The following discussion and analysis should be read together with the selected consolidated financial data and our Consolidated Financial Statements and notes thereto set forth in this Form 10-K. Certain statements contained in this discussion may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those reflected in any forward-looking statements, as discussed more fully in this Form 10-K. See "Forward-Looking Statements" and "Cautionary Statements and Risk Factors" in Item 1A.

The forward-looking information set forth in this Form 10-K is provided as of the date of this filing, and, except as required by law, we undertake no duty to update that information.

Overview

We are a leading global provider of 3D content-to-print solutions including 3D printers, print materials and on-demand custom parts services. We also provide creative content development, design productivity tools and curation services and downloads. Our integrated solutions replace, displace and complement traditional methods and reduce the time and cost of designed new products by printing real parts directly from digital data. These solutions are used to rapidly design, communicate, prototype and produce functional parts, empowering our customers to create with confidence. We derive our consolidated revenue primarily from the sale of our printers, the related print materials and services, including revenue from our on demand parts services.

Growth strategy

We are pursuing a growth strategy that focuses on four strategic initiatives:

• Build our global custom parts services;

• Accelerate 3D printer penetration;

• Grow healthcare solutions revenue; and

• Build 3D consumer content products and services.

We are working to accomplish our growth initiatives organically and, as opportunities present themselves, through selective acquisitions, including those we have already completed. We expect to be able to support organic growth by leveraging our comprehensive toolkit of solutions in order to sell more products and services to our existing customer base. As with any growth strategy, there can be no assurance that we will succeed in accomplishing our strategic initiatives.

Build Global Custom Parts Services. As a supplement to our 3D print solutions, we believe that growing and expanding our custom parts services, through organic growth and acquisitions, will enable us to impart the latest technology to our customers months or years in advance of their ability to invest in new printers for their own use. We view this as an opportunity to introduce customers to the newest 3D additive production technologies and to build brand experience and customer loyalty with them. We also view it as a significant cross-selling and upselling opportunity from single parts all the way to production printers. In connection with this initiative, we launched our on-demand parts services in October 2009, earned $18.3 million of revenue related to our on-demand parts service in 2010 and built this service to $58.8 million of revenue in 2011.

Accelerate 3D Printer Penetration. We believe that accelerating 3D printer penetration through channel expansion and new products will provide a growing installed base to enable higher revenue from recurring sales of print materials and services. With this objective in mind, we have developed an extensive portfolio of 3D

printers. We are continuing to expand our reseller channel for our personal and professional 3D printers and to train our resellers to perform installation and service for those printers. We exited 2011 with 167 resellers and $30.1 million of revenue from personal and professional printers, representing 35.9% growth over 2010 and $35.7 million of revenue from production printers, representing 10.1% growth over 2010. We expect additional growth from personal and professional printers as a result of our acquisition of Z Corp in January 2012.

Grow Healthcare Solutions Revenue. We believe that, by leveraging our rapid manufacturing core competencies in healthcare solutions applications, we can grow revenue within this marketplace. For example, in 2011 healthcare solutions revenue, including sales of printers, print materials and services for hearing aid, dental, medical device and other health-related applications, accounted for 12.1%, or $27.9 million, of total revenue in 2011 and 13.5%, or $21.6 million, of our total revenue in 2010.

Build 3D Consumer Content Products and Services. We believe that the affordability of our personal printers makes 3D consumer content critical to accelerated adoption. Recognizing the opportunity to deliver 3D content to an expanded audience, we have begun work to identify the tools and services required to deliver 3D content to consumers. We believe that the creation of content products and services could make affordable 3D printers more widely adopted and used by people of all ages and walks of life. We expect to build this capability through a combination of internal developments and acquisitions. Consumer products and services revenue was not material to our 2011 financial results.

We intend to accomplish growth in all areas of our growth strategy organically and, as opportunities present themselves, through selective acquisitions. As with any growth strategy, there can be no assurance that we will succeed in accomplishing our strategic initiatives.

Summary of 2011 Financial Results

As discussed in greater detail below, revenue for 2011 increased primarily due to higher sales across all revenue categories. Our revenue increased by 44.1% to $230.4 million in 2011 from $159.9 million in 2010, after having increased from $112.8 million in 2009. These results reflected growth in demand for 3D printers, increased demand in several key industries we serve, increased print material sales from a growing installed base, and higher service revenue from on-demand parts services and growth from acquisitions.

