3D SYSTEMS CORP - 10-Q Quarterly Report

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 ¨ No x

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

Shares of Common Stock, par value $0.001, outstanding as of June 30, 2003: 12,734,301

During the three months ended March 28, 2003 and March 29, 2002, the Company transferred $0.6 million and $1.3 million of property and equipment from inventories to fixed assets, respectively. Additionally, $0.7 million and $0.9 million of property and equipment was transferred from fixed assets to inventories for the three months ended March 28, 2003 and March 29, 2002.

In conjunction with the $22 million arbitration settlement with Vantico, which was settled through the return of shares to the Company, the Company allocated $1.7 million to a put option which is included as an addition to stockholders’ equity in the first quarter of 2002.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred operating losses totaling $5.8 million and $21.4 million for the three months ended March 28, 2003 and the year ended December 31, 2002, respectively. In addition, the Company has a working capital deficit of $14.5 million and an accumulated deficit of $28.3 million at March 28, 2003. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern.

Management’s plans include raising additional working capital through debt or equity financing. In May 2003, the Company sold approximately 2.6 million shares of its Series B Convertible Preferred Stock for aggregate consideration of $15.8 million (Note 12 – Preferred Stock). Subsequently, on May 5, 2003 the Company repaid $9.6 million of the US Bank term loan balance (Note 9 – Borrowings).

Management intends to obtain debt financing to replace the US Bank financing and currently has accepted a proposal from Congress Financial to provide a secured revolving credit facility of up to $20 million. Additionally, management intends to pursue a program to increase margins and continue cost saving programs. However, there is no assurance that the Company will succeed in accomplishing any or all of these initiatives.

The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

The accompanying consolidated financial statements of 3D Systems Corporation and subsidiaries (the “Company”) are prepared in accordance with instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) which are necessary for the fair presentation of results for the interim periods. The Company reports its interim financial information on a 13-week basis ending the last Friday of each quarter, and reports its annual financial information through the calendar year ended December 31. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. The results of the three months ended March 28, 2003 are not necessarily indicative of the results to be expected for the full year.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to allowance for doubtful accounts, income taxes, inventories, goodwill, intangible assets and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes the following critical accounting policies are most affected by management’s judgments and the estimates used in preparation of the consolidated financial statements.

The Company’s estimate for the allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, the Company evaluates specific accounts where it has information that the customer may have an inability to meet its financial obligations (for example, bankruptcy). In these cases, the Company uses its judgment, based on the available facts and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable

to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. Second, a reserve is established for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change (for example, the Company experiences higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligation to the Company), estimates of the recoverability of amounts due to the Company could be reduced by a material amount.

The provisions of SFAS No. 109 “Accounting for Income Taxes,” require a valuation allowance when, based upon currently available information and other factors, it is more likely than not that all or a portion of the deferred tax asset will not be realized. SFAS No. 109 provides that an important factor in determining whether a deferred tax asset will be realized is whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years. The existence of cumulative losses in recent years is an item of negative evidence that is particularly difficult to overcome. During its 2002 fourth quarter-end, the Company recorded a valuation allowance of approximately $12.9 million against our net deferred tax assets. The Company intends to maintain a valuation allowance until sufficient evidence exists to support its reversal. Also, until an appropriate level of profitability is reached, the Company does not expect to recognize any domestic tax benefits in future periods.

The Company believes its our determination to record a valuation allowance to reduce its deferred tax assets is a critical accounting estimate because it is based on an estimate of future taxable income in the United States, which is susceptible to change and dependent upon events that are remote in time and may or may not occur, and because the impact of recording a valuation allowance may be material to the assets reported on the Company’s balance sheet. The determination of the Company’s income tax provision is complex due to operations in numerous tax jurisdictions outside the United States, which are subject to certain risks, which ordinarily would not be expected in the United States. Tax regimes in certain jurisdictions are subject to significant changes, which may be applied on a retroactive basis. If this were to occur, the Company’s tax expense could be materially different than the amounts reported. Furthermore, as explained in the preceding paragraph, in determining the valuation allowance related to deferred tax assets, the Company adopts the liability method as required by SFAS No. 109, “Accounting for Income Taxes.” This method requires that we establish valuation allowance if, based on the weight of available evidence, in the Company’s judgment it is more likely than not that the deferred tax assets may not be realized.

Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out method. Reserves for slow moving and obsolete inventories are provided based on historical experience and current product demand. The Company evaluates the adequacy of these reserves quarterly. There were no inventories consigned to a sales agent at March 28, 2003, and inventories consigned to a sales agent at December 31, 2002 were $0.1 million.

Property and equipment are carried at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets, generally three to thirty years. Leasehold improvements are amortized on a straight-line basis over their estimated useful lives, or the lives of the leases, whichever is shorter. Realized gains and losses are recognized upon disposal or retirement of the related assets and are reflected in results of operations. Repair and maintenance charges are expensed as incurred.

Licenses and patent costs are being amortized on a straight-line basis over their estimated useful lives, which are approximately eight to seventeen-years, or on a units-of-production basis, depending on the nature of the license or patent.

The Company has applied Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” in its allocation of the purchase price of DTM Corporation (DTM) and RPC Ltd. (RPC). The annual impairment testing required by SFAS No. 142, “Goodwill and Other Intangible Assets” requires the Company to use its judgment and could require the Company to write-down the carrying value of its goodwill and other intangible assets in future periods. SFAS No. 142 requires companies to allocate their goodwill to identifiable reporting units, which are then tested for impairment using a two-step process detailed in the statement. The first step requires comparing the fair value of each reporting unit with its carrying amount, including goodwill. If that fair value exceeds the carrying amount, the second step of the process is not necessary and there are no impairment issues. If that fair value does not exceed that carrying amount, companies must perform the second step that requires an allocation of the fair value of the reporting unit to all assets and liabilities of that unit as if the reporting unit had been acquired in a purchase business combination and the fair value of the reporting unit was the purchase price. The goodwill resulting from that purchase price allocation is then compared to its carrying amount with any excess recorded as an impairment charge.

Upon implementation of SFAS No. 142 in January 2002, and in the fourth quarter of 2002, the Company concluded that the fair value of the Company’s reporting units exceeded their carrying values and accordingly, as of those dates, there were no goodwill impairment issues. The Company is required to perform a valuation of its reporting units annually in the fourth quarter, or upon significant changes in the Company’s business environment.

The Company evaluates long-lived assets other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.

The Company accounts for contingencies in accordance with SFAS No. 5, “Accounting for Contingencies,” SFAS No. 5 requires that the Company record an estimated loss from a loss contingency when information available prior to issuance of the Company’s financial statements indicates that it is probable that an asset has been impaired or a liability

has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as litigation requires the Company to use its judgment. The Company cannot reasonably estimate the costs arising from its contingencies. However, management believes the ultimate outcome of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Revenues from the sale of systems and related products are recognized upon shipment, provided that both title and risk of loss have passed to the customer and collection is reasonably assured. Some sales transactions are bundled and include equipment, software license, warranty, training and installation. The Company allocates and records revenue in these transactions based on vendor specific objective evidence that has been accumulated through historic operations. The process of allocating the revenue involves some management judgments. Revenues from services are recognized at the time of performance. We provide end users with maintenance under a warranty agreement for up to one year and defer a portion of the revenues at the time of sale based on the relative fair value of those services. After the initial warranty period, we offer these customers optional maintenance contracts; revenue related to these contracts is deferred and recognized ratably over the period of the contract. Our warranty costs were $1.2 million and $0.9 million, for the three months ended March 28, 2003 and March 29, 2002, respectively. The Company’s systems are sold with software products that are integral to the operation of the systems. These software products are not sold separately.

Certain of the Company’s sales were made through a sales agent to customers where substantial uncertainty exists with respect to collection of the sales price. The substantial uncertainty is generally a result of the absence of a history of doing business with the customer and uncertain political environment in the country in which the customer does business. For these sales, the Company records revenues based on the cost recovery method, which requires that the sales proceeds received are first applied to the carrying amount of the asset sold until the carrying amount has been recovered. Thereafter, all proceeds are recognized as gross profit.

Credit is extended based on an evaluation of each customer’s financial condition. To reduce credit risk in connection with systems sales, the Company may, depending upon the circumstances, require significant deposits prior to shipment and may retain a security interest in the system until fully paid. The Company often requires international customers to furnish letters of credit.

The Company accounts for stock-based compensation in accordance with Accounting Principles Board, APB, No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has adopted the disclosure-only provisions of FAS No. 123 “Accounting for Stock-Based Compensation.” Under APB No. 25, compensation expense relating to employee stock options is determined based on the excess of the market price of the Company’s stock over the exercise price on the date of grant, the intrinsic value method, versus the fair value method as provided under FAS No. 123. Accordingly, no stock-based employee compensation cost is reflected in net (loss) income, as all options granted under the plan had an exercise price at least equal to the market value of the underlying common stock on the date of grant. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant date for the three-month periods ended March 28, 2003 and March 29, 2002, consistent with the provisions of FAS No. 123, the Company’s net (loss) income and net (loss) income per share would have changed. The following table represents the effect on net (loss) income and net (loss) income per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. The fair value of options granted for the three months ended March 28, 2003 and March 29, 2002 was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:

Because FAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in the future years.

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 does not have a material impact on the Company’s results of operations or financial condition.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards on the classification and measurement of financial instruments with characteristics of both liabilities and equity. SFAS No. 150 will become effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective for the first interim period beginning after June 15, 2003. The Company is in the process of assessing the effect of SFAS No. 150 and does not expect the implementation of the pronouncement to have a material effect on its financial condition or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing the guarantee. FIN 45 also requires guarantors to disclose certain information for guarantees, beginning December 31, 2002. These financial statements contain the required disclosures.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires an investor with a majority of the variable interests in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling financial interest or the equity investment at

risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties. The Company does not have any variable interest entities that must be consolidated.

Depreciation expense for the three month periods ended March 28, 2003 and March 29, 2002 was $1.0 million for each period.

Licenses and patent costs at March 28, 2003 and December 31, 2002 are summarized as follows (in thousands):

For three months ended March 28, 2003 and March 29, 2002 the Company amortized $0.6 million and $0.4 million in license and patent costs, respectively. The Company incurred $1.7 million and $0.2 million in costs for the three months ended March 28, 2003 and March 29, 2002, respectively, to acquire, defend, develop and extend patents in the United States, Japan, Europe, and certain other countries.

Acquired technology at March 28, 2003 and December 31, 2002 are summarized as follows (in thousands):

For three months ended March 28, 2003 and March 29, 2002, the Company amortized $0.4 million and $0.2 million in acquired technology, respectively.

During the three months ended March 28, 2003 and March 29, 2002, the Company had amortization expense on other intangible assets of $0.1 million and $40,000, respectively.

The changes in the carrying amount of goodwill for the three months ended March 28, 2003 are as follows (in thousands):

The Company recorded no goodwill expense for the three months ended March 28, 2003.

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding plus the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been issued. Common shares related to stock options and stock warrants are excluded from the computation when their effect is anti-dilutive.

The following is a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share computations for the three months ended March 28, 2003 and March 29, 2002 (in thousands):

Potential common shares related to convertible debt, stock options and stock warrants were excluded from the calculation of diluted EPS because their effects were antidilutive. The weighted average for common shares excluded from the computation were approximately 3,478,000, and 964,000 for the three months ended March 28, 2003, and March 29, 2002, respectively.

The Company’s reportable segments include the Company’s administrative, sales, service, manufacturing and customer support operations in the United States and sales and service offices in the European Community (France, Spain, Germany, the United Kingdom, Italy, and Switzerland) and in Asia (Japan, Hong Kong, and Singapore).

The Company evaluates performance based on several factors, of which the primary financial measure is operating income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 3 of the Notes to Consolidated Financial Statements.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables (in thousands):

All intersegment sales are recorded at amounts consistent with prices charged to distributors, which are above cost.

On August 20, 1996, the Company completed a $4.9 million variable rate industrial development bond financing of our Colorado facility. Interest on the bonds is payable monthly (the interest rate at March 28, 2003 was 1.31%). Principal payments are payable in semi-annual installments through August 2016. The bonds are collateralized by an irrevocable letter of credit issued by Wells Fargo Bank, N.A. that is further collateralized by a standby letter of credit issued by U.S. Bank in the amount of $1.2 million. In order to further secure the reimbursement agreement, we executed a deed of trust, security agreement and assignment of rents, an assignment of rents and leases, and a related security agreement encumbering the Grand Junction facility and certain personal property and fixtures located there. In addition, the Grand Junction facility is encumbered by a second deed of trust in favor of Mesa County Economic Development Council, Inc. securing $0.8 million in allowances granted to us pursuant to an Agreement dated October 4, 1995. At March 28, 2003, a total of $4.2 million was outstanding under the bond. The terms of the letter of credit require the Company to maintain specific levels of minimum tangible net worth and fixed charge coverage ratios. On March 27, 2003, Wells Fargo sent a letter to the Company stating that it was in default under two covenants of the reimbursement agreement relating to this letter of credit relating minimum tangible net worth and fixed charge coverage ratios, and provided the Company until April 26, 2003, to cure such default.

