3D Systems - 10-Q quarterly report FY

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes o     No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The accompanying condensed consolidated financial statements include the accounts of 3D Systems Corporation and its subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reports. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. These financial statements should be read in conjunction with the Company’s Annual Report onForm 10-Kfor the year ended December 31, 2006, as amended byForm 10-K/Athat the Company filed on August 2, 2007.

In the opinion of management, the unaudited financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates and assumptions.

The Company has outsourced its equipment assembly and refurbishment activities as well as the assembly of field service kits that it sells to customers to several selected design and engineering companies and suppliers. The outsourced activities include assembly of its3-D modeling equipment, its SLA^®systems and its SLS^®systems. These suppliers also carry out quality control procedures on the Company’s systems prior to their shipment to customers. As part of these activities, these suppliers have responsibility for procuring the components and sub-assemblies that are used in the Company’s systems. The Company purchases finished systems from these suppliers pursuant to forecasts and customer orders that the Company supplies to them. While the outsource suppliers have responsibility for the supply chain of the components for the systems they assemble, the components, parts and sub-assemblies that are used in the Company’s systems are generally available from several potential suppliers.

The Company sells components of its inventory of raw materials related to those systems to those third-party suppliers from time to time. Those sales have been recorded in the financial statements as a product financing arrangement under Statement of Financial Accounting Standards (“SFAS”) No. 49, “Accounting for Product Financing Arrangements”. Pursuant to SFAS No. 49, as of September 30, 2007 and December 31, 2006, the Company recorded a non-trade receivable of $1,079 and $2,429, respectively, in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets, reflecting the book value of the inventory sold to the assemblers for which the Company had not received payment. At September 30, 2007 and December 31, 2006, $513 and $1,048, respectively, remained in inventory with a corresponding amount included in accrued liabilities, representing the Company’s non-contractual obligation to repurchase assembled systems and refurbished parts produced from such inventory.

Under these arrangements, the Company generally purchases assembled systems from the assemblers following its receipt of an order from a customer or as needed from the assembler to repair a component or to service equipment. Under certain circumstances, the Company anticipates that it may purchase assembled systems from the assemblers prior to the receipt of an order from a customer. At September 30, 2007 and December 31, 2006, the Company had advanced $652 and $698, respectively, of progress payments to

Components of inventories, net are summarized as follows:

Property and equipment are summarized as follows:

Depreciation expense for the three months and nine months ended September 30, 2007 was $1,099 and $3,152, respectively, compared to $648 and $1,921 for the three and nine months ended September 30, 2006, respectively. Leasehold improvements are amortized on a straight-line basis over the shorter of (i) their estimated useful lives and (ii) the estimated or contractual life of the related lease.

Leasehold improvements included $3,349 of capitalized costs for tenant improvements that the Company had made to its facility in Rock Hill, South Carolina at September 30, 2007 and December 31, 2006.

For the three months and nine months ended September 30, 2007 the Company recognized software amortization expense of $160 and $434, respectively, for capitalized enterprise resource planning (“ERP”) system costs compared to $156 and $246 for the three months and nine months ended September 30, 2006.

The Company ceased operations at its Grand Junction, Colorado facility during the second quarter of 2006 and listed the facility for sale. Subsequently, the Company reclassified approximately $3,454 of assets, net of accumulated depreciation, comprised primarily of $3,018 of building and improvements, net of accumulated depreciation, and $436 of land associated with the facility on its Condensed Consolidated

Licenses and patent costs are summarized as follows:

For the nine months ended September 30, 2007 and 2006, the Company capitalized $521 and $331, respectively, of costs incurred to acquire, develop and extend patents in the United States and various other countries. Amortization expense of previously capitalized patent costs for the three months and nine months ended September 30, 2007 was $492 and $1,287, respectively, compared to $322 and $985 for the three and nine months ended September 30, 2006, respectively.

Acquired technology costs are summarized as follows:

Acquired technology, which was purchased in 2001 in connection with the DTM Corporation acquisition, became fully amortized at September 30, 2007. Amortization expense related to this technology for the three and nine months ended September 30, 2007 was $190 and $948, respectively, compared to $379 and $1,138 for the three and nine months ended September 30, 2006.

The Company had $1,259 and $818 of other net intangible assets as of September 30, 2007 and December 31, 2006, respectively. Amortization expense related to such other intangible assets for the three and nine months ended September 30, 2007 was $20 and $61, respectively, compared to $218 and $371 for the three and nine months ended September 30, 2006.