For 2011, healthcare solutions revenue accounted for $27.9 million, or 12.1%, of our total revenue and included sales of printers, print materials and services for hearing aid, dental, medical device and other health-related applications, compared to $21.6 million, or 13.5%, in 2010, the year we announced our growth initiative related to healthcare solutions.

Our gross profit for 2011 increased by 47.4% to $109.0 million from $74.0 million in 2010, after increasing from $49.7 million in 2009. Our higher gross profit for 2011 arose primarily from an increase in sales. Our gross profit margin percentage improved to 47.3% in 2011 from 46.3% in 2010 and 44.1% in 2009. Gross profit margin benefited from higher overhead absorption, higher print materials gross profit margin due to a shift in the mix of materials with increased personal and professional print materials revenue and the elimination of costs associated with product introduction of our V-Flash ® personal printer, partially offset by increased sales of lower margin on-demand custom parts services and higher units of lower priced personal and professional 3D printers that accounted for a higher percentage of total sales.

Our total operating expenses increased by $21.1 million in 2011 from 2010, reflecting higher SG&A expense, primarily due to acquisition and severance expenses, higher commissions and staffing from our acquisitions and increased legal expenses associated with ongoing litigation and acquisitions. We expect to continue to manage expenses and drive down our costs where possible without impairing our ability to operate and service our customers.

For 2011, our operating income improved by $14.0 million to $34.9 million compared to operating income of $20.9 million in 2010 and $3.1 million in 2009. This was primarily due to higher revenue and the increase in our gross profit noted above, partially offset by higher operating expenses, including increased acquisitions expenses incurred during the fourth quarter in the amount of $2.5 million.

Our operating income for 2011 included $11.0 million of non-cash expenses, which primarily consisted of depreciation and amortization, stock-based compensation and non-cash interest expense, compared to $7.9 million of non-cash expenses in 2010 which consisted of depreciation and amortization and stock-based

compensation. The increase in non-cash expenses is primarily due to amortization from acquired intangibles, as well as an increase in stock-based compensation and non-cash interest expense related to our convertible notes issued in November 2011.

A number of actions or events occurred in 2011 that affected our liquidity and our balance sheet including the following:

• Our unrestricted cash and cash equivalents increased by $141.8 million to $179.1 million at December 31, 2011 from $37.3 million at December 31, 2010. Our cash increase included $62.1 million of net proceeds from a public equity offering carried out in early 2011 and $145.4 million of net proceeds from the issuance of senior convertible notes in November 2011 discussed above. In January 2012, $135.5 million of the net proceeds of the notes was used to complete the acquisition of Z Corp and Vidar. See "Liquidity and Capital Resources" below.

• During 2011, we used $92.7 million of cash to acquire twelve businesses, including deferred purchase payments from prior acquisitions, to augment our printers business, on-demand parts services and consumer solutions initiative. See "Liquidity and Capital Resources - Cash Flow-Cash flow from investing activities."

• Our working capital increased by $159.9 million from $42.5 million at December 31, 2010 to $202.4 million at December 31, 2011, which included the cash for the Z Corp and Vidar acquisition from the senior convertible notes as discussed above. See "Liquidity and Capital Resources - Working capital" below.

• Among major components of working capital, accounts receivable, net of allowances, increased by $15.4 million from December 31, 2010 to December 31, 2011 primarily reflecting higher revenue and increased revenue from all revenue categories sold on credit terms. Inventory at December 31, 2011 was $1.5 million higher than its December 31, 2010 level, primarily reflecting timing of orders and delivery of finished goods print materials and raw materials, which are ordered in large quantities. Accounts payable decreased $0.6 million primarily reflecting timing of orders and payments to vendors associated with inventory and printer assembly.

Results of Operations for 2011, 2010 and 2009

Table 1 below sets forth revenue and percentage of revenue by class of product and service.