On May 2, 2003, Wells Fargo drew down a letter of credit in the amount of $1.2 million which was held as partial security under the reimbursement agreement relating to the letter of credit underlying the bonds and placed the cash in a restricted account. The Company obtained a waiver for the defaults from the Bank, provided that the Company meets certain terms and conditions. The Company must remain in compliance with all other provisions of the reimbursement agreement for this letter of credit. If a replacement letter of credit cannot be obtained on or before December 31, 2003, the Company has agreed to retire $1.2 million of the bonds using the restricted cash. Management has accepted a proposal from Congress Financial, a subsidiary of Wachovia, to provide a secured revolving credit facility of up to $20.0 million of which $5.0 million would be available for a letter of credit. The proposal is contingent on Congress Financial completing due diligence to its satisfaction and other conditions.

On August 17, 2001, the Company entered into a loan agreement with U.S. Bank totaling $41.5 million, in order to finance the acquisition of DTM. The financing arrangement consisted of a $26.5 million three-year revolving credit facility and $15 million 66-month commercial term loan. At March 28, 2003, a total of $6.4 million was outstanding under the revolving credit facility and $9.6 million was outstanding under the term loan. The interest rate at March 28, 2003 for the revolving credit facility and term loan was 7.5%. The interest rate is computed as either: (1) the prime rate plus a margin ranging from 0.25% to 4.0%, or (2) the 90–day adjusted LIBOR plus a margin ranging from 2.0% to 5.75%. Pursuant to the terms of the agreement, U.S. Bank has received a first priority security interest in our accounts receivable, inventories, equipment and general intangible assets.

agreement. US Bank has also agreed to waive the Company’s compliance with each financial covenant in the loan agreement through September 30, 2003. Provided the Company obtains a commitment letter from a qualified lending institution by September 30, 2003, to refinance all of the outstanding obligations with US Bank, the waiver will be extended to the earlier of December 31, 2003, or the expiration date of the commitment letter. The Company has complied with all aspects of Waiver Agreement Number Two including the receipt of equity investments of $9.6 million and the $9.6 million principal repayment of the term loan.

On July 24, 2002, the Company substantially completed a reduction in workforce, which eliminated 109 positions out of its total workforce of 523 or approximately 20% of the total workforce. In addition, the Company closed its existing office in Austin, Texas, which it acquired as part of its acquisition of DTM, as well as its sales office in Farmington Hills, Michigan. This was the second reduction in workforce completed in 2002. On April 9, 2002, the Company eliminated approximately 10% of its total workforce. All costs incurred in connection with these restructuring activities are included as severance and other restructuring costs in the accompanying consolidated statement of operations.

A summary of the severance and other restructuring costs consist of the following (in thousands):

These amounts are included in accrued liabilities and are expected to be paid by October 2003. There have been no adjustments to the liability except for payments of amounts due under the restructuring plan.

Following decisions by the District Court and the Federal Circuit Court of Appeals on jurisdictional issues, Aarotech and Mr. Young were dismissed from the suit, and an action against Aaroflex is proceeding in the District Court. Motions for summary judgment by Aaroflex on multiple counts contained in the Company’s complaint and on Aaroflex’s counterclaims have been dismissed and fact discovery in the case has been completed. The Company’s motions for summary judgment for patent infringement and validity and Aaroflex’s motion for patent invalidity were heard on May 10, 2001. In February 2002, the court denied Aaroflex’s invalidity motions. On April 24, 2002, the court denied the Company’s motions for summary judgment on infringement, reserving the right to revisit on its own initiative the decisions following the determination of claim construction. The court also granted in part the Company’s motion on validity. The case is scheduled for trial commencing August 5, 2003, and the trial is scheduled to last three weeks.

In 1997, DTM initiated an action against Hitachi Zosen Joho Systems, the EOS distributor in Japan. In May 1998, EOS initiated two invalidation trials in the Japanese Patent Office attempting to have DTM’s patent invalidated on two separate bases. The Japanese Patent Office ruled in DTM’s favor in both trials in July 1998, effectively ruling that DTM’s patent was valid. In September 1999, the Tokyo District Court then ruled in DTM’s favor and granted a preliminary injunction prohibiting further importation and selling of the infringing plastic sintering EOS machine. In connection with this preliminary injunction, DTM was required to place 20 million yen, which is approximately $200,000, on deposit with the court towards potential damages that Hitachi might claim should the injunction be reversed. Based on the Tokyo District Court’s ruling, EOS then filed an appeal in the Tokyo High Court to have the rulings of the Japanese Patent Office revoked. On March 6, 2001, the Tokyo High Court ruled in EOS’s favor that the rulings of the Japanese Patent Office were in error. As a result, the Tokyo High Court found that Hitachi Zosen was not infringing DTM’s patent. These rulings were unsuccessfully appealed by DTM to the Tokyo Supreme Court. We amended the claims and the patent was reinstated in a corrective action in 2002 and no further challenges to the patent are pending in this matter.

approximately $27.0 million for the period from the fourth quarter of 1997 through 2002. In April 2001, consistent with an order issued by the federal court in this matter, the Company was added as a plaintiff to the lawsuit. On October 17, 2001, the Company was substituted as a defendant in this action because DTM’s corporate existence terminated when it merged into the Company’s subsidiary, 3D Systems, Inc. on August 31, 2001. In February 2002, the court granted summary adjudication on the Company’s motion that any potential liability for patent infringement terminated with the merger of DTM into 3D Systems, Inc. Concurrently, the court denied EOS’s motion for a fourth amended complaint to add counts related to EOS’s claim that 3D Systems, Inc. is not permitted to compete in the field of laser sintering under the terms of the 1997 Patent License Agreement between 3D Systems, Inc. and EOS. 3D Systems, Inc. filed counterclaims against EOS for the sale of polyamide powders in the United States based on two of the patents acquired in the DTM acquisition. The discovery cut off date was on January 20, 2003. A motion by 3D Systems, Inc. for a preliminary injunction was denied by the court on May 14, 2002. The court scheduled the trial date to October 7, 2003.

At this time, financial obligations of these contingencies are not estimable and no contingent loss and liabilities have been recorded, accordingly. However, management believes the ultimate outcome of these actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

On May 5, 2003, the Company sold 2,634,016 shares of Series B Convertible Preferred Stock for aggregate consideration of $15.8 million. The Company incurred issuance cost of approximately $0.6 million in connection with this transaction. The preferred stock accrues dividends at 8% per share and is convertible at any time into approximately 2,634,016 shares of common stock. The stock is redeemable at the Company’s option after the third anniversary date. Redemption is mandatory on the tenth anniversary date, at $6.00 per share plus accrued dividends.

We received an inquiry from the SEC relating to our revenue recognition practices. The Audit Committee has completed its own inquiry into the matter and shared its findings with the SEC. The Company has not been notified that the SEC has initiated a formal investigation.

On June 11, 2003, Regent Pacific Management Corporation filed a complaint against the Company for breach of contract in the Superior Court of the State of California, County of San Francisco. Regent provided management services to the Company from September 1999 through September 2002. Regent alleges that the Company breached non-solicitation provisions in the Company’s contract with it by retaining the services of two Regent contractors following the termination of the contract. Regent seeks $780,000 in liquidated damages together with reasonable attorney’s fees and costs. The Company currently is evaluating the complaint.

On May 6, 2003, the Company received a subpoena from the U.S. Department of Justice to provide certain documents to a grand jury investigating antitrust and related issues within its industry. The Company has been advised that it currently is not a target of the grand jury investigation, and is complying with the subpoena.

The Company has agreed to maintain an effective registration statement with respect to the resale of certain shares of its common stock that it sold in private placement transactions. At the date hereof, the Company is not in compliance with these obligations. In one transaction, the Company is obligated to pay liquidated damages in an aggregate amount of approximately $100,000 per month commencing July 15, 2003 and continuing until an effective registration statement is available for use by the shareholders. The Company intends to file a registration statement as soon as practicable following the filing of this report.

At March 28, 2003, the Company has a remaining note receivable totaling $45,232, including accrued interest, from Mr. Hull, a director and executive officer of the Company, pursuant to the 1996 Stock Incentive Plan. The loan was used to purchase shares of the Company’s common stock at the fair market value on the date of purchase. The original amount of the note was $60,000. The note bears interest at a rate of 6% per annum and matures in 2003. Pursuant to the terms of the note, as a result of meeting certain profitability targets for fiscal 2000, $20,000 of the principal amount of the note was forgiven together with $3,671 of interest in 2000. The note receivable is shown on the balance sheet as a reduction of stockholders’ equity. Pursuant to the terms of the note and related transaction documents, in July 2003, the Company agreed to retire Mr. Hull’s note in exchange for 6,031 shares of common stock.

Subsequent to the issuance of its March 29, 2002 consolidated quarterly financial statements, the Company’s management determined that certain sales transactions recorded in the three months ended March 29, 2002, did not meet all of the criteria required for revenue recognition under United States Generally Accepted Accounting Principles. The restated transactions affect the Company’s previously recorded amounts for accounts receivable, inventory, deferred revenue, sales, cost of sales and others as noted below. The consolidated financial statements as of and for the three months ended March 29, 2002 have been restated to correct the accounting for these transactions. A summary of the significant effects of the restatement is as follows:

This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1, and the cautionary statements and risk factors included in this Item 2 of this Quarterly Report.

The forward-looking information set forth in this quarterly report on Form 10-Q is as of the date of this filing, and we undertake no duty to update this information. More information about potential factors that could affect our business and financial results is included in the section in this Item 2. entitled “Cautionary Statement and Risk Factors.”

In connection with the investigation conducted by the Audit Committee of our Board of Directors as part of the fiscal 2002 audit which we discuss in detail in our Annual Report on Form 10-K filed on June 30, 2003, we have restated our previously issued financial statements for the three months ended March 29, 2002. The restatement arose from the adjustments of certain income statement items which principally relate to the treatment and timing of revenue recognition of five equipment sales transactions. The effect of the adjustments for the three months ended March 29, 2002 is to increase the Company’s previously reported first quarter 2002 consolidated revenues from $27.2 million to $27.5 million, increase net income from $8.5 million to $8.7 million and increase diluted net income per share from $0.58 to $0.59. At the direction of the Audit Committee, the Company is implementing changes to its financial organization and enhancing its internal controls in response to issues identified in the investigation and otherwise raised by the restatement. These changes are more fully discussed in Item 4 of this Report.

Unless otherwise expressly stated, all financial information in this Report is presented inclusive of these income statement changes and other adjustments. The reconciliation of previously reported amounts to the amounts currently being reported is presented in Note 13 of the accompanying Notes to Consolidated Financial Statements in this Report.

We develop, manufacture and market worldwide solid imaging systems designed to reduce the time it takes to produce three-dimensional objects. Our products produce physical objects from the digital output of solid or surface data from computer aided design and manufacturing, which we refer to as CAD/CAM, and related computer systems, and include SLA^® systems, SLS^® systems and ThermoJet^® solid object printers.

SLA systems use our proprietary stereolithography technology, which we refer to as SL, an additive solid imaging process which uses a laser beam to expose and solidify successive layers of photosensitive resin until the desired object is formed to precise specifications in epoxy or acrylic resin. SLS systems utilize a process called laser sintering, which we refer to as LS, which uses laser energy to sinter powdered material to create solid objects from powdered materials. LS and SL-produced parts can be used for concept models, engineering prototypes, patterns and masters for molds, consumable tooling, and short-run manufacturing of final product, among other applications. ThermoJet solid object printers employ hot melt ink jet technology to build models in successive layers using our proprietary thermoplastic material. These printers, about the size of an office copier, are network-ready and are designed for operation in engineering and design office environments. The ThermoJet printer output can be used as patterns and molds, and when combined with other secondary processes such as investment casting, can produce parts with representative end-use properties.

Our customers include major corporations in a broad range of industries including service bureaus and manufacturers of automotive, aerospace, computer, electronic, consumer and medical products. Our revenues are generated by product and service sales. Product sales are comprised of sales of systems and related equipment, materials, software and other component parts, as well as rentals of systems. Service and warranty sales include revenues from a variety of on-site maintenance services and customer training.

