---



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q/A

(Amendment No. 2)



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



For the quarterly period ended December 31, 2003



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.)



|                                          |  |           
|----------------------------------------- |  | ----------
|11400-A Cronridge Drive, 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 an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ̈No x



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



|                                       |  |                                 
|-------------------------------------- |  | --------------------------------
|Class                                  |  | Outstanding at February 13, 2004
|Common Stock, par value $.01 per share |  | 9,484,986                       



---



---

EXPLANATORY NOTE



We are filing this Amendment No. 2 to our Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2003 for the purpose of
amending and restating Items 1 and 2 of Part I, containing our unaudited condensed consolidated financial statements and related notes as of December 31, 2003 and for the three months ended December 31, 2003 and 2002 and Managements Discussion
and Analysis of Financial Condition and Results of Operations for the same periods. The restatement relates to certain service employees compensation that we reclassified from selling, general and administrative expenses to cost of service
revenue to correct an error and is further discussed in Note 3 to the restated condensed consolidated financial statements included herein. In addition, we have amended Item 6 of Part II to reflect the filing of updated certifications pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended. This Form 10-Q/A does not reflect events occurring after the filing of the original
form 10-Q or modify or update those disclosures affected by subsequent events.





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AVATECH SOLUTIONS, INC. AND SUBSIDIARIES



INDEX



|           |  |                                                                                                   |  |     
|---------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                   |  | Page
|           |  |                                                                                                  
|PART I     |  | FINANCIAL INFORMATION                                                                             |  |     
|           |  |                                                                                                  
|Item 1.    |  | Consolidated Financial Statements                                                                 |  |     
|           |  |                                                                                                  
|           |  | Consolidated Balance Sheets  June 30, 2003 and December 31, 2003 (Unaudited)                     |  | 4   
|           |  |                                                                                                  
|           |  | Consolidated Statements of Operations  Three months ended December 31, 2003 and 2002 (Unaudited) |  | 6   
|           |  |                                                                                                  
|           |  | Consolidated Statements of Operations  Six months ended December 31, 2003 and 2002 (Unaudited)   |  | 7   
|           |  |                                                                                                  
|           |  | Consolidated Statement of Stockholders Deficit (Unaudited)                                       |  | 8   
|           |  |                                                                                                  
|           |  | Consolidated Statements of Cash Flows  Six months ended December 31, 2003 and 2002 (Unaudited)   |  | 9   
|           |  |                                                                                                  
|           |  | Notes to Consolidated Financial Statements  December 31, 2003 (Unaudited)                        |  | 10  
|           |  |                                                                                                  
|Item 2.    |  | Managements Discussion and Analysis of Results of Operations and Financial Condition             |  | 19  
|           |  |                                                                                                  
|PART II    |  | OTHER INFORMATION                                                                                 |  |     
|           |  |                                                                                                  
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                  |  | 25  
|           | 
|SIGNATURES |  | 25                                                                                               





---

Part I. Financial Information



Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets



|                                                                                                   |  |               |           |                   |   |          
|-------------------------------------------------------------------------------------------------- |  | ------------- | --------- | ----------------- | - | ---------
|                                                                                                   |  | June 30, 2003 |           | December 31, 2003
|                                                                                                   |  | (audited)     |           | (unaudited)      
|Assets                                                                                             |  |               |           |                   |   |          
|Current assets:                                                                                    |  |               |           |                   |   |          
|Cash and cash equivalents                                                                          |  | $             | 540,384   |                   | $ | 486,549  
|Accounts receivable, less allowance of $160,000 at June 30, 2003 and $136,000 at December 31, 2003 |  |               | 3,393,123 |                   |   | 3,874,382
|Inventory                                                                                          |  |               | 146,877   |                   |   | 186,487  
|Prepaid expenses                                                                                   |  |               | 395,189   |                   |   | 469,032  
|Other current assets                                                                               |  |               | 94,258    |                   |   | 107,318  
|                                                                                                   |  |               |           |                   |   |          
|Total current assets                                                                               |  |               | 4,569,831 |                   |   | 5,123,768
|Property and equipment:                                                                            |  |               |           |                   |   |          
|Computer software and equipment                                                                    |  |               | 2,925,159 |                   |   | 2,869,085
|Office, furniture and equipment                                                                    |  |               | 760,020   |                   |   | 604,522  
|Leasehold improvements                                                                             |  |               | 207,661   |                   |   | 207,661  
|                                                                                                   |  |               |           |                   |   |          
|                                                                                                   |  |               | 3,892,840 |                   |   | 3,681,268
|Less accumulated depreciation and amortization                                                     |  |               | 3,255,361 |                   |   | 3,225,188
|                                                                                                   |  |               |           |                   |   |          
|                                                                                                   |  |               | 637,479   |                   |   | 456,080  
|Goodwill                                                                                           |  |               | 52,272    |                   |   | 52,272   
|Other assets                                                                                       |  |               | 12,385    |                   |   | 69,486   
|                                                                                                   |  |               |           |                   |   |          
|Total assets                                                                                       |  | $             | 5,271,967 |                   | $ | 5,701,606
|                                                                                                   |  |               |           |                   |   |          



See accompanying notes.



4



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Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets (Continued)



|                                                                                                                                                                                 |  |               |            |   |                   |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                                                                                                                                                 |  | June 30, 2003 |            |   | December 31, 2003 |  
|                                                                                                                                                                                 |  | (audited)     |            |   | (unaudited)       |  
|Liabilities and stockholders deficit                                                                                                                                            |  |               |            |   |                   |   |            |  
|Current liabilities:                                                                                                                                                             |  |               |            |   |                   |   |            |  
|Accounts payable and accrued expenses                                                                                                                                            |  | $             | 5,089,207  |   |                   | $ | 4,672,045  |  
|Accrued compensation and related benefits                                                                                                                                        |  |               | 354,555    |   |                   |   | 381,880    |  
|Borrowings under line-of-credit                                                                                                                                                  |  |               | 1,634,709  |   |                   |   | 1,683,370  |  
|Notes payable to related parties                                                                                                                                                 |  |               |           |   |                   |   | 885,420    |  
|Current portion of long-term debt                                                                                                                                                |  |               | 250,000    |   |                   |   | 77,500     |  
|Deferred revenue                                                                                                                                                                 |  |               | 736,963    |   |                   |   | 611,037    |  
|Other current liabilities                                                                                                                                                        |  |               | 325,920    |   |                   |   | 298,927    |  
|                                                                                                                                                                                 |  |               |            |   |                   |   |            |  
|Total current liabilities                                                                                                                                                        |  |               | 8,391,354  |   |                   |   | 8,610,179  |  
|Long-term debt                                                                                                                                                                   |  |               |           |   |                   |   | 1,172,500  |  
|Notes payable to related parties                                                                                                                                                 |  |               | 966,503    |   |                   |   |           |  
|Other long-term liabilities                                                                                                                                                      |  |               | 363,307    |   |                   |   | 322,286    |  
|Commitments and contingencies                                                                                                                                                    |  |               |           |   |                   |   |           |  
|Minority interest                                                                                                                                                                |  |               | 1,525,000  |   |                   |   | 1,525,000  |  
|Stockholders deficit:                                                                                                                                                           |  |               |            |   |                   |   |            |  
|Series C Convertible Preferred Stock, $0.01 par value; 1,000,000 shares authorized and 172,008 issued at June 30, 2003 and -0- shares
authorized and issued at December 31, 2003 |  |               | 1,720      |   |                   |   |           |  
|Series D Convertible Preferred Stock, $0.01 par value; -0- shares authorized and issued at June 30, 2003 and 1,297,537 shares authorized and
issued at December 31, 2003         |  |               |           |   |                   |   | 12,975     |  
|Common stock, $0.01 par value; 22,500,000 shares authorized; 8,897,874 and 9,478,464 shares issued and outstanding at June 30, 2003 and
December 31, 2003, respectively          |  |               | 88,980     |   |                   |   | 94,785     |  
|Additional paid-in capital                                                                                                                                                       |  |               | 3,242,454  |   |                   |   | 3,769,983  |  
|Accumulated deficit                                                                                                                                                              |  |               | (9,307,351 | ) |                   |   | (9,806,102 | )
|                                                                                                                                                                                 |  |               |            |   |                   |   |            |  
|Total stockholders deficit                                                                                                                                                      |  |               | (5,974,197 | ) |                   |   | (5,928,359 | )
|                                                                                                                                                                                 |  |               |            |   |                   |   |            |  
|Total liabilities and stockholders deficit                                                                                                                                      |  | $             | 5,271,967  |   |                   | $ | 5,701,606  |  
|                                                                                                                                                                                 |  |               |            |   |                   |   |            |  



See accompanying notes.