Table 1



                                        2011                         2010                         2009
(dollars in thousands)
Printers and other products    $  66,665         28.9 %     $  54,686         34.2 %     $  30,501         27.0 %
Materials                         70,641         30.7          58,431         36.6          50,297         44.6
Services                          93,117         40.4          46,751         29.2          32,037         28.4

Totals                         $ 230,423        100.0 %     $ 159,868        100.0 %     $ 112,835        100.0 %

Consolidated revenue

Consolidated revenue increased in 2011 due primarily to increased sales of print materials and on-demand custom parts service revenue from acquired and organic growth coupled with a 242% increase in printer unit sales over 2010. Revenue increased in 2010 due to increased volume across all sales categories primarily from increased demand from printers and on-demand custom parts services. These changes are explained in greater detail in the Revenue by class of product and service and Revenue by geographic region sections below.

Due to the relatively high list price of certain production and professional printers, our customers' purchasing decisions may have long lead times; combined with the overall low unit volume of production printers sales in any particular period, the acceleration or delay of orders and shipments of a small number of printers from one

period to another can significantly affect revenue reported for our production printers for the period involved. Revenue reported for printer sales in any particular period is also affected by revenue recognition rules prescribed by generally accepted accounting principles.

At December 31, 2011 our backlog was approximately $8.3 million, compared to $7.6 million at December 31, 2010 and $1.4 million at December 31, 2009. Due to timing of customer requested deliveries, the backlog at December 31, 2011 includes orders for production printers that amount to $1.0 million and three print materials orders that amount to $1.2 million. The December 2010 backlog included two large print materials orders placed at the end of 2010 for delivery in 2011 that amounted to $0.8 million. Additionally, on-demand parts services lead time and backlog depends on whether on-demand parts orders are for rapid prototyping or longer-range production runs. The backlog at December 31, 2011 includes $4.8 million of on-demand parts orders, compared to $1.9 million at December 31, 2010.

Revenue by class of product and service

2011 compared to 2010

Sales volumes of new products and services increased by $19.2 million in 2011, while the volume of core products and services sold increased by $49.4 million compared to 2010. Table 2 sets forth the change in revenue by class of product and service for 2011 compared to 2010.

Table 2



                                 Printers and  Other
(dollars in thousands)                 Products                   Materials                Services                   Totals
2010 Revenue                    $   54,686         34.2 %    $ 58,431       36.6 %    $ 46,751       29.2 %    $ 159,868         100 %

Change in revenue:
Volume:
Core products and services             689          1.3         5,771        9.9        43,052       92.1         49,512        31.0
New products and services           13,660         25.0         3,708        6.3         1,856        4.0         19,224        12.0
Price/Mix                           (3,504 )       (6.4 )         724        1.2             -          -         (2,780 )      (1.7 )
Foreign currency translation         1,134          2.1         2,007        3.4         1,458        3.1          4,599         3.0

Net change                          11,979         21.9        12,210       20.9        46,366       99.2         70,555        44.1

2011 Revenue                   $    66,665         28.9 %    $ 70,641       30.7 %    $ 93,117       40.4 %    $ 230,423         100 %

We earn revenue from the sales of printers and other products, print materials and services. On a consolidated basis, revenue for 2011 increased by 44.1% to $230.4 million from $159.9 million for 2010 as a result of higher units volume of lower priced personal, professional and production printers and other products and increased demand for materials sales and on-demand parts services.

The increase in revenue from printers and other products for 2011 compared to 2010 was primarily the result of higher sales of personal and professional printers.

Production printers, made up $35.7 million, or 54.3%, of total printers revenue for 2011, compared to $32.4 million, or 59%, in 2010. This represented a 10% increase in production printer revenue over 2010.

Personal and professional printers, made up $30.1 million, or 45.7%, increasing from $22.3 million, or 41%, in 2010. This represented a 35% increase in personal and professional printers over 2010.

Revenue from print materials was aided by the improvement in production printer sales, which are typically accompanied by significant initial materials purchases to charge up new printers and commence production, by the continued expansion of printers installed over the past periods and by increased materials sales from the acquisition of the RenShape® print materials. We acquired the RenShape ® materials division from Huntsman in November 2011. See Note 3 to the Consolidated Financial Statements.

Sales of integrated materials represented 52% of total print materials revenue in 2011, compared to 34% in 2010. Excluding the acquired Renshape® print materials revenue, integrated materials were 53% of total print materials revenue.

