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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

|x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934    
|- | ----------------------------------------------------------------------------------------
|  | For the fiscal year ended December 31, 2006 or                                          
|o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|  | For the transition period from _______ to _______                                       
|  | Commission file number 1-13400                                                          

|STRATASYS,   INC.                                       
|--------------------------------------------------------
|(Exact   Name of Registrant as Specified in Its Charter)

|Delaware                                                         |  | 36-3658792                            
|---------------------------------------------------------------- |  | --------------------------------------
|(State or   Other Jurisdiction of Incorporation or Organization) |  | (I.R.S.   Employer Identification No.)

|14950 Martin Drive, Eden Prairie, Minnesota 55344     
|------------------------------------------------------
|(Address   of Principal Executive Offices)            
|                                                      
|(952) 937-3000                                        
|(Registrants   Telephone Number, Including Area Code)
|                                                      
|Securities Registered Under Section 12(b) of the Act: 

|Title of   Each Class          |  | Name of   Each Exchange on Which Registered 
|------------------------------ |  | --------------------------------------------
|                               |  |                                             
|Common   stock, $.01 par value |  | Nasdaq   Global Select Market NYSE Arca, Inc

Securities Registered Under Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.

|Yes
o | No
x
|----- | ----

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act.

|Yes
o | No
x
|----- | ----

Indicate by check
mark whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 past 90 days.

|Yes
x | No
o
|----- | ----

Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
x

Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

|Yes
o | No
x
|----- | ----

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

|Large   Accelerated Filer
o | Accelerated   Filer
x | Non-Accelerated   Filer
o
|--------------------------- | --------------------- | -------------------------

The aggregate market
value of the Registrants Common Stock held by non-affiliates of the
Registrant as of June 30, 2006, the last business day of the Registrants
most recently completed second quarter, was approximately $ 276,000,000. On such
date, the closing price of the Registrants Common Stock, as quoted on the
Nasdaq Global Select Market was $29.46.

The Registrant had
10,208,862 shares of common stock outstanding as of March 12, 2007.

---



DOCUMENTS INCORPORATED BY REFERENCE

Portions of the
Registrants Definitive Proxy Statement to be filed with the Securities and
Exchange Commission with respect to the Registrants Annual Meeting of
Stockholders scheduled to be held on May 8, 2007 are incorporated by reference
into Part II, Item 5 and Part III of this Annual Report.



TABLE OF CONTENTS

|           |                                                                                                |  | Page
|---------- | ---------------------------------------------------------------------------------------------- |  | ----
|           |                                                                                                |  |     
|Part I     |                                                                                                |  |     
|           |                                                                                                |  |     
|Item 1.    | Business                                                                                       |  | 1   
|           |                                                                                                |  |     
|Item 1A.   | Risk   Factors                                                                                 |  | 13  
|           |                                                                                                |  |     
|Item 1B.   | Unresolved   Staff Comments                                                                    |  | 17  
|           |                                                                                                |  |     
|Item 2.    | Properties                                                                                     |  | 17  
|           |                                                                                                |  |     
|Item 3.    | Legal   Proceedings                                                                            |  | 18  
|           |                                                                                                |  |     
|Item 4.    | Submission   of Matters to a Vote of Stockholders                                              |  | 18  
|           |                                                                                                |  |     
|Part II    |                                                                                                |  |     
|           |                                                                                                |  |     
|Item 5.    | Market for Registrants Common Equity and Related
Stockholder Matters                          |  | 19  
|           |                                                                                                |  |     
|Item 6.    | Selected Consolidated Financial Data                                                           |  | 21  
|           |                                                                                                |  |     
|Item 7.    | Managements Discussion and Analysis of Financial
Condition and Results of Operations          |  | 21  
|           |                                                                                                |  |     
|Item 7A.   | Quantitative and Qualitative Disclosures About Market
Risk                                     |  | 38  
|           |                                                                                                |  |     
|Item 8.    | Financial Statements and Supplementary Data                                                    |  | 39  
|           |                                                                                                |  |     
|Item 9.    | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure           |  | 39  
|           |                                                                                                |  |     
|Item 9A.   | Controls   and Procedures                                                                      |  | 39  
|           |                                                                                                |  |     
|Item 9B.   | Other   Information                                                                            |  | 39  
|           |                                                                                                |  |     
|Part III   |                                                                                                |  |     
|           |                                                                                                |  |     
|Item 10.   | Directors, Executive Officers and Corporate
Governance                                         |  | 40  
|           |                                                                                                |  |     
|Item 11.   | Executive   Compensation                                                                       |  | 40  
|           |                                                                                                |  |     
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters |  | 40  
|           |                                                                                                |  |     
|Item 13.   | Certain Relationships and Related Transactions and Directors Independence                      |  | 40  
|           |                                                                                                |  |     
|Item 14.   | Principal   Accountant Fees and Services                                                       |  | 40  
|           |                                                                                                |  |     
|Part IV    |                                                                                                |  |     
|           |                                                                                                |  |     
|Item 15.   | Exhibits   and Financial Statement Schedules                                                   |  | 41  
|           |                                                                                                |  |     
|Signatures |                                                                                                |  |     



PART I

Item 1.     Business.

General Development of Business

We are a leader in
the market for office rapid prototyping (RP) systems, which includes
three dimensional (3D) printing systems.  We develop,
manufacture, and sell a family of systems, including a line of 3D printers, all
of which create physical models from computerized designs. We were incorporated
in Delaware in 1989 and our executive offices are located in Eden Prairie,
Minnesota. Our systems are based on our core patented fused deposition modeling
(FDM®) technology and on our patented
Genisys®technology, which we purchased from IBM in
1994. We sold our first product, the 3D Modeler®, commercially
in April 1992 and introduced our second product, the Benchtop, in June 1993. In
February 2002, we introduced Dimension®. Dimension offers ABS
modeling capabilities on a desktop 3D printer platform. We believe that
Dimension, when introduced at $29,900, was the lowest priced system in the RP
and 3D printing markets. Other recent significant developments in our business
are set forth below:

| |  | In September 2005, we announced that we received a $3.6 million order from a
Fortune 500 global manufacturing company to advance our proprietary
FDM® technology for direct digital manufacturing applications.
The effort will be based around our high-end FDM productivity systems and will
eventually result in the introduction of a new high-end productivity
system.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | In October 2005, we announced the launch of RedEye RPM, our Internet RP
parts service that builds prototypes and parts using the FDM process for
customers in North America. RedEye RPM.com augments our existing Paid Parts
service by employing a proprietary, secure quoting-and-ordering engine that
allows automated, instant quoting and ordering around the clock, seven days a
week.                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | In January 2006, we announced a distribution agreement with Arcam AB to
exclusively distribute their metal-based direct digital manufacturing and
prototyping systems in North America. In Arcams patented electron-beam
melting (EBM) process, called CAD to Metal®,
titanium powder is transformed into solid metal parts for either functional
prototyping or end-use. The process is currently used in three main industries:
aerospace, automobile, and medical implants.                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | In February 2006, we added a Vantage X to our FDM Vantage RP system product line
previously known as the triplets, which were introduced in 2004.
Prices now range from $85,000 for the base model Vantage to $195,000 for the
fully equipped Vantage SE. The models are differentiated by the speed at which
they build prototypes, by the size of the build envelope, by the material
offerings, by additional canister bays, which allow for longer build cycles, and
by price.                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | In April 2006 we announced the introduction of four new 3D printers, the
Dimension 1200s SST and BST and the Dimension 768s SST and BST
providing our customers products offering a wide range of features and build
sizes ranging in price from $18,900 to $29,900. The Dimension 1200s offer
a 57% larger build envelope than the 768s as well as increased build
speed. The SST models offer all the functionality as the BST with the addition
of a soluble support removal system. These systems give users greater
convenience in the design process while allowing for the creation of ABS plastic
models and prototypes that involve more complex design geometries.                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | In August 2006, we announced that effective January 1, 2007 we were
discontinuing our North American Distributor Agreement with Objet Geometries
Ltd. (Objet). The Eden systems that we distributed (the Eden
systems) use inkjet technology to jet ultra-fine layers of UV-cured resin
to build RP models. While the distribution agreement contributed approximately
$16.2 million, $9.0 million, and $4.0 million in 2006, 2005 and 2004 sales,
respectively, these sales were at an average gross margin of 27%. After
allocation of associated costs, our internal financial statements indicated that
distribution of the Eden systems made a negligible contribution to our earnings.
In order to provide a smooth transition for our customers, we will continue to
service the Eden systems we sold through August 1, 2007.

1



| |  | In January 2007, we introduced the new Dimension Elite with soluble supports
offering the customer a new ABSplus material that on average is 40% stronger
than our other ABS material offering. Priced at $32,900, the Elite builds in
thinner layers offering better fine feature model detail.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Description of Business

We are a leader in
the RP and 3D printing market. We develop, manufacture, market, and service a
family of 3D printers and high-performance systems that enable engineers and
designers to create physical models, tooling and prototypes out of plastic and
other materials directly from a computer-aided design (CAD)
workstation. Our high-performance systems are used both to create prototype
models as well as to produce parts for end user applications or direct digital
manufacturing (DDM). Our 3D printers and high-performance systems
can be used in office environments without expensive facility modification. In
many industries, the models and prototypes required in product development are
produced laboriously by hand-sculpting or machining, a traditional process that
can take days or weeks. Our computerized modeling systems use our proprietary
technology to make models and prototypes directly from a designers
three-dimensional CAD in a matter of hours. In addition to selling RP systems
and 3D printers, we make and sell parts for RP and DDM applications through our
Paid Parts service based on our customers CAD files. We estimate
approximately 10-15% of our Paid Parts revenue is for DDM parts.

We believe that the
3D printers and high-performance systems using our FDM technology are the only
systems commercially available that can produce prototypes  and parts from
production grade plastic without relying on lasers. This affords our products a
number of significant advantages over other commercially available
three-dimensional rapid prototyping technologies that rely primarily on lasers
to create models. Such benefits include:

| |  | the ability to use the device in an office environment due to the absence of
hazardous emissions
| | - | ------------------------------------------------------------------------------------------------
| |   |                                                                                                 
| |  | little or no   post-processing                                                                  
| |   |                                                                                                 
| |  | ease of use                                                                                     
| |   |                                                                                                 
| |  | the need for relatively little set up of the system for a particular
project                    
| |   |                                                                                                 
| |  | the availability of a   variety of modeling materials                                           
| |   |                                                                                                 
| |  | modeling in production-grade plastics for functional testing                                    
| |   |                                                                                                 
| |  | no need for costly   replacement lasers and laser parts                                         

Our systems can also
run virtually unattended, producing models while designers perform other
tasks.

The process involved
in the development of a three-dimensional model using our FDM systems begins
with the creation of a 3D geometric model on a CAD workstation. The model is
then imported into our proprietary software program, which mathematically slices
the CAD model into horizontal layers that are downloaded into the system. A
spool of thin thermoplastic modeling material feeds into a moving FDM extruding
head, which heats the material to a semi-liquid state. This semi-liquid material
is extruded and deposited, one ultra-thin layer at a time, on a base (the
X-Y Stage) in a thermally-controlled modeling chamber. As the
material is directed into place by the computer-controlled head, layer upon
layer, the material solidifies, creating a precise and strong laminated model.

With the addition of
the Arcam systems, we are offering for the first time an RP and DDM system that
builds parts from metal. In Arcams patented EBM process, called CAD to
Metal®, titanium powder is transformed into solid metal parts
for either functional prototyping or end-use. The process is currently used in
three main industries: aerospace, automobile, and medical implants. The
electron-beam melting process is five times more efficient than competitive
laser-based metal-fabrication processes. We see strong potential for
Arcams products in North America, and we expect to help expand its
installed base of systems.

Based upon data and estimates furnished in the 2006 Wohlers Report, through 2005
we shipped approximately 29% of all RP systems since the industrys
inception in 1987, an improvement over the 24% we realized through 2002. The
2006 Wohlers Report also states that we shipped 34% of all RP systems globally
in 2005.

2



Applications for High-performance Systems and 3D Printers

Both
high-performance systems and 3D printers allow for the physical modeling of a
design using a special class of machine technology. These systems take data
created from CAD data, CT and MRI scan data or 3D digitized data to quickly
produce models, using an additive approach. Traditionally, RP and 3D printing
have been used by organizations to accelerate product development. Many
companies use RP and 3D printing models to test form, fit and function to help
improve the time to market.

Frequently, users
report rapid pay-back times by using RP and 3D printing, as they accelerate
their product development cycle and reduce post-design flaws through more
extensive design verification and testing.

RP also represents
opportunities for direct digital manufacturing (DDM). DDM involves
the use of prototypes fabricated directly from the RP system that are
subsequently incorporated into the users end product or process. DDM is
particularly attractive in applications that require short-run or low volume
parts that require rapid turn-around, and for which tooling would not be
appropriate due to small volumes. Our FDM Titan, Vantage, and Maxum products are
well suited for these types of applications.

An emerging portion
of the DDM market segment is Rapid Tooling (RT). Although not
clearly defined today, RT is driven by added fabrication, and high-performance
systems allow for the production of molds and fixtures directly from CAD data or
indirectly by producing custom mold inserts.

During the past four
years, the largest growth segment of the RP market has been 3D printers. 3D
printers are low-cost RP systems (typically under $40,000) that reside in the
design/engineering office environment, allowing product development
organizations quick access to a modeling system.

We have shipped over
7,000 systems since our inception. A wide variety of design and manufacturing
organizations use our systems. Current markets include:

| |                                          | Aerospace                                      |  | Automotive                          | 
| | ----------------------------------------- | ---------------------------------------------- | - | ----------------------------------- | 
| |                                           |                                                |   |                                     | 
| |                                          | Consumer Products                              |  | Business Machines                   | 
| |                                           |                                                |   |                                     | 
| |                                          | Educational Institutions                       |  | Electronics                         | 
| |                                           |                                                |   |                                     | 
| |                                          | Medical Systems                                |  | Medical Analysis                    | 
| |                                           |                                                |   |                                     | 
| |                                          | Mold Making                                    |  | Tooling                             | 
| |                                           |                                                |   |                                     | 
| |                                          | Direct digital   manufacturing of custom parts |  | Fixtures                            | 
| |                                           |                                                |   |                                     | 
| |                                          | Heavy Equipment                                |  | Architecture                        | 
| |                                           |                                                |   |                                     | 
| | Additional future   applications include:
| |                                           |                                                |   |                                     | 
| |                                          | Architectural design                           |  | Secondary tooling and   mold-making | 
| |                                           |                                                |   |                                     | 
| |                                          | Free-form graphic design                       |  | Art and animation                   | 
| |                                           |                                                |   |                                     | 

Among potential
medical applications, rapid prototyping is being used to produce accurate models
of internal organs, bones and skulls for pre-operative evaluations or modeling
of prostheses. In such uses, our RP systems serve as a peripheral device for CT
and MRI devices.

3



Products

3D Printers and
High-Performance Systems

We have been
developing and improving our line of  products since our inception in 1989.
Since our first commercial product was introduced in 1992, we have enhanced and
expanded our product line. We have improved both the speed and the accuracy of
our FDM systems, expanded their build envelopes, introduced a number of new
modeling materials and developed and introduced a low-cost 3D printer. We have
also enhanced and upgraded the software that our systems use to read CAD files
and build parts.

Each of our products
is based upon our patented FDM process, and our 3D printers also employ
technology acquired from IBM.  Our products are sold as integrated systems,
which consist of an RP machine, the software to convert the CAD designs into a
machine compatible format, and modeling materials. Each of our products is
compatible with an office environment and does not require an operator to be
present while it is running.

Our family of 3D
printers and high-performance systems affords a customers product
development team, including engineers, designers and managers, the ability to
create prototypes through all stages of the development cycle. Artists and
architects utilize our systems in developing their products.  Our products
meet the needs of a very demanding and diverse industrial base by offering a
wide range of capability and price from which to choose. The domestic list
prices of our systems range from $18,900 for Dimension 768 BST to $250,000 for
our high-performance FDM Maxum. We also offer special pricing for trade-in
systems and upgrades.

Dimension is a 3D
printer that allows a user to create parts in ABS plastic. ABS offers the part
strength required for true form, fit and function testing. Dimension operates in
the office, offering speed, ease of use and networking capabilities at a
competitive price. It features our Catalyst® software, which
offers a single push-button operation by automating all of the required build
procedures. We introduced Dimension BST in February 2002, although commercial
shipments to selected resellers commenced in December 2001. We believe that
Dimension BST, at a list price of $18,900, is among the lowest-priced whole
product systems in the 3D printing market. Dimension SST, introduced in February
2004, offers users the benefits of our WaterWorks, or soluble support technology
(SST), on the Dimension platform.  It is priced at $24,900. The Dimension
Elite, introduced in January 2007 and priced at $32,900, creates parts from our
new ABSplus material, which on average builds parts that are 40% stronger than
ABS.

The Prodigy Plus is
our lowest price FDM System that incorporates our WaterWorks soluble support
system and InSight Software. The patented WaterWorks process allows for the easy
removal of supports from a completed prototype  by simple immersion into a
water-based solution. Since support material is dissolved, resulting in a
cleaned prototype, most post-processing steps required in our competitors
systems are eliminated.  Prodigy Plus is further enhanced by the addition
of our InSight software. InSight offers the customer a more flexible array of
features allowing for a range of fully automatic operation to individual and
customized functions for each step of the build process. With the combination of
ABS, WaterWorks and InSight software, the Prodigy Plus offers the customer
hands free operation of the entire prototype building process. The
Prodigy Plus was introduced in March 2002, and we have sold it to customers in a
number of industries since that time.

The FDM Titan was
introduced in 2001 and provides a unique set of features that addresses
demanding customer requirements. Titan offers users the capability to model with
a wide range of engineering thermoplastic materials, including polycarbonate
(PC), ABS, ABSi, PC/ABS, PC-ISO and polyphenylsulfone
(PPSF).  We are now in the process of enhancing Titan for use
with other thermoplastic materials.  These modeling materials provide
superior strength coupled with heat and chemical resistance. This combination of
properties affords engineers and designers a variety of options to meet
demanding industrial prototyping and design requirements. Titan has a large
build envelope and uses new technology based on look ahead motion
profiles that provide faster build speeds. The Titan also incorporates enhanced
ease of use features, such as WaterWorks, the InSight software, automatic
material loading and supply changeover.

In July 2003 we
introduced Vantage. Vantage, which is an extension of the Titan design platform,
offers modeling capabilities in PC and ABS, and is priced lower than
Titan.  In March 2004 we introduced three variations of Vantage called
Triplets.  We extended this product family to four systems in February 2006
with the introduction of the Vantage X. Prices range from $85,000 for the base
model Vantage to $195,000 for the fully equipped Vantage SE. Model build speed,
envelope size, and variety of materials account for the price range.

The FDM Maxum
was released in late 2000. It incorporates MagnaDrive technology, which allows
the extrusion head to float on a bed of air while being controlled through
electromagnet devices. Its build envelope is among the largest in the industry,
allowing users to build large parts. The Maxum also delivers a fine feature
detail capability allowing customers to make prototypes of very small parts.
This feature was developed in conjunction with Fuji Film Corp. of Japan.
Features as small as .005 x .010 may be built, allowing for
increased prototyping capabilities for the telecommunications, electrical
connector and camera and photography industries.

4



In January 2006 we
announced a North American Distributor Agreement with Arcam AB
(Arcam) to serve as the exclusive distributor of their metal-based
RP and RM system (the Arcam System) in North America.  The
Arcam System, which uses a patented electron-beam melting (EBM)
process called CAD to Metal®, transforms titanium
powder into solid metal parts for either functional prototyping or end-use.

We periodically
discontinue manufacturing older products. We discontinued sales of the
GenisysXs, FDM 8000 and Prodigy systems at various times in 2002. We
discontinued sales of the FDM 2000 in 2003 and the FDM 3000 in 2004. However, we
continue to support these products in the field.

Modeling Material

FDM technology
allows the use of a greater variety of production grade plastic modeling
materials than other RP technologies. We continue to develop filament modeling
materials that meet our customers needs for increased speed, strength,
accuracy, surface resolution, chemical and heat resistance, and color. These
materials are processed into our patented filament form, which is then fed into
the FDM systems. Our spool-based system has proven to be a significant advantage
for our products over ultraviolet (UV) polymer systems or powder
based systems, because our system allows the user to quickly change material by
simply mounting the spool and feeding the desired filament into the FDM devices.
Spools weigh from one pound to ten pounds, and the creation of a model may
require from 0.1 pound to more than one pound of filament. The spool-based
system also compares favorably with stereo lithography (SLA) UV
polymer systems, because the spool-based system allows the customer to use it in
an office environment and to purchase a single spool, as compared to an entire
vat of SLA UV polymer, thereby reducing the customers up-front costs.

