       |       | —                |       | —     |       | — |   | — |   |
| Interest cost                                      |       | 2,338                 |       | 2,334      |       | 336 |   | 348 |   |
| Actuarial (gain) loss                              |       | 1,967                 |       | (14        | )          | 107 |   | 44 |   |
| Benefits paid                                      |       | (248                  | )          | (2,282     | )          | (595 | ) | (581 | ) |
| Settlement payments                                |       | (2,546                | )          | —     |       | — |   | — |   |
| Projected benefit obligation at end of year        |       | $                     | 41,497     |       | $          | 39,986 |   | $ | 5,743 |   | $ | 5,895 |   |
|                                               |       |                  |       |       |       |   |   |   |   |
| **Changes in plan assets**                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value of plan assets at beginning of  year    |       | $                     | 35,763     |       | $          | 36,589 |   | $ | — |   | $ | — |   |
| Actual return on plan assets                       |       | (8,519                | )          | 1,456      |       | — |   | — |   |
| Contributions                                      |       | —                |       | —     |       | 595 |   | 581 |   |
| Benefits paid                                      |       | (248                  | )          | (2,282     | )          | (595 | ) | (581 | ) |
| Settlements payments                               |       | (2,546                | )          | —     |       | — |   | — |   |
| Fair value of plan assets at end of year           |       | $                     | 24,450     |       | $          | 35,763 |   | $ | — |   | $ | — |   |
|                                               |       |                  |       |       |       |   |   |   |   |
| **Net Amount Recognized**                          |       |                  |       |       |       |   |   |   |   |
| Unfunded status                                    |       | $                     | (17,047    | )          | $          | (4,222 | ) | $ | (5,743 | ) | $ | (5,895 | ) |
| Unrecognized net actuarial loss                    |       | 19,821                |       | 8,114      |       | 921 |   | 844 |   |
| Unrecognized prior service cost                    |       | —                |       | —     |       | (351 | ) | (399 | ) |
| Net amount recognized                              |       | $                     | 2,774      |       | $          | 3,892 |   | $ | (5,173 | ) | $ | (5,450 | ) |

 

Amounts recognized in theconsolidated balance sheets consist of:

 
| ** **                           | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------|------------|
| ** **                           | ** ** | **2008**              | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Accrued liability                    |       | $                     | (17,047    | )        | $          | (4,222 | ) | $ | (5,743 | ) | $ | (5,895 | ) |
| Accumulated other comprehensive loss |       | 19,821                |       | 8,114    |       | 570 |   | 445 |   |
| Net amount recognized                |       | $                     | 2,774      |     | $          | 3,892 |   | $ | (5,173 | ) | $ | (5,450 | ) |

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Componentsof net periodic benefit cost**

 
| ** **                              | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|----------|------------|
| ** **                              | ** ** | **2008**              | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                            |       | $                     | —     |     | $          | — |   | $ | — |   | $ | — |   |
| Interest cost                           |       | 2,338                 |       | 2,334    |       | 336 |   | 348 |   |
| Expected return on assets               |       | (2,781                | )          | (2,843   | )          | — |   | — |   |
| Amortization of actuarial loss          |       | 344                   |       | 235      |       | 30 |   | 24 |   |
| Amortization of prior year service cost |       | —                |       | —   |       | (48 | ) | (49 | ) |
| Settlement charge                       |       | 1,217                 |       | —   |       | — |   | — |   |
| Net periodic benefit cost (benefit)     |       | $                     | 1,118      |     | $          | (274 | ) | $ | 318 |   | $ | 323 |   |

 

***Additional information***

 

The increase to our unrecognized netactuarial loss recorded in other comprehensive loss for the Pension Plan of$11,707 and $1,137 during 2008 and 2007, respectively, arose from thedifference between the funded status and the accrued pension expense at the endof each year.

 

The increase to our minimum liabilityrecorded in other comprehensive income for the SERP of $125 and $68 during 2008and 2007, respectively, arose from the difference between the funded status andthe accrued pension expense at the end of each year.

 

***Assumptions***

 

The weighted average assumptions used todetermine benefit obligations and net periodic cost at December 31, 2008and 2007, included a discount rate of 6.0% in each period for the Pension Planand SERP.  The weighted averageassumption used to determine an expected long-term rate of return on PensionPlan assets was 8.0%.

 

The long-term rate of return on plan assetswas estimated as the weighted average of expected return of each of the assetclasses in the target allocation of plan assets.  The expected return of each asset class isbased on historical market returns.

 

***Pension PlanAssets***

*** ***

The PensionPlan’s weighted-average asset allocations at fiscal year-end andweighted-average planned targeted asset allocations going forward are asfollows:

 
| ** **                                                            |   |              |   | **2008**          |   | **2007**          |   |   |   |
|-----------------------------------------------------------------------|--------|-------------------|--------|-------------------|--------|-------------------|--------|--------|--------|
| **Asset allocation category of plan assets** |   | **Target %** |   | **Actual %** |   | **Actual %** |   |   |   |
| Equity securities                                                     |   | 60                |   | 57                |   | 58                |   |   |   |
| Debt securities                                                       |   | 30                |   | 28                |   | 31                |   |   |   |
| Real estate                                                           |   | 5                 |   | 8                 |   | 5                 |   |   |   |
| Other                                                                 |   | 5                 |   | 7                 |   | 6                 |   |   |   |

 

The asset allocation policy, consistent withthe long-term growth objectives of the Pension Plan, is to invest on adiversified basis among various asset classes as determined by the Pension PlanAdministrative Committee.  Assets will beinvested in a manner that will provide for long-term growth with a goal toachieve returns equal to or greater than applicable benchmarks.  Investments will be managed by registeredinvestment advisors.  When investingPension Plan assets, the investment managers of separately managed accountsshall not utilize derivative instruments for speculative purposes or to createleveraged positions.