5



---

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations



|                                                                    |  |                                 |           |   |                                |   |           |  
|------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------ | - | --------- | -
|                                                                    |  | Three Months Ended December 31, |          
|                                                                    |  | 2002                            |           |   | 2003                           |  
|                                                                    |  | (unaudited)                     |           |   | (unaudited andrestatedNote 3) |  
|Revenues:                                                           |  |                                 |           |   |                                |   |           |  
|Product sales                                                       |  | $                               | 2,948,353 |   |                                | $ | 5,183,449 |  
|Service revenue                                                     |  |                                 | 1,696,290 |   |                                |   | 1,283,609 |  
|Commission revenue                                                  |  |                                 | 1,040,803 |   |                                |   | 1,400,015 |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|                                                                    |  |                                 | 5,685,446 |   |                                |   | 7,867,073 |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|Cost of revenue:                                                    |  |                                 |           |   |                                |   |           |  
|Cost of product sales                                               |  |                                 | 2,081,173 |   |                                |   | 3,933,520 |  
|Cost of service revenue                                             |  |                                 | 970,441   |   |                                |   | 1,047,075 |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|                                                                    |  |                                 | 3,051,614 |   |                                |   | 4,980,595 |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|Gross margin                                                        |  |                                 | 2,633,832 |   |                                |   | 2,886,478 |  
|Other expenses:                                                     |  |                                 |           |   |                                |   |           |  
|Selling, general and administrative                                 |  |                                 | 2,878,324 |   |                                |   | 2,662,030 |  
|Depreciation and amortization                                       |  |                                 | 116,056   |   |                                |   | 82,437    |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|                                                                    |  |                                 | 2,994,380 |   |                                |   | 2,744,467 |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|Operating income (loss)                                             |  |                                 | (360,548  | ) |                                |   | 142,011   |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|Other income (expense):                                             |  |                                 |           |   |                                |   |           |  
|Minority interest                                                   |  |                                 | (17,891   | ) |                                |   | (38,125   | )
|Interest and other income                                           |  |                                 | 5,352     |   |                                |   | 5,006     |  
|Interest expense                                                    |  |                                 | (74,830   | ) |                                |   | (95,172   | )
|                                                                    |  |                                 |           |   |                                |   |           |  
|                                                                    |  |                                 | (87,369   | ) |                                |   | (128,291  | )
|                                                                    |  |                                 |           |   |                                |   |           |  
|Income (loss) from continuing operations before income taxes        |  |                                 | (447,917  | ) |                                |   | 13,720    |  
|Income tax expense                                                  |  |                                 | 10,000    |   |                                |   | 10,000    |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|Income (loss) from continuing operations                            |  |                                 | (457,917  | ) |                                |   | 3,720     |  
|Income (loss) from operations of discontinued operating segments    |  |                                 | (341,812  | ) |                                |   | 1,005     |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|Net income (loss)                                                   |  |                                 | (799,729  | ) |                                |   | 4,725     |  
|Preferred stock dividends                                           |  |                                 |          |   |                                |   | 10,122    |  
|                                                                    |  |                                 |           |   |                                |   |           |  
|Loss attributable to common stockholders                            |  | $                               | (799,729  | ) |                                | $ | (5,397    | )
|                                                                    |  |                                 |           |   |                                |   |           |  
|Loss from continuing operations per common share, basic and diluted |  | $                               | (0.06     | ) |                                | $ | (0.00     | )
|                                                                    |  |                                 |           |   |                                |   |           |  
|Loss per common share, basic and diluted                            |  | $                               | (0.11     | ) |                                | $ | (0.00     | )
|                                                                    |  |                                 |           |   |                                |   |           |  
|Shares used in computation                                          |  |                                 | 7,172,370 |   |                                |   | 9,217,874 |  
|                                                                    |  |                                 |           |   |                                |   |           |  



See
accompanying notes.



6



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Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations



|                                                                        |  |                               |            |   |                               |   |            |  
|----------------------------------------------------------------------- |  | ----------------------------- | ---------- | - | ----------------------------- | - | ---------- | -
|                                                                        |  | Six Months Ended December 31, |           
|                                                                        |  | 2002                          |            |   | 2003                          |  
|                                                                        |  | (unaudited)                   |            |   | (unaudited andretatedNote 3) |  
|Revenues:                                                               |  |                               |            |   |                               |   |            |  
|Product sales                                                           |  | $                             | 6,055,329  |   |                               | $ | 8,688,397  |  
|Service revenue                                                         |  |                               | 3,036,328  |   |                               |   | 2,760,177  |  
|Commission revenue                                                      |  |                               | 1,927,428  |   |                               |   | 2,284,811  |  
|                                                                        |  |                               |            |   |                               |   |            |  
|                                                                        |  |                               | 11,019,085 |   |                               |   | 13,733,385 |  
|                                                                        |  |                               |            |   |                               |   |            |  
|Cost of revenue:                                                        |  |                               |            |   |                               |   |            |  
|Cost of product sales                                                   |  |                               | 4,138,400  |   |                               |   | 6,414,849  |  
|Cost of service revenue                                                 |  |                               | 1,809,839  |   |                               |   | 2,106,773  |  
|                                                                        |  |                               |            |   |                               |   |            |  
|                                                                        |  |                               | 5,948,239  |   |                               |   | 8,521,622  |  
|                                                                        |  |                               |            |   |                               |   |            |  
|Gross margin                                                            |  |                               | 5,070,846  |   |                               |   | 5,211,763  |  
|Other expenses:                                                         |  |                               |            |   |                               |   |            |  
|Selling, general and administrative                                     |  |                               | 5,767,097  |   |                               |   | 5,164,987  |  
|Depreciation and amortization                                           |  |                               | 230,189    |   |                               |   | 149,626    |  
|                                                                        |  |                               |            |   |                               |   |            |  
|                                                                        |  |                               | 5,997,286  |   |                               |   | 5,314,613  |  
|                                                                        |  |                               |            |   |                               |   |            |  
|Operating loss                                                          |  |                               | (926,440   | ) |                               |   | (102,850   | )
|                                                                        |  |                               |            |   |                               |   |            |  
|Other income (expense):                                                 |  |                               |            |   |                               |   |            |  
|Gain on the extinguishment of debt                                      |  |                               | 1,960,646  |   |                               |   |           |  
|Minority interest                                                       |  |                               | (17,891    | ) |                               |   | (76,250    | )
|Interest and other income                                               |  |                               | 11,960     |   |                               |   | 4,293      |  
|Interest expense                                                        |  |                               | (157,233   | ) |                               |   | (161,697   | )
|                                                                        |  |                               |            |   |                               |   |            |  
|                                                                        |  |                               | 1,797,482  |   |                               |   | (233,654   | )
|                                                                        |  |                               |            |   |                               |   |            |  
|Income (loss) from continuing operations before income taxes            |  |                               | 871,042    |   |                               |   | (336,504   | )
|Income tax expense                                                      |  |                               | 403,000    |   |                               |   | 21,000     |  
|                                                                        |  |                               |            |   |                               |   |            |  
|Income (loss) from continuing operations                                |  |                               | 468,042    |   |                               |   | (357,504   | )
|Loss from operations of discontinued operating segments                 |  |                               | (295,695   | ) |                               |   | (141,247   | )
|                                                                        |  |                               |            |   |                               |   |            |  
|Net income (loss)                                                       |  |                               | 172,347    |   |                               |   | (498,751   | )
|Preferred stock dividends                                               |  |                               |           |   |                               |   | 17,379     |  
|                                                                        |  |                               |            |   |                               |   |            |  
|Net income (loss) attributable to common stockholders                   |  | $                             | 172,347    |   |                               | $ | (516,130   | )
|                                                                        |  |                               |            |   |                               |   |            |  
|Earnings (loss) from continuing operations per share, basic and diluted |  | $                             | 0.06       |   |                               | $ | (0.04      | )
|                                                                        |  |                               |            |   |                               |   |            |  
|Earnings (loss) per common share, basic and diluted                     |  | $                             | 0.02       |   |                               | $ | (0.06      | )
|                                                                        |  |                               |            |   |                               |   |            |  
|Shares used in computation                                              |  |                               | 7,172,370  |   |                               |   | 9,177,399  |  
|                                                                        |  |                               |            |   |                               |   |            |  



See accompanying notes.