For the first three months of 2003, the continued general economic slowdown in capital equipment spending worldwide impacted both revenues and earnings. In the first three months of 2003, SLA system unit sales were down 53.3% and SLS system unit sales were down 12.5% from the same period in 2002. This had a significant impact on both revenue and overall gross margin.

We recognize the importance of recurring revenue to moderate the impact that fluctuations in capital spending has on our high end equipment sales. The following table reflects recurring revenues (service and materials sales) and non-recurring revenues (system sales and related equipment) and those revenues as a percentage of total revenues for the periods indicated below (in thousands, expect percentages):

Since the second quarter of 2001, the market for our capital equipment has been impacted by overall economic conditions. Consequently, we reduced our cost structure by implementing an approximate 10% reduction in workforce worldwide in April 2002. After reviewing our results for the second quarter of 2002 and the long-term prospects for the worldwide economy, we took additional measures to realign our projected expenses with anticipated revenue levels. During the third quarter of 2002, we closed our existing facilities in Austin, Texas and Farmington Hills, Michigan and reduced our workforce by an additional 20% or 109 employees. As a result of these activities, we recorded a charge of $2.7 million in the quarter ended September 27, 2002.

Sales into our Advanced Digital Manufacturing (“ADM”) market continues to increase including sales into aerospace, motorsports, jewelry, and hearing aids. Our ADM revenue was approximately $7.9 million or 34.3% of our overall revenue in the first quarter of 2003 and $5.8 million or 21.1% of our total revenue in the first quarter of 2002, and we believe that the market demand for new ADM applications continues to grow.

On March 19, 2002, we reached a settlement agreement with Vantico relating to the termination of the Distribution and Research and Development Agreement which required Vantico to pay us $22 million through payment of cash or delivery of 1.55 million shares of 3D Systems common stock. On April 22, 2002, Vantico delivered their 1.55 million shares to us. We continue to focus on our resin conversion program and our overall materials business. We are moving forward with our retail materials strategy with our Accura^™ materials which we launched on April 23, 2002.

On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred Stock, at a price of $6.00 per share, for aggregate consideration of $15.8 million. The preferred stock accrues dividends at 8% per share and is convertible at any time into approximately 2,634,016 shares of common stock. The stock is redeemable at the Company’s option after the third anniversary date, The Company must redeem any shares of preferred stock outstanding on the tenth anniversary date. The redemption price is $6.00 per share plus accrued and unpaid dividends. Messrs. Loewenbaum, Service and Hull, our Chairman of the Board, Chief Executive Officer and Chief Technology Officer, respectively, purchased an aggregate of $1,450,000 of the preferred shares. Additionally, Clark Partners I, L.P., a New York limited partnership, purchased $5.0 million of the preferred shares. Kevin Moore, a member of our Board of Directors, is the president of the general partner of

Clark Partners I, L.P. In connection with the offering, Houlihan Lokey Howard & Zukin rendered its opinion that the terms of the offering were fair to the Company from a financial point of view. A special committee of the Board of Directors, composed entirely of disinterested independent directors, approved the offer and sale of the preferred shares and recommended the transaction to the Board of Directors. The Board also approved the transaction, with interested Board members not participating in the vote.

In June 2000, we entered into a distribution agreement for ThermoJet printers with 3D Solid Solutions, which we refer to as 3DSS, a partnership in which Mr. Loewenbaum, the Chairman of our Board of Directors, is a limited partner. As of December 31, 2002, Solid Imaging Technologies, LLC, of which Mr. Loewenbaum is the sole member, was the general partner of 3DSS. In 2002, 3DSS paid us approximately $84,000 for the purchase of products and services.

The services of Brian Service, our Chief Executive Officer, previously were provided under an arrangement with Regent Pacific Corporation. From September 10, 2002 (the date of the termination of the Regent Agreement), through October 15, 2002, Mr. Service was engaged on an interim consulting basis for which he was paid $79,999. Effective October 15, 2002, Mr. Service was employed by us pursuant to an employment agreement under which he has agreed to serve as Chief Executive Officer until at least December 2003. Mr. Service is being paid $17,809 on a bi-weekly basis under this agreement, and has been awarded fully vested options, with a term of five years, to purchase 350,000 shares of our common stock at a price of $5.78 (the closing price on October 15, 2002). On November 18, 2002, the Company entered into a consulting agreement with Brian K. Service, Inc. (“BKSI”), a corporation in which Mr. Service is a stockholder, officer, and director. Pursuant to this agreement the Company would pay to BKSI an amount up to $310,000 for an 11-month period for the provision of the services of qualified consultants to the Company. Under this agreement, the Company paid $45,000 through March 28, 2003

From October 1999 until November 2002, G. Walter Loewenbaum II was an employee of the Company, with a salary of $180,000 per annum. He resigned from this employment in November 2002. At the regularly scheduled Board meeting on November 18, 2002, the Board unanimously voted to grant to Mr. Loewenbaum compensation of $180,000 per annum for performing the duties of Chairman of the Board of the Company.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make critical accounting estimates that directly impact our consolidated financial statements and related disclosures. Critical accounting estimates are estimates that meet two criteria: (1) the estimates require that we make assumptions about matters that are highly uncertain at the time the estimates are made; (2) there exist different estimates that could reasonably be used in the current period, or changes in the estimates used are reasonably likely to occur from period to period, both of which would have a material impact on the presentation of the financial condition or our results of our operations. On an on-going basis, we evaluate our estimates, including those related to the allowance for doubtful accounts, income taxes, inventory, goodwill and intangible assets, contingencies and revenue recognition. We base our estimates and assumptions on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following represent what management believes are the critical accounting policies most affected by significant management estimates and judgments. Management has discussed these critical accounting policies, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the Audit Committee of the Board of Directors.

Allowance for doubtful accounts. Our estimate for the allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, we evaluate specific accounts where we have information that the customer may have an inability to meet its financial obligations (for example, bankruptcy). In these cases, we use our judgment, based on the best available facts and circumstances, and record a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. Second, a reserve is established for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change (for example, we experience higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligation to us), our estimates of the recoverability of amounts due to us could be reduced.

We believe that our allowance for doubtful accounts is a critical accounting estimate because it is susceptible to change and dependent upon events that are remote in time and may or may not occur, and because the impact of recognizing additional allowance for doubtful accounts may be material to the assets reported on our balance sheet.

Income taxes. The provisions of SFAS No. 109 “Accounting for Income Taxes,” require a valuation allowance when, based upon currently available information and other factors, it is more likely than not that all or a portion of the deferred tax asset will not be realized. SFAS No. 109 provides that an important factor in determining whether a deferred tax asset will be realized is whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years. The existence of cumulative losses in recent years is an item of negative evidence that is particularly difficult to overcome. During our 2002 fourth quarter-end, we recorded a valuation allowance of approximately $12.9 million against our net deferred tax assets. We intend to maintain a valuation allowance until sufficient evidence exists to support its reversal. Also, until an appropriate level of profitability is reached, we do not expect to recognize any domestic tax benefits in future periods.

We believe that our determination to record a valuation allowance to reduce our deferred tax assets is a critical accounting estimate because it is based on an estimate of future taxable income in the United States, which is susceptible to change and dependent upon events that are remote in time and may or may not occur, and because the impact of recording a valuation allowance may be material to the assets reported on our balance sheet. The determination of our income tax provision is complex due to operations in numerous tax jurisdictions outside the United States, which are subject to certain risks, which ordinarily would not be expected in the United States. Tax regimes in certain jurisdictions are subject to significant changes, which may be applied on a retroactive basis. If this were to occur, our tax expense could be materially different than the amounts reported. Furthermore, as explained in the preceding paragraph, in determining the valuation allowance related to deferred tax assets, the Company adopts the liability method as required by SFAS No. 109, “Accounting for Income Taxes.” This method requires that we establish valuation allowance if, based on the weight of available evidence, in the Company’s judgment it is more likely than not that the deferred tax assets may not be realized.

Inventory. Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. Reserves for slow moving and obsolete inventories are provided based on historical experience and current product demand. Our reserve for slow moving and obsolete inventory was $2.4 million and $1.9 million at March 28, 2003 and December 31, 2002, respectively. We evaluate the adequacy of these reserves quarterly. Our determination relating to the allowance for inventory obsolescence is subject to change because it is based on management’s current estimates of required reserves and potential adjustments. We believe that the allowance for inventory obsolescence is a critical accounting estimate because it is susceptible to change and dependent upon events that are remote in time and may or may not occur, and because the impact of recognizing additional obsolescence reserves may be material to the assets reported on our balance sheet and results of operations.

Goodwill, intangible and other long-lived assets. The Company has applied Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” in its allocation of the purchase price of DTM Corporation (DTM) and RPC Ltd. (RPC). The annual impairment testing required by SFAS No. 142, “Goodwill and Other Intangible Assets” requires the Company to use its judgment and could require the Company to write-down the carrying value of its goodwill and other intangible assets in future periods. SFAS No. 142 requires companies to allocate their goodwill to identifiable reporting units, which are then tested for impairment using a two-step process detailed in the statement. The first step requires comparing the fair value of each reporting unit with its carrying amount, including goodwill. If that fair value exceeds the carrying amount, the second step of the process is not necessary and there are no impairment issues. If that fair value does not exceed that carrying amount, companies must perform the second step that requires an allocation of the fair value of the reporting unit to all assets and liabilities of that unit as if the reporting unit had been acquired in a purchase business combination and the fair value of the reporting unit was the purchase price. The goodwill resulting from that purchase price allocation is then compared to its carrying amount with any excess recorded as an impairment charge.

Upon implementation of SFAS No. 142 in January 2002 and again in the fourth quarter of 2002, the Company concluded that the fair value of the Company’s reporting units exceeded their carrying value and accordingly, as of that date, there were no goodwill impairment issues. The Company is required to perform a valuation of its reporting unit annually, or upon significant changes in the Company’s business environment.

The Company evaluates long-lived assets other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying value of an assets may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.

We believe that our determination not to recognize an impairment of goodwill, intangible or other long-lived assets is a critical accounting estimate because it is susceptible to change, dependent upon estimates of the fair value of our reporting units, and because the impact of recognizing an impairment may be material to the assets reported on our balance sheet and our results of operations.

Contingencies. We account for contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” SFAS No. 5 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal and income tax matters requires us to use our judgment. At this time our contingencies are not estimable and have not been recorded, however, management believes the ultimate outcome of these actions will not have a material effect on our consolidated financial position, results of operations or cash flows.

Revenue Recognition. Revenues from the sale of systems and related products are recognized upon shipment, provided that both title and risk of loss have passed to the customer and collection is reasonably assured. Some sales transactions are bundled and include equipment, software license, warranty, training and installation. The Company allocates and records revenue in these transactions based on vendor specific objective evidence that has been accumulated through historic operations. The process of allocating the revenue involves some management judgments. Revenues from services are recognized at the time of performance. We provide end users with maintenance under a warranty agreement for up to one year and defer a portion of the revenues at the time of sale based on the objective evidence for the value of these services. After the initial warranty period, we offer these customers optional maintenance contracts; revenue related to these contracts is deferred and recognized ratably over the period of the contract. Our warranty costs were $1.2 million and $0.9 million, for the three months ended March 28, 2003 and March 29, 2002, respectively. The Company’s systems are sold with software products that are integral to the operation of the systems. These software products are not sold separately.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards on the classification and measurement of financial instruments with characteristics of both liabilities and equity. SFAS No. 150 will become effective for financial instruments entered into or modified after May 31, 2003. We are in the process of assessing the effect of SFAS No. 150 and does not expect the implementation of the pronouncement to have a material effect on its financial condition or results of operations.

requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling financial interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties. We do not have any variable interest entities that must be consolidated.

The following table sets forth, for the periods indicated, the percentage relationship of certain items from the Statements of Operations to total sales:

The following table sets forth, for the periods indicated, total sales attributable to each of our major products and services groups, and those sales as a percentage of total sales (in thousands, except for percentages):

The Company develops, manufactures and markets worldwide solid imaging systems designed to reduce the time it takes to produce three-dimensional objects. Segments are reported by geographic sales regions. The Company’s reportable segments include the Company’s administrative, sales, service, manufacturing and customer support operations in the United States and sales and service offices in the European Community (France, Spain, Germany, the United Kingdom, Italy, and Switzerland) and in Asia (Japan, Hong Kong, and Singapore).

