<PAGE>
 
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                        
                                  FORM 10-QSB
                                        
(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
        OF THE SECURTIES EXCHANGE ACT OF 1934


               For the quarterly period ended September 30, 1998

                                       OR
                                        
[_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
        OF THE SECURTIES EXCHANGE ACT OF 1934


             For the transition period from           To


                        Commission file number 0-288-42


                            SPATIAL TECHNOLOGY INC.
             (Exact name of registrant as specified in its charter)


          DELAWARE                                     84-1035353
(State or other jurisdiction of           (I.R.S. Employer Identification No.)  
incorporation or organization)                

2425 55TH STREET, SUITE 100, BOULDER, COLORADO           80301
  (address of principal executive offices)             (Zip Code)
                                        
                                 (303) 544-2900
              (Registrant's telephone number, including area code)
                                        

  Indicate by check 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
                                            -------        -------  


  As of October 1, 1998, there were outstanding 7,838,166 shares of the
Registrant's Common Stock (par value $0.01 per share).

Transitional Small Business Disclosure Format (check one): Yes          No  X
                                                              ------      ------
<PAGE>
 
                            SPATIAL TECHNOLOGY INC.

                                     INDEX
                                        
<TABLE> 
<CAPTION> 

                                                                                                  Page
                                                                                                  ----
PART I.   FINANCIAL INFORMATION
 
Item 1.   Financial Statements
<S>                                                                                                 <C>
 
          Condensed Consolidated Balance Sheets, December 31, 1997
            and September 30, 1998................................................................   3
 
          Condensed Consolidated Statements of Operations, three and nine
            months ended September 30, 1997 and 1998..............................................   4
 
          Condensed Consolidated Statements of Cash Flows, nine
            months ended September 30, 1997 and 1998..............................................   5
 
          Notes to Condensed Consolidated Financial Statements....................................   6
 
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations...   7
 
PART II.  OTHER INFORMATION.......................................................................  11
 
Signatures........................................................................................  12
 
</TABLE>

                                       2
<PAGE>
 
                            SPATIAL TECHNOLOGY INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                        
                     (Amounts in thousands, except shares)


<TABLE>
<CAPTION>

                                                              ASSETS
                                                                              December 31,             September 30,
                                                                                  1997                      1998
                                                                        ---------------------     ---------------------
                                                                                                        (Unaudited)
<S>                                                                     <C>                       <C> 
Current Assets:
  Cash and cash equivalents.............................................             $  5,736                  $  4,513
  Accounts receivable, net of allowance of $82 and $80 in 1997 and
   1998, respectively...................................................                2,415                     3,712
 
  Prepaid expenses and other............................................                  402                       451
                                                                               --------------            --------------
     Total current assets...............................................                8,553                     8,676
Equipment, net..........................................................                1,112                     1,173
Purchased computer software, net........................................                  670                       994
                                                                               --------------            --------------
 
                                                                                     $ 10,335                  $ 10,843
                                                                               ==============            ==============
 
 
                                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable......................................................             $    209                  $    338
  Accrued royalties payable.............................................                  317                       397
  Other accrued expenses................................................                1,172                       861
  Deferred revenue......................................................                1,470                     1,751
                                                                               --------------            --------------
     Total current liabilities..........................................                3,168                     3,347
                                                                               --------------            --------------
 
 
Stockholders' Equity:
  Common stock, $.01 par value; 22,500,000 shares authorized; 7,741,348
   and 7,838,166 shares issued in 1997 and 1998, respectively...........
                                                                                           77                        78
 
  Additional paid-in capital............................................               24,057                    24,400
  Accumulated deficit...................................................              (16,852)                  (16,845)
  Foreign currency translation adjustment...............................                 (115)                     (137)
                                                                               --------------            --------------
     Total stockholders' equity.........................................                7,167                     7,496
                                                                               --------------            --------------
 
                                                                                     $ 10,335                  $ 10,843
                                                                               ==============            ==============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
                            SPATIAL TECHNOLOGY INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