7



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Avatech Solutions, Inc. and Subsidiaries



Consolidated Statement of Stockholders Deficit (Unaudited)



|                                                                                             |  |                             |   |              |           |                          |   |                 |                    |           |   |                  |  |           |  |   |        |  |   |           |   |  |   |            |   |  |   |            |  
|-------------------------------------------------------------------------------------------- |  | --------------------------- | - | ------------ | --------- | ------------------------ | - | --------------- | ------------------ | --------- | - | ---------------- |  | --------- |  | - | ------ |  | - | --------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                                             |  | Convertible Preferred Stock |   | Common Stock |           | AdditionalPaid-InCapital |   |                 | AccumulatedDeficit |           |   | Total            | 
|                                                                                             |  | Series C                    |   |              | Series D  |                          |   |                 |                   
|                                                                                             |  | Number ofShares             |   |              | Par Value |                          |   | Number ofShares |                    | Par Value |   | Number of Shares |  | Par Value |  |   |       
|Balance at July 1, 2003                                                                      |  | 172,008                     |   |              | $         | 1,720                    |   |                 |                   |           | $ |                 |  | 8,897,874 |  | $ | 88,980 |  | $ | 3,242,454 |   |  | $ | (9,307,351 | ) |  | $ | (5,974,197 | )
|Issuance of restricted common stock as compensation                                          |  |                             |   |              |           |                          |   |                 |                    |           |   |                  |  | 580,590   |  |   | 5,805  |  |   | 60,692    |   |  |   |            |   |  |   | 66,497     |  
|Conversion of Series C Convertible Preferred Stock into Series D Convertible Preferred Stock |  | (172,008                    | ) |              |           | (1,720                   | ) |                 | 484,487            |           |   | 4,845            |  |           |  |   |        |  |   | (3,125    | ) |  |   |            |   |  |   |           |  
|Issuance of Series D Convertible Preferred Stock and warrants to purchase common stock       |  |                             |   |              |           |                          |   |                 | 813,050            |           |   | 8,130            |  |           |  |   |        |  |   | 479,700   |   |  |   |            |   |  |   | 487,830    |  
|Preferred stock dividends                                                                    |  |                             |   |              |           |                          |   |                 |                    |           |   |                  |  |           |  |   |        |  |   | (17,379   | ) |  |   |            |   |  |   | (17,379    | )
|Issuance of warrants                                                                         |  |                             |   |              |           |                          |   |                 |                    |           |   |                  |  |           |  |   |        |  |   | 7,641     |   |  |   |            |   |  |   | 7,641      |  
|Net loss                                                                                     |  |                             |   |              |           |                          |   |                 |                    |           |   |                  |  |           |  |   |        |  |   |           |   |  |   | (498,751   | ) |  |   | (498,751   | )
|                                                                                             |  |                             |   |              |           |                          |   |                 |                    |           |   |                  |  |           |  |   |        |  |   |           |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2003                                                                 |  |                            |   |              | $         |                         |   |                 | 1,297,537          |           | $ | 12,975           |  | 9,478,464 |  | $ | 94,785 |  | $ | 3,769,983 |   |  | $ | (9,806,102 | ) |  | $ | (5,928,359 | )
|                                                                                             |  |                             |   |              |           |                          |   |                 |                    |           |   |                  |  |           |  |   |        |  |   |           |   |  |   |            |   |  |   |            |  



See accompanying notes.



8



---

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                     |  |                               |             |   |      |   |             |  
|------------------------------------------------------------------------------------ |  | ----------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                     |  | Six Months Ended December 31, |            
|                                                                                     |  | 2002                          |             |   | 2003 |  
|                                                                                     |  | (unaudited)                   |            
|Cash flows from operating activities                                                 |  |                               |             |   |      |   |             |  
|Net income (loss)                                                                    |  | $                             | 172,347     |   |      | $ | (498,751    | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                               |             |   |      |   |             |  
|Provision for bad debts                                                              |  |                               | 44,565      |   |      |   | 55,336      |  
|Gain on extinguishment of debt                                                       |  |                               | (1,960,646  | ) |      |   |            |  
|Depreciation and amortization                                                        |  |                               | 313,642     |   |      |   | 149,626     |  
|Deferred income taxes                                                                |  |                               | 373,000     |   |      |   |            |  
|Write-off of in-process research and development                                     |  |                               | 282,000     |   |      |   |            |  
|Non-cash stock compensation expense                                                  |  |                               |            |   |      |   | 66,497      |  
|(Gain) Loss on disposal of property and equipment                                    |  |                               | (3,532      | ) |      |   | 14,121      |  
|Non-cash interest expense                                                            |  |                               | 1,920       |   |      |   | 29,529      |  
|Changes in operating assets and liabilities:                                         |  |                               |             |   |      |   |             |  
|Accounts receivable                                                                  |  |                               | 363,623     |   |      |   | (536,595    | )
|Inventory                                                                            |  |                               | 50,619      |   |      |   | (39,610     | )
|Prepaid expenses and other current assets                                            |  |                               | (394,748    | ) |      |   | (86,903     | )
|Accounts payable and accrued expenses                                                |  |                               | 742,899     |   |      |   | (417,162    | )
|Accrued compensation and related benefits                                            |  |                               | (16,988     | ) |      |   | 27,325      |  
|Deferred revenue                                                                     |  |                               | 60,661      |   |      |   | (125,926    | )
|Other current liabilities                                                            |  |                               | (165,924    | ) |      |   | (26,993     | )
|Other long-term liabilities                                                          |  |                               |            |   |      |   | (41,021     | )
|                                                                                     |  |                               |             |   |      |   |             |  
|Net cash used in operating activities                                                |  |                               | (136,562    | ) |      |   | (1,430,527  | )
|                                                                                     |  |                               |             |   |      |   |             |  
|Cash flows from investing activities                                                 |  |                               |             |   |      |   |             |  
|Cash received in merger, net of acquisition costs                                    |  |                               | 343,445     |   |      |   |            |  
|Purchase of property and equipment                                                   |  |                               | (75,811     | ) |      |   | (28,525     | )
|Proceeds from sale of property and equipment                                         |  |                               | 3,532       |   |      |   | 46,177      |  
|                                                                                     |  |                               |             |   |      |   |             |  
|Net cash provided by investing activities                                            |  |                               | 271,166     |   |      |   | 17,652      |  
|                                                                                     |  |                               |             |   |      |   |             |  
|Cash flows from financing activities                                                 |  |                               |             |   |      |   |             |  
|Proceeds from borrowings under line-of-credit                                        |  |                               | 13,618,320  |   |      |   | 15,066,775  |  
|Repayments of borrowings under line-of-credit                                        |  |                               | (13,607,019 | ) |      |   | (15,011,110 | )
|Proceeds from issuance of debt                                                       |  |                               | 1,175,000   |   |      |   | 1,000,000   |  
|Proceeds from issuance of preferred stock                                            |  |                               |            |   |      |   | 389,999     |  
|Payment of preferred stock dividends                                                 |  |                               |            |   |      |   | (17,379     | )
|Repayments of long-term debt                                                         |  |                               | (1,000,000  | ) |      |   |            |  
|Change in other assets related to financing costs                                    |  |                               | (1,612      | ) |      |   | (69,245     | )
|                                                                                     |  |                               |             |   |      |   |             |  
|Net cash provided by financing activities                                            |  |                               | 184,689     |   |      |   | 1,359,040   |  
|                                                                                     |  |                               |             |   |      |   |             |  
|Net change in cash and cash equivalents                                              |  |                               | 319,293     |   |      |   | (53,835     | )
|Cash and cash equivalents - beginning of period                                      |  |                               | 222,562     |   |      |   | 540,384     |  
|                                                                                     |  |                               |             |   |      |   |             |  
|Cash and cash equivalents - end of period                                            |  | $                             | 541,855     |   |      | $ | 486,549     |  
|                                                                                     |  |                               |             |   |      |   |             |  



See accompanying notes.



9



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Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003



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



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



The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or
regulations. The interim financial statements are unaudited, but reflect all adjustments (consisting of normal recurring accruals), which are, in managements opinion, necessary to present a fair statement of results of the interim periods
presented. These financial statements should be read in conjunction with the financial statements and the notes thereto in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2003. Operating results for the three and six
months ended December 31, 2003 are not necessarily indicative of results for any future period.



The consolidated financial statements include the accounts of Avatech Solutions, Inc. and its majority owned subsidiaries. One of the Companys subsidiaries has issued and outstanding preferred stock, which is
accounted for as minority interest. All intercompany accounts and transactions between the Company and its consolidated affiliated companies have been eliminated in consolidation.