Currently, we have
seven modeling materials commercially available for use with our FDM
technology:

| |  | ABS is an engineering thermoplastic material (named for its three initial
monomers, acrylonitrile, butadiene, and styrene), which offers a balance of
strength, toughness and thermal resistance and is used commercially to make
products such as cell phones, computer cases and toys.                                                  
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                           
| |  | ABSplus is our newest material and, like ABS, is a thermoplastic material with
all the associated benefits. ABSplus has the added benefited of creating
additional part strength. Parts build in ABSplus on average are 40 percent
stronger than our current  ABS parts.                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                           
| |  | Polycarbonate (PC) is an engineering thermoplastic material, which
is used commercially for demanding applications in a number of industries; PC
offers superior impact strength coupled with resistance to heat and corrosive
agents.                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                           
| |  | PC-ISO, a derivative of PC that is translucent, expands the usage of
polycarbonate models and prototypes in various medical applications.                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                           
| |  | Polyphenylsufone (PPSF) is a specialty thermoplastic material, which
offers excellent mechanical properties while being subjected to demanding
thermal and chemical environments. PPSF is used to make prototype parts for
numerous industries, including automotive, fluid and chemical handling,
aerospace, and medical sterilization.
| |   |                                                                                                                                                                                                                                                                                                                                           
| |  | ABSi is a higher grade translucent ABS, which features greater impact strength
than ABS. It can also be used in medical applications, including gamma-ray
sterilization.                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                           
| |  | PC-ABS is a blend of polycarbonate and ABS plastic. The blend combines the
strength of PC with the flexibility of ABS.                                                                                                                                                                                                                    

In addition to the
modeling materials, we offer a proprietary water-soluble material used for
support during the build process, which is later dissolved from the finished
part in systems that employ WaterWorks.  Other proprietary release
materials are used for support and are removed from the final model by
hand.

5



The Arcam System
uses either titanium powder or cobalt-chrome that is melted using the CAD to
Metal process.  EBM-produced materials have no remaining layering effects
or weld lines from the additive build process, and the microstructures feature a
normal grain structure for each material. It produces durable metal parts that
can be employed in end-use functions or as tooling.

Each material has
specific characteristics that make it appropriate for various applications. The
ability to use different materials allows the user to match the material to the
end use application of the prototype, whether it is a pattern for tooling, a
concept model, or a functional prototype. ABS is also offered in numerous
colors, including white, black, red, blue, yellow and green. We offer a program
to create custom colors for unique customer needs.

The modeling
filament, resin and titanium powder used in the RP system and 3D printers that
we sell are consumable products that provide us additional recurring
revenue.

Operating Software

Our high-performance
systems and 3D printers use one of two software products that convert the
three-dimensional CAD databases into the appropriate two-dimensional data
formats.  The software products also provide a wide range of features,
including automatic support generation, part scaling, positioning and nesting,
as well as geometric editing capabilities.  The software is not sold as a
stand-alone product.

Catalyst EX, our
entry-level software product, enables users to build prototype parts at the push
of a button. It was introduced in 2000 and is used on Dimension Elite, Dimension
BST and Dimension SST.

Our InSight
preprocessing software is used on the remainder of our FDM products 
Prodigy Plus, Vantage, Titan and Maxum. It increases build speed and improves
the design engineers control and efficiency over the entire build
process.  It has a broad set of features that facilitate the demanding
applications ranging from a single push button for automatic
pre-processing to individual editing and manipulation tools for each process
step.

We continuously
improve both products to meet the demands of our sophisticated customers.
Throughput enhancements, advanced build algorithms and features are intended to
keep pace with complex industrial geometric designs while saving valuable
operator time.

Services

Maintenance,
Leasing, Training and Contract Engineering

We also provide a
number of services in relation to our rapid prototyping business.  We
provide maintenance to our customers under our standard warranties and separate
maintenance contracts.  In the United States, we lease or rent RP systems
and 3D printers under operating agreements to customers that do not desire to
purchase them or enter into sales-type leases.  We offer training to our
customers, particularly on our high-performance systems.  Finally, from
time to time we offer contract engineering services to third parties in
connection with the development of systems and services incorporating our
proprietary technology.

Paid Parts

Our Paid Parts
service offers both existing and potential customers the ability to purchase
prototypes and parts that we make for them from CAD files that they provide to
us.   We have a facility near our corporate headquarters dedicated to
Paid Parts operations.  Our RedEye RPM website service, www.redeyerpm.com,
enables our customers to obtain quotes and order parts around the clock, seven
days a week. RedEye RPM offers unmatched expertise and production capacity using
the latest in proven rapid prototyping and direct digital manufacturing
technologies and processes.

6



Marketing, Distribution and Customers

Marketing and
Customers

The focus of our
marketing begins with the identification of customer needs. We feature a broad
array of products that allow us to meet the precise needs of engineers,
designers, educators, marketers and manufacturers. Our products range from
Dimension BST, priced at $18,900, to a high-performance FDM Maxum, priced at
$250,000. We currently offer nine other systems between these price points, as
well as the Arcam System, meeting a variety of material, size and performance
criteria.

We have sold systems
to the following representative customers:

| |  | General Motors Corporation          |  | Harley Davidson                  |  | Toyota                  
| | - | ----------------------------------- | - | -------------------------------- | - | ------------------------
| |   |                                     |   |                                  |   |                         
| |  | Intel                               |  | Dell                             |  | Nike                    
| |   |                                     |   |                                  |   |                         
| |  | The Boeing Company                  |  | Xerox                            |  | Mitsubishi Electronics  
| |   |                                     |   |                                  |   |                         
| |  | University of Wisconsin -   Madison |  | University of Texas at El   Paso |  | Pioneer Speaker         
| |   |                                     |   |                                  |   |                         
| |  | Chrysler                            |  | Lockheed Martin                  |  | Cornell University      
| |   |                                     |   |                                  |   |                         
| |  | Lego                                |  | Lever                            |  | Toro                    
| |   |                                     |   |                                  |   |                         
| |  | Honda                               |  | Ford Motor Company               |  | Graco                   
| |   |                                     |   |                                  |   |                         
| |  | St. Jude Medical                    |  | NASA                             |  | Medtronic-Sofamar Danek 
| |   |                                     |   |                                  |   |                         
| |  | Hewlett Packard                     |  | Hyundai                          |  | Brigham Young University

We have also sold
systems to a small number of service bureaus. We sell complete high-performance
and 3D printing systems as well as supplies and services.

No customer
accounted for more than 10% of sales in 2006, 2005, or 2004.

We use a variety of
tactical marketing methods to reach potential customers:

| |  | Web-based marketing     |  | Print advertisements      | 
| | - | ----------------------- | - | ------------------------- | 
| |   |                         |   |                           | 
| |  | Trade magazine articles |  | Direct mailings           | 
| |   |                         |   |                           | 
| |  | Brochures               |  | Trade show demonstrations | 
| |   |                         |   |                           | 
| |  | Telemarketing programs  |  | Web sites                 | 
| |   |                         |   |                           | 
| |  | CDs                    |  | Broadcast e-mail          | 
| |   |                         |   |                           | 
| |  | Press releases          |  | Webinars                  | 

In addition, we have
developed domestic and international on-site demonstration
capabilities.

FDM Sales
Organization

In early 2003, we
consolidated our FDM sales organization by structuring sales, service, and
marketing into one group. The focus of this organization is on our
high-performance systems that feature engineering modeling materials, high
quality surface finish, high accuracy and feature detail, and excellent
throughput. This group markets, sells and services our Maxum, Titan, Vantage,
and Prodigy Plus systems, as well as the Arcam System, which we distribute.

7



The FDM sales
organization operates worldwide. Our North American territory is organized as a
single region managed by a National Sales Manager. This organization is also
responsible for the sale, installation and service of the Arcam System. Regional
sales and service offices are located in Novi, Michigan, and Ontario,
California. We have identified specialists within the sales group who are
focused on Arcam and DDM opportunities.

Internationally, our
third-party distributors sell and service our FDM systems. We have relationships
throughout the world including Europe, the Middle East, Taiwan, China, and Latin
America. Sales management and technical support were increased to support the
growth of our international business. International sales and service centers
are located in Frankfurt, Germany, Bologna, Italy, and Bangalore,
India.

3D Printing Sales
Organization

In conjunction with
the consolidation of our FDM sales organization, we also consolidated our 3D
printing sales organization in 2003. A worldwide Director of Sales manages four
channel managers in North America as well as our international regional managers
for sales of our 3D printers.

We use a worldwide
reseller network to market, sell, and service our 3D printers. Many of our
reseller outlets have Dimension BST and Dimension SST systems that are available
for tradeshows, product demonstrations, and other promotional activities. As of
early 2007, we had approximately 200 reseller locations worldwide. During late
2006, we saw significant growth in the number of reseller locations established
in China. Most resellers enjoy a long-term presence in their respective
territories. In addition to Dimension, most resellers sell and service a
third-party 3D solid CAD software package. Most of our North American
territories, Germany, Japan and the United Kingdom contain a reseller devoted to
commercial accounts as well as a different reseller devoted to the education
market.

Dimension can be
found at many leading companies.  Based on estimates from the 2006 Wohlers
Report, we believe that 3D printers represented approximately 70% of all RP
systems sold in 2005, and that Dimension accounted for about 42% of all 3D
printers shipped in 2005.

Paid Parts

In 2006, we
established a dedicated internal sales channel to offer our Paid Parts services
through our RedEye RPM instant Internet quoting system. This team is responsible
for growing our Paid Parts service and nurturing customers who have rapid
prototyping and direct digital part needs insuring the customer has a favorable
experience solving their internal part requirements. Besides a commitment to
customer satisfaction, an essential objective of this operation is to increase
the number of high quality FDM parts in the marketplace which, in turn, we
believe will also support the expansion of our system sales. Various
distribution agreements have been established to accomplish the goals and
continue to grow revenue from this service.

Customer Support

Our Customer Support
department provides on-site system installation and maintenance services and
remote technical support to users of our products. We offer services on a time
and material basis as well as through a number of post-warranty maintenance
contracts with varying levels of support and pricing. Our help desk provides
technical support via phone, fax, and e-mail to international customers,
distributors, and resellers, and our field service personnel. We supply a
toll-free telephone number that our domestic customers can utilize to request
technical assistance, schedule service visits, order parts and supplies, or
directly contact a manager within the Customer Support department.

We employ a field
service organization that performs system installation, basic operation and
maintenance training, and a full range of maintenance and repair services at
customer sites. Field representatives have been trained and certified to service
all of our products. Representatives are strategically located in regional
offices across North America and are equipped with cellular phones and laptop
computers. They have remote access to a customer service database containing
service history and technical documentation to aid in troubleshooting and
repairing systems.

8



Customer Support is
represented on all cross-functional product development teams within Stratasys
to ensure that products are designed for serviceability and to provide our
internal design and engineering departments with feedback on field issues.
Failure analysis, corrective action, and continuation engineering efforts are
driven by data collected in the field. Ongoing customer support initiatives
include development of advanced diagnostic and troubleshooting techniques and
comprehensive preventative maintenance programs, an expanded training and
certification program for technical personnel, and improved communication
between the field and the factory.

Warranty and Service

We provide a
90day warranty on our commercial systems sold domestically and a one-year
warranty on domestic educational sales and systems sold internationally. In
addition, we offer annual and multiple-year service and maintenance contracts
for our systems.  Annual service contracts for our systems are priced from
approximately $2,200 to $44,000 per year.

Manufacturing

Our manufacturing
process consists assembling systems from purchased components and producing
consumable filament to be used within our systems. We obtain all parts used in
the manufacturing process either from distributors of standard electrical or
mechanical parts or from custom fabricators of our proprietary designs. Our
suppliers are measured by on-time performance and quality. We currently operate
on a build-to-forecast basis.

We purchase major
component parts for our high-performance FDM and 3D printing systems from
various outside suppliers, subcontractors and other sources and assemble them at
our Minnesota facilities. Our production floor has been organized using
demand-flow techniques (DFT) in order to maximize efficiency and
quality. Using DFT, our production lines are balanced and as capacity
constraints arise, we can avoid the requirements of relaying out our production
floor. Computer-based Material Requirements Planning (MRP) is used
for reordering to insure on-time delivery of forecasted parts. All operators and
assemblers are certified and trained on up-to-date assembly and test procedures.
The assembly process includes semi-automated functional tests of key
subassemblies. Key functional characteristics are verified through these tests
and the results are stored in a statistical database. At the completion of
assembly, we perform a complete power up and final quality tests to ensure the
quality of our products before shipment to customers. The complete final quality
tests must be run error free before the system can be cleared for shipment. We
maintain a history log on all products that shows revision level configuration
and a complete history during the manufacturing and test process. All issues on
the system during the manufacturing process are logged and tracked and used to
make continuous process improvements of our production processes. Other
manufacturing strengths that are incorporated into our new designs are the
commonality of designs in our different products as well as the incorporation of
Six Sigma concepts.

We maintain an
inventory of most of our necessary supplies, which facilitates the assembly of
products required for production. While most components are available from
multiple suppliers, certain components used in our systems and consumables are
only available from single or limited sources. Should our present single or
limited source suppliers become inadequate, we would be required to spend a
significant amount of time and money researching alternate sources. We consider
these suppliers very reliable. Although we believe we maintain adequate
inventories of vendor-specific materials, the loss of a supplier of such
vendor-specific materials or compounds could result in the delay in the
manufacture and delivery of those materials and compounds. The delay could
require us to find an alternate source, which would require us to re-qualify the
product supplied by one or more new vendors. We consider our relationships with
our suppliers to be good.

Research, Development and Engineering

We believe that
ongoing research, development and engineering efforts are essential to our
continued success. Accordingly, our engineering development efforts will
continue to focus on improvements to the FDM technology and development of new
modeling processes, materials, software, user applications and products. We have
devoted significant time and resources to the development of a universally
compatible and user-friendly software system. We are committed to designing
products using the principles of Six Sigma. We continue to standardize our
product platforms, leveraging each new design so that it will result in multiple
product offerings that are developed faster and at reduced expense. The FDM
Vantage, Prodigy Plus, and Dimension SST products as well as the Catalyst and
InSight software products are examples of this successful strategic initiative.
For the years ended December 31, 2006, 2005 and 2004, our research, development
and engineering expenses were approximately $6.7 million, $6.4 million and $5.6
million, respectively.

9



Our filament
development and production operation is located at our facilities in Eden
Prairie, MN. We regard the filament formulation and manufacturing process as a
trade secret and hold patent claims on filament usage in our products. We
purchase raw material plastics for our consumable filament production from
various large plastic suppliers.

Intellectual Property

We consider our
proprietary technology to be material to the development, manufacture, and sale
of our products and services and seek to protect our technology through a
combination of patents and confidentiality agreements with our employees and
others.  All patents and patent applications for our rapid prototyping
processes and apparatuses associated with the FDM process have been assigned to
us by their inventors. As part of our purchase of rapid prototyping technology
assets from IBM, we were also assigned the rights and title to three patents
developed by IBM, which were incorporated in our Genisys system and are used in
several of our current product lines. We recorded these patents domestically and
are in the process of recording them in certain foreign countries. The terms of
two of these patents extend until April 12, 2011, and May 17, 2011, while the
third patent has expired.  The United States patents covering our
proprietary FDM technology expire at various times between 2009 and 2026. 
In total, we currently own approximately 180 U.S. and international patents and
patent applications. Other foreign patent applications have also been filed,
including the patent applications assigned to us by IBM.

Our registered
trademarks include:

| |  | Stratasys, Inc. |  | FDM           |  | Catalyst       
| | - | --------------- | - | ------------- | - | ---------------
| |   |                 |   |               |   |                
| |  | QuickSlice      |  | AutoGen       |  | Dimension      
| |   |                 |   |               |   |                
| |  | 3D Plotter      |  | FDM Quantum   |  | Genisys        
| |   |                 |   |               |   |                
| |  | Dimension BST   |  | Dimension SST |  | Dimension Elite

Other trademarks
include:

| |  | FDM Maxum    |  | FDM Titan  |  | SupportWorks
| | - | ------------ | - | ---------- | - | ------------
| |   |              |   |            |   |             
| |  | BASS         |  | BuildFDM   |  | FDM Vantage 
| |   |              |   |            |   |             
| |  | InSight      |  | Touchworks |  | WaterWorks  
| |   |              |   |            |   |             
| |  | Prodigy Plus |  | Prodigy    |   |             

Each of the
registered trademarks has a duration of 10 years and may be renewed every 10
years while it is in use. Trademark applications have also been filed in Japan
and the European Community.

We have also
registered a number of Internet domain names, including the
following:

| |  | Stratasys.com    |  | Dimensionprinting.com |  | RedEyeRPM.com      
| | - | ---------------- | - | --------------------- | - | -------------------
| |   |                  |   |                       |   |                    
| |  | BuildFDM.com     |  | 3D-fax.com            |  | DimensionDirect.com
| |   |                  |   |                       |   |                    
| |  | 3Dprinter.com    |  | webprototypes.com     |  | prototype.com      
| |   |                  |   |                       |   |                    
| |  | Paidparts.com    |  | buildup.com           |  | webmodeling.com    
| |   |                  |   |                       |   |                    
| |  | Buildpolyjet.com |   |                       |   |                    

Backlog

Our total backlog of
system orders at December 31, 2006 was approximately $4.1 million, as compared
with approximately $2.8 million at December 31, 2005. We estimate that most of
our backlog will ship in the first half of 2007.

10



Seasonality

Historically, our
results of operations have been subject to seasonal factors.  Stronger
demand for our products has occurred in our fourth quarter primarily due to our
customers capital expenditure budget cycles and our sales compensation
incentive programs.  Our first quarter has historically been our weakest
quarter.  This trend has been muted recently by the successful introduction
of new products coupled with demonstration programs that have granted extended
payment terms to resellers and distributors of our Dimension product
line.

Competition

We compete in a
marketplace that is still dominated by conventional methods of model-making and
prototype development. Machinists and engineers working from blueprints or CAD
files and using machining or manual methods generally perform the prototype
development and fabrication. We believe that there is currently no other
commercial producer of 3D modeling devices that uses a single-step, non-toxic
technology similar to our FDM technology. Most of the 3D printing and other RP
systems manufactured by our competitors involve additional post-processing
steps, such as curing the part after construction of the model or prototype. Our
FDM technology does not rely on the laser or light technology used by other
commercial manufacturers in the RP industry.

Our competitors
employ a number of different technologies in their RP devices. 3D Systems,
D-MEC, Next Factory, Mitsui and Teijin Seiki Co. use stereolithography in their
products. 3D Systems introduced the first rapid prototyping product. 3D Systems
and EOS GmbH produce machines that use selective laser sintering
(SLS) to harden powdered material. Z Corp. uses inkjet technology to
bond powdered materials. Solidscape, 3D Systems and Object Geometries have
developed prototyping systems that use inkjet technology to deposit resin
material layer by layer. A smoothing or milling process is often required
between each deposited layer to maintain accuracy in these processes. 
Envisiontec utilizes a photopolymer mask and a light process to build models.
Solidimension Ltd. Uses plastic sheet lamination that involves adhesives and
multiple sheets of polyvinyl chloride (PVC) to build models. We believe that our
FDM technology has important advantages over our competitors products.
These advantages include:

| |  | the ability to be used in   an office environment                 
| | - | ------------------------------------------------------------------
| |   |                                                                   
| |  | the availability of   multiple production-grade modeling materials
| |   |                                                                   
| |  | a one-step modeling   process                                     
| |   |                                                                   
| |  | low acquisition price                                             
| |   |                                                                   
| |  | ease of use                                                       
| |   |                                                                   
| |  | hands-free support removal                                        

Certain of our
competitors may have greater financial and marketing resources than we
have.  Based on data and estimates presented in the 2006 Wohlers Report, in
2005 we shipped more units than any other company in the RP industry globally,
and we were the second largest in terms of revenue.  We estimate that we
recorded approximately 34% of total units shipped in the industry in 2005. 
We believe that this trend continued in 2006 as well.

Employees

As of March 1, 2007,
we had 340 full-time employees and 20 subcontractors or temporary employees.
While we have separate internal departments, such as manufacturing, marketing,
engineering and sales, many employees perform overlapping functions within the
organization. No employee is represented by a union, and we have not experienced
any work stoppages. We believe our employee relations are good.

11



Governmental Regulation

We are subject to
various local, state and federal laws, regulations and agencies that affect
businesses generally. These include:

| |  | regulations promulgated by federal and state environmental and health
agencies
| | - | ------------------------------------------------------------------------------
| |   |                                                                               
| |  | the federal Occupational Safety and Health Administration                     
| |   |                                                                               
| |  | laws pertaining to the hiring, treatment, safety and discharge of
employees   
| |   |                                                                               
| |  | export control regulations for  U.S. made products                            

Available Information

We file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any document we file
at the SECs public reference room at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for information on the public
reference room. The SEC maintains a website that contains annual, quarterly and
current reports, proxy statements and other information that issuers (including
Stratasys) file electronically with the SEC. The SECs website is
www.sec.gov.

Our website is
www.stratasys.com. We make available free of charge through our Internet
site, via a link to the SECs website at www.sec.gov, our annual
reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form
8-K; Forms 3, 4 and 5 filed on behalf of our directors and executive officers;
and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC.