                    (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                             Three Months Ended                   Nine Months Ended
                                                               September 30,                        September 30,
                                                        ----------------------------         ----------------------------
                                                           1997              1998               1997              1998
                                                        ----------        ----------         ----------        ----------
<S>                                                     <C>               <C>                <C>               <C>
Revenue:
 License fees........................................       $1,208            $1,464           $ 2,778             $3,465
 Royalties...........................................          680               900             1,979              2,804
 Maintenance and other...............................          722               840             2,128              2,467
                                                        ----------        ----------         ----------        ----------
     Total revenue...................................        2,610             3,204             6,885              8,736
                                                        ----------        ----------         ----------        ----------
 
Cost of sales:
 License fees........................................           87                91               238                219
 Royalties...........................................           31                 3               127                 14
 Maintenance and other...............................          108                60               236                197
                                                        ----------        ----------         ----------        ----------
     Total cost of sales.............................          226               154               601                430
                                                        ----------        ----------         ----------        ----------
 
     Gross profit....................................        2,384             3,050             6,284              8,306
                                                        ----------        ----------         ----------        ----------
 
Operating expenses:
 Sales and marketing.................................          978             1,186             2,878              3,442
 Research and development............................          968             1,195             2,972              3,410
 General and administrative..........................          480               507             1,874              1,460
                                                        ----------        ----------         ----------        ----------
     Total operating expenses........................        2,426             2,888             7,724              8,312
                                                        ----------        ----------         ----------        ----------
 
     Earnings (loss) from operations.................          (42)              162            (1,440)                (6)
 
Other income (expense):
 Interest income.....................................           89                59               296                188
 Interest expense....................................           (1)               (1)               (2)                (1)
 Other, net..........................................            1                (2)               (1)                (5)
                                                        ----------        ----------         ----------        ----------
     Total other income..............................           89                56               293                182
                                                        ----------        ----------         ----------        ----------
 
     Earnings (loss) before income taxes.............           47               218            (1,147)               176
 
Income tax expense...................................           37                53                58                169
                                                        ----------        ----------         ----------        ----------
 
     Net earnings (loss).............................       $   10            $  165           $(1,205)            $    7
                                                        ==========        ==========         =========         ==========
 
 
Earnings (loss) per common share:
  Basic..............................................       $ 0.00            $ 0.02           $ (0.16)            $ 0.00
  Diluted............................................       $ 0.00            $ 0.02           $ (0.16)            $ 0.00
 
Shares outstanding:
  Basic..............................................        7,460             7,812             7,435              7,786
  Diluted............................................        7,517             7,906             7,435              7,866
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
 
                            SPATIAL TECHNOLOGY INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                         Nine Months Ended
                                                                                           September 30,
                                                                        -------------------------------------------------
 
                                                                                  1997                       1998
                                                                        ----------------------     ----------------------
 
<S>                                                                     <C>                        <C>
Cash flows from operating activities:
 Net income (loss)......................................................               $(1,205)                   $     7
 Adjustments to reconcile net income (loss) to net cash
  used by operating activities:
  Provision for impairment of purchased computer software...............                   200                          -
  Depreciation and amortization.........................................                   234                        385
  Changes in operating assets and liabilities:
   Accounts receivable..................................................                (1,040)                    (1,297)
   Prepaid expenses and other...........................................                    69                        (49)
   Accounts payable.....................................................                   (69)                       129
   Accrued expenses.....................................................                   (18)                      (231)
   Deferred revenue.....................................................                   181                        281
                                                                               ---------------            ---------------
     Net cash used by operating activities..............................                (1,648)                      (775)
                                                                               ---------------            ---------------
 
Cash flows from investing activities:
 Additions to equipment.................................................                  (859)                      (310)
 Additions to purchased computer software...............................                     -                       (296)
                                                                               ---------------            ---------------
     Net cash used by investing activities..............................                  (859)                      (606)
                                                                               ---------------            ---------------
 
Cash flows from financing activities:
 Proceeds from issuance of stock........................................                   303                        180
                                                                               ---------------            ---------------
     Net cash provided by financing activities..........................                   303                        180
                                                                               ---------------            ---------------
 
Foreign currency translation adjustment affecting cash..................                    (9)                       (22)
                                                                               ---------------            ---------------
 
     Net decrease in cash and cash equivalents..........................                (2,213)                    (1,223)
 
