Evans & Sutherland Computer (ESCC)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2008

or

For the transition period from                           to                        

Commission file number 0-8771

(Exact name of registrant as specified in its charter)

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:

Indicate by check mark if the registrant is a well-known seasoned issuer, 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 reports pursuant to Section 13 or 15(d) of the Act.  o Yes  x No

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

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

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

Large accelerated filer o      Accelerated filer o                 Non-accelerated filer o                       Smaller reporting company x

(Do not check if a smaller reporting company)

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

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

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

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EVANS & SUTHERLAND COMPUTER CORPORATION

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2008

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PART I

ITEM 1.          BUSINESS

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

Evans & Sutherland was incorporated in the state of Utah on May 10, 1968.  Our principal offices are located at 770 Komas 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 on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).  We make our website content available for informational purposes only.  The information provided on our website is not incorporated by reference into this Form 10-K and our website address is not intended to be a hyperlink.  The above reports and other information are also available, free of charge, at www.sec.gov.  Alternatively, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Evans & Sutherland focuses on the production of high-quality visual systems, advanced displays including the Evans & 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’s most compelling visual systems.  With our subsidiary, Spitz, Inc., and its over 60-year history as a leading supplier of planetarium systems and other dome displays, E&S supplies premier total system solutions for its digital theater markets as well as customized domes and other curved structures in the architectural market.

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

E&S offers a range of products and services for digital theater, planetarium, and educational institutions.  These products include state of the art image generators, domes, and display systems some of which feature our ESLP that provides a seamless high resolution display from a single projector.  Additionally, we produce unique content both for our own library which we license to customers and for specific customer requirements.

We are an industry leader in providing visual systems to an international customer base in the digital theater, planetarium, and educational markets. We also supply dome projection screens and dome architectural treatments to major theme parks, casinos, world expositions, and military defense contractors.  In each of these 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 by virtue of its capability as a single source that can directly supply and integrate all of the equipment in the planetarium theater, including the projection system, sound, lighting, computer control system and domed projection screen.  We believe our range of visual systems and services at various price and performance levels, our research and development investments and capabilities, our responsiveness to customers, and our ability to design and manufacture value-added visual systems enable us to compete effectively.

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

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commercial projectors similar to systems sold by our competitors.  Our proprietary image generator, the Digistar 4 (“D4”), along with other customized software tools differentiates our digital theater systems and competes favorably with competitive digital display systems.

We began work in 1997 to build a new generation of projection technology with specifications beyond any other technology either available or likely in the foreseeable future.  This goal evolved into the production of a revolutionary projector using lasers for illumination and micro-electro-mechanical systems (MEMS) to modulate the laser light and create an image.  The result is our ESLP Systems, which were first delivered late in 2005, with additional units delivered in each year since.  The first units have been supplied to our traditional simulation and digital theater customers who continue to order systems with the new projection technology.  We believe that the ESLP also has application to other markets in the future where ultra-high resolution, high efficiency, excellent image quality, and low life-cycle cost are important considerations.

Our Spitz subsidiary is the world’s leading producer of domed projection screens. Spitz designs, manufactures, and installs domed projection screens used in planetarium theaters and a variety of other applications such as ride simulators, special or large format film theaters, simulation training systems and architectural treatments. Spitz’s experience enables it to advise on the architectural integration of domed projection screens and solve complex optical problems involving reflectivity and image distortion on compound curved surfaces. The Company believes that these skills are important to buyers of domed projection screens. The principal customers in our dome business are entities in the entertainment, educational and commercial and military simulation markets. Customers include major theme parks, casinos, world expositions, museums, schools, and military defense contractors. There is currently one known domestic competitor that manufactures domed projection screens. In addition, construction or metal fabrication contractors will occasionally supply domed projection screens, particularly in foreign markets.

We own a significant number of patents and trademarks and we are a licensee under several others.  Our portfolio of patents and trademarks is, as a whole, material to our business.  However, no one piece of intellectual property is critical to our business, thus no individual piece of our intellectual property is separately discussed.  In the U.S. and internationally, we hold active patents that cover many aspects of our visualization technology.  Several patent applications are presently pending in the U.S., Japan and several European countries, and other patent applications are in preparation. We actively pursue patents on our new technology and we intend to vigorously protect our patent rights.  We often trademark key product names and brand names to protect our equity in the marketplace. We routinely copyright software, documentation and chip masks designed by us and institute copyright registration when appropriate.  Currently we retain a total of 33 active U.S. patents, and have licenses to an additional 25 U.S. patents.