We make available on
www.stratasys.com our most recent annual report on Form 10-K, our
quarterly reports on Form 10-Q for the current fiscal year and our most recent
proxy statement, although in some cases these documents are not available on our
site as soon as they are available on the SECs site. You will need to have
on your computer the Adobe Acrobat Reader software to view these documents,
which are in PDF format. If you do not have Adobe Acrobat, a link to
Adobes Internet site, from which you can download the software, is
provided. The information on our website is not incorporated by reference into
this report.

Financial Information About Operations In the United States and Other
Countries

The information required by this item is incorporated by reference to our
Financial Statements included elsewhere in this report. (See Part IV, Item 15,
Note 14.)

12



Item 1A. Risk Factors.

Many of the factors
that affect our business and operations involve risk and uncertainty. The
following describes the principal risks affecting us and our business.
Additional risks and uncertainties, not presently known to us or currently
deemed material, could negatively impact our results of operations or financial
condition in the future.

We may not be able to introduce new high-performance systems and 3D printing
systems and materials acceptable to the market or to improve the technology and
software used in our current systems.

Our ability to
compete in the high-performance and 3D printing markets depends, in large part,
on our success in enhancing our existing product lines and in developing new
products. Even if we successfully enhance existing systems or create new
systems, it is likely that new systems and technologies that we develop will
eventually supplant our enhanced systems or our competitors will create systems
that will replace ours. The RP industry is subject to rapid and substantial
innovation and technological change. We may not successfully enhance existing
systems and materials or develop new systems or materials, and any of our
products may be rendered obsolete or uneconomical by our or others
technological advances.

If the 3D printing market does not continue to accept our systems, our
revenues may stagnate or decline.

We derive a
substantial portion of our sales from the sale of 3D printers. If the market for
3D printers declines or if competitors introduce products that compete
successfully against ours, we may not be able to sustain the sales of those
products. If that happens, our revenues may not increase and could decline.

If we are unable to maintain revenues and gross margins from sales of our
existing products, our profitability will be adversely affected.

Our current strategy
is to attempt to reduce the prices of our high-performance systems and 3D
printers to expand the market and improve sales.  In conjunction with that
strategy, we are constantly seeking to reduce our direct manufacturing costs as
well.  Our engineering and selling, general and administrative expenses,
however, generally do not vary substantially in relation to our sales.
Accordingly, if our strategy is successful and we increase our revenues while
maintaining our gross margins, our operating profits generally will increase
faster as a percentage of revenues than the percentage increase in revenues.
Conversely, if our revenues or gross margins decline, our operating profits
generally will decline faster than the decline in revenues or gross margins.
Therefore, declines in our revenues may lead to disproportionate reductions in
our operating profits.

If we are unable to replace the revenues and gross margins from the
distribution of Eden systems for Objet, or to successfully redeploy the
resources supporting this distribution, our profitability will be adversely
affected.

Through the end of
2006, we distributed the Eden polyjet systems and related consumables and
maintenance for Objet Geometries, Inc. With the exception of providing
maintenance for existing Eden systems through August 1, 2007, we are no longer
distributing these systems or the related consumables. Our 2007 strategy
includes emphasizing sale of Arcam EBM systems and our existing proprietary FDM
systems, as well as the future introduction of new products, in order to
continue growing our revenue and profitability. If we are not successful in our
strategy, our net sales and profitability will be adversely effected.

If other manufacturers were to successfully develop and market consumables
for use in our systems, our revenues and profits could be adversely
affected.

We presently sell
substantially all of the consumables that our customers use in our
systems.  However, even though we attempt to protect against replication of
our consumables through patents and trade secrets and we provide that our
warranties are valid only if customers use consumables that we certify, it is
possible that other manufacturers could develop consumables that could be used
successfully in our systems.  If our customers were to purchase consumables
from our competitors, we would lose some of our sales and would be forced to
reduce prices, which would impair our overall revenue and
profitability.

13



If we fail to grow our Paid Parts service as anticipated, our net sales and
profitability will be adversely affected.

We are attempting to
grow our Paid Parts service substantially.  To this end, we have made
significant infrastructure, technological and sales and marketing
investments.  These investments include a dedicated facility, increased
staffing, use of a substantial number of our FDM systems exclusively for Paid
Parts, and the development and launch of our  RedEye RPM service, which
enables customers to obtain quotes for and order parts over the Internet. 
If our Paid Parts service does not generate the level of sales required to
support our investment, our net sales and profitability will be adversely
affected.

Termination of our North American Distributor Agreement with Arcam would
adversely affect our sales and profitability.

We have invested
significant resources in sales and marketing of the EBM Systems that we
distribute for Arcam in North America.  Sales of the EBM System contributed
to our sales growth in 2006 and we expect that such sales will continue to
contribute to sales growth in 2007.  The termination of this agreement to
distribute these systems and related products and services would have an adverse
effect on our sales and earnings.

A loss of a significant number of our international distributors or North
American resellers would impair our ability to sell our products and services
and could result in a reduction of sales and net income.

We sell all of our
products internationally through distributors, and we sell our 3D printers in
North America through resellers.  We rely heavily on these distributors and
resellers to sell our products to end users in their respective geographic
regions.  If a significant number of those distributors or resellers were
to terminate their relationship with us or otherwise fail or refuse to sell our
products, we may not be able to find replacements that are as qualified or as
successful in selling our products.  If we are unable to find qualified and
successful replacements, our sales will suffer, which would have a material
adverse effect on our net income.

We may not be able to adequately protect or enforce our intellectual property
rights, which could harm our competitive position.

Our success and
future revenue growth will depend, in part, on our ability to protect our
intellectual property.  We rely primarily on patents, trademarks and trade
secrets, as well as non-disclosure agreements and other methods, to protect our
proprietary technologies and processes.  Despite our efforts to protect our
proprietary technologies and processes, it is possible that competitors or other
unauthorized third parties may obtain, copy, use or disclose our technologies
and processes.  We cannot assure you that any of our existing or future
patents will not be challenged, invalidated or circumvented.  As such, any
rights granted under these patents may not provide us with meaningful
protection.  We may not be able to obtain foreign patents on pending
applications corresponding to our U.S. patent applications.  Even if
foreign patents are granted, effective enforcement in foreign countries may not
be available.  If our patents do not adequately protect our technology, our
competitors may be able to offer products similar to ours.  Our competitors
may also be able to develop similar technology independently or design around
our patents.  Any of the foregoing events would lead to increased
competition and lower revenue or gross margins, which would adversely affect our
net income.

If our intangible assets become impaired, we may be required to record a
significant charge to earnings.

As of December 31,
2006, the net book value of our intangible assets was approximately $4.9
million. Accounting rules require us to take a charge against our earnings to
the extent that any of these intangible assets are impaired.  Accordingly,
invalidation of our patents, trademarks or other intellectual property or the
impairment of other intangible assets due to litigation, obsolescence,
competitive factors or other reasons could result in a material charge against
our earnings and have a material adverse effect on our results of operations.

14



We operate a global business that exposes us to additional risks.

Our sales outside of
the United States accounted for approximately 41% of our consolidated net sales
in 2006.  We continue to expand into international markets.  The
future growth and profitability of our foreign market is subject to a variety of
risks and uncertainties.  Any of the following factors could adversely
affect our sales to customers located outside of the United States:

| |  | Relative strength of the US dollar against foreign currencies could make our
products more expensive and would reduce our profit margins on sales to foreign
customers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                        
| |  | If we are unable to protect our intellectual property in foreign countries,
competitors could use it to compete against us, adversely affecting our sales
and profits. 
| |   |                                                                                                                                                                        
| |  | Political or economic instability in regions where we sell our products could
reduce or eliminate sales to customers located in those regions.                         
| |   |                                                                                                                                                                        
| |  | Seasonal fluctuations in business activity in certain countries could result in
significant fluctuations in sales from quarter to quarter.                             
| |   |                                                                                                                                                                        
| |  | Changes in export controls and tariffs could make it more difficult for us to
sell our products outside of the United States.                                          

Our operating results and financial condition may fluctuate.Our operating
results and financial condition may fluctuate from quarter to quarter and year
to year and are likely to continue to vary due to a number of factors, many of
which are not within our control.  If our operating results do not meet the
expectations of securities analysts or investors, who may derive their
expectations by extrapolating data from recent historical operating results, the
market price of our common stock will likely decline.  Fluctuations in our
operating results and financial condition may be due to a number of factors,
including, but not limited to, those listed below and those identified
throughout this Risk Factors section:

| |  | changes in the amount that we spend to develop, acquire or license new products,
consumables, technologies or businesses;                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                               
| |  | changes in the amount we spend to promote our products and services;                                                                                          
| |   |                                                                                                                                                               
| |  | changes in the cost of satisfying our warranty obligations and servicing our
installed base of systems;                                                       
| |   |                                                                                                                                                               
| |  | delays between our expenditures to develop and market new or enhanced systems
and consumables and the generation of sales from those products;                
| |   |                                                                                                                                                               
| |  | development of new   competitive systems by others;                                                                                                           
| |   |                                                                                                                                                               
| |  | changes in accounting rules, such as accounting for tax contingencies commencing
in the first quarter of 2007;                                                
| |   |                                                                                                                                                               
| |  | the mix of high-performance systems, 3D printers, and Arcam Systems that we sell
during any period;                                                           
| |   |                                                                                                                                                               
| |  | the geographic distribution of our sales;                                                                                                                     
| |   |                                                                                                                                                               
| |  | our responses to price   competition;                                                                                                                         
| |   |                                                                                                                                                               
| |  | market acceptance of our   products;                                                                                                                          
| |   |                                                                                                                                                               
| |  | general economic and industry conditions, including changes in interest rates
affecting returns on cash balances and investments, that affect customer
demand;
| |   |                                                                                                                                                               
| |  | failure of a development partner to continue supporting certain product
development efforts they are funding; and                                             
| |   |                                                                                                                                                               
| |  | our level of research and   development activities.                                                                                                           

Due to all of the
foregoing factors, and the other risks discussed in this report, you should not
rely on quarter-to-quarter comparisons of our operating results as an indicator
of future performance.

15



Default in payment by one or more international distributors or North
American resellers that have large account receivable balances could adversely
impact our results of operations and financial condition.

Certain
international distributors and North American resellers carry high account
receivable balances, some of which exceed our normal payment terms. Many of
these distributors and resellers are small, thinly capitalized companies that
rely upon sales of our products to cover their operating expenses.  Default
by one or more of these distributors or resellers would result in a significant
charge against our earnings and adversely affect our results of operations and
financial condition.

If we are unable to retain our key operating personnel and attract additional
skilled operating personnel, our development of new products will be delayed and
our personnel costs will increase.

Our growth plans
require us to retain key employees in, and to hire additional skilled employees
for, our operating departments, such as engineering and computer programming, to
enhance existing products and develop new products. Our inability to retain and
hire key engineers and other employees could have the effect of delaying our
development and introduction of new products, which would adversely affect our
revenues.  In addition, a possible shortage of such personnel in the
Minneapolis region could require us to pay more to retain and hire such
employees, thereby increasing our costs.

Our common stock price has been and may continue to be highly volatile.

In the preceding 12
months, our common stock has traded at prices ranging between $22.04 and $41.75.
Investors may have difficulty selling our common stock following periods of
volatility, because of the markets adverse reaction to such volatility.
Factors that we believe have caused or may cause this volatility include, among
other things:

| |  | actual or anticipated variations in quarterly or annual operating
results;      
| | - | --------------------------------------------------------------------------------
| |   |                                                                                 
| |  | our announcements of the issuance of patents or other technological
innovations;
| |   |                                                                                 
| |  | our announcements of new   products;                                            
| |   |                                                                                 
| |  | our competitors announcements of new products;                                 
| |   |                                                                                 
| |  | changes in financial estimates by securities analysts;                          
| |   |                                                                                 
| |  | the employment and termination of key personnel; and                            
| |   |                                                                                 
| |  | sales or repurchases of   our common stock                                      

Many of these
factors are beyond our control. These factors may have a material adverse affect
on the market price of our common stock, regardless of our operating
performance.

If our internal controls over financial reporting do not comply with the
requirements of the Sarbanes-Oxley Act, our business and stock price could be
adversely affected.

Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal controls over financial reporting as of the end of each year, and to
include a management report assessing the effectiveness of our internal controls
over financial reporting in all annual reports.  Section 404 also requires
our independent registered public accounting firm to attest to, and to report
on, managements assessment of our internal controls over financial
reporting.

Our management,
including our CEO and CFO, does not expect that our internal controls over
financial reporting will prevent all error and fraud.  A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives will be met. 
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs.  Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, involving Stratasys have been, or
will be detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake.  The design of any system of controls is based
in part on certain assumptions about the likelihood of future events, and we
cannot assure you that any design will succeed in achieving its stated goals
under all potential future conditions.  Over time, our controls may become
inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures.  Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.

16



Although our
management has determined, and our independent registered public accounting firm
has attested, that our internal controls over financial reporting were effective
as of December 31, 2006, we cannot assure you that our independent registered
accounting firm will not identify a material weakness in our internal controls
in the future.  A material weakness in our internal controls over financial
reporting would require management and our independent registered public
accounting firm to evaluate our internal controls as ineffective.  If our
internal controls over financial reporting are not considered adequate, we may
experience a loss of public confidence, which could have an adverse effect on
our business and our stock price.

The foregoing list
is not exhaustive. There can be no assurance that we have correctly identified
and appropriately assessed all factors affecting our business or that the
publicly available and other information with respect to these matters is
complete and correct. Additional risks and uncertainties not presently known to
us or that we currently believe to be immaterial also may adversely impact our
business. Should any risks or uncertainties develop into actual events, these
developments could have material adverse effects on our business, financial
condition, and results of operations.

We assume no
obligation (and specifically disclaim any such obligation) to update these Risk
Factors or any other forward-looking statements contained in this Annual Report
to reflect actual results, changes in assumptions or other factors affecting
such forward-looking statements.

Item 1B.  Unresolved Staff Comments.

Not
applicable.

Item 2.  Properties.

Our executive
offices and production facilities presently comprise approximately 215,000
available square feet in four buildings in Eden Prairie, Minnesota, near
Minneapolis. We occupy a 27,856 square foot facility under a lease that expires
on July 31, 2007. Current monthly base rent on this facility is $14,519. This
facility is used for R&D, administrative, marketing, and sales
activities.

On August 1, 2001,
we purchased our Eden Prairie manufacturing facility and land for approximately
$3.0 million. The facility consists of 62,100 square feet, and is used for
machine assembly, inventory storage, operations, sales support, and
administration.

In March 2004, we
purchased an additional 42,500 square foot manufacturing facility for
approximately $1.2 million. The facility is located near our manufacturing
facility in Eden Prairie, Minnesota, and is used for our Paid Parts
service.

In November 2005, we
purchased an additional 86,000 square foot manufacturing facility for
approximately $5.1 million. The facility is across from our manufacturing
facility in Eden Prairie, Minnesota. We expect it to accommodate our
intermediate expansion requirements.  We occupied approximately 67,000
square feet of the building in January 2007, with the balance of space under
lease agreements that expire over the next year-and-a-half.

We have two North
American sales offices and one service office. We occupy 2,659 square feet of
space in Novi, Michigan, a Detroit suburb. Base monthly rent under this lease is
approximately $2,400 and expires in July 2010. We also occupy a 2,504 square
feet sales office in Ontario, California. Monthly base rent on this facility is
approximately $4,200 and expires in August 2008. In addition, we have a 1,440
square feet service office in Ontario, California. Monthly base rent on this
facility is approximately $2,300 and expires in August 2009.  We are also
responsible for real estate taxes, insurance, utilities, trash removal, and
maintenance expenses at these facilities.

17



We have three
international sales and service offices under lease. Our German subsidiary
leases 4,360 square feet of space in Frankfurt, Germany, with a base rent of
5,700. This facility is on a month-to-month lease. We are currently
looking for additional space. Our Italian subsidiary leases 1,300 square feet in
Bologna, Italy for a base rent of 1,800 per month. This lease expires in
December 2010. We have a 2,500 square foot sales office in Bangalore, India, for
a base rent of US$1,000 per month that expires in May 2008.

Item 3.  Legal Proceedings.

None.

Item 4.  Submission of Matters to a Vote of
Stockholders.

No matter was
submitted to a vote of stockholders, through the solicitation of proxies or
otherwise, during the fourth quarter of the fiscal year ended December 31,
2006.

18



PART II

Item 5.  Market For Common Equity and Related Stockholder
Matters.

Market Information

Our common stock is
traded on the Nasdaq Global Select Market (Nasdaq) under the symbol
SSYS, and on NYSE Arca, Inc. under the symbol SAS. We have announced that we
will be voluntarily delisting our shares from NYSE Arca, Inc.

The following table
sets forth the high and low closing sale prices of our common stock for each
quarter from January 1, 2005 through the fiscal year ended December 31, 2006
reported on the Nasdaq Global Select Market.

|                                      |  | High                      |       | Low | 
|------------------------------------- |  | ------------------------- | ----- | --- | 
|                                      |  |                           |       |     | 
|                                      |  | Closing Sale Prices ($) * |      
|                                      |  |                           |      
|Fiscal Year Ended December   31, 2005 |  |                           |       |     | 
|January 1, 2005  March   31, 2005    |  |                           | 37.50 |     | 
|April 1, 2005  June 30,   2005       |  |                           | 34.30 |     | 
|July 1, 2005  September   30, 2005   |  |                           | 36.08 |     | 
|October 1, 2005  December   31, 2005 |  |                           | 30.04 |     | 
|Fiscal Year Ended December   31, 2006 |  |                           |       |     | 
|January 1, 2006  March   31, 2006    |  |                           | 29.53 |     | 
|April 1, 2006  June 30,   2006       |  |                           | 34.39 |     | 
|July 1, 2006  September   30, 2006   |  |                           | 29.93 |     | 
|October 1, 2006  December   31, 2006 |  |                           | 32.57 |     | 

|                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*Reflects the high and low closing sale prices reported on the Nasdaq National
Market, prior to commencement of trading on the Nasdaq Global Select Market on
August 1, 2006

There were
approximately 102 record and 7,033 beneficial stockholders of our common stock
as of March 7, 2007.

Dividends

We have not paid or
declared any cash dividends to date and do not anticipate paying any in the
foreseeable future. We intend to retain earnings, if any, to support the growth
of our business.

Shares Issuable Under Equity Compensation Plans

Information
regarding our equity compensation plans, including both stockholder approved
plans and plans not approved by stockholders, is incorporated herein by
reference to our Definitive Proxy Statement with respect to our Annual Meeting
of Stockholders scheduled to be held May 8, 2007.

19



Issuer Purchases of Equity Securities

On October 27, 2005,
our Board of Directors authorized us to purchase up to $20 million of our
outstanding shares of common stock, which superseded a prior $10 million
authorization.  We repurchased no shares in the fourth quarter of 2006
pursuant to that authorization.  As of December 31, 2006, we had remaining
authorization of approximately $8.0 million for future share
repurchases.

Stock Performance Graph

The following graph compares on a cumulative basis the yearly percentage change,
assuming dividend reinvestment, over the last five fiscal years in (a) the total
stockholder return on our Common Stock with (b) the total return on the Nasdaq
(US) Composite Index, and (c) the total return on the information technology
sector of the Standard & Poors SmallCap 600 Index (S&P 600
Info Tech Index). The S&P 600 Info Tech Index consists of 125 of
the 600 stocks comprising the Standard & Poors SmallCap 600 Index, a
capitalization-weighted index of domestic stocks chosen for market size,
liquidity and industry representation.

The following graph
assumes that $100 had been invested in each of Stratasys, the Nasdaq (US)
Composite Index, and the S&P 600 Info Tech Index on December 31,
2001.

Message

20



Item 6.  Selected Consolidated Financial Data.

The selected
consolidated financial data as of and for the five-year period ended December
31, 2006, should be read in conjunction with the Consolidated Financial
Statements and related Notes for the year ended December 31, 2006, and the
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

|                                                   |  | Years   Ended December 31,                 |        
|-------------------------------------------------- |  | ------------------------------------------ | -------
|                                                   |  |                                            |        
|                                                   |  | (In   Thousands, Except Per Share Amounts) |        
|                                                   |  | 2006                                       |        
|                                                   |  |                                            |        
|Statement   of Operations Data:                    |  |                                            |        
|Net sales                                          |  | $                                          | 103,809
|Gross profit (a)                                   |  |                                            | 51,441 
|Selling, general and   administrative expenses (a) |  |                                            | 29,105 
|Research and development                           |  |                                            | 6,699  
|Operating income                                   |  |                                            | 15,637 
|Net income                                         |  |                                            | 11,164 
|Net income per basic   common share                |  | $                                          | 1.10   
|Weighted average basic   shares outstanding        |  |                                            | 10,120 
|Net income per diluted   common share              |  | $                                          | 1.08   
|Weighted average diluted   shares outstanding      |  |                                            | 10,362 
|Balance   Sheet Data:                              |  |                                            |        
|Working capital                                    |  | $                                          | 55,311 
|Total assets                                       |  |                                            | 118,004
|Long term debt (less   current portion)            |  |                                            |       
|Stockholders equity                               |  |                                            | 97,792 

|                                                                                                                                                                                                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) 2002-2005 have been restated to reflect customer service costs as part of
the cost of sales instead of as operating expenses. This reclassification had no
effect on operating or net income or net income per basic and diluted common
share.