Cash and cash equivalents at beginning of period........................                 8,407                      5,736
                                                                               ---------------            ---------------
 
Cash and cash equivalents at end of period..............................               $ 6,194                    $ 4,513
                                                                               ===============            ===============
 
Supplemental disclosures:
 Cash paid for interest.................................................               $     2                    $     1
                                                                               ===============            ===============
 
 Cash paid for income taxes.............................................               $    96                    $   139
                                                                               ===============            ===============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                            SPATIAL TECHNOLOGY INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)
                               September 30, 1998

A. FINANCIAL STATEMENT PRESENTATION

  The accompanying audited and unaudited condensed consolidated financial
statements of the Company have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission.  Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.  The
Company believes the disclosures included in the condensed consolidated
financial statements, when read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the year ended December 31, 1997, are adequate to make the
information presented not misleading.


B. EARNINGS (LOSS) PER SHARE

  Basic earnings (loss) per share is computed using the weighted average number
of common shares outstanding during the period.  Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the dilutive effect of potential common stock.  For the nine
month period ended September 30, 1997, diluted loss per share is the same as
basic loss per share, as the effect of potential common stock is antidilutive.
The effect of potential common stock for the quarters ended September 30, 1997
and 1998, and the nine month period ended September 30, 1998 is not significant.

C.  ACCOUNTING PRONOUNCEMENTS

  Revenue Recognition

  Effective for the fiscal year beginning January 1, 1998, the Company adopted
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2") which
requires that revenue for licensing, selling, leasing, or otherwise marketing
computer software be recognized when certain criteria are met.

  In March 1998, the AICPA issued Statement of Position No. 98-4 ("SOP 98-4"),
"Deferral of the Effective Date of a Provision of SOP 97-2."  SOP 98-4 defers,
for one year, the application of certain passages in SOP 97-2, which limit what
is considered vendor-specific objective evidence necessary to recognize revenue
for software licenses in multiple-element arrangements when undelivered elements
exist. Additional guidance is expected to be provided prior to adoption of any
resulting final amendments related to the deferred provisions of SOP 97-2.

  The Company does not expect that the effect of adopting the remaining
provisions of  SOP 97-2 will have a material effect on the Company's financial
statements given the Company's policy of utilizing standard contracts and
allocating revenue to each element in a given contract based on an established
price list.

  Comprehensive Income

  The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998.
This statement requires the disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as net income plus revenues, expenses, gains and losses that,
under generally accepted accounting principles, are excluded from net income.
The components of comprehensive income, which are excluded from net income, are
not significant individually or in aggregate, and therefore, no separate
statement of comprehensive income has been presented.

                                       6
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

  Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties.  The Company's actual results could differ materially from those
presented here.  Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and those
discussed in the Company's Form 10-KSB for the year ended December 31, 1997,
particularly those contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

RESULTS OF OPERATIONS

Revenue

  Total revenue for the quarter ended September 30, 1998 increased 23% to $3.2
million from $2.6 million reported for the quarter ended September 30, 1997,
reflecting an increase in all revenue categories. License fees increased 21% to
$1.5 million for the third quarter of 1998 from $1.2 million reported in the
third quarter of 1997. Increased license fees in the third quarter of 1998 as
compared to the same prior year quarter were primarily due to new license
contracts in Europe and Japan, partially off set by fewer new license contracts
in North America. While revenue from the ACIS(R) 3D Toolkit, the Company's
principal product, has historically been the largest contributor to total
revenue, for the quarter ended September 30, 1998 more than 50% of license fees
were generated from products that were first introduced to the market during
this fiscal year. Contracts from these products resulted in one materially large
license agreement. Royalties increased 32%, to $900,000, for the third quarter
of 1998 as compared to $680,000 reported for the same quarter in 1997. Increased
royalties for the quarter ended September 30, 1998 as compared to the comparable
quarter in 1997 were the result of an increase in the number of the Company's
customers shipping ACIS(R)-enabled software applications. Maintenance and other
revenue increased 16% to $840,000 for the quarter ended September 30, 1998 as
compared to $722,000 reported for the quarter ended September 30, 1997. Total
recurring revenue, which is comprised of royalty revenue and maintenance fees,
increased 24% from the prior-year period and represented 54% of total revenue
during the third quarter of 1998.

  For the nine month period ended September 30, 1998 total revenue increased 27%
to $8.7 million as compared to $6.9 million reported for the same nine month
period in 1997, resulting from increases in all three revenue categories.
License fees increased 25% to $3.5 million in the nine month period ended
September 30, 1998 as compared to $2.8 million reported for the comparable prior
year period.  The increase in license fees was primarily attributable to an
increase in new license contracts in Europe in 1998 as compared to 1997.
Royalties increased 42%, growing to $2.8 million for the nine month period ended
September 30, 1998 versus $2.0 million reported for the nine month period ended
September 30, 1997.  Increased royalties for 1998 as compared to 1997 resulted
from an increase in the number of the Company's customers shipping ACIS-enabled
software applications.  Maintenance and other revenue increased 16% to $2.5
million for the nine month period ended September 30, 1998 as compared to $2.1
million reported for the comparable period in 1997 resulting from an increase in
renewed maintenance contracts and an increase in the customer base.  The
increased customer base is evidenced by an increase in the number of new license
contracts executed in the first nine months of 1998 as compared to the
comparable period in 1997.

  Geographically, international revenue increased 82% for the quarter ended
September 30, 1998 and represented 64% of revenue as compared to 43% for the
quarter ended September 30, 1997.  For the nine month period ended September 30,
1998 international revenue increased 42% and represented 52% of total revenue as
compared to 46% for the comparable prior year period.  The increase in the ratio
of international revenue for all periods presented is a result of an increase in
the number of license contracts in Europe.

                                       7
<PAGE>
 
Cost of Sales

  Cost of sales consists of support costs, royalty payments by the Company to
third party developers, manufacturing costs (primarily media duplication,
manuals, and shipping) and amortization of purchased computer software.  Total
cost of sales decreased 32% to $154,000 for the quarter ended September 30, 1998
from $226,000 reported for the quarter ended September 30, 1997.  For the nine
month period ended September 30, 1998 cost of sales decreased 28% to $430,000
from $601,000 reported in the comparable prior year period.  The decrease in
cost of sales for all periods presented was primarily due to a decrease in
royalty expenses to third party developers, partially offset by increased
amortization of purchased computer software.  Decreased royalty expense in 1998
as compared to 1997 was due to the acquisition of certain intellectual property
rights in the fourth quarter of 1997, which resulted in the elimination of a
royalty obligation of the Company.  In connection with the acquisition of these
intellectual property rights, the Company capitalized certain assets as
purchased computer software and is amortizing these assets over a period of
seven years, which resulted in an increase in amortization in 1998 as compared
to 1997.  The increase in amortization of purchased computer software in 1998
also reflects amortization of technology purchased in 1998.  As a percent of
total revenue, cost of sales decreased to 5% for the three and nine months ended
September 30, 1998, as compared to 9% for the comparable periods in 1997.

Operating Expenses

  Sales and marketing expense increased 21% to $1.2 million for the quarter
ended September 30, 1998 as compared to $978,000 reported in the quarter ended
September 30, 1997.  For the nine month period ended September 30, 1998 sales
and marketing expense increased 20% to $3.4 million from $2.9 million reported
for the nine month period ended September 30, 1997.  Increased sales and
marketing expense in 1998 as compared to 1997 was due to increased commissions
and travel related costs associated with increased revenue, as well as increased
spending for marketing programs, in particular for tradeshows and public
relations.  As a percent of total revenue, sales and marketing expense decreased
to 36% and 39% for the three and nine month periods ended September 30, 1998,
respectively, as compared to 37% and 42% for the comparable periods in 1997,
respectively.