 

No equity securities of the Company were partof the Pension Plan assets as of December 31, 2008 or 2007.

 

***Cash Flow***

*** ***

**Employer contributions**

** **

Our funding policy is to contribute amounts sufficientto satisfy regulatory funding standards, based upon independent actuarialvaluations.  No contributions areexpected to be made to the Pension Plan in 2009.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Weare not currently required to fund the SERP. All benefit payments are made by us directly to those who receivebenefits from the SERP.  As such, these paymentsare treated as both contributions and benefits paid for reporting purposes.

 

The Company has debt and equity securitiesinvested in a trust intended to fund the SERP obligations.  These investments are classified andaccounted for as available-for-sale securities. At December 31, 2008 and 2007, the investment was reported at itsfair market value of $3,122 and $5,568, respectively, and was classified asprepaid retirement expenses. There was $(1,703) and $166 of unrealized gain(loss) relating to this asset recorded in accumulated other comprehensiveincome as of December 31, 2008 and 2007, respectively. Realized gains were$54 and $424 for the years ended December 31, 2008 and 2007.  Unrealized losses were $1,867 and $106 forthe years ended December 31, 2008 and 2007.  The Company expects to contribute and paybenefits of approximately $655 related to the SERP in 2009.  This contribution is expected to be made byliquidating the investments classified as prepaid retirement expenses.

 

**Fair Value Measurements**

Effective January 1, 2008, we adoptedSFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifiesthat fair value is a market-based measurement that should be determined basedon assumptions that market participants would use in pricing an asset or aliability. As a basis for considering such assumptions, SFAS 157 establishes athree-tier value hierarchy, which prioritizes the inputs used in the valuationmethodologies in measuring fair value:

 

**Level 1**—Observableinputs that reflect quoted prices (unadjusted) for identical assets orliabilities in active markets.

**Level 2**—Observableinputs (other than Level 1) that are directly or indirectly observable in themarketplace.

**Level 3**—Unobservableinputs which are supported by little or no market activity.

 

In accordance with SFAS 157, we measured ourinvestments classified as prepaid retirement expenses at fair value.  Our cash equivalents and marketablesecurities are classified within Level 1 because the underlying investmentshave readily available market prices available, with the exception of oneequity security for which current market prices are not readily available.

 

Assets andliabilities measured at fair value on a recurring basis are summarized below:

 
| ** **                            | ** ** | **Fair value measurement at reporting date using** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Description**                       | ** ** | **December  31, 2008**                                                      | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| **Assets:**                           |       |                                                                             |       |   |   |   |   |   |   |
| **Prepaid retirement expenses:**      |       |                                                                             |       |   |   |   |   |   |   |
| Marketable equity securities          |       | $                                                                                | 3,069      |   | $ | 2,743 |   | $ | 326 |   | $ | — |   |
| Money market mutual funds             |       | 53                                                                               |       | 53 |   | — |   | — |   |
| **Total prepaid retirement expenses** | ** ** | **$**                                                                            | **3,122**  | ** ** | **$** | **2,796** | ** ** | **$** | **326** | ** ** | **$** | **—** | ** ** |

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Estimatedfuture benefit payments**

 

The followingbenefit payments are expected to be paid based on actuarial estimates and priorexperience:

 
| ** **            | ** ** | **Pension** | ** ** | ** ** | ** ** |
|-----------------------|------------|-------------|------------|------------|------------|
| **Fiscal years** | ** ** | **Plan**    | ** ** | **SERP**   | ** ** |
| 2009                  |       | $           | 2,754      |       | $          | 655 |   |
| 2010                  |       | 2,032       |       | 641        |       |
| 2011                  |       | 2,697       |       | 632        |       |
| 2012                  |       | 2,460       |       | 582        |       |
| 2013                  |       | 2,669       |       | 552        |       |
| 2014-2018             |       | 17,360      |       | 2,623      |       |
|                       |            |             |            |            |            |  |  |

 

**Note 7 –Long-term Debt**

 

Long-term debtconsists of the following as of December 31:

 
| ** **                                                                                                                                                                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| First mortgage note payable due in monthly  installments of $26 including interest at 7.81% through January 1, 2024;  payment and rate subject to adjustment every 3 years, next adjustment  January 14, 2010 |       | $        | 2,752      |     | $          | 2,844 |   |
|                                                                                                                                                                                                                    |       |     |       |     |       |   |   |
| Second mortgage note payable due in monthly  installments of $4 including interest at 5.75% through October 1, 2028;  payment and rate subject to adjustment every 5 years, next adjustment  October 1, 2013  |       | 497      |       | —   |       |
|                                                                                                                                                                                                                    |       |     |       |     |       |
| Revolving credit note payable                                                                                                                                                                                           |       | —   |       | —   |       |
|                                                                                                                                                                                                                    |       |     |       |     |       |
| Total debt                                                                                                                                                                                                              |       | 3,249    |       | 2,844    |       |
|                                                                                                                                                                                                                    |       |     |       |     |       |
| Less current portion of long-term debt                                                                                                                                                                                  |       | (113     | )          | (92      | )          |
|                                                                                                                                                                                                                    |       |     |       |     |       |
| Long-term debt, less current portion                                                                                                                                                                                    |       | $        | 3,136      |     | $          | 2,752 |   |

 

Principalmaturities on total debt are scheduled to occur in the following years:

 
| 2009       |   | $     | 113    |   |   |   |
|------------|--------|-------|--------|--------|--------|--------|
| 2010       |   | 122   |   |   |   |
| 2011       |   | 132   |   |   |   |
| 2012       |   | 142   |   |   |   |
| 2013       |   | 154   |   |   |   |
| Thereafter |   | 2,586 |   |   |   |
| Total debt |   | $     | 3,249  |   |   |   |