The increase in services revenue primarily reflects revenue from on-demand parts services, which was introduced in the fourth quarter of 2009, partially offset by a decrease in sales of printer upgrades. Service revenue from on-demand custom parts was $58.8 million, or 63.1%, of service revenue for 2011 compared to $18.3.million, or 39.2%, of 2010 service revenue. Of the $58.8 million of on-demand parts services revenue, $32.1 million was from businesses acquired in 2011. For the fourth quarter of 2011, revenue from on-demand parts services was $18.7 million, or 26.7%, of total fourth quarter revenue compared to $6.8 million, or 13.3%, of total 2010 fourth quarter revenue.

In addition to changes in sales volumes, there are two other primary drivers of changes in revenue 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 printers as the trend toward smaller, lower-priced printers has continued and the influence of new printers and materials on our operating results has grown.

2010 compared to 2009

Sales volumes of new products and services increased by $20.2 million in 2010, while the volume of core products and services sold increased by $30.8 million compared to 2009. Table 3 sets forth the change in revenue by class of product and service for 2010 compared to 2009.

Table 3



                                    Printers and
(dollars in thousands)             Other Products              Materials                  Services                   Totals
2009 Revenue                    $ 30,501        27.0 %    $ 50,297        44.6 %    $ 32,037        28.4 %    $ 112,835         100 %

Change in revenue:
Volume:
Core products and services         6,192        20.3        10,890        21.7        13,749        42.9         30,831        27.3
New products and services         19,926        65.3        (1,476 )      (2.9 )       1,790         5.6         20,240        17.9
Price/Mix                           (680 )      (2.2 )        (495 )      (1.0 )           -           -         (1,175 )      (1.0 )
Foreign currency translation      (1,253 )      (4.1 )        (785 )      (1.6 )        (825 )      (2.6 )       (2,863 )      (2.5 )

Net change                        24,185        79.3         8,134        16.2        14,714        45.9         47,033        41.7

2010 Revenue                    $ 54,686        34.2 %    $ 58,431        36.6 %    $ 46,751        29.2 %    $ 159,868         100 %

As set forth in Table 1 and Table 3:

• Revenue from printers and other products increased by $24.2 million, or 79.3%, to $54.7 million for 2010 from $30.5 million for 2009 and increased to 34.2% of consolidated revenue in 2010 from 27.0% in 2009. The increase in revenue from printers and other products that is due to volume for 2010 compared to 2009 was primarily the result of higher volume with a shift in the mix of printers and other products toward lower priced personal and professional printers. This increase was partially offset by a $0.7 million unfavorable effect of price and mix and a negative $1.3 million foreign currency translation impact.

• Revenue from materials increased by $8.1 million, or 16.2%, to $58.4 million for 2010 from $50.3 million for 2009. Revenue from materials was aided by the improvement in production printer sales, which are typically accompanied by significant initial materials purchases to charge up new printers and commence production, and the continued expansion of printers installed over the past periods. Materials revenue

• Revenue from services increased $14.7 million for 2010 compared to 2009 and increased to 29.2% of consolidated revenue in 2010 from 28.4% in 2009 reflecting the effect of the increase in revenue from on-demand parts services, partially offset by a decrease in sales of printer upgrades. Service revenue from on-demand parts services was $18.3 million.

Revenue by geographic region

2011 compared to 2010

All geographic regions experienced higher levels of revenue in 2011 compared to 2010. This was principally due to continued economic recovery in 2011 and an increase in global R&D spendings, which we believe led to higher levels personal, professional and of production printer sales and print materials sales. Revenue from U.S. operations increased as a percentage of total revenue due to revenue related to increased acquisition activity in the U.S., including the acquisition of Quickparts. The continued volatility in foreign currencies led to increased positive impact of foreign currency translation for the European region, while a strengthening Japanese Yen resulted in a favorable foreign currency translation for the Asia-Pacific region.