Accrued liabilities are summarized as follows:

Other liabilities are summarized as follows:

The Company incurred no restructuring costs for the three and nine months ended September 30, 2007. For the three and nine months ended September 30, 2006, the Company incurred $1,745 and $5,663, respectively, of restructuring costs primarily related to personnel, relocation and recruiting costs in connection with its relocation to Rock Hill, South Carolina. All accrued restructuring costs at December 31, 2006 were paid on or before September 30, 2007.

As a result of the closing and anticipated disposition of the Grand Junction facility discussed in Note 4 above, the following assets and liabilities were recorded on the Condensed Consolidated Balance Sheets at September 30, 2007 and the Consolidated Balance sheet at December 31, 2006:

The restricted cash is held on deposit as partial security for the Company’s obligations under the industrial development bonds reflected above and therefore is not available to the Company for its general use.

Total outstanding borrowings were as follows:

In the third quarter of 2007, the Company’s outstanding 6% convertible subordinated debentures were converted into Common Stock, and the Company voluntarily prepaid the outstanding borrowings under its bank credit facility.

On October 1, 2007, the Company’s loan and security agreement, as amended, with Silicon Valley Bank expired in accordance with its terms. The credit facility had provided that the Company and certain of its subsidiaries could borrow up to $15,000 of revolving loans, subject to a borrowing base tied to the Company’s accounts receivable. The credit facility included sub-limits for letters of credit and foreign exchange facilities and was secured by a first lien in favor of the Bank on certain of the Company’s assets, including domestic accounts receivable, inventory and certain fixed assets.

Interest accrued on outstanding borrowings at either the Bank’s prime rate in effect from time to time or at a LIBOR rate plus a borrowing margin. Under the credit facility as last amended, the borrowing margins were 0 basis points for prime-rate loans and 275 basis points for LIBOR-rate loans. Prior to this amendment, the borrowing margins for prime-rate loans and LIBOR-rate loans were 100 basis points and 325 basis points, respectively. The Company was obligated to pay, on a quarterly basis, a commitment fee equal to 0.375% per annum of the unused amount of the credit facility prior to its expiration.

The credit facility imposed certain limitations on the Company’s activities, including limitations on the incurrence of debt and other liens, limitations on the disposition of assets, limitations on the making of certain investments and limitations on the payment of dividends on the Company’s Common Stock. The credit facility also required that the Company comply with certain financial covenants, including (a) commencing as of January 1, 2007 and continuing through October 1, 2007, a modified quick ratio (as defined in the credit facility) of at least 0.70 to 1.00 and, as of December 31, 2006 and for certain prior periods, a modified quick ratio (as defined in the credit facility) of at least 0.80 to 1.00 and (b) a ratio of total liabilities less subordinated debt to tangible net worth (as each such term is defined in the credit facility) of not more than 2.00 to 1.00 as of December 31, 2006 and at the end of each calendar quarter thereafter. The credit facility also required that the Company comply with a modified minimum EBITDA (as defined in the credit facility) of not less than $3,000, $1,000 and $2,500 for the calendar quarters ended December 31, 2006, March 31, 2007 and June 30, 2007, respectively. For each subsequent twelve month period ending prior to October 1, 2007, the minimum EBITDA was $15,000. These requirements expired upon the expiration of the credit facility.

At September 30, 2007 and December 31, 2006, the Company had $0 and $8,200, respectively, of revolving borrowings outstanding under this credit facility. At September 30, 2007 and December 31, 2006,

The Company’s Grand Junction, Colorado facility was financed by industrial development bonds in the original aggregate principal amount of $4,900. At September 30, 2007 and December 31, 2006, the outstanding principal amount of these bonds was $3,325 and $3,545, respectively. Interest on the bonds accrues at a variable rate of interest and is payable monthly. The interest rate at September 30, 2007 and December 31, 2006 was 3.94% and 4.01%, respectively. Principal payments are due in semi-annual installments through August 2016. The Company reclassified this indebtedness to current indebtedness in 2006 in anticipation of the sale of the Grand Junction facility. The Company has made all scheduled payments of principal and interest on these bonds. The bonds are collateralized by, among other things, a first mortgage on the facility, a security interest in certain equipment and an irrevocable letter of credit issued by Wells Fargo Bank, N.A. pursuant to the terms of a reimbursement agreement between the Company and Wells Fargo. The Company is required to pay an annual letter of credit fee equal to 1% of the stated amount of the letter of credit.