 

***Mortgage Notes***

*** ***

The first mortgage note payable representsthe balance on a $3,200 note (“First Mortgage Note”) issued on January 14,2004 by Spitz. The First Mortgage Note requires repayment in monthlyinstallments of principal and interest over twenty years.  On each third anniversary of the FirstMortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% overthe Three-Year Constant Maturity Treasury Rate published by the United StatesFederal Reserve (“3YCMT”).  The monthlyinstallment is recalculated on the first month following a change in theinterest rate. The recalculated monthly installment is equal to the monthlyinstallment sufficient to repay the principal balance, as of the date of thechange in the interest rate, over the remaining portion of the originaltwenty-year term.  The monthlyinstallment for the first three years was $23 and included interest at 5.75%per annum. On January 14, 

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

2007, the 3YCMT was 4.81% and the interestrate on the First Mortgage Note adjusted to 7.81% per annum. As a result of theinterest rate adjustment, the monthly installment amount was adjusted to $26.

 

The second mortgage note payable representsthe balance on a $500 note (“Second Mortgage Note”) issued on September 11,2008 by Spitz. The Second Mortgage Note requires repayment in monthlyinstallments of principal and interest over twenty years.  On each fifth anniversary of the SecondMortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% over3YCMT.  The monthly installment isrecalculated on the first month following a change in the interest rate. Therecalculated monthly installment is equal to the monthly installment sufficientto repay the principal balance, as of the date of the change in the interestrate, over the remaining portion of the original twenty-year term.  The monthly installment for the first threeyears is $4 and includes interest at 5.75% per annum.

 

The index used to compute the future changein the interest rate for The First Mortgage Note and the Second Mortgage Note(the “ Mortgage Notes”), the 3YCMT, was 1.00% as of December 31, 2008. TheMortgage Notes are secured by the real property occupied by Spitz pursuant to aMortgage and Security Agreements; the real property had a carrying value of$4,925 as of December 31, 2008. The Mortgage Notes are guaranteed by theCompany.

 

***Line of Credit***

*** ***

On August 24, 2007, the Company entered into an agreement toreinstate, under modified terms, a Line of Credit Agreement (the “CreditAgreement”) which had matured on June 30, 2007. The Credit Agreementpermits borrowings of up to $1,100 which are used to fund Spitz’ workingcapital requirements. The primary modifications to the previous terms consistof a reduction in the per annum interest rate from one-half (0.5%) above theWall Street Prime Rate to the amount equal to the Wall Street Prime Rate, theelimination of minimum balance deposit requirements and the removal of thelimitation placed on borrowings by an asset based formula. Borrowings under theCredit Agreement are secured by Spitz real and personal property and all of theoutstanding shares of Spitz common stock. The Credit Agreement and MortgageNotes contain cross default provisions whereby the default of either agreementwill result in the default of both agreements. As of December 31, 2008there were no borrowings outstanding under the Credit Agreement.

 

**Note 8 -Income Taxes**

** **

The incometax expense of $22 for 2008 included $38 of refunded foreign income taxwithholding, the release of $97 of federal income tax contingency and stateincome tax expense of $157. The income tax benefit of $93 for 2007 representsadjustments to foreign income taxes accrued in 2006.  The actual expense (benefit) differs from theexpected tax expense (benefit) as computed by applying the U.S. federalstatutory income tax rate of 35 percent, during fiscal year:

 
| ** **                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Tax (expense) benefit at U.S. federal  statutory rate     |       | $        | 1,387      |     | $          | 2,233 |   |
| Gains of foreign subsidiaries                             |       | —   |       | 93       |       |
| Adjustment for resolution of tax  contingency             |       | 97       |       | —   |       |
| State taxes (net of federal income tax  benefit)          |       | (45      | )          | 180      |       |
| Research and development tax credits                      |       | (323     | )          | (7,642   | )          |
| Change in valuation allowance attributable  to operations |       | (812     | )          | 5,348    |       |
| Other, net                                                |       | (326     | )          | (119     | )          |
| Tax (expense) benefit                                     |       | $        | (22        | )        | $          | 93 |   |

 

Income tax(expense) benefit consisted of the following:

 
| ** **                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Income tax (expense) benefit from  continuing operations         |       | $        | (22        | )        | $          | 853 |   |
| Income tax expense from gain on sale of  discontinued operations |       | —   |       | (760     | )          |
| Tax (expense) benefit                                            |       | $        | (22        | )        | $          | 93 |   |

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

The tax effects of temporarydifferences that give rise to significant portions of the deferred tax assetsand liabilities as of fiscal year-end:

 
| ** **                                                                  | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Deferred income tax assets:**                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Plant and equipment, principally due to  differences in depreciation        |       | $          | 475        |       | $          | 443 |   |
| Inventory reserves and other inventory  related temporary basis differences |       | 714        |       | 786        |       |
| Warranty, vacation, deferred rent and other  liabilities                    |       | 1,999      |       | 1,511      |       |
| Retirement liabilities                                                      |       | 2,213      |       | 2,299      |       |
| Net operating loss carryforwards                                            |       | 59,132     |       | 58,951     |       |
| Credit carryforwards                                                        |       | 1,466      |       | 1,466      |       |
| Other                                                                       |       | 845        |       | 762        |       |
| Total deferred income tax assets                                            |       | 66,844     |       | 66,218     |       |
| Less valuation allowance                                                    |       | (66,787    | )          | (65,975    | )          |
| Net deferred income tax assets                                              |       | 57         |       | 243        |       |
| **Deferred income tax liabilities:**                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible assets                                                           |       | (57        | )          | (243       | )          |
| Total deferred income tax liabilities                                       |       | (57        | )          | (243       | )          |
| Net deferred income tax assets and  liabilities                             |       | $          | —     |       | $          | — |   |