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



FASB Interpretation No. 46



In December 2003, the FASB revised Interpretation No. 46, Consolidation of Variable Interest Entities, and postponed the effective date for certain variable
interests. The objective of FASB Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. It requires variable interest entities to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entitys activities or is entitled to receive a majority of the entitys residual returns or both. The Company currently does not have any interests in variable interest entities and,
therefore, the adoption of FASB Interpretation No. 46 during 2003 did not have an impact on the Companys financial position or results of operations.



FASB Statement No. 150



In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires the issuer to classify a financial instrument that is within the scope of the standard as
a liability if the financial instrument embodies an obligation of the issuer. Effective July 1, 2003, the Company adopted the provisions of Statement No. 150, which did not have any impact on its financial position or results of operations.



10



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Avatech Solutions, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)



|3. | Restatement of Cost of Service Revenues and Selling, General and Administrative Expenses
|-- | ----------------------------------------------------------------------------------------



The operating results for the three and six months ended December 31, 2003 have been restated to correct an error in the classification of
certain service employees compensation from selling, general and administrative expenses to cost of service revenue. The classification error totaled $554,000 for the three and six months ended December 31, 2003 and had no effect on net income
(loss) for those periods.



|                                                                                             |  |                                     |           |   |                                   |   |           |  
|-------------------------------------------------------------------------------------------- |  | ----------------------------------- | --------- | - | --------------------------------- | - | --------- | -
|                                                                                             |  | Three months endedDecember 31, 2003 |           |   | Six months endedDecember 31, 2003 |  
|Cost of service revenues, as previously reported                                             |  | $                                   | 493,557   |   |                                   | $ | 1,553,255 |  
|Adjustment to reclassify certain service employees compensation                             |  |                                     | 553,518   |   |                                   |   | 553,518   |  
|                                                                                             |  |                                     |           |   |                                   |   |           |  
|Cost of service revenues, as restated                                                        |  | $                                   | 1,047,075 |   |                                   | $ | 2,106,773 |  
|                                                                                             |  |                                     |           |   |                                   |   |           |  
|                                                                                             |  |                                    
|Selling, general and administrative expenses, as previously reported                         |  | $                                   | 3,215,548 |   |                                   | $ | 6,414,849 |  
|Adjustment to reclassify certain service employees compensation as cost of service revenues |  |                                     | (553,518  | ) |                                   |   | (553,518  | )
|                                                                                             |  |                                     |           |   |                                   |   |           |  
|Selling, general and administrative expenses, as restated                                    |  | $                                   | 2,662,030 |   |                                   | $ | 5,164,987 |  
|                                                                                             |  |                                     |           |   |                                   |   |           |  
|Gross margin, as previously reported                                                         |  |                                     | 43.7      | % |                                   |   | 42.0      | %
|                                                                                             |  |                                     |           |   |                                   |   |           |  
|Gross margin, as restated                                                                    |  |                                     | 36.7      | % |                                   |   | 37.9      | %
|                                                                                             |  |                                     |           |   |                                   |   |           |  



|4. | Discontinued Operations of Certain Operating Segments
|-- | -----------------------------------------------------



In June 2003, due to poor operating results, the Company closed a total of three offices located in New York, Michigan and Ohio. These locations were authorized software
dealers subject to the Companys channel partner agreement with its principal supplier. By virtue of these closings, the Company is no longer authorized to market or distribute software products subject to the channel partner agreements in
those areas.



Additionally, the Company closed another office located in
California in August 2003, which was also an authorized software dealer for which the Company is no longer authorized to market or distribute software products subject to the channel partner agreement with its principal supplier. In connection with
the closing of the California office in August 2003, the Company did not incur a gain or loss.



The discontinued operations were components of the Company as the operations and cash flows were clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company. The operations
and cash flows of the components have been eliminated from the ongoing operations of the Company, and the Company will not have any significant continuing involvement in the operations of the components. Accordingly, the historical results of
operations of these components are presented in the accompanying consolidated statements of operations for all periods as a separate component of operations classified as discontinued operations.



11



---

Avatech Solutions, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)



|4. | Discontinued Operations of Certain Operating Segments (continued)
|-- | -----------------------------------------------------------------



Summarized operating results of the discontinued operations are as follows:



|                  |  |                                 |          |                               |      |   |        |  |   |           |   |  |   |          |  
|----------------- |  | ------------------------------- | -------- | ----------------------------- | ---- | - | ------ |  | - | --------- | - |  | - | -------- | -
|                  |  | Three months ended December 31, |          | Six months ended December 31, |     
|                  |  | 2002                            |          |                               | 2003 |   | 2002   |  |   | 2003      |  
|Revenue           |  | $                               | 756,451  |                               |      | $ | 20,236 |  | $ | 1,281,674 |   |  | $ | 71,721   |  
|Net income (loss) |  | $                               | (341,812 | )                             |      | $ | 1,005  |  | $ | (295,695  | ) |  | $ | (141,247 | )



|5. | Debt and Gain on Extinguishment of Debt
|-- | ---------------------------------------



On September 11, 2003, the Company entered into a revolving line-of-credit agreement with a financial institution which expires September 2006, but is payable within 60
days of demand by the lender. This line of credit replaced the borrowing facility for $2.0 million that previously existed. The credit extended under this financing agreement is limited to the lesser of $2.0 million or 75% of the Companys
aggregate outstanding eligible accounts receivable. Borrowings under this line-of-credit bear interest at the higher of 7.5% or the prime rate plus 2.0% and are secured by the assets of the Company. In addition, the bank has the right to restrict
any prepayment of other indebtedness by the Company.



In November 2003, the
lender temporarily raised the credit limits to the lesser of $2.5 million or 75% of the Companys eligible accounts receivable. These credit terms will revert back to the original $2.0 million limit in February 2004. The balance outstanding
under this line-of-credit was $1.7 million at December 31, 2003.



On July 22,
2003, the Company entered into a marketing and channel distribution agreement with a software developer. Under this agreement, Avatech will provide marketing, distribution and related services for the developers products. In connection with
this agreement, the software developer has agreed to fund certain marketing costs incurred by the Company. Additionally, the arrangement provides for a loan by the software developer to fund working capital needs related to the distribution of these
products.



The terms of the loan agreement provide for a loan of $1,500,000
funded in two payments. Initial funding of $1,000,000 occurred on July 25, 2003. The remaining $500,000 of funding was provided on February 5, 2004. The loan agreement provides for repayment of principal plus interest at 6% per annum in thirty-five
equal quarterly installments commencing in January 2005. The Company is required to meet certain financial and non-financial covenants in connection with this agreement.



At June 30, 2002, the Company was obligated to one of its suppliers under a note agreement in the amount of $2.96 million, bearing interest
at 6.5% per annum. In August 2002, the Company entered into an agreement to extinguish the outstanding $2.96 million debt for a cash payment of $1.0 million and compliance with certain non-financial covenants. The gain on the extinguishment of the
debt of $1.96 million was recorded in August 2002.



On January 1, 2004, the
Company retired or refinanced $250,000 of subordinated notes payable. The Company paid $51,000 in cash to retire certain notes and issued new subordinated notes totaling $199,000. The new notes mature on July 1, 2005, with installment payments
totaling $26,000 due on July 1, 2004. In conjunction with this refinancing, the Company issued 45,000 warrants to purchase common stock for $0.21 per share. These warrants expire on July 1, 2005 and were valued at $7,300.



12



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Avatech Solutions, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)



|6. | Employee Stock Compensation Plans
|-- | ---------------------------------



The Company records compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25). Under APB No. 25, compensation expense is recorded over the vesting period to the extent that the fair value of the underlying stock on the date of grant exceeds the exercise or acquisition price of
the stock or stock-based award. Financial Accounting Standards Board Statement No. 123, Accounting for Stock Based Compensation (Statement 123) encourages companies to recognize expense for stock-based awards based on their
estimated fair value on the date of grant. Statement 123 requires the disclosure of pro forma income and earnings per share data in the notes to the financial statement if the fair value method is not adopted.



