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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 March 31, 2008

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, a non-accelerated filer or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                           |  |                             
|-------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈   |  | Smaller reporting company  x

(Do not check if a smaller reporting company)

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: as of May 1, 2008, there were 16,317,264 shares of common stock, par value $.01 per share, outstanding.









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AVATECH SOLUTIONS, INC. AND SUBSIDIARIES

INDEX



|              |  |                                                                                                |  |     
|------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                |  | Page
|PART I        |  | FINANCIAL INFORMATION                                                                          |  |     
|              |  |                                                                                               
|ITEM 1.       |  | Consolidated Financial Statements                                                              |  |     
|              |  |                                                                                               
|              |  | Consolidated Balance Sheets  March 31, 2008 (Unaudited) and June 30, 2007                     |  | 3   
|              |  |                                                                                               
|              |  | Consolidated Statements of Operations  Three months ended March 31, 2008 and 2007 (Unaudited) |  | 5   
|              |  |                                                                                               
|              |  | Consolidated Statements of Operations  Nine months ended March 31, 2008 and 2007 (Unaudited)  |  | 6   
|              |  |                                                                                               
|              |  | Consolidated Statement of Stockholders Equity  Nine months ended March 31, 2008 (Unaudited)  |  | 7   
|              |  |                                                                                               
|              |  | Consolidated Statements of Cash Flows  Nine months ended March 31, 2008 and 2007 (Unaudited)  |  | 8   
|              |  |                                                                                               
|              |  | Notes to Consolidated Financial Statements (Unaudited)                                         |  | 9   
|              |  |                                                                                               
|ITEM 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 14  
|              |  |                                                                                               
|ITEM 4T.      |  | Controls and Procedures                                                                        |  | 22  
|              |  |                                                                                               
|PART II       |  | OTHER INFORMATION                                                                              |  |     
|              |  |                                                                                               
|ITEM 1A.      |  | Risk Factors                                                                                   |  | 23  
|              |  |                                                                                               
|ITEM 6.       |  | Exhibits                                                                                       |  | 23  
|              | 
|SIGNATURES    |  | 24                                                                                            
|              | 
|EXHIBIT INDEX |  |                                                                                               



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PART I. FINANCIAL INFORMATION

Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                 |  |               |            |              |   |           
|---------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ------------ | - | ----------
|                                                                                                                 |  | March 31,2008 |            | June 30,2007
|                                                                                                                 |  | (unaudited)   |            |             
|Assets                                                                                                           |  |               |            |              |   |           
|Current assets:                                                                                                  |  |               |            |              |   |           
|Cash and cash equivalents                                                                                        |  | $             | 4,147,000  |              | $ | 1,688,000 
|Accounts receivable, less allowance of $176,000 as of March 31, 2008 and $188,000 as of June 30, 2007            |  |               | 7,337,000  |              |   | 7,402,000 
|Other receivables                                                                                                |  |               | 279,000    |              |   | 492,000   
|Inventory                                                                                                        |  |               | 679,000    |              |   | 902,000   
|Prepaid expenses and other current assets                                                                        |  |               | 311,000    |              |   | 356,000   
|                                                                                                                 |  |               |            |              |   |           
|Total current assets                                                                                             |  |               | 12,753,000 |              |   | 10,840,000
|Property and equipment:                                                                                          |  |               |            |              |   |           
|Computer software and equipment                                                                                  |  |               | 3,153,000  |              |   | 2,907,000 
|Office furniture and equipment                                                                                   |  |               | 1,183,000  |              |   | 1,212,000 
|Leasehold improvements                                                                                           |  |               | 167,000    |              |   | 167,000   
|                                                                                                                 |  |               |            |              |   |           
|                                                                                                                 |  |               | 4,503,000  |              |   | 4,286,000 
|Less accumulated depreciation and amortization                                                                   |  |               | 3,654,000  |              |   | 3,352,000 
|                                                                                                                 |  |               |            |              |   |           
|                                                                                                                 |  |               | 849,000    |              |   | 934,000   
|Customer list, net of accumulated amortization of $599,000 as of March 31, 2008 and $387,000 as of June 30, 2007 |  |               | 1,591,000  |              |   | 1,803,000 
|Goodwill                                                                                                         |  |               | 5,968,000  |              |   | 5,888,000 
|Other assets                                                                                                     |  |               | 99,000     |              |   | 109,000   
|                                                                                                                 |  |               |            |              |   |           
|Total assets                                                                                                     |  | $             | 21,260,000 |              | $ | 19,574,000
|                                                                                                                 |  |               |            |              |   |           

See accompanying notes.



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Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets (continued)



|                                                                                                                                                                                                                                                                                                                                            |  |               |            |   |              |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ------------ | - | ---------- | -
|                                                                                                                                                                                                                                                                                                                                            |  | March 31,2008 |            |   | June 30,2007 |  
|                                                                                                                                                                                                                                                                                                                                            |  | (unaudited)   |            |   |              |  
|Liabilities and stockholders equity                                                                                                                                                                                                                                                                                                        |  |               |            |   |              |   |            |  
|Current liabilities:                                                                                                                                                                                                                                                                                                                        |  |               |            |   |              |   |            |  
|Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                                       |  | $             | 6,860,000  |   |              | $ | 5,635,000  |  
|Accrued compensation and related benefits                                                                                                                                                                                                                                                                                                   |  |               | 711,000    |   |              |   | 1,461,000  |  
|Borrowings under line of credit                                                                                                                                                                                                                                                                                                             |  |               |           |   |              |   | 1,408,000  |  
|Deferred revenue                                                                                                                                                                                                                                                                                                                            |  |               | 1,221,000  |   |              |   | 1,094,000  |  
|Other current liabilities                                                                                                                                                                                                                                                                                                                   |  |               | 22,000     |   |              |   | 127,000    |  
|                                                                                                                                                                                                                                                                                                                                            |  |               |            |   |              |   |            |  
|Total current liabilities                                                                                                                                                                                                                                                                                                                   |  |               | 8,814,000  |   |              |   | 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 March 31, 2008 and June 30, 2007;
1,090,183 and 1,106,929 outstanding at March 31, 2008 and June 30, 2007, respectively; aggregate liquidation preference of $1,624,000 and $1,704,000 at March 31, 2008 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 16,317,246 at March 31, 2008 and 15,482,036
at June 30, 2007                                                                                                                                                                                  |  |               | 163,000    |   |              |   | 155,000    |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                                                  |  |               | 12,866,000 |   |              |   | 12,706,000 |  
|Accumulated deficit                                                                                                                                                                                                                                                                                                                         |  |               | (4,303,000 | ) |              |   | (6,652,000 | )
|                                                                                                                                                                                                                                                                                                                                            |  |               |            |   |              |   |            |  
|Total stockholders equity                                                                                                                                                                                                                                                                                                                  |  |               | 8,737,000  |   |              |   | 6,220,000  |  
|                                                                                                                                                                                                                                                                                                                                            |  |               |            |   |              |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                                                                                  |  | $             | 21,260,000 |   |              | $ | 19,574,000 |  
|                                                                                                                                                                                                                                                                                                                                            |  |               |            |   |              |   |            |  

See accompanying notes.