Summarized financial information concerning the Company’s reportable segments is shown in the following table (in thousands):

Revenues. Revenues during the three months ended March 28, 2003, (the “first quarter of 2003”) were $23.0 million, a decrease of 16.3%, from the $27.5 million recorded during the three months ended March 29, 2002 (the “first quarter of 2002”). The decrease in overall revenues reflects a decline in capital spending due to poor economic conditions in the United States and the uncertainty surrounding the war with Iraq.

Product sales of $14.7 million were recorded in the first quarter of 2003, a decrease of 23.8%, compared to $19.3 million for the first quarter of 2002. The decrease was primarily in the United States operating segments, which experienced a decrease in revenue from $15.6 million to $11.1 million, or 28.8%. The decrease is directly related to the decline in unit sales of our SLA systems as customers delayed decisions with respect to capital expenditures. Our Asia operating unit also experienced a decline in revenue of 34.9% from $4.3 million in the first quarter of 2002 to $2.8 million for the similar period in 2003. The decline in sales for Asia is primarily due to service bureau purchases of systems in the first quarter of 2002 which are not expected to be repeated on an annual basis. Product sales in our Europe operating segment increased 21.1% to $9.2 million in the first quarter of 2003 from $7.6 million for the first quarter of 2002. This increase is primarily attributable to the reassignment of sales personnel from other regions to Europe and a change in the management of our European operations.

Total units sold for the three months ended March 28, 2003 and March 29, 2002 were 39 and 67, respectively. During the first quarter of 2003, we sold a total of 14 SLA systems, 7 SLS systems and 18 ThermoJet systems, as compared to 30 SLA systems, 8 SLS systems and 29 ThermoJet systems sold in the first quarter of 2002. The decrease in units sold is primarily due to the continued overall economic decline in capital spending by customers in the United States and the distraction of management’s attention caused by the accounting issues discussed in Item 4 of this Report. We also continue to experience a shift in our sales mix from our large frame SLA systems to our small frame SLA systems.

System orders and sales may fluctuate on a quarterly basis as a result of a number of other factors, including world economic conditions, fluctuations in foreign currency exchange rates, acceptance of new products and the timing of product shipments. Due to the price of certain systems and the overall low unit volumes, the acceleration or delay of shipments of a small number of higher-end SLA systems from one period to another can significantly affect our results of operations for the quarters involved.

Materials revenue of $7.4 million was recorded in the first quarter of 2003, a 21.8% decrease from the $9.5 million recorded in the first quarter of 2002. The decrease in materials revenue primarily relates to lower volume of resin sales as we continue to solicit customers to transition from Vantico material to RPC supplied material as well as fewer initial vat fill revenues resulting from a decrease in the number of systems sold in the first quarter of 2003. We believe that many customers have converted to our RPC resins and that we supply approximately 50% of the worldwide market for SL resins used in our SLA systems.

Service sales during the first quarter of 2003 totaled $8.3 million, a slight increase from the $8.25 million recorded in the first quarter of 2002. The increase primarily reflects an increase in new maintenance contract revenue as a result of an increase in the overall number of systems in the marketplace. This increase is offset by delays in customer decisions whether to renew maintenance contracts.

Cost of sales. Cost of sales was $15.5 million or 67.4% of sales in the first quarter of 2003 and $17.2 million or 62.5% of sales in the first quarter of 2002.

Product cost of sales as a percentage of product sales was 57.7% in the first quarter of 2003 and 56.5% in the first quarter of 2002. Product cost of sales as a percentage of product sales increased primarily due to a shift in the sales mix of our SLA systems and the increase of our service revenue as a percentage of total revenue which has lower margins than our systems revenue. These higher costs were partially offset by lower costs of sales on our resin materials which we produce internally and distribute through RPC.

Cost of sales for U.S. operations decreased to $8.0 million in the first quarter of 2003 from $8.5 million in the first quarter of 2002. The monetary decrease in cost of sales is directly related to the decrease in sales. Cost of sales for U.S. operations as a percentage of U.S. sales increased 72.1% in the first quarter of 2003 from 54.5% in the first quarter of 2002. This increase is due to the change in our sales mix for the quarter between service revenue and systems revenue, as noted above. We believe that during 2003 our mix of service revenue and systems revenue will stabilize and consequently, cost of sales as a percentage of sales will approximate our historical results. Cost of sales for our European operations decreased to $5.9 million or 64.1% of sales in the first quarter of 2003 from $6.5 million or 85.9% of sales in the first quarter of 2002. The decrease in cost of sales as a percent of sales relates to higher

margins on resin sales offset by lower margins associated with the mix of SLS and SLA systems sold. Cost of sales for our Asia/Pacific operations decreased to $1.6 million or 57.1% of sales in the first quarter of 2003 from $2.1 million or 48.8% of sales in the first quarter of 2002 primarily as a result of lower sales of SLA and SLS systems.

Service cost of sales as a percentage of service sales was 84.8% in the first quarter of 2003 and 76.5% in the first quarter of 2002. The increase in the service cost of sales as a percentage of service sales is primarily attributable to an unusually high demand for warranty replacement of lasers in our machines for the quarter, which we do not expect to continue. Additionally, delayed decisions by customers whether to renew service contracts reduced our gross profit margins as certain of our service costs of sales are fixed and do not fluctuate depending on service revenues.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $10.7 million in the first quarter of 2003 and $11.0 million in the first quarter of 2002. This decrease was primarily a result of cost savings achieved due to a reduction in workforce and other restructuring activities during the second and third quarters of 2002 offset by increased professional fees incurred in connection with the audit committee investigation and the completion of the 2002 audit.

Research and development expenses. Research and development expenses in the first quarter of 2003 decreased to $2.6 million or 11.3% of sales compared to $3.9 million or 14.3% of sales in the first quarter of 2002. The decrease in research and development expenses is primarily due to closure of the research and development facility in Austin, Texas and consolidation this activity in other locations. We continue the development work associated with the InVision^{^®} si2 3-D printer. We do not anticipate any revenue from the InVision^{^®}si2 3-D printer until we have successfully completed design validation testing, which we currently anticipate to be in the third quarter of 2003. Given the anticipated impact of cost reductions and closure of our Austin facility, we anticipate further research and development expenses to be more in line with historical levels of approximately 9% of revenue.

Income (loss) from operations. Operating loss for the first quarter of 2003 was $5.8 million compared to a loss of $4.6 million in the first quarter of 2002. This increase in operating loss is attributable primarily to decreased revenue. Poor economic conditions have delayed the purchase of capital equipment for many customers. We expect this trend to change as the worldwide economic outlook improves.

Interest and other income (expense), net. Interest and other income (expense), net for the first quarter of 2003 was $(0.9) million compared to interest and other income (expense), net of $(0.7) million in the first quarter of 2002. The increased expense in the first quarter of 2003 reflects higher interest rates on our debt and additional loan costs for U.S. Bank as a result of obtaining the required waivers of default.

Provision for income taxes. For the first quarter of 2003, our income tax provision was $0.2 million, compared to $4.6 million in the first quarter of 2002, due to the Vantico settlement recorded in the first quarter of 2002.

Net cash provided by operating activities in the first three months of 2003 of $79,000 primarily results from net loss of $6.9 million. In addition cash was generated by net collections of accounts receivable of $7.9 million partially offset by an increase in inventory of $1.5 million. Furthermore, cash decreased due to a decrease in accounts payable and accrued liabilities of $0.7 million and $1.0 million, respectively, related to payments for sales commissions, royalties, and payments related to severance and other restructuring costs.

Net cash used for investing activities during the first three months of 2003 totaled $1.9 million. The cash used primarily relates to additions to licenses and patents of $1.7 million for legal defense and new patent filings and to payments for the Optoform acquisition of $0.2 million.

Net cash provided by financing activities during the first three months of 2003 totaled $3.1 million and primarily reflects $7.0 million in draw downs on the line of credit and $3.9 million in debt repayment.

The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred operating losses totaling $5.8 million and $21.4 million for the three months ended March 28, 2003 and the year ended December 31, 2002 respectively, and has an accumulated deficit of $28.3 million at March 28, 2003.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. As of June 27, 2003, the Company had cash balances of $8.4 million, of which $1.2 million was restricted, and $0.1 million was available under a bank line of credit available to meet current obligations. Further, the Company is obligated under its existing line of credit to have a commitment letter from a substitute lender by September 30, 2003. Failure to obtain a commitment letter from an acceptable lender will cause the amount under the line of credit to become immediately due. Management has accepted a proposal from Congress Financial, a subsidiary of Wachovia, to provide a secured revolving credit facility of up to $20.0 million, of which $5.0 million would be available for a letter of credit. The proposal is contingent on Congress Financial completing due diligence to its satisfaction and other conditions. We cannot assure you that over the next twelve months or thereafter we will generate funds from operations or that capital will be available from external sources such as debt or equity financings or other potential sources to fund future operating costs, debt service obligations and capital requirements. Our operations are not currently profitable. Our ability to continue operations is uncertain if we are not successful in obtaining outside funding. Management plans to continue raising additional capital to fund operations. The lack of additional capital resulting from the inability to generate cash flow or raise financing from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. Further, we cannot assure you that any necessary funds, if available, will be available on attractive terms or that they will not have a significantly dilutive effect on the Company’s existing shareholders.

On August 20, 1996, we completed a $4.9 million variable rate industrial development bond financing of our Colorado facility. Interest on the bonds is payable monthly (the interest rate at March 28, 2003 was 1.31%). Principal payments are payable in semi-annual installments through August 2016. The bonds are collateralized by an irrevocable letter of credit issued by Wells Fargo Bank, N.A. that is further collateralized by a standby letter of credit issued by U.S. Bank in the amount of $1.2 million. In order to further secure the reimbursement agreement, we executed a deed of trust, security agreement and assignment of rents, an assignment of rents and leases, and a related security agreement encumbering the Grand Junction facility and certain personal property and fixtures located there. In addition, the Grand Junction facility is encumbered by a second deed of trust in favor of Mesa County Economic Development Council, Inc. securing $0.8 million in allowances granted to us pursuant to an Agreement dated October 4, 1995. At March 28, 2003, a total of $4.2 million was outstanding under the bonds. The terms of the letter of credit require us to maintain specific levels of minimum tangible net worth and fixed charge coverage ratio.

On March 27, 2003, Wells Fargo sent a letter to the Company stating that it was in default of the fixed charge coverage ratio and minimum tangible net worth covenants of the reimbursement agreement relating to the letter of credit. The bank provided the Company until April 26, 2003, to cure these defaults.

On August 17, 2001, the Company entered into a loan agreement with U.S. Bank totaling $41.5 million, in order to finance the acquisition of DTM. The financing arrangement consisted of a $26.5 million three-year revolving credit facility and a $15 million 66-month commercial term loan. At March 28, 2003, a total of $6.4 million was outstanding under the revolving credit facility and $9.6 million was outstanding under the term loan. The interest rate at March 28, 2003, for the revolving credit facility and term loan was 7.5%. The interest rate is computed as either: (1) the prime rate plus a margin ranging from 0.25% to 4.0%, or (2) the 90–day adjusted LIBOR plus a margin ranging from 2.0% to

5.75%. Pursuant to the terms of the agreement, U.S. Bank has received a first priority security interest in our accounts receivable, inventories, equipment and general intangible assets.

On May 1, 2003 the Company entered into “Waiver Agreement Number Two” with U.S. Bank whereby U.S. Bank waived all financial covenant violations at December 31, 2002 and March 31, 2003. The events of default caused by the Company’s failure to timely submit audited financial statements and failure to make the March 31, 2003 principal payment of $5.0 million were also waived. The agreement requires the Company to obtain additional equity investments of at least $9.6 million; to pay off the balance on the term loan of $9.6 million by May 5, 2003; to increase the applicable interest rate to prime plus 5.25%; and to pay a $150,000 waiver fee and all related costs of drafting the agreement. US Bank has also agreed to waive the Company’s compliance with each financial covenant in the loan agreement through September 30, 2003. Provided the Company obtains a commitment letter from a qualified lending institution by September 30, 2003, to refinance all of the outstanding obligations with US Bank, the waiver will be extended to the earlier of December 31, 2003, or the expiration date of the commitment letter. Through the date of this filing, the Company has complied with all aspects of Waiver Agreement Number Two including the receipt of equity investments of $9.6 million and the $9.6 million principal repayment of the term loan.

On May 5, 2003, we sold 2,634,016 shares of our Series B Convertible Preferred Stock at a price of $6.00 per share for aggregate consideration of $15.8 million. The preferred stock accrues dividends at 8% per share and is convertible at any time into approximately 2,634,016 shares of common stock. The stock is redeemable at the Company’s option at any time after the third anniversary date. The Company must redeem any shares of preferred stock outstanding on the tenth anniversary date. The redemption price is equal to $6.00 per share plus accrued and unpaid dividends. Net proceeds to us from this transaction were $15.2 million.