 

Worldwide income (loss) before income taxes consisted of the following:

 
| ** **    | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| United States |       | $        | (3,801     | )        | $          | (6,264 | ) |
| Foreign       |       | (162     | )          | (116     | )          |
| Total         |       | $        | (3,963     | )        | $          | (6,380 | ) |

 

Income tax(expense) benefit consisted of the following:

 
| ** **                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| *Current*                               |       |     |       |     |       |
| U.S. federal                            |       | $        | 97         |     | $          | — |   |
| State                                   |       | (157     | )          | —   |       |
| Foreign                                 |       | 38       |       | 93       |       |
| Total                                   |       | $        | (22        | )        | $          | 93 |   |
| *Deferred*                              |       |     |       |     |       |
| U.S. federal                            |       | $        | 650        |     | $          | (6,187 | ) |
| State                                   |       | 162      |       | 40       |       |
| Foreign                                 |       | —   |       | 799      |       |
| Total                                   |       | 812      |       | (5,348   | )          |
| Valuation allowance increase (decrease) |       | (812     | )          | 5,348    |       |
| Total                                   |       | $        | —     |     | $          | — |   |

 

We have total federal netoperating loss carryforwards of approximately $154,500 which expire from 2009through 2028.  Approximately $176 offederal net operating loss carryforwards expired in 2008.  We have various federal tax creditcarryforwards of approximately $1,500, a portion of which expire between 2011and 2016.  We also have state netoperating loss carryforwards of approximately $130,900 that expire depending onthe rules of the various states to which the loss or credit is allocated.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

During the year ended December 31,2008, the valuation allowance on deferred income tax assets increased$812.  During the year ended December 31,2007 the valuation allowance on deferred income tax assets decreased byapproximately $5,348.  Valuationallowances were established according to our belief that it is more likely thannot that these net deferred income tax assets will not be realized.

 

On January 1, 2007, theCompany adopted the provisions of FASB Interpretation 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109,“Accounting for Income Taxes,”  .  Previously, the Company had accounted for taxcontingencies in accordance with SFAS No. 5, “Accounting forContingencies.” As required by FIN 48, the Company recognizes the financialstatement benefit of a tax position only after determining that the relevanttax authority would more likely than not sustain the position following anaudit. For tax positions meeting the more-likely-than-not threshold, the amountrecognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimate settlementwith the relevant tax authority. At the adoption date, the Company applied FIN48 to all tax positions for which the statute of limitations remained open. Asa result of the implementation of FIN 48, the Company impaired approximately $6million of deferred tax assets related to research and experimentation taxcredits, which had a full valuation allowance and therefore did not result in areduction to the January 1, 2007, balance of retained earnings.  The amount of unrecognized tax benefits as ofJanuary 1, 2007, was $6 million. That amount includes unrecognized taxbenefits which, if ultimately recognized would not have an impact to theCompany’s annual effective tax rate due to the full valuation allowance.  The Company is subject to audit by the IRSand various states for tax years dating back to 1992.

 

**Note 9 -Commitments and Contingencies**

 

***Research and Development Arrangement***

 

In December 2005,we entered into a research and development agreement (the “2005 R&D Agreement”)with a third party under which we paid $1,720 during the year ended December 31,2007.   The 2005 R&D Agreement wasterminated in January 2008, when we entered into a new research anddevelopment agreement (the “2008 R&D Agreement”) with the same thirdparty.  Under the 2008 R&D Agreement,the Company paid $1,460 during the year ended December 31, 2008.  The Company has a royalty obligation underthe 2008 R&D Agreement of 4% of the net sales of the licensed product soldby the Company, with an annual minimum royalty of $400.  Because the agreement relates to technologythat is under development and has not reached technological feasibility, allpayments made under the agreement are expensed as research and development asincurred.

 

***Letters of Credit***

 

The Company has finance arrangements whichfacilitate the issuance of letters of credit and bank guarantees. Under******the terms of the arrangements, weare required to maintain a balance in a specific cash account equal to orgreater than the outstanding value of all letters of credit or bank guaranteesissued, plus other amounts necessary to adequately secure our obligations withthe financial institution.  As of December 31,2008, we had outstanding letters of credit and bank guarantees of $1,642.  Lettersof credit that expire in 2009 and 2010 were $1,622 and $20, respectively.

 

**Note 10 -Stock Option and Stock Purchase Plan**

 

***Stock Option Plan***

 

In 2004, shareholders approvedthe adoption of the 2004 Stock Incentive Plan of Evans & SutherlandComputer Corporation (“2004 Plan”), which expires in 2014.  The 2004 Plan is a stock incentive plan thatprovides for the grant of options and restricted stock awards to employees andfor the grant of options to non-employee directors.  Under the 2004 Plan non-employee directorsreceive an annual option grant for no more than 10,000 shares.  New non-employee directors receive an optiongrant for no more than 10,000 shares upon their appointment or election.  In addition, with the adoption of this planno additional options can be issued under any of the prior stock-basedplans.  The 2004 Plan establishes aminimum exercise price for options of 110% of fair market value on the date ofgrant.  Restricted stock awards may bequalified as a performance-based award that conditions a participant’s award 

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

upon achievement by the Companyor its subsidiaries of performance goals established by our Board of Directors’Compensation Committee.

 

The number of shares, terms,and exercise period of option grants are determined by the Board of Directorson an option-by-option basis. Options generally vest ratably over three yearsand expire ten years from the date of grant. As of December 31, 2008, options to purchase 1,526,184 shares ofcommon stock were authorized and reserved for future grant.

