<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                             ---------------------
 
                                  FORM 10-KSB
 
<TABLE>
<S> <C>                                                          <C>
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                SECURITIES AND EXCHANGE ACT OF 1934
            FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                  COMMISSION FILE NUMBER 0-288-42
[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
                       SECURITIES ACT OF 1934
         FOR THE TRANSITION PERIOD           TO           .
</TABLE>
 
                             ---------------------
 
                            SPATIAL TECHNOLOGY INC.
                 (Name of Small Business Issuer in its charter)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      84-1035353
       (State or other jurisdiction of              (I.R.S. Employer Identification No.)
        incorporation or organization)
</TABLE>
 
              2425 55TH STREET, SUITE 100, BOULDER, COLORADO 80301
          (Address of principal executive offices, including zip code)
 
                                 (303) 449-0649
                (Issuer's telephone number, including area code)
 
 Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.01
                                   PAR VALUE
 
        Securities registered pursuant to Section 12(g) of the Act: NONE
 
     Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X] No [
]
 
     Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to be the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.  [X]
 
     The Issuer's revenues for its most recent fiscal year were: $9,573,000.
 
     The aggregate market value of the voting stock held by non-affiliates of
the Issuer was $15,571,000 as of February 28, 1997.*
 
     The number of shares of Common Stock outstanding was 7,429,799 as of
February 28, 1997. Transitional Small Business Disclosure Format.  Yes [X]  
No [ ]
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     The information required by Part III (Items 9, 10, 11 and 12) is
incorporated by reference to portions of the Issuer's definitive proxy statement
for the 1997 Annual Meeting of Stockholders which will be filed with the
Securities and Exchange Commission within 120 days after the fiscal year ended
December 31, 1996. Also incorporated by reference is the Company's Registration
Statement on Form SB-2, File No. 333-5416-D, as amended.
---------------
 
* Excludes 3,537,023 shares of Common Stock held by directors and officers and
  stockholders whose beneficial ownership exceeds five percent of the shares
  outstanding at February 28, 1997. Exclusion of shares held by any person
  should not be construed to indicate that such person possesses the power,
  direct or indirect, to direct or cause the direction of the management or
  policies of the Issuer, or that such person is controlled by or under common
  control with the Issuer.
================================================================================
<PAGE>   2
 
                            SPATIAL TECHNOLOGY INC.
 
                          ANNUAL REPORT OF FORM 10-KSB
                               DECEMBER 31, 1996
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----
<S>      <C>                                                           <C>
                                  PART I
Item 1   Description of Business.....................................    1
Item 2   Description of Property.....................................    6
Item 3   Legal Proceedings...........................................    6
Item 4   Submission of Matters to a Vote of Security Holders.........    7
 
                                  PART II
Item 5   Market for Common Equity and Related Stockholder Matters....    8
Item 6   Management's Discussion and Analysis of Financial Condition
           and Results of Operations.................................    9
Item 7   Financial Statements........................................   20
Item 8   Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure..................................   34
 
                                 PART III
Item 9   Directors, Executive Officers, Promoters and Control
           Persons; Compliance with Section 16(a) of the Exchange
           Act.......................................................   34
Item 10  Executive Compensation......................................   34
Item 11  Security Ownership of Certain Beneficial Owners and
           Management................................................   34
Item 12  Certain Relationships and Related Transactions..............   34
Item 13  Exhibits, Lists and Reports on Form 8-K.....................   35
</TABLE>
 
                                        i
<PAGE>   3
 
     Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
                                     PART I
 
ITEM 1. DESCRIPTION OF BUSINESS
 
     Spatial Technology Inc. (Spatial or the Company) was incorporated under the
laws of the State of Delaware on July 7, 1986 to design, develop, and market 3D
modeling software. Spatial has three wholly owned subsidiaries, Spatial
Technology Ltd., Spatial Technology GmbH, and Spatial Technology K.K. located in
England, Germany, and Japan, respectively, that assist in the sales and
licensing of the Company's products.
 
     The Company is a leading developer of three dimensional modeling software.
The Company licenses its 3D modeling software to software developers, enabling
them to incorporate advanced 3D modeling functionality into their applications.
The Company's 3D modeling software is designed as an open, component-based
software technology that is compatible with a variety of platforms. The
Company's ACIS 3D modeling software products provide core 3D modeling capability
for numerous commercial CAD software applications. In addition, the Company's 3D
modeling software is licensed by leading universities and research institutions.
 
     The Company expects the rapid growth of personal computers with advanced 3D
capabilities to open significantly broader markets for 3D modeling software,
including virtual reality, animation, interactive entertainment, architecture,
film and video, Web site design and a variety of other interactive desktop
applications. The Company has recently licensed its 3D modeling software to
developers in emerging 3D markets, including virtual reality, architecture,
animation and professional film making. The Company's 3D solid modeling software
has a relatively compact and rich data representation, which the Company
believes provides it with a significant competitive advantage for low-bandwidth
applications, such as intranets and the Internet.
 
     To leverage its existing 3D modeling technology and broaden the use of
ACIS-based applications, the Company has introduced a 3D modeling software
toolkit, 3D Building Blox, targeted at visual programming developers in the
first quarter of 1997. 3D Building Blox provides easy-to-use 3D modeling tools,
enabling visual programmers to incorporate 3D capabilities into their
applications. The toolkit is fully compatible with Microsoft's ActiveX
technology and can be used with other visual programming languages such as
Visual Java and Delphi.
 
THREE DIMENSIONAL MODELING OVERVIEW
 
     3D modeling refers to the ability to create and modify 3D objects on a
computer and manipulate those objects by moving, sizing, rotating, stretching,
intersecting and performing other operations on them. 3D solid modeling uses
mathematical definitions of edges, surfaces and volumes and, in addition, may
integrate other physical attributes such as density, hardness, dimensions and
light reflectance to model an object. As a result, 3D applications employing
solid models incorporate more accurate, lifelike and intuitive modeling
capabilities than other modeling technologies.
 
     Historically, CAD has been the primary market for 3D modeling software, and
the use of 3D modeling for CAD applications has become widespread. Today, 3D
modeling software is extending beyond the CAD market and is increasingly
affecting the way people communicate, work, learn and play. Emerging markets for
3D modeling software include virtual reality, animation, interactive
entertainment, architecture, film and video, Web site design and a variety of
other interactive desktop applications.
<PAGE>   4
 
PRODUCTS AND TECHNOLOGY
 
     The Company designs, develops and markets 3D modeling software, which
incorporates a solid modeling engine and component extensions. The ACIS 3D
modeling engine is used for the creation, definition and manipulation of 3D
shapes, while component extensions enhance the modeling engine and provide
optional functionalities. In 1994, the Company introduced the ACIS 3D Toolkit,
which includes a suite of component extensions packaged with the modeling
engine. This packaging allows developers to quickly produce prototype
applications, greatly reducing their development costs and time to market.
 
     The Company's 3D modeling software is designed as an open, component-based
software technology that is compatible with a variety of platforms. Open
architecture allows applications developers to integrate the ACIS 3D modeling
engine and component extensions to mix and match "best of breed" applications
and tools in order to better address the requirements of specific markets,
products and applications and allows end-users to share 3D models generated with
different ACIS-based applications.
 
  ACIS 3D MODELING ENGINE
 
     The ACIS 3D modeling engine enables solid, surface and wire-frame modeling
in a single modeling environment. The ACIS 3D modeling engine uses a solid
modeling technique known as analytic and spline-based modeling, which is a means
of precisely representing the characteristics of a 3D model using mathematical
definitions of edges, surfaces and volumes and, in addition, may integrate other
physical attributes such as density, hardness, dimensions and light reflectance.
This technique offers greater precision than competing 3D modeling techniques,
such as wire-frame and surface modeling techniques, and is better at producing
complex objects with smooth flowing lines, resulting in richer, more robust
models. The completeness of ACIS 3D solid models allows software applications to
calculate other attributes such as strength, center of gravity, mass,
flexibility and momentum. As a result, 3D applications employing ACIS 3D models
can incorporate lifelike and intuitive operations for building and manipulating
3D shapes. In addition, because the ACIS 3D modeling engine defines 3D shapes
using mathematical formulas, the resulting 3D models have relatively compact
data requirements for transmission of rich 3D content, which the Company
believes provides it with significant competitive advantages for low bandwidth
environments such as intranets and the Internet.
 
  ACIS 3D TOOLKIT
 
     The ACIS 3D Toolkit has been designed for rapid, low cost development of 3D
applications and is currently the primary packaging for delivery of the ACIS 3D
modeling engine. The ACIS 3D Toolkit consists of the ACIS 3D modeling engine and
a suite of component extensions that make it easy to create, manipulate,
visualize and interact with 3D models and develop prototype applications.
Component extensions include geometry construction, which facilitates the
creation of geometric shapes, graphical interaction, a graphical user interface
for modeling, and basic rendering, which applies shading, coloring and other
visual features to the model. The componentry of the ACIS 3D Toolkit provides a
powerful LISP-based scripting language allowing the Company's customers to
quickly create and prototype ACIS-based 3D applications. Applications developers
may also utilize an Applications Procedural Interface and direct C++ access to
integrate the functionality of the ACIS 3D modeling software directly into their
3D applications. The ACIS 3D Toolkit has also been designed to enable developers
to integrate common graphical user interface (GUI) tools into their ACIS-based
3D applications.
 
     The Company offers its customers development licenses for the ACIS 3D
Toolkit which range in price depending on the range of functionality and
distribution rights. Optional maintenance services, including product updates,
are available for an annual fee. In addition, most licensees are required by
their license agreements to pay royalties typically based on a percentage of the
net revenue generated by their sales of applications incorporating ACIS-based
products.
 
                                        2
<PAGE>   5
 
  OPTIONAL COMPONENT EXTENSIONS
 
     In addition to the component extensions packaged with the ACIS 3D Toolkit,
the Company offers a series of optional component extensions that increase the
functionality of the ACIS 3D Toolkit. The introduction of new component
extensions by the Company allows it to market new products to new and existing
customers. The open architecture of the ACIS 3D modeling technology also enables
licensees to integrate additional functionality through independently developed
ACIS-compatible component extensions. Optional component extensions are priced
separately from the ACIS 3D Toolkit. Examples of component extensions recently
released by the Company include:
 
     - Advanced blending. Advanced blending allows a user to seamlessly connect
       or "blend" two or more different curves or surfaces. This component
       extension was developed to meet the advanced design requirements
       necessary for consumer product, automotive and aerospace design, where
       smooth, flowing surfaces are critical.
 
     - Deformable surfaces. Deformable surfaces allows users to interactively
       shape a model by applying forces and pressures much the same as a
       sculptor would shape clay. This component extension has applications in
       3D markets where natural aesthetics and intuitive modeling are required,
       such as consumer product design, animation, film making and graphic arts.
 
     - Local operations. Local operations is an advanced editing tool that
       allows developers to easily modify features of a model after it has been
       constructed. For example, features such as holes can be moved around on a
       model or removed completely. This component extension has broad
       applications throughout CAD and particularly in manufacturing design.
 
     - Mesh surfaces. Mesh surfaces provides an alternative method for modeling
       a surface in ACIS. The mesh surface represents a surface as a simple
       collection of small triangular patches. This simplified approach enables
       the mesh surface to model much larger surfaces than alternative
       approaches.
 
     - Shelling. Shelling offers the ability to convert a solid volume to a
       thin-walled volume by "shelling" out the inside of an object. Since it is
       usually faster to model an object as a solid volume and then remove the
       interior contents, shelling reduces design time. For example, this
       component extension can be used to design thin-walled plastic parts, such
       as a computer monitor casing or a telephone handset.
 
  3D BUILDING BLOX
 
     To leverage its ACIS 3D modeling technology and broaden the use of
ACIS-based applications, the Company has introduced 3D Building Blox targeted at
visual programming developers. This toolkit is packaged and delivered to
developers as an ActiveX control. The Company believes 3D Building Blox does not
compete with the ACIS 3D Toolkit since it will not allow direct access to the
modeling engine and will have a reduced set of procedural interfaces, limiting
the functionality to those functions appropriate for the visual programming
market. There can be no assurances that the Company will be successful in
further developing and marketing 3D Building Blox. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Dependence on New Products; Delays in Product Releases; Potential
Product Errors" and "-- Risks Associated with the Visual Programming Market."
 
     3D Building Blox enables developers to create 3D models using basic
geometry construction and will provide the ability to import and export models
generated by other applications built using the Company's 3D modeling software.
The product also supports real-time rendering, texture mapping and model
manipulation and will include capabilities such as virtual walk-throughs and
animation. The product is delivered with several sample applications that serve
as templates for basic modeling, rendering and object manipulation functions,
easing application development.
 
CUSTOMERS
 
     The Company's customer base of over 350 licensees generally falls into one
of three categories: (i) software application developers who create ACIS-based
commercial products, (ii) major companies which
 
                                        3
<PAGE>   6
 
use the Company's 3D modeling software for internal purposes and (iii) leading
universities and research institutions. Software application developers
represent the majority of the Company's current customer base and revenue. The
Company's sales to developers using the ACIS 3D modeling software for internal
purposes are important because they create demand for ACIS 3D modeling
technology by encouraging commercial software developers to produce
ACIS-compliant applications. In addition, universities and research institutions
have initiated design ideas incorporated by the Company and use the software to
educate students in ACIS 3D modeling technology.
 
     In order to encourage the adoption of the ACIS 3D modeling technology by
the CAD market, in June 1991 the Company entered into a strategic relationship
with Autodesk. Pursuant to the Company's agreements with Autodesk, the Company
granted a perpetual nonexclusive license of the ACIS 3D modeling engine for use
in Autodesk's family of products. Autodesk has paid the Company an initial
license fee and is required to pay the Company royalties on a quarterly basis
for products sold which incorporate the Company's ACIS 3D modeling software. In
addition, Autodesk is required to pay maintenance fees which entitle Autodesk to
license product upgrades as they are released. Either party may terminate upon
material breach of the agreement. During 1994 and 1996 Autodesk accounted for
11% and 13%, respectively, of total revenue.
 
RESEARCH AND PRODUCT DEVELOPMENT
 
     The Company believes that its continued growth will depend in large part on
its ability to maintain and enhance its current products, develop new products
and maintain technological competitiveness. The Company has built a development
group with specialized expertise in geometric modeling techniques, advanced
mathematics and C++ programming techniques. During 1994, 1995 and 1996 research
and development expenses were $3.2 million, $3.1 million and $3.9 million,
respectively.
 
     To maintain and improve its competitive position, the Company is committed
to providing its customers technological innovations and product upgrades. In
March 1996, the Company introduced the ACIS 2.0 version of its ACIS 3D modeling
engine, together with the release of five new optional component extensions. The
Company released ACIS 2.1 in September 1996 which enhanced the functionality of
the five component extensions released in March 1996.
 
     The Company identifies customer requirements for product enhancements and
new products through an analysis of current customer requests communicated
through the Technical Support Department and new customer requests communicated
through the Sales and Marketing Department. In order to enhance the level of
communication with its customers, the Company holds an annual developer
conference. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors -- Dependence on New Products; Delays in
Product Releases; Potential Product Errors."
 
     The Company augments its internal development capabilities through a
network of development partners possessing geometric modeling expertise. The
Company has development relationships with recognized leaders in 3D modeling.
The Company typically co-owns the technology with the development partner and
has the exclusive right to market and distribute that technology.
 
     The Company also resells certain rendering component extensions from other
third party software developers. Although the Company has a license to
distribute these products, ownership of this software is retained by the
developer and there can be no assurance that the Company will be able to control
the development of such extensions.
 
SALES, MARKETING AND DISTRIBUTION
 
     To date, the Company has focused its sales, marketing and distribution
efforts primarily on the CAD market. Recently, the Company has marketed and sold
its 3D modeling software to emerging 3D markets including architecture,
animation and professional film making, virtual reality, and interactive
entertainment. The Company markets its products to application developers
worldwide through a direct sales force serviced by the Company's Boulder,
Colorado facility and its sales offices in Monchengladbach, Germany and Tokyo,
 
                                        4
<PAGE>   7
 
Japan. In 1996, the majority of the Company's sales were for the ACIS 3D Toolkit
and approximately 49% of the Company's sales were to customers outside the
United States.
 
     The Company's sales cycle for new customers of its ACIS 3D Toolkit is
generally three to nine months. Following identification of a prospect, the
Company trains prospects in design and programming techniques. The sales cycle
then entails a preliminary agreement which, for a fee, entitles the customer to
a one to three month limited license primarily for product evaluation. Following
a satisfactory evaluation, the Company typically licenses the ACIS 3D modeling
software on a non-exclusive, perpetual use basis. The Company generally ships
products as orders are received and, therefore, has little or no backlog, See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Fluctuations in Quarterly Results.
 
     The market for 3D Building Blox has significantly different characteristics
than the Company's existing markets. Visual programmers are often individuals or
businesses which do not require direct access to the ACIS 3D modeling engine and
its comprehensive functionality. Accordingly, the Company's current application
developer licensing model, which grants licenses for direct access to the
modeling engine and its complete set of procedural interfaces, is not
appropriate for the visual programming market. The Company believes that some of
the visual programming licensees will eventually wish to acquire rights to
functionality not currently available in 3D Building Blox. These visual
programmers would be required to upgrade their license to a ACIS 3D Toolkit
license, requiring additional license fees and maintenance payments to the
Company.
 
     The Company believes that the software developers targeted for 3D Building
Blox typically purchase a substantial number of tools and products through a
variety of visual programming catalogues and over the Internet. Accordingly, the
Company initially anticipates marketing 3D Building Blox through leading catalog
distributors and through advertising, feature story writing for visual
programming trade publications and attendance at key visual programming
conferences.
 
CUSTOMER SERVICE AND SUPPORT
 
     The Company believes that customer service and support is critical to the
success of its products. Customer phone calls or e-mails are answered and
managed by support professionals who review customer communications with the
appropriate development group and coordinate the response to the customer.
 
     As part of its licensing arrangements for the ACIS 3D Toolkit, the Company
offers maintenance services including technical updates and product support. To
date, a majority of customers have purchased these maintenance services which
are offered on a renewable basis for an annual fee. These services allow
customers full access to the ACIS 3D modeling technology they have licensed
including all new releases, telephone support and other support required to
utilize the Company's products effectively.
 
COMPETITION
 
     The markets for the Company's products are highly competitive, subject to
rapid change and characterized by constant demand for new product features and
pressure to accelerate the release of new products and product enhancements and
to reduce prices. A number of companies currently offer products that compete
directly or indirectly with one or more of the Company's products. These
companies include, among others, Shape Data, Ltd. (a subsidiary of Electronic
Data Systems Corp.) and Ricoh Corp. In addition, the Company also competes with
in-house proprietary development programs producing modeling tools and 3D
products. While the Company is not aware of any competitor providing solid
modeling tools to the visual programming market, other companies may have
introduced other modeling technologies to this market. Many of the Company's
competitors or potential competitors have or may have significantly greater
financial, management, technical and marketing resources than the Company. A
variety of potential actions by any of the Company's competitors, including
announcement or accelerated introduction of new or enhanced products or
features, increased promotion or a reduction of product prices could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company's present and future competitors
may be able to develop products comparable or superior to those offered by the
Company or adapt more
 
                                        5
<PAGE>   8
 
quickly than the Company to new technologies or evolving market requirements.
The Company believes that the primary competitive factors affecting the market
for the Company's products include performance, features, quality, name
recognition, reputation, access to channels of distribution, the quality of
documentation, customer support and price. Although the Company believes that it
competes favorably with respect to these factors, there can be no assurance that
the Company will be able to continue to compete effectively with respect to
these or any other competitive factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Competition."
 
INTELLECTUAL PROPERTY
 
     The Company regards its software as proprietary and relies primarily on a
combination of copyright, trademark and trade secret laws, employee and third
party nondisclosure agreements, and other intellectual property protection
methods to protect its products and technology. The Company has no patents with
respect to its ACIS 3D modeling technology. The Company believes that the
ownership of patents is not presently a significant factor in its business and
that its success does not depend on the ownership of patents, but primarily on
the innovative skills, technical competence and marketing abilities of its
personnel. Existing copyright laws afford only limited protection, and it may be
possible for unauthorized third parties to copy the Company's products or to
reverse engineer or obtain and use information that the Company regards as
proprietary. The Company licenses portions of the technology used in the ACIS 3D
modeling engine and component extensions. The Company also resells certain
component extensions of third party software developers.
 
     While the Company is not aware that any of its products infringe the
proprietary rights of any third parties, there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects that it could increasingly be subject to
such claims as the number of products and competitors in the 3D modeling
software market grows and the functionality of such products overlaps with other
industry segments. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors -- Dependence on Third Party
Developers" and "-- Proprietary Rights Limitations."
 
EMPLOYEES
 
     As of December 31, 1996, the Company had 61 full-time employees, including
28 in product development and quality assurance, 22 in sales, marketing and
technical support and 11 in administration. The Company's employees are not
subject to any collective bargaining agreements, and the Company believes its
relations with its employees are good.
 
ITEM 2. DESCRIPTION OF PROPERTY
 
     The Company's principal executive office is located at 2425 55th Street,
Suite 100, Boulder, Colorado 80301, where the Company leases approximately
23,500 square feet of office space. Monthly lease payments for this facility are
approximately $23,000. The lease for this facility expires in September 2000. In
addition, the Company leases international sales offices in Monchengladbach,
Germany and Tokyo, Japan. The Company believes that its facilities are adequate
for its current needs and its needs for the foreseeable future.
 
ITEM 3. LEGAL PROCEEDINGS
 
     From time to time, the Company has been involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this Prospectus, the Company is not a party to any legal proceedings,
the adverse outcome of which would, in management's opinion, have a material
adverse effect on the Company's operating results and financial condition. In
1995 a software developer asserted a claim for additional royalties in the
amount of $551,000 based on its interpretation of the terms of its license
agreement with the Company. The Company disputes the claim and believes that it
has adequately provided for its royalty liability under the agreement as of
December 31, 1996. As of February 28, 1997, to the
 
                                        6
<PAGE>   9
 
Company's knowledge the software developer has not initiated legal proceedings
against the Company to recover the additional royalty payments.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     The Company submitted the following matters to all of its security holders
through the solicitation of written consents during the fourth quarter of the
fiscal year ended December 31, 1996:
 
          (a) On October 10, 1996, the Company solicited the written consent of
     its security holders with respect to an amendment to the Company's Restated
     Certificate of Incorporation to (i) provide for the automatic conversion of
     the Company's outstanding shares of preferred stock upon an initial public
     offering at an offering price to the public equal to at least $7.00 per
     share and (ii) to carve out the shares issued upon an initial public
     offering at a price of at least $7.00 per share from the anti-dilution
     protection afforded the holders of Series D Preferred Stock. 600,936 shares
     of Common Stock were voted in favor of such proposal, no shares of Common
     Stock were voted against such proposal and no shares of Common Stock were
     withheld regarding such proposal; 3,000,000 shares of Series A Preferred
     Stock were voted in favor of such proposal, no shares of Series A Preferred
     Stock were voted against such proposal and no shares of Series A Preferred
     Stock were withheld regarding such proposal; 3,359,997 shares of Series B
     Preferred Stock were voted in favor of such proposal, no shares of Series B
     Preferred Stock were voted against such proposal and no shares of Series B
     Preferred Stock were withheld regarding such proposal; 1,679,688 shares of
     Series C Preferred Stock were voted in favor of such proposal, no shares of
     Series C Preferred Stock were voted against such proposal and no shares of
     Series C Preferred Stock were withheld regarding such proposal; and 555,844
     shares of Series D Preferred Stock were voted in favor of such proposal, no
     shares of Series D Preferred Stock were voted against such proposal and no
     shares of Series D Preferred Stock were withheld regarding such proposal.
     Such votes resulted in the adoption of such proposal.
 
          (b) On October 16, 1996, the Company solicited the written consent of
     its security holders with respect to an amendment to the Company's Restated
     Certificate of Incorporation to (i) provide for the automatic conversion of
     the Company's outstanding shares of preferred stock upon an initial public
     offering at an offering price to the public equal to at least $5.00 per
     share and (ii) to carve out the shares issued upon an initial public
     offering at a price of at least $5.00 per share from the anti-dilution
     protection afforded the holders of Series D Preferred Stock. 600,936 shares
     of Common Stock were voted in favor of such proposal, no shares of Common
     Stock were voted against such proposal and no shares of Common Stock were
     withheld regarding such proposal; 3,000,000 shares of Series A Preferred
     Stock were voted in favor of such proposal, no shares of Series A Preferred
     Stock were voted against such proposal and no shares of Series A Preferred
     Stock were withheld regarding such proposal; 3,359,997 shares of Series B
     Preferred Stock were voted in favor of such proposal, no shares of Series B
     Preferred Stock were voted against such proposal and no shares of Series B
     Preferred Stock were withheld regarding such proposal; 1,679,688 shares of
     Series C Preferred Stock were voted in favor of such proposal, no shares of
     Series C Preferred Stock were voted against such proposal and no shares of
     Series C Preferred Stock were withheld regarding such proposal; and 555,844
     shares of Series D Preferred Stock were voted in favor of such proposal, no
     shares of Series D Preferred Stock were voted against such proposal and no
     shares of Series D Preferred Stock were withheld regarding such proposal.
     Such votes resulted in the adoption of such proposal.
 
                                        7
<PAGE>   10
 
                                    PART II
 
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Issuer's Common Stock began trading publicly in the over-the-counter
market through the American Stock Exchange under the symbol "STY" on October 18,
1996. Prior to that date, there was no public market for the Common Stock. The
following table indicates the high and low sale prices per share reported by the
American Stock Exchange for the period indicated. These prices do not include
retail markups, markdowns or commissions.
 
<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                              -----    -----
<S>                                                           <C>      <C>
FISCAL YEAR ENDED DECEMBER 31, 1996:
Fourth Quarter ended December 31, 1996 (from October 18,
  1996).....................................................  $5.38    $3.75
</TABLE>
 
     As of February 28, 1997 there were approximately 93 holders of record of
the Common Stock.
 
     The Company has never declared or paid dividends on its Common Stock. The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.
 
                                        8
<PAGE>   11
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
SELECTED CONSOLIDATED FINANCIAL DATA
 
     The following table sets forth selected financial data of the Company. The
selected financial data as of and for the years ended December 31, 1992, 1993,
1994, 1995 and 1996 have been derived from the Company's consolidated financial
statements which have been audited by KPMG Peat Marwick LLP, independent
auditors. The data should be read in conjunction with the consolidated financial
statements and related notes included in Item 7 hereof.
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                           ---------------------------------------------------
                                             1992       1993       1994       1995      1996
                                           --------   --------   --------   --------   -------
<S>                                        <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  License fees...........................  $  3,528   $  3,687   $  3,087   $  4,850   $ 4,553
  Royalties..............................        85        562        876      1,207     1,925
  Prepaid royalties......................     2,571      1,475        448         --       182
  Maintenance and other..................     1,341      1,657      2,137      2,572     2,913
                                           --------   --------   --------   --------   -------
Total revenue............................     7,525      7,381      6,548      8,629     9,573
Gross profit.............................     6,161      6,231      5,843      7,952     8,830
Operating expenses:
  Sales and marketing....................     2,907      3,220      2,710      2,942     3,564
  Research and development...............     2,770      3,843      3,166      3,123     3,945
  General and administrative.............     1,851      1,776        950      1,210     1,366
  Severance costs........................        --        300         --         --        --
                                           --------   --------   --------   --------   -------
Total operating expenses.................     7,528      9,139      6,826      7,275     8,875
Earnings (loss) from operations..........    (1,367)    (2,908)      (983)       677       (45)
Earnings (loss) before extraordinary
  item...................................    (1,411)    (3,011)    (1,162)       388      (162)
Extraordinary item(1)....................        --         --        298         --        --
                                           --------   --------   --------   --------   -------
Net earnings (loss)......................  $ (1,411)  $ (3,011)  $   (864)  $    388   $  (162)
                                           ========   ========   ========   ========   =======
Earnings (loss) per common share (2):
  Continuing operations..................  $  (0.31)  $  (0.61)  $  (0.23)  $   0.07   $ (0.03)
  Extraordinary item.....................        --         --       0.06         --        --
                                           --------   --------   --------   --------   -------
  Earnings (loss) per common share.......  $  (0.31)  $  (0.61)  $  (0.17)  $   0.07   $ (0.03)
                                           ========   ========   ========   ========   =======
Weighted average number of common shares
  and common equivalent shares
  outstanding(2).........................     4,559      4,958      5,116      5,210     5,754
</TABLE>
 
<TABLE>
<CAPTION>
                                                           AS OF DECEMBER 31,
                                           ---------------------------------------------------
                                             1992       1993       1994       1995      1996
                                           --------   --------   --------   --------   -------
<S>                                        <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents................  $    175   $  1,812   $    288   $    153   $ 8,407
Working capital (deficit)................        61       (369)    (1,206)    (1,383)    7,530
Total assets.............................     3,067      4,441      2,763      2,848    11,071
Long-term debt and capital lease
  obligation.............................       587        507        500         --        --
Redeemable preferred stock(3)............    11,412     14,155     14,155     14,155        --
Total stockholders' equity (deficit).....   (11,189)   (14,427)   (15,313)   (14,915)    8,311
</TABLE>
 
---------------
 
(1) The extraordinary item represents the gain on the early extinguishment of
    debt as described in Note 3 of Notes to Consolidated Financial Statements.
 
(2) Earnings (loss) per share and weighted average common shares outstanding for
    all periods shown give effect to the conversion of all outstanding shares of
    preferred stock into 4,099,598 shares of common stock as described in Note 4
    of Notes to Consolidated Financial Statements.
 
(3) Converted to common stock in 1996 -- see Note 4 of Notes to Consolidated
    Financial Statements.
 
                                        9
<PAGE>   12
 
GENERAL
 
     Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section under "Risk
Factors."
 
     The Company has three sources of revenue: license fees, royalties, and
maintenance and other. License fees consist of fees paid by customers to license
the Company's products for use in customers' product development efforts.
Revenue from license fees is recognized upon completion of a signed contract and
shipment of product. The Company's license agreements generally provide for
royalty payments from customers based on shipment of customers' products which
incorporate the Company's 3D modeling software. Royalty revenue is generally
recognized upon receipt of payment or according to the payment terms specified
in the contract. Maintenance revenue, consisting of fees received by the Company
for customer support and product upgrades, is generally based on annual
contracts recognized ratably over the period of the contract. Other revenue
consists of training and consulting fees, which are recognized upon completion
of a training class or performance of services, respectively.
 
     Until 1994, the Company utilized a sales strategy whereby initial license
fees were bundled with prepaid non-refundable royalties, giving customers the
right to ship a specified amount of future ACIS-based products without paying
additional royalties to the Company. Between 1991 and 1994, the Company
collected a total of $4.7 million of such non-refundable royalty prepayments,
which were recognized as revenue in the periods received and are reflected on
the Statements of Operations as "prepaid royalties." The Company believes this
strategy had the effect of substantially increasing royalty revenue in 1991
through 1994 above levels that would otherwise have been achieved. The Company
discontinued the strategy of selling large prepaid non-refundable royalties in
1994, and in fact, reported no prepaid royalties in 1995. During 1996, the
Company reported $182,000 of prepaid royalties from three customers. The Company
expects to continue accepting orders that include nominal prepaid royalties.
 
     To leverage its existing 3D modeling technology, the Company has introduced
a 3D modeling software toolkit, 3D Building Blox, targeted at visual programming
developers in the first quarter of 1997. 3D Building Blox provides 3D modeling
tools to enable visual programmers to incorporate 3D capabilities into their
applications, and will be fully compatible with Microsoft's ActiveX technology.
In connection with the introduction of 3D Building Blox, the Company anticipates
incurring increased fixed operating expenses and sales and marketing expenses.
To the extent such expenses precede or are not followed by increased revenues,
the Company's business, operating results and financial condition could be
materially and adversely affected. Additionally, there can be no assurance that
commercial acceptance of the Company's products by the visual programming market
will result in profits for the Company. See "Risk Factors -- Risks Associated
with the Visual Programming Market."
 
     The Company has experienced in the past and expects to continue to
experience in the future significant fluctuations in quarterly operating results
due to factors within and outside the Company's control. Because the Company's
operating expenses to a large extent are fixed and are based in part on
anticipated revenues, a substantial portion of which may not be generated until
near the end of each quarter, the Company may be unable to adjust spending in
time to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in sales of the Company's products in relation to the
Company's expectations could have a material adverse impact on the Company's
operating results. Additionally, the Company's revenues are historically based
on low volume, high value orders. Software license fees from a single contract
are often in excess of $100,000, therefore, the receipt, delay or cancellation
of just a few customer orders can have a dramatic impact on license fee revenues
in any given period. See "Risk Factors -- Fluctuations in Quarterly Results."
 
     As of December 31, 1996, the Company had net operating loss carryforwards
totaling $11.5 million which may be used to reduce future income taxes.
Utilization of these net operating loss carryforwards may be limited under
certain circumstances. See Note 6 of Notes to Consolidated Financial Statements.
 
                                       10
<PAGE>   13
 
RESULTS OF OPERATIONS
 
     The following table sets forth for the periods indicated certain statements
of operations data expressed as a percentage of total revenue:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1994     1995     1996
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Revenue:
  License fees..............................................    47%      56%      48%
  Royalties.................................................    13       14       20
  Prepaid royalties.........................................     7       --        2
  Maintenance and other.....................................    33       30       30
                                                               ---      ---      ---
          Total revenue.....................................   100      100      100
Gross profit................................................    89       92       92
Operating expenses:
  Sales and marketing.......................................    41       34       37
  Research and development..................................    48       36       41
  General and administrative................................    15       14       15
                                                               ---      ---      ---
          Total operating expenses..........................   104       84       93
Earnings (loss) from operations.............................   (15)       8       (1)
Earnings (loss) before extraordinary item...................   (18)       5       (2)
Extraordinary item(1).......................................     5       --       --
                                                               ---      ---      ---
Net earnings (loss).........................................   (13)%      5%      (2)%
                                                               ===      ===      ===
</TABLE>
 
FISCAL YEARS ENDED DECEMBER 31, 1996 AND 1995
 
     Revenue. Total revenue increased 11% to $9.6 million for 1996 from $8.6
million for 1995. This increase was due to increased royalties, prepaid
royalties, and maintenance and other revenue, partially offset by a decrease in
license fees. License fees decreased 6% to $4.6 million for 1996, as compared to
$4.9 million reported for 1995. The decline was attributable to both fewer and
lower value contracts executed in 1996 as compared to 1995. Royalties increased
59%, growing from $1.2 million in 1995 to $1.9 million reported in 1996. The
increase in royalties was a result of an increase in the number of the Company's
customers shipping ACIS-based software applications during 1996. Prepaid
royalties were $182,000 for 1996 as compared to none in 1995. Maintenance and
other revenue increased 13% to $2.9 million for 1996 from $2.6 million reported
in 1995. The increase in maintenance and other revenue reflects increased
maintenance revenue as a result of an increase in the customer base.
 
     Domestic revenue represents 51% of total revenue in 1996 as compared to 45%
in 1995, reflecting a 25% increase to $4.9 million in 1996 from $3.9 million
reported in 1995. International revenue was unchanged at $4.7 million for 1995
and 1996. Included in international revenue for 1996 was $2.2 million in revenue
for Europe, which represents an 18% increase from the $1.9 million reported in
1995. Japan revenue decreased 6% to $1.7 million for 1996 from $1.8 million for
1995. Revenue from other geographic regions, including other parts of Asia and
Canada, decreased 25% to $750,000 in 1996 from $1.0 million reported in 1995.
 
     Cost of Sales. Total cost of sales increased 10% to $743,000 for 1996 as
compared to $677,000 for 1995. Cost of sales consists of royalty payments by the
Company to third party developers, manufacturing costs (primarily media
duplication, manuals, and shipping) and purchased computer software
amortization. Increased cost of sales was due to higher royalty expense and
purchased computer software amortization, partially offset by lower
manufacturing and shipping expense. Royalty expense increased $61,000 due to
higher revenue. Purchased computer software amortization increased $42,000
reflecting initial amortization of technology included in the Company's update
which began shipping at the end of the first quarter of 1996. Manufacturing
costs decreased due to the Company's transition to CD-ROM based media as its
primary media format for both software products and documentation. As a percent
of revenue, cost of sales was 8% for both 1995 and 1996.
 
                                       11
<PAGE>   14
 
     Sales and Marketing Expense. For the year ended December 31, 1996, sales
and marketing expense increased 21% to $3.6 million from $2.9 million reported
in 1995. The increase was attributable to increased promotional activity and
commission expense needed to support increased revenue. As a percent of revenue,
sales and marketing expense increased from 34% in 1995 to 37% in 1996.
 
     Research and Development Expense. Research and development expense
increased 26% to $3.9 million for 1996 as compared to $3.1 million reported in
1995. The increase was primarily due to increased staffing, as well as increased
utilization of contract programmers by the company, in support of growing
development efforts to enhance the existing ACIS product line, and to develop 3D
Building Blox for the visual programming market. As a percent of revenue,
research and development expense increased from 36% in 1995 to 41% in 1996. The
Company accounts for research and development expense in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, under which the
Company is required to capitalize software development costs after technological
feasibility is established. Capitalizable software development costs incurred to
date have not been significant; therefore, the Company has expensed all of these
costs in the periods incurred.
 
     General and Administrative Expense. General and administrative expense was
$1.4 million in 1996, increasing 13% from $1.2 million reported in 1995.
Increased expense was attributable to increased bad debt provisions in 1996 as
compared to 1995. As a percent of revenue, general and administrative expense
was 14% for 1995 and 1996.
 
     Other Income (Expense), Net. Other income reported in 1996 was $23,000 as
compared to an expense of $115,000 in 1995, reflecting interest income earned on
proceeds from the initial public offering described in "Liquidity and Capital
Resources" below. Additionally, costs related to financing in 1995 did not recur
in 1996.
 
     Income Tax Expense. The Company's income tax expense decreased 20% to
$140,000 for 1996 from $174,000 for 1995. Income tax expense for these periods
included only withholding taxes on foreign sales. See Note 6 of Notes to
Consolidated Financial Statements.
 
FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994
 
     Revenue. Total revenue increased 32% to $8.6 million for 1995 from $6.5
million for 1994. This increase resulted from increased license fees, royalties
and maintenance and other, partially offset by a decline in prepaid royalties.
License fees increased 57% to $4.9 million for 1995 from $3.1 million for 1994.
This increase was due primarily to an increase in the number of licenses
executed in 1995 as an enhanced version of the Company's ACIS 3D modeling
software released in late 1994 was well received by customers. Royalties
increased 38% to $1.2 million for 1995 from $876,000 for 1994. This increase was
due to increased shipments of ACIS-based software by the Company's customers.
The Company had no prepaid royalties for 1995 as compared to $448,000 of prepaid
royalties for 1994. This decrease resulted from a change in the Company's sales
strategy in 1994 when the Company discontinued offering large prepaid royalty
arrangements. Maintenance and other revenue increased 20% to $2.6 million for
1995 as compared to $2.1 million in 1994. This increase was due primarily to
increased customer interest in receiving product updates, which are included in
the annual maintenance fee, as well as the Company's implementation of a
systematic renewal program in 1994 emphasizing the value of its technical
support and maintenance program.
 
     Geographically, all regions increased in 1995 as compared to 1994. As a
percent of total revenue, domestic revenue decreased to 45% in 1995 from 51% in
1994. Domestic revenue increased 17% to $3.9 million in 1995 as compared to $3.4
million for 1994. International revenue increased 48% to $4.7 million for 1995
from $3.2 million reported for 1994. Internationally, Europe revenue increased
28% to $1.9 million for 1995 as compared to $1.5 million reported in 1994. Japan
grew 19% to $1.8 million from $1.6 million reported in 1994. Other parts of Asia
and Canada increased from $168,000 in 1994 to $1.0 million in 1995. One customer
in Canada represents approximately $500,000 of the increase in 1995 as compared
to 1994.
 
     Cost of Sales. Cost of sales decreased 4% to $677,000 for 1995 from
$705,000 for 1994. The decreased cost of sales resulted from decreases of
$27,000 for royalty expense and $31,000 for manufacturing expense,
 
                                       12
<PAGE>   15
 
partially offset by an increase of $30,000 in purchased computer software
amortization. Royalty expense as a percent of total revenue decreased to 5% in
1995 from 7% in 1994. The decrease in royalty expense was due to the Company's
efforts to reduce the amount of third party technology incorporated in its 3D
modeling software. As a percent of total revenue, cost of sales declined to 8%
for 1995 from 11% for 1994.
 
     Sales and Marketing Expense. Sales and marketing expense increased 9% to
$2.9 million for 1995 from $2.7 million for 1994. The increased sales and
marketing expense was primarily due to increased staffing and commission expense
in support of the Company's increased revenue. As a percent of total revenue,
sales and marketing expense decreased to 34% for 1995 from 41% for 1994,
reflecting increased productivity by the Company's sales force.
 
     Research and Development Expense. Research and development expense
decreased slightly to $3.1 million for 1995 as compared to $3.2 million for
1994. As a percent of total revenue, research and development expense declined
to 36% for 1995 from 48% for 1994, as the Company was able to spread its
research and development expense over increased revenue.
 
     General and Administrative Expense. General and administrative expense
increased 27% for 1995 to $1.2 million from $950,000 for 1994. This increase
reflects increased staffing for human resources, contract administration and
finance in support of increased revenue. As a percent of total revenue, general
and administrative expense declined to 14% for 1995 from 15% for 1994.
 
     Other Expense, Net. Other expense increased to $115,000 for 1995 from
$42,000 for 1994, reflecting increased costs related to financing.
 
     Income Tax Expense. The Company's income tax expense increased to $174,000
for 1995 from $137,000 for 1994. Income tax expense for these periods included
only withholding taxes on foreign sales, as the Company was able to offset tax
expense related to domestic operations through the reduction in the valuation
allowance for deferred tax assets related to the Company's net operating loss
carryforward. See Note 6 of Notes to Consolidated Financial Statements.
 
     Extraordinary Item. During 1994, a $500,000 promissory note payable to a
major customer was forgiven in consideration for restructuring this customer's
license terms and the payment of $202,000 plus accrued interest on the note. The
Company recognized an extraordinary gain of $298,000 on this transaction.
 
QUARTERLY RESULTS
 
     The following table sets forth certain quarterly financial data for the
periods indicated. This quarterly information is unaudited. In the opinion of
management, such unaudited information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation for the
periods. The operating results for any quarter are not necessarily indicative of
results for any future period.
 
<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED
                                         -----------------------------------------------------------------------------
                                         MAR. 31   JUN. 30   SEP. 30   DEC. 31   MAR. 31   JUN. 30   SEP. 30   DEC. 31
                                          1995      1995      1996      1995      1996      1996      1996      1996
                                         -------   -------   -------   -------   -------   -------   -------   -------
<S>                                      <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Revenue:
  License fees.........................  $1,212    $1,174    $1,173    $1,291    $  951    $1,397    $1,462    $  743
  Royalties............................     338       289       234       346       718       410       400       397
  Prepaid royalties....................      --        --        --        --        --       100        --        82
  Maintenance and other................     649       624       652       647       716       745       745       707
                                         ------    ------    ------    ------    ------    ------    ------    ------
Total revenue..........................   2,199     2,087     2,059     2,284     2,385     2,652     2,607     1,929
Gross profit...........................   2,044     1,943     1,837     2,128     2,153     2,481     2,419     1,777
Operating expenses:
  Sales and marketing..................     776       730       684       752       735       939       899       991
  Research and development.............     745       750       796       832       935       978       984     1,048
  General and administrative...........     409       251       256       294       330       437       329       270
                                         ------    ------    ------    ------    ------    ------    ------    ------
Total operating expenses...............   1,930     1,731     1,736     1,878     2,000     2,354     2,212     2,309
Earnings (loss) from operations........     114       212       101       250       153       127       207      (532)
Net earnings (loss)....................  $   52    $  147    $   71    $  118    $   59    $  125    $  164    $ (510)
</TABLE>
 
                                       13
<PAGE>   16
 
     Until the fourth quarter of 1996 the Company experienced nine consecutive
quarters of profitability. A net loss of $510,000 in the fourth quarter of 1996
is attributable to a shortfall in total revenue, primarily license fees.
Additionally, operating expenses are higher due to increased marketing programs
worldwide in the fourth quarter as compared to previous quarters.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     In October 1996, the Company completed its initial public offering and its
common stock began trading on the American Stock Exchange under the symbol
"STY." Through the offering, the Company sold 2,100,000 shares of its common
stock for net proceeds of approximately $8.7 million after deducting
underwriting discounts and commissions and other offering expenses.
Additionally, a portion of the net proceeds from the initial public offering has
been used to reduce certain liabilities totaling approximately $625,000. Such
liabilities included outstanding notes payable and certain other accrued
liabilities.
 
     As of December 31, 1996, the Company had $8.4 million in cash and cash
equivalents reflecting an increase of $8.3 million from 1995 due to proceeds
from the initial public offering. Cash decreased $135,000 and $1.5 million in
1995 and 1994, respectively.
 
     Net cash used by operating activities was $24,000 in 1996. The net loss for
1996, increased prepaid expenses, and decreased accounts payable and accrued
expenses were partially offset by decreased accounts receivable and increased
deferred revenue. Net cash provided by operating activities was $104,000 for the
year ended December 31, 1995, as net income and increased accounts payable were
partially offset by decreased deferred revenue. Net cash used by operating
activities was $885,000 for the year ended December 31, 1994, primarily
reflecting the Company's net loss.
 
     Cash used by investing activities was $435,000, $249,000, and $212,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. Net cash used by
investing activities in 1996 reflects $235,000 for equipment purchases and
$200,000 for additions to purchased computer software. Cash used by investing
activities in 1995 was for equipment purchases and cash used in 1994 was
primarily for additions to purchased computer software.
 
     Net cash provided by financing activities was $8.7 million in 1996 as
compared to $41,000 in 1995, and a net use of cash of $397,000 in 1994. Net cash
provided from financing activities in 1996 reflects $8.7 million in proceeds
from the initial public offering and $525,000 provided from the exercise of
common stock warrants and options, partially offset by $500,000 used for
payments on notes payable. Net cash provided by financing activities in 1995
reflects proceeds from exercise of common stock options and warrants. Cash used
by financing activities of $397,000 for the year ended December 31, 1994
reflects net principal payments on notes payable.
 
     As of December 31, 1996, the Company had accounts receivable of
approximately $1.5 million for license fees and maintenance and other fees.
Typically, the Company's terms for payment on its accounts receivable are net 30
days from invoicing and shipment, and the Company typically experiences
collection cycles of 30 to 60 days. The Company generally recognizes a
substantial portion of its revenue near the end of each quarter and, as a
result, the accounts receivable outstanding at the end of each quarter have
averaged less than 30 days.
 
     As of December 31, 1996, the Company's principal source of liquidity was
cash and cash equivalents totaling $8.4 million. The Company also has a
revolving line of credit with a bank providing for maximum borrowings of
$500,000. The line of credit bears interest at the bank's prime rate plus 0.75%
and matures in June 1997. As of February 28, 1997, the Company had no
outstanding borrowings under this line of credit.
 
     The Company believes that existing cash, together with existing credit
facilities and cash generated from operations, will be sufficient to meet the
Company's operating and capital requirements for the foreseeable future
including at least the next twelve months.
 
                                       14
<PAGE>   17
 
RISK FACTORS
 
  Fluctuations in Quarterly Results
 
     The Company has experienced in the past and expects to continue to
experience significant fluctuations in quarterly operating results due to
factors that affect two of the Company's principal sources of revenue: license
fees and royalties. Quarterly revenues from license fees depend on a number of
factors that are difficult to forecast, including, among others, the volume of
orders received within a quarter, demand for the Company's products, the product
mix purchased by the Company's customers, competing capital budget
considerations of the Company's customers, introduction and enhancement of
products by the Company and its competitors, market acceptance of new products,
reviews in the industry press concerning the products of the Company or its
competitors, changes or anticipated changes in pricing by the Company or its
competitors and general economic conditions. Sales of the Company's products
also may be negatively affected by delays in the introduction or availability of
hardware and software products from third parties. The Company's license fee
revenues also may vary as a result of seasonal factors, such as the timing of
new product releases, year-end purchasing and trade shows. In addition, timing
of the Company's license fees is subject to quarterly fluctuations because the
Company generally ships products as orders are received and, therefore, has
little or no backlog, and because the Company's sales cycle is generally three
to nine months or longer from initial inquiry to order. Quarterly revenues from
royalties may also fluctuate significantly from quarter to quarter. The
Company's royalty revenues are based on sales by the Company's customers of
products incorporating the ACIS 3D modeling software and, as a result, quarterly
royalty revenues are subject to fluctuations in the sales of these products by
the Company's software developer customers. As a result of the quarterly
fluctuations in license fees and royalties, the Company's quarterly operating
results are subject to substantial fluctuations and are difficult to predict.
 
     In addition, the Company has generally shipped products and recognized most
of its license fee revenues near the end of each quarter, with a substantial
portion of license fee revenue recognized in the last few days of a quarter. The
Company's operating expenses are to a large extent fixed and are based in part
on anticipated revenues. As a result, it is difficult for the Company to reduce
expenses in time to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in sales of the Company's products in
relation to the Company's expectations could have a material adverse impact on
the Company's operating results.
 
     Due to the foregoing factors, it is possible that the Company's operating
results for some future quarters may fall below the expectations of securities
analysts and investors. In such event, the market price of the Common Stock
could be materially and adversely affected.
 
  Product and Market Concentration
 
     The Company generates substantially all of its revenues from license fees,
royalties and maintenance and training contracts relating to the ACIS 3D
modeling software. Continued market acceptance of the ACIS 3D modeling software
is, therefore, critical to the Company's future success. Any decline in demand
for the ACIS 3D modeling software or failure to achieve market acceptance of any
new version of the ACIS 3D modeling software as a result of competition,
technological change, failure of the Company to release on a timely basis new
versions of the ACIS 3D modeling software, or otherwise, could have a material
adverse effect on the business, operating results and financial condition of the
Company.
 
     Historically, the Company's revenues have been generated primarily from
sales to large CAD software developers such as Autodesk, Inc., Bentley Systems,
Inc. and Intergraph Corporation. The Company's growth strategy includes
targeting smaller software developers of 3D applications. Sales to these
customers may result in lower profit margins and higher credit risks than the
Company has experienced previously. There can be no assurance that revenues from
the Company's current customers will continue at the same levels, or that the
Company will be able to expand its customer base at profitable levels.
 
                                       15
<PAGE>   18
 
  Dependence on New Products; Delays in Product Releases; Potential Product
Errors
 
     The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, changes in customer
requirements and computer operating environments and frequent new product
introductions and enhancements. As a result, the Company's success depends
substantially upon its ability to continue to enhance its existing products,
develop and introduce in a timely manner new products incorporating
technological advances and meet increasing customer expectations. Due to the
inherent uncertainties of software development, the Company cannot predict the
exact timing of shipment of a new product or version release on any particular
platform, and the Company has experienced delays in the development of certain
new products and product versions. The Company also utilizes third party
development partners to facilitate the development of product enhancements and
new component extensions for the Company. Consequently, factors beyond the
Company's control may also affect the ability of the Company's partners to
deliver product enhancements and new component extensions on a timely basis and
to deliver products which meet the demands of the marketplace. In addition,
negative reviews of the Company's new products or product versions could have a
material adverse effect on market acceptance. There can be no assurance that the
Company will be successful in developing and marketing new products or
enhancements to its existing products on a timely basis or that any new or
enhanced products will adequately address the changing needs of the marketplace.
If the Company is unable to develop and introduce enhancements to existing
products or new products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition could be materially and adversely affected. There can be
no assurance that the announcement of a new product or new version by the
Company will not result in delays in license fee revenue as a consequence of
licensees anticipating the availability of such new product or version release.
 
     Software products offered by the Company may contain undetected errors when
first introduced or as new versions are released. The Company has in the past
discovered software errors in certain of its new products and enhancements after
their introduction. There can be no assurance that errors will not be found in
new products or releases after commencement of commercial shipments, resulting
in a loss of or delay in market acceptance, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
Although the Company has not experienced product liability claims by customers
as a result of product errors, there can be no assurance that such claims will
not be brought against the Company in the future. See "Business -- Research and
Product Development."
 
  Risks Associated with the Visual Programming Market
 
     A significant component of the Company's strategy involves marketing
certain of its 3D modeling software to visual programming software developers.
There can be no assurance that a market will develop for 3D modeling tools for
these software developers or that the Company's 3D modeling software will be
accepted by these software developers. The Company believes the emergence of
this market for its products is dependent on a number of variables, including
the demand for applications incorporating 3D models, preferences of software
developers, the installed base of personal computers with powerful processing
capabilities and the further development of the Internet. See
"Business -- Products and Technology" and "-- 3D Building Blox."
 
     The Company plans to license 3D Building Blox to the visual programming
market using a substantially different business model than the Company applies
to its current customers. Any failure to create market acceptance of the
Company's 3D modeling software among visual programming developers, or respond
effectively to the evolving requirements of this market, would negatively impact
the ability of the Company to penetrate this emerging market. Even if the
Company's products are well received in this market, there can be no assurance
that the Company will develop the ability to distribute its products to these
consumers. The Company intends to distribute its visual programming toolkit
through third party distributors and there can be no assurance that the Company
will be able to negotiate distribution agreements on terms acceptable to the
Company. Failure to enter into distribution agreements or to develop independent
means of distributing its visual programming toolkit could have a material
adverse effect on the Company's operating results. See "Business -- Sales,
Marketing and Distribution."
 
                                       16
<PAGE>   19
 
     3D Building Blox incorporates a lower level of functionality than the
Company's current products, is expected to be priced at levels substantially
lower than the products currently offered by the Company to other markets and
may face downward pricing pressure over time. The Company currently intends to
increase its fixed operating expenses to introduce the 3D modeling software to
the visual programming market, increase its sales and marketing operations and
expand distribution channels. To the extent such expenses precede or are not
followed by increased revenues, the Company's business, operating results and
financial condition could be materially and adversely affected. Additionally,
there can be no assurance that commercial acceptance of the Company's products
by the visual programming market will result in profits for the Company.
Although the Company believes 3D Building Blox will not compete with the
Company's current line of products, it is uncertain what impact, if any, the
introduction of 3D Building Blox by the Company will have on the Company's
current customer base and on its prospective customers of the ACIS 3D Toolkit.
See "Business -- Products and Technology" and "-- 3D Building Blox."
 
  Competition
 
     The markets for the Company's products are highly competitive, subject to
rapid change and characterized by constant demand for new product features, and
pressure to accelerate the release of new products and product enhancements and
to reduce prices. Many of the Company's competitors or potential competitors
have significantly greater financial, managerial, technical and marketing
resources than the Company. A variety of potential actions by any of the
Company's competitors, including a reduction of product prices, increased
promotion, announcement or accelerated introduction of new or enhanced products
or features, acquisitions of software applications or technologies from third
parties, product giveaways or product bundling could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, the Company's present and future competitors may be able to develop
products comparable or superior to those offered by the Company or adapt more
quickly than the Company to new technologies or evolving market requirements.
Accordingly, there can be no assurance that the Company will be able to continue
to compete effectively in its markets, that competition will not intensify or
that future competition will not have a material adverse effect on the Company's
business, operating results and financial condition. See
"Business -- Competition."
 
  Dependence on Key Personnel
 
     The Company is substantially dependent on its executive officers and key
employees. The Company has not entered into employment agreements with any of
its U.S.-based executive officers. The Company is also dependent on its ability
to attract, retain and motivate high quality personnel, especially its
management, highly skilled development personnel and sales personnel.
Competition for highly skilled development personnel with specialized experience
and training applicable to the Company's technologies is intense. In connection
with the growth of its sales force, the Company has experienced turnover among
its U.S. sales force that has, in some cases, delayed sales. The loss of the
services of any of its executive officers or other key employees or the
inability of the Company to identify and recruit new executive officers or key
sales, management or development personnel could have a material adverse effect
on the Company's business, operating results and financial condition.
 
  Dependence on Third Party Developers
 
     The Company relies on a number of development partners and third party
licensors for portions of the ACIS 3D modeling software. These development
partners have contributed and continue to contribute to the development of the
Company's products, including the initial development of, and enhancements made
to, the ACIS 3D modeling engine and certain component extensions. The Company's
plans for the future development of the ACIS 3D modeling technology place
continued reliance on these development partners and third party licensors for
further product enhancements and extensions. The Company shares ownership of, or
rights to, the technology developed with certain development partners, and in
certain limited circumstances, such parties may use such technology to compete
with the Company. All of the Company's agreements with its development partners
and third party licensors are terminable by the other party under certain
circumstances,
 
                                       17
<PAGE>   20
 
including upon default by the Company. There can be no assurance that the
Company will be able to continue to use the services of its development partners
to augment its development capabilities or the technologies of third party
licensors in its products, or that the Company could replace those services or
technologies in a timely manner, if necessary. The loss of or inability to
maintain any third party licenses could also result in delays or cancellations
in product shipments until equivalent software can be identified, licensed or
developed, and integrated with the Company's products. See "Business -- Research
and Product Development."
 
  Ability to Manage Growth
 
     The Company has experienced significant growth in its operations that has
placed substantial demands on the Company's managerial, operational and
financial resources. The Company's future success will depend upon its ability
to continue to enhance its core 3D modeling technologies, commercialize products
using such technologies, respond to competitive developments, expand its sales
and marketing efforts and attract, train, motivate and retain qualified
management and engineering personnel. Although the Company believes that its
systems and controls are adequate for the current level of operations, the
Company anticipates that it may need to add additional personnel and expand and
upgrade its systems and controls to manage possible future growth. The Company's
failure to do so could have a materially adverse effect upon the Company's
business, operating results and financial condition. In the future, the Company
may make acquisitions of complementary companies, products or technologies,
although no such acquisitions are currently pending or under negotiation.
Managing acquired businesses entails numerous operational and financial risks,
including difficulties in assimilating acquired operations, diversion of
management's attention to other business concerns, and potential loss of key
employees or customers of acquired operations. There can be no assurance that
the Company will be able to achieve growth, or to effectively manage growth, and
failure to do so could have a material adverse effect on the Company's operating
results.
 
  Proprietary Rights Limitations
 
     The Company's success and ability to compete is dependent in part upon its
proprietary technologies. The Company relies on trade secret and copyright laws
to protect its proprietary technologies, including its source code, but there
can be no assurance that such laws will provide sufficient protection to the
Company, that others will not develop technologies that are similar or superior
to the Company's, or that third parties will not copy or otherwise obtain and
use the Company's technologies without authorization. The Company has no patents
with respect to the ACIS 3D modeling technology. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries.
 
     The Company generally enters into confidentiality or license agreements
with its employees, consultants, and customers, and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology or that such agreements will be enforceable. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
 
     There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. Any such third party
claims, whether or not they are meritorious, could result in costly litigation
or require the Company to enter into royalty or license agreements. Such royalty
or license agreements, if required, may not be available with terms acceptable
to the Company, or at all. If the Company were found to have infringed upon the
proprietary rights of third parties, it could be required to pay damages, cease
sales of the infringing products and redesign or discontinue such products, any
of which could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Intellectual
Property."
 
                                       18
<PAGE>   21
 
  International Expansion
 
     International sales represented 49% of the Company's total revenue for the
year ended December 31, 1996. The Company believes that international sales will
continue to represent a significant portion of its total revenue, and that it
will be subject to the inherent risks of conducting business internationally,
such as unexpected changes in regulatory requirements, problems and delays in
collecting accounts receivable, export license requirements, tariffs and other
trade barriers, difficulties in staffing and managing foreign operations,
political instability, fluctuations in currency exchange rates, seasonal
reductions in business activity and potentially adverse tax consequences, which
could adversely impact the success of the Company's international operations.
Sales of products by the Company currently are denominated principally in U.S.
dollars. Accordingly, any increase in the value of the U.S. dollar as compared
to currencies in the Company's principal overseas markets would increase the
foreign currency-denominated cost of the Company's products, which may
negatively affect the Company's sales in those markets. The Company has not
engaged in any currency exchange hedging practices. In addition, effective
copyright and trade secret protection may be limited or unavailable under the
laws of certain foreign jurisdictions, subjecting the Company to the risk of
intellectual property piracy in those markets. There can be no assurance that
one or more of such factors will not have a material adverse effect on the
Company's international operations and, consequently, on the Company's business,
operating results and financial condition. See "Business -- Sales, Marketing and
Distribution."
 
  Termination of Lock-up Agreements
 
     In connection with the closing of the Company's initial public offering in
October 1996, holders of approximately 4,000,000 shares of Common Stock executed
lock-up agreements which prevented such holders from selling, disposing of or
transferring any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable therefor, for a period of 180 days after October 17,
1996 without the prior written consent of Cruttenden Roth Incorporated. Such
lock-up agreements will terminate on April 15, 1997, and all shares subject to
such lock-up agreements which were not previously released by Cruttenden Roth
Incorporated will become eligible for sale in the public market, subject to any
restrictions imposed by Rule 144 promulgated under the Securities Act of 1933,
as amended. Sales of substantial amounts of Common Stock in the public market
may adversely impact its market price.
 
                                       19
<PAGE>   22
 
ITEM 7. FINANCIAL STATEMENTS
 
                            SPATIAL TECHNOLOGY INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................   21
 
Financial Statements:
 
  Consolidated Balance Sheets, as of December 31, 1995 and
     1996...................................................   22
 
  Consolidated Statements of Operations, years ended
     December 31, 1994, 1995 and 1996.......................   23
 
  Consolidated Statements of Stockholders' Equity (Deficit),
     years ended December 31, 1994, 1995 and 1996...........   24
 
  Consolidated Statements of Cash Flows, years ended
     December 31, 1994, 1995 and 1996.......................   25
  Notes to Consolidated Financial Statements................   26
</TABLE>
 
     All schedules are omitted because of the absence of conditions under which
they are required or because the required information is provided in the
financial statements or notes thereto.
 
                                       20
<PAGE>   23
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders
of Spatial Technology Inc.:
 
     We have audited the accompanying consolidated balance sheets of Spatial
Technology Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Spatial
Technology Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
 
                                            KPMG PEAT MARWICK LLP
 
Boulder, Colorado
February 14, 1997
 
                                       21
<PAGE>   24
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                     (AMOUNTS IN THOUSANDS, EXCEPT SHARES)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                               AS OF DECEMBER 31,
                                                              --------------------
                                                                1995        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Current Assets:
  Cash and cash equivalents.................................  $    153    $  8,407
  Accounts receivable, net of allowance of $34 and $50 in
     1995 and 1996, respectively............................     1,893       1,542
  Prepaid expenses and other................................       179         341
                                                              --------    --------
          Total current assets..............................     2,225      10,290
Equipment, net (note 2).....................................       377         423
Purchased computer software, net............................       246         358
                                                              --------    --------
                                                              $  2,848    $ 11,071
                                                              ========    ========
 
                  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Note payable (note 3).....................................  $    500    $     --
  Accounts payable..........................................       585         314
  Accrued royalties payable.................................       455         366
  Other accrued expenses....................................       848         755
  Deferred revenue..........................................     1,220       1,325
                                                              --------    --------
          Total current liabilities.........................     3,608       2,760
                                                              --------    --------
Mandatory redeemable convertible preferred stock, $.01 par
  value; 7,566,324 shares authorized; 6,381,473 shares
  issued and outstanding; converted to common stock in 1996
  (note 4)..................................................    14,155          --
Stockholders' equity (deficit) (note 5):
  Common stock, $.01 par value; 22,500,000 shares
     authorized; 1,060,791 and 7,369,888, shares issued in
     1995 and 1996, respectively............................        11          74
  Additional paid-in capital................................       183      23,351
  Accumulated deficit.......................................   (14,872)    (15,034)
  Treasury stock at cost; 83,333 shares of common stock in
     1995...................................................      (176)         --
  Foreign currency translation adjustment...................       (61)        (80)
                                                              --------    --------
          Total stockholders' equity (deficit)..............   (14,915)      8,311
Commitments and contingencies (note 7)
                                                              --------    --------
                                                              $  2,848    $ 11,071
                                                              ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       22
<PAGE>   25
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1994       1995      1996
                                                              -------    ------    ------
<S>                                                           <C>        <C>       <C>
Revenue:
  License fees..............................................  $ 3,087    $4,850    $4,553
  Royalties.................................................      876     1,207     1,925
  Prepaid royalties.........................................      448        --       182
  Maintenance and other.....................................    2,137     2,572     2,913
                                                              -------    ------    ------
          Total revenue.....................................    6,548     8,629     9,573
                                                              -------    ------    ------
Cost of sales:
  License fees..............................................      231       287       338
  Royalties.................................................      127       145       192
  Prepaid royalties.........................................       65        --         6
  Maintenance and other.....................................      282       245       207
                                                              -------    ------    ------
          Total cost of sales...............................      705       677       743
                                                              -------    ------    ------
          Gross profit......................................    5,843     7,952     8,830
                                                              -------    ------    ------
Operating expenses:
  Sales and marketing.......................................    2,710     2,942     3,564
  Research and development..................................    3,166     3,123     3,945
  General and administrative................................      950     1,210     1,366
                                                              -------    ------    ------
          Total operating expenses..........................    6,826     7,275     8,875
                                                              -------    ------    ------
          Earnings (loss) from operations...................     (983)      677       (45)
Other income (expense):
  Interest income...........................................       24        21        91
  Interest expense..........................................      (82)      (83)      (83)
  Other, net................................................       16       (53)       15
                                                              -------    ------    ------
          Total other income (expense)......................      (42)     (115)       23
                                                              -------    ------    ------
          Earnings (loss) before income taxes and
            extraordinary item..............................   (1,025)      562       (22)
Income tax expense (note 6).................................      137       174       140
                                                              -------    ------    ------
          Earnings (loss) before extraordinary item.........   (1,162)      388      (162)
Extraordinary item -- gain on early extinguishment of debt
  (note 4)..................................................      298        --        --
                                                              -------    ------    ------
          Net earnings (loss)...............................  $  (864)   $  388    $ (162)
                                                              =======    ======    ======
Earnings (loss) per common share:
  Continuing operations.....................................    (0.23)    (0.07)     0.03
  Extraordinary item........................................     0.06        --        --
                                                              -------    ------    ------
          Earnings (loss) per common share..................  $ (0.17)   $ 0.07    $(0.03)
                                                              =======    ======    ======
Weighted average number of common shares and common
  equivalent shares outstanding(1)..........................    5,116     5,210     5,754
                                                              =======    ======    ======
</TABLE>
 
---------------
 
(1) Reflects the conversion of all preferred shares into 4,099,598 common shares
    for all periods shown upon the completion of the initial public offering
    described in note 5.
 
          See accompanying notes to consolidated financial statements.
 
                                       23
<PAGE>   26
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                     (AMOUNTS IN THOUSANDS, EXCEPT SHARES)
 
<TABLE>
<CAPTION>
                                                                                                        FOREIGN         TOTAL
                                              COMMON STOCK      ADDITIONAL                             CURRENCY     STOCKHOLDERS'
                                           ------------------    PAID-IN-    ACCUMULATED   TREASURY   TRANSLATION      EQUITY
                                            SHARES     AMOUNT    CAPITAL       DEFICIT      STOCK     ADJUSTMENT      (DEFICIT)
                                           ---------   ------   ----------   -----------   --------   -----------   -------------
<S>                                        <C>         <C>      <C>          <C>           <C>        <C>           <C>
Balances at January 1, 1994..............  1,006,827    $ 10     $   135      $(14,396)    $  (176)       $ --        $(14,427)
Exercise of common stock options for
  cash...................................     11,613      --           4            --          --          --               4
Common stock issued for services.........      1,333      --           4            --          --          --               4
Exercise of common stock warrants for
  cash...................................      3,435      --          --            --          --          --              --
Net loss.................................         --      --          --          (864)         --          --            (864)
Foreign currency translation
  adjustment.............................         --      --          --            --          --         (30)            (30)
                                           ---------    ----     -------      --------     -------        ----        --------
Balances at December 31, 1994............  1,023,208      10         143       (15,260)       (176)        (30)        (15,313)
 
Exercise of common stock options for
  cash...................................     37,583       1          40            --          --          --              41
Net earnings.............................         --      --          --           388          --          --             388
Foreign currency translation
  adjustment.............................         --      --          --            --          --         (31)            (31)
                                           ---------    ----     -------      --------     -------        ----        --------
Balances at December 31, 1995............  1,060,791      11         183       (14,872)       (176)        (61)        (14,915)
 
Common stock issued in initial public
  offering, net of offering costs (note
  5).....................................  2,100,000      21       8,629            --          --          --           8,650
Conversion of preferred stock............  4,099,598      41      14,114            --          --          --          14,155
Exercise of common stock warrants for
  cash...................................    155,821       2         503            --          --          --             505
Exercise of common stock options for
  cash...................................     13,678      --          20            --          --          --              20
Common stock issued for services.........      8,333      --          20            --          --          --              20
Common stock issued for cash.............     15,000      --          57            --          --          --              57
Retirement of treasury stock.............    (83,333)     (1)       (175)           --         176          --              --
Net loss.................................         --      --          --          (162)         --          --            (162)
Foreign currency translation
  adjustment.............................         --      --          --            --          --         (19)            (19)
                                           ---------    ----     -------      --------     -------        ----        --------
Balances at December 31, 1996............  7,369,888    $ 74     $23,351      $(15,034)    $    --        $(80)       $  8,311
                                           =========    ====     =======      ========     =======        ====        ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       24
<PAGE>   27
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1994       1995       1996
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net earnings (loss).......................................  $  (864)   $   388    $  (162)
  Adjustments to reconcile net earnings (loss) to net cash
     provided (used) by operating activities:
     Extraordinary item -- gain on early extinguishment of
       debt.................................................     (298)        --         --
     Depreciation and amortization..........................      267        174        277
     Common stock issued for services.......................        4         --         20
     Changes in operating assets and liabilities:
       Accounts receivable..................................      142       (151)       351
       Prepaid expenses and other...........................      (43)         6       (162)
       Accounts payable.....................................     (117)       306       (271)
       Accrued expenses.....................................       32       (113)      (182)
       Deferred revenue.....................................       (8)      (506)       105
                                                              -------    -------    -------
          Net cash provided (used) by operating
            activities......................................     (885)       104        (24)
                                                              -------    -------    -------
Cash flows from investing activities:
  Additions to equipment....................................       (2)      (249)      (235)
  Additions to purchased computer software..................     (210)        --       (200)
                                                              -------    -------    -------
          Net cash used by investing activities.............     (212)      (249)      (435)
                                                              -------    -------    -------
Cash flows from financing activities:
  Principal payments on notes payable.......................     (501)      (100)      (500)
  Proceeds from issuance of common stock, net...............       --         --      8,707
  Proceeds from exercise of common stock options and
     warrants...............................................        4         41        525
  Proceeds from notes payable...............................      100        100         --
                                                              -------    -------    -------
          Net cash provided (used) by financing
            activities......................................     (397)        41      8,732
                                                              -------    -------    -------
Foreign currency translation adjustment affecting cash .....      (30)       (31)       (19)
                                                              -------    -------    -------
          Net increase (decrease) in cash and cash
            equivalents.....................................   (1,524)      (135)     8,254
Cash and cash equivalents at beginning of period............    1,812        288        153
                                                              -------    -------    -------
Cash and cash equivalents at end of period..................  $   288    $   153    $ 8,407
                                                              =======    =======    =======
Supplemental disclosures:
  Cash paid for interest....................................  $    71    $    76    $    38
                                                              =======    =======    =======
  Cash paid for income taxes................................  $    83    $   127    $    91
                                                              =======    =======    =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       25
<PAGE>   28
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  (a) Organization and Basis of Financial Statement Presentation
 
     Spatial Technology Inc. (Spatial or the Company) was incorporated under the
laws of the State of Delaware on July 7, 1986 to design, develop, and market 3D
modeling software. Spatial has three wholly owned subsidiaries, Spatial
Technology Ltd., Spatial Technology GmbH, and Spatial Technology K.K. located in
England, Germany, and Japan, respectively, that assist in the sales and
licensing of the Company's products.
 
     The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.
 
     The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
 
  (b) Cash and Cash Equivalents
 
     The Company considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents.
 
  (c) Foreign Currency Translation
 
     The functional currencies of each of the Company's foreign subsidiaries is
the local currency of the country where the subsidiary is located. Assets and
liabilities of the Company's international subsidiaries are translated into U.S.
dollars using current exchange rates in effect at the balance sheet date, and
revenue and expense accounts are translated using a weighted average exchange
rate during the period. Net exchange gains and losses resulting from such
translation are included as a separate component of stockholders' equity
(deficit) and reported as a separate line item in the consolidated statements of
cash flows. Gains and losses from foreign currency transactions, when
applicable, are included in other income (expense). There were no significant
gains or losses on foreign currency transactions during the years ended December
31, 1994, 1995 and 1996.
 
  (d) Revenue Recognition
 
     Revenue from products or services is recognized based upon shipment of
products or performance of services. License fee revenue is recognized upon
completion of a signed contract and shipment of the software. Revenue from
royalties is recognized upon receipt of payment or according to the payment
terms specified in the contract. Prepaid royalties represent non-refundable
amounts paid for use of the Company's software for which the Company has no
obligation to refund or return upon non-delivery of products. Revenue from
maintenance contracts is deferred and recognized ratably over the period of the
agreement. Training is recognized upon completion of the training course by the
customer.
 
  (e) Equipment and Purchased Computer Software
 
     Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the respective assets which range from
five to seven years. Prior to 1996, the estimated useful lives were three to
four years. During the fourth quarter of 1996, these estimates were changed to
better reflect the estimated periods during which these assets will remain in
service and to utilize useful lives which are more consistent with industry
practice. The changes in estimates of depreciable lives were made on a
prospective basis, effective January 1, 1996. The effect of this change on
depreciation expense and net loss for 1996 was not significant.
 
                                       26
<PAGE>   29
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Purchased computer software represents software enhancements acquired from
third parties, and is amortized over its estimated useful life of three years,
beginning when the software is incorporated into the Company's products.
 
  (f) Stock-Based Compensation
 
     The Company accounts for its stock-based employee and non-employee director
compensation plans using the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations ("APB 25"). The Company has provided pro
forma disclosures of net loss and loss per share as if the fair value based
method of accounting for these plans, as proscribed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), had been applied. Pro forma disclosures include the effects of employee
and non-employee director stock options granted during 1996. See note 5.
 
  (g) Impairment of Long-Lived Assets
 
     Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("SFAS 121") which requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. An
impairment loss is recognized when estimated undiscounted future cash flows
expected to be generated by the asset is less than its carrying value.
Measurement of the impairment loss is based on the fair value of the asset,
which is generally determined using valuation techniques such as discounted
present value of expected future cash flows. The adoption of SFAS 121 had no
effect on the consolidated financial statements of the Company.
 
  (h) Research and Development Costs
 
     Costs to establish the technological feasibility of computer software
products are expensed as incurred.
 
  (i) Income Taxes
 
     The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109). SFAS 109 requires the use of
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory rates
applicable to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
 
(2) EQUIPMENT
 
     Equipment consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31,
                                                              ------------------
                                                               1995       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Computer equipment..........................................  $ 1,641    $ 1,853
Furniture and office equipment..............................      277        300
Leasehold improvements......................................       64         64
                                                              -------    -------
                                                                1,982      2,217
Less accumulated depreciation...............................   (1,605)    (1,794)
                                                              -------    -------
                                                              $   377    $   423
                                                              =======    =======
</TABLE>
 
                                       27
<PAGE>   30
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(3) NOTES PAYABLE
 
     In July 1996, the Company obtained a revolving line of credit from a bank
of up to $500,000. This line of credit is secured by accounts receivable, bears
interest at the bank's prime rate plus 0.75% and matures in June 1997. As of
December 31, 1996, the Company had no borrowings under this line of credit. In
July 1996, the Company also obtained equipment financing for $250,000, bearing
interest at the banks prime rate plus 2.25% and due June 1998. The equipment
financing was paid in full during 1996.
 
     In January 1996, the Company issued a promissory note for $125,000 to a
bank bearing interest at prime rate plus 1% per annum and maturing on June 30,
1996. This promissory note was secured by a guarantee from an existing
stockholder. In connection with these transactions, the Company issued a warrant
to purchase 12,500 shares of common stock with an exercise price of $8.22 per
share. The warrant expires in January 2003. In February 1996, the Company issued
a promissory note for $100,000 to an existing stockholder bearing interest at
10% per annum and maturing on June 30, 1996. In connection with this
transaction, the Company issued a warrant to purchase 10,000 shares common stock
with an exercise price of $8.22 per share. The warrant expires in February 2003.
Both notes were paid in full during 1996.
 
     Note payable as of December 31, 1995 for $500,000 was pursuant to a
revolving line of credit with a bank, with maximum borrowings of $500,000,
bearing interest at the bank's prime rate plus 2% per annum, through April 30,
1996, and was paid in 1996. Advances under the line of credit were based upon a
70% advance rate against accounts receivable, and were secured by substantially
all the assets of the Company.
 
     During November 1994, a $500,000 promissory note payable, and related
accrued interest payable, to a major customer was forgiven in consideration for
future royalty payments owed to the Company and $202,000 in cash. The Company
recognized an extraordinary gain of $298,000 on the transaction.
 
(4) MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
     Effective upon the closing of the initial public offering described in note
5, all 6,381,473 shares of outstanding mandatory redeemable preferred stock were
converted into 4,099,598 shares of common stock.
 
(5) STOCKHOLDERS' EQUITY (DEFICIT)
 
  Initial Public Offering
 
     In October 1996, the Company completed an initial public offering
(Offering) of 3,000,000 shares of common stock. The Offering consisted of
2,100,000 shares sold by the Company and 900,000 shares sold by existing
stockholders, at a price of $5.00 per share. Net proceeds to the Company were
approximately $8,650,000, after deducting underwriting discounts and commissions
and other offering expenses.
 
  Reverse Common Stock Split
 
     In June 1996, the Board of Directors of the Company approved a 1-for-3
reverse common stock split. Accordingly, all share and per share amounts
included in the accompanying consolidated financial statements, and notes
thereto, have been retroactively adjusted to reflect the effects of the reverse
stock split as of and for all periods presented.
 
  Preferred Stock
 
     In June 1996, the Board of Directors of the Company authorized, at their
discretion, the issuance of up to 2,500,000 shares of preferred stock in one or
more series and to fix the rights, preferences, and privileges of such series.
As of December 31, 1996 no shares of preferred stock were outstanding.
 
                                       28
<PAGE>   31
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Stock Options
 
     In June 1996, the Board of Directors of the Company approved the 1996
Equity Incentive Plan (1996 Plan). Up to 1,000,000 shares of Common Stock may be
issued pursuant to the 1996 Plan. Under the 1996 Plan the Company may issue
incentive stock options and nonqualified options. Incentive stock options are
granted at an exercise price not less than the fair market value of the stock on
the date of grant, vest over a four-year employment period, and are exercisable
over a maximum ten-year employment period. The Company also grants nonqualified
stock options under the 1996 Plan that vest over a four-year period or upon
specific performance objectives, and are exercisable over a maximum ten-year
period or upon completion of such objectives. As of December 31, 1996 there were
482,054 options available for grant under the 1996 Plan.
 
     In June 1996, the Board of Directors approved the 1996 Non-Employee
Directors' Stock Option Plan (Directors' Plan). Up to 250,000 shares of Common
Stock may be issued pursuant to the Directors' Plan. Stock options granted under
the Directors' Plan are granted at not less than the fair market value of the
stock on the date of grant, immediately exercisable, subject to repurchase by
the Company, vest in four equal annual installments, and are exercisable over a
ten-year period from date of grant. During 1996 the Company granted options
under the Directors' Plan to purchase 60,000 shares of common stock at exercise
prices ranging between $4.13 and $5.00, all of which were outstanding as of
December 31, 1996.
 
     In August 1996, the Company's Board of Directors approved the termination,
effective upon the initial public offering described above, of the Amended and
Restated 1987 Stock Option Plan (1987 Plan). Under the 1987 Plan the Company
issued incentive stock options and nonqualified options. Incentive stock options
were granted at an exercise price not less than the fair market value of the
stock on the date of grant, vest over a four-year employment period, and are
exercisable over either a five-year or ten-year employment period. The Company
also granted nonqualified stock options under the 1987 Plan that vest over a
four-year period or upon specific performance objectives, and are exercisable
over a five-year period or upon completion of such objectives. As a result of
such termination, no additional options may be issued under the 1987 Plan. The
options to purchase 311,863 shares of Common Stock at a weighted average
exercise price of $3.15 outstanding as of December 31, 1996 will remain
exercisable until they expire or terminate pursuant to their terms.
 
     The fair value of options granted was estimated on the date of grant using
the Black-Scholes multiple option pricing model with the following weighted
average assumptions used for grants in 1995 and 1996: risk-free interest rate of
5.875; expected life of 3 years; 57.6% volatility; and no cash dividends.
 
     Pro forma financial information assuming the use of SFAS 123 in accounting
for stock based compensation is as follows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                                -----------------------
                                                                 1995            1996
                                                                ------          -------
<S>                                                             <C>             <C>
Pro forma net earnings (loss):
  As reported...............................................     $ 388           $ (162)
  Adjusted pro forma........................................       348             (483)
Pro forma net earnings (loss) per share:
  As reported...............................................     $0.07           $(0.03)
  Adjusted pro forma........................................      0.07            (0.08)
</TABLE>
 
                                       29
<PAGE>   32
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the status of the Company's fixed option plans as of December
31, 1994, 1995 and 1996 and changes during the years ending on those dates is
presented below:
 
<TABLE>
<CAPTION>
                                         1994                  1995                  1996
                                 --------------------   -------------------   -------------------
                                            WEIGHTED-             WEIGHTED-             WEIGHTED-
                                             AVERAGE               AVERAGE               AVERAGE
                                            EXERCISE              EXERCISE              EXERCISE
                                  SHARES      PRICE     SHARES      PRICE     SHARES      PRICE
                                 --------   ---------   -------   ---------   -------   ---------
<S>                              <C>        <C>         <C>       <C>         <C>       <C>
Outstanding at beginning of
  year.........................   236,915     $3.23     307,213     $2.56     329,505     $2.81
Granted........................   231,979      3.00     107,154      3.00     657,872      4.81
Exercised......................   (11,608)     0.35     (35,578)     1.00     (17,010)     1.57
Forfeited......................  (150,073)     4.47     (49,284)     2.84     (80,558)     3.06
                                 --------               -------               -------
Outstanding at end of year.....   307,213      2.56     329,505      2.81     889,809      4.29
                                 ========               =======               =======
Weighted-average fair value of
  options granted during the
  year at exercise price equal
  to market price at grant
  date.........................     $1.46                 $1.62                 $2.56
</TABLE>
 
     The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:
 
<TABLE>
<CAPTION>
                           OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
             -----------------------------------------------   -------------------------------
                               WEIGHTED-                          NUMBER
                 NUMBER         AVERAGE                        EXERCISABLE
 RANGE OF    OUTSTANDING AT    REMAINING                            AT
 EXERCISE     DECEMBER 31,    CONTRACTUAL   WEIGHTED-AVERAGE   DECEMBER 31,   WEIGHTED-AVERAGE
  PRICES          1996           LIFE        EXERCISE PRICE        1996        EXERCISE PRICE
 --------    --------------   -----------   ----------------   ------------   ----------------
<C>          <C>              <S>           <C>                <C>            <C>
$1.50-3.00      269,851       3.2 years          $2.88           156,299           $2.80
$3.84-5.00      619,958       9.8                 4.91           578,779            4.91
                -------                                          -------
                889,809       7.8                 4.29           735,078            4.46
                =======                                          =======
</TABLE>
 
  Employee Stock Purchase Plan
 
     In June 1996, the Board of Directors approved the Employee Stock Purchase
Plan. Up to 100,000 shares of common stock may be issued pursuant to the plan.
Employees may elect to withhold up to 15% of their compensation for the purchase
of the Company's common stock. The amounts withheld are used to purchase the
Company's common stock at a price equal to 85% of the fair market value of
shares. No shares have been issued under the Employee Stock Purchase Plan as of
December 31, 1996.
 
  Warrants
 
     In October 1996, in connection with the initial public offering described
above, the Company issued a warrant to the underwriter to purchase 210,000
shares of common stock at an exercise price of $6.50 per share. This warrant is
exercisable at the holder's option through its expiration in 2001.
 
     During 1995, the Company issued additional warrants to purchase 20,000
shares of preferred stock at an exercise price of $2.74 per share in connection
with the Company's debt financing. Consistent with the terms of the preferred
stock warrants, upon the closing of the initial public offering described above
these preferred stock warrants were converted into warrants to purchase 6,666
shares of common stock at a price of $8.22 per share. These warrants are
exercisable at the holder's option through their expiration in 2000.
 
     During 1994, the Company issued warrants to purchase 682,482 shares of
preferred stock at an exercise price of $2.74 per share in connection with the
Company's debt financing. During 1995, 182,482 of these
 
                                       30
<PAGE>   33
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
warrants were canceled. Consistent with the terms of the preferred stock
warrants, upon the closing of the initial public offering described above the
remaining preferred stock warrants to purchase 500,000 shares of preferred stock
were converted into warrants to purchase 166,665 shares of common stock at a
price of $8.22 per share. The remaining warrants are exercisable at the holder's
option through their expiration in 2001.
 
     During 1993, the Company issued warrants to purchase 30,000 shares of
preferred stock at an exercise price of $3.75 per share. Consistent with the
terms of these preferred stock warrants, upon the closing of the initial public
offering described above these preferred stock warrants were converted into
warrants to purchase 30,000 shares of common stock at a price of $3.75 per
share. In October 1996 these warrants were exercised by the holder.
 