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Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations



|                                                   |  |                              |            |   |             |   |            |  
|-------------------------------------------------- |  | ---------------------------- | ---------- | - | ----------- | - | ---------- | -
|                                                   |  | Three Months Ended March 31, |           
|                                                   |  | 2008                         |            |   | 2007        |  
|                                                   |  | (unaudited)                  |            |   | (unaudited) |  
|Revenues:                                          |  |                              |            |   |             |   |            |  
|Product sales                                      |  | $                            | 6,341,000  |   |             | $ | 9,094,000  |  
|Service revenue                                    |  |                              | 3,132,000  |   |             |   | 2,802,000  |  
|Commission revenue                                 |  |                              | 3,279,000  |   |             |   | 2,688,000  |  
|                                                   |  |                              |            |   |             |   |            |  
|                                                   |  |                              | 12,752,000 |   |             |   | 14,584,000 |  
|                                                   |  |                              |            |   |             |   |            |  
|Cost of revenue:                                   |  |                              |            |   |             |   |            |  
|Cost of product sales                              |  |                              | 4,413,000  |   |             |   | 6,236,000  |  
|Cost of service revenue                            |  |                              | 2,109,000  |   |             |   | 1,876,000  |  
|                                                   |  |                              |            |   |             |   |            |  
|                                                   |  |                              | 6,522,000  |   |             |   | 8,112,000  |  
|                                                   |  |                              |            |   |             |   |            |  
|Gross margin                                       |  |                              | 6,230,000  |   |             |   | 6,472,000  |  
|                                                   |  |                              |            |   |             |   |            |  
|Other operating expenses:                          |  |                              |            |   |             |   |            |  
|Selling, general and administrative                |  |                              | 4,744,000  |   |             |   | 6,403,000  |  
|Depreciation and amortization                      |  |                              | 168,000    |   |             |   | 180,000    |  
|                                                   |  |                              |            |   |             |   |            |  
|                                                   |  |                              | 4,912,000  |   |             |   | 6,583,000  |  
|                                                   |  |                              |            |   |             |   |            |  
|Operating income (loss)                            |  |                              | 1,318,000  |   |             |   | (111,000   | )
|                                                   |  |                             
|Interest and other income (expense), net           |  |                              | 19,000     |   |             |   | (30,000    | )
|                                                   |  |                              |            |   |             |   |            |  
|Income (loss) before income taxes                  |  |                              | 1,337,000  |   |             |   | (141,000   | )
|                                                   |  |                             
|Income tax expense                                 |  |                              | 332,000    |   |             |   | 83,000     |  
|                                                   |  |                              |            |   |             |   |            |  
|Net income (loss)                                  |  |                              | 1,005,000  |   |             |   | (224,000   | )
|                                                   |  |                             
|Preferred stock dividends                          |  |                              | (40,000    | ) |             |   | (45,000    | )
|                                                   |  |                              |            |   |             |   |            |  
|Net income (loss) available to common stockholders |  | $                            | 965,000    |   |             | $ | (269,000   | )
|                                                   |  |                              |            |   |             |   |            |  
|Earnings (loss) per common share, basic            |  | $                            | 0.06       |   |             | $ | (0.02      | )
|                                                   |  |                              |            |   |             |   |            |  
|Earnings (loss) per common share, diluted          |  | $                            | 0.05       |   |             | $ | (0.02      | )
|                                                   |  |                              |            |   |             |   |            |  
|Shares used in computation - basic                 |  |                              | 16,304,013 |   |             |   | 14,484,564 |  
|                                                   |  |                              |            |   |             |   |            |  
|Shares used in computation - diluted               |  |                              | 20,267,042 |   |             |   | 14,484,564 |  
|                                                   |  |                              |            |   |             |   |            |  

See accompanying notes.



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Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations



|                                            |  |                             |            |   |             |   |            |  
|------------------------------------------- |  | --------------------------- | ---------- | - | ----------- | - | ---------- | -
|                                            |  | Nine Months Ended March 31, |           
|                                            |  | 2008                        |            |   | 2007        |  
|                                            |  | (unaudited)                 |            |   | (unaudited) |  
|Revenues:                                   |  |                             |            |   |             |   |            |  
|Product sales                               |  | $                           | 20,960,000 |   |             | $ | 23,614,000 |  
|Service revenue                             |  |                             | 8,635,000  |   |             |   | 7,767,000  |  
|Commission revenue                          |  |                             | 8,505,000  |   |             |   | 7,660,000  |  
|                                            |  |                             |            |   |             |   |            |  
|                                            |  |                             | 38,100,000 |   |             |   | 39,041,000 |  
|                                            |  |                             |            |   |             |   |            |  
|Cost of revenue:                            |  |                             |            |   |             |   |            |  
|Cost of product sales                       |  |                             | 14,272,000 |   |             |   | 15,418,000 |  
|Cost of service revenue                     |  |                             | 6,129,000  |   |             |   | 5,442,000  |  
|                                            |  |                             |            |   |             |   |            |  
|                                            |  |                             | 20,401,000 |   |             |   | 20,860,000 |  
|                                            |  |                             |            |   |             |   |            |  
|Gross margin                                |  |                             | 17,699,000 |   |             |   | 18,181,000 |  
|                                            |  |                             |            |   |             |   |            |  
|Other operating expenses:                   |  |                             |            |   |             |   |            |  
|Selling, general and administrative         |  |                             | 14,093,000 |   |             |   | 16,998,000 |  
|Depreciation and amortization               |  |                             | 523,000    |   |             |   | 515,000    |  
|                                            |  |                             |            |   |             |   |            |  
|                                            |  |                             | 14,616,000 |   |             |   | 17,513,000 |  
|                                            |  |                             |            |   |             |   |            |  
|Operating income                            |  |                             | 3,083,000  |   |             |   | 668,000    |  
|                                            |  |                            
|Interest and other income (expense), net    |  |                             | 55,000     |   |             |   | (150,000   | )
|                                            |  |                             |            |   |             |   |            |  
|Income before income taxes                  |  |                             | 3,138,000  |   |             |   | 518,000    |  
|                                            |  |                            
|Income tax expense                          |  |                             | 789,000    |   |             |   | 199,000    |  
|                                            |  |                             |            |   |             |   |            |  
|Net income                                  |  |                             | 2,349,000  |   |             |   | 319,000    |  
|                                            |  |                            
|Preferred stock dividends                   |  |                             | (324,000   | ) |             |   | (260,000   | )
|                                            |  |                             |            |   |             |   |            |  
|Net income available to common stockholders |  | $                           | 2,025,000  |   |             | $ | 59,000     |  
|                                            |  |                             |            |   |             |   |            |  
|Earnings per common share, basic            |  | $                           | 0.13       |   |             | $ | 0.00       |  
|                                            |  |                             |            |   |             |   |            |  
|Earnings per common share, diluted          |  | $                           | 0.12       |   |             | $ | 0.00       |  
|                                            |  |                             |            |   |             |   |            |  
|Shares used in computation - basic          |  |                             | 16,096,985 |   |             |   | 13,908,920 |  
|                                            |  |                             |            |   |             |   |            |  
|Shares used in computation - diluted        |  |                             | 20,108,236 |   |             |   | 15,386,200 |  
|                                            |  |                             |            |   |             |   |            |  