 

A summary of activity follows(shares in thousands):

 
| ** **                                                      | ** ** | **2008**           | ** ** | **2007**      | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|---------------|------------|
| ** **                                                      | ** ** | ** **         | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                                      | ** ** | ** **         | ** ** | **Average**   | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                      | ** ** | **Number**         | ** ** | **Exercise**  | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| ** **                                                      | ** ** | **of shares** | ** ** | **Price**     | ** ** | **of shares** | ** ** | **Price** | ** ** |
| Outstanding at beginning of year                                |       | 1,561              |       | $             | 8.97       |   | 1,917 |   | $ | 9.59 |   |
| Granted                                                         |       | 175                |       | 1.21          |       | 167 |   | 3.55 |   |
| Exercised                                                       |       | —             |       | —        |       | — |   | — |   |
| Cancelled                                                       |       | (501               | )          | 13.46         |       | (523 | ) | 9.51 |   |
| Outstanding at end of year                                      |       | 1,235              |       | 6.05          |       | 1,561 |   | 8.97 |   |
|                                                            |       |               |       |          |       |   |   |   |   |
| Exercisable at year end                                         |       | 887                |       | 7.27          |       | 1,267 |   | 9.92 |   |
|                                                            |       |               |       |          |       |   |   |   |   |
| Weighted average fair value of options  granted during the year |       | $                  | 0.642      |          |       |   | $ | 1.24 |   |   |   |
|                                                                 |            |                    |            |               |            |  |  |  |  |  |  |  |  |

 

As of December 31, 2008, options exercisableand options outstanding had a weighted average remaining contractual term of4.2 and 5.4 years, respectively, and no aggregate intrinsic value.

 

The fair value of each optiongrant is estimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions used forgrants:

 
| ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------|------------|------------|------------|------------|------------|----------|------------|----------|------------|
| Expected life (in years) |       |       |       |       |       | 2.6      |       | 2.6      |       |
| Risk free interest rate  |       |       |       |       |       | 2.86     | %          | 4.3      | %          |
| Expected volatility      |       |       |       |       |       | 75       | %          | 63       | %          |
| Dividend yield           |       |       |       |       |       | —   |       | —   |       |

 

Expected option lives and volatilities are based on historical data ofthe Company.  Our risk free interest rateis calculated as the average US Treasury bill rate that corresponds with theoption life.  Historically, the Companyhas not declared dividends and there are no future plans to do so.

 

As of December 31, 2008, there wasapproximately $87 of total unrecognized share-based compensation cost relatedto grants under our plans that will be recognized over a weighted-averageperiod of one year.

 

Share-based compensation expense from awards underthe 2004 Plan for the year ended December 31, 2008 and 2007 was $151 and$350, respectively.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 11 - Preferred Stock**

 

***Class APreferred Stock***

 

We have 5,000,000 authorizedshares of Class A Preferred Stock. As of December 31, 2008 and 2007, there were no Class APreferred shares of stock outstanding. In November 1998, the Company adopted a shareholder rights plan andthe Board of Directors declared a dividend of one preferred stock purchaseright (“Right”) for each outstanding share of common stock of E&S as of November 19,1998, and for all future issuances of common stock.  Each Right entitled the registered holder topurchase from E&S one one-thousandth of a share of Preferred Stock at aprice per share of $60.00, subject to adjustment. The Rights would have beenexercisable ten business days following a public announcement of a person orgroup of persons acquiring beneficial ownership of 15% or more of ouroutstanding common shares or following the announcement of a tender offer orexchange offer, the consummation of which would result in the beneficialownership by a person or group of persons of 15% or more of the outstandingE&S stock.  The shareholder rightsplan expired by its own terms on November 30, 2008.  Accordingly, the consequences of anacquisition of our common stock, as prescribed by the shareholder rights plan,are no longer in effect.

 

***Class B Preferred Stock***

 

We have 5,000,000 authorizedshares of Class B Preferred Stock. As of December 31, 2008 and 2007, no shares were outstanding.

 

**Note 12 - Geographic Information**

 

The table below presents salesby geographic location of sales.  Saleswithin any individual country did not exceed 10% of consolidated sales:

 
| ** **      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| United States   |       | $        | 19,212     |     | $          | 15,360 |   |
| International   |       | 18,447   |       | 10,859   |       |
| **Total sales** |       | $        | 37,659     |     | $          | 26,219 |   |

 

**Note 13 - Significant Customers**

 

For the years ended December 31,2008 and December 31, 2007, no individual customer represented 10% or moreof total revenue.  At December 31,2008, accounts receivable from Customer A was 27% of total accounts receivable.At December 31, 2007, accounts receivable from Customers A and B were 40%and 11% of total accounts receivable, respectively.  At December 31, 2008, Customer Crepresented 16% of total costs and estimated earnings in excess ofbillings.  At December 31, 2007,Customer D represented 11% of total costs and estimated earnings in excess ofbillings.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and

Stockholders of Evans & Sutherland Computer Corporation

 

We have audited the accompanying consolidated balance sheets of Evans & Sutherland Computer Corporation (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for the years then ended.   These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of Evans & Sutherland Computer Corporation as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

 

Tanner LC

 

Salt Lake City, Utah

March 6, 2009

 

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

 

None.

 
| **ITEM 9A.** | ** ** | **CONTROLS AND PROCEDURES** |
|--------------|------------|-----------------------------|

 

**Evaluation of Disclosure Controls andProcedures.**

 

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined inRule 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934 (the “Exchange Act”)) as of the end of the period covered by thisreport.  Based upon that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures as of the end of the period covered by thisreport were effective at the reasonable assurance level such that theinformation required to be disclosed by us in reports filed under the ExchangeAct is (i) recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission and (ii) accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding disclosure. In designing andevaluating the disclosure controls and procedures, management recognized thatany controls system cannot provide absolute assurance, however, that theobjectives of the controls system are met, and no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within a company have been detected.

 

**Management’sAnnual Report on Internal Control over Financial Reporting.**

 

Our managementis responsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a-15(f) under the ExchangeAct). Our internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of consolidated financial statements for external purposesof accounting principles generally accepted in the United States.  Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.Therefore, even those systems determined to be effective can provide only reasonableassurance of achieving their control objectives. Further, because ofchanges in conditions, the effectiveness of internal control may vary overtime.

 

Ourmanagement, with the participation of the Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2008.  In making this assessment, our managementused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control — Integrated Framework.  Based on this evaluation, our management,with the participation of the Chief Executive Officer and Chief FinancialOfficer, concluded that, as of December 31, 2008, our internal controlover financial reporting was effective based on those criteria.

 

This annualreport does not include an attestation report of the Company’s registeredpublic accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by the Company’s registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the Company to provide only management’s report in this annual report.

 

**Changes inInternal Control Over Financial Reporting.**

 

During thequarter ended December 31, 2008, there has been no change in our internalcontrol over financial reporting (as defined in Rule 13a-15(f) and15d-15(f) under the Exchange Act) ) that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting. Our process for evaluating controls and procedures iscontinuous and encompasses constant improvement of the design and effectivenessof established controls and procedures and the remediation of any deficiencieswhich may be identified during this process.

 

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**PART III**

 
| **ITEM 10.** | ** ** | **DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE  GOVERNANCE** |
|--------------|------------|-------------------------------------------------------------|

 

Certaininformation required by Item 401 of Regulation S-K will be included under thecaption “Election of Directors” in the Proxy Statement for our 2009 AnnualMeeting of Shareholders and that information is incorporated herein byreference.  Information required by Item405 of Regulation S-K will be included under the caption “Compliance with Section 16(a) ofthe Securities Exchange Act of 1934” in the Proxy Statement for our 2009 AnnualMeeting of Shareholders and that information is incorporated herein by reference.  Certain information required by Item 401 ofRegulation S-K is included in Part I of this Form 10-K under thecaption “Executive Officers of the Registrant.” The information required byItem 407(a) of Regulation S-K will be included under the caption “Electionof Directors” in the Proxy Statement for our 2009 Annual Meeting ofShareholders and that information is herein incorporated by reference.

 

**Code of Ethics**

 

Evans & Sutherlandmaintains a Code of Ethics and Business Conduct which is applicable to allemployees, including all officers, and including our independent non-employeedirectors with regard to Evans & Sutherland related activities.  The Code of Ethics and Business Conductincorporates our guidelines designed to deter wrongdoing and to promote honestand ethical conduct and compliance with applicable laws and regulations. Italso incorporates our expectations of our employees that enable us to provideaccurate and timely disclosure in our filings with the Securities and ExchangeCommission and other public communications. In addition, they incorporate our expectations of our employeesconcerning prompt internal reporting of violations of our Code of Ethics andBusiness Conduct.

 

The full text of the Evans &Sutherland Code of Ethics and Business Conduct is published on our InvestorsRelations website at www.es.com.  Weintend to disclose future amendments to certain provisions of our Code ofEthics and Business Conduct or waivers of such provisions granted to executiveofficers and directors, on this website within four business days following thedate of such amendment or waiver.

 
| **ITEM 11.** | ** ** | **EXECUTIVE COMPENSATION** |
|--------------|------------|----------------------------|

 

Theinformation required by this item will be included under the captions“Executive Compensation” and “Election of Directors” in the Proxy Statement forour 2009 Annual Meeting of Shareholders and that information is hereinincorporated by reference.

 

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

 

Theinformation required by Item 403 of Regulation S-K will be included under thecaption “Security Ownership of Certain Beneficial Owners and Management” in theProxy Statement for our 2009 Annual Meeting of Shareholders and thatinformation is herein incorporated by reference.

 

**Securities Authorized for Issuance Under Equity Compensation Plans asof December 31, 2008**

 
| ** **                                                  | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights  (a)** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance  under equity compensation  plans (excluding securities  reflected in column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders     |       | 1,234,804                                                                                                                                             |       | $                                                                                                                     | 6.05       |                                                                                                                                                                                                                  | 1,526,184  |   |
| Equity compensation plans not approved by  security holders |       | —                                                                                                                                                |       | —                                                                                                                |       | —                                                                                                                                                                                                                |       |
| Total                                                       |       | 1,234,804                                                                                                                                             |       | $                                                                                                                     | 6.05       |                                                                                                                                                                                                                  | 1,526,184  |   |

 
| **ITEM 13.** | ** ** | **CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS** |
|--------------|------------|-----------------------------------------------------|

 

Theinformation required by Item 404 of Regulation S-K will be included under thecaption “Certain Relationships and Related Party Transactions” in the ProxyStatement for our 2009 Annual Meeting of Shareholders and that information isherein incorporated by reference.

 
| **ITEM 14.** | ** ** | **PRINCIPAL ACCOUNTANT FEES AND SERVICES** |
|--------------|------------|--------------------------------------------|

 

Theinformation required by Item 14 will be included under the caption “Report ofthe Audit Committee of the Board of Directors” in the Proxy Statement for our2009 Annual Meeting of Shareholders and that information is herein incorporatedby reference.

 

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**PART IV**

** **

**ITEM 15.**       EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

** **

**(a)****   List of documents filed as partof this report**

 

1.     FinancialStatements

 

The following consolidated financial statements are included in Part II,Item 8 of this report on Form 10-K.

 

·      ConsolidatedBalance Sheets as of December 31, 2008 and 2007

 

·      ConsolidatedStatement of Operations for each of the years ended December 31, 2008 and2007

 

·      ConsolidatedStatements of Stockholders’ Equity and Comprehensive Loss for the years ended December 31,2008 and 2007

 

·      ConsolidatedStatement of Cash Flows for each of the years ended December 31, 2008 and2007

 

·      Notesto Consolidated Financial Statements

 

2.     FinancialStatement Schedules

 

There are no schedules filed because of the absence of conditions underwhich they are required or because the required information is presented in theconsolidated financial statements or the notes thereto.

 

3.     Exhibits

 

Articles of Incorporation andBylaws

 

3.1.1        Articles of Incorporation,as amended, filed as Exhibit 3.1 to Evans & Sutherland ComputerCorporation’s Annual Report on Form 10-K, SEC File No. 000-08771, forthe fiscal year ended December 25, 1987, and incorporated herein by thisreference.

 

3.1.2        Amendments to Articles of Incorporation filed as Exhibit 3.1.1 toEvans & Sutherland Computer Corporation’s Annual Report on Form 10-K,SEC File No. 000-08771, for the fiscal year ended December 30, 1988,and incorporated herein by this reference.

 

3.1.3        Certificate of Designation, Preferences andOther Rights of the Class B-1 Preferred Stock of Evans &Sutherland Computer Corporation, filed as Exhibit 3.1 to Evans &Sutherland Computer Corporation’s Form 10-Q, SEC File No. 000-08771,for the quarter ended September 25, 1998, and incorporated herein by thisreference.

 

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

 

3.2.2        Amendment No. 1 tothe Amended and Restated Bylaws of Evans & Sutherland ComputerCorporation, filed as Exhibit 3.3 to Evans & Sutherland ComputerCorporation’s Form 10-K for the year ended December 31, 2000, andincorporated herein by this reference.

 

Instruments defining the rightsof security holders

 

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

 

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

 

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4.3           SecondAmendment to Rights Agreement dated as of August 13, 2004 between Evans &Sutherland Computer Corporation and American Stock Transfer & TrustCompany, filed as Exhibit 4.1 to Evans & Sutherland ComputerCorporation’s Form 8-K filed on August 16, 2004, and incorporatedherein by this reference.

 

Material contracts

 

Management contracts and compensatory plans

 

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

 

10.2         Evans &Sutherland Computer Corporation’s 1995 Long-Term Incentive Equity Plan, filedas Exhibit 10.11 to Evans & Sutherland Computer Corporation’sAnnual Report on Form 10-K, SEC File No. 000-08771, for the fiscalyear ended December 29, 1995, and incorporated herein by this reference.

 

10.3         Evans &Sutherland Computer Corporation 2004 Stock Incentive Plan, filed as Annex A toEvans & Sutherland’s Form 14A, SEC File No. 001-14667, filedon April 19, 2004 and incorporated herein by this reference.

 

10.4         Amended and restatedEvans & Sutherland Computer Corporation’s Supplemental ExecutiveRetirement Plan (SERP), dated May 16, 2002, filed as Exhibit 10.38 toEvans & Sutherland Computer Corporation’s Form 10-K for the yearended December 31, 2002, and incorporated herein by reference.

 

10.5         Amended and restatedEvans & Sutherland Computer Corporation’s Executive Savings Plan,dated May 16, 2002, filed as Exhibit 10.39 to Evans &Sutherland Computer Corporation’s Form 10-K for the year ended December 31,2002, and incorporated herein by reference.

 

10.6         Employment agreementbetween Evans & Sutherland Computer Corporation and Kirk Johnson,dated August 26, 2002, filed as Exhibit 10.14 to Evans &Sutherland Computer Corporation’s Form 10-K for the year ended December 31,2004, and incorporated herein by reference.

 

10.7         Employment Agreement,dated February 8, 2006, by and between Evans & SutherlandComputer Corporation and Jonathan Shaw, filed as Exhibit 10.1 to Evans &Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30,2006, and incorporated herein by reference.

 

10.8         Employment Agreementdated February 8, 2006, by and between Evans & SutherlandComputer Corporation and Paul Dailey, filed as Exhibit 10.2 to Evans &Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30,2006, and incorporated herein by reference.

 

10.9         Employment Agreement,dated August 26, 2002, by and between Evans & Sutherland ComputerCorporation and David H. Bateman, filed as Exhibit 10.13 to Evans &Sutherland Computer Corporation’s Form 10-K for the year ended December 31,2006, and incorporated herein by reference.

 

Other material contracts

 

10.10       Line of Credit Agreement,dated April 28, 2006, between Evans & Sutherland ComputerCorporation, Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.4to Evans & Sutherland Computer Corporation’s Form 10-Q for thequarter ended June 30, 2006, and incorporated herein by reference.

 

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10.11       Line of Credit Note, dated April 28,2006, by and between Evans & Sutherland Computer Corporation, Spitz, Inc.and First Keystone Bank, filed here with filed as Exhibit 10.6 to Evans &Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30,2006, and incorporated herein by reference.

 

10.12      Guaranty, dated April 28,2006, by Evans and Sutherland Computer Corporation, filed as Exhibit 10.7to Evans & Sutherland Computer Corporation’s Form 10-Q for thequarter ended June 30, 2006, and incorporated herein by reference.

 

10.13       Pledge Agreement, dated April 28,2006, by and between Evans & Sutherland Computer Corporation, Spitz, Inc.and First Keystone Bank, filed as Exhibit 10.8 to Evans &Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30,2006, and incorporated herein by reference.

 

10.14       Security Agreement, dated April 28,2006, by and between Spitz, Inc. and First Keystone Bank, filed here withfiled as Exhibit 10.9 to Evans & Sutherland Computer Corporation’sForm 10-Q for the quarter ended June 30, 2006, and incorporatedherein by reference.

 

10.15       Open-end Mortgage andSecurity Agreement, dated April 28, 2006, by and between Spitz, Inc.and First Keystone Bank, filed as Exhibit 10.10 to Evans &Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30,2006, and incorporated herein by reference.

 

10.16       First ModificationAgreement to Line of Credit Agreements, dated July 28, 2006, by andbetween Evans & Sutherland Computer Corporation, Spitz, Inc. andFirst Keystone Bank, filed as Exhibit 10.11 to Evans & SutherlandComputer Corporation’s Form 10-Q for the quarter ended June 30, 2006,and incorporated herein by reference.

 

10.17       Credit Agreement betweenEvans & Sutherland Computer Corporation and Wells Fargo Bank, NationalAssociation effective December 1, 2006, filed as Exhibit 10.24 toEvans & Sutherland Computer Corporation’s Form 10-K for the yearended December 31, 2006, and incorporated herein by reference.

 

10.18       Mortgage Note dated January 14,2004, of Transnational Industries, Inc. and Spitz, Inc. to FirstKeystone Bank filed as Exhibit 10.25 to Evans & SutherlandComputer Corporation’s Form 10-K for the year ended December 31,2006, and incorporated herein by reference.

 

10.19       Open-End Mortgage andSecurity Agreement dated January 14, 2004, between Spitz, Inc. andFirst Keystone Bank filed as Exhibit 10.26 to Evans & SutherlandComputer Corporation’s Form 10-K for the year ended December 31,2006, and incorporated herein by reference.

 

10.20       Loan Agreement dated as January 14,2004, between First Keystone Bank, Transnational Industries, Inc. andSpitz, Inc filed as Exhibit 10.27 to Evans & Sutherland ComputerCorporation’s Form 10-K for the year ended December 31, 2006, andincorporated herein by reference.

 

10.21       First ModificationAgreement to Mortgage Loan Agreements, dated March 30 2007, by and betweenEvans & Sutherland Computer Corporation, Spitz, Inc. and FirstKeystone Bank, filed as Exhibit 10.28 to Evans & SutherlandComputer Corporation’s Form 10-K for the year ended December 31,2006, and incorporated herein by reference.

 

10.22       Second ModificationAgreement to Line of Credit Agreements, dated March 30 2007, by andbetween Evans & Sutherland Computer Corporation, Spitz, Inc. andFirst Keystone Bank, filed as Exhibit 10.29 to Evans & SutherlandComputer Corporation’s Form 10-K for the year ended December 31,2006, and incorporated herein by reference.

 

10.23      Guaranty, dated March 30,2007 by Evans and Sutherland Computer Corporation, filed as Exhibit 10.30to Evans & Sutherland Computer Corporation’s Form 10-K for theyear ended December 31, 2006, and incorporated herein by reference.

 

10.24      Third Modification Agreementto Line of Credit Agreements, dated August 24 2007, by and between Evans &Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, 

 

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filed as Exhibit 10.31 to Evans &Sutherland Computer Corporation’s Form 10-K for the year ended December 31,2007, and incorporated herein by reference.

 

Subsidiaries of the registrant

 

21.1         Subsidiaries of Registrant, filed as Exhibit 21.1to Evans & Sutherland Computer Corporation’s Form 10-K for theyear ended December 31, 2007, and incorporated herein by reference.

 

Consent of experts and counsel

 

23.1         Consent of CurrentIndependent Registered Public Accounting Firm, filed herein.

 

Rule 13a-14(a)/15d-14(a) Certifications

 

31.1         Certification of Chief Executive Officerpursuant to Rule 13a-14(a) and Rule 15d-14(a) of theSecurities Exchange Act, as amended, filed herein.

 

31.2         Certification of Chief Financial Officerpursuant to Rule 13a-14(a) and Rule 15d-14(a) of theSecurities Exchange Act, as amended, filed herein.

 

Section 1350Certifications

 

32.1         Certification of Chief Executive Officer andChief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, filed herein.

 

**TRADEMARKS USED IN THIS FORM 10-K**

** **

E&S, ESLP,and Digistar are trademarks or registered trademarks of Evans &Sutherland Computer Corporation.  Allother product, service, or trade names or marks are the properties of theirrespective owners.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|   | EVANS &  SUTHERLAND COMPUTER CORPORATION |
|--------|---------------------------------------------------|
|   |                                              |   |
|   |                                              |   |
|   | By                                      |  /s/ DAVID H. BATEMAN |
|   |                                              | David  H. Bateman |
|   |                                              | Chief  Executive Officer and Director |

 

March 6, 2009

 

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 

 
| **Signature** | ** **                   | **Title**               | ** **                       | **Date** |
|---------------|------------------------------|-------------------------|----------------------------------|----------|
|          |                         | Chief Executive Officer |                             |     |
| /s/           | DAVID  H. BATEMAN            |                    | and Director                     |     | March 6, 2009 |
|          | David  H. Bateman            |                    | (Principal Executive Officer)    |     |   |
|          |                         |                    | Chief Financial Officer          |     |   |
| /s/           | PAUL  L. DAILEY              |                    | (Principal Financial Officer and |     | March 6, 2009 |
|          | Paul  L. Dailey              |                    | Principal Accounting Officer)    |     |   |
|          |                         |                    |                             |     |   |
| /s/           | DAVID  J. COGHLAN            |                    | Chairman of the Board            |     | March 6, 2009 |
|          | David  J. Coghlan            |                    |                             |     |   |
|          |                         |                    |                             |     |   |
| /s/           | WILLIAM  SCHNEIDER, JR.      |                    | Director                         |     | March 6, 2009 |
|          | William  Schneider, Jr. |                    |                             |     |   |
|          |                         |                    |                             |     |   |
| /s/           | JAMES  P. MCCARTHY           |                    | Director                         |     | March 6, 2009 |
|          | James  P. McCarthy           |                    |                             |     |   |
|          |                         |                    |                             |     |   |
|          |                         |                    |                             |     |   |
| /s/           | E.  MICHAEL CAMPBELL         |                    | Director                         |     | March 6, 2009 |
|          | E.  Michael Campbell         |                    |                             |     |   |

 

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