Item 7.    Managements Discussion and Analysis of
Financial Condition and Results of Operations.

Introduction

Managements
Discussion and Analysis of Financial Condition and Results of Operations is
intended to facilitate an understanding of our business and results of
operations.  It should be read in conjunction with our Consolidated
Financial Statements and the accompanying Notes to Consolidated Financial
Statements included elsewhere in this report.  All amounts in the following
discussions are stated in thousands, except employees, share and per share data,
prices for systems, or as otherwise indicated.

General

We develop,
manufacture, and market a family of rapid prototyping (RP) devices,
which includes our 3D printing systems, that enable engineers and designers to
create physical models, tooling and prototypes out of plastic and other
materials directly from a computer aided design (CAD)
workstation.  In 2006, our sales grew by more than 25% on a 38% increase in
the number of units shipped, as compared with the levels reported in 2005.

Our strategy in 2006
was to continue expanding our market position in the 3D printing market through
increased sales of Dimension BST, our low-cost 3D printer, and the Dimension
SST, which we introduced in 2004. In January 2006, we reduced the price of our
Dimension SST to $24,900 from $29,900 and the Dimension BST to $18,900 from
$24,900. In April 2006, we introduced the Dimension 1200 BST and SST at $24,900
and $29,900, respectively.

21



The Dimension 1200 series has a 57% larger build capacity and approximately a
20% faster build speed than the existing Dimension products. In 2006, the unit
growth rate of Dimension was 46%, which contributed to a 34% increase in
revenues from this product line as compared with 2005. According to the 2006
Wohlers Report (Wohlers), we shipped more 3D printers than other
company in the world in 2005, and based on our results in 2006, we believe that
we have continued that trend in 2006.  Our 2005 strategy also included the
expansion of our position in the RP market through the growth of our installed
base of high-performance systems, represented by our Titan, Vantage, Prodigy
Plus and Maxum systems, coupled with Eden260, Eden333 and Eden500 systems that
were distributed for Objet Geometries Ltd. in North America and the EBM metal
system distributed for Arcam AB in North America.  In 2006, unit growth of
these high-performance RP products amounted to 3%, and sales growth was 11%.
Unit and sales growth were both attributable to the sales of the Eden Systems.
After careful consideration of strategic and financial considerations, effective
January 1, 2007, we are no longer distributing the Eden product line.  We
remain fully committed to our historic core RP business.  We expect growth
rates for our high-performance systems will continue to be slower than the
growth of the 3D printing systems, but that sale of these high-performance
systems will be very profitable. We believe distribution of the Arcam System
will continue to contribute to our top-line growth, but will be made at a 
gross profit that is lower than from our FDM systems. We also believe that new
opportunities in direct digital manufacturing (DDM), rapid tooling, and
expansion of traditional rapid prototyping applications will be the impetus for
this growth.

During the quarter
ended September 30, 2005 we announced that we received a $3.6 million order from
a Fortune 100 global manufacturing company to advance our proprietary
FDM® (fused deposition modeling) technology for direct digital
manufacturing applications. Our efforts are based around our high-end FDM
productivity systems. The agreement includes payments to us over four years as
we achieve R&D milestones as well as payments that are dependent upon future
deliverables. R&D payments received offset accelerated R&D efforts aimed
at direct digital manufacturing advances and do not recognize these payments as
revenue.  In 2006, we offset approximately $1.1 million of R&D expenses
from monies received under this contract.

Total net unit
shipments increased 38% in 2006 amounting to 1,796 systems compared with the
1,297 net units shipped in 2005. Based on data derived from Wohlers, we believe
we shipped more total systems than any other company in the world in 2005 and
that this will also be the case for 2006. Our growth was derived from a number
of industries, including automotive, consumer products, electronics, general
manufacturing, educational, government, and aerospace.

In 2006, we
continued to invest in establishing our Paid Parts service of producing parts
for customers. We believe this is a fragmented global market dominated by small
companies generating less than $1 million in annual sales.  Sales from our
Paid Parts service have been volatile quarter-to-quarter as we work to identify
the most effective ways of reaching customers. In the fall of 2005, we launched
RedEye RPM  as an Internet site allowing customers to obtain instant
quotes and then order their parts over the Internet via the submission of a
standard 3D CAD STL file. Year-over-year sales of what we term Paid
Parts increased by 45%. As customers continue to increase their volume of
parts ordered, we are often successful in selling them systems to produce their
own parts.

As our installed
base of systems has increased, we have derived an increasing amount of revenue
from sales of consumables, maintenance contracts, and other services. 
These represent recurring revenue for us.  In 2006, total non-system
revenue increased by 30%, due principally to growth in our consumable, service,
and Paid Parts businesses.

In 2007, we will
continue to make significant investments in fixed assets, process improvements,
information technology (IT), head count additions, and human
resource development activities that will be required for future growth. With
the discontinuance of the Objet relationship, we expect slower revenue growth in
2007, but with a higher overall gross profit percentage.  We anticipate
that our operating expenses will increase in 2007 over the amounts reported in
2006, but that our gross profit growth will exceed that of our expenses. 
This should allow for increased operating profits as a percentage of sales in
2007 as compared with 2006.  Our expense levels are based in part on our
expectations of future sales. While we have adjusted, and will continue to
adjust, our expense levels based on both actual and anticipated sales,
fluctuations in sales in a particular period could adversely impact our
operating results. Whereas our backlog as of December 31, 2006, was $4.1
million, it would not be sufficient to meet our budgeted sales targets should
new system orders in 2007 decline.

22



Our current and
future growth is largely dependent upon our ability to penetrate new markets and
develop and market new RP and 3D printing systems, materials, applications, and
services that meet the needs of our current and prospective customers.  Our
ability to implement our strategy for 2007 is subject to numerous uncertainties,
many of which are described under Risk Factors, above, in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations and in the section below captioned Forward Looking Statements
and Factors That May Affect Future Results of Operations.  We cannot
ensure that our efforts will be successful.

The 2005 and 2004 income statements have been restated to reflect customer
service costs as part of the cost of sales instead of a part of operating
expenses. These reclassifications had no effect on operating or net income or
net income per basic and diluted common share.

Results of Operations (Expressed in Thousands)

Twelve months ended December 31, 2006 compared with twelve months ended
December 31, 2005

The following table
sets forth certain statement of operations data as a percentage of net sales for
the periods indicated.  All items are included in or derived from our
consolidated statement of operations.

|                                       |  | For the   twelve months ended December 31, |      
|-------------------------------------- |  | ------------------------------------------ | -----
|                                       |  |                                            |      
|                                       |  | 2006                                       |      
|                                       |  |                                            |      
|Net sales                              |  |                                            | 100.0
|Cost of sales                          |  |                                            | 50.4 
|Gross profit                           |  |                                            | 49.6 
|Selling, general, and   administrative |  |                                            | 28.0 
|Research & development                 |  |                                            | 6.5  
|Operating income                       |  |                                            | 15.1 
|Other income (expenses)                |  |                                            | 1.3  
|Income before taxes                    |  |                                            | 16.4 
|Income taxes                           |  |                                            | 5.6  
|Net income                             |  |                                            | 10.8 

Net Sales

Net sales of our
products and services for 2006 and 2005 and changes in net sales were as
follows:

|            |  | 2006 |         | 2005 |   | Year-over-   Year Change | 
|----------- |  | ---- | ------- | ---- | - | ------------------------ | 
|            |  |      |         |      |   |                          | 
|Products    |  | $    | 83,449  |      | $ | 66,179                   | 
|Services    |  |      | 20,359  |      |   | 16,665                   | 
|            |  |      |         |      |   |                          | 
|Net   sales |  | $    | 103,808 |      | $ | 82,844                   | 
|            |  |      |         |      |   |                          | 

| |                                                                         |                                           
| | ----------------------------------------------------------------------- | ------------------------------------------
| | The primary drivers of the year-over-year growth in product sales
were:
| |                                                                        | 35% increase in consumable   sales        
| |                                                                        | 34% increase from   Dimension system sales
| |                                                                        | 65% increase in Eden   Systems sales      

As we increase our
installed base of systems in the field, we continue to see excellent growth in
consumables. Sales of our low-cost 3D Printers represented by the Dimension
products are increasing due to increased market awareness and promotion. Sales
of the Dimension BST benefited from a price decrease from $24,900 to $18,900 in
January 2006. 3D Printers sales growth was also due to the introduction of the
Dimension 1200 BST and SST offered at $22,900 and $29,900, respectively. The
Eden Systems we distributed saw excellent sales growth with the introduction of
a new, larger Eden500 system in late 2005.

23



Service revenues
predominately consist of the following components:  maintenance, Paid
Parts, contract engineering services, and rentals. We saw a 45% increase in our
relatively new Paid Parts service as we continued to invest in reaching
customers through trade shows, direct mailings and our RedEye RPM 
website allowing customers to order their parts over the Internet. Our
maintenance business saw year-over-year revenue growth of 16%. We attribute this
to a high maintenance renewal rate on our high-performance systems and 3D
printers, as well as the increase in our installed base of active systems in the
field.

Net sales and the
percentage of net sales by region for 2006 and 2005, as well as the percentage
change were as follows:

|              |  | 2006 |         | 2005 |  | Year-over-   Year Change |  
|------------- |  | ---- | ------- | ---- |  | ------------------------ | -
|              |  |      |         |      |  |                          |  
|North America |  | $    | 64,704  |      |  | 62                       | %
|Europe        |  |      | 21,459  |      |  | 21                       | %
|Asia Pacific  |  |      | 16,629  |      |  | 16                       | %
|Other         |  |      | 1,016   |      |  | 1                        | %
|              |  |      |         |      |  |                          |  
|Total         |  | $    | 103,808 |      |  | 100                      | %
|              |  |      |         |      |  |                          |  

| | North American sales   benefited from:
| | --------------------------------------
| |                                      
| |                                      
| |                                      

We saw a recovery in the European market during 2006 for our high-end
productivity systems; we believe a portion of this recovery was due to the
weakness of the dollar relative to the euro. In addition, we saw strong growth
in our Dimension products as we continued to grow our reseller network and their
effectiveness. We saw reasonable growth in Asia Pacific due to our increasing
installed base of systems and increased effectiveness in our Dimension reseller
network.

We believe that
sales into our North American region will show some weakness in 2007 relative to
2006 with the discontinuation of the Eden products effective January 1, 2007. We
believe Europe will remain strong throughout 2007 with new product introductions
and assuming continued weakness in the US dollar. We expect the Asia Pacific
region will be strong due to new product introductions and due to expansions we
have made in our reseller network late in 2006. However, declining economic
conditions in any of these regions could adversely impact our future sales and
profitability.

Gross Profit

Gross profit and
gross profit as a percentage of sales for our products and services for 2006 and
2005, as well as the percentage changes in gross profit were as
follows:

|               |  | 2006 |        | 2005 |                       | Year-over-   Year Change |  
|-------------- |  | ---- | ------ | ---- | --------------------- | ------------------------ | -
|               |  |      |        |      |                       |                          |  
|               |  |      |        |      | % of   Relative Sales |                          |  
|               |  |      |        |      |                       |                          |  
|Products       |  | $    | 41,496 |      |                       | 49.7                     | %
|Services       |  |      | 9,945  |      |                       | 48.8                     | %
|               |  |      |        |      |                       |                          |  
|Gross   profit |  | $    | 51,441 |      |                       | 49.6                     | %
|               |  |      |        |      |                       |                          |  

Product gross profit declined, as a percentage of product sales, due to an
increased component of Eden Systems and related consumables in the overall mix.
The products that we distribute carry a significantly lower margin than our
proprietary systems and consumables, which we manufacture.  Service gross
profit increased as a percentage of sales due to a larger component of sales
from our Paid Parts service, which carries a somewhat higher margin.

24



Operating Expenses

Operating expenses
and operating expense as a percentage of sales for 2006 and 2005, as well as the
percentage change in operating expenses were as follows:

|                                    |  | 2006 |        | 2005 |            | Year-over-   Year Change |  
|----------------------------------- |  | ---- | ------ | ---- | ---------- | ------------------------ | -
|                                    |  |      |        |      |            |                          |  
|                                    |  |      |        |      | % of Sales |                          |  
|                                    |  |      |        |      |            |                          |  
|Selling, general &   administrative |  | $    | 29,105 |      |            | 28.0                     | %
|Research and development            |  |      | 6,699  |      |            | 6.5                      | %
|                                    |  |      |        |      |            |                          |  
|Total   operating expenses          |  | $    | 35,804 |      |            | 34.5                     | %
|                                    |  |      |        |      |            |                          |  

Selling, general and
administrative expenses for 2006 include approximately $1.3 million  of
stock option compensation expense due to the adoption of Statement of Financial
Accounting Standards No. 123 Revised Accounting for Stock-Based
Compensation (SFAS No. 123(R)), which is a revision to SFAS
No. 123.  SFAS 123(R) requires all share-based payments to employees,
including grants to employee stock options, to be recognized in the financial
statements based on their grant date fair values. In 2005 and prior, we elected
the disclosure-only method as an alternative to financial statement
recognition.  Consequently, there was no similar expense recorded in the
2005 consolidated financial statements. Even with the adoption of SFAS No.
123(R), selling, general and administrative expenses declined as a percentage of
sales as we successfully obtained some operating leverage on the higher sales
volume. In 2006, we invested significantly in our information technology (IT)
systems as we established a formal IT department and made both hardware and
software investments. We expect to continue to invest in this area to support
our growth.

Research and
development increased by 5.4% over the previous year as we remain committed to
designing new products and materials, reducing costs on existing products, and
improving the quality and reliability of all of our platforms.  Increases
were primarily the result of increases in engineering headcounts partially
offset by an increase in internally capitalized software. During the quarter
ended September 30, 2005, we announced that we received a $3.6 million order
from a Fortune 100 global manufacturing company to advance our proprietary FDM
technology for direct digital manufacturing applications. This effort is based
around our high-performance systems. The agreement includes payments to us over
four years as R&D milestones are achieved, as well as payments that are
dependent upon future deliverables. R&D payments received offset accelerated
R&D efforts aimed at direct digital manufacturing advances and are not
recognized as revenue. During 2006 we offset approximately $1.1 million of
R&D expenses with monies received from this customer. As we continue our
commitment to R&D into 2007, we expect to report a similar range of R&D
spending in 2007 as a percentage of sales.

Operating Income

Operating income and
operating income as a percentage of sales for 2006 and 2005, as well as the
percentage change in operating income were as follows:

|                   |  | 2006 |        | 2005 |            | Year-over-   Year Change |  
|------------------ |  | ---- | ------ | ---- | ---------- | ------------------------ | -
|                   |  |      |        |      |            |                          |  
|                   |  |      |        |      | % of Sales |                          |  
|                   |  |      |        |      |            |                          |  
|Operating   income |  | $    | 15,637 |      |            | 15.1                     | %
|                   |  |      |        |      |            |                          |  

Operating income
increased due to the higher overall sales volume. However, operating income
declined as a percentage of sales primarily due to the adoption of SFAS No.
123(R) and the decline in revenue from our high gross profit high-end
proprietary systems as compared with solid growth in sales of our 3D printers
and distributed products.

25



Other Income (Expenses)

Other income
(expenses) for 2006 and 2005 and changes in other income (expenses) were as
follows:

|                               |  | 2006 |       | 2005 |   | Year-over-   Year Change |  
|------------------------------ |  | ---- | ----- | ---- | - | ------------------------ | -
|                               |  |      |       |      |   |                          |  
|Interest income                |  | $    | 1,648 |      | $ | 1,616                    |  
|Foreign currency   translation |  |      | (307  | )    |   | (484                     | )
|Other                          |  |      | (13   | )    |   | (7                       | )
|                               |  |      |       |      |   |                          |  
|Total                          |  | $    | 1,328 |      | $ | 1,125                    |  
|                               |  |      |       |      |   |                          |  

Interest income was
relatively flat. We had higher average cash and investment balances throughout
the year compared with 2005, but we shifted our investment strategy more toward
tax free instruments which have a lower pre-tax yield but a higher net after-tax
return.

We incurred foreign
currency translation losses because we sell primarily in euros throughout most
of Europe. Consequently, we have euro denominated receivables that we mark to
the current exchange rate at the end of each month. As the euro has declined
compared to the US dollar throughout most of 2006, we had written down the
carrying value of these receivables to reflect the changes in the exchange rate.
Each month we enter into 30-day forward contracts to offset a portion of the
impact in exchange rates. In 2006, our hedging strategy was more effective than
in 2005 due to better forecasting of euro denominated cash flow.  At
December 31, 2006 we had approximately 3.5 million net in euro-denominated
receivables and a 3.5 million 30-day forward contract.

Income Taxes

Income taxes and
income taxes as a percent of net income before taxes for 2006 and 2005, as well
as the percentage change were as follows:

|                                             |  | 2006 |       | 2005 |   | Year-over-   Year Change |  
|-------------------------------------------- |  | ---- | ----- | ---- | - | ------------------------ | -
|                                             |  |      |       |      |   |                          |  
|Income   taxes                               |  | $    | 5,800 |      | $ | 4,680                    |  
|                                             |  |      |       |      |   |                          |  
|As a percent of income   before income taxes |  |      | 34.2  | %    |   | 30.6                     | %
|                                             |  |      |       |      |   |                          |  

The following is a
reconciliation of the 2006 effective income tax rate compared with the 2005
rate:

|2005 effective income tax   rate                                   |  |  | 30.60 | %
|------------------------------------------------------------------ |  |  | ----- | -
|Discrete items recognized   in 2005 not recurring in 2006          |  |  | 2.10  |  
|Impact of increased   tax-free interest income                     |  |  | -1.20 |  
|Accounting for stock based   compensation expense                  |  |  | 1.00  |  
|Increase in effective   foreign income taxes                       |  |  | 0.70  |  
|Impact of partial phase-out   of extraterritorial income exclusion |  |  | 0.60  |  
|Increase in effective state   income taxes, net                    |  |  | 0.40  |  
|                                                                   |  |  |       |  
|2006 effective income tax   rate                                   |  |  | 34.20 | %
|                                                                   |  |  |       |  

26



Net Income

Net income and net
income as a percent of sales for 2006 and 2005, as well as the percentage change
in net income were as follows:

|           |  | 2006 |        | 2005 |            | Year-over-   Year Change |  
|---------- |  | ---- | ------ | ---- | ---------- | ------------------------ | -
|           |  |      |        |      |            |                          |  
|           |  |      |        |      | % of Sales |                          |  
|           |  |      |        |      |            |                          |  
|Net income |  | $    | 11,164 |      |            | 10.8                     | %
|           |  |      |        |      |            |                          |  

For the reasons cited above, our net income for the twelve months ended December 31, 2006 was at a lower percent of sales than in the year ended December 31, 2005.

27



Twelve months ended December 31, 2005 compared with twelve months ended December 31, 2004

The following table
sets forth certain statement of operations data as a percentage of net sales for
the periods indicated.  All items are included in or derived from our
consolidated statement of operations.

|                                       |  | For the   twelve months ended December 31, |      
|-------------------------------------- |  | ------------------------------------------ | -----
|                                       |  |                                            |      
|                                       |  | 2005                                       |      
|                                       |  |                                            |      
|Net sales                              |  |                                            | 100.0
|Cost of sales                          |  |                                            | 47.2 
|Gross profit                           |  |                                            | 52.8 
|Selling, general, and   administrative |  |                                            | 28.0 
|Research & development                 |  |                                            | 7.7  
|Operating income                       |  |                                            | 17.1 
|Other income (expenses)                |  |                                            | 1.3  
|Income before taxes                    |  |                                            | 18.4 
|Income taxes                           |  |                                            | 5.6  
|Net income                             |  |                                            | 12.8 

Net Sales

Net sales of our
products and services for 2005 and 2004 and changes in net sales were as
follows:

|            |  | 2005 |        | 2004 |   | Year-over-   Year Change | 
|----------- |  | ---- | ------ | ---- | - | ------------------------ | 
|            |  |      |        |      |   |                          | 
|Products    |  | $    | 66,179 |      | $ | 56,833                   | 
|Services    |  |      | 16,665 |      |   | 13,496                   | 
|            |  |      |        |      |   |                          | 
|Net   sales |  | $    | 82,844 |      | $ | 70,329                   | 
|            |  |      |        |      |   |                          | 

| | The primary drivers of the   year-over-year growth in product sales were:
| | -------------------------------------------------------------------------
| |                                                                         
| |                                                                         
| |                                                                         

As we increased our
installed base of systems in the field, we continued to see excellent growth in
consumables. Sales of our low-cost Dimension BST and Dimension SST increased due
to increased market awareness and promotion. Sales of the Dimension SST
benefited from a price decrease from $34,500 to $29,900 in February 2005. The
Eden Systems we distributed saw excellent sales growth with the introduction of
a new, larger Eden500 system.