This letter of credit is in turn collateralized by $1,200 of restricted cash that Wells Fargo holds, which the Company reclassified as a short-term asset during 2006 in anticipation of its sale of the Grand Junction facility. Wells Fargo has a security interest in that restricted cash as partial security for the performance of the Company’s obligations under the reimbursement agreement. The Company has the right, which it has not exercised, to substitute a standby letter of credit issued by a bank acceptable to Wells Fargo as collateral in place of the funds held by Wells Fargo.

The reimbursement agreement, as amended, contains financial covenants that require, among other things, that the Company maintain a minimum tangible net worth (as defined in the reimbursement agreement) of $23,000 plus 50% of net income from July 1, 2001 forward and a fixed-charge coverage ratio (as defined in the reimbursement agreement) of no less than 1.25 to 1.00. The Company is required to demonstrate its compliance with these financial covenants as of the end of each calendar quarter. On April 24, 2007, Wells Fargo agreed to waive the Company’s non-compliance with the fixed-charge coverage ratio for the period ended December 31, 2006 and for each subsequent quarterly period ending on or before June 30, 2007. On October 10, 2007, Wells Fargo waived the Company’s non-compliance with the fixed-charge coverage ratio for the period ended September 30, 2007.

On July 20, 2007, the entire $14,845 aggregate principal amount of the 6% convertible subordinated debentures that were outstanding on that date was converted by their holders into shares of the Company’s Common Stock. As a result of the conversion, the Company issued 1,458 shares of its Common Stock to the former holders of the debentures and paid the holders $122 of accrued and unpaid interest.

Prior to the conversion, the 6% convertible subordinated debentures bore interest at the rate of 6% per year payable semi-annually in arrears in cash on May 31 and November 30 of each year. They were convertible into shares of Common Stock at the option of the holders at any time prior to maturity at $10.18 per share.

At December 31, 2006, $15,354 aggregate principal amount of these debentures was outstanding.

The Company conducts business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, the Company is subject to the risk that fluctuations in foreign exchange rates between the dates that those transactions are entered into and their respective settlement dates will result in a foreign exchange gain or loss. When practicable, the Company endeavors to match assets and liabilities in the same currency on its balance sheet and those of its subsidiaries in order to reduce these risks. The Company also, when it considers it to be appropriate, enters into foreign currency contracts to hedge exposures arising from those transactions. The Company has not adopted hedge accounting under SFAS No. 133, “Accounting for Derivatives and Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138, and all gains and losses (realized or unrealized) are recognized in cost of sales in the Condensed Consolidated Statements of Operations.

At September 30, 2007, the Company had $1,686 outstanding foreign currency contracts related primarily to inventory purchases from a third party. The notional amount of these contracts at September 30, 2007 aggregated 1,992 Swiss francs (equivalent to $1,686 at the settlement date). The fair value of this contract at September 30, 2007 was $1,712.

At December 31, 2006, these outstanding foreign currency contracts related primarily to purchases of inventory from third parties and intercompany purchase obligations of the Company’s subsidiaries. The notional amount of these contracts at the settlement date was $3,023. The notional amount of the contracts related to purchases aggregated 641 Swiss francs (equivalent to $536 at the settlement date.) The respective notional amounts of the contracts related to intercompany purchase obligations at December 31, 2006 aggregated 1,500 euros (equivalent to $1,901 at the settlement date) and 315 pound sterling (equivalent to $586 at the settlement date). The fair value of these contracts at December 31, 2006 was $3,121.

The dollar equivalent of the foreign currency contracts and their related fair values as of September 30, 2007 and December 31, 2006 were as follows:

The net fair value of all foreign exchange contracts at September 30, 2007 and December 31, 2006 reflected unrealized gains (losses) of $26 and $(118), respectively. The foreign currency contracts at September 30, 2007 expire at various times between October 10, 2007 and November 14, 2007.

Changes in the fair value of derivatives are recorded in cost of sales in the Consolidated Statements of Operations. Depending on their fair value at the end of the reporting period, derivatives are recorded either in prepaid expenses and other current assets or in accrued liabilities on the Condensed Consolidated Balance Sheet.

The total impact of foreign currency derivatives on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 reflected gains (losses) of $18 and $31, respectively, compared to $(179) and $51 for the three and nine months ended September 30, 2006.