The following table illustrates the effect on net income (loss) and earnings (loss) per share
if the Company had applied the fair value recognition provisions of Statement 123 to stock-based employee compensation.



|                                                                                                                              |  |                                |            |   |                               |   |         |      |  |   |          |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ----------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                                                              |  | Three Months EndedDecember 30, |            |   | Six Months Ended December 30, |  
|                                                                                                                              |  | 2002                           |            |   | 2003                          |   |         | 2002 |  |   | 2003     |  
|Net income (loss), as reported                                                                                                |  | $                              | (799,729   | ) |                               | $ | 1,005   |      |  | $ | 172,347  |   |  | $ | (498,751 | )
|Add: Stock-based employee compensation cost included in net income (loss), net of taxes                                       |  |                                |           |   |                               |   | 6,125   |      |  |   |         |   |  |   | 56,350   |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes |  |                                | (354,497   | ) |                               |   | (56,935 | )    |  |   | (402,683 | ) |  |   | (57,258  | )
|                                                                                                                              |  |                                |            |   |                               |   |         |      |  |   |          |   |  |   |          |  
|Pro forma net income (loss)                                                                                                   |  | $                              | (1,154,226 | ) |                               | $ | (46,085 | )    |  | $ | (230,336 | ) |  | $ | (499,659 | )
|                                                                                                                              |  |                                |            |   |                               |   |         |      |  |   |          |   |  |   |          |  
|Net income (loss) per common share:                                                                                           |  |                                |            |   |                               |   |         |      |  |   |          |   |  |   |          |  
|Basic and diluted  as reported                                                                                               |  | $                              | (0.11      | ) |                               | $ | (0.00   | )    |  | $ | 0.02     |   |  | $ | (0.06    | )
|Basic and diluted  pro forma                                                                                                 |  | $                              | (0.16      | ) |                               | $ | (0.00   | )    |  | $ | (0.03    | ) |  | $ | (0.06    | )



A summary of stock option activity
during the six months ended December 31, 2003 and related information is included in the table below:



|                                            |  |           |   |  |                                |     
|------------------------------------------- |  | --------- | - |  | ------------------------------ | ----
|                                            |  | Options   |   |  | Weighted-average ExercisePrice
|Outstanding at July 1, 2003                 |  | 554,386   |   |  | $                              | 1.88
|Granted                                     |  | 838,865   |   |  |                                | 0.42
|Forfeited                                   |  | (210,399  | ) |  |                                | 3.71
|Outstanding at December 31, 2003            |  | 1,182,852 |   |  | $                              | 0.50
|                                            |  |           |   |  |                                |     
|Exercisable at December 31, 2003            |  | 259,084   |   |  | $                              | 0.78
|                                            |  |           |   |  |                                |     
|Weighted-average remaining contractual life |  | 8.8 Years |   |  |                                |     
|                                            |  |           |   |  |                                |     



13



---

Avatech Solutions, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)



|6. | Employee Stock Compensation Plans (continued)
|-- | ---------------------------------------------



Stock Option Cancellation Program and Fiscal Year 2004 Grants



In April 2003, the Company offered its employees a voluntary option to surrender and cancel
certain outstanding stock option agreements. Under the terms of the arrangement, the employee, if still employed, was eligible to receive an equivalent number of stock options six months and a day after the specific cancellation periods with an
exercise price equal to the market value of the common stock on the grant date. On November 4, 2003, the Company issued 274,486 options under this cancellation program that will vest over periods up to 24 months.



Employee Stock Purchase Plan



On September 24, 2003 the Company amended the Employee Stock Purchase Plan. The Plan allows
for the board to provide offering periods, not to exceed 27 months in duration, to employees owning less than 5% of the total combined voting power or value of all classes of stock of the Company. Common shares sold under the Plan shall not exceed
in the aggregate 450,000 shares. As of December 31, 2003, common stock sold under the Plan totaled 265,932 shares.



The Company initiated a six-month offering commencing January 1, 2004. Employees eligible to participate under the plan can accumulate funds, up to 15% of their
compensation, to purchase common stock through payroll deductions. At the conclusion of the offering, shares will be purchased on behalf of the employees at a price per share equal to the lower of 85% of the quoted market value of the common stock
on the first or last day of the offering.



Restricted Stock Award Plan



In July 2003, the Company issued 540,000 shares of restricted common
stock with a quoted market value of $0.163 share, to certain officers as compensation. The common stock is restricted based on various vesting periods ranging from twelve to twenty-four months. Compensation expense for these awards of $93,000 is
being recognized over the vesting period. The issuance resulted in compensation expense totaling $56,000 for the six months ended December 31, 2003.



|7. | Stock Dividend
|-- | --------------



The Companys board of directors authorized a three-for-one stock split in the form of a stock dividend, which was distributed to stockholders of record as of September 15, 2003 on October 1, 2003. All share and
per share data included in the consolidated financial statements have been restated to reflect the stock split.



14



---

Avatech Solutions, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)



|8. | Preferred Stock
|-- | ---------------



In the second quarter of fiscal year 2004, in connection with a Series D Convertible Preferred Stock (Series D) issuance, shareholders of Series C Convertible Preferred Stock were given the option to
convert their shares to Series D Convertible Preferred Stock. On December 31, 2003, 172,008 shares of Series C Convertible Preferred Stock, representing all outstanding shares, were converted into 484,487 shares of Series D.



The Company also issued 813,050 shares of Series D for cash proceeds totaling $390,000 and a
reduction in notes payable to a related party of $97,000. In connection with the issuance of Series D, 1.7 million warrants were granted to preferred shareholders. The warrants entitle the holder to purchase common stock at an exercise price of
$0.45 per share during the warrant exercise period, not to exceed one year after the date of issuance.



The Series D Convertible Preferred shares outstanding at December 31, 2003 totaled 1,297,537, and were issued with the following terms:



Redemption Feature



The preferred stock is redeemable in the event that the Company is engaged in a business combination that is approved by the board of directors and subsequently submitted
and approved by a vote of the Companys shareholders. Any director who holds shares of Series D is not eligible to vote on the proposed business combination. The redemption price is $0.60 per share plus an amount equal to all declared and
unpaid dividends accrued on such shares since the original issue date.



Voting Rights



Each holder of the preferred stock shall vote
together with all other classes and series of stock of the Company as a single class on all actions. Each share shall entitle the holder to one vote per share of common stock into which the preferred stock is then convertible on each such action.



Dividend Rate



The holders of the Series D are entitled to receive cumulative dividends at a rate of 10.0%
per annum when and as declared by the Board of Directors. Dividends are paid quarterly to preferred shareholders.



Conversion Feature



The preferred stock is convertible at any time beginning 120 days after the original issuance date at the option of the holder and automatically converts into common stock if the common stock trades for more than
$2.25 per share for 60 consecutive trading days in such market.



Each share of
preferred stock is convertible into shares of common stock by multiplying the appropriate conversion rate in effect by the number of shares of preferred stock being converted. Currently, the conversion rate is two shares of common stock for each
share of Series D; however, this rate may be adjusted due to stock splits, dividends, and other events defined in the stock purchase agreement.



15



---

Avatech Solutions, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)



|8. | Preferred Stock (continued)
|-- | ---------------------------



Liquidation Preference



In the event of a liquidation, dissolution or winding up of the Company, the holders of Series D are entitled to receive for each share,
prior and in preference to any distribution of any of the assets or surplus funds to the holders of common stock, an amount equal to $0.60 per share plus all accumulated but unpaid dividends. If upon the occurrence of such event, the assets and
funds thus distributed among the holders are insufficient to permit the payment of the preferential amount, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the preferred
stockholders.



|9. | Stock Purchase Warrants
|-- | -----------------------



As of December 31, 2003, the Company has outstanding warrants to purchase common stock. A summary of the warrants is as follows:



|                 |  |                |  |                
|---------------- |  | -------------- |  | ---------------
|Number of Shares |  | Exercise Price |  | Expiration Date
|45,000           |  | $0.01          |  | August 2013    
|97,200           |  | $0.27          |  | June 2008      
|45,000           |  | $0.21          |  | July 2005      
|180,000          |  | $43.33         |  | February 2005  
|1,007,823        |  | $0.45          |  | December 2004  
|722,220          |  | $0.45          |  | November 2004  
|37,500           |  | $83.33         |  | June 2004      
|18,750           |  | $6.67          |  | June 2004      
|                 |  |                |  |                
|2,153,493        |  |                |  |                
|                 |  |                |  |                



|10. | Earnings Per Share
|--- | ------------------



Basic earnings (loss) per common share is computed as net income (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share include 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. Basic and diluted earnings (loss) per common share are equal for all years presented because the
assumed conversion of preferred stock and exercise of options and warrants is antidilutive.