Service revenues
predominately consisted of the following components:  maintenance, Paid
Parts, contract engineering services, and rentals. Our maintenance business saw
year-over-year revenue growth of 20%. We attribute this to a high maintenance
renewal rate on our RP systems and 3D printers, as well as the increase in our
installed base of active systems in the field. We saw a 32% increase in our
relatively new Paid Parts service as we continued to invest in reaching
customers through trade shows, direct mailings and our RedEye RPM 
website allowing customers to order their parts over the Internet, which was
introduced in October 2005.

28



Net sales and the
percentage of net sales by region for 2005 and 2004, as well as the percentage
change were as follows:

|              |  | 2005 |        | 2004 |  | Year-over-   Year Change |  
|------------- |  | ---- | ------ | ---- |  | ------------------------ | -
|              |  |      |        |      |  |                          |  
|North America |  | $    | 50,595 |      |  | 61                       | %
|Europe        |  |      | 17,296 |      |  | 21                       | %
|Asia Pacific  |  |      | 14,176 |      |  | 17                       | %
|Other         |  |      | 777    |      |  | 1                        | %
|              |  |      |        |      |  |                          |  
|Total         |  | $    | 82,844 |      |  | 100                      | %
|              |  |      |        |      |  |                          |  

| | North American sales   benefited from:
| | --------------------------------------
| |                                      
| |                                      
| |                                      

We saw relative
weakness in the European market during 2005, particularly in the second and
third quarters, with a slight recovery in the fourth quarter. We believe the
weakness was due to weakening economic conditions as well as increased
competitive pricing. These factors were somewhat offset by additions to our
European reseller network for our Dimension products. We saw reasonable growth
in Asia Pacific due to our increasing installed base of systems and increased
effectiveness in our Dimension reseller network.

Gross Profit

Gross profit and
gross profit as a percentage of sales for our products and services for 2005 and
2004, as well as the percentage changes in gross profit were as
follows:

|               |  | 2005 |        | 2004 |                           | Year-over-   Year Change |  
|-------------- |  | ---- | ------ | ---- | ------------------------- | ------------------------ | -
|               |  |      |        |      |                           |                          |  
|               |  |      |        |      | Percent to Relative Sales |                          |  
|               |  |      |        |      |                           |                          |  
|Products       |  | $    | 36,053 |      |                           | 54.5                     | %
|Services       |  |      | 7,702  |      |                           | 46.2                     | %
|               |  |      |        |      |                           |                          |  
|Gross   profit |  | $    | 43,755 |      |                           | 52.8                     | %
|               |  |      |        |      |                           |                          |  

Product gross profit declined, as a percentage of product sales, due to an
increased component of Eden Systems and related consumables in the overall mix.
The products that we distribute carry a significantly lower margin than our
proprietary systems and consumables, which we manufacture.  Service gross
profit declined as a percentage of sales due to a larger component of sales from
our Paid Parts service, which carried a somewhat lower margin in
2005.

29



Operating Expenses

Operating expenses
and operating expense as a percentage of sales for 2005 and 2004, as well as the
percentage change in operating expenses were as follows:

|                                    |  | 2005 |        | 2004 |            | Year-over-   Year Change |  
|----------------------------------- |  | ---- | ------ | ---- | ---------- | ------------------------ | -
|                                    |  |      |        |      |            |                          |  
|                                    |  |      |        |      | % of Sales |                          |  
|                                    |  |      |        |      |            |                          |  
|Selling, general &   adminsitrative |  | $    | 23,243 |      |            | 28.1                     | %
|Research and deveopment             |  |      | 6,354  |      |            | 7.7                      | %
|                                    |  |      |        |      |            |                          |  
|Total   operating expenses          |  | $    | 29,597 |      |            | 35.7                     | %
|                                    |  |      |        |      |            |                          |  

Selling, general and
administrative expenses declined as a percentage of sales as we successfully
obtained some operating leverage on the higher sales volume. In 2005, we
invested significantly in advertising our 3D printers in order to increase
awareness in the market. We also invested in adding the position of a Chief
Operating Officer, expanding our executive officer positions from two to three.

Research and
development increased by 12.7% over the previous year as we remained committed
to designing new products and materials, reducing costs on existing products,
and improving the quality and reliability of all of our platforms. 
Increases were primarily the result of increases in engineering headcounts
partially offset by an increase in internally capitalized software.

Operating Income

Operating income and
operating income as a percentage of sales for 2005 and 2004, as well as the
percentage change in operating income were as follows:

|                 |  | 2005 |        | 2004 |            | Year-over-   Year Change |  
|---------------- |  | ---- | ------ | ---- | ---------- | ------------------------ | -
|                 |  |      |        |      |            |                          |  
|                 |  |      |        |      | % of Sales |                          |  
|                 |  |      |        |      |            |                          |  
|Operating income |  | $    | 14,157 |      |            | 17.1                     | %
|                 |  |      |        |      |            |                          |  

Operating income
increased due to the higher overall sales volume. However, operating income
declined as a percentage of sales primarily due to slower growth of our high-end
proprietary RP systems as compared with growth in sales of our 3D printers and
distributed products.

Other Income (Expenses)

Other income
(expenses) for 2005 and 2004 and changes in other income (expenses) were as
follows:

|                               |  | 2005 |       | 2004 |   | Year-over-   Year Change |  
|------------------------------ |  | ---- | ----- | ---- | - | ------------------------ | -
|                               |  |      |       |      |   |                          |  
|Interest income                |  | $    | 1,616 |      | $ | 727                      |  
|Foreign currency   translation |  |      | (484  | )    |   | (26                      | )
|Other                          |  |      | (7    | )    |   | 148                      |  
|                               |  |      |       |      |   |                          |  
|Total                          |  | $    | 1,125 |      | $ | 849                      |  
|                               |  |      |       |      |   |                          |  

Interest income
increased due to higher average cash and investment balances throughout the year
compared with 2004. Also, we benefited from increases in the average yield on
cash and investments due to increasing interest rates.

30



We incurred foreign
currency translation losses because we sell primarily in euros throughout most
of Europe. Consequently, we have euro denominated receivables that we mark to
the current exchange rate at the end of each month. As the euro declined
compared to the US dollar throughout most of 2005, we had written down the
carrying value of these receivables to reflect the changes in the exchange rate.
Each month we entered into 30-day forward contracts to offset a portion of the
impact in exchange rates.  At December 31, 2005 we had approximately
3.9 million net in euro-denominated receivables and a 4.0 million
30-day forward contract.

Income Taxes

Income taxes and
income taxes as a percent of net income before taxes for 2005 and 2004, as well
as the percentage change were as follows:

|                                             |  | 2005 |       | 2004 |   | Year over    Year Change |  
|-------------------------------------------- |  | ---- | ----- | ---- | - | ------------------------ | -
|                                             |  |      |       |      |   |                          |  
|Income   taxes                               |  | $    | 4,680 |      | $ | 4,718                    |  
|                                             |  |      |       |      |   |                          |  
|As a percent of income   before income taxes |  |      | 30.6  | %    |   | 34.1                     | %
|                                             |  |      |       |      |   |                          |  

| | The effective tax rate was   lower in 2005 for three primary reasons:
| | ---------------------------------------------------------------------
| |                                                                      
| |                                                                     
| |                                                                     
| |                                                                     

These benefits were
somewhat offset by a 1.1% higher effective state income taxes rate, net of the
federal benefit and other items.

Net Income

Net income and net
income as a percent of sales for 2005 and 2004, as well as the percentage change
in net income were as follows:

|           |  | 2005 |        | 2004 |            | Year-over-   Year Change |  
|---------- |  | ---- | ------ | ---- | ---------- | ------------------------ | -
|           |  |      |        |      |            |                          |  
|           |  |      |        |      | % of Sales |                          |  
|           |  |      |        |      |            |                          |  
|Net income |  | $    | 10,603 |      |            | 12.8                     | %
|           |  |      |        |      |            |                          |  

For the reasons
cited above, our net income for the twelve months ended December 31, 2005 was at
a similar percent of sales as in the year ended December 31, 2004.

31



Liquidity and Capital Resources (Expressed in Thousands)

A summary of our
statements of cash flows for each of the three year periods ended December 31,
2006 is as follows:

|                                                         |  | 2006 |        | 2005 |   | 2004   |  
|-------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                         |  |      |        |      |   |        |  
|Net income                                               |  | $    | 11,164 |      | $ | 10,602 |  
|Depreciation and   amortization                          |  |      | 3,832  |      |   | 3,060  |  
|Stock-based compensation                                 |  |      | 1,266  |      |   |        |  
|Change in working capital   assets                       |  |      | (2,600 | )    |   | (5,537 | )
|Net cash provided by   operating activities              |  |      | 12,396 |      |   | 8,125  |  
|Net cash used in investing   activities                  |  |      | (8,419 | )    |   | (6,273 | )
|Net cash provided by (used   in) in financing activities |  |      | (1,704 | )    |   | (9,329 | )
|Effect of exchange rate   changes on cash                |  |      | 131    |      |   | (147   | )
|Net increase (decrease) in   cash and equivalents        |  |      | 2,404  |      |   | (7,624 | )
|Cash and equivalents,   beginning of year                |  |      | 10,106 |      |   | 17,730 |  
|                                                         |  |      |        |      |   |        |  
|Cash and equivalents, end   of year                      |  | $    | 12,510 |      | $ | 10,106 |  
|                                                         |  |      |        |      |   |        |  

The net cash
provided by our operating activities over the past three years has amounted to
approximately $38.2 million, principally derived from $30.9 million in net
income, plus $9.6 million in depreciation and amortization, $1.3 million in
stock-based compensation, less $2.3 million attributable to changes in net
working capital and other items.

In 2006, the
principal source of cash from our operating activities was our net income, as
adjusted to exclude the effects of non-cash charges, and changes in working
capital, primarily inventories and accounts receivable. Our net accounts
receivable balances increased to $25.0 million in 2006 from $20.0 million in
2005 and were $15.0 million 2004, principally due to higher sales in the second
half of 2006. Some of our international distributors have continued to carry
high balances, some of which have exceeded our normal terms. In addition, we
allow 3D Printing resellers extended 180-day terms on demo units. These factors
adversely impacted our days sales outstanding (DSO). 
DSOs were 88 days in both 2005 and 2006.

For the years ended
December 31, 2006, 2005, and 2004, our inventory balances have amounted to $9.9
million, $10.9 million, and $7.5 million, respectively. The decrease in 2006
from 2005 was principally due to a reduction in Eden Systems and
consumable inventory as we prepared to exit the Eden distribution effective
January 1, 2007. We have instituted better inventory management, but recognize
that we have opportunities to make considerably more improvement to reduce
overall inventory and improve turns. A significant portion of our inventory is
dedicated to fulfill our service contract and warranty obligations.  As we
have introduced new products over the past few years, there are more platforms
and models to service than in the past, which increases the requirements to
maintain spare parts inventory.  With the introduction of these new
products, older products are discontinued but certain inventory is still
required to fulfill our service contracts.  Our procedures for dealing with
this inventory are more fully explained in the section below captioned
Critical Accounting Policies.

Investments in
sales-type leases used cash of $.9 million in 2006, $1.2 million in 2005 and
$2.7 million in 2004.  In mid-2003 we introduced a leasing program that was
principally designed for the Dimension.   The program successfully
enabled us to offer an attractive leasing solution to approximately 264
accounts.  The program includes customers interested in our
high-performance systems. We intend to continue to use this leasing program in
2007.

For the years ended
December 31, 2006, 2005, and 2004 accounts payable and other current accrued
liabilities provided cash of $.7 million, $3.0 million and $.8 million,
respectively. These liabilities have grown as our overall business has grown
over the years. In 2006, the increase was related to the increases in employee
compensation and the timing of payments for Eden inventory.

32



Unearned revenue,
principally due to maintenance contracts or implied maintenance contracts,
provided cash of $1.1 million in 2006, $1.4 million in 2005 and $2.4 million in
2004.  This was principally due to the larger number of maintenance
contracts and increased implied maintenance contracts due to higher sales and a
larger installed base of systems.

Our investing
activities used cash of $8.4 million, $6.2 million, and $23.3 million in the
twelve months ended December 31, 2006, 2005, and 2004, respectively. In 2006,
payments for investments, net of proceeds, utilized cash of approximately $.8
million, whereas we provided cash from net investments of approximately $7.5
million in 2005 as we changed our investment strategy to include more items not
considered cash equivalents.

At December 31,
2006, our investments included:

| |  | $18.8 million in tax-free Auction Rate Certificates, which re-price
approximately every 30 days;             
| | - | -------------------------------------------------------------------------------------------------------------
| |  | approximately $13.0 million in municipal government bonds maturing between
January 2007 and October 2025; and
| |  | approximately $0.3 million   in certificates of deposit.                                                     

Property and
equipment acquisitions totaled $6.1 million, $9.8 million, and $7.1 million in
2006, 2005, and 2004, respectively. In the fall of 2005, we purchased a building
for approximately $5.1 million in order to accommodate our growth needs over the
next several years. Many of the capital expenditures in 2006 included renovating
the building to fit our needs. Most of the remaining capital expenditures in
2006 were for equipment required by the fastest growing components of our
business, including 3D printers, consumable manufacturing, and Paid Parts
service as well as our IT infrastructure. In March 2004, due to the anticipated
growth requirements for consumable manufacturing and Paid Parts service, we
purchased a 40,000 sq. ft. building near our current manufacturing facility for
approximately $1.2 million, and subsequently spent approximately $0.5 million
for building improvements.  Over the three-year period ended December 31,
2006, our other principal capital expenditures were for manufacturing or
engineering development equipment, tooling, and leasehold improvements, and for
the acquisition of computer systems and software applications.  Payments
for intangible assets, including patents and capitalized software, amounted to
$1.5 million, $4.1 million and $0.9 million for the years ended December 31,
2006, 2005, and 2004, respectively.

Our 2006 financing
activity included the repurchase of 128,500 shares of common stock for
approximately $3.1 million representing an average price of $24.21 per share.
The 2006 financing activity also includes $1.4 million in proceeds from the
exercise of 157,675 stock options. Proceeds from the exercise of 75,370 stock
options provided cash of $.3 million in 2005, compared with proceeds from the
exercise of 174,515 stock options and 9,000 warrants, which provided cash of $.8
million in 2004.

For 2007, we expect
to use our cash as follows;

| |  | for improvements to our   facilities;                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | for the continuation of   our leasing program;                                                                                                                
| |  | for working capital   purposes;                                                                                                                               
| |  | for information systems (I/S) and infrastructure
enhancements;                                                                                              
| |  | for new product and   materials development;                                                                                                                  
| |  | for sustaining   engineering;                                                                                                                                 
| |  | for the acquisition of equipment, including production equipment, tooling, and
computers;                                                                     
| |  | for the purchase or development of intangible assets, including
patents;                                                                                      
| |  | for increased selling and marketing activities, especially as they relate to the
continued market and channel development as well as Arcam market
development;
| |  | for acquisitions and/or   strategic alliances; and                                                                                                            
| |  | for our common stock buyback   program.                                                                                                                       

While we believe
that the primary source of liquidity during 2007 will be derived from current
cash balances and cash flows from operations, we have maintained a line of
credit for the lesser of $4.0 million or a defined borrowing base.  To
date, we have not borrowed against this credit facility.

33



At December 31,
2006, large balances were concentrated with certain international distributors
and North American resellers, and some of these balances exceed our payment
terms.  Default by one or more of these distributors or customers could
result in a significant charge against our current reported earnings. We have
reviewed our policies that govern credit and collections, and will continue to
monitor them in light of current payment status and economic
conditions.   While we can give no assurances, we believe that most,
if not all, of the accounts receivable balances will ultimately be
collected.  For further information, see the section below captioned
Critical Accounting Policies.

Our total current
assets amounted to $75.5 million at December 31, 2006, the majority of which
consisted of cash and cash equivalents, investments, inventories and accounts
receivable.  Total current liabilities amounted to $20.2 million. We have
no debt.  We estimate that we will spend approximately between $8 and $10
million in 2007 for property and equipment. As of December 31, 2006, we estimate
that material commitments for inventory purchases from selected vendors for the
ensuing twelve-month period ending December 31, 2007, amounted to approximately
$8.3 million. In addition, we have future commitments for leased
facilities.   We intend to finance these purchases from existing cash
or from cash flows from operations.    The future contractual
cash obligations related to the commitments are as follows:

|Year   ending December 31, |  | Facilities |         | Inventory |   | Total     | 
|-------------------------- |  | ---------- | ------- | --------- | - | --------- | 
|                           |  |            |         |           |   |           | 
|2007                       |  | $          | 302,299 |           | $ | 8,300,000 | 
|2008                       |  |            | 197,238 |           |   |           | 
|2009                       |  |            | 179,823 |           |   |           | 
|2010                       |  |            | 147,749 |           |   |           | 
|2011                       |  |            | 51,266  |           |   |           | 
|                           |  |            |         |           |   |           | 
|                           |  | $          | 878,375 |           | $ | 8,300,000 | 
|                           |  |            |         |           |   |           | 

Inflation

We believe that
inflation has not had a material effect on our operations or on our financial
condition during the three most recent fiscal years.

Foreign Currency Transactions

We invoice sales to
certain European distributors in euros. Our reported results are therefore
subject to fluctuations based upon changes in the exchange rates of that
currency in relation to the United States dollar.  In the year ended
December 31, 2006, the loss from foreign currency translations amounted to
approximately $.3 million, whereas in the comparable 2005 period we reported
losses from foreign currency translations of approximately $.5 million.  In
the year ended December 31, 2006, we hedged between 3.0 and 4.0
million of our accounts receivable that were denominated in euros. The hedge
resulted in a currency exchange loss of approximately $.5 million for this
period.  We intend to continue to hedge some of our accounts receivable
balances that are denominated in euros throughout 2007, and will continue to
monitor our exposure to currency fluctuations.  Instruments to hedge our
risks may include foreign currency forward, swap, and option contracts. 
These instruments will be used to selectively manage risks, but there can be no
assurances that we will be fully protected against material foreign currency
fluctuations.  We expect to continue to derive most of our revenue from
regions where the transactions are negotiated, invoiced, and paid in US
dollars.  Fluctuations in the currency exchange rates in these other
countries may therefore reduce the demand for our products by increasing the
price of our products in the currency of countries in which the local currency
has declined in value.

Critical Accounting Policies

We have prepared our
consolidated financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America. 
This has required us to make estimates, judgments, and assumptions that affected
the amounts we reported.  Note 1 of Notes to Consolidated Financial
Statements contains the significant accounting policies that we used to
prepare our consolidated financial statements.

34



We have identified
several critical accounting policies that required us to make assumptions about
matters that were uncertain at the time of our estimates. Had we used different
estimates and assumptions, the amounts we recorded could have been significantly
different. Additionally, if we had used different assumptions or different
conditions existed, our financial condition or results of operations could have
been materially different.  The critical accounting policies that were
affected by the estimates, assumptions, and judgments used in the preparation of
our consolidated financial statements are listed below.

Revenue Recognition

We recognize
revenue, consistent with SAB 104 and EITF 00-21, when 1) persuasive evidence of
a final agreement exists, 2) delivery has occurred or services have been
rendered, 3) the selling price is fixed or determinable, and 4) collectibility
is reasonably assured.   Our standard terms are FOB shipping point,
and as such most of our revenue from system sales is primarily recognized at
time of shipment if the shipment conforms to the terms and conditions of the
purchase agreement. Exceptions to this policy occur only if a customers
purchase order indicates an alternative term or provides that the equipment sold
would be subject to certain contingencies, such as formal acceptance.  In
these instances, revenues would be recognized only upon satisfying the
conditions established by the customer in its purchase order to us. 
Revenue from sales-type leases of our FDM systems is recognized at the time of
lessee acceptance, which follows installation. Revenue from sales-type leases of
our Dimension systems is recognized at time of shipment, since either the
customer or the reseller performs the installation.  We recognize revenue
from sales-type leases at the net present value of future lease payments. 
Revenue from operating leases is recognized ratably over the lease period.
Revenue from maintenance contracts is recognized ratably over the term of the
contract, usually one year.  On certain sales that require a one-year
warranty rather than our standard 90-day warranty, a percentage of the selling
price that represents the fair value of the extended warranty is deferred and
recognized ratably over the period of the extended warranty as an implied
maintenance contract.  This has had the effect of deferring, as of December
31, 2006, approximately $2.3 million of revenue that will be recognized in
future periods.

We assess
collectibility as part of the revenue recognition process.  We evaluate a
number of factors to assess collectibility, including an evaluation of the
creditworthiness of the customer, past payment history, and current economic
conditions.  If it is determined that collectibility cannot be reasonably
assured, we would decline shipment, request a down payment, or defer recognition
of revenue until ultimate collectibility is more
determinable.     We also record a provision for estimated
product returns and allowances in the period in which the related revenue is
recorded.  This provision against current gross revenue is based
principally on historical rates of sales returns, but also factors in changes in
the customer base, geographic economic conditions, and changes in the financial
conditions of our customers.  If past trends were to change, we would
potentially have to increase or decrease the amount of the provision for these
returns.  We have little history as to potential returns under our lease
programs.  We will monitor our lease sales in the future, and if necessary
will record a provision for returns on leased systems.  As of December 31,
2006, our allowance for returns was $0.2 million compared with a $0.1 million
balance as of December 31, 2005.