We lease certain facilities under non-cancelable operating leases expiring through December 2006. The leases are generally on a net-rent basis, whereby we pay taxes, maintenance and insurance. Leases that expire are expected to be renewed or replaced by leases on other properties. Rental expense for the three months ended March 28, 2003 and March 29, 2002, aggregated $0.7 million for each period.

In addition to the foregoing contractual commitments in connection with the acquisition of RPC, the Company has guaranteed the value of an aggregate of 264,900 shares of common stock underlying warrants issued to the former RPC shareholders. If the fair market value of our common stock is less than $25.27 on September 19, 2003, then each warrant holder has the right to receive, in exchange for the warrant, an amount equal to CHF 8.25 (approximately $6.30 at June 20, 2003) multiplied by the total number of shares of common stock then underlying the warrant. The value of this commitment at the acquisition date was $1.3 million and was included in the purchase price of RPC (see Note 10 of Notes to Consolidated Financial Statements for the year ended December 31, 2002). Our aggregate potential liability at March 28, 2003 was approximately $1.6 million. Payment in cash is due within 30 days of exercise of the guaranty right by the warrant holder.

In order to preserve cash, we have been required to reduce expenditures for capital projects, research and development, and in our corporate infrastructure, any of which may have a material adverse effect on our future operations. Further reductions in our cash balances could require us to make more significant cuts in our operations, which would have a material adverse impact on our future operations. We cannot assure you that we can achieve adequate savings from these reductions over a short enough period of time in order to allow us to continue as a going concern.

In the event we are unable to generate cash flow and achieve our estimated cost savings, we will need to aggressively seek additional debt or equity financing and other strategic alternatives. However, recent operating losses, our declining cash balances, our historical stock performance, the ongoing inquiries into certain matters relating to our revenue recognition and

the general economic downturn may make it difficult for us to attract equity investments or debt financing or strategic partners on terms that are deemed favorable to us. If our financial condition continues to worsen and we are unable to attract equity or debt financing or other strategic transactions, we could be forced to consider steps that would protect our assets against our creditors.

The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. In that event the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.

Our independent auditors’ report expresses doubt about our ability to continue as a going concern.

At December 31, 2002, our independent auditors’ report, dated June 20, 2003, includes an explanatory paragraph relating to substantial doubt as to our ability to continue as a going concern. We experienced significant operating losses in the first quarter of 2003, each quarter of fiscal 2002 and in preceding years. Our cash and short-term investment balances have continued to decline since December 31, 2002, and we expect to experience further declining balances. We have failed to meet our financial covenants under our bank agreements and our reimbursement agreement relating to our municipal bond financing. US Bank has waived our compliance with the financial covenants in our loan agreement with them through September 30, 2003 and subject to obtaining a commitment letter from a qualified lending institution by September 30, 2003 to refinance all of our outstanding obligations with US Bank, the waiver will be extended to the earlier of December 31, 2003, or the expiration date of the commitment letter. Wells Fargo has waived compliance with certain covenants, provided that we remain in compliance with all other provisions of the reimbursement agreement. The waiver extends through December 31, 2003 provided that if we do not obtain a letter of credit to replace Wells Fargo on or before December 31, 2003, we agree to retire $1.2 of the bonds through the use of restricted cash. If we are unable to obtain a commitment letter as required under the US Bank waiver, we will need to raise additional capital through debt or equity financing to pay off the bank loan or we will be in default.

We are primarily reliant on cash generated from operations to meet our cash requirements. In order to preserve cash, we have been required to reduce expenditures for capital projects, research and development, and in our corporate infrastructure, any of which may have a material adverse affect on our future operations. Further reductions in our cash balances could require us to make more significant reductions in our operations, which would have a material adverse impact on our future operations. We cannot assure you that we can generate sufficient cash from operations and realize our anticipated cost savings in order to allow us to continue as a going concern. In the event we are unable to generate cash flow and achieve our estimated cost savings, or unable to enter into a commitment letter to refinance the US Bank loan by September 30, 2003, we will need to aggressively seek additional debt or equity financing and other strategic alternatives. However, recent operating losses, our declining cash balances, our historical stock performance, the ongoing inquiries into certain matters relating to our revenue recognition and the general economic downturn may make it difficult for us to attract equity investments or debt financing or strategic partners on terms that are deemed favorable to us or at all. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and could be forced to consider steps that would protect our assets against our creditors.

The inquiry initiated by SEC may lead to charges or penalties and may adversely affect our business.

If any government inquiry or other investigation leads to charges against us, we likely will be harmed by negative publicity, the costs of litigation, the diversion of management time, and other negative effects, even if we ultimately prevail. The SEC has inquired into matters pertaining to our revenue recognition practices. Our Audit Committee has met, and cooperated fully, with the SEC. The Company has not been notified that the SEC has initiated a formal investigation. This matter is pending and continues to require management attention and resources. Any adverse finding by the SEC may lead to significant fines and penalties and limitations on our activities and may harm our relationships with existing customers and impair our ability to attract new customers. The filing of our restated financial statements will not necessarily resolve the SEC inquiry.

Our common stock is trading on The Nasdaq National Market under an exception from the continued listing requirements.

If we fail to timely file any periodic report due by December 31, 2003, Nasdaq will delist our common stock and, as a consequence, fewer investors, especially institutional investors, will be willing to invest in our company, our stock price will decline, and it will be difficult to raise money on terms acceptable to us, or at all.

If Nasdaq delists our common stock, it could become subject to the Securities and Exchange Commission “Penny Stock” rules. Penny stocks generally are equity securities with a price of less than $5.00 per share that are not registered on a national securities exchange or quoted on the Nasdaq system. Broker-dealers dealing in our common stock would then be subject to additional burdens which may discourage them from effecting transactions in our common stock, which could make it difficult for investors to sell their shares and, consequently, limit the liquidity of our common stock.

In addition, if Nasdaq delists our common stock, we expect that some or all of the following circumstances will occur, which likely will cause a further decline in our trading price and make it more difficult to raise funds:

Our debt level could adversely affect our financial health and affect our ability to run our business.

As of June 30, 2003, our debt was $38.6 million, of which $8.6 million was current borrowings and $25.8 million related to convertible and preferred instruments. This level of debt could have important consequences to you as a holder of shares. Below we have identified for you some of the material potential consequences resulting from this significant amount of debt.

Under certain circumstances, we may be able to incur additional indebtedness in the future. If we add new debt, the related risks that we now face could intensify.

Our balance sheet contains several categories of intangible assets that we may be required to write-off or write-down based on the future performance of the Company, which may adversely impact our future earnings and our stock price.

As of March 28, 2003, we had $67.8 million of unamortized intangible assets, including goodwill, licenses and patents, other intellectual property, and certain expenses that we amortize over time. Any material impairment to any of these items could reduce our net income and may adversely affect the trading price of our common stock.

At March 28, 2003, we had $44.5 million in goodwill capitalized on our balance sheet. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets,” which requires among other things, the discontinuance of the amortization of goodwill and certain other intangible assets that have indefinite useful lives, and the introduction of impairment testing in its place. Under SFAS 142, goodwill and some indefinite-lived intangibles will not be amortized into results of operations, but instead will be tested for impairment at least annually, with impairment being measured as the excess of the carrying value of the goodwill or intangible asset over its fair value. In addition, goodwill and intangible assets will be tested more often for impairment as circumstances warrant, and may result in write-downs of some of our goodwill and indefinite-lived intangibles. Accordingly,

we could, from time to time, incur impairment charges, which will be recorded as operating expenses and will reduce our net income and adversely affect our operating results.

We currently have approximately $4.9 million related to a license fee prepaid in 1999 related to the solid object printer machine platform included under license and patent costs, net, in our financial statements. The amortization of this intangible is based on the number of solid object printer units sold. If future sales of the solid object printer machine platforms do not increase, then a more rapid rate of amortization of this balance will be required relative to the number of units sold.

We are carrying a significant amount of model-related inventory and tooling costs for a solid object printer machine platform.

We are carrying approximately $2.0 million in inventory and tooling cost associated with the development and production of a new solid object printer machine platform. Changes to the bill of material as a result of the design validation testing, or abandonment of the new platform because of adverse market studies, may render inventory and tooling obsolete. Additionally, we continue to carry inventory and have vendor commitments related to our existing solid object printer model totaling $1.1 million, which if not sold, could become obsolete. A significant write-down of inventory and tooling due to obsolescence could adversely affect our results of operations.

We continuously expand our product offerings, including our materials, and work to increase the number of geographic markets in which we operate and the distribution channels we use in order to reach our various target markets and customers. This variety of products, markets and channels results in a range of gross margins and operating income which can cause substantial quarterly fluctuations depending on the mix of product shipments from quarter to quarter. We may experience significant quarterly fluctuations in gross margins or net income due to the impact of the mix of products, channels, or geographic markets utilized from period to period. More recently, our mix of products sold has reflected increased sales of our lower end systems, which have reduced gross margins as compared to the high-end SLA systems. If this trend continues over time, we may experience lower average gross margins and returns.

Products as complex as those we offer may contain undetected defects or errors when first introduced or as enhancements are released that, despite our testing, are not discovered until after the product has been installed and used by customers, which could result in delayed market acceptance of the product or damage to our reputation and business. We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising from defects or errors in our products. However, the nature and extent of such limitations vary from customer to customer, and it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or laws enacted in the future. The sale and support of our products entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit, could result in material expense to us, diversion of management time and attention, and damage to our business reputation and ability to retain existing customers or attract new customers.

We face significant competition in many aspects of our business and this competition is likely to increase in the future.

We compete for customers with a wide variety of producers of equipment for models, prototypes and other 3-dimensional objects, ranging from traditional model makers and subtractive-type producers, such as CNC machine makers, to a wide variety of additive solid imaging system manufacturers as well as service bureaus that provide any or all of these types of technology, and producers of materials and services for this equipment. Some of our existing and potential competitors are researching, designing, developing and marketing other types of equipment, materials and services. Any reduction in our research and development efforts could affect our ability to compete effectively. Many of our competitors have financial, marketing, manufacturing, distribution and other resources substantially greater than ours. In many cases, the existence of these competitors extends the purchase decision time as customers investigate the alternative products and solutions. Under a settlement agreement with the Department of Justice relating to our merger with DTM, we were required to license certain of our patents for use in the manufacture and sale of either stereolithography or laser sintering products, but not both, in North America. On June 6, 2002, we entered into a license agreement with Sony Corporation, pursuant to which they would license our patents for use in the field of stereolithography in North America (defined as the United States, Canada and Mexico). On July 9, 2002, we were informed by the Department of Justice that they had approved Sony as our licensee. Although

stereolithography is a very small part of its activities, and Sony has thus far only been able to be active in the Japanese/Asia Pacific region, Sony is an extremely large and sophisticated corporation with annual revenues in excess of $58 billion. We cannot be certain of the market impact of the license to Sony, however we anticipate that Sony will be an aggressive competitor in all aspects of our stereolithography business.

Our material revenue, excluding DTM related revenues, declined significantly for the quarter ended March 28, 2003 as compared to the quarter ended March 29, 2002. This was due to the termination of our liquid resin research and development agreements with Vantico on April 22, 2002, under which we had jointly developed liquid photopolymers with Vantico and served as the exclusive worldwide distributor (except in Japan) of these materials. Sales of these materials accounted for 32.3% and 34.5% of our total revenues for the first quarter of 2003 and 2002, respectively. Sales of our materials excluding the LS product line accounted for 14.8% and 20.0% of our total revenues for the first quarter of 2003 and 2002 respectively. On September 20, 2001, we acquired RPC, an independent supplier of stereolithography resins located in Switzerland and many customers have converted from Vantico material to our RPC resins. However, prices have fallen significantly as a result of increased competition. In addition, our management team does not have substantial experience in the materials development and manufacturing business. Also, the manufacture of materials business increases some of the existing risks we face and poses new risks to our company. For example, we must comply with all applicable environmental laws, rules and regulations associated with large scale manufacturing of resins in Switzerland. Our compliance with these laws may increase our cost of production and reduce our margins and any failure to comply with these laws may result in legal or regulatory action instituted against us, substantial monetary fines or other damages. In addition we entered into a two-year non-exclusive distribution agreement for the sale of a line of resins produced by another chemical manufacturer.

We also face significant competition in the supply of nylon powdered materials for laser sintering equipment where we have a leading position. In North America this competition is the subject of a patent infringement suit against EOS. We entered into two agreements with chemical manufacturers for the development, manufacture, and distribution of new nylon powder materials as well as a third agreement for the development of a new aluminum powder material.