  Research and development expense increased 23% to $1.2 million for the quarter
ended September 30, 1998 from $968,000 reported in the same prior year quarter.
For the nine month period ended September 30, 1998 research and development
expense increased 15% to $3.4 million from $3.0 million reported in the
comparable prior year period.  Increased research and development expense was
due to increased staffing in support of increased development efforts for
existing products, as well as for new product offerings, including the ACIS(R)
3D Open Viewer and the ACIS(R) Healing Husk.  Further, research and development
expense in the second quarter of 1997 included a $200,000 charge for a write-
down of purchased computer software, which was due to a change in the Company's
development strategy.  Excluding this non-recurring charge of $200,000, research
and development expense increased 23% for the nine month period ended September
30, 1998, as compared to the comparable period in 1997.  As a percent of total
revenue, research and development expense decreased slightly to 37% and 39% for
the three and nine month periods ended September 30, 1998, respectively, from
37% and 43% for the comparable prior year periods, respectively.  The Company
accounts for research and development expense in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, under which the Company is
required to capitalize software development costs after technological
feasibility is established.  Capitalizable software development costs incurred
to date have not been significant; therefore, the Company has expensed all of
these costs in the periods incurred.

  General and administrative expense increased 6% to $507,000 for the quarter
ended September 30, 1998 from $480,000 reported for the same quarter in 1997.
For the nine month period ended September 30, 1998 general and administrative
expense decreased 22% to $1.5 million from $1.9 million reported for the
comparable prior year period.  Decreased general and administrative expense was
due to a decrease in staffing and lower professional fees in 1998 as compared to
1997.  In addition, general and administrative expense in the second quarter of
1997 included a charge of approximately $198,000  in connection with expenses
associated with the resignation of the former president of the Company.
Excluding these non-recurring charges, general and administrative expense
decreased 13% for the nine month period ended September 30, 1998 as compared to
the comparable period in 1997.  As a percent of total revenue, general and
administrative expense decreased to 16% and 17% for the three and nine month
periods ended 

                                       8
<PAGE>
 
September 30, 1998, respectively, as compared to 18% and 27% for the comparable
prior year periods, respectively.

Other Income (Expense), net

  Other income decreased to $56,000 for the third quarter of 1998 as compared to
$89,000 reported for the third quarter of 1997 and to $182,000 for the nine
month period ended September 30, 1998 from $293,000 for the comparable prior
year period.  Decreased other income reflects lower interest income, as a result
of lower cash balances in 1998 as compared to 1997.

Income Tax Expense

  Income tax expense increased to $53,000 for the fiscal quarter ended September
30, 1998 as compared to $37,000 reported for the same quarter in 1997.  For the
nine month period ended September 30, 1998 income tax expense increased to
$169,000 from $58,000 for the same period in 1997 due to income tax liabilities
and increased withholding tax on sales in Japan.  Historically, income tax
expense included only withholding taxes on foreign sales.  Beginning in 1998,
the Company began incurring an income tax liability for its Japanese subsidiary.

FLUCTUATIONS IN QUARTERLY RESULTS

  The Company has experienced in the past and expects to continue to experience
in the future significant fluctuations in quarterly operating results due to a
number of factors that are difficult to forecast, including, among others, the
volume of orders received within a quarter, demand for the Company's products,
the product mix purchased by the Company's customers, competing capital budget
considerations of the Company's customers, introduction and enhancement of
products by the Company and its competitors, market acceptance of new products,
reviews in the industry press concerning the products of the Company or its
competitors, changes or anticipated changes in pricing by the Company or its
competitors and general economic conditions.  Due to the foregoing factors, it
is possible that the Company's operating results for some future quarters may
fall below the expectations of securities analysts and investors.

YEAR 2000 CAPABILITY

  Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field.  These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates.  As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements.

  The Company has evaluated Year 2000 compliance issues and believes that with
respect to the Company's products and internal management information systems it
will not be materially adversely impacted by such issues.  The Company's
software products do not incorporate date-sensitive algorithms.  Any date codes
contained in the Company's software do not affect the functionality of the
products.  The Company also incorporates third party software with its core
product.  The Company has concluded that any date codes contained in such third
party software will not materially adversely impact the Company's products.  In
addition, the Company has evaluated whether its management information systems
are Year 2000 compliant and has concluded that they are substantially compliant
and that the Company's business will not be materially adversely affected.
Moreover, the number of transactions that the Company manages is relatively low
because it depends on low volume, high value orders.  As a result, the Company
believes that any date-sensitive material contained in its software would not
have a material adverse effect on the Company's management information systems
software.  However, to the extent that any of the Company's foregoing
assessments are incorrect, there can be no assurance that the cost necessary to
update the performance of software will not have a material adverse effect on
the Company's business, financial condition and results of operations.

                                       9
<PAGE>
 
  Moreover, there can be no assurance that Year 2000 compliance issues affecting
the Company's customers products and internal management information systems
will not have a material adverse effect on the Company's business, financial
condition and results of operations.  As an OEM provider the Company's products
may be incorporated directly into its customers' products, which may contain
date-sensitive processes that may affect the ability of the Company's customers
to sell end-user products.

INTERNATIONAL EXPANSION

  The Company believes that international sales will continue to represent a
significant portion of its total revenue, and that it will be subject to the
inherent risks of conducting business internationally.  Such risks include, but
are not limited to, problems and delays in collecting accounts receivable,
fluctuations in currency exchange rates and other uncertainties relative to
regional economic circumstances (such as the current economic turbulence in
Asia).  Sales of products by the Company currently are denominated principally
in U.S. dollars.  Accordingly, any increase in the value of the U.S. dollar as
compared to currencies in the Company's principal overseas markets would
increase the foreign currency-denominated cost of the Company's products, which
may negatively affect the Company's sales in those markets, or could delay
collection of current or future accounts receivables.  The Company has not
engaged in any currency exchange hedging practices.  As of September 30, 1998,
the Company believes it has adequately reserved for risks associated with
foreign currency transactions.  However, there can be no assurance that one or
more of such factors will not have a material adverse effect on the Company's
business, operating results and financial condition.

LIQUIDITY AND CAPITAL RESOURCES

  As of September 30, 1998, the Company had $4.5 million in cash and cash
equivalents.  Cash and cash equivalents decreased $1.2 million for the nine
months ended September 30, 1998, as compared to $2.2 million for the comparable
prior year period.

  Net cash used by operating activities was $775,000 for the nine month period
ended September 30, 1998 as compared to $1.6 million for the comparable prior
year period.  Net cash used by operations in 1998 was primarily the result of
increased accounts receivable, partially offset by increased deferred revenue.
Cash used by operations in 1997 was primarily due a net loss, combined with an
increase in accounts receivable, partially offset by the non-cash write-down of
purchased computer software.

  Net cash used by investing activities totaling $606,000 for the nine month
period ended September 30, 1998 reflected $310,000 used for equipment purchases
and $296,000 used for purchased computer software, including technology included
in products first introduced to the market during this fiscal year.  Cash used
for the comparable period in 1997 totaling $859,000 reflects furniture and
equipment purchases.

  Net cash provided by financing activities was $180,000 for the nine months
ended September 30, 1998, due to proceeds in connection with the Company's
employee stock purchase plan.  Net cash provided by financing activities in the
comparable prior year period was $303,000 reflecting the issuance of stock in
connection with the exercise of stock options, as well as the Company's employee
stock purchase plan.

  In August 1998 the Company amended its revolving line of credit with a bank.
The amended line of credit provides for maximum borrowings of $1,500,000 through
August 2, 1999.  The line of credit bears interest at the bank's prime rate.
The Company currently has no borrowings under the line of credit.

  The Company believes that cash generated from operations, together with
existing cash, will be sufficient to meet the Company's operating and capital
requirements for the foreseeable future including at least the next twelve
months.

                                       10
<PAGE>
 
                          PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings:
         None

Item 2.  Changes in Securities:
         None

Item 3.  Defaults on Senior Securities:
         Not Applicable

Item 4.  Submission of Matters to Vote of Security Holders:
         None

Item 5.  Other Information:
         None

Item 6.  Exhibits and Reports on Form 8-K:
         a)  Exhibits
                 27  Financial Data Schedule

         b)  Reports on Form 8-K
             None

                                       11
<PAGE>
 
                                   SIGNATURES
                                        
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.




                             SPATIAL TECHNOLOGY INC.
 
 
 
Date November 13, 1998       /s/ R. Bruce Morgan
     -----------------      ---------------------------------------------------
                             R. Bruce Morgan
                             President, Chief Executive Officer, and Director
                             (Principal Financial and Accounting Officer)

                                       12