Allowance for Doubtful Accounts

While we evaluate
the collectibility of a sale as part of our revenue recognition process, we must
also make judgments regarding the ultimate realization of our accounts
receivable.  A considerable amount of judgment is required in assessing the
realization of these receivables, including the aging of the receivables and the
creditworthiness of each customer.    We may not be able to
accurately and timely predict changes to a customers financial condition.
If a customers financial condition should suddenly deteriorate, calling
into question our ability to collect the receivable, our estimates of the
realization of our receivables could be adversely affected.  We might then
have to record additional allowances for doubtful accounts, which could have an
adverse effect on our results of operations in the period affected.

Our allowance for
doubtful accounts is adjusted quarterly using two methods.  First, our
overall reserves are based on a percentage applied to certain aged receivable
categories that are predominately based on historical bad debt write-off
experience.  Then, we make an additional evaluation of overdue customer
accounts, for which we specifically reserve.   In our evaluation we
use a variety of factors, such as past payment history, the current financial
condition of the customer, and current economic conditions.  We also
evaluate our overall concentration risk, which assesses the total amount owed by
each customer, regardless of its current status.

35



Certain of our
international distributors have carried large balances that have become
overdue.  Most of these distributors have continued to pay down their
balances and are still considered performing.  A default by one or more of
these distributors could have a material effect, ranging from $.2 million to
$1.0 million, on our reported operating results in the period affected.  As
of December 31, 2006 and 2005, our allowance for doubtful accounts amounted to
$1.3 and $1.6 million, respectively. The decrease in the reserve was primarily
due to the write-off of a $.4 million receivable from a French distributor who
filed for bankruptcy.

Inventories

Our inventories are
recorded at the lower of cost or market, with cost determined on a first-in,
first-out basis.  We periodically assess this inventory for obsolescence
and potential excess by reducing the difference between our cost and the
estimated market value of the inventory based on assumptions about future demand
and historical sales patterns.  Our inventories consist of materials and
products that are subject to technological obsolescence and competitive market
conditions.  If market conditions or future demand are less favorable than
our current expectations, additional inventory write downs or reserves may be
required, which could have an adverse effect on our reported results in the
period the adjustments are made.   Additionally, engineering or field
change orders (ECO and FCO, respectively) introduced by
our engineering group could suddenly create extensive obsolete and/or excess
inventory. Although our engineering group considers the estimated effect that an
ECO or FCO would have on our inventories, a mandated ECO or FCO could have an
immediate adverse affect on our reported financial condition if they required
the use of different materials in either new production or our service
inventory.

Some of our
inventory is returned to us by our customers and refurbished.  This
refurbished inventory, once fully repaired and tested, is functionally
equivalent to new production and is utilized to satisfy many of our requirements
under our warranty and service contracts.  Upon receipt of the returned
material, this inventory is recorded at a discount from original cost, and
further reduced by estimated future refurbishment expense.  While we
evaluate this service material in the same way as our stock inventory (i.e., we
periodically test for obsolescence and excess), this inventory is subject to
changing demand that may not be immediately apparent. Adjustments to this
service inventory, following an obsolescence or excess review, could have an
adverse effect on our reported financial condition in the period when the
adjustments are made. We review the requirements for service inventory for
discontinued products using the number of active maintenance contracts per
product line as the key determinant for inventory levels and composition. 
A sudden decline in the number of customers renewing service agreements in a
particular period could lead to an unanticipated write down of this service
inventory for a particular product line.

Income Taxes

We comply with SFAS
No. 109, Accounting for Income Taxes, which requires that deferred
tax assets and liabilities be recognized using enacted tax rates for the effect
of temporary differences between the book and tax bases of recorded assets and
liabilities.  SFAS 109 also requires a valuation allowance if it is more
likely than not that a portion of the deferred tax asset will not be
realized.  We have determined that it is more likely than not that our
future taxable income will be sufficient to realize our deferred tax
assets.

Our provision for
income taxes is based on our effective income tax rate.  The effective rate
is highly dependent upon a number of factors, including our total earnings, the
geographic location of sales, the availability of tax credits, and the
effectiveness of our tax planning strategies.  We monitor the effects of
these variables throughout the year and adjust our income tax rate
accordingly.  However, if our actual results differ from our estimates, we
could be required to adjust our effective tax rate or record a valuation
adjustment on our deferred tax assets.  This could have an adverse effect
on our financial condition and results of operations.

36



Impairment of Long-Lived Assets

The Company adheres to SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets and periodically assesses the recoverability
of the carrying amounts of long-lived assets, including intangible assets. 
A loss is recognized when expected undiscounted future cash flows are less than
the carrying amount of the asset.  The impairment loss is the difference by
which the carrying amount of the asset exceeds its fair value. A change in the
estimated future values of these assets could have an adverse effect on our
financial condition and results of operations.

Forward-looking Statements and Factors That May Affect Future Results of
Operations

All statements
herein that are not historical facts or that include such words as
expect, anticipate, project,
estimate or believe or other similar words are
forward-looking statements that we deem to be covered by and to qualify for the
safe harbor protection covered by the Private Securities Litigation Reform Act
of 1995 (the 1995 Act).  Investors and prospective investors in
our Company should understand that several factors govern whether any
forward-looking statement herein will be or can be achieved.  Any one of
these factors could cause actual results to differ materially from those
projected herein.

These
forward-looking statements include the expected increases in net sales of
high-performance and 3D printing systems, services and consumables, and our
ability to maintain our gross margins on these sales. The forward-looking
statements include our assumptions about the size of the high-performance and 3D
printing market, and our ability to penetrate, compete, and successfully sell
our products in these markets.  They include our plans and objectives to
introduce new products, to control expenses, to improve the quality and
reliability of our systems, to respond to new or existing competitive products,
and to improve profitability.  The forward-looking statements included
herein are based on current expectations that involve a number of risks and
uncertainties, some of which are described in Item 1A, Risk Factors
above. These forward-looking statements are based on assumptions, among others,
that we will be able to:

| |  | continue to introduce new high-performance and 3D printing systems and materials
acceptable to the market, and to continue to improve our existing technology and
software in our current product offerings;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                             
| |  | successfully develop the 3D printing market with our Dimension BST, Dimension
SST and Dimension Elite systems, and that the market will accept these
systems;                                               
| |   |                                                                                                                                                                                                             
| |  | maintain our revenues and gross margins on our present products and by our paid
parts service;                                                                                                              
| |   |                                                                                                                                                                                                             
| |  | control our operating   expenses;                                                                                                                                                                           
| |   |                                                                                                                                                                                                             
| |  | expand our manufacturing capabilities to meet the expected demand generated by
Dimension BST, Dimension SST, Dimension Elite, Paid Parts, and our consumable
products;                                      
| |   |                                                                                                                                                                                                             
| |  | successfully and profitably distribute and service the Arcam systems;                                                                                                                                       
| |   |                                                                                                                                                                                                             
| |  | successfully commercialize new materials, and that the market will accept these
new materials; and                                                                                                          
| |   |                                                                                                                                                                                                             
| |  | recruit, retain, and develop employees with the necessary skills to produce,
create, commercialize, market, and sell our products.                                                                          

Assumptions relating
to the foregoing involve judgments with respect to, among other things, future
economic, geo-political, competitive, market and technological conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of those assumptions could prove inaccurate, and therefore there
is and can be no assurance that the results contemplated in any such
forward-looking statement will be realized. The impact of actual experience and
business developments may cause us to alter our marketing plans, our capital
expenditure budgets, or our engineering, selling, manufacturing or other
budgets, which may in turn affect our results of operations or the success of
our new product development and introduction. We may not be able to alter our
plans or budgets in a timely manner, resulting in reduced profitability or
losses.

37



Due to the factors
noted above and elsewhere in this Managements Discussion and Analysis of
Financial Condition and Results of Operations, our future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis.  Additionally, we may not learn of revenue or earnings shortfalls
until late in a fiscal quarter, since we frequently receive a significant number
of orders very late in a quarter.  This could result in an immediate and
adverse effect on the trading price of our common stock.  Past financial
performance should not be considered a reliable indicator of future performance,
and investors should not use historical trends to anticipate results or trends
in future periods.

Item 7A.  Quantitative and Qualitative Disclosures About Market
Risk.

Interest Rate Risk

Our cash and cash
equivalent investments are exclusively in short-term money market accounts,
auction rate certificates, and sweep instruments with maturities of less than 90
days.  These are subject to limited interest rate risk.  A 10% change
in interest rates would not have a material effect on our financial condition or
results of operations.  Our short- and long-term investments are invested
in Auction Rate Certificates, municipal government bonds, and certificates of
deposit that bear interest at rates of 3.0% to 7.0%. An immediate 10% change in
interest rates would have no material effect on our financial condition or
results of operations.

38



Foreign Currency Exchange Rate Risk

We have not
historically hedged sales from or expenses incurred by our European operations
that are conducted in euros. A hypothetical 10% change in the exchange rates
between the U.S. dollar and the euro could increase or decrease our earnings
before taxes by less than $0.3 million for the continued maintenance of our
European facility.  Throughout 2006 we hedged between 3.0 million and
4.0 million of our accounts receivable balances that were denominated in
euros.  A hypothetical 10% change in the exchange rates between the US
dollar and the euro could increase or decrease earnings before taxes by between
$0.4 million and $0.5 million.

Item 8.  Financial Statements and Supplementary Data.

The information that
appears following Item 15 of this report and is incorporated herein by
reference.

Item 9.  Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure.

We did not have any
changes in or disagreements with our accountants on accounting and financial
disclosure.

Item 9A. Controls and Procedures.

Disclosure
Controls and Procedures.Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as
of the end of the period covered by this report (the Evaluation
Date). Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded as of the Evaluation Date that our disclosure
controls and procedures were effective such that the information relating to us
required to be disclosed in our Securities and Exchange Commission
(SEC) reports (i) is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and
(ii) is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.

Internal Control
over Financial Reporting.Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we are responsible for establishing and maintaining an
adequate system of internal control over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).  Our
management has conducted an assessment of our internal control over financial
reporting based on the framework established by the committee of Sponsoring
Organizations of the Treadway Commission in Internal Control  Integrated
Framework.  There have not been any changes in our internal control over
financial reporting identified in connection with the assessment that occurred
during the fourth quarter of 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.  Our management has prepared an annual report on internal
control over financial reporting.  Managements report, together with
the related attestation report of Rothstein, Kass & Company, P.C., our
independent registered public accounting firm, are included in this Annual
Report on Form    10-K on pages F-1 and  F-2 to F-4 of the
consolidated financial statements.

Item 9B.  Other Information.

Not applicable.

39



PART III

Item 10.   Directors, Executive Officers and Corporate
Governance.

Incorporated herein
by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 8, 2007.

Item 11.   Executive Compensation.

Incorporated herein
by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 8, 2007.

Item 12.   Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters.

Incorporated herein
by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 8, 2007.

Item 13.  Certain Relationships and Related Transactions, and Directors
Independence.

Incorporated herein
by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 8, 2007.

Item 14.  Principal Accountant Fees and Services.

Incorporated herein
by reference to our Definitive Proxy Statement with respect to our Annual
Meeting of Stockholders scheduled to be held May 8, 2007.

40



PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

|(a) | Documents                                                                                                                            |  |             
|--- | ------------------------------------------------------------------------------------------------------------------------------------ |  | ------------
|    |                                                                                                                                      |  |             
|    | 1. Consolidated Financial   Statements                                                                                              |  |             
|    |                                                                                                                                      |  |             
|    | Managements   Responsibility for Financial Reporting                                                                                |  | F-1         
|    |                                                                                                                                      |  |             
|    | Managements   Report on Internal Controls Over Financial Reporting                                                                  |  | F-1         
|    |                                                                                                                                      |  |             
|    | Reports of   Independent Registered Public Accounting Firm                                                                           |  | F-2 to F-4  
|    |                                                                                                                                      |  |             
|    | Consolidated   Balance Sheets December 31, 2006 and 2005                                                                             |  | F-5         
|    | Consolidated   Statements of Operations Years Ended December 31, 2006, 2005 and 2004                                                 |  | F-6         
|    | Consolidated   Statements of Changes in Stockholders Equity and Comprehensive Income Years   Ended December 31, 2006, 2005 and 2004 |  | F-7         
|    | Consolidated   Statements of Cash Flows Years Ended December 31, 2006, 2005 and 2004                                                 |  | F-8  to F-9 
|    | Notes to   Consolidated Financial Statements                                                                                         |  | F-10 to F-28
|    |                                                                                                                                      |  |             
|    | 2. Consolidated Financial   Statement Schedule --                                                                                    |  |             
|    |                                                                                                                                      |  |             
|    | Schedule   II-- Valuation and Qualifying Accounts and Reserves                                                                       |  | F-29        
|    |                                                                                                                                      |  |             
|    | Notes                                                                                                                                |  |             

All other schedules
called for under Regulation S-X are not submitted because they are not
applicable or not required, or because the required information is included in
the financial statements or notes thereto.

Separate financial
statements of the Registrant have been omitted because the Registrant is
primarily an operating company. All subsidiaries included in the consolidated
financial statements are majority owned, and none of the subsidiaries have
indebtedness that is not guaranteed by the Registrant.

41



STRATASYS, INC. AND SUBSIDIARIESCONSOLIDATED FINANCIAL
STATEMENTS AND REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM DECEMBER 31, 2006 AND 2005



STRATASYS, INC. AND SUBSIDIARIES

CONTENTS

---

|Managements Responsibility for Financial
Reporting                    |  | F-1      
|---------------------------------------------------------------------- |  | ---------
|                                                                       |  |          
|Managements Report on Internal Controls over Financial
Reporting      |  | F-1      
|                                                                       |  |          
|Reports of Independent Registered Public Accounting
Firm               |  | F-2-F-4  
|                                                                       |  |          
|Consolidated Financial Statements                                      |  |          
|                                                                       |  |          
|Balance Sheets                                                         |  | F-5      
|                                                                       |  |          
|Statements of Operations                                               |  | F-6      
|                                                                       |  |          
|Statements of Changes in Stockholders Equity and
Comprehensive Income |  | F-7      
|                                                                       |  |          
|Statements of Cash Flows                                               |  | F-8-F-9  
|                                                                       |  |          
|Notes to Financial Statements                                          |  | F-10-F-28
|                                                                       |  |          
|Schedule II - Valuation and Qualifying Accounts and
Reserves           |  | F-29     



MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting (as such term is defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934). The Companys
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Companys assets that could have a
material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable
assurance to the Companys management and board of directors regarding the
preparation of reliable financial statements for external purposes in accordance
with accounting principles generally accepted in the United States. Internal
control over financial reporting includes self-monitoring mechanisms and actions
taken to correct deficiencies as they are identified. Because of the inherent
limitations in any internal control, no matter how well designed, misstatements
may occur and not be prevented or detected. Accordingly, even effective internal
control over financial reporting can provide only reasonable assurance with
respect to financial statement preparation. Further, the evaluation of the
effectiveness of internal control over financial reporting was made as of a
specific date, and continued effectiveness in future periods is subject to the
risks that controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies and procedures may
decline.

MANAGEMENTS REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING

Management conducted an evaluation of the effectiveness of the Companys
system of internal control over financial reporting as of December 31, 2006
based on the framework set forth in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its evaluation, management concluded that, as of
December 31, 2006, the Companys internal control over financial reporting
is effective based on the specified criteria.

Managements assessment of the effectiveness of the Companys internal
control over financial reporting has been audited by the Companys
independent registered public accounting firm, Rothstein, Kass & Company,
P.C., as stated in their report at pages F-3 and F-4 herein.

|/s/ S. Scott Crump      | 
|----------------------- | 
|                        | 
|S. Scott Crump          | 
|Chief Executive Officer | 
|                        | 
|                        | 
|/s/ Robert F. Gallagher | 
|                        | 
|Robert F. Gallagher     | 
|Chief Financial Officer | 
|                        | 
|                        | 
|Date: March 14, 2007    | 

F-1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of  Stratasys, Inc.

We have audited the accompanying consolidated balance sheets of Stratasys, Inc.
and Subsidiaries (collectively, the Company) as of December 31, 2006
and 2005, and the related consolidated statements of operations, changes in
stockholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2006.  These financial statements are
the responsibility of the Companys management.  Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stratasys, Inc. and
Subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Companys  internal control over financial reporting as of December
31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated January 31, 2007 expressed an unqualified opinion on managements
assessment of internal control over financial reporting and an unqualified
opinion on the effectiveness of internal control over financial reporting.

In connection with our audits of the financial statements referred to above, we
audited the financial schedule listed under Schedule II  Valuation and
Qualifying Accounts and Reserves.  In our opinion, this financial schedule,
when considered in relation to the financial statements taken as a whole,
presents fairly, in all material respects, the information stated therein.

/s/ Rothstein, Kass & Company, P.C.Roseland, New Jersey  January 31, 2007

F-2



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of  Stratasys, Inc.

We have audited managements assessment, included in the accompanying
Managements Report on Internal Control Over Financial Reporting, under
Item 9A, that Stratasys, Inc. and Subsidiaries (collectively, the
Company) maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in
Internal Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO
criteria).  The Companys management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managements assessment and
an opinion on the effectiveness of the Companys internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A companys internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit the preparation of financial statements in accordance with accounting
principles generally accepted in the United States, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, managements assessment that Stratasys, Inc. and
Subsidiaries maintained effective internal control over financial reporting as
of December 31, 2006, is fairly stated, in all material respects, based on the
COSO criteria.  Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.

F-3



We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2006 and 2005, and the related consolidated
statements of operations, changes in stockholders equity and cash flows
for each of the years in the three-year period ended December 31, 2006 and our
report dated January 31, 2007 expressed an unqualified opinion.

/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey  January 31, 2007

F-4



|STRATASYS, INC. AND SUBSIDIARIES
|--------------------------------
|                                
|CONSOLIDATED BALANCE SHEETS     
|                                

|December 31,                                                                                                                              |  | 2006 |             | 2005 |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | -
|                                                                                                                                          |  |      |             |      |  
|ASSETS                                                                                                                                    |  |      |             |      |  
|Current assets                                                                                                                            |  |      |             |      |  
|Cash and cash equivalents                                                                                                                 |  | $    | 12,509,861  |      | $
|Short-term investments                                                                                                                    |  |      | 21,367,316  |      |  
|Accounts receivable, less allowance for returns and doubtful accounts of
$1,265,837 and $1,584,149 in 2006 and 2005, respectively         |  |      | 25,035,665  |      |  
|Inventories                                                                                                                               |  |      | 9,925,217   |      |  
|Net investment in sales-type leases                                                                                                       |  |      | 2,858,054   |      |  
|Prepaid expenses                                                                                                                          |  |      | 3,368,586   |      |  
|Deferred income taxes                                                                                                                     |  |      | 459,000     |      |  
|                                                                                                                                          |  |      |             |      |  
|Total current assets                                                                                                                      |  |      | 75,523,699  |      |  
|                                                                                                                                          |  |      |             |      |  
|Property and equipment,net                                                                                                                |  |      | 20,412,719  |      |  
|                                                                                                                                          |  |      |             |      |  
|Other assets                                                                                                                              |  |      |             |      |  
|Intangible assets, net                                                                                                                    |  |      | 4,868,923   |      |  
|Net investment in sales-type leases                                                                                                       |  |      | 3,271,015   |      |  
|Deferred income taxes                                                                                                                     |  |      | 915,000     |      |  
|Long-term investments                                                                                                                     |  |      | 10,747,689  |      |  
|Other                                                                                                                                     |  |      | 2,265,200   |      |  
|                                                                                                                                          |  |      |             |      |  
|                                                                                                                                          |  |      | 22,067,827  |      |  
|                                                                                                                                          |  |      |             |      |  
|Total assets                                                                                                                              |  | $    | 118,004,245 |      | $
|                                                                                                                                          |  |      |             |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                      |  |      |             |      |  
|Current liabilities                                                                                                                       |  |      |             |      |  
|Accounts payable and other current liabilities                                                                                            |  | $    | 10,335,607  |      | $
|Unearned revenues                                                                                                                         |  |      | 9,876,719   |      |  
|                                                                                                                                          |  |      |             |      |  
|Total current liabilities                                                                                                                 |  |      | 20,212,326  |      |  
|                                                                                                                                          |  |      |             |      |  
|Commitments and contingencies                                                                                                             |  |      |             |      |  
|Stockholders equity                                                                                                                      |  |      |             |      |  
|Common stock, $.01 par value, authorized 15,000,000 shares; issued 12,444,880
shares and 12,287,205 shares in 2006 and 2005, respectively |  |      | 124,449     |      |  
|Capital in excess of par value                                                                                                            |  |      | 75,726,716  |      |  
|Retained earnings                                                                                                                         |  |      | 41,960,124  |      |  
|Accumulated other comprehensive loss                                                                                                      |  |      | (116,995    | )    |  
|Less cost of treasury stock, 2,300,029 and 2,171,529 shares in 2006 and 2005,
respectively                                                |  |      | (19,902,375 | )    |  
|                                                                                                                                          |  |      |             |      |  
|Total stockholders equity                                                                                                                |  |      | 97,791,919  |      |  
|                                                                                                                                          |  |      |             |      |  
|Total liabilities and stockholders equity                                                                                                |  | $    | 118,004,245 |      | $
|                                                                                                                                          |  |      |             |      |  

See accompanying notes to consolidated financial statements.

