Overview

We are a worldwide leading manufacturer of three-dimensional ("3D") printers and high-performance rapid prototyping ("RP") systems for the office-based RP and direct digital manufacturing ("DDM") markets. Our 3D printers and high-performance RP systems provide users of 3D computer-aided design ("CAD") programs a fast, office-friendly, and low-cost alternative for building functional 3D parts. We develop, manufacture and sell a broad product line of 3D printers and DDM systems (and related proprietary consumable materials) that create physical models from CAD designs. We also offer rapid prototyping and production part manufacturing services through our centers located in North America, Europe and Australia.

For the quarter ended June 30, 2009, we recorded net income of $0.8 million, or $0.04 per diluted share, as compared to net income of $4.1 million, or $0.19 per diluted share, for the second quarter of 2008. The world-wide economic slow down that took hold in late 2008 has continued to soften demand for our products and services. As a result of the cost reduction efforts taken during the first quarter of 2009, we have been able to offset some of this weakness and return to profitability.

Our revenues decreased to $24.6 million, a 21.2% decrease from the $31.3 million that we reported in the second quarter of 2008. Gross profit also decreased by $5.7 million, or 33.1%, to $11.6 million as compared with $17.3 million in the prior year. These decreases were primarily attributable to lower product sales and margins.

Our balance sheet continues to be strong. As of June 30, 2009, our cash and investments balance was approximately $51.1 million, up from $47.7 million at December 31, 2008. We generated approximately $2.5 million of cash from operations during the quarter, primarily driven by earnings before depreciation and amortization and a reduction of inventory levels. We also have no debt and believe that we have adequate liquidity to fund our growth strategy for the remainder of 2009.

3D Printers It is our belief that we are successfully implementing our overall marketing strategy by addressing the needs of both the high-performance and 3D printing ends of the market. Over the last three years, we have been the price leaders in the 3D printer market and have followed a strategy of continuing to move down the price elasticity curve as evidenced by our introduction of the uPrint in January 2009. We feel that this strategy is appropriate for the long-term success of our company while at the same time, we recognize the short-term challenges that this presents. While competitors have recently introduced low-cost 3D printers, we believe our strategy of offering low-priced 3D printing systems combined with higher reliability and increased functionality will continue to make our 3D printers an attractive alternative to our competitors' products. Furthermore, we believe our recent introduction of the uPrint should serve to increase awareness of our products, which would typically drive higher volume to offset the reduced margins for that system. However, due to the unprecedented world-wide economic challenges that our market is currently facing, we feel that revenues and margins will continue to be under pressure.

Our strategy in the 3D printing market is to continue expanding our position through increased unit sales of our Dimension product line and particularly the uPrint system. Concurrent with the launch of the uPrint in January 2009, we lowered the price of our other Dimension systems and discontinued the production of our SST768 and BST768 models, although we will continue to provide support and service for these discontinued systems going forward. Our current 3D printing line now consists of four system types that range in price from $14,900 to $32,900. Based upon data and estimates furnished in the Wohlers Report released in May of 2009, we shipped approximately 43% of all RP systems globally in 2008 and 50% of all 3D printers shipped globally in 2008.

We continue to offer a highly successful distributor program that allows resellers to purchase demonstration systems with extended payment terms. While this program negatively impacts our accounts receivable days sales outstanding ("DSO"), it has proven to be an effective tool in promoting and selling our systems. Given the success of the program in the past, we offered a similar program for the launch of the uPrint in the first quarter of 2009, but with shorter extended payment terms than in prior years. Although this program has a negative effect on our DSO, we believe that it remains an integral part of our strategy to expand our share of the market.

We also have opportunities for the Fortus line in DDM applications. DDM involves the manufacture of parts fabricated directly from our systems that are subsequently incorporated into the user's end product or process. DDM is particularly attractive in applications that require short-run or low-volume parts, that require rapid turnaround and for which tooling would not be appropriate due to small volumes.

An emerging portion of the DDM market segment is the production of fabrication and assembly tools that aid in the customer's production and assembly process. We believe this fabrication and assembly tool market is substantially larger than the $1.1 billion rapid prototyping market we currently serve. In addition, we have seen a growing number of applications for end-use parts.

Recurring Revenues As our installed base has increased, we expect an increasing amount of revenue from the sales of consumables, maintenance contracts, and other services that represents recurring revenue for us. Despite a history of growth in this area, we have seen this trend flatten out recently as our existing customers have curtailed some discretionary or variable spending in response to the economic slow down.

In January 2009, we launched a new personal 3D printer, the uPrint, at a new lower price point of $14,900. Although this represents a lower selling price and lower margin than our other system offerings, we believe that the launch of this product represents a significant milestone in our strategy of continuing to move down the price elasticity curve. Consistent with our previous product launches, we have seen a temporary drop in demand for the uPrint in the quarter following the launch as our reseller network begins to sell their initial inventory purchase in the current environment of worldwide economic slowdown. Because the uPrint is proving to be a robust and reliable product, we believe it appeals to a broader network of resellers and expanding the distribution channel for this product will be a priority in the coming quarters.

Due to the continued weakness in the world economy, we reevaluated our fixed and variable cost structure in light of current sales expectations. As a result, in the first quarter of 2009, we took certain cost-saving measures that lowered our fixed costs and curtailed some discretionary spending while maintaining a focus on the key goals and objectives of our long-term strategy. These cost-saving measures resulted in a charge of approximately $779,000, consisting primarily of severance costs related to a reduction in force. We expect these measures will amount to savings of approximately $2.7 million on an annualized basis.

At the end of 2008, we replaced our Fortus direct sales channel in the United States with a select group of existing resellers that more than triples our sales support for these high-end systems. We expect that lower revenues resulting from reseller discounts will be offset by reduced fixed costs that were previously associated with our direct sales force. Although there were many factors that affected our Fortus revenues and gross profits in the first half of 2009, we believe that this change to a variable cost structure has been neutral to our operating income.

In 2008, we satisfied our responsibilities under a three-year, $3.6 million agreement with a Fortune 500 global manufacturing company to jointly advance our proprietary FDM technology for rapid manufacturing applications. This agreement entitled us to receive reimbursement payments as we achieved specific milestones stated in the agreement. This effort was focused around our high-performance systems and resulted in the commercial release of the Fortus 900mc. Due to the success of this initial arrangement, we are continuing this relationship and have established a new agreement with similar terms and objectives. During the six months ended June 30, 2009 and June 30, 2008, approximately $1.5 million and $300,000, respectively, of research and development expenses were offset by payments that were received from this company.

Our current and future growth is largely dependent upon our ability to penetrate new markets and develop and market new rapid prototyping and manufacturing systems, materials, applications, and services that meet the needs of our current and prospective customers. Our expense levels are based in part on our expectations of future revenues. While we have adjusted, and will continue to adjust, our expense levels based on both actual and anticipated revenues, fluctuations in revenues in a particular period could adversely impact our operating results. Our ability to implement our strategy for 2009 is subject to numerous uncertainties and risks, many of which are described in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in the section below captioned "Forward Looking Statements and Factors That May Affect Future Results of Operations," and in Item 1A, "Risk Factors," of our Annual Report on Form 10-K for 2008. We cannot ensure that our efforts will be successful.

Results of Operations
(unaudited)

   The following table sets forth certain consolidated statements of operations
data as a percentage of net sales for the periods indicated. All items are
included in or derived from our consolidated interim statements of operations.

Three- and Six-Month Periods Ended June 30,

                                            Three Months                     Six Months
                                        2009            2008            2009            2008
Net sales                                100.0 %         100.0 %         100.0 %         100.0 %
Cost of sales                             53.0 %          44.7 %          55.8 %          44.1 %
Gross profit                              47.0 %          55.3 %          44.2 %          55.9 %
Research and development                   6.7 %           8.2 %           7.4 %           7.6 %
Selling, general, and administrative      34.4 %          28.5 %          37.2 %          30.0 %
Operating income                           5.9 %          18.7 %          -0.3 %          18.3 %
Other income (expense)                    -0.6 %           1.2 %           0.8 %           1.1 %
Income before income taxes                 5.3 %          19.9 %           0.5 %          19.4 %
Income taxes                               1.8 %           6.8 %           0.2 %           6.7 %
Net income                                 3.4 %          13.1 %           0.3 %          12.7 %

Net Sales

   Our revenues decreased to $24.6 million, a 21.2% decrease from the $31.3
million that we reported in the second quarter of 2008. Revenue for the first
half of 2009 was $47.8 million, down $14.2 million, or 22.9%, from $62.0 million
in the prior year. The following is a breakdown of our revenues by products and
services:

Three- and Six-Month Periods Ended June 30,

(In Thousands)         Three Months             Period-over-              Six Months              Period-over-
                   2009            2008        period change         2009            2008        period change
Products       $     18,200    $     24,846          -26.7 %     $     35,152    $     49,954          -29.6 %
Services              6,448           6,429            0.3 %           12,642          12,029            5.1 %
               $     24,648    $     31,275          -21.2 %     $     47,794    $     61,983          -22.9 %

Revenues derived from products decreased $6.6 million in the quarter ended June 30, 2009, as compared with the quarter ended June 30, 2008. The number of units that we shipped in the quarter decreased by approximately 18%, or 92 units, to 442 as compared with 540 units shipped in the second quarter of 2008. Revenues derived from products decreased $14.8 million in the six months ended June 30, 2009, as compared with the six months ended June 30, 2008. The number of units that we shipped in the first half of 2009 decreased by approximately 8%, or 84 units, to 1,033 as compared with 1,117 units shipped in the first half of 2008. The decrease in both revenues and units for the 2009 periods compared to the 2008 periods were principally attributable to the worldwide economic slowdown.

Revenues in the Americas region, which includes North and South America, accounted for approximately 54.2% and 53.1% of total revenue for the quarters ended June 30, 2009 and 2008, respectively. Revenue in the Americas region accounted for approximately 57.5% and 51.8% of total revenue for the six months ended June 30, 2009 and 2008, respectively. This increase in sales percentage is primarily due to a smaller decline in system revenues as compared to the international region. Historically, the launch of a new system like the uPrint has an impact on domestic revenues earlier than it does internationally.

International revenues accounted for approximately 45.8% and 46.9% of total revenues for the quarters ended June 30, 2009 and 2008, respectively. International revenues for the first six months of 2009 accounted for approximately 42.5% of total revenues as compared to 48.2% for the same prior-year period. The international decrease was led by lower system volumes in both the high-performance systems as well as the 3D Printers.

Gross Profit

Three- and Six-Month Periods Ended June 30,

(In Thousands)                                     Three Months               Period-over-                Six Months                Period-over-
                                              2009              2008         period change          2009              2008         period change
Products                                 $      7,921      $     13,124            -39.6 %     $     14,187      $     27,489            -48.4 %
Services                                        3,652             4,184            -12.7 %            6,959             7,183             -3.1 %
Total                                    $     11,573      $     17,308            -33.1 %     $     21,146      $     34,672            -39.0 %

Gross Profit as a Percentage of Sales
Products                                         43.5 %            52.8 %                              54.8 %            55.0 %
Services                                         56.6 %            65.1 %                              66.6 %            59.7 %
Total                                            47.0 %            55.3 %                              58.2 %            55.9 %

Gross profit decreased by $5.7 million, or 33.1%, to $11.6 million in the quarter ended June 30, 2009 as compared with $17.3 million in the same prior-year period. Gross profit decreased by $13.5 million, or 39.0%, to $21.1 million in the six months ended June 30, 2009 as compared with $34.7 million in the same prior-year period. This decrease for both the three and six-months periods ended June 30, 2009 were primarily attributable to the lower revenue volume as well as a product mix that favored the lower margin uPrint relative to the prior-year periods ended June 30, 2008

Product gross profit decreased by 39.6% and 48.4% for the three and six months ended June 30, 2009, respectively, as compared to the same prior-year periods. This is decrease is primarily attributable to lower system revenues covering less of our fixed manufacturing overhead costs. The decrease in product gross profit was also attributable to the launch of our new uPrint system, which has a lower direct margin than our other systems. As production volumes increase for the uPrint, we expect to reduce material costs for this system up to 15% from its March 31, 2009 costs by the end of 2009.

Gross profit from services decreased by 12.7% and 3.1% for the three and six months ending June 30, 2009, respectively, as compared to the same prior-year periods. This decrease is primarily attributable to an aggressive pricing environment experienced by our Paid Parts service.

Operating Expenses

   Operating expenses and operating expense as a percentage of sales, as well as
the percentage changes in operating expenses were as follows:

Three- and Six-Month Periods Ended June 30,

(In Thousands)                                Three Months               Period-over-                Six Months                Period-over-
                                         2009              2008         period change          2009              2008         period change
Research & development              $      1,655      $      2,573            -35.7 %     $      3,527      $      4,741            -25.6 %
Selling, general & administrative          8,468             8,898             -4.8 %           17,776            18,589             -4.4 %
                                    $     10,123      $     11,471            -11.8 %     $     21,303      $     23,330             -8.7 %
Percentage of sales                         41.1 %            36.7 %                              44.6 %            37.6 %

Research and development expense decreased by 35.7% and 25.6% for the three and six months ended June 30, 2009 compared to the same prior-year periods. The decrease resulted primarily from a lower level of investment due to economic concerns and reduced headcount. Capitalized research and development expenditures for the three and six months ended June 30, 2009 relating to internally developed software decreased by $182,000 and $275,000, respectively, from the same prior-year periods.

In 2008, we satisfied our responsibilities under a three-year, $3.6 million agreement with a Fortune 500 global manufacturing company to jointly advance our proprietary FDM technology for rapid manufacturing applications. This agreement entitled us to receive reimbursement payments as we achieved specific milestones stated in the agreement. This effort was focused around our high-performance systems and resulted in the commercial release of the Fortus 900mc. Due to the success of this initial arrangement, we are continuing this relationship and have established a new agreement with similar terms and objectives. During the six months ended June 30, 2009 and June 30, 2008, approximately $1.5 million and $300,000, respectively, of research and development expenses were offset by payments that were received from this company.

Selling, general and administrative expenses decreased by 4.8% and 4.4%, for the three and six months ended June 30, 2009 and 2008, respectively, compared to the same prior-year periods. The decreases in the second quarter and first six-months of 2009 were primarily attributable to the reduction in our direct sales force in January of 2009, which converted some of our selling expenses to a variable cost structure, some additional headcount reductions effected in the first quarter of 2009, and a continued effort to lower discretionary spending.

The cost-saving measures taken in the first quarter of 2009 lowered our fixed costs and curtailed some discretionary spending while maintaining a focus on the key goals and objectives of our long-term strategy. These cost-saving measures resulted in a charge of approximately $779,000 in the first quarter of 2009, consisting primarily of severance costs related to a reduction in force.

Operating Income (Loss)

   Operating income (loss) and operating income (loss) as a percentage of sales,
as well as the percentage changes in operating income (loss), were as follows:

Three- and Six-Month Periods Ended June 30,

(In Thousands)                     Three Months              Period-over-               Six Months               Period-over-
                              2009             2008         period change         2009             2008         period change
Operating income (loss)   $     1,450      $     5,838            -75.2 %     $     (157 )    $     11,342            -101.4 %

Percentage of sales               5.9 %           18.7 %                            -0.3 %            18.3 %

We recorded operating income of $1.5 million for the three months ended June 30, 2009 as compared to $5.8 million for the same prior-year period. We recorded an operating loss of $157,000 for the six months ended June 30, 2009 as compared to $11.3 million in operating income for the same prior-year period. This decrease was primarily due to reduced revenues from a weak world economy and a product mix shift towards lower margin 3D printing systems.

Other Income (Expense)

   Other income (expense) as a percentage of sales and changes in other income
(expense) were as follows:

Three- and Six-Month Periods Ended June 30,

(In Thousands)                                 Three Months             Period-over-              Six Months               Period-over-
                                           2009            2008        period change         2009            2008         period change
Interest income                        $      238      $      547             -56 %      $      524      $     1,148             -54 %
Foreign currency transaction losses          (400 )          (188 )          -113 %            (163 )           (216 )           -25 %
Other                                          12              23             -48 %              26             (253 )           110 %
                                       $     (150 )    $      382            -139 %      $      387      $       679             -43 %
Percentage of sales                          -0.6 %           1.2 %                             0.8 %            1.1 %

While cash and investment balances increased over the prior year, interest income decreased for the three- and six-month periods ended June 30, 2009 compared to the same prior-year periods due to the lower effective interest rate of our investment portfolio. As of June 30, 2009, we had approximately $20.9 million invested in a US Treasury money market with a current yield of approximately 0.13%.

We invoice sales to certain European distributors in Euros and reported results are therefore subject to fluctuations in the exchange rates of that currency in relation to the United States dollar. Our strategy is to hedge a most of our Euro-denominated accounts receivable positions by entering into 30-day foreign currency forward contracts on a month-to-month basis to reduce the risk that our earnings will be adversely affected by changes in currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

We will continue to monitor exposure to currency fluctuations. Instruments to hedge risks may include foreign currency forward, swap, and option contracts. These instruments will be used to selectively manage risks, but there can be no assurance that we will be fully protected against material foreign currency fluctuations.

Income Taxes (Benefit)

   Income taxes and income taxes as a percentage of net income before income
taxes, as well as the percentage changes, were as follows:

Three- and Six-Month Periods Ended June 30,

(In Thousands)               Three Months             Period-over-              Six Months               Period-over-
                        2009            2008         period change         2009            2008         period change
Income taxes         $     451      $     2,124            -78.8 %     $       84      $     4,126            -98.0 %

Effective tax rate        34.7 %           34.1 %                            36.5 %           34.3 %

Income tax expense was recorded for the three months ended June 30, 2009 with a similar effective tax rate as the same prior year period. Income tax expense for the six months ended June 30, 2009 was slightly higher than the prior year due to the impact of foreign taxes.

Net Income

   Net income and net income as a percentage of sales, as well as the percentage
changes in net income, were as follows:

Three- and Six-Month Periods Ended June 30,

(In Thousands)                Three Months             Period-over-              Six Months              Period-over-
                         2009            2008         period change        2009            2008         period change
Net income            $     850      $     4,096            -79.2 %     $     146      $     7,895            -98.2 %

Percentage of sales         3.4 %           13.1 %                            0.3 %           12.7 %

Net income in the current period decreased significantly during the three and six months ended June 30, 2009 primarily from lower revenues resulting from a world-wide economic slowdown and other reasons stated elsewhere in this section.

Liquidity and Capital Resources
(unaudited)

   A summary of our consolidated interim statements of cash flows for the six
months ended June 30, 2009 and 2008 are as follows:

(In Thousands)
                                                       2009              2008
Net income                                          $       146     $      7,895
Depreciation and amortization                             4,261            3,329
. . .