The Company’s future minimum lease payments under capitalized leases at September 30, 2007 and December 31, 2006 were $8,887 and $9,012, respectively. The current portion of those leases at September 30, 2007 and December 31, 2006 was $178 and $168, respectively.

No preferred stock was issued or outstanding at September 30, 2007 or December 31, 2006. On June 8, 2006, all of the Company’s then outstanding Series B Convertible Preferred Stock was converted by its holders into 2,640 shares of Common Stock. For the three and nine months ended September 30, 2006, the Company recognized $0 and $1,414, respectively, of dividend cost including $0 and $885, respectively, of accreted costs associated with initial offering costs.

The Company maintains stock-based compensation plans that are described more fully in Note 15, “Stock-Based Compensation,” to the Consolidated Financial Statements filed with the Company’s Annual Report onForm 10-Kfor the year ended December 31, 2006, as amended byForm 10-K/Athat the Company filed on August 2, 2007.

The Company records stock-based compensation expense in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. Stock-based compensation expense for the three and nine month periods ended September 30, 2007 and 2006 is as follows:

The nine-month period ended September 30, 2007 includes $497 of stock-based compensation expense primarily related to the acceleration of expense with respect to restricted stock awards related to the separation from service of the Company’s former Chief Financial Officer in the first quarter of 2007.

The number of shares of restricted Common Stock issued and the weighted average fair value per share during the three and nine months ended September 30, 2007 and 2006 are:

In the third quarter of 2007, the Company granted restricted stock awards covering 6 shares of Common Stock to certain employees, including certain executive officers, pursuant to the Company’s 2004 Incentive Stock Plan. Under the terms of these awards, the employees had until September 24, 2007 to accept the awards. The awards were accepted by all recipients.

The Company presents basic and diluted earnings (loss) per share (EPS) amounts. Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the applicable period. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding during the applicable period. The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding shares:

The conversion of our 6% convertible subordinated debentures in July 2007 was taken into account in computing basic average outstanding shares in the third quarter of 2007.

No dilutive securities were included in the diluted weighted average shares outstanding for the nine months ended September 30, 2007 and the three months and nine months ended September 30, 2006 because the effect of their inclusion would have been anti-dilutive; that is, they would have reduced net loss per share. For the three months ended September 30, 2007, the equivalent of 661 shares of Common Stock issuable upon the exercise of in-the-money stock options were included in the calculation of diluted weighted average shares outstanding.

For the three months ended September 30, 2007, the Company used a 42.9% effective income tax rate to determine its tax provision for that period. For the nine month period ended September 30, 2007 and the three month and nine month periods ended September 30, 2006, the Company recorded tax provisions even though it reported a loss for those periods and accordingly used (5.6)%, (24.9)% and (11.0)% effective tax rates, respectively, for those periods. In the third quarter of 2006, the Company recorded a $2,500 valuation allowance against the net deferred tax assets previously recorded on its Condensed Consolidated Balance Sheet in accordance with Statement of Financial Accounting Standards No. 109 (“SFAS No. 109”), “Accounting for Income Taxes.” Excluding this valuation allowance, the effective tax rates for the three month and nine month periods ended September 30, 2006, were 2.9% and 0.9%, respectively.

The Company maintained $499 and $748 of deferred tax assets on its Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006, respectively. These deferred tax assets relate to the Company’s operations outside the United States. The Company maintained a full valuation allowance on all of its U.S. deferred tax assets at both of those dates.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”, which the Company adopted as of January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109 and prescribes a minimum recognition threshold defined by a standard that it must be more-likely-than-not that a tax position will be sustained upon examination before being recognized in the financial statements. Under FIN 48, the impact of an uncertain income tax position on the income tax returns must be recognized at the largest amount that is more-likely-than-not to be required to be recognized upon audit by the relevant taxing authority. Under FIN 48, an uncertain income tax position should be recognized for financial statement reporting purposes only if it has a greater than 50 percent likelihood of being sustained upon examination. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition issues with respect to tax positions.