16



---

Avatech Solutions, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)



|10. | Earnings Per Share (continued)
|--- | ------------------------------



The following summarizes the computations of basic and diluted earnings (loss) per share:



|                                                                             |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|---------------------------------------------------------------------------- |  | ------------------------------ | --------- | - | ---------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                             |  | Three Months EndedDecember 31, |           |   | Six Months EndedDecember 31, |  
|                                                                             |  | 2002                           |           |   | 2003                         |   |           | 2002 |  |   | 2003      |  
|Numerator used in basic and diluted earnings (loss) per common share:        |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|Income (loss) from continuing operations                                     |  | $                              | (457,917  | ) |                              | $ | 3,720     |      |  | $ | 468,042   |   |  | $ | (357,504  | )
|Less: preferred stock dividends                                              |  |                                |          |   |                              |   | (10,122   | )    |  |   |          |   |  |   | (17,379   | )
|                                                                             |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|Income (loss) from continuing operations available to common stockholders    |  |                                | (457,917  | ) |                              |   | (6,402    | )    |  |   | 468,042   |   |  |   | (374,883  | )
|Income (loss) from discontinued operations, net of income taxes              |  |                                | (341,812  | ) |                              |   | 1,005     |      |  |   | (295,695  | ) |  |   | (141,247  | )
|                                                                             |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|Net income (loss) attributable to common stockholders                        |  | $                              | (799,729  | ) |                              | $ | (5,397    | )    |  | $ | 172,347   |   |  | $ | (516,130  | )
|                                                                             |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|Denominator:                                                                 |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|Weighted average shares outstanding                                          |  |                                | 7,172,370 |   |                              |   | 9,217,874 |      |  |   | 7,172,370 |   |  |   | 9,177,399 |  
|                                                                             |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|Earnings (loss) per common share:                                            |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|Income (loss) from continuing operations                                     |  | $                              | (0.06     | ) |                              | $ | (0.00     | )    |  | $ | 0.06      |   |  | $ | (0.04     | )
|Income(loss) from operations of discontinued operations, net of income taxes |  | $                              | (0.05     | ) |                              | $ | 0.00      |      |  | $ | (0.04     | ) |  | $ | (0.02     | )
|                                                                             |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|Earnings (loss) per common share, basic and diluted                          |  | $                              | (0.11     | ) |                              | $ | (0.00     | )    |  | $ | 0.02      |   |  | $ | (0.06     | )
|                                                                             |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  



|11. | Income Taxes
|--- | ------------



Income tax expense for the six months ended December 31, 2002 and 2003 was $403,000 and $21,000, respectively. In August 2002, the Company realized a $1.96 million taxable gain from the extinguishment of certain debt,
which resulted in a net deferred tax asset of $373,000 being recorded at June 30, 2002. During the six months ended December 31, 2002, the Company recorded deferred income tax expense of $373,000 related to the estimated reduction in deferred tax
assets in fiscal year 2003. This increase in deferred income tax expense, coupled with certain state tax expense, resulted in the income tax expense for the six months ended December 31, 2002. For the six months ended December 31, 2003, income tax
expense related solely to estimated state tax expense for the period.



17



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Avatech Solutions, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)



|12. | Liquidity and Capital Resources
|--- | -------------------------------



During 2003, the Company incurred significant losses from its operations that depleted its capital resources. These losses were incurred primarily due to unexpected
declines in revenue and losses and costs related to the acquisition of PlanetCAD Inc. In response, management has taken actions to close under-performing offices, significantly reduce overhead to improve operational efficiency, initiate new revenue
programs and obtain additional financing. Management believes that the actions it has taken will allow the Company to aggressively pursue its business plan and return to profitability in the near term.



Based on an evaluation of the likely cash to be generated from operations in the near term
and available capital resources, management believes that it has sufficient sources of working capital to fund its operations in the normal course of business through at least July 1, 2004.



|13. | Contingencies
|--- | -------------



The Company is a defendant in a lawsuit filed by a vendor for alleged breach of contract. The suit asks for actual damages totaling $178,000. Legal counsel engaged by the Company has advised that at this stage in the
proceedings, they cannot offer an opinion as to the probable outcome, and accordingly, no amounts have been accrued at December 31, 2003. The Company believes the suit is without merit and is vigorously defending its position.



18



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|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.



Certain statements set forth below constitute forward-looking statements. Such forward-looking statements involve known and unknown risk,
uncertainties and other factors including, but not limited to, those discussed in our annual and quarterly reports, that may cause our actual results, performance or achievements to be materially different from any future results, performance or
achievements implied by such forward-looking statements. These forward-looking statements may generally be identified by the use of the words may, will, believe, should, expects,
anticipates, estimates, and similar expressions. Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to
update information contained in any forward-looking statement.



Overview



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



During 2003, we revised our growth strategy and began to focus on new ways of expanding our people resources, product offerings, and geographic
footprint. We plan to increase our efforts to attract and employ highly qualified professionals in specialized areas throughout the organization, including salespeople, applications engineers, and software developers. Our portfolio of
products and services has been expanded to include new relationships with other software manufacturers, additional service offerings, and continued development of new proprietary software products to support our entry into the product lifecycle
management (PLM) market. Geographic expansion will be supported by targeted mergers and acquisitions, the opening of new locations, and expanded international product distribution relationships. This diversification strategy is intended to match our
product and service offerings more precisely with the needs of our customers.



In June 2003, we closed three offices in New York, Michigan and Ohio due to operating performance issues. These locations were authorized software dealers subject to a channel partner agreement with our principal
suppliers. In connection with the closure of these locations, we recognized a loss on disposal of approximately $179,000 in June 2003. Additionally, we closed another office located in California in August 2003, which was also subject to the same
channel partner agreement. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the results of operations of these operating units are treated as discontinued
operations, and reported as a separate component of operating results in our consolidated statements of operations. Our consolidated financial statements for all interim periods in fiscal year 2003 have been restated to consistently present these
operations as discontinued operations. Unless otherwise indicated, all amounts included in Managements Discussion and Analysis of Financial Condition and Results of Operations are from continuing operations. We have included in Note 3 
Discontinued Operations of Certain Operating Segments to the Consolidated Financial Statements a more comprehensive discussion about our discontinued operations.



In July 2003, we entered into a Authorized Reseller Agreement with Dassault Systemes Corp., a French developer and
distributor of PLM application software and services, whereby we will market and distribute Dassaults SMARTEAM PLM products in the United States. In connection with this agreement, Dassault provided us with certain financial assistance to
create a dedicated PLM sales force and to conduct related marketing efforts.



Product Sales. Our product sales consist primarily of the resale of packaged design software programs that are installed on a user workstation, on a local area network server, or in a hosted environment. The
programs perform and support a wide variety of functions related to design, modeling, drafting, mapping, rendering, and facilities management tasks. We are one of the largest domestic resellers of design software developed by Autodesk, one of the
worlds leading design software and digital content companies for building design and land development,



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manufacturing, utilities, telecommunications, wireless data services and digital media. Approximately 90% of our total product revenues are related to the
resale of Autodesk products.



Service Revenue. We also
provide services in the form of training, technical support, and professional services. Our training offerings include product and process education classes at our training facilities or directly at a customer site. Our class instructors are
application engineers who have formal training or industry experience in the course content.



We provide technical support services primarily through our telephone support center located in Omaha, Nebraska. Through our staff of full time consultants, we provide assistance to customers making inquiries related
to the software products that we sell.



We also provide
project-focused professional consulting services through our own application engineers and programmers, as well as software customization, data migration, computer aided design standards consulting, workflow analysis, and implementation assistance
for complex software products.



Commission Revenue. We
generate commission revenue from the resale of Autodesk software to various customers, a number of which Autodesk considers to be major accounts. Autodesk designates these customers as major accounts based on specific criteria, primarily
sales volume, and typically gives these customers volume discounts. We are responsible for managing and reselling Autodesk products to a number of these major account customers; however, software product is shipped directly from Autodesk to the
customers. We receive commissions upon shipment of the product from Autodesk to the customer based on the product sales price, the product type, total volume, and overall performance. Additionally, we receive commission revenue from the sale of
Autodesk software subscriptions, which entitle the end-user to software upgrades and various support benefits.



Cost of Product Sales. Our cost of product sales consists of the cost of purchasing products from software suppliers or hardware manufacturers. We
also include the associated shipping and handling costs in cost of product sales.



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 us. Our cost of service revenue does not include an allocation of overhead costs.



Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of compensation and other expenses associated with management, finance, human resources, and information systems. We also include advertising and public relations expenses, as well as expenses for facilities
such as rent and utilities, are included in selling, general and administrative expense. Beginning in June 2003, we instituted a number of cost containment measures to align our selling, general and administrative expenses with our current revenue
levels. First, we terminated approximately 30 employees in June 2003, which we expect to contribute approximately $1.9 million of reductions in salaries and employee benefits. And second, we reduced our professional fees, telephone, supplies,
marketing, and travel expense related to the discontinued operations due to operating performance issues in June and August 2003. We considered these expense reduction measures necessary to help reduce operating losses arising from the prolonged
impact of the economic recession impacting the software industry.