We consider the timely development and improvement of our technology to be essential to maintain our competitive position and to capitalize on market opportunities.  We continue to fund essentially all research and development (“R&D”) efforts internally.

A significant focus for our R&D in 2008 was the continued development of our laser projector, the ESLP.  We first delivered ESLP’s in the fourth quarter of 2005 to the Air Force and have since delivered the ESLP to planetariums.  Efforts to improve production process, performance and reliability of the laser projector continue. In addition we are exploring the potential application of the ESLP technology in new markets through partnering and licensing arrangements.

R&D efforts continue to improve the D4, the current generation of our popular image generator and a key component to our digital display systems.  We are also exploring the possibility of other commercial applications for D4 technology.

Most of our current parts and assemblies are readily available through multiple sources in the open market; however, a limited number are available only from a single source.  In these cases, we either stock adequate inventory to cover future product demands, obtain the agreement of the vendor to maintain adequate stock for future

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

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

We believe our facilities and operations are within standards fully acceptable to the Environmental Protection Agency and that all facilities and procedures are operated in accordance with environmental rules and regulations, and international, federal, state and local laws.

In the normal course of business we develop and maintain various types of relationships with key customers and technology partners.  The teaming agreements are with industry partners and are intended to improve our overall competitive position.  The product development agreements enhance our products by the cooperative development of new features and capabilities necessary to maintain our industry leading position.

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

The following sets forth certain information regarding the executive officers of E&S as of December 31, 2008.

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

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

Bob Morishita was appointed Vice President of Human Resources in 2000.  He joined E&S as Compensation Manager in 1982 and was appointed Human Resources Director in 1997.

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

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

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

ITEM 2.          PROPERTIES

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

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

ITEM 3.          LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2008.

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PART II

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

We have never paid a cash dividend on our common stock and have used retained earnings for the operation and expansion of our business.  Currently we have an accumulated deficit.  For the foreseeable future, we intend to follow our policy of retaining any future earnings to finance the development and growth of our business.

Additional information required by this item is incorporated by reference to the table captioned Securities Authorized for Issuance Under Equity Compensation Plans as of December 31, 2008 in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Part III of this annual report on Form 10-K.

The table below presents the high and low sales prices per share on the Nasdaq Stock Market by quarter for 2008 and 2007. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

ITEM 6.  NOT APPLICABLE

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

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

Revenue and gross profit contributions from our digital theater and dome products continued to increase through 2008.  The increased revenue and gross profit improved the 2008 results of operations but were not enough to cover operating expenses which included our continued investment in the development of the Evans & Sutherland Laser Projector (“ESLP”) and increased pension plan expenses. Although this resulted in a loss reported for 2008, the improvements achieved nearly breakeven results with positive cash flow before changes in working capital for the fourth quarter of 2008.

Development of our laser projector products continues with the objective of improving key components that will facilitate more efficient production and performance reliability. Although development efforts have improved the performance of the ESLP, further advances will be required and are expected in 2009 in order to facilitate the delivery and acceptance of more customer projects with corresponding revenue. Also, the exploration of potential opportunities for our laser technology in new markets will continue in 2009.  Our success in the development of these new opportunities is the critical element in our plan to profitably grow our business.

The 2008 improvement in revenue and gross profit was driven by increased demand for digital planetarium products and special dome display systems for retail and entertainment venues. The increased demand for planetarium products is attributable to theater conversions replacing old mechanical projections systems and the growth of new science and technology museums in developing foreign countries. Retail and entertainment venues continue to show interest in special dome display systems to create unique exhibits to differentiate themselves from competing visitor attractions.

We are monitoring our business to determine the effects of the current global economic turmoil. Most of the projects that generate sales of our products are of a long term nature with significant investments made in advance of ordering our products. We believe this 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. However, many of our digital theater customers’ projects depend on funding by financially stressed local governments and, in some cases, charitable donations.  There is also an element of our revenue source dependent upon discretionary demand for entertainment attractions. These issues may negatively affect demand for our products.  We believe 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.