See accompanying notes.



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Avatech Solutions, Inc. and Subsidiaries

Consolidated Statement of Stockholders Equity (Unaudited)

For the Nine Months Ended March 31, 2008



|                                                                        |                 |                 |   |              |   |                 |  |            |  |                          |         |  |                    |            |   |       |   |               |   |  |   |           |  
|----------------------------------------------------------------------- | --------------- | --------------- | - | ------------ | - | --------------- |  | ---------- |  | ------------------------ | ------- |  | ------------------ | ---------- | - | ----- | - | ------------- | - |  | - | --------- | -
|                                                                        |                 | Preferred Stock |   | Common Stock |   |                 | 
|                                                                        | Number ofShares |                 |   | Par Value    |   | Number ofShares |  | Par Value  |  | AdditionalPaid-InCapital |         |  | AccumulatedDeficit |            |   | Total |  
|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                                |                 |                |   |              |   |                |  | 54,897     |  |                          |        |  |                    | 51,000     |   |       |   |              |   |  |   | 51,000    |  
|Issuance of common stock purchased through Employee Stock Purchase Plan |                 |                |   |              |   |                |  | 91,935     |  |                          | 1,000   |  |                    | 82,000     |   |       |   |              |   |  |   | 83,000    |  
|Issuance of common stock upon the exercise of stock options             |                 |                |   |              |   |                |  | 531,941    |  |                          | 5,000   |  |                    | 110,000    |   |       |   |              |   |  |   | 115,000   |  
|Conversion of preferred stock into common stock                         |                 | (16,746         | ) |              |   |                |  | 156,437    |  |                          | 2,000   |  |                    | (2,000     | ) |       |   |              |   |  |   |          |  
|Vesting of stock options issued to employees                            |                 |                |   |              |   |                |  |           |  |                          |        |  |                    | 243,000    |   |       |   |              |   |  |   | 243,000   |  
|                                                                        |                 |                 |   |              |   |                 | 
|Preferred stock dividends                                               |                 |                |   |              |   |                |  |           |  |                          |        |  |                    | (324,000   | ) |       |   |              |   |  |   | (324,000  | )
|                                                                        |                 |                 |   |              |   |                 | 
|Net income                                                              |                 |                |   |              |   |                |  |           |  |                          |        |  |                    |           |   |       |   | 2,349,000     |   |  |   | 2,349,000 |  
|                                                                        |                 |                 |   |              |   |                 |  |            |  |                          |         |  |                    |            |   |       |   |               |   |  |   |           |  
|Balance at March 31, 2008                                               |                 | 1,090,183       |   |              | $ | 11,000          |  | 16,317,246 |  | $                        | 163,000 |  | $                  | 12,866,000 |   |       | $ | (4,303,000    | ) |  | $ | 8,737,000 |  
|                                                                        |                 |                 |   |              |   |                 |  |            |  |                          |         |  |                    |            |   |       |   |               |   |  |   |           |  

See accompanying notes.



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Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                            |             |                             |            |      |  |   |             |  
|------------------------------------------------------------------------------------------- | ----------- | --------------------------- | ---------- | ---- |  | - | ----------- | -
|                                                                                            |             | Nine Months Ended March 31, |           
|                                                                                            | 2008        |                             |            | 2007 | 
|                                                                                            | (unaudited) |                            
|Cash flows from operating activities                                                        |             |                             |            |      |  |   |             |  
|Net income                                                                                  |             | $                           | 2,349,000  |      |  | $ | 319,000     |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |             |                             |            |      |  |   |             |  
|Provision for bad debts, net of recoveries                                                  |             |                             | (41,000    | )    |  |   | 56,000      |  
|Depreciation and amortization                                                               |             |                             | 523,000    |      |  |   | 515,000     |  
|Loss on the sale of property and equipment                                                  |             |                             | 8,000      |      |  |   |             |  
|Non-cash stock compensation expense                                                         |             |                             | 294,000    |      |  |   | 678,000     |  
|Changes in operating assets and liabilities:                                                |             |                             |            |      |  |   |             |  
|Accounts and other receivables                                                              |             |                             | 319,000    |      |  |   | (3,752,000  | )
|Inventory                                                                                   |             |                             | 223,000    |      |  |   | 530,000     |  
|Prepaid expenses and other current assets                                                   |             |                             | 45,000     |      |  |   | 24,000      |  
|Other assets                                                                                |             |                             | 10,000     |      |  |   | 30,000      |  
|Accounts payable and accrued expenses                                                       |             |                             | 1,225,000  |      |  |   | 965,000     |  
|Accrued compensation and related benefits                                                   |             |                             | (750,000   | )    |  |   | 289,000     |  
|Deferred revenue                                                                            |             |                             | 127,000    |      |  |   | 127,000     |  
|Other current liabilities                                                                   |             |                             | (105,000   | )    |  |   | 75,000      |  
|                                                                                            |             |                             |            |      |  |   |             |  
|Net cash provided by (used in) operating activities                                         |             |                             | 4,227,000  |      |  |   | (144,000    | )
|                                                                                            |             |                             |            |      |  |   |             |  
|                                                                                            |             |                            
|Cash flows from investing activities                                                        |             |                             |            |      |  |   |             |  
|Purchase of property and equipment                                                          |             |                             | (266,000   | )    |  |   | (395,000    | )
|Acquisition of customer list                                                                |             |                             |           |      |  |   | (224,000    | )
|Proceeds from the sale of property and equipment                                            |             |                             | 32,000     |      |  |   |            |  
|                                                                                            |             |                             |            |      |  |   |             |  
|Net cash used in investing activities                                                       |             |                             | (234,000   | )    |  |   | (619,000    | )
|                                                                                            |             |                             |            |      |  |   |             |  
|                                                                                            |             |                            
|Cash flows from financing activities                                                        |             |                             |            |      |  |   |             |  
|Proceeds from borrowings under line of credit                                               |             |                             | 1,460,000  |      |  |   | 52,503,000  |  
|Repayments of borrowings under line of credit                                               |             |                             | (2,868,000 | )    |  |   | (52,351,000 | )
|Repayments of long-term debt                                                                |             |                             |           |      |  |   | (54,000     | )
|Proceeds from sale of common stock through private placement                                |             |                             |           |      |  |   | 1,529,000   |  
|Proceeds from sale of common stock to employees and exercise of stock options               |             |                             | 197,000    |      |  |   | 225,000     |  
|Issuance of common stock purchased through Employee Stock Purchase Plan                     |             |                             | 1,000      |      |  |   |            |  
|Payment of preferred stock dividends                                                        |             |                             | (324,000   | )    |  |   | (260,000    | )
|Change in accounts payable and accrued expenses related to financing                        |             |                             |           |      |  |   | (38,000     | )
|Change in other long-term liabilities                                                       |             |                             |           |      |  |   | (66,000     | )
|                                                                                            |             |                             |            |      |  |   |             |  
|Net cash (used in) provided by financing activities                                         |             |                             | (1,534,000 | )    |  |   | 1,488,000   |  
|                                                                                            |             |                             |            |      |  |   |             |  
|Net change in cash and cash equivalents                                                     |             |                             | 2,459,000  |      |  |   | 725,000     |  
|Cash and cash equivalents - beginning of period                                             |             |                             | 1,688,000  |      |  |   | 581,000     |  
|                                                                                            |             |                             |            |      |  |   |             |  
|Cash and cash equivalents - end of period                                                   |             | $                           | 4,147,000  |      |  | $ | 1,306,000   |  
|                                                                                            |             |                             |            |      |  |   |             |  

See accompanying notes.



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Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

For the Nine Months Ended March 31, 2008

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 8 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 nine months ended March 31, 2008 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



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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 $73,000 for the quarter ended March 31, 2008, or less than $0.01 per basic and diluted share. For the nine months ended March 31, 2008, the effect of applying this
Statement was $243,000 or less than $0.02 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 nine months ended March 31, 2008, the Company issued 19,308 and 54,897 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 $21,000 and $51,000, respectively. For the three months and nine months ended March 31, 2008, total stock compensation expense
charged against income for these plans was $94,000 and $294,000, respectively, compared to $390,000 and $678,000, respectively, for the same periods of fiscal year 2007.

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.

There were no stock option awards granted during the three months ended March 31, 2008 and 2007. The following are the assumptions made in computing the fair value of stock-based awards for the nine months ended March 31, 2008 and
2007:



|                                               |      |                             |           |      |  |   |           |  
|---------------------------------------------- | ---- | --------------------------- | --------- | ---- |  | - | --------- | -
|                                               |      | Nine months ended March 31, |          
|                                               | 2008 |                             |           | 2007 | 
|Average risk-free interest rate                |      |                             | 4.26      | %    |  |   | 4.62      | %
|Dividend yield                                 |      |                             | 0         | %    |  |   | 0         | %
|Expected term                                  |      |                             | 8.4 years |      |  |   | 5.9 years |  
|Average expected volatility                    |      |                             | 0.96      |      |  |   | 1.05      |  
|Weighted average fair value of granted options |      | $                           | 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 nine months ended March 31, 2008 and related information is included in the table below:



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|                                            |  |           |   |  |                                |      |                         |   |        
|------------------------------------------- |  | --------- | - |  | ------------------------------ | ---- | ----------------------- | - | -------
|                                            |  | Options   |   |  | Weighted-AverageExercise Price |      | AggregateIntrinsicValue
|Outstanding at July 1, 2007                 |  | 1,625,301 |   |  | $                              | 0.93 |                         |   |        
|Granted                                     |  | 597,000   |   |  |                                | 0.84 |                         |   |        
|Exercised                                   |  | (531,942  | ) |  |                                | 0.30 |                         |   |        
|Forfeited                                   |  | (46,603   | ) |  |                                | 1.43 |                         |   |        
|                                            |  |           |   |  |                                |      |                         |   |        
|Outstanding at March 31, 2008               |  | 1,643,756 |   |  | $                              | 1.12 |                         | $ | 151,000
|                                            |  |           |   |  |                                |      |                         |   |        
|Exercisable at March 31, 2008               |  | 912,337   |   |  | $                              | 1.20 |                         | $ | 149,000
|                                            |  |           |   |  |                                |      |                         |   |        
|Weighted-average remaining contractual life |  | 7.2 Years |   |  |                                |      |                         |   |        
|                                            |  |           |   |  |                                |      |                         |   |        

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 March 31, 2008 ranged from $0.17 to $63.33 as follows:



|                         |  |                    |  |                                                    |      |                                                               |           |                    |         |                                                    |   |                                                               |  |          
|------------------------ |  | ------------------ |  | -------------------------------------------------- | ---- | ------------------------------------------------------------- | --------- | ------------------ | ------- | -------------------------------------------------- | - | ------------------------------------------------------------- |  | ---------
|Range of Exercise Prices |  | OptionsOutstanding |  | WeightedAverageExercisePrices ofOptionsOutstanding |      | WeightedAverageRemainingContractual Lifeof OptionsOutstanding |           | OptionsExercisable |         | WeightedAverageExercisePrices ofOptionsExercisable |   | WeightedAverageRemainingContractual Lifeof OptionsExercisable
|$ 0.17  0.34            |  | 111,299            |  | $                                                  | 0.29 |                                                               | 5.7 years |                    | 111,299 |                                                    | $ | 0.29                                                          |  | 5.7 years
|0.35  0.91              |  | 1,056,000          |  |                                                    | 0.77 |                                                               | 8.1 years |                    | 518,583 |                                                    |   | 0.67                                                          |  | 6.8 years
|1.05  63.33             |  | 476,457            |  |                                                    | 2.09 |                                                               | 8.0 years |                    | 282,455 |                                                    |   | 2.51                                                          |  | 7.7 years
|                         |  |                    |  |                                                    |      |                                                               |           |                    |         |                                                    |   |                                                               |  |          
|                         |  | 1,643,756          |  |                                                    |      |                                                               |           |                    | 912,337 |                                                    |   |                                                               |  |          
|                         |  |                    |  |                                                    |      |                                                               |           |                    |         |                                                    |   |                                                               |  |          

Assuming that no additional share-based payments are granted after March 31, 2008, unamortized stock
compensation expense of $521,000 will be recognized in the statement of operations over a weighted average period of 2.9 years.

During fiscal 2008 fiscal
year, the Company granted stock options to executive management in lieu of a cash bonus plan. A portion of the options will vest at June 30, 2008 if certain net income, service revenue and service margin targets are achieved. The Company has
recorded $28,000 of expense for the three months ended March 31, 2008 due to the likelihood that the some of the performance criteria will be achieved and that vesting will accelerate on a portion of the options granted. Given the
Companys results, management believes that it is highly unlikely that all the performance criteria will be achieved, but in that event, the Company would record $294,000 in expense related to these options during the fourth quarter of fiscal
year 2008.

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
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% when the Companys net worth exceeds $4,000,000 at the end
of a fiscal quarter. The interest rate as of March 31, 2008 was the banks prime rate plus one-half percent, or 5.75%.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 $0 and $1,408,000 at March 31, 2008 and June 30, 2007,
respectively.



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5. Income Taxes

Income tax expense during the nine months ended March 31, 2008 includes both federal and state income taxes, after adjusting for available net operating loss carryforwards from prior years. Income tax expense during the nine months
ended March 31, 2008 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.

6. 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 March 31, 2008,
8,865,588 shares of common stock were issuable upon the conversion or exercise of options, warrants and preferred stock. For the three and nine months ended March 31, 2008, there were 5,306,559 and 5,013,559, respectively, 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 nine months ended March 31, 2008 and 2007:



|                                                   |  |                              |            |   |      |   |            |  
|-------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                   |  | Three Months Ended March 31, |           
|                                                   |  | 2008                         |            |   | 2007 |  
|Numerator:                                         |  |                              |            |   |      |   |            |  
|Net income                                         |  | $                            | 1,005,000  |   |      | $ | (224,000   | )
|Less: preferred stock dividends                    |  |                              | (40,000    | ) |      |   | (45,000    | )
|                                                   |  |                              |            |   |      |   |            |  
|Net income (loss) available to common stockholders |  | $                            | 965,000    |   |      | $ | (269,000   | )
|                                                   |  |                              |            |   |      |   |            |  
|Denominator:                                       |  |                              |            |   |      |   |            |  
|Weighted average shares outstanding - basic        |  |                              | 16,304,013 |   |      |   | 14,484,564 |  
|                                                   |  |                             
|Assumed conversion of dilutive preferred stock     |  |                              | 3,660,244  |   |      |   |           |  
|Effect of outstanding dilutive stock options       |  |                              | 192,311    |   |      |   |           |  
|Effect of outstanding dilutive stock warrants      |  |                              | 110,474    |   |      |   |           |  
|                                                   |  |                              |            |   |      |   |            |  
|Weighted average shares outstanding - diluted      |  |                              | 20,267,042 |   |      |   | 14,484,564 |  
|                                                   |  |                              |            |   |      |   |            |  
|Earnings (loss) per common share - basic           |  | $                            | 0.06       |   |      | $ | (0.02      | )
|                                                   |  |                              |            |   |      |   |            |  
|Earnings (loss) per common share - diluted         |  | $                            | 0.05       |   |      | $ | (0.02      | )
|                                                   |  |                              |            |   |      |   |            |  



|                                               |  |                             |            |   |      |   |            |  
|---------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                               |  | Nine Months Ended March 31, |           
|                                               |  | 2008                        |            |   | 2007 |  
|Numerator:                                     |  |                             |            |   |      |   |            |  
|Net income                                     |  | $                           | 2,349,000  |   |      | $ | 319,000    |  
|Less: preferred stock dividends                |  |                             | (324,000   | ) |      |   | (260,000   | )
|                                               |  |                             |            |   |      |   |            |  
|Net income available to common stockholders    |  | $                           | 2,025,000  |   |      | $ | 59,000     |  
|                                               |  |                             |            |   |      |   |            |  
|Denominator:                                   |  |                             |            |   |      |   |            |  
|Weighted average shares outstanding - basic    |  |                             | 16,096,985 |   |      |   | 13,908,920 |  
|                                               |  |                            
|Assumed conversion of dilutive preferred stock |  |                             | 3,660,244  |   |      |   |           |  
|Effect of outstanding dilutive stock options   |  |                             | 224,007    |   |      |   | 1,087,807  |  



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|                                              |  |   |            |  |   |           
|--------------------------------------------- |  | - | ---------- |  | - | ----------
|Effect of outstanding dilutive stock warrants |  |   | 127,000    |  |   | 389,473   
|                                              |  |   |            |  |   |           
|Weighted average shares outstanding - diluted |  |   | 20,108,236 |  |   | 15,386,200
|                                              |  |   |            |  |   |           
|Earnings per common share - basic             |  | $ | 0.13       |  | $ | 0.00      
|                                              |  |   |            |  |   |           
|Earnings per common share - diluted           |  | $ | 0.12       |  | $ | 0.00      
|                                              |  |   |            |  |   |           

7. Liquidity and Capital Resources

In June 2006, the Company raised capital through a sale of $4 million of its Series F Convertible Preferred Stock (Series F). Under the terms of the Purchase Agreement, the holders of the Series E shares
received an option to require the Company to redeem up to 12.5% of their holdings ($500,000) each quarter beginning July 1, 2008. The holders of the Series F shares have informally expressed their intention to exercise this option and the
Company expects to be required to fully redeem the entire $4 million during the next two fiscal years. Based on the current balance of cash and cash equivalents, the $5 million of unused line of credit that is available to the Company and cash to be
generated from future operations and other available capital resources, management believes that it has sufficient sources of working capital to fund the redemption of the Series F issuance as well as its operations in the normal course of business.