We also expect future competition may arise from the development of allied or related techniques, both additive and subtractive, for equipment and materials that are not encompassed by our patents, from the issuance of patents to other companies that inhibit our ability to develop certain products, and from the improvement to existing material and equipment technologies. We have determined to follow a strategy of continuing product development and aggressive patent prosecution to protect our position to the extent practicable. We cannot assure you that we will be able to maintain our current position in the field or continue to compete successfully against current and future sources of competition.

If we do not keep pace with technological change and introduce new products, we may lose revenue and market share.

We are affected by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new standards and practices, any of which could render our existing products and proprietary technology and systems obsolete. We believe that our future success will depend on our ability to deliver products that meet changing technology and customer needs. To remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. Our success will depend, in part, on our ability to:

We have incurred and may continue to incur substantial expense protecting our patents and proprietary rights, which we believe are critical to our success.

We regard our copyrights, service marks, trademarks, trade secrets, patents and similar intellectual property as critical to our success. Third parties may infringe or misappropriate our proprietary rights, and we intend to pursue enforcement and defense of our patents and other proprietary rights. We have incurred, and may continue to incur, significant expenses in

preserving our proprietary rights, and these costs could have a material adverse effect on our results of operations, liquidity and financial condition and could cause significant fluctuations in our operating results from quarter to quarter.

As of March 28, 2003, we held 359 patents, which include 152 in the United States, 146 in Europe, 17 in Japan, and 44 in other foreign jurisdictions. At that date, we also had 176 pending patent applications: 52 in the United States, 53 in Japan, 48 in European countries and 23 other foreign countries. As we discover new developments and components to our technology, we intend to apply for additional patents. Effective trademark, service mark, copyright, patent and trade secret protection may not be available in every country in which our products and services are made available. We cannot assure you that the pending patent applications will be granted or that we have taken adequate steps to protect our proprietary rights, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, our competitors may independently develop or initiate technologies that are substantially similar or superior to ours. We cannot be certain that we will be able to maintain a meaningful technological advantage over our competitors.

We currently are involved in several patent infringement actions, both as plaintiff and as defendant. At March 28, 2003, we had capitalized $7.5 million in legal costs related to various litigation, which if not settled favorably, would need to be written off and would have a significant negative impact on our financial results. Our ability to fully protect and exploit our patents and proprietary rights could be adversely impacted by the level of expense required for intellectual property litigation.

We, as successor to DTM, currently are involved in intellectual property litigation, the outcome of which could materially and adversely affect us.

On August 24, 2001, we completed our acquisition of DTM. As the successor to DTM, we face direct competition for selective laser sintering equipment and materials outside the United States from EOS GmbH of Planegg, Germany, which we refer to in this Report as EOS. Prior to our acquisition, DTM had been involved in significant litigation with EOS in France, Germany, Italy, Japan and the United States with regard to its proprietary rights to selective laser sintering technology. EOS has also challenged the validity of patents related to laser sintering in the European Patent Office and the Japanese Patent Office. In addition, EOS filed a patent infringement suit against DTM in federal court in California alleging that DTM infringed certain U.S. patents that we license to EOS.

Our inability to resolve the claims or to prevail in any related litigation could result in a finding of infringement of our licensed patents. Additionally, one EOS patent is asserted which, if found valid and infringed, could preclude the continued development and sale of certain of our laser sintering products that incorporate the intellectual property that is the subject of the patent. In addition, we may become obligated to pay substantial monetary damages for past infringement. Regardless of the outcome of these actions we will continue to incur significant related expenses and costs that could have a material adverse effect on our business and operations. Furthermore, these actions could involve a substantial diversion of the time of some members of management. The failure to preserve our laser sintering intellectual property rights and the costs associated with these actions could have a material adverse effect on our results of operations, liquidity and financial condition and could cause significant fluctuations in operating results from quarter to quarter.

We depend on a single or limited number of suppliers for specified components. If these relationships terminate, our business may be disrupted while we locate an alternative supplier.

We subcontract for manufacture of material laser sintering components, powdered sintering materials and accessories from a single-source third-party supplier. There are several potential suppliers of the material components, parts and subassemblies for our stereolithography products. However, we currently use only one or a limited number of suppliers for several of the critical components, parts and subassemblies, including our lasers, materials and certain ink jet components. Our reliance on a single or limited number of vendors involves many risks including:

If any of our suppliers suffers business disruptions, financial difficulties, or if there is any significant change in the condition of our relationship with the supplier, our costs of goods sold may increase or we may be unable to obtain these key components for our products. In either event, our revenues, results of operations, liquidity and financial condition would be adversely affected. While we believe we can obtain most of the components necessary for our products from other manufacturers, any unanticipated change in the source of our supplies, or unanticipated supply limitations, could adversely affect our ability to meet our product orders.

Our ability to retain existing customers, and attract new customers may be impaired as a result of questions raised by our revenue recognition issues.

Our improper recognition of revenue with regard to certain sales transactions, the ensuing audit committee investigation and the adjustments to previously filed financial statements could seriously harm our relationships with existing customers and impair our ability to attract new customers. Customers who purchase our products make a significant long-term commitment to the use of our technology. Our products often become an integral part of each customer’s facility and our customers look to us to provide continuing support, enhancements and new versions of our products. Because of the long-term nature of a commitment in some of our products, customers are often concerned about the stability of their suppliers. Purchasing decisions by potential and existing customers have been and may continue to be postponed, we believe in part due to our improper recognition of revenue and the ensuing audit committee investigation. The failure to timely file our 10-K and 10-Q and the adjustment to our previously filed financial statements may cause existing and potential customers concern over our stability and these concerns may cause us to lose sales. Any loss in sales could adversely affect our results of operations, further deepening concern among current and potential customers. If potential and existing customers lose confidence in us, our competitive position in our industry may be seriously harmed and our revenues could further decline.

The audit committee investigation into our revenue recognition issues and our recent reductions in work force, have caused turnover in our finance and sales which could have a material adverse effect on our business.

The recent departure of key accounting, finance and sales personnel may cause delays in completing our business initiatives and adversely impact our organization’s institutional knowledge regarding key policies, significant contracts and agreements, and other key facts. We have experienced substantial turnover in our employees, including senior members of our finance, accounting and sales departments, since the commencement of the audit committee investigation. In addition, in 2002, we completed substantial reductions in our workforce and closed our office in Austin, Texas, which we acquired as part of our acquisition of DTM and our sales office in Farmington Hills, Michigan. Many of these departed employees had significant experience with our market, as well as relationships with many of our existing and potential customers and business partners. It will take substantial time for new employees to develop an in-depth understanding of our market and to form significant relationships with our customers and partners. In addition, the reductions in force may lead to reduced employee morale and productivity, increased attrition and difficulty retaining existing employees and recruiting future employees, any of which could harm our business and operating results.

We are seeking a significant number of new members to our organization. Our future success depends in substantial part on our ability to identify, hire, train, assimilate and retain an adequate number of highly qualified finance, sales, engineering, marketing, managerial and support personnel. Despite the current economic downturn, the competition for qualified employees in our industry is particularly intense and it can be difficult to attract and retain quality employees at reasonable cost. If we cannot successfully recruit and retain these persons our development and introduction of new products could be delayed and our ability to compete successfully could be impaired.

We face risks associated with conducting business internationally and if we do not manage these risks, our results of operations may suffer.

A material portion of our sales is to customers in foreign countries. There are many risks inherent in our international business activities that, unless managed properly, may adversely affect our profitability, including our ability to collect amounts due from customers. Our foreign operations could be adversely affected by:

Political and economic events and the uncertainty resulting from them may have a material adverse effect on our operating results.

The terrorist attacks that took place in the United States on September 11, 2001, along with the United States’ military campaign against terrorism in Iraq, Afghanistan and elsewhere and continued violence in the Middle East have created many economic and political uncertainties, some of which may materially harm our business and revenues. The disruption of our business as a result of these events, including disruptions and deferrals of customer purchasing decisions, had an immediate adverse impact on our business. Since September 11, 2001, some economic commentators have indicated that spending on capital equipment of the type that we sell has been weaker than spending in the economy as a whole, and many of our customers are in industries that are also viewed as under-performing the overall economy, such as the automobile and telecommunication industries. The long-term effects of these events on our customers, the market for our common stock, the markets for our services and the U.S. economy as a whole are uncertain. The consequences of any additional terrorist attacks, or any expanded-armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets, or our business.

The loss of Brian Service, our Chief Executive Officer, or our inability to attract and retain qualified executives could materially and adversely affect our business.

Our ability to develop and expand our products, business and markets and to manage our growth is dependent upon the services of our executive team, including Brian Service, who currently is employed as Chief Executive Officer. We do not maintain any key life insurance coverage for Mr. Service or any other member of our executive team. Our success also depends on our ability to attract and retain additional key technical, management and other personnel. Competition for these professionals is intense. The loss of the services of any of our key executives or the failure to attract and retain other key personnel could impair the development of new products and have an adverse effect on our business, operating results and financial condition.

Our operating results vary from quarter to quarter, which could impact our stock price.

Our operating results fluctuate from quarter to quarter and may continue to fluctuate in the future. In some quarters it is possible that results could be below expectations of analysts and investors. If so, the price of our common stock may decline.

Many factors, some of which are beyond our control, may cause these fluctuations in operating results. These factors include:

In addition, certain of our components require an order lead time of three months or longer. Other components that currently are readily available may become more difficult to obtain in the future. We may experience delays in the receipt of some key components. To meet forecasted production levels, we may be required to commit to long lead time prior to receiving orders for our products. If our forecasts exceed actual orders, we may hold large inventories of slow moving or unusable parts, which could have an adverse effect on our cash flows, profitability and results of operations.

Our future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Shortfalls in our revenues or earnings in any given period relative to the levels expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock.

Historically, our stock price has been volatile. The prices of the common stock have ranged from $4.00 to $13.84 during the 52-week period ended May 16, 2003.

Factors that may have a significant impact on the market price of our common stock include:

Takeover defense provisions may adversely affect the market price of our common stock.

Various provisions of our corporate governance documents and of Delaware law, together with our shareholders rights plan, may inhibit changes in control not approved by our Board of Directors and may have the effect of depriving you of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile takeover.

The Board is authorized to issue up to five million shares of preferred stock, of which approximately 3.7 million is outstanding or reserved for issuance. The Board also is authorized to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of any preferred stock may adversely affect the rights of holders of common stock. Our ability to issue preferred stock gives us flexibility concerning possible acquisitions and financing, but it could make it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, any preferred stock to be issued may have other rights, including economic rights, senior to the common stock, which could have a material adverse effect on the market value of the common stock. In addition, provisions of our Certificate of Incorporation and Bylaws could have the effect of discouraging potential takeover attempts or making it more difficult for stockholders to change management.

We are subject to Delaware laws that could have the effect of delaying, deterring or preventing a change in control of the Company. One of these laws prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date that the person became an interested stockholder, unless certain conditions are met.

In addition, we have adopted a Shareholders’ Rights Plan. Under the Shareholders’ Rights Plan, we distributed a dividend of one right for each outstanding share of our common stock. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our Board of Directors and may have the effect of deterring hostile takeover attempts.

The number of shares of common stock issuable upon conversion of our Debentures and exercise of our Series B Convertible Preferred Stock could dilute your ownership and negatively impact the market price for our common stock.

Our shares of Series B Convertible Preferred Stock are convertible at any time into approximately 2,634,016 shares of common stock. Our subordinated debt is convertible at any time into approximately 833,333 shares of common stock. To the extent that all of the shares of preferred stock and debentures are converted, a significantly greater number of shares of our common stock will be outstanding and the interests of our existing stockholders may be diluted. Moreover, future sales of substantial amounts of our stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our common stock.

We are exposed to the impact of interest rate changes and foreign currency fluctuations.

Interest Rate Risk. Our exposure to market rate risk for changes in interest rates relates primarily to our cash investments and long-term debt. We invest our excess cash in money market funds or other high quality investments. We protect and preserve our invested funds by limiting default, market and reinvestment risk.

Investments in floating rate interest-earning instruments carry a degree of interest rate risk. Floating rate securities may produce less income than expected if interest rates fall. Due in part to this factor, our future investment income may fall short of expectations due to changes in interest rates.

We are exposed to interest rate risk on our revolving credit facility and term loan with US Bank, which have variable interest rates. At March 28, 2003, we had a total of $6.4 million outstanding under our revolving credit facility and $9.6 million outstanding on our term loan. The interest rate at March 28, 2003 for the revolving credit facility and the term loan was 7.5%. The revolving credit facility expires in 2003. This loan was paid off in May 2003.

We have an industrial development bond on our Colorado facility, which has an outstanding balance of $4.2 million. We will make annual principal payments of $150,000, $165,000, $180,000, $200,000, $220,000, for the years ending 2003, 2004, 2005, 2006, 2007 and $3,325,000 thereafter. The bond has a variable interest rate and the interest rate at March 28, 2003 was %. An increase or decrease in the variable interest rate of 1.00% would increase or decrease our annual interest expense by $42,000. We have not entered into any hedging contracts to protect ourselves against future changes in interest rates, which could negatively impact the amount of interest we are required to pay. However, we do not feel that this risk is significant and we do not plan to attempt to hedge to mitigate this risk in the foreseeable future.

In the fourth quarter of 2001, we sold convertible subordinate debentures. As of December 31, 2001 we received $9.4 million in proceeds from this sale. We received additional proceeds of $600,000 in January 2002, for a total of $10.0 million. The convertible debentures are convertible into an aggregate of 833,333 shares of our common stock immediately at the option of the holder or at our discretion at any time after December 31, 2003, and prior to maturity at December 31, 2006. The debentures bear interest at the rate of 7% payable quarterly. The Chairman of the Board of Directors and related parties contributed $1.0 million to the completion of the convertible debentures.

The carrying amount, principal maturity and estimated fair value of long-term debt exposure as of December 31, 2002 are as follows:

Foreign Currency Risk. International revenues accounted for approximately 52.0% of our total revenue in 2002. International sales are made primarily from our foreign sales subsidiaries in their respective countries and are denominated in United States dollars or the local currency of each country. These subsidiaries also incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency.

Our international business is subject to risks typical of an international business, including, but not limited to differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.

Our exposure to foreign exchange rate fluctuations arises in part from inter-company accounts in which costs incurred in the United States are charged to our foreign sales subsidiaries. These inter-company accounts are typically denominated in United States dollars. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into United States dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The realized effect of foreign exchange rate fluctuations in 2002 resulted in a $1.3 million gain.

As of March 28, 2003, we had investments in foreign operations that are sensitive to foreign currency exchange rates, including non-functional currency denominated receivables and payables. The net amount that is exposed in foreign currency when subjected to a 10% change in the value of the functional currency versus the non-functional currency produces an approximate $3.3 million change in our balance sheet as of March 28, 2003.

The Company uses derivative instruments to manage exposure to foreign currency risk. The Company manages selected exposures through financial market transactions in the form of foreign exchange forward and put option contracts. The Company does not enter into derivative contracts for speculative purposes. The Company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on its consolidated net (loss) income. The Company has no put option contracts in place on March 28, 2003.

In connection with the investigation conducted by the Audit Committee of our Board of Directors as part of the fiscal 2002 audit, which we discuss in detail in our Annual Report on Form 10-K filed on June 30, 2003, deficiencies in the Company’s internal controls were identified relating to:

Deloitte has verbally advised the Audit Committee and management that these internal control deficiencies constitute reportable conditions and a material weakness as defined in Statement of Auditing Standards No. 60. At the direction of the Audit Committee, the Company is implementing changes to its financial organization and enhancing its internal controls in response to BDO’s conclusions. These changes include,

The Company is in the process of implementing these changes. To date, the Company has retained a Director of Internal Audit, expanded the number of employees in its finance department, terminated or reassigned senior officers and key employees, established an anonymous hotline for employees to report potential violations of policies and procedures and, through its Disclosure Committee, which is discussed in more detail below, engaged in detailed reviews of its public disclosures and reporting. The Company is in the process of implementing each other recommendation. In order to prepare this report, pending full implementation of the changes set forth above, the Company implemented interim alternative and additional control measures (the “Interim Measures”) to ensure that the financial statements, and other financial information included in these reports, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in these reports.

Our management, including the Principal Executive Officer and our Principal Accounting Officer, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Evaluation of disclosure controls and procedures. During fiscal 2002, the Company formed a disclosure committee to assist the Principal Executive Officer and Principal Accounting Officer in fulfilling their responsibility in designing, establishing, maintaining and reviewing the Company’s disclosure controls and procedures (the “Disclosure Committee”). The Disclosure Committee currently includes the Company’s Principal Executive Officer, Principal Accounting Officer, General Counsel, Chief Technology Officer, Senior Vice President, Development and Operations, Senior Vice President, Worldwide Revenue Generation. Within 90 days prior to the date of filing this report, the Company’s Principal Executive Officer and Principal Accounting Officer, along with the other members of the Disclosure Committee, evaluated the Company’s disclosure controls and procedures. The Company’s Principal Executive Officer and Principal Accounting Officer have concluded that, with the application of the Interim Measures together with the other changes to its organization and controls implemented to date, the disclosure controls and procedures are sufficient to bring to their attention on a timely basis material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act.

Changes in internal controls. The Company has implemented and continues to implement the changes identified above, and has applied the Interim Measures, all of which are intended to increase the effectiveness of its control procedures. Other than the aforementioned items, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls.

3D Systems, Inc. vs. Aaroflex, et al. On January 13, 1997, we filed a complaint in U.S. District Court, Central District of California, against Aarotech Laboratories, Inc., Aaroflex, Inc. and Albert C. Young. Aaroflex is the parent corporation of Aarotech. Young is the Chairman of the Board and Chief Executive Officer of both Aarotech and Aaroflex. The original complaint alleged that stereolithography equipment manufactured by Aaroflex infringes six of our patents. In August 2000, two additional patents were added to the complaint. The Company seeks damages and injunctive relief from the defendants, who have threatened to sue the Company for trade libel. To date, the defendants have not filed such a suit.

Following decisions by the District Court and the Federal Circuit Court of Appeals on jurisdictional issues, Aarotech and Mr. Young were dismissed from the suit, and an action against Aaroflex is proceeding in the District Court. Motions for summary judgment by Aaroflex on multiple counts contained in our complaint and on Aaroflex’s counterclaims have been dismissed and fact discovery in the case has been completed. Our motions for summary judgment for patent infringement and validity and Aaroflex’s motion for patent invalidity were heard on May 10, 2001. In February 2002, the court denied Aaroflex’s invalidity motions. On April 24, 2002, the court denied our motions for summary judgment on infringement, reserving the right to revisit on its own initiative the decisions following the determination of claim construction. The court also granted in part our motion on validity. The case is scheduled for trial commencing August 5, 2003, and the trial is scheduled to last three weeks.

DTM vs. EOS, et al. The plastic sintering patent infringement actions against EOS began in France (Paris Court of Appeals), Germany (District Court of Munich) and Italy (Regional Court of Pinerolo) in 1996. Legal actions in France, Germany and Italy are proceeding. EOS had challenged the validity of two patents related to thermal control of the powder bed in the European Patent Office, or EPO. Both of those patents survived the opposition proceedings after the original claims were modified. One patent was successfully challenged in an appeal proceeding and in January 2002, the claims were invalidated. The other patent successfully withstood the appeal process and the infringement hearings were re-started. In October 2001, a German district court ruled the patent was not infringed, and this decision is being appealed. In November 2001, we received a decision of a French court that the French patent was valid and infringed by the EOS product sold at the time of the filing of the action and an injunction was granted against future sales of the product. EOS filed an appeal of that decision in June 2002. That action is pending and has been scheduled for hearing on March 30, 2004. In February 2002, we received a decision from an Italian court that the invalidation trial initiated by EOS was unsuccessful and the Italian patent was held valid. The infringement action in a separate Italian court has now been recommenced and a decision is expected based on the evidence that has been submitted.

Hitachi Zosen vs. 3D Systems, Inc. On November 25, 2002, 3D Systems was served with a complaint through the Japanese Consulate General from EOS’ Japanese distributor, Hitachi Zosen, seeking damages in the amount of 535,293,436 yen (approximately $4.5 million), alleging lost sales during the period in which DTM Corporation had an injunction in Japan prohibiting the sale of EOS EOSint P350 laser sintering systems. Initial procedural hearings occurred in March and April 2003 in Tokyo District Court, with a third preliminary hearing scheduled for June 30, 2003.

EOS vs. DTM and 3D Systems, Inc. In December 2000, EOS filed a patent infringement suit against DTM in the U.S. District Court, Central District of California. EOS alleges that DTM has infringed and continues to infringe certain U.S. patents that we license to EOS. EOS has estimated its damages to be approximately $27.0 million for the period from the fourth quarter of 1997 through 2002. In April 2001, consistent with an order issued by the federal court in this matter, we were added as a plaintiff to the lawsuit. On October 17, 2001, we were substituted as a defendant in this action because

DTM’s corporate existence terminated when it merged into our subsidiary, 3D Systems, Inc. on August 31, 2001. In February 2002, the court granted summary adjudication on our motion that any potential liability for patent infringement terminated with the merger of DTM into 3D Systems, Inc. Concurrently, the court denied EOS’s motion for a fourth amended complaint to add counts related to EOS’s claim that 3D Systems, Inc. is not permitted to compete in the field of laser sintering under the terms of the 1997 Patent License Agreement between 3D Systems, Inc. and EOS. 3D Systems, Inc. filed counterclaims against EOS for the sale of polyamide powders in the United States based on two of the patents acquired in the DTM acquisition. The discovery cut off date was on January 20, 2003. A motion by 3D Systems, Inc. for a preliminary injunction was denied by the court on May 14, 2002. The court rescheduled the trial date to October 7, 2003.

3D Systems, Inc. vs. AMES. In April 2002, we filed suit for patent infringement against Advanced Manufacturing Engineering Systems of Nevada, Iowa for patent infringement related to AMES’ purchase and use of EOS powders in the Company’s SLS system. On June 24, 2002, upon motion by the defendants, this matter was stayed pending trial of the EOS vs. DTM and 3D Systems, Inc. matter described immediately above. We have been informed that Ames is no longer in business and we are in the process of requesting a dismissal of the action.

EOS GmbH Electro Optical Systems vs. 3D Systems, Inc. On January 21, 2003, we were served with a complaint that had been filed in May 2002 in Regional Court, Commerce Division, Frankfurt, Germany, seeking 1,000,000 Euros for the alleged breach of a non-competition agreement entered into in 1997. We answered the complaint on April 25, 2003. At a hearing on June 27, 2003, the court advised the parties that it intends to issue a decision in this matter on September 27, 2003.

Board of Regents, The University of Texas System and 3D Systems, Inc. vs. EOS GmbH Electro Optical Systems. On February 25, 2003, 3D Systems, along with the Board of Regents of the University of Texas, filed suit against EOS GmbH Electro Optical Systems (“EOS”) in the United States District Court, Western District of Texas seeking damages and injunctive relief arising from violation of U.S. Patents Nos. 5,597,589 and 5,639,070, which are patents relating to laser sintering which have been licensed by the University of Texas to 3D. On March 25, 2003, EOS filed its answer to this complaint, along with counterclaims including breach of contract and antitrust violations. Following a summary judgment hearing, the court on June 25, 2003 dismissed the anti-trust conspiracy counterclaims against the University of Texas.

Regent Pacific Management Corporation vs. 3D Systems Corporation. On June 11, 2003, Regent Pacific Management Corporation filed a complaint against us for breach of contract in the Superior Court of the State of California, County of San Francisco. Regent provided management services to us from September 1999 through September 2002. Regent alleges that we breached non-solicitation provisions in our contract with it by retaining the services of two Regent contractors following the termination of the contract. Regent seeks $780,000 in liquidated damages together with reasonable attorney’s fees and costs. We currently are evaluating the complaint.

SEC Inquiry. We received an inquiry from the SEC relating to our revenue recognition practices. The Audit Committee has completed its own inquiry into the matter and shared its findings with the SEC. The Company has not been notified that the SEC has initiated a formal investigation.

In addition, on May 6, 2003, we received a subpoena from the U.S. Department of Justice to provide certain documents to a grand jury investigating antitrust and related issues within our industry. We have been advised that we currently are not a target of the grand jury investigation, and we are complying with the subpoena.

The Company is engaged in certain additional legal actions arising in the ordinary course of business, and, on the advice of legal counsel, the Company believes it has adequate legal defenses and that the ultimate outcome of these actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.


10.1		Lease Amendment No. 2 dated as of March 1, 1996 by and between Katell Valencia Associates, a California limited partnership and 3D Systems, Inc., a California corporation.

