##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------------

For the quarterly period ended December 31, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number: 001-31265





Avatech Solutions, Inc.

(Exact Name of Registrant as Specified in its Charter)









|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 84-1035353                       
|(State or Other Jurisdiction of Incorporation or Organization) |  | (IRS Employer Identification No.)



|                                                      
|------------------------------------------------------
|10715 Red Run Blvd., Suite 101, Owings Mills, MD 21117
|(Address of Principal Executive Offices) (Zip Code)   

(410) 581-8080

(Registrants telephone number, including area code)





Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer   ̈    Accelerated filer   ̈    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date.



|                                       |  |                                
|-------------------------------------- |  | -------------------------------
|Class                                  |  | Outstanding at February 1, 2008
|Common Stock, par value $.01 per share |  | 16,293,921                     









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##### Table of Contents

AVATECH SOLUTIONS, INC. AND SUBSIDIARIES

INDEX



|           |  |                                                                                                   |  |     
|---------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                   |  | Page
|PART I     |  | FINANCIAL INFORMATION                                                                             |  | 3   
|           |  |                                                                                                  
|ITEM 1.    |  | Consolidated Financial Statements                                                                 |  |     
|           |  |                                                                                                  
|           |  | Consolidated Balance Sheets  December 31, 2007 (Unaudited) and June 30, 2007                     |  | 3   
|           |  |                                                                                                  
|           |  | Consolidated Statements of Operations  Three months ended December 31, 2007 and 2006 (Unaudited) |  | 5   
|           |  |                                                                                                  
|           |  | Consolidated Statements of Operations  Six months ended December 31, 2007 and 2006 (Unaudited)   |  | 6   
|           |  |                                                                                                  
|           |  | Consolidated Statement of Stockholders Equity  Six months ended December 31, 2007 (Unaudited)   |  | 7   
|           |  |                                                                                                  
|           |  | Consolidated Statements of Cash Flows  Six months ended December 31, 2007 and 2006 (Unaudited)   |  | 8   
|           |  |                                                                                                  
|           |  | Notes to Consolidated Financial Statements (Unaudited)                                            |  | 9   
|           |  |                                                                                                  
|ITEM 2.    |  | Managements Discussion and Analysis of Results of Operations and Financial Condition             |  | 14  
|           |  |                                                                                                  
|ITEM 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                        |  | 22  
|           |  |                                                                                                  
|ITEM 4.    |  | Controls and Procedures                                                                           |  | 22  
|           |  |                                                                                                  
|PART II    |  | OTHER INFORMATION                                                                                 |  | 22  
|           |  |                                                                                                  
|ITEM 1A.   |  | Risk Factors                                                                                      |  | 22  
|           |  |                                                                                                  
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                               |  | 22  
|           |  |                                                                                                  
|ITEM 6.    |  | Exhibits                                                                                          |  | 23  
|           | 
|SIGNATURES |  | 24                                                                                               



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                    |  |                  |            |              |   |           
|------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | ------------ | - | ----------
|                                                                                                                    |  | December 31,2007 |            | June 30,2007
|                                                                                                                    |  | (unaudited)      |            |             
|Assets                                                                                                              |  |                  |            |              |   |           
|Current assets:                                                                                                     |  |                  |            |              |   |           
|Cash and cash equivalents                                                                                           |  | $                | 1,781,000  |              | $ | 1,688,000 
|Accounts receivable, less allowance of $202,000 as of December 31, 2007 and $188,000 as of June 30, 2007            |  |                  | 7,871,000  |              |   | 7,402,000 
|Other receivables                                                                                                   |  |                  | 210,000    |              |   | 492,000   
|Inventory                                                                                                           |  |                  | 750,000    |              |   | 902,000   
|Prepaid expenses and other current assets                                                                           |  |                  | 399,000    |              |   | 356,000   
|                                                                                                                    |  |                  |            |              |   |           
|Total current assets                                                                                                |  |                  | 11,011,000 |              |   | 10,840,000
|Property and equipment:                                                                                             |  |                  |            |              |   |           
|Computer software and equipment                                                                                     |  |                  | 3,037,000  |              |   | 2,907,000 
|Office furniture and equipment                                                                                      |  |                  | 1,220,000  |              |   | 1,212,000 
|Leasehold improvements                                                                                              |  |                  | 167,000    |              |   | 167,000   
|                                                                                                                    |  |                  |            |              |   |           
|                                                                                                                    |  |                  | 4,424,000  |              |   | 4,286,000 
|Less accumulated depreciation and amortization                                                                      |  |                  | 3,571,000  |              |   | 3,352,000 
|                                                                                                                    |  |                  |            |              |   |           
|                                                                                                                    |  |                  | 853,000    |              |   | 934,000   
|Customer list, net of accumulated amortization of $522,000 as of December 31, 2007 and $387,000 as of June 30, 2007 |  |                  | 1,662,000  |              |   | 1,803,000 
|Goodwill                                                                                                            |  |                  | 5,968,000  |              |   | 5,888,000 
|Other assets                                                                                                        |  |                  | 99,000     |              |   | 109,000   
|                                                                                                                    |  |                  |            |              |   |           
|Total assets                                                                                                        |  | $                | 19,593,000 |              | $ | 19,574,000
|                                                                                                                    |  |                  |            |              |   |           

See accompanying notes.



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##### Table of Contents

Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets (continued)



|                                                                                                                                                                                                                                                                                                                                                     |  |                  |            |   |              |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ------------ | - | ---------- | -
|                                                                                                                                                                                                                                                                                                                                                     |  | December 31,2007 |            |   | June 30,2007 |  
|                                                                                                                                                                                                                                                                                                                                                     |  | (unaudited)      |            |   |              |  
|Liabilities and stockholders equity                                                                                                                                                                                                                                                                                                                 |  |                  |            |   |              |   |            |  
|Current liabilities:                                                                                                                                                                                                                                                                                                                                 |  |                  |            |   |              |   |            |  
|Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                                                |  | $                | 5,950,000  |   |              | $ | 5,635,000  |  
|Accrued compensation and related benefits                                                                                                                                                                                                                                                                                                            |  |                  | 1,036,000  |   |              |   | 1,461,000  |  
|Borrowings under line-of-credit                                                                                                                                                                                                                                                                                                                      |  |                  | 3,000      |   |              |   | 1,408,000  |  
|Current portion of long-term debt                                                                                                                                                                                                                                                                                                                    |  |                  | 13,000     |   |              |   | 31,000     |  
|Deferred revenue                                                                                                                                                                                                                                                                                                                                     |  |                  | 1,233,000  |   |              |   | 1,094,000  |  
|Other current liabilities                                                                                                                                                                                                                                                                                                                            |  |                  | 5,000      |   |              |   | 96,000     |  
|                                                                                                                                                                                                                                                                                                                                                     |  |                  |            |   |              |   |            |  
|Total current liabilities                                                                                                                                                                                                                                                                                                                            |  |                  | 8,240,000  |   |              |   | 9,725,000  |  
|Deferred tax liability                                                                                                                                                                                                                                                                                                                               |  |                  | 80,000     |   |              |   |           |  
|Series F Convertible Preferred Stock                                                                                                                                                                                                                                                                                                                 |  |                  | 3,629,000  |   |              |   | 3,629,000  |  
|Stockholders equity:                                                                                                                                                                                                                                                                                                                                |  |                  |            |   |              |   |            |  
|Convertible Preferred Stock, $0.01 par value; 1,300,537 shares authorized and 1,298,728 issued at December 31, 2007 and June 30,
2007; 1,090,183 and 1,106,929 outstanding at December 31, 2007 and June 30, 2007, respectively; aggregate liquidation preference of $1,624,000 and $1,704,000 at December 31, 2007 and June 30, 2007, respectively. |  |                  | 11,000     |   |              |   | 11,000     |  
|Common stock, $0.01 par value; 80,000,000 shares authorized; issued and outstanding shares of 16,253,046 at December 31, 2007 and
15,482,036 at June 30, 2007                                                                                                                                                                                        |  |                  | 162,000    |   |              |   | 155,000    |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                                                           |  |                  | 12,779,000 |   |              |   | 12,706,000 |  
|Accumulated deficit                                                                                                                                                                                                                                                                                                                                  |  |                  | (5,308,000 | ) |              |   | (6,652,000 | )
|                                                                                                                                                                                                                                                                                                                                                     |  |                  |            |   |              |   |            |  
|Total stockholders equity                                                                                                                                                                                                                                                                                                                           |  |                  | 7,644,000  |   |              |   | 6,220,000  |  
|                                                                                                                                                                                                                                                                                                                                                     |  |                  |            |   |              |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                                                                                           |  | $                | 19,593,000 |   |              | $ | 19,574,000 |  
|                                                                                                                                                                                                                                                                                                                                                     |  |                  |            |   |              |   |            |  

See accompanying notes.