  Liquidity and capital resources have been pressured by the recent economic downturn. The drop in global investment markets has produced significant unrealized losses on the investments in our pension trusts which fund our pension obligations. As a result, accumulated other comprehensive loss has pushed stockholders’ equity to a deficit position. The actuarial analysis indicates that, based on current regulations, 2009 liquidity will not be affected by the pension obligations as cash contributions to the pension trusts can be deferred until 2010. Our ability to satisfy the pension obligations in 2010 and beyond will depend on the recovery of investment performance and profitable growth from the existing and new company products.  Otherwise, the adequacy of current liquidity sources to fund operations will depend on a sufficient stream of new orders with adequate customer progress payments through 2009. Much progress has been made to reduce the absorption of cash by operations; however, our ability to continue to book new orders required to sustain sufficient revenue to cover operating expenses could be adversely affected by economic conditions.  We are closely monitoring this situation and exploring possible sources

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for liquidity and capital which could supplement the funding of our operations until new laser products can contribute to revenue and gross profits.

Results of Operations

The following table summarizes our consolidated sales for fiscal year:

Sales increased 44% from 2007 to 2008 due to an increase in the volume of orders and deliveries, primarily due to increasing sales of our Digistar and SciDome planetarium systems, domes and the successful delivery and acceptance of an ESLP system.  Sales in 2008 also included $1,050 related to the settlement of an agreement for the development and supply of laser based products. The introduction of our new Digistar 4 platform contributed to the increased order volume.  Sales were especially strong for the Digistar SP2HD and SciDome systems which are planetarium systems for smaller theaters generally sold to smaller museums and schools. We anticipate continued strong sales of the SP2HD and SciDome systems as planetarium theaters replace their older analog systems and as institutions take advantage of the expanded capabilities of our digital planetarium products.  The increase in dome sales was attributable to domes sold with planetarium systems as well as special display applications for retail shopping centers and theme park ride simulators. Efforts continue to resolve the development challenges related to the ESLP. We expect continuing progress on the development of the ESLP to help sustain higher sales in 2009, although there is no assurance that we will achieve the desired results.

 On December 31, 2008, our revenue backlog was $20,432 compared with $28,509 at December 31, 2007.  We anticipate that approximately 92% of the 2008 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 sales levels in 2009.  E&S believes that sufficient sales prospects exist to meet this goal; however, much may depend on how economic conditions affect our customer orders as discussed in the executive summary above.

The following table summarizes our gross profit and the percentage to total sales during fiscal year:

The increase in gross profit from 2007 to 2008 was driven primarily by favorable contract performance and the high margin from sales recognized for the $1,050 of sales related to the settlement of an agreement for the development and supply of laser based products.

SG&A expenses increased 16% from 2007 compared to 2008 primarily due to an increase in pension expense of $1,387 over 2007 due to settlement charges that occurred in 2008 which were driven by lump sum payouts to pension participants as well as 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.

R&D expense for 2008 was comparable to 2007.  We expect R&D expense to remain at a similar level in 2009 due to continued development efforts on our laser projection technology and our D4 product with the goal of reaching new markets.

The following table summarizes our other income and expense during fiscal year:

Interest income in 2008 decreased compared to 2007 due to the reduction in our average cash balances earning interest during 2008.  Other expense increased over 2007 due to realized losses on foreign exchange transactions during 2008.

Income tax benefit (expense) consisted of the following:

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

Liquidity and Capital Resources

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

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

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

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operations through 2010. In December 2008, independent appraisals on 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 on the Spitz properties.   We expect that the current cash balance 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 in the short term as we continue to invest heavily in research and development.  For the long term, we believe that improved cash from operations will fund our planned needs.  However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Continued poor investment performance may increase the funding requirements for our pension obligations in 2010 and beyond.  Accordingly, there can be no assurance that our sources of funds will be sufficient to meet our liquidity needs or that we will be able to raise additional funds to meet those needs, including future business expansion, through the sale of equity or debt securities or from credit facilities with lending institutions.

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

Operating Activities

Operating activities used $4,770 of cash during 2008.  Net cash used in continuing operating activities was $4,721, which was primarily attributable to $1,462 absorbed by the net loss from continuing operations after the effect of $2,474 of non-cash items, as well as by cash used from changes in working capital of $3,259.  Significant changes in working capital that used cash included an increase in accounts receivable and inventories. These items reflect the higher volume of sales orders that occurred in 2008.  Significant changes in working capital that provided cash included a decrease in costs and estimated earnings in excess of billings on uncompleted contracts and an increase in pension and retirement liabilities.

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

Investing Activities

Investing activities used $1,154 of cash during 2008 primarily due to purchases of property, plant and equipment.

Investing activities used $804 of cash during 2007 primarily due to purchases of property, plant and equipment.