Table 4 sets forth the change in revenue by geographic area for 2011 compared to 2010:

Table 4



(dollars in thousands)                  U.S.                     Europe                Asia-Pacific                  Total
2010 Revenue                    $  72,452        45.3 %    $ 65,539       41.0 %    $ 21,877       13.7 %    $ 159,868         100 %

Change in revenue:
Volume:                            49,628        68.5        12,841       19.6         6,267       28.6         68,736        43.0
Price/Mix                          (4,341 )      (6.0 )       1,302        2.0           259        1.2         (2,780 )      (1.7 )
Foreign currency translation            -           -         3,642        5.6           957        4.4          4,599         2.8

Net change                         45,287        62.5        17,785       27.1         7,483       34.2         70,555        44.1

2011 Revenue                    $ 117,739        51.1 %    $ 83,324       36.2 %    $ 29,360       12.7 %    $ 230,423         100 %

As shown in Table 4:

• Revenue from U.S. operations increased by $45.2 million, or 62.5%, in 2011 to $117.7 million from $72.5 million in 2010. This increase was due primarily to higher volume coupled with the unfavorable combined effect of price and mix.

• Revenue from non-U.S. operations increased by $25.3 million, or 28.9%, to $112.7 million in 2011 from $87.4 million in 2010 and comprised 48.9% of consolidated revenue in 2011 compared to 54.7% in 2010. The increase in non-U.S. revenue, excluding the impact of foreign currency translation, was 23.5% in 2011.

• Revenue from European operations increased by $17.8 million, or 27.2%, to $83.3 million in 2011 from $65.5 million in 2010. This increase was due to a $12.8 million increase in volume, a $3.6 million favorable effect of foreign currency translation and a $1.3 million combined favorable impact of price and mix.

• Revenue from Asia-Pacific operations increased by $7.5 million, or 34.2%, to $29.4 million in 2011 from $21.9 million in 2010. This increase was caused primarily by a $6.2 million increase in volume, a $1.0 million favorable foreign currency translation and $0.3 million favorable combined effect of price and mix.

2010 compared to 2009

Each geographic region experienced higher levels of revenue in 2010 compared to 2009. This was principally caused by continued economic recovery in 2010, which we believe led to higher levels of production printer sales. The continued volatility in foreign currencies led to increased negative impact of foreign currency translation for the European region, while a strengthening Japanese Yen resulted in favorable foreign currency translation for the Asia-Pacific region.

Table 5 sets forth the change in revenue by geographic area for 2010 compared to 2009.

Table 5



(dollars in thousands)                 U.S.                     Europe                Asia-Pacific                  Total
2009 Revenue                    $ 48,917       43.4 %    $ 48,740        43.2 %    $ 15,178       13.4 %    $ 112,835         100 %

Change in revenue:
Volume:                           23,006       47.0        22,020        45.2         6,045       39.8         51,071        45.2
Price/Mix                            529        1.1        (1,759 )      (3.6 )          55        0.4         (1,175 )      (1.0 )
Foreign currency translation           -          -        (3,462 )      (7.1 )         599        3.9         (2,863 )      (2.5 )

Net change                        23,535       48.1        16,799        34.5         6,699       44.1         47,033        41.7

2010 Revenue                    $ 72,452       45.3 %    $ 65,539        41.0 %    $ 21,877       13.7 %    $ 159,868         100 %

As shown in Table 5:

• Revenue from U.S. operations increased by $23.5 million or 48.1% in 2010 to $72.5 million from $48.9 million in 2009. This increase was due primarily to higher volume coupled with the favorable combined effect of price and mix.

• Revenue from non-U.S. increased by $23.5 million or 36.8% to $87.4 million in 2010 from $63.9 million in 2009 and comprised 54.7% of consolidated revenue in 2010 compared to 56.6% in 2009. The increase in non-U.S. revenue, excluding the impact of foreign currency translation, was 41.2% in 2010, primarily due to an increase in volume of $28.1 million combined with an unfavorable combined effect of price and mix of $1.7 million and unfavorable foreign currency impact of $2.9 million.

• Revenue from European operations increased by $16.8 million, or 34.5%, to $65.5 million in 2010 from $48.7 million in 2009. This increase was due to $22.0 million increase in volume, partially offset by a $3.5 million unfavorable effect of foreign currency translation as the U.S. Dollar weakened against the Euro and British Pound and a $1.8 million unfavorable combined effect of price and mix.

• Revenue from Asia-Pacific operations increased by $6.7 million, or 44.1%, to $21.9 million in 2010 from $15.2 million in 2009. This increase was caused primarily by a $6.0 million increase in volume and a $0.6 million favorable effect of foreign currency translation in the Asia-Pacific region.

. . .