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##### Table of Contents

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations



|                                            |             |                                 |            |             |  |   |            |  
|------------------------------------------- | ----------- | ------------------------------- | ---------- | ----------- |  | - | ---------- | -
|                                            |             | Three Months Ended December 31, |           
|                                            | 2007        |                                 |            | 2006        | 
|                                            | (unaudited) |                                 |            | (unaudited) | 
|Revenues:                                   |             |                                 |            |             |  |   |            |  
|Product sales                               |             | $                               | 7,365,000  |             |  | $ | 7,266,000  |  
|Service revenue                             |             |                                 | 2,679,000  |             |  |   | 2,346,000  |  
|Commission revenue                          |             |                                 | 2,887,000  |             |  |   | 2,800,000  |  
|                                            |             |                                 |            |             |  |   |            |  
|                                            |             |                                 | 12,931,000 |             |  |   | 12,412,000 |  
|                                            |             |                                 |            |             |  |   |            |  
|Cost of revenue:                            |             |                                 |            |             |  |   |            |  
|Cost of product sales                       |             |                                 | 4,913,000  |             |  |   | 4,506,000  |  
|Cost of service revenue                     |             |                                 | 1,989,000  |             |  |   | 1,736,000  |  
|                                            |             |                                 |            |             |  |   |            |  
|                                            |             |                                 | 6,902,000  |             |  |   | 6,242,000  |  
|                                            |             |                                 |            |             |  |   |            |  
|Gross margin                                |             |                                 | 6,029,000  |             |  |   | 6,170,000  |  
|                                            |             |                                 |            |             |  |   |            |  
|Other operating expenses:                   |             |                                 |            |             |  |   |            |  
|Selling, general and administrative         |             |                                 | 4,728,000  |             |  |   | 5,372,000  |  
|Depreciation and amortization               |             |                                 | 180,000    |             |  |   | 164,000    |  
|                                            |             |                                 |            |             |  |   |            |  
|                                            |             |                                 | 4,908,000  |             |  |   | 5,536,000  |  
|                                            |             |                                 |            |             |  |   |            |  
|Operating income                            |             |                                 | 1,121,000  |             |  |   | 634,000    |  
|                                            |             |                                 |            |             |  |   |            |  
|Other income (expense):                     |             |                                 |            |             |  |   |            |  
|Interest and other income                   |             |                                 | 26,000     |             |  |   | 19,000     |  
|Interest expense                            |             |                                 | (1,000     | )           |  |   | (85,000    | )
|                                            |             |                                 |            |             |  |   |            |  
|                                            |             |                                 | 25,000     |             |  |   | (66,000    | )
|                                            |             |                                 |            |             |  |   |            |  
|Income before income taxes                  |             |                                 | 1,146,000  |             |  |   | 568,000    |  
|Income tax expense                          |             |                                 | 291,000    |             |  |   | 61,000     |  
|                                            |             |                                 |            |             |  |   |            |  
|Net income                                  |             |                                 | 855,000    |             |  |   | 507,000    |  
|Preferred stock dividends                   |             |                                 | (242,000   | )           |  |   | (167,000   | )
|                                            |             |                                 |            |             |  |   |            |  
|Net income available to common stockholders |             | $                               | 613,000    |             |  | $ | 340,000    |  
|                                            |             |                                 |            |             |  |   |            |  
|Earnings per common share, basic            |             | $                               | 0.04       |             |  | $ | 0.02       |  
|                                            |             |                                 |            |             |  |   |            |  
|Earnings per common share, diluted          |             | $                               | 0.04       |             |  | $ | 0.02       |  
|                                            |             |                                 |            |             |  |   |            |  
|Shares used in computation - basic          |             |                                 | 16,194,764 |             |  |   | 13,627,309 |  
|                                            |             |                                 |            |             |  |   |            |  
|Shares used in computation - diluted        |             |                                 | 20,219,220 |             |  |   | 19,261,073 |  
|                                            |             |                                 |            |             |  |   |            |  

See accompanying notes.



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##### Table of Contents

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations



|                                            |             |                               |            |             |  |   |            |  
|------------------------------------------- | ----------- | ----------------------------- | ---------- | ----------- |  | - | ---------- | -
|                                            |             | Six Months Ended December 31, |           
|                                            | 2007        |                               |            | 2006        | 
|                                            | (unaudited) |                               |            | (unaudited) | 
|Revenues:                                   |             |                               |            |             |  |   |            |  
|Product sales                               |             | $                             | 14,619,000 |             |  | $ | 14,520,000 |  
|Service revenue                             |             |                               | 5,503,000  |             |  |   | 4,965,000  |  
|Commission revenue                          |             |                               | 5,226,000  |             |  |   | 4,972,000  |  
|                                            |             |                               |            |             |  |   |            |  
|                                            |             |                               | 25,348,000 |             |  |   | 24,457,000 |  
|                                            |             |                               |            |             |  |   |            |  
|Cost of revenue:                            |             |                               |            |             |  |   |            |  
|Cost of product sales                       |             |                               | 9,859,000  |             |  |   | 9,182,000  |  
|Cost of service revenue                     |             |                               | 4,021,000  |             |  |   | 3,565,000  |  
|                                            |             |                               |            |             |  |   |            |  
|                                            |             |                               | 13,880,000 |             |  |   | 12,747,000 |  
|                                            |             |                               |            |             |  |   |            |  
|Gross margin                                |             |                               | 11,468,000 |             |  |   | 11,710,000 |  
|                                            |             |                               |            |             |  |   |            |  
|Other operating expenses:                   |             |                               |            |             |  |   |            |  
|Selling, general and administrative         |             |                               | 9,349,000  |             |  |   | 10,596,000 |  
|Depreciation and amortization               |             |                               | 354,000    |             |  |   | 335,000    |  
|                                            |             |                               |            |             |  |   |            |  
|                                            |             |                               | 9,703,000  |             |  |   | 10,931,000 |  
|                                            |             |                               |            |             |  |   |            |  
|Operating income                            |             |                               | 1,765,000  |             |  |   | 779,000    |  
|                                            |             |                               |            |             |  |   |            |  
|Other income (expense):                     |             |                               |            |             |  |   |            |  
|Interest and other income                   |             |                               | 50,000     |             |  |   | 31,000     |  
|Interest expense                            |             |                               | (13,000    | )           |  |   | (152,000   | )
|                                            |             |                               |            |             |  |   |            |  
|                                            |             |                               | 37,000     |             |  |   | (121,000   | )
|                                            |             |                               |            |             |  |   |            |  
|Income before income taxes                  |             |                               | 1,802,000  |             |  |   | 658,000    |  
|Income tax expense                          |             |                               | 458,000    |             |  |   | 115,000    |  
|                                            |             |                               |            |             |  |   |            |  
|Net income                                  |             |                               | 1,344,000  |             |  |   | 543,000    |  
|Preferred stock dividends                   |             |                               | (284,000   | )           |  |   | (215,000   | )
|                                            |             |                               |            |             |  |   |            |  
|Net income available to common stockholders |             | $                             | 1,060,000  |             |  | $ | 328,000    |  
|                                            |             |                               |            |             |  |   |            |  
|Earnings per common share, basic            |             | $                             | 0.07       |             |  | $ | 0.02       |  
|                                            |             |                               |            |             |  |   |            |  
|Earnings per common share, diluted          |             | $                             | 0.07       |             |  | $ | 0.02       |  
|                                            |             |                               |            |             |  |   |            |  
|Shares used in computation - basic          |             |                               | 15,994,637 |             |  |   | 13,621,915 |  
|                                            |             |                               |            |             |  |   |            |  
|Shares used in computation - diluted        |             |                               | 20,040,662 |             |  |   | 19,307,760 |  
|                                            |             |                               |            |             |  |   |            |  

See accompanying notes.



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##### Table of Contents

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statement of Stockholders Equity (Unaudited)



|                                                                        |                 |                 |   |              |   |                          |  |            |                    |   |         |       |   |            |   |  |   |            |   |  |   |           |  
|----------------------------------------------------------------------- | --------------- | --------------- | - | ------------ | - | ------------------------ |  | ---------- | ------------------ | - | ------- | ----- | - | ---------- | - |  | - | ---------- | - |  | - | --------- | -
|                                                                        |                 | Preferred Stock |   | Common Stock |   | AdditionalPaid-InCapital |  |            | AccumulatedDeficit |   |         | Total |  
|                                                                        | Number ofShares |                 |   | Par Value    |   | Number ofShares          |  | Par Value  |                    |   |        
|Balance at July 1, 2007                                                 |                 | 1,106,929       |   |              | $ | 11,000                   |  | 15,482,036 |                    | $ | 155,000 |       | $ | 12,706,000 |   |  | $ | (6,652,000 | ) |  | $ | 6,220,000 |  
|Issuance of common stock as compensation                                |                 |                |   |              |   |                         |  | 35,589     |                    |   |        |       |   | 30,000     |   |  |   |           |   |  |   | 30,000    |  
|Issuance of common stock purchased through Employee Stock Purchase Plan |                 |                |   |              |   |                         |  | 51,060     |                    |   |        |       |   | 50,000     |   |  |   |           |   |  |   | 50,000    |  
|Issuance of common stock upon the exercise of stock options             |                 |                |   |              |   |                         |  | 527,924    |                    |   | 5,000   |       |   | 109,000    |   |  |   |           |   |  |   | 114,000   |  
|Conversion of preferred stock into common stock                         |                 | (16,746         | ) |              |   |                         |  | 156,437    |                    |   | 2,000   |       |   | (2,000     | ) |  |   |           |   |  |   |          |  
|Vesting of stock options issued to employees                            |                 |                |   |              |   |                         |  |           |                    |   |        |       |   | 170,000    |   |  |   |           |   |  |   | 170,000   |  
|Preferred stock dividends                                               |                 |                |   |              |   |                         |  |           |                    |   |        |       |   | (284,000   | ) |  |   |           |   |  |   | (284,000  | )
|Net income                                                              |                 |                |   |              |   |                         |  |           |                    |   |        |       |   |           |   |  |   | 1,344,000  |   |  |   | 1,344,000 |  
|                                                                        |                 |                 |   |              |   |                          |  |            |                    |   |         |       |   |            |   |  |   |            |   |  |   |           |  
|Balance at December 31, 2007                                            |                 | 1,090,183       |   |              | $ | 11,000                   |  | 16,253,046 |                    | $ | 162,000 |       | $ | 12,779,000 |   |  | $ | (5,308,000 | ) |  | $ | 7,644,000 |  
|                                                                        |                 |                 |   |              |   |                          |  |            |                    |   |         |       |   |            |   |  |   |            |   |  |   |           |  

See accompanying notes.



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##### Table of Contents

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                            |             |                               |            |      |  |   |             |  
|------------------------------------------------------------------------------------------- | ----------- | ----------------------------- | ---------- | ---- |  | - | ----------- | -
|                                                                                            |             | Six Months Ended December 31, |           
|                                                                                            | 2007        |                               |            | 2006 | 
|                                                                                            | (unaudited) |                              
|Cash flows from operating activities                                                        |             |                               |            |      |  |   |             |  
|Net income                                                                                  |             | $                             | 1,344,000  |      |  | $ | 543,000     |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |             |                               |            |      |  |   |             |  
|Provision for bad debts                                                                     |             |                               | 50,000     |      |  |   | 33,000      |  
|Depreciation and amortization                                                               |             |                               | 354,000    |      |  |   | 335,000     |  
|Non-cash stock compensation expense                                                         |             |                               | 200,000    |      |  |   | 287,000     |  
|Changes in operating assets and liabilities:                                                |             |                               |            |      |  |   |             |  
|Accounts and other receivables                                                              |             |                               | (231,000   | )    |  |   | (2,756,000  | )
|Inventory                                                                                   |             |                               | 152,000    |      |  |   | 72,000      |  
|Prepaid expenses and other current assets                                                   |             |                               | (43,000    | )    |  |   | (18,000     | )
|Other assets                                                                                |             |                               | 10,000     |      |  |   | 21,000      |  
|Accounts payable and accrued expenses                                                       |             |                               | 315,000    |      |  |   | (881,000    | )
|Accrued compensation and related benefits                                                   |             |                               | (425,000   | )    |  |   | 85,000      |  
|Deferred revenue                                                                            |             |                               | 139,000    |      |  |   | 109,000     |  
|Other current liabilities                                                                   |             |                               | (91,000    | )    |  |   | 94,000      |  
|                                                                                            |             |                               |            |      |  |   |             |  
|Net cash provided by (used in) operating activities                                         |             |                               | 1,774,000  |      |  |   | (2,076,000  | )
|                                                                                            |             |                               |            |      |  |   |             |  
|Cash flows from investing activities                                                        |             |                               |            |      |  |   |             |  
|Purchase of property and equipment                                                          |             |                               | (138,000   | )    |  |   | (233,000    | )
|Acquisition of customer list                                                                |             |                               |           |      |  |   | (200,000    | )
|                                                                                            |             |                               |            |      |  |   |             |  
|Net cash used in investing activities                                                       |             |                               | (138,000   | )    |  |   | (433,000    | )
|                                                                                            |             |                               |            |      |  |   |             |  
|Cash flows from financing activities                                                        |             |                               |            |      |  |   |             |  
|Proceeds from borrowings under line-of-credit                                               |             |                               | 1,460,000  |      |  |   | 32,607,000  |  
|Repayments of borrowings under line-of-credit                                               |             |                               | (2,865,000 | )    |  |   | (30,100,000 | )
|Repayments of long-term debt                                                                |             |                               | (18,000    | )    |  |   | (31,000     | )
|Proceeds from sale of common stock to employees and exercise of stock options               |             |                               | 164,000    |      |  |   | 97,000      |  
|Payment of preferred stock dividends                                                        |             |                               | (284,000   | )    |  |   | (215,000    | )
|Change in accounts payable and accrued expenses related to financing                        |             |                               |           |      |  |   | (24,000     | )
|Change in other long-term liabilities                                                       |             |                               |           |      |  |   | (65,000     | )
|                                                                                            |             |                               |            |      |  |   |             |  
|Net cash (used in) provided by financing activities                                         |             |                               | (1,543,000 | )    |  |   | 2,269,000   |  
|                                                                                            |             |                               |            |      |  |   |             |  
|Net change in cash and cash equivalents                                                     |             |                               | 93,000     |      |  |   | (240,000    | )
|Cash and cash equivalents - beginning of period                                             |             |                               | 1,688,000  |      |  |   | 581,000     |  
|                                                                                            |             |                               |            |      |  |   |             |  
|Cash and cash equivalents - end of period                                                   |             | $                             | 1,781,000  |      |  | $ | 341,000     |  
|                                                                                            |             |                               |            |      |  |   |             |  

See accompanying notes.



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##### Table of Contents

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2007



|1. | Basis of Presentation
|-- | ---------------------

Avatech Solutions, Inc. (the
Company) provides design automation and facilities and data management software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions throughout the United
States.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all adjustments (consisting of normal recurring accruals) which are, in
managements opinion, necessary to present a fair statement of results of the interim periods presented. These financial statements should be read in conjunction with the audited financial statements and the notes thereto in the Companys
Annual Report on Form 10-K for the fiscal year ended June 30, 2007. Operating results for the three and six months ended December 31, 2007 are not necessarily indicative of results for the full fiscal year or any future interim period.

The consolidated financial statements include the accounts of Avatech Solutions, Inc. and its majority owned subsidiaries. All intercompany accounts and
transactions between the Company and its consolidated affiliated companies have been eliminated in consolidation.



|2. | Recent Accounting Pronouncements
|-- | --------------------------------

In December 2007, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Revised 2007 (SFAS 141R), Business Combinations. SFAS 141Rs objective is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies prospectively to business combinations for which the acquisition date is on
or after December 15, 2008.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements. SFAS 160s objective is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 shall be effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15,
2008. The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements.



|3. | Employee Stock Compensation Plans
|-- | ---------------------------------

During fiscal year 2006, the
Company adopted Financial Accounting Standards Board Statement No. 123R, Share-Based Payment (Statement 123R), which requires an entity to measure the cost of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. Previously, the Company accounted for stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and
related Interpretations and provided the required pro forma disclosures of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation. On July 1, 2005, the Company elected to adopt the
modified prospective transition method as provided by Statement 123R. Under this transition method, compensation cost recognized during fiscal year 2007 includes (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of July 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all



---

##### Table of Contents

share-based payments granted subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of Statement
123R. The effect of applying Statement 123R was a decrease to net income of $62,000 for the quarter ended December 31, 2007, or less than $0.01 per basic and diluted share. For the six months ended December 31, 2007, the effect of applying
this Statement was $170,000, or less than $0.01 per basic and diluted share.

The Board of Directors may grant options under the Avatech Solutions, Inc.
2002 Stock Option Plan to purchase shares of the Companys common stock at an exercise price of not less than the fair market value of the common stock on the date of grant. The plan provides for the granting of either incentive or
non-qualified stock options to purchase an aggregate of up to 3,100,000 shares of common stock to eligible employees, officers, and directors of the Company. Stock options generally have a maximum term of 10 years. Options generally vest ratably
over three or four years, depending on the specific grant award. Pursuant to its Board compensation plan, for the three and six months ended December 31, 2007, the Company issued 16,806 and 35,589 shares, respectively, of fully vested common
stock to members of the Board of Directors under the Companys Restricted Stock Award Plan, with an aggregate market value of $14,000 and $30,000, respectively. For the three months and six months ended December 31, 2007 and 2006, total
stock compensation expense charged against income for these plans was $76,000 and $200,000, and $153,000 and $287,000 respectively.

The minimum value
method calculates the fair value of options as the excess of the estimated fair value of the underlying stock at the date of grant over the present value of both the exercise price and the expected dividend payments, each discounted at the risk-free
rate, over the expected life of the option. For all stock options granted prior to November 19, 2002, the date the Companys common stock became publicly traded and had a readily determinable market value, the Company used the minimum
value method to calculate pro forma stock compensation expense. For all stock options granted after this date, the Company used the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for estimating the fair
value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Companys
stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock-based awards.

The following are the assumptions made in computing the fair
value of stock-based awards:



|                                               |      |                                |          |      |                              |   |           |   |  |      |           |   |  |   |           |  
|---------------------------------------------- | ---- | ------------------------------ | -------- | ---- | ---------------------------- | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                               |      | Three months endedDecember 31, |          |      | Six months endedDecember 31, |  
|                                               | 2007 |                                |          | 2006 |                              |   | 2007      |   |  | 2006 |          
|Average risk-free interest rate                |      |                                | 4.34     | %    |                              |   | 4.57      | % |  |      | 4.26      | % |  |   | 4.62      | %
|Dividend yield                                 |      |                                | 0        | %    |                              |   | 0         | % |  |      | 0         | % |  |   | 0         | %
|Expected term                                  |      |                                | 10 years |      |                              |   | 5.8 years |   |  |      | 8.4 years |   |  |   | 5.9 years |  
|Average expected volatility                    |      |                                | 0.95     |      |                              |   | 1.03      |   |  |      | 0.96      |   |  |   | 1.05      |  
|Weighted average fair value of granted options |      | $                              | 0.80     |      |                              | $ | 1.29      |   |  | $    | 0.75      |   |  | $ | 1.39      |  

Expected volatilities are based on historical volatility of the Companys common stock. The expected term of
options granted represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of stock option activity
during the six months ended December 31, 2007 and related information is included in the table below:



|                                            |  |           |   |  |                                |      |                         |   |        
|------------------------------------------- |  | --------- | - |  | ------------------------------ | ---- | ----------------------- | - | -------
|                                            |  | Options   |   |  | Weighted-AverageExercise Price |      | AggregateIntrinsicValue
|Outstanding at July 1, 2007                 |  | 1,625,301 |   |  | $                              | 0.93 |                         |   |        
|Granted                                     |  | 597,000   |   |  |                                | 0.84 |                         |   |        
|Exercised                                   |  | (527,924  | ) |  |                                | 0.22 |                         |   |        
|Forfeited                                   |  | (43,267   | ) |  |                                | 1.44 |                         |   |        
|                                            |  |           |   |  |                                |      |                         |   |        
|Outstanding at December 31, 2007            |  | 1,651,110 |   |  | $                              | 1.12 |                         | $ | 281,000
|                                            |  |           |   |  |                                |      |                         |   |        
|Exercisable at December 31, 2007            |  | 898,733   |   |  | $                              | 1.19 |                         | $ | 234,000
|                                            |  |           |   |  |                                |      |                         |   |        
|Weighted-average remaining contractual life |  | 7.4 Years |   |  |                                |      |                         |   |        
|                                            |  |           |   |  |                                |      |                         |   |        



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##### Table of Contents

The weighted average grant date fair value of options granted during the quarter ended December 31, 2007 was $0.84
per share. All options granted have an exercise price equal to the fair market value of the Companys common stock on the date of grant. Exercise prices for options outstanding as of December 31, 2007 ranged from $0.17 to $63.33 as
follows:



|                        |              |                    |           |                                                    |   |                                                               |  |                    |  |                                                    |  |                                                               |      |  |          
|----------------------- | ------------ | ------------------ | --------- | -------------------------------------------------- | - | ------------------------------------------------------------- |  | ------------------ |  | -------------------------------------------------- |  | ------------------------------------------------------------- | ---- |  | ---------
|Range of ExercisePrices |              | OptionsOutstanding |           | WeightedAverageExercisePrices ofOptionsOutstanding |   | WeightedAverageRemainingContractual Lifeof OptionsOutstanding |  | OptionsExercisable |  | WeightedAverageExercisePrices ofOptionsExercisable |  | WeightedAverageRemainingContractual Lifeof OptionsExercisable
|$                       | 0.17  0.34  |                    | 116,153   |                                                    | $ | 0.29                                                          |  | 5.9 years          |  | 116,153                                            |  | $                                                             | 0.29 |  | 5.9 years
|                        | 0.35  0.91  |                    | 1,056,000 |                                                    |   | 0.77                                                          |  | 8.4 years          |  | 518,583                                            |  |                                                               | 0.67 |  | 7.0 years
|                        | 1.05  63.33 |                    | 478,957   |                                                    |   | 2.09                                                          |  | 8.2 years          |  | 263,997                                            |  |                                                               | 2.59 |  | 7.9 years
|                        |              |                    |           |                                                    |   |                                                               |  |                    |  |                                                    |  |                                                               |      |  |          
|                        |              |                    | 1,651,110 |                                                    |   |                                                               |  |                    |  | 898,733                                            |  |                                                               |      |  |          
|                        |              |                    |           |                                                    |   |                                                               |  |                    |  |                                                    |  |                                                               |      |  |          

Assuming that no additional share-based payments are granted after December 31, 2007, unamortized stock
compensation expense of $594,000 will be recognized in the statement of operations over a weighted average period of 3.1 years.



|4. | Borrowings Under Line-of-Credit
|-- | -------------------------------

The Company
maintains a line of credit from a bank which provides for up to $5 million of borrowings limited to 80% of the Companys aggregate eligible accounts receivable. The loan bears interest at a rate tied to the banks prime rate and will
decrease as the Companys aggregate net worth increases. The interest rate ranges from the banks prime rate plus two percent to a low of the banks prime rate plus 0.25% when the Companys net worth exceeds $4,000,000 at the end
of a fiscal quarter. The interest rate as of December 31, 2007 was the banks prime rate plus one-half percent (1/2 %), or 7.75%.The loan has a December 31, 2008 expiration date and is secured by all of the Companys
assets, except inventory.

The aggregate outstanding borrowings from the bank under this credit line were $3,000 and $1,408,000 at December 31, 2007
and June 30, 2007, respectively.



|5. | Current Portion of Long-Term Debt
|-- | ---------------------------------

The Company entered into two
loans in connection with its April 2005 acquisition of Comtrex Corporation which totaled $13,000 as of December 31, 2007. Such debt is classified as a current liability because it is due within one year.



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##### Table of Contents

|6. | Income Taxes
|-- | ------------

Income tax expense during the six months ended
December 31, 2007 includes both federal and state income taxes, after adjusting for available net operating loss carryforwards from prior years. Income tax expense during the six months ended December 30, 2006 relates to the recordation of
state income taxes and a federal alternative minimum tax provision as a result of the Companys profitable results. The Company has net operating loss carryforwards which will be used to offset some of its taxable income during fiscal year
2008. A portion of the federal net operating loss carryforwards is subject to an annual limit under Section 382 of the Internal Revenue Code. For all periods presented, valuation allowances have been provided for the full amount of all net
deferred tax assets.



|7. | Earnings Per Share
|-- | ------------------

Basic earnings per common share is computed as
net earnings available to common stockholders divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share includes the potential dilution that would occur from common shares issuable upon the
exercise of outstanding stock options and warrants and the conversion of preferred stock. As of December 31, 2007, 8,929,514 shares of common stock were issuable upon the conversion or exercise of options, warrants and preferred stock. For the
three and six months ended December 31, 2007, there were 4,905,059 shares of common stock equivalents excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

The following summarizes the computations of basic and diluted earnings per common share for the three and six months ended December 31, 2007 and 2006:



|                                               |      |                                 |            |      |  |   |            |  
|---------------------------------------------- | ---- | ------------------------------- | ---------- | ---- |  | - | ---------- | -
|                                               |      | Three Months Ended December 31, |           
|                                               | 2007 |                                 |            | 2006 | 
|Numerator:                                     |      |                                 |            |      |  |   |            |  
|Net income                                     |      | $                               | 855,000    |      |  | $ | 507,000    |  
|Less: preferred stock dividends                |      |                                 | (242,000   | )    |  |   | (167,000   | )
|                                               |      |                                 |            |      |  |   |            |  
|Net income available to common stockholders    |      | $                               | 613,000    |      |  | $ | 340,000    |  
|                                               |      |                                 |            |      |  |   |            |  
|Denominator:                                   |      |                                 |            |      |  |   |            |  
|Weighted average shares outstanding - basic    |      |                                 | 16,194,764 |      |  |   | 13,627,309 |  
|                                               |      |                                
|Assumed conversion of dilutive preferred stock |      |                                 | 3,660,244  |      |  |   | 4,192,708  |  
|Effect of outstanding dilutive stock options   |      |                                 | 234,123    |      |  |   | 1,072,796  |  
|Effect of outstanding dilutive stock warrants  |      |                                 | 130,089    |      |  |   | 368,260    |  
|                                               |      |                                 |            |      |  |   |            |  
|Weighted average shares outstanding - diluted  |      |                                 | 20,219,220 |      |  |   | 19,261,073 |  
|                                               |      |                                 |            |      |  |   |            |  
|Earnings per common share - basic              |      | $                               | 0.04       |      |  | $ | 0.02       |  
|                                               |      |                                 |            |      |  |   |            |  
|Earnings per common share - diluted            |      | $                               | 0.04       |      |  | $ | 0.02       |  
|                                               |      |                                 |            |      |  |   |            |  
|                                               |     
|                                               |      | Six Months Ended December 31,   |           
|                                               | 2007 |                                 |            | 2006 | 
|Numerator:                                     |      |                                 |            |      |  |   |            |  
|Net income                                     |      | $                               | 1,344,000  |      |  | $ | 543,000    |  
|Less: preferred stock dividends                |      |                                 | (284,000   | )    |  |   | (215,000   | )
|                                               |      |                                 |            |      |  |   |            |  
|Net income available to common stockholders    |      | $                               | 1,060,000  |      |  | $ | 328,000    |  
|                                               |      |                                 |            |      |  |   |            |  
|Denominator:                                   |      |                                 |            |      |  |   |            |  
|Weighted average shares outstanding - basic    |      |                                 | 15,994,637 |      |  |   | 13,621,915 |  
|                                               |      |                                
|Assumed conversion of dilutive preferred stock |      |                                 | 3,660,244  |      |  |   | 4,192,708  |  
|Effect of outstanding dilutive stock options   |      |                                 | 249,717    |      |  |   | 1,112,966  |  
|Effect of outstanding dilutive stock warrants  |      |                                 | 136,064    |      |  |   | 380,171    |  
|                                               |      |                                 |            |      |  |   |            |  
|Weighted average shares outstanding - diluted  |      |                                 | 20,040,662 |      |  |   | 19,307,760 |  
|                                               |      |                                 |            |      |  |   |            |  
|Earnings per common share - basic              |      | $                               | 0.07       |      |  | $ | 0.02       |  
|                                               |      |                                 |            |      |  |   |            |  
|Earnings per common share - diluted            |      | $                               | 0.07       |      |  | $ | 0.02       |  
|                                               |      |                                 |            |      |  |   |            |  



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##### Table of Contents

|8. | Liquidity and Capital Resources
|-- | -------------------------------

The Companys operations have
continued to improve during this fiscal year and it has generated sufficient capital to further strengthen its balance sheet. As a result, as of December 31, 2007, stockholders equity was $7,644,000. Based on an evaluation of likely cash
to be generated from operations and other available capital resources, management believes that it has sufficient sources of working capital to fund its operations in the normal course of business.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN
THIS REPORT.

This report contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995.
Readers of this report should be aware of the speculative nature of forward-looking statements. Statements that are not historical in nature, including those that include the words anticipate, estimate,
should, expect, believe, intend, and similar expressions, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and
they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic,
market, or business conditions; changes in interest rates, the cost of funds, and demand for the Companys products and services; changes in the Companys competitive position or competitive actions by other companies; the Companys
ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond the Companys control. Consequently, all of the forward-looking statements made in this report are
qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. These and other risk
factors are discussed in detail the Companys periodic reports that it files with the Securities and Exchange Commission (the SEC) (see Item 1A of Part II of this report for further information). Except as required by
applicable laws, the Company does not intend to publish updates or revisions of any forward-looking statements to reflect new information, future events or otherwise.

Overview

Avatech is a leading provider of design automation and data management solutions for the
manufacturing, building design, engineering, and total infrastructure and facilities management markets. The Company specializes in technical support, training, and consulting aimed at improving design and documentation efficiencies and the seamless
integration of workflow processes. These technology solutions enable its customers to enhance productivity, profitability, and competitive position. Avatech is one of the largest Autodesk software integrators worldwide and a leading provider of
engineering document management solutions.

The Companys business strategy is built on three core principles designed to leverage its
existing strengths with expected market opportunities:



| |  |  | Maintain and profitably grow its strong position in the Autodesk software economy.
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Profitably grow its consulting and services business by leveraging its expertise in design engineering.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Acquire and integrate diverse, yet complementary, software and services businesses to extend its product offerings to its large customer base and expand its market
potential.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This strategy was designed to match the Companys product and service offerings more precisely with the needs of its
customers.

Product Sales- Product sales consist primarily of the resale of packaged design software, including:



| |  |  | Autodesk design automation software for mechanical, architectural and civil engineering sectors and the Discreet product line for animation;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

| |  |  | Autodesk data management software; and
| | - |  | --------------------------------------



| |  |  | Archibus facilities management software for space planning, strategic planning, and lease/property administration.
| | - |  | ------------------------------------------------------------------------------------------------------------------

Product sales also include Leica 3D laser scanning equipment for the Architectural, Engineering and Construction sector.

The Company also offers Autodesks subscription programs, which entitle subscribers to receive software upgrades, web support and eLearning lessons
directly from Autodesk. Because subscribers do not participate in the delivery of these subscription products or the web support and eLearning lesson benefits, Avatech records the gross profit from the sale of Autodesk software subscriptions as
commission revenue. Approximately 91% of the Companys total product revenue is related to the resale of Autodesk products.

Service Revenue- Avatech provides services in the form of training, consulting services, software development, and technical support to its customers. Avatech employs a technical staff of approximately 98 personnel associated with
these types of services.

Commission Revenue- The Company generates commission revenue from the resale of Autodesk software to
various customers, a number of which Autodesk considers major accounts. Autodesk designates these customers as major accounts based on specific criteria, primarily sales volume, and typically gives these customers volume discounts. The
Company is responsible for managing and reselling Autodesk products to a number of these major account customers; however, software products are shipped directly from Autodesk to the customers. Avatech receives commissions upon shipment of the
products from Autodesk to the customer based on the product sales price. In addition, the Company sells technology upgrades to existing Autodesk customers through the Autodesk Subscription program where the customers receive the latest releases of
Autodesk software, incremental product enhancements, personalized web support direct from Autodesk technical experts, and self-paced training to help extend its customers skills. Based on the Companys analysis of the Autodesk
Subscription program, it records the net proceeds that it receives from Autodesk for subscription sales in accordance with the provisions of EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.

Cost of Product Sales- The cost of product sales consists of the cost of purchasing products from software suppliers or hardware manufacturers as
well as the associated shipping and handling costs.

Cost of Service Revenue- Cost of service revenue includes the direct costs
associated with the implementation of software and hardware solutions as well as training, support services, and professional services. These costs consist primarily of compensation, benefits, travel, and the costs of third-party contractors engaged
by the Company. The cost of service revenue does not include an allocation of overhead costs.

Selling, General and Administrative
Expense- Selling, general and administrative expense consist primarily of compensation and other expenses associated with the Companys sales force, management, finance, human resources, and information systems. Advertising and public
relations expenses and expenses for facilities, such as rent and utilities, are also included in selling, general and administrative expenses.

Depreciation and Amortization Expense- Depreciation and amortization expenses represent the period costs associated with our investment in property and equipment, consisting principally of computer equipment, software, furniture and
fixtures, and leasehold improvements. The Company computes depreciation and amortization expenses using the straight-line method. The Company leases all of its facilities and depreciates leasehold improvements over the lesser of the lease term or
the estimated useful life of the asset.

Interest Expense- Interest expense consists primarily of interest on a revolving line of
credit.



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##### Table of Contents

Three Months Ended December 31, 2007 Compared to the Three Months Ended December 31, 2006

The following tables set forth a comparison of the Companys results of operations for the three-month period ended December 31, 2007 to the
three month period ended December 31, 2006. The amounts are derived from selected items reflected in our unaudited Consolidated Statements of Operations included elsewhere in this report. These financial results are not necessarily indicative
of future results.

Revenues



|                   |  |                                 |            |      |   |            |  |      |  
|------------------ |  | ------------------------------- | ---------- | ---- | - | ---------- |  | ---- | -
|                   |  | Three Months Ended December 31, |           
|                   |  | 2007                            |            | 2006 |   | %increase  | 
|Revenues:          |  |                                 |            |      |   |            |  |      |  
|Product sales      |  | $                               | 7,365,000  |      | $ | 7,266,000  |  | 1.4  | %
|Service revenue    |  |                                 | 2,679,000  |      |   | 2,346,000  |  | 14.2 | %
|Commission revenue |  |                                 | 2,887,000  |      |   | 2,800,000  |  | 3.1  | %
|                   |  |                                 |            |      |   |            |  |      |  
|Total revenues     |  | $                               | 12,931,000 |      | $ | 12,412,000 |  | 4.2  | %
|                   |  |                                 |            |      |   |            |  |      |  

Revenues. Total revenues for the three months ended December 31, 2007 increased
$519,000 or 4.2% when compared to the same period in the prior fiscal year.

Product sales increased 1.4% when compared to the same period
in the prior fiscal year despite a smaller number of sales professionals employed by the Company and a weakening national economy. The increased productivity is attributed to a more experienced sales force and sales management team. The Company is
executing on its operating plan for fiscal year 2008 which provides for greater emphasis on returning to profitability coupled with moderate revenue growth.

Service revenue showed continued growth, consistent with the Companys operating plan, increasing by $333,000, or 14.2%, for the three months ended December 31, 2007 when compared to the same period in the
prior fiscal year. The continued growth in services revenue resulted from a market driven need for additional services associated with upgrading to higher end vertical and 3D software products.

Commission revenue increased by 3.1%, or $87,000, for the three months ended December 31, 2007 when compared to the same period in the prior fiscal
year, the result of improved sales techniques for subscription contract renewals.

Cost of Revenues and Gross Margin



|                        |  |                                 |           |      |   |           |  |      |  
|----------------------- |  | ------------------------------- | --------- | ---- | - | --------- |  | ---- | -
|                        |  | Three Months Ended December 31, |          
|                        |  | 2007                            |           | 2006 |   | %increase | 
|Cost of revenue:        |  |                                 |           |      |   |           |  |      |  
|Cost of product sales   |  | $                               | 4,913,000 |      | $ | 4,506,000 |  | 9.0  | %
|Cost of service revenue |  |                                 | 1,989,000 |      |   | 1,736,000 |  | 14.6 | %
|                        |  |                                 |           |      |   |           |  |      |  
|Total cost of revenue   |  | $                               | 6,902,000 |      | $ | 6,242,000 |  | 10.6 | %
|                        |  |                                 |           |      |   |           |  |      |  
|Gross margin            |  | $                               | 6,029,000 |      | $ | 6,170,000 |  |      |  
|                        |  |                                 |           |      |   |           |  |      |  

Cost of revenue. The total cost of revenue increased $660,000, or 10.6%, for the three
months ended December 31, 2007 when compared to the same period in the prior fiscal year.

Cost of product sales increased 9.0% while
product sales increased only 1.4% during the three months ended December 31, 2007 as compared with the same period the prior fiscal year. Product costs increased at a higher rate than product revenues due to changes in costs and incentive plans
made by the Companys principal supplier, Autodesk. The Company continues to improve its sales strategies and has increased its gross margin rate on products from 31.8% for the three months ended September 30, 2007 to 32.6 % for the
current fiscal quarter.



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##### Table of Contents

Cost of service revenue increased $253,000, or 14.6%, for the three months ended December 31, 2007
when compared to the same period in the prior fiscal year, while service revenues increased $333,000 or 14.2%. Cost of service revenue as a percentage of related revenue remained nearly flat at 74.2% versus 74.0% during the three months ended
December 31, 2007 when compared to the same period in the prior fiscal year. Service revenue per person increased this quarter over the same quarter last year, the result of a more experienced services team and greater management focus on
improving such productivity.

Gross margin. For the previously stated reasons, the Companys gross margin percentage decreased
to 46.6% for the three months ended December 31, 2007 as compared to 49.7% for the same period in the prior fiscal year.

Other Operating Expenses



|                                    |  |                                 |           |      |   |           |  |       |   
|----------------------------------- |  | ------------------------------- | --------- | ---- | - | --------- |  | ----- | --
|                                    |  | Three Months Ended December 31, |          
|                                    |  | 2007                            |           | 2006 |   | %increase | 
|Other operating expenses:           |  |                                 |           |      |   |           |  |       |   
|Selling, general and administrative |  | $                               | 4,728,000 |      | $ | 5,372,000 |  | (12.0 | )%
|Depreciation and amortization       |  |                                 | 180,000   |      |   | 164,000   |  | 9.8   | % 
|                                    |  |                                 |           |      |   |           |  |       |   
|Total other operating expenses      |  | $                               | 4,908,000 |      | $ | 5,536,000 |  | (11.3 | )%
|                                    |  |                                 |           |      |   |           |  |       |   

Selling, General and Administrative Expense. Selling, general and administrative expenses
decreased $644,000, or 12.0%, for the three months ended December 31, 2007 when compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of the total revenues was 36.6% for the three months
ended December 31, 2007, down from 43.3% for the same period in the prior fiscal year. The decrease in selling, general and administrative expenses is the result of cost-cutting initiatives which occurred during the fourth quarter of fiscal
year 2007 including a reduction in executive and senior management positions, two office closings, and elimination of non-critical positions.

Depreciation and Amortization. Depreciation and amortization expenses increased $16,000, or 9.8%, for the three months ended December 31, 2007 when compared to the same period in the prior fiscal year as a result of purchases of
fixed assets.

Other Income (Expense)



|                             |  |                                 |        |   |      |   |         |           |  |        |   
|---------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------- | --------- |  | ------ | --
|                             |  | Three Months Ended December 31, |       
|                             |  | 2007                            |        |   | 2006 |   |         | %increase | 
|Other income (expense):      |  |                                 |        |   |      |   |         |           |  |        |   
|Interest and other income    |  | $                               | 26,000 |   |      | $ | 19,000  |           |  | 36.8   | % 
|Interest expense             |  |                                 | (1,000 | ) |      |   | (85,000 | )         |  | (98.8  | )%
|                             |  |                                 |        |   |      |   |         |           |  |        |   
|Total other income (expense) |  | $                               | 25,000 |   |      | $ | (66,000 | )         |  | (137.9 | )%
|                             |  |                                 |        |   |      |   |         |           |  |        |   

Other Income (Expense). The Company earned $25,000 in other income during the three months
ended December 31, 2007 compared to $66,000 in other expense during the same period in the prior fiscal year. The Companys positive cash flow in recent quarters has resulted in minimal use of its line of credit and positive cash balances
which the Company invests in overnight interest-earning accounts. During the same period in the prior fiscal year, the Company borrowed more against its line of credit, and earned substantially less interest due to its lower average cash balances.



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##### Table of Contents

Income Tax Expense



|                   |  |                                 |         |      |   |           |  |       |  
|------------------ |  | ------------------------------- | ------- | ---- | - | --------- |  | ----- | -
|                   |  | Three Months Ended December 31, |        
|                   |  | 2007                            |         | 2006 |   | %increase | 
|Income tax expense |  | $                               | 291,000 |      | $ | 61,000    |  | 377.0 | %
|                   |  |                                 |         |      |   |           |  |       |  

Income Tax Expense. The Company recorded a tax provision of $291,000 during the three
months ended December 31, 2007, a 377% increase over the $61,000 recorded for the same period in the prior fiscal year, the result of increased income before income taxes and limitations on the utilization of its operating loss carryforwards.
During fiscal year 2007, the Companys net income was fully offset by federal net operating losses, and the Companys tax provision was necessary for federal alternative minimum tax as well as state and local income taxes.

The Company has approximately $1.8 million of federal net operating loss carryforwards available for the remainder of fiscal year 2008 and beyond.
However, $1.3 million of the carryforwards is subject to a $91,000 annual limitation under Internal Revenue Code Section 382. Due to this annual limitation, the Company expects that its net income will exceed its available net operating loss
carryforwards in fiscal year 2008.

Additionally, the Company has deferred tax assets which are fully offset by a valuation allowance due
to the uncertainty that such assets will be realized. As the Company continues to demonstrate its ability to consistently earn net income, some portion of the deferred tax asset valuation allowance may need to be reversed in future periods. The
Company will continue to evaluate the likelihood of this asset being realized and will adjust the valuation allowance when circumstances warrant its recordation.

Six Months Ended December 31, 2007 Compared to the Six Months Ended December 31, 2006

The following tables set
forth a comparison of the Companys results of operations for the six month period ended December 31, 2007 to the six month period ended December 31, 2006. The amounts are derived from selected items reflected in our unaudited
Consolidated Statements of Operations included elsewhere in this report. The six months financial results are not necessarily indicative of future results.

Revenues



|                   |  |                               |            |      |   |            |  |      |  
|------------------ |  | ----------------------------- | ---------- | ---- | - | ---------- |  | ---- | -
|                   |  | Six Months Ended December 31, |           
|                   |  | 2007                          |            | 2006 |   | %          | 
|Revenues:          |  |                               |            |      |   |            |  |      |  
|Product sales      |  | $                             | 14,619,000 |      | $ | 14,520,000 |  | 0.7  | %
|Service revenue    |  |                               | 5,503,000  |      |   | 4,965,000  |  | 10.8 | %
|Commission revenue |  |                               | 5,226,000  |      |   | 4,972,000  |  | 5.1  | %
|                   |  |                               |            |      |   |            |  |      |  
|Total revenues     |  | $                             | 25,348,000 |      | $ | 24,457,000 |  | 3.6  | %
|                   |  |                               |            |      |   |            |  |      |  

Revenues. Total revenues for the six months ended December 31, 2007 increased $891,000
or 3.6% when compared to the same period in the prior fiscal year.

Product sales increased 0.7% when compared to the same period in the
prior fiscal year despite a smaller number of sales professionals employed by the Company and a weakening national economy. The increased productivity is attributed to a more experienced sales force and sales management team. The Company is
executing on its operating plan for fiscal year 2008 which provides for greater emphasis on returning to profitability coupled with moderate revenue growth. Product sales grew at a lower rate than commission revenue, due to customers transitioning
from buying new upgraded software to subscriptions contracts which provide access to all product upgrades during the subscription period and are classified as commission revenue on the Companys income statement.



---

##### Table of Contents

Service revenue showed continued growth, consistent with the Companys operating plan, increasing by
$538,000, or 10.8%, for the six months ended December 31, 2007 when compared to the same period in the prior fiscal year. The continued growth in services revenue resulted from a market driven need for additional services associated with
upgrading to higher end vertical and 3D software products.

Commission revenue increased by 5.1%, or $254,000, for the six months ended
December 31, 2007 when compared to the same period in the prior fiscal year, due to improved sales techniques for subscription contract renewals, as well as the transition of existing software customers to subscription contracts as previously
described.

Cost of Revenues and Gross Margin



|                        |      |                               |            |  |   |            |  |      |  
|----------------------- | ---- | ----------------------------- | ---------- |  | - | ---------- |  | ---- | -
|                        |      | Six Months Ended December 31, |           
|                        | 2007 |                               | 2006       |  | % |           
|Cost of revenue:        |      |                               |            |  |   |            |  |      |  
|Cost of product sales   |      | $                             | 9,859,000  |  | $ | 9,182,000  |  | 7.4  | %
|Cost of service revenue |      |                               | 4,021,000  |  |   | 3,565,000  |  | 12.8 | %
|                        |      |                               |            |  |   |            |  |      |  
|Total cost of revenue   |      | $                             | 13,880,000 |  | $ | 12,747,000 |  | 8.9  | %
|                        |      |                               |            |  |   |            |  |      |  
|Gross margin            |      | $                             | 11,468,000 |  | $ | 11,710,000 |  |      |  
|                        |      |                               |            |  |   |            |  |      |  

Costs of revenue. Total cost of revenue increased $1,133,000, or 8.9%, for the six months
ended December 31, 2007 as compared to the same period in the prior fiscal year.

Cost of product sales increased 7.4% while product
sales increased only 0.7% during the six months ended December 31, 2007 when compared with the same period the prior fiscal year. Product costs increased at a higher rate than product revenues due to changes in costs and incentive plans made by
the Companys principal supplier, Autodesk.

Cost of service revenue increased $456,000, or 12.8%, for the six months ended
December 31, 2007 when compared to the same period in the prior fiscal year, while service revenues increased $538,000 or 10.8%. Cost of service revenue as a percentage of related revenue increased to 73.1% versus 71.8% during the six months
ended December 31, 2007 when compared to the same period in the prior fiscal year. The Company received funds from its principal supplier to offset the cost of newly hired services personnel during the six months ended December 31, 2006
but there were no such funds during the same period of the current fiscal year 2008, and this was the primary reason for the increased services cost. Service revenue per person increased during the six months ended December 31, 2007 over the
same period last year, the result of a more experienced services team and greater management focus on improving such productivity.

Gross margin. For the previously-stated reasons, the Companys gross margin percentage decreased from 47.9% for the six months ended December 31, 2006 to 45.2% for the same period in the current fiscal year.

Other Operating Expenses



|                                    |      |                               |           |  |   |            |  |       |   
|----------------------------------- | ---- | ----------------------------- | --------- |  | - | ---------- |  | ----- | --
|                                    |      | Six Months Ended December 31, |          
|                                    | 2007 |                               | 2006      |  | % |           
|Other operating expenses:           |      |                               |           |  |   |            |  |       |   
|Selling, general and administrative |      | $                             | 9,349,000 |  | $ | 10,596,000 |  | (11.8 | )%
|Depreciation and amortization       |      |                               | 354,000   |  |   | 335,000    |  | 5.7   | % 
|                                    |      |                               |           |  |   |            |  |       |   
|Total other operating expenses      |      | $                             | 9,703,000 |  | $ | 10,931,000 |  | (11.2 | )%
|                                    |      |                               |           |  |   |            |  |       |   

Selling, General and Administrative Expense. Selling, general and administrative expenses
decreased $1,247,000, or 11.8%, for the six months ended December 31, 2007 when compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of the total revenues was



---

##### Table of Contents

36.9% for the six months ended December 31, 2007, down from 43.3% for the same period in the prior fiscal year. The decrease in selling, general and
administrative expenses is the result of cost cutting initiatives which occurred during the fourth quarter of fiscal year 2007 including a reduction in executive and senior management positions, two office closings, and elimination of non-critical
positions.

Depreciation and Amortization. Depreciation and amortization expenses increased $19,000, or 5.7%, for the six months
ended December 31, 2007 when compared to the same period in the prior fiscal year as a result of purchases of fixed assets.

Other income (expense)



|                             |      |                               |         |      |  |   |          |   |  |        |   
|---------------------------- | ---- | ----------------------------- | ------- | ---- |  | - | -------- | - |  | ------ | --
|                             |      | Six Months Ended December 31, |        
|                             | 2007 |                               |         | 2006 |  |   | %        |  
|Other income (expense):      |      |                               |         |      |  |   |          |   |  |        |   
|Interest and other income    |      | $                             | 50,000  |      |  | $ | 31,000   |   |  | 61.3   | % 
|Interest expense             |      |                               | (13,000 | )    |  |   | (152,000 | ) |  | (91.4  | )%
|                             |      |                               |         |      |  |   |          |   |  |        |   
|Total other income (expense) |      | $                             | 37,000  |      |  | $ | (121,000 | ) |  | (130.6 | )%
|                             |      |                               |         |      |  |   |          |   |  |        |   

Other Income (Expense). The Company earned $37,000 in other income during the six months
ended December 31, 2007 compared to $121,000 in other expense during the same period in the prior fiscal year. The Companys positive cash flow in recent quarters has resulted in minimal use of its line of credit and positive cash balances
which the Company invests in overnight interest-earning accounts. During the same period in the prior fiscal year, the Company borrowed more against its line of credit, and earned substantially less interest due to its lower average cash balances.

Income tax expense



|                   |      |                               |         |  |   |         |  |       |  
|------------------ | ---- | ----------------------------- | ------- |  | - | ------- |  | ----- | -
|                   |      | Six Months Ended December 31, |        
|                   | 2007 |                               | 2006    |  | % |        
|Income tax expense |      | $                             | 458,000 |  | $ | 115,000 |  | 298.3 | %
|                   |      |                               |         |  |   |         |  |       |  

Income Tax Expense. The Company recorded a tax provision of $458,000 during the six months
ended December 31, 2007, a 298% increase over the $115,000 recorded for the same period in the prior fiscal year, the result of increased income before income taxes and limitations on the utilization of its operating loss carryforwards.

The Company has approximately $1.8 million of federal net operating loss carryforwards available for the remainder of fiscal year 2008 and
beyond. However, $1.3 million of the carryforwards is subject to a $91,000 annual limitation under Internal Revenue Code Section 382. Due to this annual limitation, the Company expects that its net income will exceed its available net operating
loss carryforwards in fiscal year 2008.

Additionally, the Company has deferred tax assets which are fully offset by a valuation allowance
due to the uncertainty that such assets will be realized. As the Company continues to demonstrate its ability to consistently earn net income, some portion of the deferred tax asset valuation allowance may need to be reversed in future periods. The
Company will continue to evaluate the likelihood of this asset being realized and will adjust the valuation allowance when circumstances warrant its recordation.

Liquidity and Capital Resources

Historically, the Company has financed its operations and met its capital expenditure
requirements primarily through cash flows provided by operations, borrowings under short-term and long-term debt arrangements, and sales of its securities.

The Companys operating assets and liabilities consist primarily of accounts receivable, inventory and accounts payable. Changes in these balances are affected principally by the timing of sales and investments
in inventory based on expected customer demand. The Company attempts to minimize inventory levels through arrangements with suppliers to ship products with an average delivery period of



---

##### Table of Contents

two days and centralized inventory management but has increased inventories at times to take advantage of special pricing and rebates offered by its main
supplier. The Company purchases approximately 90% of its product from one principal supplier which provides $4 million of available credit to finance those purchases.

The Companys investing activities consist principally of investments in computer and office equipment. For the six months ended December 31, 2006, this balance also included payments made to acquire the
customer list of Sterling Systems. Capital expenditures for the six months ended December 31, 2007 were approximately $138,000, compared to $433,000 for the same period in 2006.

For the six months ended December 31, 2007, net cash provided by operating activities was $1,774,000, an increase in cash and cash equivalents of
$3,850,000 over the same period in 2006. The major difference between the periods were net income of $1,344,000 for the quarter ended December 31, 2007 as compared to $543,000 for the same quarter of the prior year and a $231,000 increase in
the Companys accounts and other receivables for the six months ended December 31, 2007 versus $2,756,000 for the same period in 2006. The accounts receivable balance has remained steady due to improved collections experience.

For the six months ended December 31, 2007, the Company used $1,543,000 in financing activities due to repayments made on borrowings drawn
against the line of credit as compared to being provided $2,269,000 of cash for the same period in 2006. For the period ended December 31, 2006, the Company obtained $2,507,000 in net proceeds from the line of credit.

The Company maintains the line of credit from a bank which provides for up to $5 million of borrowings limited to 80% of the Companys aggregate
eligible accounts receivable. The loan bears interest at a rate tied to the banks prime rate adjusted for changes in the Companys capital structure. The interest rate ranges from the banks prime rate plus two percent to a low of
the banks prime rate plus 0.25%. Based on the Companys capital structure, the interest rate for the quarter ended December 31, 2007 was the banks prime rate plus one-half percent (1/2%), or 7.75%. The loan has a
December 31, 2008 expiration date and is secured by all of the Companys assets, except inventory.

The total borrowings from the
bank under this line of credit were approximately $3,000 and $3.9 million as of December 31, 2007 and 2006, respectively.

The Company
had no long-term debt at December 31, 2007, and had working capital of $2,771,000.

As a result of its profitable operations, the
Companys working capital needs have stabilized and management believes the Companys near-term needs can be met from its available cash resources, cash flows from operations and its line of credit.

Because the Company is one of the largest resellers of Autodesk software and because Autodesk has continued to state its intention to continue to
strengthen its relationships with its resellers, the Company expects to continue to be a leading seller of Autodesk software at margins sufficient to grow its business and improve its financial results. The Companys Channel Partner Agreement
with Autodesk, which designates the Company as an authorized reseller of Autodesk products, provides one year targets but expires February 1, 2010.

Below is a summary of the Companys contractual obligations and commitments at December 31, 2007:



|                                   |  |       |           |                 |   |             |  |             |           |                  |   |         |  |   |       
|---------------------------------- |  | ----- | --------- | --------------- | - | ----------- |  | ----------- | --------- | ---------------- | - | ------- |  | - | ------
|                                   |  | Total |           | Less than1 year |   | 1  3 years |  | 3  5 years |           | More than5 years
|Contractual Obligations            |  |       |           |                 |   |             |  |             |           |                  |   |         |  |   |       
|Line of credit                     |  | $     | 3,000     |                 | $ | 3,000       |  | $           |          |                  | $ |        |  | $ |      
|Current portion of long-term debt  |  |       | 13,000    |                 |   | 13,000      |  |             |          |                  |   |        |  |   |      
|Interest on fixed rate obligations |  |       | 1,000     |                 |   | 1,000       |  |             |          |                  |   |        |  |   |      
|Operating leases                   |  |       | 4,054,000 |                 |   | 1,311,000   |  |             | 1,933,000 |                  |   | 772,000 |  |   | 38,000
|Capital lease obligations          |  |       | 1,000     |                 |   | 1,000       |  |             |          |                  |   |        |  |   |      
|                                   |  |       |           |                 |   |             |  |             |           |                  |   |         |  |   |       
|Total obligations                  |  | $     | 4,072,000 |                 | $ | 1,329,000   |  | $           | 1,933,000 |                  | $ | 772,000 |  | $ | 38,000
|                                   |  |       |           |                 |   |             |  |             |           |                  |   |         |  |   |       



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##### Table of Contents

|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

The
Company is exposed to market risk from changes in interest rates associated with its variable rate line of credit. At December 31, 2007, there was $3,000 in outstanding debt on the variable rate line of credit. The Company may, however, borrow
against this line of credit in future periods for normal, recurring business transactions. Assuming the expected levels of borrowings at variable rates and assuming a 100 basis point change in the average interest rate under these borrowings, the
Company estimates that its interest expense and net income would not change by a material amount in future reporting periods. In the event of an adverse change in interest rates, management would likely take actions to further mitigate this
exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, the analysis assumes no such actions. Further, the analysis does not consider the effects of the change in the level of overall economic
activity that could exist in such an environment.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

The Company maintains
disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded, processed, summarized
and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO),
as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls as of December 31, 2007 was carried out under the supervision and with the participation of management, including the CEO and the CFO. Based on that
evaluation, management, including the CEO and the CFO, has concluded that the Companys disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the most recently-completed quarter, there was no change in our internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1A. | Risk Factors
|-------- | ------------

The risks and uncertainties to which
the Companys financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Companys Annual Report on Form 10-K for the year ended June 30, 2007. Management does not believe that any material
changes in these risk factors have occurred since the filing of the Form 10-K.



|ITEM 4. | Submission of Matters to Vote of Security Holders
|------- | -------------------------------------------------

At the Annual Meeting of Stockholders held on November 9, 2007, the stockholders of the Company elected eight individuals to serve as directors until the 2008 Annual Meeting of Stockholders and approved an amendment of the Employee
Stock Purchase Plan to increase the number of shares of common stock authorized for issuance thereunder by 1,000,000.



---

##### Table of Contents

The results of the voting for the slate of the nominated Board of Directors were as follows:



|                      |  |            |  |         |  |         |  |                 
|--------------------- |  | ---------- |  | ------- |  | ------- |  | ----------------
|Name                  |  | For        |  | Against |  | Abstain |  | BrokerNon- votes
|Garnett Y. Clark, Jr. |  | 15,704,864 |  | 40,829  |  | 0       |  | 0               
|George Cox            |  | 15,688,168 |  | 57,525  |  | 0       |  | 0               
|George M. Davis       |  | 15,449,856 |  | 295,837 |  | 0       |  | 0               
|Eugene J. Fischer     |  | 15,687,457 |  | 58,236  |  | 0       |  | 0               
|W. James Hindman      |  | 15,689,479 |  | 56,214  |  | 0       |  | 0               
|Robert Post           |  | 15,651,016 |  | 94,677  |  | 0       |  | 0               
|David C. Reymann      |  | 15,688,205 |  | 57,488  |  | 0       |  | 0               
|Thom Waye             |  | 15,688,321 |  | 57,372  |  | 0       |  | 0               

The results of the voting for the amendment to the Employee Stock Purchase were as follows:



|          |  |           |  |         |  |                
|--------- |  | --------- |  | ------- |  | ---------------
|For       |  | Against   |  | Abstain |  | BrokerNon-Votes
|9,490,589 |  | 6,249,752 |  | 0       |  | 0              



|ITEM 6. | EXHIBITS
|------- | --------

The exhibits filed or furnished with this
report are listed in the Exhibit Index that immediately follows the Signatures to this report, which list is incorporated herein by reference.



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##### Table of Contents

SIGNATURES

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



|                        |  |                         |  |                                                     
|----------------------- |  | ----------------------- |  | ----------------------------------------------------
|                        |  | AVATECH SOLUTIONS, INC.
|                        |  |                        
|Date: February 14, 2008 |  | By                      |  | /s/ George M. Davis                                 
|                        |  |                         |  | George M. Davis                                     
|                        |  |                         |  | President and Chief Executive Officer               
|                        |  |                        
|Date: February 14, 2008 |  | By                      |  | /s/ Lawrence Rychlak                                
|                        |  |                         |  | Lawrence Rychlak                                    
|                        |  |                         |  | Executive Vice President and Chief Financial Officer
|                        |  |                         |  | (Principal financial and accounting officer)        



---

##### Table of Contents

EXHIBIT INDEX



|        |  |                                                                         
|------- |  | ------------------------------------------------------------------------
|Exhibit |  | Description                                                             
|31.1    |  | Rule 15d-14(a) Certification of Chief Executive Officer (filed herewith)
|        | 
|31.2    |  | Rule 15d-14(a) Certification of Chief Financial Officer (filed herewith)
|        | 
|32.1    |  | Section 1350 Certifications (filed herewith)