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Financing Activities

Financing activities provided $405 of cash during 2008 which reflected $500 of proceeds from an addition to long-term debt that was used to fund improvements to an existing building owned by the company.

Financing activities used $794 of cash during 2007 primarily due to $700 of repayment on the Spitz line of credit agreement and $94 of payments on long-term debt and capital leases.

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

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

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

The first mortgage note payable represents the balance on a $3,200 note (“First Mortgage Note”) issued on January 14, 2004 by Spitz. The First Mortgage Note requires repayment in monthly installments of principal and interest over twenty years.  On each third anniversary of the First Mortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% over the Three-Year Constant Maturity Treasury Rate published by the United States Federal Reserve (“3YCMT”).  The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original twenty-year term.  The monthly installment for the first three years 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 Note adjusted to 7.81% per annum. As a result of the interest rate adjustment, the monthly 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 Second Mortgage Note requires repayment in monthly installments of principal and interest over twenty years.  On each fifth anniversary of the Second Mortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% over 3YCMT.  The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original twenty-year term.  The monthly installment for the first three years is $4 and includes interest at 5.75% per annum.

The index used to compute the future change in 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. The Mortgage Notes are secured by the real property occupied by Spitz pursuant to a Mortgage and Security 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 default provisions whereby the default of either agreement will result in the default of both agreements. The Mortgage Notes are guaranteed by the Company.

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

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

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

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

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

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

The application of the accounting estimates discussed below is considered by management to be critical to an understanding of our consolidated financial statements.  Their application places significant demands on management’s judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain.  Specific risks for these critical accounting estimates are described in the following paragraphs.  A summary of significant accounting policies can be found in Note 1 “Nature of Operations and Summary of Significant Accounting Policies” of Item 8 “Financial Statements and Supplementary Data” in this annual report on Form 10-K.  For all of these policies, management cautions that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment.

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

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

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

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

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

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

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

We recognize scheduled rent increases on a straight-line basis over the lease term, which may include optional lease renewal terms, and deferred rent income and expense is recognized to reflect the difference between the rent paid or received in the current period and the calculated straight-line amount.

In March 2008, the Financial Accounting Standards 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 disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and hedging Activities” (“SFAS 133”),  with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company believes that the future requirements of SFAS 161 will not have a material effect on its consolidated financial statements.

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In April 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash 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 Company believes that the adoption of FSP FAS 142-3 will not have a material effect on its consolidated financial statements.

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

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

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Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.  Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.  Our actual results could differ materially from these forward-looking statements.  Important factors to consider in evaluating such forward-looking statements include risks of product demand, market acceptance, economic conditions, competitive products and pricing, difficulties in product development, and product delays.  In light of these risks and uncertainties, there can be no assurance that the events contemplated by the forward-looking statements contained in this annual report will, in fact, occur.

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ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

(In thousands)

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See notes to consolidated financial statements.

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notes to consolidated financial statements

All dollar amounts are in thousands except per share information or unless otherwise indicated.

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

Evans & Sutherland Computer Corporation, referred to in these notes as “Evans & Sutherland,” “E&S,” “we,” “us,” “our” or the “Company,” produces visual systems used to rapidly and accurately display images.  We design, manufacture, market and support our visual systems for various applications, including planetariums, science centers and entertainment venues.  Our products and solutions range from the visual systems generated by a desktop PC to what we believe are the most advanced visual systems in the world.  The Company operates as one segment, which is the visual simulation market.

Evans & Sutherland’s fiscal year ends on December 31.  The consolidated financial statements include the accounts of Evans & Sutherland and its wholly owned subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition based on the percentage-of-completion method, inventory reserves, allowance for doubtful accounts, income tax valuation allowance, impairment of long-lived assets, pension and retirement obligations and useful lives of depreciable assets.  Actual results could differ from those estimates.

The Company considers all highly liquid investments with original maturities of three or fewer months to be cash equivalents.  The Company maintains cash balances in bank accounts that, at times, may exceed federally insured limits.  The Company has not experienced any losses in these accounts and believes it is not exposed to any significant risk with respect to cash.  As of December 31, 2008, cash deposits, including restricted cash, exceeded the federally insured limits by approximately $6,846.

Restricted cash that guarantees issued letters of credit that mature or expire within one year is reported as a current asset.  Restricted cash that guarantees issued letters of credit that mature or expire in more than one year are 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.