10.2		Waiver dated June 26, 2003, between Wells Fargo and Registrant.

99.1		Certificationof Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated July 14, 2003.

99.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated July 14, 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

1. I have reviewed this quarterly report on Form 10-Q of 3D Systems Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

1. I have reviewed this quarterly report on Form 10-Q of 3D Systems Corporation;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

			Page
PART I.	FINANCIAL INFORMATION		3

	ITEM 1.	Financial Statements	3

		Consolidated Balance Sheets as of March 28, 2003 (unaudited) and December 31, 2002	3

		Consolidated Statements of Operations for the Three Months Ended March 28, 2003 and March 29, 2002 (unaudited)	4

		Consolidated Statements of Cash Flows for the Three Months Ended March 28, 2003 and March 29, 2002 (unaudited)	5

		Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 28, 2003 and March 29, 2002 (unaudited)	7

		Notes to Consolidated Financial Statements for the Three Months Ended March 28, 2003 and March 29, 2002 (unaudited)	8

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

		Liquidity and Capital Resources	30

		Cautionary Statements and Risk Factors	34

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	42

	ITEM 4.	Controls and Procedures	43

PART II.	OTHER INFORMATION		45

	ITEM 1.	Legal Proceedings	45

	ITEM 6.	Exhibits and Reports on Form 8-K	47

	(unaudited)			(audited)
	March 28, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	3,510		$	2,279
Accounts receivable, less allowances for doubtful accounts of $2,607 and $3,068		20,133			27,420
Current portion of lease receivables		322			322
Inventories, net of reserves of $2,111 and $1,876		13,997			12,564
Prepaid expenses and other current assets		3,169			3,687

Total current assets		41,131			46,272
Property and equipment, net		14,138			15,339
Licenses and patent costs, net		16,051			14,960
Lease receivables, less current portion and net of allowance of $463 and $414		459			553
Acquired technology, net		7,240			7,647
Goodwill		44,499			44,456
Other assets, net		2,682			3,006

	$	126,200		$	132,233

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	6,350		$	2,450
Accounts payable		10,173			10,830
Accrued liabilities		14,618			15,529
Current portion of long-term debt		9,755			10,500
Customer deposits		700			801
Deferred revenues		14,009			14,770

Total current liabilities		55,605			54,880
Other liabilities		3,275			3,397
Long-term debt, less current portion		4,010			4,090
Subordinated debt		10,000			10,000

Total liabilities		72,890			72,367

Stockholders’ equity:
Preferred stock, authorized 5,000 shares, none issued		—			—
Common stock, authorized 25,000 shares, issued and outstanding 12,734 and issued and outstanding 12,725		13			13
Capital in excess of par value		84,970			84,931
Notes receivable from officers for purchase of stock		(59	)		(59	)
Accumulated deficit		(28,290	)		(21,419	)
Accumulated other comprehensive loss		(3,324	)		(3,600	)

Total stockholders’ equity		53,310			59,866

	$	126,200		$	132,233

	Three months ended
	March 28, 2003			March 29, 2002 As restated (see Note 13)
Sales:
Products	$	14,737		$	19,261
Services		8,280			8,253

Total sales		23,017			27,514
Cost of sales:
Products		8,501			10,880
Services		7,021			6,314

Total cost of sales		15,522			17,194

Gross profit		7,495			10,320

Operating expenses:
Selling, general and administrative		10,656			10,970
Research and development		2,600			3,928

Total operating expenses		13,256			14,898

Loss from operations		(5,761	)		(4,578	)
Interest and other income (expense), net		(894	)		(700	)
Gain on arbitration settlement		—			18,464

(Loss) income before provision for income taxes		(6,655	)		13,186
Provision for income taxes		216			4,492

Net (loss) income	$	(6,871	)	$	8,694

Shares used to calculate basic net (loss) income per share		12,724			13,132

Basic net (loss) income per share	$	(0.54	)	$	0.66

Shares used to calculate diluted net (loss) income per share		12,724			14,651

Diluted net income (loss) per share	$	(0.54	)	$	0.59

	Three months ended
	March 28, 2003			March 29, 2002 As restated (see Note 13)
Cash flows from operating activities:
Net (loss) income	$	(6,871	)	$	8,694
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred income taxes		—			4,547
Gain on arbitration settlement (including $1,536 included in S,G&A for legal reimbursement)		—			(20,310	)
Depreciation and amortization		2,248			2,032
Adjustment to allowance accounts		299			130
Adjustment to inventory reserve		494			(40	)
Loss on disposition of property and equipment		120			55
Changes in operating accounts, excluding acquisition:
Accounts receivable		7,146			10,831
Lease receivables		94			630
Inventories		(1,499	)		(254	)
Prepaid expenses and other current assets		548			278
Other assets		189			260
Accounts payable		(680	)		(486	)
Accrued liabilities		(963	)		(2,975	)
Customer deposits		(101	)		969
Deferred revenues		(797	)		(486	)
Other liabilities		(148	)		(88	)

Net cash provided by operating activities		79			3,787
Cash flows from investing activities:
Investment in OptoForm SARL		—			(1,200	)
Purchase of property and equipment		(186	)		(1,189	)
Additions to licenses and patents		(1,727	)		(738	)
Software development costs		—			(140	)

Net cash used for investing activities		(1,913	)		(3,267	)
Cash flows from financing activities:
Exercise of stock options and purchase plan		39			119
Borrowings		7,000			13,600
Repayment of long-term debt		(3,925	)		(14,892	)

Net cash provided by (used for) financing activities		3,114			(1,173	)
Effect of exchange rate changes on cash		(49	)		247

Net increase (decrease) in cash and cash equivalents		1,231			(406	)
Cash and cash equivalents at the beginning of the period		2,279			5,948

Cash and cash equivalents at the end of the period	$	3,510		$	5,542

	Three months ended
	March 28, 2003			March 29, 2002 As restated (see Note 13)
Net (loss) income	$	(6,871	)	$	8,694
Foreign currency translation		276			356

Comprehensive (loss) income	$	(6,595	)	$	9,050

	March 28, 2003			March 29, 2002
Net (loss) income, as reported	$	(6,871	)	$	8,694
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax benefits		—			—
Deduct: Stock based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		585			1,470

Pro forma net (loss) earnings	$	(7,456	)	$	7,224

Basic net (loss) earnings per common share:
As reported	$	(0.54	)	$	0.66

Pro forma	$	(0.59	)	$	0.55

Diluted net (loss) earnings per common share :
As reported	$	(0.54	)	$	0.59

Pro forma	$	(0.59	)	$	0.49

	March 28, 2003		March 29, 2002
Risk free interest rate	2.4	%	1.97	%
Expected life	4 years		2.7 years
Expected volatility	83	%	83	%

	March 28, 2003		December 31, 2002
Raw materials	$	2,409	$	2,617
Work in progress		678		196
Finished goods		10,910		9,751

	$	13,997	$	12,564

	March 28, 2003			December 31, 2002			Useful Life (in years)
Land	$	435		$	435		—
Building		4,202			4,202		30
Machinery and equipment		26,767			26,984		3-5
Office furniture and equipment		3,628			3,597		5
Leasehold improvements		4,139			4,137		Life of lease
Rental equipment		1,188			1,189		5
Construction in progress		300			206		N/A

		40,659			40,750
Less accumulated depreciation		(26,521	)		(25,411	)

	$	14,138		$	15,339

	March 28, 2003			December 31, 2002
Licenses, at cost	$	2,333		$	2,333
Patent costs		24,673			22,946

		27,006			25,279
Less: Accumulated amortization		(10,955	)		(10,319	)

	$	16,051		$	14,960

	March 28, 2003			December 31, 2002
Acquired technology	$	10,047		$	10,029
Less: Accumulated amortization		(2,807	)		(2,382	)

	$	7,240		$	7,647

Balance as of December 31, 2002	$	44,456
Effect of foreign currency exchange rates		43

Balance at March 28, 2003	$	44,499

	Three months ended
	March 28, 2003			March 29, 2002
Numerator:
Net (loss) income—numerator for basic and diluted net (loss) income per share	$	(6,871	)	$	8,694

Denominator:
Denominator for basic net (loss) income per share—weighted average shares		12,724			13,132
Effect of dilutive securities:
Stock options and warrants		—			1,519

Denominator for diluted net (loss) income per share		12,724			14,651

	March 28, 2003			March 29, 2002
Net Sales:
USA	$	13,111		$	20,109
Europe		11,681			10,372
Asia		2,777			4,300

Subtotal		27,569			34,781
Intersegment Elimination		(4,552	)		(7,267	)

Total	$	23,017		$	27,514

	March 28, 2003		March 29, 2002
Intersegment Eliminations:
USA	$	2,052	$	4,482
Europe		2,500		2,785
Asia		—		—

Total	$	4,552	$	7,267

	March 28, 2003			March 29, 2002
(Loss) income from operations:
USA	$	(7,133	)	$	(3,669	)
Europe		474			2,428
Asia		837			1,985

Subtotal		(5,822	)		(4,112	)
Intersegment Elimination		(61	)		(466	)

Total	$	(5,761	)	$	(4,578	)

	March 28, 2003			December 31, 2002
Assets:
USA	$	273,768		$	273,492
Europe		56,701			59,067
Asia		9,240			13,825

Subtotal		339,709			346,384

Intersegment Elimination		(213,509	)		(214,151	)

Total	$	126,200		$	132,233

	December 31, 2002		Utilized		March 28, 2003
Severance costs (one-time benefits)	$	245	$	102	$	143
Contract termination costs		552		135		417
Other associated costs		66		48		18

Total severance and other restructuring costs	$	863	$	285	$	578

	As Restated March 29, 2002			As Previously Reported March 29, 2002
	(in thousands, except per share amounts)
Consolidated Statements of Operations
For the three months ended:
Sales	$	27,514		$	27,195
Gross profit		10,320			10,137
Total operating expenses		14,898			14,828
Loss from operations		(4,578	)		(4,691	)
Income tax expense (benefit)		4,492			4,575
Net income		8,694			8,498
Basic net income per share		.66			.65
Diluted net income per share		.59			.58

	Three Months Ended
	March 28, 2003			March 29, 2002
Recurring revenues	$	15,710		$	17,753
Non-recurring revenues		7,307			9,761

Total revenues	$	23,017		$	27,514

Recurring revenues		68.3	%		64.5	%
Non-recurring revenues		31.7	%		35.5	%

Total revenues		100	%		100	%

	Three months ended
	March 28, 2003		March 29, 2002 Restated
Sales:
Products	64.0	%	70.0	%
Services	36.0	%	30.0	%
Total sales	100.0	%	100.0	%
Cost of sales:
Products (as a percent of product sales)	57.7	%	56.5	%
Services (as a percent of services sales)	84.8	%	76.5	%
Total cost of sales	67.4	%	62.5	%
Gross profit	32.6	%	37.5	%
Selling, general and administrative expenses	46.3	%	39.9	%
Research and development expenses	11.3	%	14.3	%
Loss from operations	(25.0	)%	(16.6	)%
Interest and other income (expense), net	(3.9	)%	(2.5	)%
Gain on arbitration settlement	—	%	67.1	%
Provision for income taxes	0.9	%	16.3	%
Net (loss) income (loss)	(29.9	)%	31.6	%

	March 28, 2003			December 31, 2002
	(in thousands)
Cash and cash equivalents	$	3,510		$	2,279
Working capital deficit		(14,474	)		(8,608	)

Contractual Obligations	2003		2004		2005		2006		2007		Later Years		Total
Line of credit	$	2,450	$	—	$	—	$	—	$	—	$	—	$	2,450
Term loan(a)		10,350		—		—		—		—		—		10,350
Industrial development bond		150		165		180		200		220		3,325		4,240
Subordinated debt		—		—		—		10,000		—		—		10,000

Operating leases		2,949		2,599		1,723		1,518		738		—		9,527

Total Contractual Obligations	$	15,899	$	2,764	$	1,903	$	11,718	$	958	$	3,325	$	36,567

	Carrying Amount 2002			2003		2004		Payments 2005		2006		2007		Later Years		Fair Value
Line of credit	$	2,450		$	2,450	$	—	$	—	$	—	$	—	$	—	$	2,450
Interest rate		7.5	%
Term loan(a)	$	10,350		$	10,350	$	—	$	—	$	—	$	—	$	—	$	10,350
Interest rate		6.42	%
Industry Development Bond	$	4,240		$	150	$	165	$	180	$	200	$	220	$	3,325	$	4,240
Interest rate		1.31	%
Subordinated debt	$	10,000		$	—	$	—	$	—	$	10,000	$	—	$	—	$	8,560
		7.00	%


		/s/ BRIAN K. SERVICE
By:		Brian K. Service
Title:		Chief Executive Officer, Chief Operating Officer and President (Principal Executive Officer)


		/s/ G. PETER V. WHITE
By:		G. Peter V. White
Title:		Vice President, Finance (Principal Accounting Officer)