As a result of adoption of FIN 48, at January 1, 2007, the Company had recognized a $1,208 increase to its accumulated deficit in earnings that consisted of a $323 reduction in its deferred tax assets and the recording of an $885 long-term income tax payable in its Condensed Consolidated Balance Sheets. In addition, the Company would have recognized a $3,734 increase to deferred tax assets for unrecognized benefits related to positions taken in prior periods, which would have affected accumulated deficit in earnings if it had not made, which it did, a corresponding increase in the valuation allowance maintained in its Consolidated Financial Statements. For the three and nine months ended September 30, 2007, the Company increased its FIN 48 reserve by $18 and $54, respectively, related to accrued interest on uncertain tax positions that the Company had recorded. The Company does not anticipate any additional unrecognized tax benefits during the next twelve months that would result in a material change to its consolidated financial position.

The Company includes interest and penalties accrued in accordance with FIN 48 in the consolidated financial statements as a component of income tax expense.

The principal tax jurisdictions in which the Company files income tax returns are the United States, France, Germany, Japan, Italy, Switzerland and the United Kingdom. Tax years 1997 through 2006 remain subject to examination by the U.S. Internal Revenue Service. The Company’snon-U.S. subsidiariestax returns are open to possible examination beginning in the year shown in parentheses in the following countries: France (2004), Germany (2000), Japan (2003), Italy (2002), Switzerland (2003) and United Kingdom (2005).

For a discussion of other tax matters relating to the Company, please see Note 21 to the Consolidated Financial Statements filed with the Company’s Annual Report on10-K for the year ended December 31, 2006, as amended byForm 10-K/Athat the Company filed on August 2, 2007.

The Company operates in one reportable business segment in which it develops, manufactures and markets worldwide3-Dmodeling, rapid prototyping and manufacturing systems designed to reduce the time it takes to produce three-dimensional objects. The Company conducts its business through operations in the United States, sales and service offices in the European Community (France, Germany, the United Kingdom and Italy) and the Asia-Pacific region (Japan and Hong Kong), and a research and production facility in Switzerland. Revenue from unaffiliated customers attributed to Germany includes sales by the Company’s German unit to customers in countries other than Germany. The Company has historically disclosed summarized financial information for the geographic areas of operations as if they were segments in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Such summarized financial information concerning the Company’s geographical operations is shown in the following tables:

The Company’s revenue from unaffiliated customers by type was as follows:

Intercompany sales are as follows:

All revenue between geographic areas is recorded at prices that provide for an allocation of profit (loss) between entities. Income (loss) from operations and assets for each geographic area are as follows:

Effective April 1, 2006, the Company entered into an agreement with Symyx Technologies, Inc. under which the Company and Symyx are working together to discover and commercialize advanced materials for use in the Company’s rapid prototyping and rapid manufacturing solutions. Under this agreement, the Company agreed to fund up to $2,400 of research over a two-year period to enable Symyx to develop new materials’ formulations that the Company could commercialize for rapid prototyping and rapid manufacturing applications. For the three and nine month periods ended September 30, 2007, the Company recorded $300 and $900, respectively, of research and development expense related to this agreement compared to $300 and $600 for the three and nine month periods ended September 30, 2006.

The Company is involved in various legal matters incidental to its business. The Company’s management believes, after consulting with counsel, that the disposition of these legal matters will not have a material effect on the Company’s consolidated results of operations or consolidated financial position.

In July 2006, FASB issued FIN 48, which the Company adopted as of January 1, 2007. This interpretation was issued to clarify the accounting for uncertainty in the amount of income taxes to be recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company also adopted FASB Staff PositionNo. FIN 48-1(“FSPFIN 48-1”),“Definition of Settlement in FASB Interpretation No. 48” as of January 1, 2007. FSPFIN 48-1provides that a company’s tax position will be considered settled if the taxing authority has completed its examination, the company does not plan to appeal, and it is remote that the taxing authority would reexamine the tax position in the future.

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. This statement defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures with respect to fair value measurements. This statement does not require any new fair value measurements. This statement is expected to be applied prospectively and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company believes that the adoption of SFAS No. 157 will not have a material effect on its results of operations or consolidated financial position.

In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”, which permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value, nor does it eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, “Fair Value Measurements” and SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” The Company expects SFAS No. 159 to become effective for its fiscal year beginning January 1, 2008. The Company is currently assessing the impact that the adoption of SFAS No. 159 may have on its consolidated financial statements.

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in Item 1 of this Quarterly Report onForm 10-Q.

We are subject to a number of risks and uncertainties that may affect our future performance that are discussed in greater detail in the sections entitled “Forward-Looking Statements” and “Cautionary Statements and Risk Factors” at the end of this Item 2 and that are discussed or referred to in Item 1A of Part II of this Quarterly Report onForm 10-Q.

We design, develop, manufacture, market and service Rapid Manufacturing, Prototyping andThree-DimensionalModeling systems and related products and materials that enable complex three-dimensional objects to be produced directly from computer data without tooling, greatly reducing the time and cost required to produce prototypes or customized production parts. Our products offer our customers integrated systems solutions consisting of equipment and related software, consumable materials and customer service to meet a wide range of customer needs, including traditional model, mold and prototyping,3-D modeling and rapid manufacturing.

Our consolidated revenue is derived primarily from the sale of our systems, the sale of the related materials used by the systems to produce solid objects and the provision of services to our customers.

During the first nine months of 2007, we continued our new product development activities, resulting in the introduction of the following new products:

These new products did not have a material effect on our revenue for the third quarter or first nine months of 2007.

As discussed in greater detail below, we achieved record revenue for the third quarter and nine months ended September 30, 2007 primarily as a result of higher unit volume of sales of new products, the favorable combined effect of price and mix and the favorable effect of foreign currency translation. As discussed in greater detail below, for the third quarter of 2007, revenue increased 21.5% to $38.2 million from $31.5 million for the third quarter of 2006, and for the nine months ended September 30, 2007 our revenue increased 21.0% to $111.6 million from $92.2 million for the first nine months of 2006.

We also achieved a modest level of operating income in the third quarter of 2007, reversing an $8.7 million operating loss in the 2006 quarter. Our operating income was $0.4 million in the third quarter of 2007. For the first nine months of 2007, our operating loss declined by 67.8% to $6.6 million from $20.4 million in the 2006 period.

This operating improvement was due to higher gross profit and, in both the three and nine-month periods ended September 30, 2007, a higher gross profit margin in each period, lower operating expenses in the third quarter of 2007, and a decline in operating expenses as a percentage of revenue in the first nine months of 2007 despite an increase in operating expenses in that period.

We believe that our overall improved results demonstrate that the strategic actions that we have taken to reshape our organization, transform our product portfolio and re-engineer our business model are taking effect.

Our operating loss for the first nine months of 2007 included $8.5 million of non-cash expenses compared to $10.1 million of non-cash expenses in the 2006 period, which included higher depreciation and amortization expense in the 2007 period arising from our higher level of capital expenditures in 2006 for our relocation to Rock Hill, South Carolina, and our implementation of a new ERP system as well as higher stock-based

Our higher gross profit in the third quarter and first nine months of 2007 arose primarily from our higher level of revenue, and the improvements in our gross profit margin reflected the more modest increases in cost of sales in each period and the absence of the business disruptions that we incurred in the 2006 periods, which we discuss elsewhere herein.

Our operating expenses declined by $3.9 million in the third quarter of 2007 from the previous year’s quarter reflecting lower selling general and administrative expenses, lower research and development expenses and the absence of the restructuring costs that we incurred in 2006 for our relocation to Rock Hill. We believe that, apart from the high costs associated with the launch of our V-Flash^tmDesktop Modeler this year, our quarterly operating expenses have begun to resume a more normalized run rate, and accordingly we expect our SG&A expenses for the fourth quarter of this year to fall into the range of $11 to $13 million.

As we have previously disclosed, during the second and third quarters of 2006, we experienced disruptions and adverse effects from the implementation of our new ERP system, supply chain staffing issues, and the outsourcing of our spare parts and certain of our finished goods supply activities to a logistics management company. We also experienced some growing pains as our initial success in late 2005 and early 2006 in placing new Sinterstation^®Pro, Viper^tmPro and 3-DModeling systems stretched our field engineering resources and presented some stability issues with certain installed systems. The absence of these matters in the 2007 periods has contributed to our favorable performance this year.

We have also taken several actions to strengthen our liquidity and our balance sheet during 2007, including the following:

As discussed below in “Item 4. Controls and Procedures,” we believe that we have, subject to the completion of testing, completed the remediation of substantially all of the material weaknesses that we have previously disclosed with respect to our internal controls over financial reporting. We expect to complete our remediation program by the end of 2007, but we can provide no assurance that we will be fully successful in accomplishing this goal or that these or other currently unknown material weaknesses will not continue to affect us in future periods.

Table 1 sets forth our change in revenue by class of product and service for the third quarter of 2006 compared to the third quarter of 2007 (dollars in thousands):