In the normal course of business, we provide unsecured credit terms to our customers.  Accordingly, we maintain an allowance for doubtful accounts for possible losses on uncollectible accounts receivable.  We routinely analyze accounts receivable and costs and estimated earnings in excess of billings, and consider history, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and payment term changes when evaluating adequacy of the allowance for doubtful accounts.  Changes in these factors could result in material differences to bad debt expense.  Past due balances are determined based on contractual terms and are reviewed individually for collectability. Uncollectible accounts receivable are charged against the allowance for doubtful accounts only after exhaustive efforts have been made to collect and with management’s approval.

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

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notes to consolidated financial statements

Inventory includes materials at standard costs, which approximate average costs, as well as inventoried costs on programs and long-term contracts.  Inventoried costs include material, direct engineering and production costs, and applicable overhead, not in excess of estimated realizable value.   Spare parts and general stock materials are stated at cost not in excess of realizable value.  We periodically review inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and provide a reserve we consider sufficient to cover these items.  Revisions of these estimates could result in the need for adjustments.

Inventories net of reserves at fiscal year-end were as follows:

Property, plant and equipment are stated at cost.  Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets.  Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized.  Routine maintenance, repairs and renewal costs are expensed as incurred.  When property is retired or otherwise disposed of, the book value of the property is removed from the fixed assets and the related accumulated depreciation accounts.  Depreciation is included in cost of sales, research and development or selling, general and administrative expenses depending on the nature of the asset.  The cost and estimated useful lives of property, plant and equipment and the total accumulated depreciation and amortization were as follows at December 31:

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

We classify our marketable debt and equity securities as available-for-sale.  Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a component of accumulated other comprehensive loss until realized.  Dividend and interest income are recognized when earned.  Realized gains and losses from the sale of securities are included in results of operations and are determined on the specific identification basis.  A decline in the market value that is deemed other than temporary results in a charge to other income (expense) and the establishment of a new cost basis for the investment.

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the book value of an asset may not be fully recoverable. When this occurs, we review the value assigned to long-lived assets by

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analyzing the anticipated, undiscounted cash flows they generate.  When the expected future undiscounted cash flows from these assets do not exceed their carrying balances, the Company determines the estimated fair value of such assets. An impairment is recognized to the extent the carrying amount of the assets exceeds their estimated fair value.  Assets held for sale are reported at the lower of their carrying amount or fair value less costs to sell.

We provide a warranty reserve for estimated future costs of servicing products under warranty agreements extending for periods from 90 days to one year.  Anticipated costs for product warranties are based upon estimates derived from experience factors and are recorded at the time of sale or over the period revenues are recognized for long-term contracts.  Warranty reserves are classified as accrued liabilities in the accompanying consolidated balance sheets.

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

Percentage-of-Completion. In arrangements that are longer in term and require significant production, modification or customization, revenue is recognized in accordance with the provisions of Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), using the percentage-of-completion method.  In applying the provisions of SOP 81-1, we utilize cost-to-cost methodology whereby we estimate the percent complete by calculating the ratio of costs incurred (consisting of material, labor and subcontracting costs, as well as an allocation of indirect costs) to management’s estimate of total anticipated costs.    This ratio is then utilized to determine the amount of gross profit earned based on management’s estimate of total estimated gross profit at completion.  We routinely review estimates related to percentage-of-completion contracts and adjust for changes in the period revisions are made.  Billings on uncompleted percentage-of-completion contracts may be greater than or less than incurred costs and estimated earnings and are recorded as an asset or liability in the accompanying consolidated balance sheets.

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

Completed Contract. Contract arrangements which typically require a relatively short period of time to complete the production, modification, and customization of our products are accounted for using the completed contract method.  Accordingly, revenue is recognized upon delivery of the completed product, provided persuasive evidence of an arrangement exists, title and risk of loss has transferred, the fee is fixed and determinable, and collection is reasonably assured.

Other.  Other revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element to our customers.  Revenue from product maintenance 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 at completion, 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, offsetting amounts as contract costs are incurred and do not generate further gross profits (losses).

Multiple Element Arrangements.  Some of our contracts include multiple elements.  Revenue earned on elements such as products, services and maintenance contracts are allocated to each 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 is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period.  Stock options are potentially common stock equivalents.

Basic income or loss per common share is based upon the average number of shares of common stock outstanding during the period. There were no dilutive shares in 2007 or 2008. Potentially dilutive securities from stock options are discussed in Note 10.

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

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

The components of accumulated other comprehensive loss were as follows as of December 31: