This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.
We are subject to a number of risks and uncertainties that may affect our future performance. Such risks are discussed in greater detail in the sections entitled "Forward-Looking Statements" and "Cautionary Statements and Risk Factors" at the end of this Item 2 and that are discussed or referred to in Item 1A of Part II of this Quarterly Report on Form 10-Q.
Business Overview
We design, develop, manufacture, market and service 3-D printing, rapid manufacturing and prototyping systems and related products and materials that enable complex three-dimensional objects to be produced directly from computer data without tooling. Our products and materials help to greatly reduce the time and cost required to produce prototypes or customized production parts. We also operate a comprehensive service bureau that offers our customers rapid prototyping and manufacturing services for the production of precision parts. Our consolidated revenue is derived primarily from the sale of our systems, the sale of the related materials used by the systems to produce solid objects and the provision of services to our customers. Recent Developments
Since the beginning of the third quarter of 2009, we continued our new product development activities, resulting in the following, which were not material to our operating results:
• During the third quarter, we moved the production of our Projet™ line of 3-D printers, the assembly of which was previously outsourced, to our facility in Rock Hill. With the transition, we expect to improve oversight of quality control and make better use of our Rock Hill facility.

• In September 2009, we acquired the key assets of Desktop Factory, a company engaged in the development of a sub-$5,000 desktop printer. The Desktop Factory 3-D printer exhibits a build speed comparable to existing 3-D printing technologies to produce robust plastic parts. With the acquisition of Desktop Factory's patent portfolio, we expect to complete the development and integration of Desktop Factory's technology into several new products within our existing research and development budget.

• On October 1, 2009, we acquired the assets and certain of the liabilities of Acu-Cast Technologies, LLC, a leading provider of rapid prototyping and manufacturing services that offers precision parts made on a wide range of traditional and additive manufacturing systems. Concurrently, we launched 3Dproparts™, a rapid prototyping and manufacturing parts service. We expect our 3Dproparts™ service to bring together a wide range of production and additive grade materials and the latest additive and traditional manufacturing systems, enabling us to deliver a broad range of precision plastic and metal parts and assemblies to our customers. Revenues from the acquisition and the 3Dproparts™ service will be reported within our service revenue line.

Results of Operations
Summary of 2009 financial results
We generated $1.8 million of net cash in the first nine months of 2009 and finished the period with $24.0 million of unrestricted cash compared to $22.2 million of unrestricted cash at December 31, 2008.
As discussed in greater detail below, revenue for the third quarter of 2009 declined by 22% to $27.7 million from $35.6 million for the third quarter of 2008 due to weak global demand, particularly in the automotive and consumer electronics sectors. Revenue was down across all classes of products and services, primarily reflecting the cumulative effect of the decline in large-frame systems sales that began in the first quarter of 2008. Revenue for the nine months ended September 30, 2009 declined 27% to $76.4 million from $104.0 million in 2008, for primarily the same reasons.

Materials sales for the third quarter of 2009 declined by $3.2 million from the third quarter of 2008 as revenue from materials was adversely impacted by the reduction in large-frame systems sales, which are typically accompanied by initial materials purchases to charge up new systems and commence production, and decreased demand due to the downturn in the global economy. Although both systems and materials sales for the third quarter of 2009 decreased compared to the third quarter of 2008, they increased from second quarter 2009 levels by $0.9 million (16%) and $1.4 million (12%), respectively. Revenue from services fell by $1.3 million to $7.7 million in the third quarter of 2009 from $9.0 million in the same quarter of 2008 primarily as a result of a significant drop in maintenance and warranty revenue, which reflects the trailing 12-month cumulative effect of lower large-frame sales that began during the first quarter of 2008. Services revenue increased by $0.6 million in the third quarter of 2009 from $7.1 million in the second quarter of 2009, resulting from increased maintenance contract revenues.
Foreign currency translation had a $0.3 million unfavorable impact on revenue in the third quarter of 2009 compared to a $1.0 million favorable impact on revenue in the third quarter of 2008.
Through our cost saving initiatives we were able to improve gross margin, reduce operating expenses and move from a $0.3 million operating loss for the third quarter of 2008 to a $1.1 million operating income for the 2009 quarter. Our gross profit improved to $12.3 million in the third quarter of 2009 from $10.8 million in the second quarter of 2009. It decreased $6.7 million compared to the first nine months of 2008 primarily due to our lower level of revenue. Our cost of sales also fell due to a combination of lower sales and the initiatives undertaken in 2008 and 2009 to lower our cost of sales, as discussed below. Our gross profit margin increased to 44.5% in the third quarter of 2009 from 39.5% in the third quarter of 2008 as increased supply chain efficiencies, the elimination of certain third-party logistics costs in the U.S. and cost reductions in our field service organization more than offset lower overhead absorption over lower sales. Also included in our gross profit margin for the third quarter of 2009 is the previously disclosed 4.1 percentage point negative impact of sales of our V-Flash® Desktop Printer. These changes reflect the reclassifications of foreign exchange effects from cost of sales to interest and other expense, net, which are more fully described below under our discussion of "Gross profit and gross profit margins." Our operating expenses declined by $3.1 million in the third quarter of 2009 to $11.2 million from $14.3 million in the 2008 quarter. The decrease reflected lower selling, general and administrative expenses and lower research and development expenses, which are discussed below under our discussion of "Operating expenses." We expect our SG&A expenses for the remainder of 2009 to be in the range of $8.5 million to $10 million, and our research and development expenses to be in the range of $2.5 million to $3 million. Results of Operations - Third Quarter Comparisons Third quarter comparison of revenue by class of product and service Table 1 sets forth our change in revenue by class of product and service for the third quarter of 2009 compared to the third quarter of 2008:

Table 1

                               Systems and
                                  Other
(Dollars in thousands)          Products                   Materials                  Services                    Totals
Revenue - 3rd quarter
2008                      $ 10,246         28.8 %    $ 16,313         45.9 %    $  9,018         25.3 %    $ 35,577          100 %

Change in revenue:
Volume
Core products and
services                      (850 )       (8.3 )      (2,346 )      (14.4 )        (946 )      (10.5 )      (4,142 )      (11.6 )
New products and
services                      (750 )       (7.3 )      (1,618 )       (9.9 )        (228 )       (2.5 )      (2,596 )       (7.3 )
Price/Mix                   (1,855 )      (18.1 )         995          6.1             -            -          (860 )       (2.4 )
Foreign currency
translation                     34          0.3          (221 )       (1.4 )        (125 )       (1.4 )        (312 )       (0.9 )

Net change                  (3,421 )      (33.4 )      (3,190 )      (19.6 )      (1,299 )      (14.4 )      (7,910 )      (22.2 )

Revenue - 3rd quarter
2009                      $  6,825         24.7 %    $ 13,123         47.4 %    $  7,719         27.9 %    $ 27,667        100.0 %

We earn revenues from the sale of systems and other products, materials and services. On a consolidated basis, revenue for the third quarter of 2009 decreased by $7.9 million, or 22.2%, compared to the third quarter of 2008 as a result of the continuing weak global economic conditions.
The decline in revenue from systems and other products that is due to volume for the third quarter of 2009 compared to the same quarter of 2008 was primarily the result of lower sales of large-frame and mid-frame systems that were only partially offset by an increase in unit volume of 3-D printers. Sales of systems consisted of:
• Large-frame systems, which represented 31% of total systems revenue for the third quarter of 2009, compared to 31% for the third quarter of 2008;

• Mid-frame and small-frame systems, which accounted for 23% of total systems revenue for the 2009 period, compared to 49% for the same period in 2008; and

• 3-D printers, which made up the remaining 46%, increasing from 20% in the third quarter of 2008.

Despite the decrease in systems and other products revenue quarter over quarter, systems and other products revenue increased sequentially by $0.9 million, led by a 142% rebound in large-frame system sales.
Due to the relatively high list price of certain systems, our customers' purchasing decisions may have a long lead time; combined with the overall low unit volume of systems sales in any particular period, the acceleration or delay of orders and shipments of a small number of systems from one period to another can significantly affect revenue reported for our systems sales for the period involved. Revenue reported for systems sales in any particular period is also affected by revenue recognition rules prescribed by generally accepted accounting principles.
Production and delivery of our systems is generally not characterized by long lead times, and backlog is therefore generally not a material factor in our business. At September 30, 2009 our backlog was approximately $1.7 million, a 26.1% increase from the $1.4 million of backlog at December 31, 2008, and a 65.5% increase from the $1.0 million of backlog at September 30, 2008. We believe that our level of backlog at September 30, 2009 is generally consistent with the normal operating trends in our business.
Revenue from materials was also adversely impacted by lower large-frame systems sales, which are typically accompanied by significant initial materials purchases to charge up new systems and commence production, and decreased demand in the global marketplace due to the continued overall economic downturn. Sales of integrated materials represented 30% of total materials revenue in the third quarter of 2009, compared to 30% in the second quarter of 2009, 35% in the first quarter of 2009 and 28% in the fourth quarter of 2008. Sales of integrated materials in the third quarter of 2009 decreased 7.7% compared to the third quarter of 2008. Materials revenue increased sequentially by $1.4 million during the third quarter of 2009.
The decrease in services revenue reflects a reduction in maintenance revenue and the trailing 12-month cumulative impact of the decline in large-frame systems sales on warranty revenue. The decrease was partially offset by an increase in sales of upgrades, which are recorded in this line item. Services revenues increased 8.4% sequentially during the third quarter of 2009.
In addition to changes in sales volumes, there are two other primary drivers of changes in revenues from one period to another: the combined effect of changes in product mix and average selling prices, sometimes referred to as price and mix effects, and the impact of fluctuations in foreign currencies.
As used in this Management's Discussion and Analysis, the price and mix effects relate to changes in revenue that are not able to be specifically related to changes in unit volume. Among these changes are changes in the product mix of our materials and our systems as the trend toward smaller, more economical systems has continued and the influence of new systems and materials on our operating results has grown. Our reporting systems are not currently configured to produce more quantitative information regarding the effect of price and mix changes on revenue.

Change in third quarter revenue by geographic region Each geographic region contributed to our lower level of revenue in the third quarter of 2009. Table 2 sets forth the changes in revenue by geographic area for the third quarter of 2009 compared to the third quarter of 2008:

Table 2

(Dollars in thousands)            U.S.                      Europe                  Asia-Pacific                 Totals
Revenue - 3rd quarter
2008                      $ 14,106         39.7 %    $ 16,049         45.1 %    $ 5,422         15.2 %    $ 35,577          100 %

Change in revenue:
Volume                      (1,576 )      (11.2 )      (4,459 )      (27.8 )       (703 )      (13.0 )      (6,738 )      (18.9 )
Price/Mix                     (315 )       (2.2 )         (17 )       (0.1 )       (528 )       (9.7 )        (860 )       (2.4 )
Foreign currency
translation                      -            -          (646 )       (4.0 )        334          6.2          (312 )       (0.9 )

Net change                  (1,891 )      (13.4 )      (5,122 )      (31.9 )       (897 )      (16.5 )      (7,910 )      (22.2 )

Revenue - 3rd quarter
2009                      $ 12,215         44.2 %    $ 10,927         39.4 %    $ 4,525         16.4 %    $ 27,667          100 %

Revenue from U.S. operations declined by $1.9 million, or 13.4%, to $12.2 million in 2009 from $14.1 million in the third quarter of 2008. The decrease was due to lower volume and the unfavorable combined effect of price and mix.
Revenue from non-U.S. operations for the third quarter of 2009 declined by $6.0 million, or 28.0%, to $15.5 million from $21.5 million for the third quarter of 2008. Revenue from non-U.S. operations as a percent of total revenue was 55.8% and 60.3%, respectively, for the third quarters of 2009 and 2008. The decline in non-U.S. revenue, excluding the effect of foreign currency translation, was 26.6% in the third quarter of 2009.
Revenue from European operations declined by $5.1 million, or 31.9%, to $10.9 million from $16.0 million in the prior year period. This decrease was due to a $4.5 million decline in volume and the $0.6 million unfavorable impact of foreign currency translation.
Revenue from Asia-Pacific operations declined by $0.9 million, or 16.5%, to $4.5 million from $5.4 million in the prior year period due primarily to the unfavorable $1.2 million combined decrease in volume, price and mix as sales were adversely affected by the previously disclosed reorganization filing of our largest Japanese customer. This decline in sales volume was partially offset by $0.3 million in favorable foreign currency translation. Gross profit and gross profit margins - third quarter Table 3 sets forth gross profit and gross profit margin for our products and services for the third quarters of 2009 and 2008:

Table 3

                                                Quarter Ended September 30,
                                              2009                       2008
                                      Gross           %          Gross           %
        (Dollars in thousands)        Profit       Revenue       Profit       Revenue
        Systems and other products   $  1,116          16.4 %   $  1,374          13.4 %
        Materials                       7,523          57.3       10,260          62.9
        Services                        3,680          47.7        2,403          26.6

        Total                        $ 12,319          44.5 %   $ 14,037          39.5 %

We reclassified $0.2 million of foreign exchange loss, which had previously been included in product cost of sales for the third quarter of 2008, to interest and other expense, net in our condensed consolidated statements of operations. This had the effect of increasing our previously reported gross profit and interest and other expense, net for the third quarter of 2008 by $0.2 million and of decreasing operating loss for that quarter by the same amount. It did not affect any of the other line items on our condensed consolidated statements of operations for 2008, and this management discussion and analysis reflects the results of this reclassification.
On a consolidated basis, gross profit for the third quarter of 2009 decreased by $1.7 million to $12.3 million from $14.0 million in the third quarter of 2008. This decrease is the result of lower materials sales and lower large-frame and mid-frame systems revenue, as well as the negative impact of sales of our V-Flash® Desktop Printer as discussed below.
Consolidated gross profit margin in the third quarter of 2009 improved by 5.0 percentage points to 44.5% of revenue from 39.5% of revenue for the 2008 quarter. Countering the adverse effect of our lower revenue, the increase in gross profit margin reflected the effect of various cost savings initiatives that we pursued in 2008 and during the first three quarters of 2009, which included certain supply chain efficiencies, the movement of certain third-party logistics activities in-house, the sale of system upgrades and a reduction in field service costs. The 2009 gross profit margin was adversely affected by approximately 4.1 percentage points due to the previously disclosed negative impact on margin of sales of our V-Flash® Desktop Printer.

Systems and other products gross profit for the third quarter of 2009 decreased to $1.1 million from $1.4 million for the 2008 quarter. Gross profit margin for systems and other products increased by 3.0 percentage points to 16.4% of revenue from 13.4% of revenue in the 2008 quarter. The 2009 gross profit margin was negatively impacted by sales of our V-Flash®Desktop Printer during this first year of commercialization and by the decline in volume resulting in the absorption of fixed costs over fewer units. Partially offsetting this decline were supply chain efficiencies and lower system refurbishment costs. Materials gross profit for the third quarter of 2009 decreased by $2.7 million or 26.7% to $7.5 million from $10.3 million for the 2008 quarter. Gross profit margin for materials decreased by 5.6 percentage points to 57.3% of revenue from 62.9% of revenue in the 2008 quarter primarily due to changes in price and mix, which was adversely affected by the lower level of large-frame systems sales and decreased demand due to weakness in the overall global economy. Gross profit for services for the third quarter of 2009 increased by $1.3 million or 53.1% to $3.7 million from $2.4 million for the 2008 quarter. Gross profit margin for services increased by 21.0 percentage points to 47.7% of revenue from 26.6% of revenue in the 2008 quarter on 14.4% lower revenue. Gross profit margin increased sequentially for the sixth consecutive quarter. The improved gross profit was due to the combined effect of a decline in fixed costs associated with our decision to cease servicing certain legacy products, resolution of the premature failure of certain system components and reductions in field service costs initiated in 2008. Operating expenses
As shown in Table 4, total operating expenses decreased by $3.1 million or 21.7% to $11.2 million in the third quarter of 2009 from $14.3 million in the third quarter of 2008 as our cost savings initiatives have gained traction, as evidenced by continued declines in operating expenses in each of the last eight quarters. This decrease consisted of $2.1 million in lower selling, general and administrative expenses and $1.0 million of lower research and development expenses, both of which are discussed below.

Table 4

                                                     Quarter Ended September 30,
                                                 2009                           2008
                                                          %                              %
(Dollars in thousands)                  Amount         Revenue         Amount         Revenue
Selling, general and administrative
expenses                               $   8,362            30.2 %    $  10,414            29.3 %
Research and development expenses          2,865            10.4          3,916            11.0

Total operating expenses               $  11,227            40.6 %    $  14,330            40.3 %

Selling, general and administrative expenses Selling, general and administrative expenses declined by $2.1 million to $8.4 million in the third quarter of 2009 compared to $10.4 million in the third quarter of 2008 related to:
• $0.8 million of lower compensation, contract labor, and consultant costs primarily due to lower staffing levels;

• $0.4 million of lower bad debt expense;

• $0.4 million of lower professional fees and

• $0.5 million of lower other costs.

Research and development expenses
Research and development expenses decreased by $1.0 million or 26.8% to $2.9 million in the third quarter of 2009 from $3.9 million in the third quarter of 2008, principally due to a $0.6 million decrease in outside consulting services in the 2009 quarter and the reduction in costs for 2009 following the commercialization of certain new products previously announced in 2008.

Income from operations
Our income from operations for the third quarter of 2009 increased by $1.4 million to $1.1 million from a $0.3 million loss in the third quarter of 2008, including the effect of the third quarter 2008 reclassification discussed above. See "Gross profit and gross profit margins"above. Our reduced loss from operations in the quarter ended September 30, 2009 reflected our higher gross profit margin and our lower operating expenses, which partially offset the effect of our lower consolidated revenue.
The following table sets forth operating income by geographic area for the third quarter of 2009 and 2008:

Table 5

                                             Quarter Ended September 30,
          (Dollars in thousands)              2009                2008
          Income (loss) from operations
          United States                   $        (86 )     $       (2,474 )
          Germany                                  163                  342
          Other Europe                             247                  662
          Asia Pacific                             927                1,349

          Subtotal                               1,251                 (121 )
          Inter-segment elimination               (159 )               (172 )

          Total                           $      1,092       $         (293 )

The decrease in the U.S. operating loss from 2008 to 2009 reflected the same factors relating to our consolidated operating income that are discussed above. As most of our operations outside the U.S. are conducted through sales and marketing subsidiaries, the changes in operating income in our operations outside the U.S. from 2008 to 2009 are affected by changes in transfer pricing. Interest and other expense, net
Interest and other expense, net decreased to $0.1 million of net expense in the third quarter of 2009 from $0.3 million in the 2008 quarter, after giving effect to the reclassification of foreign currency effects discussed above. See "Gross profit and gross profit margins" above.
Table 6 shows the components of the decrease:

Table 6

                                         Quarter Ended September 30,
      (Dollars in thousands)              2009                  2008         Change
      Interest expense               $          151         $        235     $   (84 )
      Interest income                             -                  (91 )        91
      Foreign currency (gain) loss             (285 )                249        (534 )
      Other                                     193                  (57 )       250

      Total                          $           59         $        336     $  (277 )

The reduction in interest expense from 2008 resulted from the repayment of the outstanding industrial development bonds in January 2009, while the lower interest income was the result of our having moved our short-term investments into U.S. Treasury funds.
Provision for income taxes
We recorded a provision for income taxes of $0.1 million in the quarter ended September 30, 2009, compared to $0.4 million for the quarter ended September 30, 2008. Our provision for income taxes primarily reflects income taxes in foreign jurisdictions.
Net income
Our net income for the third quarter of 2009 improved to $0.9 million, compared to a net loss of $1.0 million for the third quarter of 2008. The principal reasons for our lower net loss for the third quarter 2009, discussed in more detail above, were: the $1.4 million reduction in our operating loss, the $0.2 million reduction in interest and other expense, net, and the $0.3 million decrease in our provision for income taxes.

For the quarter ended September 30, 2009, our weighted average common shares outstanding were 22.6 million, and on a per share basis the basic and diluted earnings per share for the same period were $0.04. For the quarter ended September 30, 2008, our weighted average common shares outstanding were 22.4 million, and on a per share basis the basic and diluted loss per share for the same period was $0.04.
Results of Operations - Nine-Month Comparisons Nine-month comparison of revenue by class of product and service Table 7 sets forth our change in revenue by class of product and service for the first nine months of 2009 compared to the same period of 2008:

Table 7

                               Systems and
                                  Other
(Dollars in thousands)           Products                   Materials                   Services                     Totals
Revenue - nine months
2008                      $  29,575         28.4 %    $  47,462         45.6 %    $ 26,983         26.0 %    $ 104,020          100 %

Change in revenue:
Volume
Core products and
services                     (6,116 )      (20.7 )       (4,878 )      (10.3 )        (927 )       (3.4 )      (11,921 )      (11.5 )
New products and
services                     (3,196 )      (10.8 )       (6,261 )      (13.2 )      (1,394 )       (5.2 )      (10,851 )      (10.4 )
Price/Mix                    (2,126 )       (7.2 )        1,028          2.2             -            -         (1,098 )       (1.1 )
. . .