The Companys operations have continued to improve during this fiscal year and it has generated additional capital to further strengthen its balance
sheet. As a result, as of March 31, 2008, stockholders equity was $8,737,000.



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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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



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



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| |  |  | 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 93% 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 March 31, 2008 Compared to the Three Months Ended March 31, 2007

The following tables set forth a comparison of the Companys results of operations for the three-month period ended March 31, 2008 to the three
month period ended March 31, 2007. 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 March 31, |           
|                   | 2008 |                              | 2007       |  | % change |           
|Revenues:          |      |                              |            |  |          |            |  |       |   
|Product sales      |      | $                            | 6,341,000  |  | $        | 9,094,000  |  | (30.3 | )%
|Service revenue    |      |                              | 3,132,000  |  |          | 2,802,000  |  | 11.8  | % 
|Commission revenue |      |                              | 3,279,000  |  |          | 2,688,000  |  | 22.0  | % 
|                   |      |                              |            |  |          |            |  |       |   
|Total revenues     |      | $                            | 12,752,000 |  | $        | 14,584,000 |  | (12.6 | )%
|                   |      |                              |            |  |          |            |  |       |   

Revenues. Total revenues for the three months ended March 31, 2008 decreased
$1,832,000 or 12.6% when compared to the same period in the prior fiscal year.

Product sales decreased 30.3% when compared to the same
period in the prior fiscal year due to a smaller number of sales professionals employed by the Company, a weakening national economy and less production by the current sales force.

Service revenue showed continued growth, consistent with the Companys operating plan, increasing by $330,000, or 11.8%, for the three months ended
March 31, 2008 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 22%, or $591,000, for the three months ended March 31, 2008 when compared to the same period in the prior
fiscal year.Included in commission revenues for the current fiscal quarter is a $770,000 commission that the Company earned from a single sale, the largest such sale and commission in the Companys history. While management believes
that it is unlikely that the Company will close a similarly sized sale in future periods, Avatech has in the past closed large sales of its products that yielded significant commission revenues and expects that large sales opportunities may arise in
the future.

Cost of Revenues and Gross Margin



|                        |  |                              |           |      |   |           |  |       |   
|----------------------- |  | ---------------------------- | --------- | ---- | - | --------- |  | ----- | --
|                        |  | Three Months Ended March 31, |          
|                        |  | 2008                         |           | 2007 |   | % change  | 
|Cost of revenue:        |  |                              |           |      |   |           |  |       |   
|Cost of product sales   |  | $                            | 4,413,000 |      | $ | 6,236,000 |  | (29.2 | )%
|Cost of service revenue |  |                              | 2,109,000 |      |   | 1,876,000 |  | 12.4  | % 
|                        |  |                              |           |      |   |           |  |       |   
|Total cost of revenue   |  | $                            | 6,522,000 |      | $ | 8,112,000 |  | (19.6 | )%
|                        |  |                              |           |      |   |           |  |       |   
|Gross margin            |  | $                            | 6,230,000 |      | $ | 6,472,000 |  |       |   
|                        |  |                              |           |      |   |           |  |       |   

Cost of revenue. The total cost of revenue decreased $1,590,000, or 19.6%, for the three
months ended March 31, 2008 when compared to the same period in the prior fiscal year.

Cost of product sales decreased 29.2% while
product sales decreased 30.3% during the three months ended March 31, 2008 as compared with the same period the prior fiscal year. Product costs decreased at a



16



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##### Table of Contents

lower 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 $233,000, or 12.4%, for the three months ended March 31, 2008 when compared to the same period in the prior fiscal
year, while service revenues increased $330,000 or 11.8%. Cost of service revenue as a percentage of related revenue remained nearly flat at 67.3% versus 67.0% during the three months ended March 31, 2008 when compared to the same period in the
prior fiscal year. Service revenue per person increased this quarter over the same quarter last year as a result of a more experienced services team and greater management focus on improving such productivity.

Gross margin. The Companys gross margin percentage increased to 48.9% for the three months ended March 31, 2008 as compared to 44.4%
for the same period in the prior fiscal year, primarily due to the increased commission revenue as previously discussed.

Other Operating Expenses



|                                    |  |                              |           |      |   |           |  |       |   
|----------------------------------- |  | ---------------------------- | --------- | ---- | - | --------- |  | ----- | --
|                                    |  | Three Months Ended March 31, |          
|                                    |  | 2008                         |           | 2007 |   | % change  | 
|Other operating expenses:           |  |                              |           |      |   |           |  |       |   
|Selling, general and administrative |  | $                            | 4,744,000 |      | $ | 6,403,000 |  | (25.9 | )%
|Depreciation and amortization       |  |                              | 168,000   |      |   | 180,000   |  | (6.7  | )%
|                                    |  |                              |           |      |   |           |  |       |   
|Total other operating expenses      |  | $                            | 4,912,000 |      | $ | 6,583,000 |  | (25.4 | )%
|                                    |  |                              |           |      |   |           |  |       |   

Selling, General and Administrative Expense. Selling, general and administrative expenses
decreased $1,659,000, or 25.9%, for the three months ended March 31, 2008 when compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of the total revenues was 37.2% for the three months
ended March 31, 2008, down from 43.9% for the same period in the prior fiscal year. During the third quarter of fiscal year 2007, the Company incurred severance costs of $525,000 related to the departure of its President. Excluding the effect
of the severance costs, the Company decreased its selling, general and administrative expenses for the quarter ended March 31, 2008 by $1.1 million when compared to the same period in the prior fiscal year through cost-cutting initiatives. The
cost-cutting initiatives began during the fourth quarter of fiscal year 2007 and included a reduction in executive and senior management positions, three office closings, and elimination of non-critical positions.

Depreciation and Amortization. Depreciation and amortization expenses decreased $12,000, or 6.7%, for the three months ended March 31, 2008
when compared to the same period in the prior fiscal year as a result of fewer depreciable assets.