Depreciation and Amortization Expense. Depreciation and amortization expense represents the period costs associated with our investment in property and equipment, consisting principally of computer equipment, software, furniture and
fixtures, and leasehold improvements. We computed depreciation and amortization expense using the straight-line method. We lease all of our facilities and depreciate leasehold improvements over the lesser of the lease term or the useful life of the
asset.



Interest Expense. Interest expense consists
primarily of interest on our revolving line-of-credit and subordinated debt, which we incurred to fund operations over the past three years.



Critical Accounting Policies



General. Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management
during their preparation. Critical accounting policies and estimates that impact the consolidated financial statements are those that relate to software revenue recognition and estimates of bad debts. We discuss all of these critical accounting
policies with our Audit Committee on a periodic basis.



20



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Presented below is a description of the accounting policies that are most critical to an understanding of our consolidated financial statements.



Software Revenue Recognition. We derive most of our revenue from
the resale of packaged software products. Our product sales may also include hardware that we may purchase for the convenience of our customers. Historically, we have not experienced significant customer returns. We earn service revenue from
training and other professional services, which often are related to the products that we sell but are not essential to the functionality of the software. We offer annual support contracts to our customers for the software products that we sell, or
we offer maintenance and support services under hourly billing arrangements.



We recognize revenue from software arrangements in accordance with the provisions of AICPA Statement of Position No. 97-2, Software Revenue Recognition, as amended by SOP No 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. Prior to recognizing any revenue under these arrangements, (1) persuasive evidence of an arrangement must exist, (2) delivery of the software or service must have occurred,
(3) all fees must be assessed as fixed or determinable and (4) all fees must be probable of collection. We determine whether criteria (3) and (4) have been satisfied based on our judgment regarding the fixed nature of the fee charged for services
rendered and products delivered and the collectibility of such fee. Revenue recognized in reporting period could be adversely affected if future changes in conditions related to a transaction cause us to determine these criteria are not met. In the
past, we have not needed to adjust our reported revenue due to changes in conditions, and we continue to evaluate current conditions that may affect the nature and timing of our revenue recognition.



Our customer arrangements can involve the sale of one or more elements. When
this occurs, we allocate revenue to each element based on the relative fair value of each element. We limit the assessment of fair value to the price that we charge when the element is sold separately. All of the elements included in the multiple
element arrangements have been analyzed by management, which may include products that are resold, training and other professional services, and support services. We have determined that sufficient evidence of the fair value based on these separate
sales exists to allocate revenue to the specified elements. We recognize training and other professional services revenue as services are delivered and recognize support revenue ratably over the respective contract term. We include all unrecognized
fees that have been billed in our deferred revenue.



Bad
Debts. We maintain an allowance for doubtful accounts for estimated losses which may result from the inability of our customers to pay for purchased products and services or for disputes that affect our ability to fully collect our accounts
receivable. We estimate this allowance by reviewing the status of our past-due accounts and record general reserves based on our historical bad debt expense. Our actual experience has not varied significantly from our estimates; however, if the
financial condition of our customers were to deteriorate, resulting in their inability to pay for products or services, we may need to record additional allowances in future periods. To mitigate this risk, we perform ongoing credit evaluations of
our customers.



Effect of Recent Accounting Pronouncements



FASB Interpretation No. 46. In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities. The objective of FASB Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. It requires variable interest entities to
be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or is entitled to receive a majority of the entitys residual returns or both. The Company currently
does not have any interest in variable interest entities and, therefore, the adoption of FASB Interpretation No. 46 during 2003 did not have an impact on the Companys financial position or results of operations.



FASB Statement No. 150.In May 2003, the FASB issued Statement
No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires the issuer to classify a financial instrument that is within the scope of the standard as a liability if the financial instrument embodies an obligation of the issuer. Effective July 1, 2003, the Company
adopted the provisions of Statement No. 150, which did not have any impact on the Companys financial position or results of operations.



21



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Three and Six Months Ended December 31, 2003 Compared to the Three and Six Months Ended December 31, 2002



Revenues. Total revenues for the three months
ended December 31, 2003 increased $2.2 million, or 38%, to $7.9 million, compared to $5.7 million for the same period in 2002. Total revenues for the six months ended December 31, 2003 increased $2.7 million, or 25% to $13.7 million, compared to
$11.0 million for the same period in 2002. Our revenues include product sales, service revenue, and commission revenue. The gross margin percentage decreased to 44% for the three months ended December 31, 2003, compared to 46% in the same period in
2002, and decreased to 42% for the six months ended December 31, 2003 compared to 46% in the same period in 2002.



Product sales for the three months ended December 31, 2003 increased $2.2 million, or 76%, to $5.2 million, compared to $2.9 million in the same period in
2002. Product sales for the six months ended December 31, 2003 increased $2.6 million, or 43%, to $8.7 million, compared to $ 6.1 million in the same period in 2002. Our product sales have increased due to increased sales volume caused by several
factors. During fiscal year 2004, demand for Autodesk products have increased, caused in part by product upgrades required by our customers in order to continue to receive product maintenance services and an overall improvement in economic
conditions. Also, during the month of October 2003, we reduced prices when Autodesk reduced the price we pay for products by 20% under a short-term promotional program. This price reduction, along with additional strategic discounts to certain
customers throughout the three months ended December 31, 2003, have contributed to our increase in product sales.



Service revenue for the three months ended December 31, 2003 decreased $413,000, or 24%, to $1.3 million, compared to $1.7 million in the same period in
2002. For the six months ended December 31, 2003, service revenue decreased $277,000, or 9% to $2.8 million, compared to $3.0 million for the same period in 2002. These decreases in service revenue are the result of a change in our strategy in
fiscal year 2004 to focus on developing PLM products and services, as discussed in the Overview. In June 2003 and August 2003, we also closed five offices that contributed to a decline in our service revenue.



Commission revenue for the three months ended December 31, 2003 increased
$359,000, or 35%, to $1.4 million, compared to $1.0 million in the same period in 2002. For the six months ended December 31, 2003, commission revenue increased $357,000, or 19%, to $2.3 million, compared to $1.9 million for the same period in 2002.
The increase in commission revenues is consistent with the revenue increases we experienced in product sales resulting from an improved economy, Autodesks promotional activities, and demand caused by customers upgrading their software.



Cost of Revenues and Expenses



Costs of Revenue. Cost of product sales for three months ended
December 31, 2003 increased $1.8 million or 89%, to $3.9 million, compared to $2.1 million for the same period in 2002. For the six months ended December 31, 2003, cost of product sales increased $2.3 million, or 55%, to $6.4 million, compared to
$4.1 million for the same period in 2002. Although our revenues have increased in fiscal year 2004, our product margins have declined from 31.7% for the six months ended December 31, 2002 to 26.2% for the six months ended December 31, 2003. Our
product margins were 24.1% for the three months ended December 31, 2003, compared to 29.4% for the comparative quarter in fiscal year 2003. Our product margins have been decreasing as a result of several factors. Our major vendor, Autodesk, changed
our cooperative advertising program to increase the price we pay for Autodesk products, while increasing the payments we receive from Autodesk to support our marketing and advertising efforts. In addition, we have strategically reduced the price we
charge our customers for certain products to obtain additional sales volume. We expect that our product margins for the remainder of fiscal year 2004 will stabilize at approximately 25%.



Cost of service revenue for the three months ended December 31, 2003 was consistent with the corresponding quarter in fiscal
year 2003. However, as a percentage of related service revenue, cost of service revenue increased from 57% to 82%. The significant decline in our service revenue margins is a consequence of the aforementioned 24% reduction in our service revenues
without corresponding decreases during the quarter in the direct labor costs that comprise the significant component of our cost of service revenue. We are currently focused on developing our PLM and F/AM products and related services, and until
such time as we generate significant revenue from these product lines, our margins will be affected by our investment in a professional, well-trained service staff. For the six months ended December 31, 2003, our margins were also affected by this
change in focus that occurred in the second quarter, with service revenue margins decreasing from 40% to 24%. We expect that as our revenues from PLM and F/AM services increase, our margins will likely return to historical levels.



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Selling, General and Administrative Expense. Selling, general and administrative expense for the
three months ended December 31, 2003 decreased $216,000, or 7.5%, to $2.7 million, compared to $2.9 million for the same period in 2002. . Selling, general and administrative expense for the six months ended December 31, 2003 decreased $602,000, or
10.4%, to $5.2 million, compared to $5.8 million for the same period in 2002. We attribute this decrease in selling, general and administrative expenses for the first six months of 2004 as a result of our restructuring efforts in the fourth quarter
of 2003, as discussed more fully in our 2003 Annual Report on Form 10-K. Additionally, began to control our travel expenses by contracting a travel agency. Also, Autodesk restructured our marketing cooperative program, whereby marketing costs in
selling, general and administrative expenses are reduced through credits issued by Autodesk. In the past, Autodesk reduced our product costs in exchange for cooperative marketing expenditures. We expect that selling, general and administrative
expense for the last six months of 2004 will approximate $6 million.