F-5



|STRATASYS, INC. AND SUBSIDIARIES     
|-------------------------------------
|                                     
|CONSOLIDATED STATEMENTS OF OPERATIONS
|                                     

|Years Ended December 31,                   |  | 2006 |             | 2005 |   | 2004       |  
|------------------------------------------ |  | ---- | ----------- | ---- | - | ---------- | -
|                                           |  |      |             |      |   |            |  
|Net sales                                  |  |      |             |      |   |            |  
|Product                                    |  | $    | 83,449,388  |      | $ | 66,178,670 |  
|Services                                   |  |      | 20,359,463  |      |   | 16,665,634 |  
|                                           |  |      |             |      |   |            |  
|                                           |  |      | 103,808,851 |      |   | 82,844,304 |  
|                                           |  |      |             |      |   |            |  
|Cost of sales                              |  |      |             |      |   |            |  
|Product                                    |  |      | 41,953,162  |      |   | 30,125,996 |  
|Services                                   |  |      | 10,414,305  |      |   | 8,963,516  |  
|                                           |  |      |             |      |   |            |  
|                                           |  |      | 52,367,467  |      |   | 39,089,512 |  
|                                           |  |      |             |      |   |            |  
|Gross profit                               |  |      | 51,441,384  |      |   | 43,754,792 |  
|                                           |  |      |             |      |   |            |  
|Operating expenses                         |  |      |             |      |   |            |  
|Research and development                   |  |      | 6,699,373   |      |   | 6,353,877  |  
|Selling, general and administrative        |  |      | 29,105,342  |      |   | 23,243,455 |  
|                                           |  |      |             |      |   |            |  
|                                           |  |      | 35,804,715  |      |   | 29,597,332 |  
|                                           |  |      |             |      |   |            |  
|Operating income                           |  |      | 15,636,669  |      |   | 14,157,460 |  
|                                           |  |      |             |      |   |            |  
|Other income (expense)                     |  |      |             |      |   |            |  
|Interest income                            |  |      | 1,648,035   |      |   | 1,616,851  |  
|Foreign currency transaction losses, net   |  |      | (307,314    | )    |   | (484,352   | )
|Other                                      |  |      | (13,211     | )    |   | (7,062     | )
|                                           |  |      |             |      |   |            |  
|                                           |  |      | 1,327,510   |      |   | 1,125,437  |  
|                                           |  |      |             |      |   |            |  
|Income before income taxes                 |  |      | 16,964,179  |      |   | 15,282,897 |  
|Income taxes                               |  |      | 5,800,000   |      |   | 4,680,000  |  
|                                           |  |      |             |      |   |            |  
|Net income                                 |  | $    | 11,164,179  |      | $ | 10,602,897 |  
|                                           |  |      |             |      |   |            |  
|Net income per common share                |  |      |             |      |   |            |  
|Basic                                      |  | $    | 1.10        |      | $ | 1.01       |  
|                                           |  |      |             |      |   |            |  
|Diluted                                    |  | $    | 1.08        |      | $ | 0.99       |  
|                                           |  |      |             |      |   |            |  
|Weighted average common shares outstanding |  |      |             |      |   |            |  
|Basic                                      |  |      | 10,120,006  |      |   | 10,527,807 |  
|                                           |  |      |             |      |   |            |  
|Diluted                                    |  |      | 10,361,580  |      |   | 10,744,583 |  
|                                           |  |      |             |      |   |            |  

See accompanying notes to consolidated financial statements.

F-6



|STRATASYS, INC. AND SUBSIDIARIES                                                   
|-----------------------------------------------------------------------------------
|                                                                                   
|CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
|                                                                                   
|                                                                                   
|Years Ended December 31, 2006, 2005, and 2004                                      
|                                                                                   

|                                                                          |  |              |            |                                    |   |                     |  | Accumulated Other Comprehensive Income (Loss) |                  |  |                                |            |                        |   |         
|------------------------------------------------------------------------- |  | ------------ | ---------- | ---------------------------------- | - | ------------------- |  | --------------------------------------------- | ---------------- |  | ------------------------------ | ---------- | ---------------------- | - | --------
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |  
|                                                                          |  | Common Stock |            | Capital in   Excess of   Par Value |   | Retained   Earnings |  |                                               | Treasury   Stock |  | Total   Stockholders   Equity |            | Comprehensive   Income |  
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                 
|                                                                          |  | Shares       |            | Amount                             |   |                     |  |                                               |                  |  |                               
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Balances, January 1, 2004                                                 |  |              | 12,028,320 |                                    | $ | 120,283             |  | $                                             | 69,924,093       |  | $                              | 11,063,902 |                        | $ | (41,274 
|Exercise of stock options and warrants, net of issuance
expenses          |  |              | 183,515    |                                    |   | 1,835               |  |                                               | 754,415          |  |                                |            |                        |   |         
|Income tax reductions relating to exercise of stock options               |  |              |            |                                    |   |                     |  |                                               | 1,083,592        |  |                                |            |                        |   |         
|Purchase of 1,170 shares of treasury stock                                |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Net income                                                                |  |              |            |                                    |   |                     |  |                                               |                  |  |                                | 9,129,146  |                        |   |         
|**Other   comprehensive income,** foreign currency translation adjustment |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   | 47,184  
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Total comprehensive income                                                |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Balances, December 31, 2004                                               |  |              | 12,211,835 |                                    |   | 122,118             |  |                                               | 71,762,100       |  |                                | 20,193,048 |                        |   | 5,910   
|**Exercise of stock options,** net of issuance expenses                   |  |              | 75,370     |                                    |   | 754                 |  |                                               | 265,453          |  |                                |            |                        |   |         
|Income tax reductions relating to exercise of stock options               |  |              |            |                                    |   |                     |  |                                               | 438,399          |  |                                |            |                        |   |         
|Purchase of 401,503 shares of treasury stock                              |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Net income                                                                |  |              |            |                                    |   |                     |  |                                               |                  |  |                                | 10,602,897 |                        |   |         
|Other   comprehensive loss, foreign currency translation adjustment       |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   | (330,509
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Total comprehensive income                                                |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Balances,
December 31, 2005                                               |  |              | 12,287,205 |                                    |   | 122,872             |  |                                               | 72,465,952       |  |                                | 30,795,945 |                        |   | (324,599
|Exercise of stock options, net   of issuance expenses                     |  |              | 157,675    |                                    |   | 1,577               |  |                                               | 1,405,597        |  |                                |            |                        |   |         
|Income tax reductions relating to exercise of stock options               |  |              |            |                                    |   |                     |  |                                               | 589,611          |  |                                |            |                        |   |         
|Purchase of 128,500 shares of treasury stock                              |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Stock based compensation                                                  |  |              |            |                                    |   |                     |  |                                               | 1,265,556        |  |                                |            |                        |   |         
|Net income                                                                |  |              |            |                                    |   |                     |  |                                               |                  |  |                                | 11,164,179 |                        |   |         
|**Other   comprehensive income,**foreign currency translation adjustment  |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   | 207,604 
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Total comprehensive income                                                |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         
|Balances, December 31, 2006                                               |  |              | 12,444,880 |                                    | $ | 124,449             |  | $                                             | 75,726,716       |  | $                              | 41,960,124 |                        | $ | (116,995
|                                                                          |  |              |            |                                    |   |                     |  |                                               |                  |  |                                |            |                        |   |         

See accompanying notes to consolidated financial statements.

F-7



|STRATASYS, INC. AND SUBSIDIARIES     
|-------------------------------------
|                                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     

|Years Ended December 31,                                                                   |  | 2006 |            | 2005 |   | 2004        |  
|------------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ----------- | -
|                                                                                           |  |      |            |      |   |             |  
|Cash flows from operating activities                                                       |  |      |            |      |   |             |  
|Net income                                                                                 |  | $    | 11,164,179 |      | $ | 10,602,897  |  
|Adjustments to reconcile net income to net cash   provided by operating activities:        |  |      |            |      |   |             |  
|Deferred income taxes                                                                      |  |      | 204,611    |      |   | 258,399     |  
|Depreciation                                                                               |  |      | 2,783,089  |      |   | 2,274,551   |  
|Amortization                                                                               |  |      | 1,049,145  |      |   | 785,239     |  
|Stock based compensation                                                                   |  |      | 1,265,556  |      |   |             |  
|Loss on disposal of property and equipment                                                 |  |      | 55,860     |      |   | 43,081      |  
|Loss on write-off of intangible assets                                                     |  |      |            |      |   | 45,847      |  
|Increase (decrease) in cash attributable to   changes in operating assets and liabilities: |  |      |            |      |   |             |  
|Accounts receivable, net                                                                   |  |      | (4,859,210 | )    |   | (5,396,948  | )
|Inventories                                                                                |  |      | 1,013,897  |      |   | (3,426,039  | )
|Net investment in sales-type leases                                                        |  |      | (949,526   | )    |   | (1,161,214  | )
|Prepaid expenses                                                                           |  |      | (1,068,264 | )    |   | (546,975    | )
|Other assets                                                                               |  |      | (166,337   | )    |   | 269,495     |  
|Accounts payable and other current liabilities                                             |  |      | 740,037    |      |   | 2,960,595   |  
|Unearned revenues                                                                          |  |      | 1,162,943  |      |   | 1,415,841   |  
|                                                                                           |  |      |            |      |   |             |  
|Net cash provided by operating activities                                                  |  |      | 12,395,980 |      |   | 8,124,769   |  
|                                                                                           |  |      |            |      |   |             |  
|Cash flows from investing activities                                                       |  |      |            |      |   |             |  
|Proceeds from sale of investments                                                          |  |      | 6,820,000  |      |   | 38,120,000  |  
|Purchase for investments                                                                   |  |      | (7,637,455 | )    |   | (30,577,550 | )
|Acquisition of property and equipment                                                      |  |      | (6,063,741 | )    |   | (9,756,217  | )
|Acquisition of intangible and other assets                                                 |  |      | (1,537,875 | )    |   | (4,059,698  | )
|                                                                                           |  |      |            |      |   |             |  
|Net cash used in investing activities                                                      |  |      | (8,419,071 | )    |   | (6,273,465  | )
|                                                                                           |  |      |            |      |   |             |  
|Cash flows from financing activities                                                       |  |      |            |      |   |             |  
|Proceeds   from exercise of stock options and warrants                                     |  |      | 1,407,174  |      |   | 266,207     |  
|Purchases of treasury stock                                                                |  |      | (3,111,280 | )    |   | (9,594,954  | )
|                                                                                           |  |      |            |      |   |             |  
|Net cash provided by (used in)   financing activities                                      |  |      | (1,704,106 | )    |   | (9,328,747  | )
|                                                                                           |  |      |            |      |   |             |  
|Effect of exchange rate changes on cash                                                    |  |      | 131,859    |      |   | (147,203    | )
|                                                                                           |  |      |            |      |   |             |  
|Net increase (decrease) in cash and cash equivalents                                       |  |      | 2,404,662  |      |   | (7,624,646  | )
|Cash and cash equivalents,beginning of year                                                |  |      | 10,105,199 |      |   | 17,729,845  |  
|                                                                                           |  |      |            |      |   |             |  
|Cash and cash equivalents,end of year                                                      |  | $    | 12,509,861 |      | $ | 10,105,199  |  
|                                                                                           |  |      |            |      |   |             |  

See accompanying notes to consolidated financial statements.

F-8



|STRATASYS, INC. AND SUBSIDIARIES                 
|-------------------------------------------------
|                                                 
|CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
|                                                 

|Years Ended December 31,                                                                                    |  | 2006 |           | 2005 |   | 2004      | 
|----------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | 
|                                                                                                            |  |      |           |      |   |           | 
|Supplemental disclosures of cash flow information,cash paid during   the year for:                          |  |      |           |      |   |           | 
|Income taxes                                                                                                |  | $    | 5,283,313 |      | $ | 2,754,721 | 
|                                                                                                            |  |      |           |      |   |           | 
|Supplemental schedule of noncash investing activities, inventory   transferred from machinery and equipment |  | $    | 135,446   |      | $ | 148,901   | 
|                                                                                                            |  |      |           |      |   |           | 

See accompanying notes to consolidated financial statements.

F-9



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

1.          Nature
of operations and summary of significant accounting policies

Nature of Operations

Stratasys, Inc. and Subsidiaries (collectively, the Company)
develops, manufactures, distributes and markets a family of rapid prototyping
systems (RPS) and devices that permit engineers and designers to
create physical models and prototypes, made of various materials, utilizing
three dimensional Computer Aided Design (3D CAD) files at a CAD
workstation.  The Company sells these devices and the related consumable
materials and maintenance worldwide. In addition, the Company offers both
existing and potential customers the ability to purchase prototypes and parts
that we make for them from CAD files that they provide to us.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Stratasys, Inc. and its wholly and majority owned subsidiaries.  All
intercompany accounts and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

The fair value of the Companys assets and liabilities, which qualify as
financial instruments under Statement of Financial Accounting Standards
(SFAS) No. 107, Disclosures About Fair Value of Financial
Instruments, approximate the carrying amounts presented in the
consolidated balance sheets.

Cash and Cash Equivalents

The Company considers all highly-liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.  At December 31,
2006 cash equivalents consisted of money market accounts and tax-free government
bonds aggregating approximately $11,156,000.  At December 31, 2005 cash
equivalents consisted of money market accounts, certificates of deposit, and
tax-free government bonds aggregating approximately $8,757,000.  As of
December 31, 2006 and 2005, and at various times during those years, balances of
cash at financial institutions exceeded the federally insured limit.  The
Company has not experienced any losses in such accounts and believes it is not
subject to any significant credit risk on cash and cash equivalents.

Short-term and Long-term Investments

Short-term and long-term investments consist of Auction Rate Certificates
(ARC), tax-free government bonds, certificates of deposit, and
municipal notes, with maturities ranging from January 2007 through October 2025
at December 31, 2006 and from January 2006 through September 2008 at December
31, 2005.

Accounts Receivable and Allowance for Doubtful Accounts

The Company carries its accounts receivable at cost less an allowance for
returns and doubtful accounts.  On a periodic basis, the Company evaluates
its accounts receivable and establishes an allowance for doubtful accounts based
on a history of past write-offs and collections and current credit conditions.
Accounts are written-off against the reserve when management deems the accounts
are no longer collectible.

Inventories

Inventories are stated on the first-in, first-out method, at the lower of cost
or market.  Inventory costs consist of material, direct labor and overhead.
We periodically asses inventory for obsolescence and excess by reducing the
difference between our cost and the estimate market value based on assumption
about future demand and historical sales patterns.

F-10



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

1.          Nature
of operations and summary of significant accounting policies (continued)

Inventories (continued)

The Company complies with the provisions of SFAS No. 151, Inventory
Costs-an amendment of ARB No. 43, Chapter 4, which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage), which requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of so abnormal.  In addition, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities.  Management of
the Company does not believe the effects of SFAS No. 151 have a material effect
on the consolidated financial statements, as the Company has not incurred any
inventory costs that meet the definition of so abnormal.

Impairment of Long-Lived Assets

The Company adheres to SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets and periodically assesses the recoverability
of the carrying amounts of long-lived assets, including intangible assets. 
A loss is recognized when expected undiscounted future cash flows are less than
the carrying amount of the asset.  The impairment loss is the difference by
which the carrying amount of the asset exceeds its fair value.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and
amortization.  Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets ranging from
2 to 30 years.  Maintenance and repairs are charged to operations, while
betterments and improvements are capitalized.

Intangible Assets

Intangible assets are capitalized and amortized over their estimated useful or
economic lives using the straight-line method in conformity with SFAS No. 142,
Goodwill and Other Intangible Assets as follows:

| | RPS technology                           | 11 years | 
| | ---------------------------------------- | -------- | 
| | Capitalized software   development costs | 3 years  | 
| | Patents                                  | 10 years | 
| | Trademarks                               | 5 years  | 

The costs of software development, including significant product enhancements,
incurred subsequent to establishing technological feasibility have been
capitalized in accordance with SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed.  Costs
incurred prior to establishment of technological feasibility are charged to
research and development expense.

F-11



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

1.          Nature
of operations and summary of significant accounting policies (continued)

Product Warranties

The Company services and supports customers by providing warranties for its
products.  The standard warranty is three months, however, educational and
international customers are granted a 12-month warranty.  In all cases,
three months of expected warranty costs will be accrued in the same period as
the product revenues.  These expected warranty costs are based on
historical costs of supporting the Companys products.  When the
warranty period exceeds the standard three-month warranty period, an accrual of
expected costs for the three-month standard warranty period is made and the
portion of revenue applicable to the remaining nine months of extended warranty
coverage will be deferred.  The amount deferred is based on the fair market
value of a purchased maintenance agreement for the same product and term of
coverage.  The expenses of maintaining the products under the extended
warranty periods are treated as period costs, as they are expected to be
incurred evenly throughout the same period and reflect a proper matching of
revenue and expenses.

Unearned Revenues

The Company services and supports customers by providing warranties and selling
maintenance agreements for its products.  Unearned revenues comprise
purchased maintenance agreements, covering future periods, and deferred implied
maintenance, as discussed under Product Warranties above. Implied maintenance is
recognized as earned maintenance revenue in equal installments over the extended
nine-month warranty period (months 4 through 12).  The purchased
maintenance is deferred in whole and amortized over the period of coverage
ranging from one to two years.

Revenue Recognition

The Company derives revenue from sales of rapid prototyping (RP)
systems, consumables, and services.  The Company recognizes revenue when
(1) persuasive evidence of a final agreement exists, (2) delivery has occurred
or services have been rendered, (3) the selling price is fixed or determinable,
and (4) collectibility is reasonably assured.  The Companys standard
terms are FOB shipping point, and as such most of the revenue from the sale of
RP machines and consumables is recognized when shipped.   Exceptions
to this policy occur only if a customers purchase order indicates an
alternative term or provides that the equipment sold would be subject to certain
contingencies, such as formal acceptance.  In these instances, revenues
would be recognized only upon satisfying the conditions established by the
customer as contained in its purchase order to the Company.  Revenue from
sales-type leases for the Companys FDM systems is recognized at the time
of lessee acceptance, which follows installation.  Revenue from sales-type
leases for the Companys Dimension systems is recognized at the time of
shipment, since either the customer or the reseller performs the
installation.  The Company recognizes revenue from sales-type leases at the
net present value of future lease payments.  Revenue from operating leases
is recognized ratably over the lease period.

Service revenue is derived from sales of maintenance contracts, installation
services, and training.  Service revenue from maintenance contracts is
recognized ratably over the term of the contract, typically one to two
years.  On certain sales that require a one-year warranty, rather than the
standard 90-day warranty, the extended warranty is treated for revenue
recognition purposes as a maintenance agreement.  The fair value of this
maintenance agreement is deferred and recognized ratably over the period of the
extended warranty as an implied maintenance contract.  Installation service
revenues are recognized upon completion of the installation.  Training
revenues are recognized upon completion of the training.

F-12



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

1.          Nature
of operations and summary of significant accounting policies (continued)

Revenue Recognition (continued)

In accordance with Emerging Issues Task Force (EITF) No. 00-21,
Revenue Arrangements with Multiple Deliverables, when two or more
product offerings are contained in a single arrangement, revenue is allocated
between the elements based on their relative fair value, provided that each
element meets the criteria for treatment as a separate unit of accounting. 
An item is considered a separate unit of accounting if it has value to the
customer on a stand-alone basis and there is objective and reliable evidence of
the fair value of the undelivered items.  Fair value is generally
determined based upon the price charged when the element is sold
separately.  In the absence of fair value for a delivered element, revenue
is allocated first to the fair value of the undelivered elements and then the
residual revenue is allocated to the delivered elements. In the absence of fair
value for an undelivered element, the arrangement is accounted for as a single
unit of accounting, resulting in a delay of revenue recognition for the
delivered elements until all undelivered elements have been fulfilled.

Revenues from training and installation are unbundled and are recognized after
the services have been performed.  Both of these services are optional to
the customer.  The majority of the Companys products are sold through
distribution channels, with training and installation services offered by the
resellers or distributors.  For the Dimension product neither installation
nor training is offered.  Consistent with the SECs Staff Accounting
Bulletin (SAB) No. 104, Revision of Topic 13: Revenue
Recognition in Financial Statements, the equipment the Company
manufactures and sells is subject to factory testing that should replicate the
conditions under which the customers intend to use the equipment.  All of
the systems are sold subject to published specifications, and all systems sales
involve standard models.

The Company assesses collectability as part of the revenue recognition
process.  The Company also evaluates a number of factors to assess
collectability, including an evaluation of the creditworthiness of the customer,
past payment history, and current economic conditions.  If it is determined
that collectability cannot be reasonably assured, the Company will decline
shipment, request a down payment, or defer recognition of revenue until ultimate
collectability is more determinable.