Interest and Other Income (Expense), net



|                                    |  |                              |        |      |   |         |          |  |        |   
|----------------------------------- |  | ---------------------------- | ------ | ---- | - | ------- | -------- |  | ------ | --
|                                    |  | Three Months Ended March 31, |       
|                                    |  | 2008                         |        | 2007 |   |         | % change | 
|Interest and other income (expense) |  | $                            | 19,000 |      | $ | (30,000 | )        |  | (163.3 | )%
|                                    |  |                              |        |      |   |         |          |  |        |   

Interest and other income (expense). The Company earned $19,000 in net interest and other
income during the three months ended March 31, 2008 compared to a net $30,000 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



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##### Table of Contents

|                   |  |                              |         |      |   |          |  |       |  
|------------------ |  | ---------------------------- | ------- | ---- | - | -------- |  | ----- | -
|                   |  | Three Months Ended March 31, |        
|                   |  | 2008                         |         | 2007 |   | % change | 
|Income tax expense |  | $                            | 332,000 |      | $ | 83,000   |  | 300.0 | %
|                   |  |                              |         |      |   |          |  |       |  

Income Tax Expense. The Company recorded a tax provision of $332,000 during the three
months ended March 31, 2008, a 300% increase over the $83,000 recorded for the same period in the prior fiscal year as a 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.

Nine Months Ended March 31, 2008 Compared to the Nine Months Ended March 31, 2007

The following tables set forth
a comparison of the Companys results of operations for the nine month period ended March 31, 2008 to the nine month period ended March 31, 2007. The amounts are derived from selected items reflected in our unaudited Consolidated
Statements of Operations included elsewhere in this report. The nine-month financial results are not necessarily indicative of future results.

Revenues



|                   |  |                             |            |      |   |            |  |       |   
|------------------ |  | --------------------------- | ---------- | ---- | - | ---------- |  | ----- | --
|                   |  | Nine Months Ended March 31, |           
|                   |  | 2008                        |            | 2007 |   | % change   | 
|Revenues:          |  |                             |            |      |   |            |  |       |   
|Product sales      |  | $                           | 20,960,000 |      | $ | 23,614,000 |  | (11.2 | )%
|Service revenue    |  |                             | 8,635,000  |      |   | 7,767,000  |  | 11.2  | % 
|Commission revenue |  |                             | 8,505,000  |      |   | 7,660,000  |  | 11.0  | % 
|                   |  |                             |            |      |   |            |  |       |   
|Total revenues     |  | $                           | 38,100,000 |      | $ | 39,041,000 |  | (2.4  | )%
|                   |  |                             |            |      |   |            |  |       |   

Revenues. Total revenues for the nine months ended March 31, 2008 decreased $941,000
or 2.4% when compared to the same period in the prior fiscal year

Product sales decreased 11.2% when compared to the same period in the
prior fiscal year mainly due to a smaller number of sales professionals employed by the Company, a weakening national economy and less production by the current sales force. However, the Company has increased its average sales and gross margin per
salesperson during the nine months ended March 31, 2008 when compared to the same period in the prior fiscal year and expects to show overall revenue growth in future quarters.

Service revenue showed continued growth, consistent with the Companys operating plan, increasing by $868,000, or 11.2%, for the nine months ended
March 31, 2008 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.



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##### Table of Contents

Commission revenue increased by 11.0%, or $845,000, for the nine months ended March 31, 2008 when
compared to the same period in the prior fiscal year. As previously discussed, $770,000 of the increase is due to a single sale which occurred during the third fiscal quarter. Excluding the effect of the single large sale, the Company achieved a
modest increase in commission revenue despite having a smaller number of sales professionals. The increased productivity resulted from improved sales techniques for subscription contracts, which are classified as commission revenue.

Cost of Revenues and Gross Margin



|                        |  |                             |            |      |   |            |  |      |   
|----------------------- |  | --------------------------- | ---------- | ---- | - | ---------- |  | ---- | --
|                        |  | Nine Months Ended March 31, |           
|                        |  | 2008                        |            | 2007 |   | % change   | 
|Cost of revenue:        |  |                             |            |      |   |            |  |      |   
|Cost of product sales   |  | $                           | 14,272,000 |      | $ | 15,418,000 |  | (7.4 | )%
|Cost of service revenue |  |                             | 6,129,000  |      |   | 5,442,000  |  | 12.6 | % 
|                        |  |                             |            |      |   |            |  |      |   
|Total cost of revenue   |  | $                           | 20,401,000 |      | $ | 20,860,000 |  | (2.2 | )%
|                        |  |                             |            |      |   |            |  |      |   
|Gross margin            |  | $                           | 17,699,000 |      | $ | 18,181,000 |  |      |   
|                        |  |                             |            |      |   |            |  |      |   

Costs of revenue. Total cost of revenue decreased $459,000, or 2.2%, for the nine months
ended March 31, 2008 as compared to the same period in the prior fiscal year.

Cost of product sales decreased 7.4% while product
sales decreased 11.2% during the nine months ended March 31, 2008 when compared with the same period the prior fiscal year. Product costs decreased at a lower 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 average revenue and margin per salesperson during the nine months ended March 31, 2008, when compared to the same period in the
prior fiscal year.

Cost of service revenue increased $687,000, or 12.6%, for the nine months ended March 31, 2008 when compared to
the same period in the prior fiscal year, while service revenues increased $868,000 or 11.2%. Cost of service revenue as a percentage of related revenue remained almost flat, increasing to 71.0% versus 70.1% during the nine months ended
March 31, 2008 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 nine months ended March 31, 2007 but received
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 nine months ended March 31, 2008 over the same period last
year as a result of a more experienced services team and greater management focus on improving such productivity.

Gross margin. The
Companys gross margin percentage remained virtually flat at 46.5% for the nine months ended March 31, 2008 versus 46.6% for the same period in the prior fiscal year.



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##### Table of Contents

Other Operating Expenses



|                                    |  |                             |            |      |   |            |  |       |   
|----------------------------------- |  | --------------------------- | ---------- | ---- | - | ---------- |  | ----- | --
|                                    |  | Nine Months Ended March 31, |           
|                                    |  | 2008                        |            | 2007 |   | % change   | 
|Other operating expenses:           |  |                             |            |      |   |            |  |       |   
|Selling, general and administrative |  | $                           | 14,093,000 |      | $ | 16,998,000 |  | (17.1 | )%
|Depreciation and amortization       |  |                             | 523,000    |      |   | 515,000    |  | 1.6   | % 
|                                    |  |                             |            |      |   |            |  |       |   
|Total other operating expenses      |  | $                           | 14,616,000 |      | $ | 17,513,000 |  | (16.5 | )%
|                                    |  |                             |            |      |   |            |  |       |   

Selling, General and Administrative Expense. Selling, general and administrative expenses
decreased $2,905,000, or 17.1%, for the nine months ended March 31, 2008 when compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of the total revenues was 37.0% for the nine months
ended March 31, 2008, down from 43.5% for the same period in the prior fiscal year. During the third quarter of fiscal year 2007, the Company incurred severance costs of $525,000 related to the resignation of its President. Excluding the effect
of the severance costs, the Company decreased its selling, general and administrative expenses for the quarter ended March 31, 2008 by $2.4 million when compared to the same period in the prior fiscal year through cost-cutting initiatives. The
cost-cutting initiatives began during the fourth quarter of fiscal year 2007 and included a reduction in executive and senior management positions, three office closings, and elimination of non-critical positions.

Depreciation and Amortization. Depreciation and amortization expenses remained almost flat, increasing $8,000, or 1.6%, for the nine months ended
March 31, 2008 when compared to the same period in the prior fiscal year as a result of purchases of fixed assets.

Interest and Other Income
(Expense), net



|                                    |  |                             |        |      |   |          |          |  |        |   
|----------------------------------- |  | --------------------------- | ------ | ---- | - | -------- | -------- |  | ------ | --
|                                    |  | Nine Months Ended March 31, |       
|                                    |  | 2008                        |        | 2007 |   |          | % change | 
|Interest and other income (expense) |  | $                           | 55,000 |      | $ | (150,000 | )        |  | (136.7 | )%
|                                    |  |                             |        |      |   |          |          |  |        |   

Interest and other income (expense). The Company earned $55,000 in other income, net,
during the nine months ended March 31, 2008 compared to a net $150,000 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



|                   |  |                             |         |      |   |          |  |       |  
|------------------ |  | --------------------------- | ------- | ---- | - | -------- |  | ----- | -
|                   |  | Nine Months Ended March 31, |        
|                   |  | 2008                        |         | 2007 |   | % change | 
|Income tax expense |  | $                           | 789,000 |      | $ | 199,000  |  | 296.5 | %
|                   |  |                             |         |      |   |          |  |       |  

Income Tax Expense. The Company recorded a tax provision of $789,000 during the nine months
ended March 31, 2008, a 296.5% increase over the $199,000 recorded for the same period in the prior fiscal year as a 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.



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##### Table of Contents

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.

In June 2006, the Company raised capital through a sale of $4 million of its Series F Convertible Preferred Stock (Series F). Under the terms of the Purchase Agreement, the holders of the Series E shares
received an option to require the Company to redeem up to 12.5% of their holdings ($500,000) each quarter beginning July 1, 2008. The holders of the Series F shares have informally expressed their intention to exercise this option and the
Company expects to be required to fully redeem the entire $4 million during its next two fiscal years. Based on the current balance of cash and cash equivalents, the $5 million of unused line of credit that is available to the Company and cash to be
generated from future operations and other available capital resources, management believes that it has sufficient sources of working capital to fund the redemption of the Series F issuance as well as its operations in the normal course of business.

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 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 92% 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. Net investing activities for the nine months ended March 31, 2008 were approximately $234,000, compared to $619,000 for the same period in 2007. For the nine months ended
March 31, 2007, this balance also included payments made to acquire the customer list of TTS, Inc.

For the nine months ended
March 31, 2008, net cash provided by operating activities was $4,227,000, compared with $144,000 cash used in operating activities during the same period in 2007, resulting primarily from increased net income coupled with improved collection of
accounts receivable.

For the nine months ended March 31, 2008, the Company used $1,534,000 in financing activities due to repayments
made on borrowings drawn against the line of credit as compared to being provided $1,488,000 of cash for the same period in 2007. For the nine months ended March 31, 2008, the Company paid down $1,408,000 of the outstanding balance on 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 March 31, 2008 was the banks prime rate plus one-half percent, or 5.75%. The loan has a
December 31, 2008 expiration date and is secured by all of the Companys assets, except inventory.

There were no outstanding
borrowings from the bank under this line of credit as of March 31, 2008 and approximately $1.4 million as of March 31, 2007.

The
Company had no long-term debt at March 31, 2008, and had working capital of $3,939,000.



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##### Table of Contents

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 March 31, 2008:



|                                   |  |       |           |                 |   |             |  |             |           |                  |   |         |  |   |       
|---------------------------------- |  | ----- | --------- | --------------- | - | ----------- |  | ----------- | --------- | ---------------- | - | ------- |  | - | ------
|                                   |  | Total |           | Less than 1year |   | 1  3 years |  | 3  5 years |           | More than 5years
|Contractual Obligations            |  |       |           |                 |   |             |  |             |           |                  |   |         |  |   |       
|Interest on fixed rate obligations |  |       | 1,000     |                 |   | 1,000       |  |             |          |                  |   |        |  |   |      
|Operating leases                   |  |       | 4,225,000 |                 |   | 1,314,000   |  |             | 2,041,000 |                  |   | 817,000 |  |   | 53,000
|Capital lease obligations          |  |       | 1,000     |                 |   | 1,000       |  |             |          |                  |   |        |  |   |      
|                                   |  |       |           |                 |   |             |  |             |           |                  |   |         |  |   |       
|Total obligations                  |  | $     | 4,227,000 |                 | $ | 1,316,000   |  | $           | 2,041,000 |                  | $ | 817,000 |  | $ | 53,000
|                                   |  |       |           |                 |   |             |  |             |           |                  |   |         |  |   |       

Market Risk

The Company is exposed to market risk from changes in interest rates associated with its variable rate line of credit. At March 31, 2008, there was no 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 4T. | 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 March 31, 2008 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.



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During the quarter ended March 31, 2008, 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 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: May 14, 2008 |  | By                      |  | /s/ George M. Davis                                 
|                   |  |                         |  | George M. Davis                                     
|                   |  |                         |  | President and Chief Executive Officer               
|                   |  |                        
|Date: May 14, 2008 |  | By                      |  | /s/ Lawrence Rychlak                                
|                   |  |                         |  | Lawrence Rychlak                                    
|                   |  |                         |  | Executive Vice President and Chief Financial Officer
|                   |  |                         |  | (Principal financial and accounting officer)        



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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 (furnished herewith)                        



25