Depreciation and Amortization. Depreciation and amortization expense for the three months ended December 31, 2003 decreased $34,000 or 29%, to $82,000, compared to $116,000 for the same period in 2002. Depreciation and amortization
expense for the six months ended December 31, 2003 decreased $81,000, or 35%, to $150,000, compared to $230,000 for the same period in 2002. Depreciation and amortization of property and equipment decreased as a result of reduced capital
expenditures for computer equipment and software, an increase in the number of fully depreciated assets compared to the prior period and reductions is depreciable assets from closed offices.



Other Income (Expense). Other income (expense) for the three months
ended December 31, 2003 decreased $41,000, or 47%, to $(128,000), compared to $(87,000) for the same period in 2002. For the six months ended December 31, 2003, other income (expense) decreased $2.0 million, or 113%, to $(234,000), compared to $1.8
million for the same period in 2002. Included in other income for the six month period ended December 31, 2002 was a $2.0 million gain from the extinguishment of debt resulting from the payment to a significant supplier of $1.0 million in full
satisfaction of a $3.0 million loan made to us by that supplier in 1999. We expect that our interest expense will increase slightly for the remainder of 2004, caused by an increase in our outstanding borrowings. As discussed more fully in Note 4 to
the consolidated financial statements, we have borrowed $1.5 million with interest at 6% per annum to assist us with working capital needs, $500,000 of which was received in February 2004.



Income Tax Expense. Income tax expense for the six months ended
December 31, 2003 decreased $382,000, or 95%, to $21,000, compared to $403,000 for the same period in 2002. In August 2002, we realized a $2.0 million taxable gain from the extinguishment of certain debt (described above), which resulted in us
recording a net deferred tax asset of $373,000 at June 30, 2002. In fiscal year 2003, we recorded deferred income tax expense of $373,000 related to the estimated reduction in deferred tax assets in 2003. Our income tax expense in 2004 is expected
to relate solely to state income tax expense, which we expect to approximate $40,000 for the full year.



Liquidity and Capital Resources



Historically, we have financed our operations and met our capital expenditure requirements primarily through cash flows provided by operations and borrowings under short-term and long-term debt arrangements. Because we have incurred
significant cumulative losses since 1999, we have depleted our capital base and have relied upon borrowings under our bank line of credit and from our shareholders to satisfy our operating cash needs. Our financing activities resulted in negative
working capital of $3.8 million at June 30, 2003 and $3.5 million at December 31, 2003. Our outstanding debt totaled $2.9 million at June 30, 2003 and $3.9 million at December 31, 2003.



During the first six months of fiscal year 2004, we used $1.4 million of cash in operations. This use of cash was caused by
losses before non-cash charges of about $184,000 and uses of working capital of about $1.2 million. Our working capital needs increased as a result of increases in accounts receivable caused by increasing revenues in the second quarter. Our revenues
increased about $1.6 million in the first six months of 2004 compared to the last six months of 2003, which led to a corresponding increase in our accounts receivable of about $537,000 since June 30, 2003. In addition, we reduced our accounts
payable and accrued expenses by about $417,000 since June 30, 2003, principally because in 2004 we settled and paid certain expenses related to our fiscal year 2003 merger with PlanetCad. We financed these operating cash needs by borrowing $1.0
million from Dassault Systemes and selling preferred stock and warrants to generate $390,000 of cash proceeds. We purchase over 90% of the product we sell from Autodesk, which provides us with the ability to purchase up to $3.0 million of inventory
under 60 to 90 day payment terms. Historically, we have been able to manage our average days sales outstanding in a range from 50 to 60 days. Our customary collection terms range from 30 to 60 days for all of our customers.



23



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Our deficiency of working capital is in large part caused by the classification of our line of credit as
a current liability due to its terms. Our line of credit with a bank allows us to borrow up to $2.0 million (on November 24, 2003, this line of credit was temporarily increased to $2.5 million), limited to 75% of eligible accounts receivable. The
line-of-credit expires in three years and is payable within 60 days of demand. Despite the existence of the 60-day demand provision on this line-of-credit, we do not believe it is likely that the bank will exercise the demand provisions of the
agreement. In the event that the bank would do so, we believe that other lenders would provide us with a line of credit with similar terms so long as our financial position and results of operations had not significantly declined.



We also have outstanding borrowings at December 31, 2003 of about $885,000,
payable to a director and shareholder, that mature on July 1, 2004. If necessary, we expect that we will be able to refinance the repayment of this note over an extended period. On July 22, 2003, we entered into a loan agreement with a software
developer to borrow up to $1.5 million for working capital purposes. The loan was received in two payments, with the initial funding of $1.0 million occurring on July 25, 2003 and the remaining $500,000 provided on February 6, 2004. The loan
agreement requires repayment of principal plus interest at 6% per annum in thirty-five equal quarterly installments beginning in January 2005. We must meet certain financial and non-financial covenants in connection with this agreement.



We expect to generate income from our operations before non-cash charges
for the remaining six months of 2004. Our working capital needs are expected to stabilize, and any working capital needs should be met from the $500,000 of borrowings that we made in February 2004 and from our available cash resources and line of
credit. We do not have any material commitments to acquire property and equipment, and our capital equipment needs for the next twelve months are expected to be insignificant. Because of our reliance on Autodesk to supply us with the products that
we sell, and due to the concentration of our revenues from the sale of Autodesk products, we cannot readily predict our ability to generate sufficient cash from our operations to meet our obligations beyond July 1, 2004. In the event that our
operating results do not improve and we are unable to generate cash flows from our operations in the near term, then we may be unable to meet our existing obligations in the normal course of business and expand our operations to allow for continued
long-term improvement in operating results.



Below is a summary of our
contractual obligations and commitments at December 31, 2003:



|                                  |  |                               |           |      |   |           |  |      |           |      |   |                    |  |   |         |  |   |          
|--------------------------------- |  | ----------------------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | ------------------ |  | - | ------- |  | - | ---------
|                                  |  | Payments due by Fiscal Period
|                                  |  | Total                         |           | 2004 |   | 2005      |  | 2006 |           | 2007 |   | 2008 andthereafter
|Contractual Obligations           |  |                               |           |      |   |           |  |      |           |      |   |                    |  |   |         |  |   |          
|Long-term debt and line-of-credit |  | $                             | 3,818,790 |      | $ | 1,734,620 |  | $    | 968,812   |      | $ | 286,786            |  | $ | 114,286 |  | $ | 714,286  
|Operating leases                  |  |                               | 2,831,144 |      |   | 500,269   |  |      | 679,006   |      |   | 602,263            |  |   | 483,980 |  |   | 565,626  
|                                  |  |                               |           |      |   |           |  |      |           |      |   |                    |  |   |         |  |   |          
|Total obligations                 |  | $                             | 6,649,934 |      | $ | 2,234,889 |  | $    | 1,647,818 |      | $ | 889,049            |  | $ | 598,266 |  | $ | 1,279,912
|                                  |  |                               |           |      |   |           |  |      |           |      |   |                    |  |   |         |  |   |          



24



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PART II. OTHER INFORMATION



|ITEM 6. | EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
|------- | -----------------------------------------------------------------



(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K



|            |  |                                          
|----------- |  | -----------------------------------------
|Exhibit No. |  |                                          
|            | 
|31.1        |  | Certification of Chief Executive Officer*
|            | 
|31.2        |  | Certification of Chief Financial Officer*
|            | 
|32.1        |  | Section 1350 Certifications *            



|* | Filed herewith
|- | --------------



SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereto duly authorized.



|                   |  |  |  |                                          |  |                                                                                               |  | 
|------------------ |  |  |  | ---------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | 
|                   |  |  |  | AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
|                   |  |  | 
|Date: May 17, 2004 |  |  |  | By                                       |  | /s/ Donald R. Scotty Walsh                                                                 
|                   |  |  |  |                                          |  |                                                                                               | 
|                   |  |  |  |                                          |  | Donald R. Scotty Walsh Chief Executive Officer                                             
|                   |  |  | 
|Date: May 17, 2004 |  |  |  | By                                       |  | /s/ Beth MacLaughlin                                                                         
|                   |  |  |  |                                          |  |                                                                                               | 
|                   |  |  |  |                                          |  | Beth MacLaughlin Interim Chief Financial Officer (principal financial and accounting officer)



25