     During 1993, in connection with the issuance of preferred stock, the
Company issued warrants to purchase 42,915 shares of common stock at $.03 per
share. These warrants are exercisable at the holders' option from February 2,
1993 through their expiration in 1999. During 1994, a warrant for 3,435 shares
of common stock, held by an existing stockholder was exercised at $.03 per
share. No warrants were exercised during 1995. During 1996, two warrants for
4,091 and 19,741 shares of common stock, held by existing stockholders were
exercised at $.03 per share. At December 31, 1996 15,648 shares of authorized,
but unissued, common stock has been reserved for the exercise of the remaining
outstanding warrants.
 
     During 1991, the Company issued warrants to purchase 141,243 shares of
common stock at $3.84 per share in connection with the conversion of demand
notes to preferred stock. These warrants were exercisable at the holder's option
through their expiration in April 1996. In April 1996, warrants to purchase
101,989 shares of Common Stock, held by existing stockholders, were exercised at
$3.84 per share. The remaining warrants to purchase 39,254 shares of Common
Stock expired in April 1996.
 
(6) INCOME TAXES
 
     Tax expense for 1994, 1995, and 1996 is comprised solely of withholding
taxes on foreign sales.
 
     Income tax expense differs from the amount computed by applying the
statutory federal income tax rate to earnings (loss) before income taxes and
extraordinary item as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                               1994      1995     1996
                                                              ------    ------    -----
<S>                                                           <C>       <C>       <C>
Expected income tax expense (benefit).......................   $(247)    $ 191     $ (7)
Non deductible expenses, net................................      35        10        7
Net operating loss for which no benefit was recognized......     212        --       --
Decrease in deferred tax valuation allowance due to
  utilization of net operating loss.........................      --      (201)      --
carryforward Withholding taxes on foreign sales.............     137       174      140
                                                               -----     -----     ----
Income tax expense..........................................   $ 137     $ 174     $140
                                                               =====     =====     ====
</TABLE>
 
                                       31
<PAGE>   34
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The tax effects of significant temporary differences that result in
deferred tax assets are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31,
                                                              -------------------
                                                                1995       1996
                                                              --------   --------
<S>                                                           <C>        <C>
Accounts receivable, primarily due to differences in
  accounting for bad debts..................................    $   11     $   17
Property and equipment, primarily due to differences in
  depreciation..............................................        13          1
Deferred revenue, due to differences in revenue recognition
  for financial statement and income tax purposes...........        --         26
Accrued expenses, primarily due to difference in the period
  of recognition for financial statement and income tax
  purposes..................................................       156         61
Purchased software, primarily due to differences in carrying
  values for financial statement and income tax purposes....        77         32
Research and development and other tax credits..............       883        929
Net operating loss carryforwards............................     3,804      3,918
                                                                ------     ------
          Total deferred tax assets.........................     4,944      4,984
Less valuation allowance....................................     4,944      4,984
                                                                ------     ------
          Net deferred tax assets...........................    $   --     $   --
                                                                ======     ======
</TABLE>
 
     At December 31, 1996, the Company had net operating loss carryforwards for
regular income tax purposes of approximately $11,525,000, which if not utilized,
expire in the years 2004 through 2011. Approximately $2,996,000 of the total net
operating loss carryforward at December 31, 1996 is subject to limitation under
Section 382 of the Internal Revenue Code. Should a subsequent change in
ownership occur, the remaining net operating loss carryforward may also be
subject to limitation.
 
     The Company also has research and development credit carryforwards for
income tax purposes available totaling approximately $929,000, which if not
utilized, expire in the years 2001 through 2011. Approximately $284,000 of the
total credit carryforward is also subject to limitation under Section 382 of the
Internal Revenue Code.
 
(7) COMMITMENTS AND CONTINGENCIES
 
     The Company leases its office facilities and various office equipment under
noncancelable operating leases. Future minimum rental payments on these leases
are as follows (in thousands):
 
<TABLE>
<S>                                                    <C>
1997.................................................  $  360
1998.................................................     350
1999.................................................     356
2000.................................................     279
2001.................................................       4
                                                       ------
                                                       $1,349
                                                       ======
</TABLE>
 
     Rent expense was approximately $279,000, $405,000 and $419,000 in 1994,
1995 and 1996, respectively.
 
     The Company executed a long-term consulting agreement with Three-Space
Limited, a United Kingdom corporation, in 1989 obligating the Company to pay
approximately $30,000 per month (as of December 31, 1996) for specified research
and marketing activities. Consulting expense under this agreement was
approximately $365,000, $350,000 and $408,000 in 1994, 1995 and 1996,
respectively. This agreement also requires the Company to pay a royalty to this
entity on the sale of specific products, certain components of
 
                                       32
<PAGE>   35
 
                    SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
which resulted from the research activities. Royalty expense under this
agreement totaled approximately $235,000, $249,000 and $275,000 in 1994, 1995
and 1996, respectively.
 
     The Company has entered into various other licensing agreements which
require the Company to pay royalties on each sale of the licensed software
products. Royalty expense under these agreements is included in costs of sales
and totaled approximately $193,000, $152,000 and $187,000 in 1994, 1995 and
1996, respectively.
 
     In connection with one such licensing agreement, a software developer has
asserted a claim for additional royalties totaling $551,000. The Company
disputes the claim and believes that it has adequately provided for its royalty
liability under the agreement as of December 31, 1996.
 
     In February 1995, a judgment was entered against the Company in the amount
of $419,000, relating to litigation by a former employee, which was accrued as
of December 31, 1994. This liability was paid in full in October 1996.
 
(8) REVENUE, SIGNIFICANT CUSTOMERS AND CONCENTRATION OR CREDIT RISK
 
     Revenue by geographic area is summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          1994       1995       1996
                                                         ------     ------     ------
<S>                                                      <C>        <C>        <C>
United States..........................................  $3,358     $3,913     $4,882
Europe.................................................   1,465      1,870      2,199
Japan..................................................   1,557      1,846      1,742
Other..................................................     168      1,000        750
                                                         ------     ------     ------
          Total........................................  $6,548     $8,629     $9,573
                                                         ======     ======     ======
</TABLE>
 
     Earnings (loss) from operations by geographic area is summarized as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                       -------------------------------
                                                        1994        1995        1996
                                                       -------     -------     -------
<S>                                                    <C>         <C>         <C>
United States........................................  $ 2,443     $ 2,782     $ 3,524
Europe...............................................      643       1,027       1,171
Japan................................................      778         887         632
Other................................................     (365)        669         468
                                                       -------     -------     -------
                                                         3,499       5,365       5,795
Unallocated corporate expenses.......................   (4,482)     (4,688)     (5,840)
                                                       -------     -------     -------
          Total......................................  $  (983)    $   677     $   (45)
                                                       =======     =======     =======
</TABLE>
 
     Substantially all of the company's identifiable assets relate to domestic
operations.
 
     During 1994 and 1996, one customer accounted for 11% and 13%, respectively,
of the Company's revenue.
 
     The Company is exposed to potential concentrations of credit risk from its
accounts receivable with its various customers. The Company's accounts
receivable are from both large multinational corporate customers and smaller
companies in a variety of industries, with no concentration in a single
industry. To reduce this risk, the Company evaluates the credit worthiness of
its customers prior to the shipment of software or performance of services.
 
                                       33
<PAGE>   36
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    PART III
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT
 
     The information concerning directors and executive officers is set forth in
the Proxy Statement under the headings "Election of Directors" and "Executive
Officers", which information is incorporated herein by reference.
 
ITEM 10. EXECUTIVE COMPENSATION
 
     The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management", which information is
incorporated herein by reference.
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Transactions",
which information is incorporated herein by reference.
 
                                       34
<PAGE>   37
 
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
 
  (a) Exhibits
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
       3(i).1*           -- Restated Certificate of Incorporation.
       3(i).2*           -- [Intentionally Omitted]
       3(i).2(a)*        -- Certificate of Correction to the Restated Certificate of
                            Incorporation.
       3(i).2(b)*        -- Certificate of Amendment to the Restated Certificate of
                            Incorporation.
       3(i).2(c)*        -- Certificate of Amendment to the Restated Certificate of
                            Incorporation.
       3(i).2(d)*        -- Certificate of Amendment to the Restated Certificate of
                            Incorporation.
       3(i).3*           -- Form of Restated Certificate of Incorporation to be
                            effective upon the closing of this offering to which this
                            Registration Statement relates.
      3(ii).4*           -- By-laws of the Registrant, as amended.
      3(ii).5*           -- Form of By-laws to be effective upon the closing of this
                            offering to which this Registration Statement relates.
          4.1*           -- Reference is made to Exhibits 3(i).1 through 3(ii).2.
          4.2            -- [Intentionally Omitted]
         10.1*           -- Form of Indemnification Agreement entered into between
                            the Registrant and its directors and officers, with
                            related schedule.
         10.2*           -- Investment Agreement, dated as of August 12, 1986.
         10.3*           -- Investors' Rights Agreement, dated as of February 4,
                            1993.
         10.4*           -- 1996 Amended and Restated 1987 Stock Option Plan of the
                            Registrant (the "Restated Plan"), including form of
                            Incentive Stock Option and Nonstatutory Stock Option
                            under the Restated Plan.
         10.5*           -- 1996 Equity Incentive Plan (the "Incentive Plan"),
                            including form of Incentive Stock Option and Nonstatutory
                            Stock Option under the Incentive Plan of the Registrant.
         10.6*           -- 1996 Non-Employee Directors' Stock Option Plan of the
                            Registrant (the "Directors' Plan"), including form of
                            Nonstatutory Stock Option under the Directors' Plan.
         10.7*           -- Employee Stock Purchase Plan of the Registrant and
                            related offering document.
         10.8*           -- Employment Agreement between the Registrant and Karlheinz
                            Peters, dated as of May 5, 1993.
         10.9            -- [Intentionally omitted]
         10.10*          -- Lease Agreement between the Registrant and Cottonwood
                            Development Partners, dated June 29, 1990, as amended.
         10.11           -- [Intentionally omitted]
         10.12           -- [Intentionally omitted]
         10.13*          -- Warrant to Purchase 15,648 shares of Common Stock issued
                            by the Registrant to New York Life Insurance Company.
         10.14           -- [Intentionally omitted]
         10.15*          -- Warrant to Purchase 100,000 shares of Next Preferred
                            Stock issued by the Registrant to New York Life Insurance
                            Company.
         10.16*          -- Warrant to Purchase 200,000 shares of Next Preferred
                            Stock issued by the Registrant to Nazem & Company II,
                            L.P.
</TABLE>
 
                                       35
<PAGE>   38
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.17*          -- Warrant to Purchase 200,000 shares of Next Preferred
                            Stock issued by the Registrant to Benefit Capital
                            Management Corporation.
         10.18*          -- Warrant to Purchase 20,000 shares of Next Preferred Stock
                            issued by the Registrant to Silicon Valley Bank.
         10.19*          -- Warrant to Purchase 37,500 shares of Next Preferred Stock
                            issued by the Registrant to Benefit Capital Management
                            Corporation.
         10.20*          -- Warrant to Purchase 30,000 shares of Next Preferred Stock
                            issued by the Registrant to New York Life Insurance
                            Company.
         10.21*          -- Development Agreement between the Registrant and
                            Three-Space Limited, dated June 26, 1987, as amended.
         10.22*          -- Marketing Agreement between the Registrant and
                            Three-Space Limited, dated May 31, 1989, as amended.
         10.23*          -- Consultancy Agreement between the Registrant and D-Cubed
                            Ltd., dated June 19, 1991, as amended.
         10.24*          -- Technology Development and Royalty Agreement between the
                            Registrant and Autodesk, Inc., dated June 27, 1991, as
                            amended.
         10.25*          -- Amended and Restated Loan and Security Agreement between
                            the Registrant and Silicon Valley Bank, dated as of
                            August 15, 1995, as amended.
         10.26*          -- Ninth Amendment to the Development Agreement between the
                            Registrant and Three-Space Limited, dated June 26, 1987,
                            as theretofore amended (Exhibit 10.21 to this
                            Registration Statement) dated September 11, 1996.
         21.1*           -- List of Subsidiaries of the Registrant.
         27              -- Financial Data Schedule
</TABLE>
 
---------------
 
* Incorporated by reference to the Issuer's Registration Statement on Form SB-2,
  File No. 333-5416-D, as amended.
 
  (b) Reports on Form 8-K
 
     No reports on Form 8-K were filed during the period covered by this report.
 
                                       36