The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included in Item 1 of Part I of this Form 10-Q. Except for the historical information contained herein, this quarterly report on Form 10-Q includes certain "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933 and
Section 21E of the Exchange Act of 1934, including, among others, those statements preceded by, followed by, or including the words "estimates," "believes," "expects," "anticipates," "plans," "projects," or similar expressions.

These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. These forward-looking statements include, but are not limited to:

† Our belief that the acquisition of Spitz and the continued success of our ESLP product will allow us to gain market share in digital theaters and that we may be able to grow the Spitz dome business in the remainder of 2008 and future years.

† 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 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, which will ultimately result in future revenues.

† Our belief that our products are performing well, that we will meet all our delivery requirements, and as a result we will incur no unforeseen damages or penalties for late deliveries during the next year.

† 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 the remainder of 2008 or future years.

† Our belief that the effects of inflation will not be material for fiscal year 2008.

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

† Our belief that most of our backlog will be converted to sales over the next year.

† Our belief that new orders will continue to be strong for the remainder of 2008 and into 2009.

† Our belief that existing cash balances along with future cash from operations will fund our planned needs through at least the next twelve months as we continue to invest in research and development related to our laser projector products.

† Our belief our cash from operations will fund our planned needs in the long term.

† Our belief that existing cash, restricted cash, letter of credit availability under our current arrangement, and expected cash from future operations will be sufficient to meet our anticipated working capital needs, routine capital expenditures and current debt service obligations.

These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially from these forward-looking statements. Recent trends are not necessarily reliable indicators of future stock prices or financial performance and there can be no assurance that the events contemplated by the forward-looking statements contained in this quarterly report will, in fact, occur.

For further information, refer to the business description and additional risk factors sections included in our Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission.

All currency amounts are in thousands unless otherwise indicated.

EXECUTIVE SUMMARY

In the first nine months of 2008, revenue from our current digital theater and dome products continued to improve our results of operations as compared to 2007. The gains realized from the improvement in gross profits were invested in product development and business planning activities intended to provide opportunities to sell into new markets. Notable was the strong revenue and gross profit despite the anticipated absence of significant revenue from the Evans & Sutherland Laser Projector ("ESLP") in the first nine months of 2008. The continuing product development and business planning activities sustained operating expenses at a level which offset the gross profit resulting in an operating loss for the quarter. We anticipate improved results in the fourth quarter of 2008 and into 2009 concurrent with the improvement of key components of the ESLP which will facilitate the delivery and acceptance of more customer projects with corresponding higher revenue.

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 order to continue the positive progress seen in 2008 into 2009.

The exploration of potential opportunities for our laser technology in new markets continues in 2008. Our success in the development of these new opportunities is the critical element in our plan to create profitable growth of our business.

We are monitoring our business to determine the effects of the recent global economic turmoil. Our near term liquidity sources are not directly dependent on debt and credit lines which are affected by the credit markets. We are unable to determine how the credit markets might affect our customers. Many of our digital theater customers' projects include funding by government sources and, in some cases, charitable donations. There is also an element of our revenue source dependent upon consumer demand for entertainment attractions. To date, we have seen no evidence of changes to existing or prospective customer projects resulting from funding problems. The potential affect that the recent drop in global investment values could have on our pension obligations is discussed in the Liquidity and Capital Resources section below.

CRITICAL ACCOUNTING POLICIES

Certain accounting policies are 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. A summary of critical accounting policies can be found in our Form 10-K for the year ended December 31, 2007. For all of these policies, management cautions that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment.

RESULTS OF OPERATIONS - CONTINUING OPERATIONS



Consolidated Sales



The following table summarizes our consolidated sales:



           For the Three Months Ended         For the Nine Months Ended
        September 26,     September 28,    September 26,     September 28,
             2008              2007             2008              2007
Sales   $        7,999    $        6,706   $       26,016    $       17,610

For the three and nine month periods ended September 26, 2008, our sales increased 19% and 48%, respectively, compared to the same periods of 2007, as a result of increased customer orders and increased deliveries of our digital theater and dome products. Also, in the second quarter we recorded sales of $1,050 related to the settlement of the Laser Agreements, as discussed in Note 7 of the accompanying condensed consolidated financial statements.

Gross Profit



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



                                     For the Three Months Ended           For the Nine Months Ended
                                  September 26,     September 28,     September 26,      September 28,
                                       2008              2007              2008              2007
Gross profit                      $        3,060    $        2,558    $       10,209    $         5,857
Gross profit percentage                       38 %              38 %              39 %               33 %

For the nine month period ended September 26, 2008, our gross profit improved compared to the same periods of 2007 due primarily to improved production efficiencies for all products and due to sales of $1,050 from the settlement of the Laser Agreements, as discussed in Note 7 of the accompanying condensed consolidated financial statements. Also, 2007 gross profits were lowered by increases in estimates to complete ESLP deliveries. Gross profit for the three months ended September 26, 2008 was comparable to the same period of 2007.

Operating Expenses



The following table summarizes our operating expenses:



                                       For the Three Months Ended          For the Nine Months Ended
                                     September 26,       September      September 26,     September 28,
                                          2008           28, 2007            2008              2007
Sales, general and administrative    $        1,999    $       1,900    $        6,878    $        6,301
Research and development                      2,128            2,705             6,954             7,508
                                     $        4,127    $       4,605    $       13,832    $       13,809

For the three months ended September 26, 2008, sales, general and administrative expense were comparable to the same period of 2007. For the nine months ended September 26, 2008, sales, general and administrative expenses were higher than the same period of 2007 primarily due to increased pension expense settlement charges for 2008.

For the three and nine month periods ended September 26, 2008, research and development expenses were lower than the same periods of 2007 by 21% and 7%, respectively. This reflects decreases in supplier costs related to the development of our ESLP technology and an overall decrease in development costs of future planetarium products.

Other Income and Expense



The following table summarizes our other income and expense:



                                   For the Three Months Ended             For the Nine Months Ended
                                September 26,       September 28,     September 26,       September 28,
                                    2008                2007               2008               2007
Other income (expense), net    $           (81 )   $           170    $         (121 )   $           440

For the three and nine months ended September 26, 2008, other expense increased compared to the prior year due to lower interest income in 2008 from lower cash balances.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

In the first nine months of 2008 there was $4,409 of cash used in continuing operations which was primarily attributable to $2,457 absorbed by fluctuations in working capital. The remaining $1,952 of cash used in continuing operations was attributable to the net loss for the nine months after the effect of $1,699 of non-cash items. Significant fluctuations in working capital that absorbed cash during the first nine months included increases in accounts receivable and inventories partly offset by cash provided from increased progress payments received on customer contracts. The fluctuations in working capital for the nine month period were within the normal range expected from business activities.

In the first nine months of 2008, cash used in our investing activities of $685 was due to purchases of property, plant, and equipment.

In the first nine months of 2008, cash provided by our financing activities of $431 was due to $500 of proceeds on a mortgage note payable and $69 of principal payments on mortgage notes payable.

Credit Facilities

The Company is a party to a Credit Agreement with a commercial bank which permits borrowings of up to $1,100 to fund working capital requirements. Interest is charged on amounts borrowed at the Wall Street Prime Rate. As of September 26, 2008 there were no borrowings outstanding under the Credit Agreement.

The Company has a finance arrangement which facilitates the issuance of letters of credit and bank guarantees. Under the terms of the arrangement, we are required to maintain a balance in a specific bank account equal to or greater than the outstanding value of all letters of credit issued, plus other amounts necessary to adequately secure our obligations with the financial institution. As of September 26, 2008, we had outstanding letters of credit and bank guarantees of $1,758.

Mortgage Notes

As of September 26, 2008, our wholly owned Spitz subsidiary, had obligations totaling $3,275 under two mortgage notes payable. The first ("First Mortgage Note") was issued on January 14, 2004 to fund the acquisition of real property which Spitz had occupied under lease for approximately thirty years. The second ("Second Mortgage Note") was issued on September 11, 2008 to fund improvements to the Spitz property. The balance of the First and Second Mortgage Notes as of September 26, 2008 was $2,775 and $500, respectively. 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 current monthly installment is $26 based on an interest rate of 7.81% which was computed from the 3YCMT of 4.81% on January 14, 2007. The interest rate will be subject to adjustment next on January 14, 2010. The 3YCMT as of September 26, 2008 was 2.38%. The First Mortgage Note is secured by the real property acquired with the proceeds of the note. The First Mortgage Note and Credit Agreement contain cross default provisions whereby the default of either agreement will result in the default of both agreements. The terms of the Second Mortgage Note are substantially the same as the First Mortgage Note and both mortgage notes are guaranteed by the Company.

Other

Our Board of Directors has authorized the repurchase of 1,600,000 shares of our common stock. As of September 26, 2008, 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 of our 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.

We believe our existing cash, restricted cash, line of credit, letter of credit availability under our current arrangement, and expected cash from future operations will be sufficient to meet our anticipated working capital needs, routine capital expenditures and current debt service obligations through at least the next twelve months. At September 26, 2008 our total indebtedness was $3,275, consisting of the balance due on the Mortgage Notes. Our cash and restricted cash, subject to various restrictions, are available for working capital needs, capital expenditures, strategic investments, mergers and acquisitions, stock repurchases and other potential cash needs as they may arise. 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. Accordingly, there can be no assurance that our sources of funds will be sufficient to meet our liquidity needs or that we will not be required 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.

Investments held in trust for our defined benefit pension obligations are exposed to the global investment markets. The rules and regulations governing funding and accounting of defined benefit pension obligations are guided by the long term return on investments held in trust for the pension obligations. As such, short term swings of investment values generally will not have significant immediate impact on the results of operations and pension funding requirements. However, because of the size of our pension trust assets relative to our financial position and the magnitude of the recent drop in investment values, our stockholders equity position at the end of the year and future funding requirements could be adversely affected if significant negative investment performance holds.

Backlog

As of September 26, 2008, our backlog was $27,486 compared with $28,509 at December 31, 2007.

TRADEMARKS USED IN THIS FORM 10-Q

ESLP is a registered trademark of Evans & Sutherland Computer Corporation. All other products, services, or trade names or marks are the properties of their respective owners.