The Company also records a provision for estimated product returns and
allowances in the period in which the related revenue is recorded.  This
provision against current gross revenue is based principally on historical rates
of sales returns, but also factors in changes in the customer base, geographic
economic conditions, and changes in the financial conditions of the
Companys customers.  If past trends were to change, the Company would
potentially have to increase or decrease the amount of the provision for these
returns.  The Company has a limited history as to potential returns under
the lease programs.  The Company has continued to monitor its lease sales,
and if necessary will record a provision for returns on leased systems.  As
of December 31, 2006, the allowance for returns was $168,644 as compared with
$100,850 as of December 31, 2005.

Derivative Financial Instruments

The Company uses derivatives primarily to hedge its exposure to changes in
foreign currency exchange rates between the US dollar and the euro. The Company
is exposed to fluctuations in foreign currency cash flows related primarily to
third party purchases. Forward contracts of generally one-month duration are
used to hedge some of these risks and any ineffectiveness is recognized in
earnings in the period deemed ineffective. At December 31, 2006 and 2005, the
Company had forward contracts (in euros) of  3.5 million and 4
million, respectively.

F-13



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

1.          Nature
of operations and summary of significant accounting policies (continued)

Advertising

Advertising costs are charged to operations as incurred and were approximately
$2,740,000, $3,396,000, and $1,675,000, for 2006, 2005 and 2004, respectively.

Research and Development Costs

The Company complies with SFAS No. 2, Accounting for Research and
Development Costs.  Expenditures for research, development and
engineering of products and manufacturing processes are expensed as incurred.

Income Taxes

The Company complies with SFAS No. 109, Accounting for Income Taxes,
which requires an asset and liability approach to financial reporting of income
taxes.  Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income.  Valuation allowances
are established, when necessary, to reduce the deferred income tax assets to the
amount expected to be realized.

Earnings Per Share

The Company complies with SFAS No. 128, Earnings Per Share. 
SFAS No. 128 requires dual presentation of basic and diluted income per common
share for all periods presented.  Basic income per common share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. 
Diluted income per common share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then share in the income of the Company.  The difference between the number
of common shares used to compute basic income per share and diluted income per
common share relates to additional common shares to be issued upon the assumed
exercise of stock options and warrants, net of common shares hypothetically
repurchased at the average market price with the proceeds of exercise. The
additional common shares amounted to 241,574, 216,776, and 375,858 in 2006,
2005, and 2004, respectively.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123(R), Accounting for Stock-Based Compensation
(Revised).  SFAS No. 123(R) supersedes APB No. 25 and its related
implementation guidance.  SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services.  It also addresses transactions in which an entity
incurs liabilities in exchange for goods or services that are based on the fair
value of the entitys equity instruments or that may be settled by the
issuance of those equity instruments.  SFAS No. 123(R) focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions.  SFAS No. 123(R) requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions).  That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award the requisite
service period (usually the vesting period).  No compensation costs are
recognized for equity instruments for which employees do not render the
requisite service.  The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments (unless observable market prices
for the same or similar instruments are available).

F-14



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

1.          Nature
of operations and summary of significant accounting policies (continued)

Stock-Based Compensation (continued)

If an equity award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification.  The Company adopted SFAS No. 123(R), effective January 1,
2006. Based on stock options that vested during 2006, the Company recorded
approximately $1.3 million in additional compensation expense for the year ended
December 31, 2006, under SFAS No. 123(R).

Prior to January 1, 2006 the Company followed SFAS No. 123, Accounting for
Stock-Based Compensation.  The provisions of SFAS No. 123 allowed
companies to either expense the estimated fair value of stock options or to
continue to follow the intrinsic value method set forth in APB Opinion 25,
Accounting for Stock Issued to Employees (APB 25), but
disclose the pro forma effect on net income (loss) had the fair value of the
options been expensed.

Had compensation cost for the Companys five stock option plans been
determined based on the fair value at the grant or issue date prior to January
1, 2006 and consistent with the provisions of SFAS No. 123(R), the
Companys net income and income per share would have been reduced to the
pro forma amounts indicated below:

|                                                                                                                                |  | 2005 |            | 2004 |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | -
|                                                                                                                                |  |      |            |      |  
|Net income, as reported                                                                                                         |  | $    | 10,602,897 |      | $
|Deduct: Total stock-based compensation expense determined under the fair value
method for all awards, net of related tax effect |  |      | (6,858,000 | )    |  
|                                                                                                                                |  |      |            |      |  
|Net income, pro forma                                                                                                           |  | $    | 3,744,897  |      | $
|                                                                                                                                |  |      |            |      |  
|Income per share:                                                                                                               |  |      |            |      |  
|Basic   income per share - as reported                                                                                          |  | $    | 1.01       |      | $
|                                                                                                                                |  |      |            |      |  
|Diluted   income per share - as reported                                                                                        |  | $    | 0.99       |      | $
|                                                                                                                                |  |      |            |      |  
|Basic   income per share - pro forma                                                                                            |  | $    | 0.36       |      | $
|                                                                                                                                |  |      |            |      |  
|Diluted   income per share - pro forma                                                                                          |  | $    | 0.35       |      | $
|                                                                                                                                |  |      |            |      |  

F-15



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

1.          Nature
of operations and summary of significant accounting policies (continued)

Use of Estimates

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. 
Actual results could differ from those estimates.

Foreign Currency Translation

The Company complies with SFAS No. 52, Foreign Currency Translation,
which states that for foreign subsidiaries whose functional currency is the
local foreign currency, assets and liabilities are translated using the
published exchange rate in effect at the balance sheet date. Results of
operations are translated using an approximated weighted average exchange rate
for the year. Resulting translation adjustments are recorded as a component of
accumulated other comprehensive income (loss).

Comprehensive Income

The Company complies with SFAS No. 130, Reporting Comprehensive
Income.  SFAS No. 130 establishes rules for the reporting and display
of comprehensive income (loss) and its components.  SFAS No. 130 requires
the Companys change in the foreign currency translation adjustments to be
included in other comprehensive income (loss).

Recently Issued Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Correction Replacement of APB Opinion No. 20 and FASB Statement No. 3
(SFAS No. 154).  SFAS No. 154 replaces APB Opinion No. 20, Accounting
Changes (Opinion 20), and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements, and changes the requirements for
the accounting for and reporting of a change in accounting principle. 
Opinion 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle.  SFAS
No. 154 requires retrospective application to prior periods financial
statements of changes in accounting principle.  SFAS No. 154 defines
retrospective application as the application of a different accounting principle
to prior accounting periods as if that principle had always been used. 
SFAS No. 154 also requires that a change in depreciation, amortization, or
depletion method for long-lived, non-financial assets be accounted for as a
change in accounting estimate affected by a change in accounting
principle.  The adoption of SFAS No. 154 had no impact on the consolidated
financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes-an Interpretation of FASB Statement No.
109 (FIN No. 48). FIN No. 48 clarifies what criteria must be
met prior to recognition of the financial statement benefit of a position taken
in a tax return. FIN No. 48 will require companies to include additional
qualitative and quantitative disclosures within their financial statements. The
disclosures will include potential tax benefits from positions taken for tax
return purposes that have not been recognized for financial reporting purposes
and a tabular presentation of significant changes during each period. The
disclosures will also include a discussion of the nature of uncertainties,
factors which could cause a change, and an estimated range of reasonably
possible changes in tax uncertainties.

F-16



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

1.          Nature
of operations and summary of significant accounting policies (continued)

Recently Issued Accounting Pronouncements (continued)

FIN No. 48 will also require a company to recognize a financial statement
benefit for a position taken for tax return purposes when it will be
more-likely-than-not that the position will be sustained. FIN No. 48 will be
effective for fiscal years beginning after December 15, 2006. The adoption of
FIN No. 48 is not expected to have a material impact on the companys
 financial statements.

Reclassifications

The 2005 and 2004 income statements have been restated to reflect customer
service costs as part of the cost of sales instead of as operating expenses.
These reclassifications had no effect on operating or net income or net income
per basic and diluted common share.

2.          Inventories

Inventories consist of the following at December 31:

|               |  | 2006 |           | 2005 |  
|-------------- |  | ---- | --------- | ---- | -
|               |  |      |           |      |  
|Finished goods |  | $    | 5,022,552 |      | $
|Raw materials  |  |      | 4,902,665 |      |  
|               |  |      |           |      |  
|               |  | $    | 9,925,217 |      | $
|               |  |      |           |      |  

3.          Net
investment in sales-type leases

The Company leases certain of its systems under agreements accounted for as
sales-type leases.  Included in revenues for the years ended December 31,
2006, 2005 and 2004 are approximately $1,543,000, $1,546,000 and $2,115,000,
respectively, of revenues related to sales-type leases.  These
non-cancelable leases expire over the next one to four years.

The following lists the components of the net investment in sales-type leases as
of December 31, 2006 and 2005:

|                                                   |  | 2006 |           | 2005 |  
|-------------------------------------------------- |  | ---- | --------- | ---- | -
|                                                   |  |      |           |      |  
|Net minimum lease payments   receivable            |  | $    | 6,559,165 |      | $
|Less unearned interest   income                    |  |      | (430,096  | )    |  
|                                                   |  |      |           |      |  
|Net investment in sales-type   leases              |  | $    | 6,129,069 |      | $
|                                                   |  |      |           |      |  
|Sales-type leases consist   of:                    |  |      |           |      |  
|Net   investment in sales-type leases - short term |  | $    | 2,858,054 |      | $
|Net   investment in sales-type leases - long term  |  |      | 3,271,015 |      |  
|                                                   |  |      |           |      |  
|Net investment in   sales-type leases, as above    |  | $    | 6,129,069 |      | $
|                                                   |  |      |           |      |  

F-17



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

3.          Net
investment in sales-type leases (continued)

Future minimum lease payments due from customers under sales-type leases as of
December 31, 2006 are as follows:

|Year ending December 31, |  |   |           | 
|------------------------ |  | - | --------- | 
|                         |  |   |           | 
|2007                     |  | $ | 2,983,927 | 
|2008                     |  |   | 2,049,523 | 
|2009                     |  |   | 1,181,226 | 
|2010                     |  |   | 344,489   | 
|                         |  |   |           | 
|                         |  | $ | 6,559,165 | 
|                         |  |   |           | 

The interest income for sales-type leases amounted to approximately $251,000,
$152,000, and $56,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.

4.          Property
and equipment

Property and equipment consists of the following at December 31:

|                                            |  | 2006 |            | 2005 |  
|------------------------------------------- |  | ---- | ---------- | ---- | -
|                                            |  |      |            |      |  
|Machinery and equipment                     |  | $    | 15,962,275 |      | $
|Building and improvements                   |  |      | 7,634,207  |      |  
|Land and improvements                       |  |      | 2,989,069  |      |  
|Computer equipment and   software           |  |      | 6,849,491  |      |  
|Office equipment                            |  |      | 1,542,640  |      |  
|Leasehold improvements                      |  |      | 2,047,873  |      |  
|                                            |  |      |            |      |  
|                                            |  |      | 37,025,555 |      |  
|Accumulated depreciation   and amortization |  |      | 16,612,836 |      |  
|                                            |  |      |            |      |  
|                                            |  | $    | 20,412,719 |      | $
|                                            |  |      |            |      |  

F-18



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

5.          Intangible
assets

Intangible assets consist of the following at December 31:

|                                         |  | 2006                      |            | 2005                       |  
|---------------------------------------- |  | ------------------------- | ---------- | -------------------------- | -
|                                         |  |                           |            |                            |  
|                                         |  | Gross   Carrying   Amount |            | Accumulated   Amortization |  
|                                         |  |                           |            |                            |  
|RPS technology                           |  | $                         | 4,118,732  |                            | $
|Capitalized software   development costs |  |                           | 6,931,879  |                            |  
|Patents                                  |  |                           | 2,421,172  |                            |  
|Trademarks                               |  |                           | 275,067    |                            |  
|                                         |  |                           |            |                            |  
|                                         |  | $                         | 13,746,850 |                            | $
|                                         |  |                           |            |                            |  
|Accumulated amortization                 |  |                           | 8,877,927  |                            |  
|                                         |  |                           |            |                            |  
|                                         |  | $                         | 4,868,923  |                            |  
|                                         |  |                           |            |                            |  
|Aggregate amortization   expense         |  | $                         | 1,049,145  |                            |  
|                                         |  |                           |            |                            |  

For the years ended December 31, 2006, 2005 and 2004, amortization of
capitalized software development costs charged to operations was approximately
$629,000, $226,000 and $331,000, respectively.

Estimated amortization expense, for all intangible assets, for the five years
subsequent to December 31, 2006 is approximately as follows:

|Year ending December 31, |  |   |           | 
|------------------------ |  | - | --------- | 
|                         |  |   |           | 
|2007                     |  | $ | 1,155,000 | 
|2008                     |  |   | 1,368,000 | 
|2009                     |  |   | 804,000   | 
|2010                     |  |   | 547,000   | 
|2011                     |  |   | 238,000   | 

6.          Line of
credit

The Company has an available line of credit from a financial institution for the
lesser of $4,000,000 or a defined borrowing base.  The credit line bears
interest at defined rates based upon two different indexes and expires in June
2007.  No amounts were outstanding at December 31, 2006 and 2005.

F-19



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

7.          Accounts
payable and other current liabilities

Accounts payable and other current liabilities consist of the following at
December 31:

|                                                 |  | 2006 |            | 2005 |  
|------------------------------------------------ |  | ---- | ---------- | ---- | -
|                                                 |  |      |            |      |  
|Trade payables                                   |  | $    | 4,250,556  |      | $
|Compensation, commissions   and related benefits |  |      | 3,331,503  |      |  
|Reserve for warranty   expenses                  |  |      | 276,979    |      |  
|Income taxes                                     |  |      | 1,073,422  |      |  
|Other                                            |  |      | 1,403,147  |      |  
|                                                 |  |      |            |      |  
|                                                 |  | $    | 10,335,607 |      | $
|                                                 |  |      |            |      |  

8.          Unearned
revenues

Unearned revenues consist of the following at December 31:

|                                |  | 2006 |           | 2005 |  
|------------------------------- |  | ---- | --------- | ---- | -
|                                |  |      |           |      |  
|Maintenance contracts           |  | $    | 6,848,702 |      | $
|Implied maintenance   contracts |  |      | 2,260,442 |      |  
|Other                           |  |      | 767,575   |      |  
|                                |  |      |           |      |  
|                                |  | $    | 9,876,719 |      | $
|                                |  |      |           |      |  

F-20



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

9.          Income taxes

The components of the Companys deferred tax assets (liabilities) at
December 31, 2006 and 2005 are as follows:

|                                      |  | 2006 |           | 2005 |  
|------------------------------------- |  | ---- | --------- | ---- | -
|                                      |  |      |           |      |  
|Depreciation                          |  | $    | (397,000  | )    | $
|Allowance for doubtful   accounts     |  |      | 350,000   |      |  
|Inventory reserves                    |  |      | 466,000   |      |  
|Deferred maintenance   revenue        |  |      | 301,000   |      |  
|Stock based compensation              |  |      | 294,000   |      |  
|Amortization                          |  |      | 251,000   |      |  
|Reserve for warranty   expenses       |  |      | 104,000   |      |  
|Reserve for sales returns,   net      |  |      | 63,000    |      |  
|Unrealized gain on foreign   currency |  |      | (58,000   | )    |  
|                                      |  |      |           |      |  
|                                      |  | $    | 1,374,000 |      | $
|                                      |  |      |           |      |  

Income (loss) before income taxes for the years ended December 31, 2006, 2005
and 2004 are as follows:

|              |  | 2006 |            | 2005 |   | 2004       | 
|------------- |  | ---- | ---------- | ---- | - | ---------- | 
|              |  |      |            |      |   |            | 
|United States |  | $    | 16,647,884 |      | $ | 14,929,335 | 
|Foreign       |  |      | 316,295    |      |   | 353,562    | 
|              |  |      |            |      |   |            | 
|              |  | $    | 16,964,179 |      | $ | 15,282,897 | 
|              |  |      |            |      |   |            | 

The components of income taxes for the years ended December 31, 2006, 2005 and 2004 are as follows:

|         |  | 2006 |           | 2005 |   | 2004      |  
|-------- |  | ---- | --------- | ---- | - | --------- | -
|         |  |      |           |      |   |           |  
|Current  |  |      |           |      |   |           |  
|Federal  |  | $    | 4,645,186 |      | $ | 3,747,815 |  
|State    |  |      | 779,814   |      |   | 560,185   |  
|Foreign  |  |      | 170,389   |      |   | 113,246   |  
|         |  |      |           |      |   |           |  
|         |  |      | 5,595,389 |      |   | 4,421,246 |  
|         |  |      |           |      |   |           |  
|Deferred |  |      |           |      |   |           |  
|Federal  |  |      | 242,611   |      |   | 331,754   |  
|State    |  |      | (38,000   | )    |   | (73,000   | )
|         |  |      |           |      |   |           |  
|         |  |      | 204,611   |      |   | 258,754   |  
|         |  |      |           |      |   |           |  
|         |  | $    | 5,800,000 |      | $ | 4,680,000 |  
|         |  |      |           |      |   |           |  

F-21



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

9.          Income
taxes (continued)

During the years ended December 31, 2006, 2005, and 2004, approximately
$590,000, $439,000, and $1,084,000, respectively, was added to capital in excess
of par in accordance with FASB No. 109 reflecting the permanent book to tax
difference in accounting for tax benefits related to employee stock option
transactions.

A reconciliation of the statutory federal income tax rate and the effective tax
rate for the years ended December 31, 2006, 2005 and 2004 are as
follows:

|                                                                   |  | 2006 |      | 2005 |  | 2004 |  
|------------------------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | -
|                                                                   |  |      |      |      |  |      |  
|Federal statutory rate                                             |  |      | 35.0 | %    |  | 34.0 | %
|State income taxes, net of   federal benefit                       |  |      | 2.8  |      |  | 2.4  |  
|Resolution of tax   contingency                                    |  |      |      |      |  | (2.1 | )
|Tax exempt interest income                                         |  |      | (2.3 | )    |  | (1.1 | )
|Stock based compensation   expense                                 |  |      | 1.0  |      |  |      |  
|Export tax benefits                                                |  |      | (1.0 | )    |  | (1.3 | )
|Manufacturing deduction                                            |  |      | (.7  | )    |  | (.5  | )
|Utilization of research   and development tax credit               |  |      | (.8  | )    |  | (1.0 | )
|Earnings of subsidiaries   taxed at other than U.S. statutory rate |  |      | .3   |      |  |      |  
|Other                                                              |  |      | (.1  | )    |  | .2   |  
|                                                                   |  |      |      |      |  |      |  
|Effective income tax rate                                          |  |      | 34.2 | %    |  | 30.6 | %
|                                                                   |  |      |      |      |  |      |  

F-22



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

10.         Commitments

The Company rents certain of its facilities under non-cancellable operating
leases, which expire through 2011.

Aggregate future minimum annual rental payments in the years subsequent to
December 31, 2006 are approximately as follows:

|Year ending December 31, |  |   |         | 
|------------------------ |  | - | ------- | 
|                         |  |   |         | 
|2007                     |  | $ | 302,000 | 
|2008                     |  |   | 197,000 | 
|2009                     |  |   | 180,000 | 
|2010                     |  |   | 148,000 | 
|2011                     |  |   | 51,000  | 

Rent expense for the years ended December 31, 2006, 2005 and 2004 was
approximately $739,000, $664,000 and $576,000, respectively.

11.        Common stock

The Company has a common stock repurchase program and has repurchased 128,500
and 401,503 shares during the years ended December 31, 2006 and 2005,
respectively.  As of December 31, 2006, the Company is authorized to
repurchase approximately $8.0 million of additional common stock.

F-23



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

12.         Stock options and warrants

The Company has various stock option plans that have been approved by
stockholders.  The plans provide for the granting of options to purchase up
to 3,825,000 shares of the Companys common stock to qualified employees of
the Company, independent contractors, consultants, and other persons.  Of
the 3,825,000 options available for grant, 3,564,417 options have been granted,
leaving 260,583 options as of December 31, 2006 available to be granted by the
Company. Options principally vest  immediately or ratably over five years
and are exercisable over five to six years.

|                                           |  | Number   of   Options |           | Per Share   Option Price |   | Weighted   Average   Option   Price | 
|------------------------------------------ |  | --------------------- | --------- | ------------------------ | - | ----------------------------------- | 
|                                           |  |                       |           |                          |   |                                     | 
|Shares under option at   January 1, 2004   |  |                       | 882,355   |                          | $ | 1.84                                | 
|Granted in 2004                            |  |                       | 200,750   |                          |   | 8.70                                | 
|Exercised in 2004                          |  |                       | (174,515  | )                        |   | 2.00                                | 
|Expired in 2004                            |  |                       | (76,680   | )                        |   | 2.19                                | 
|Forfeited in 2004                          |  |                       | (20,070   | )                        |   | 2.00                                | 
|                                           |  |                       |           |                          |   |                                     | 
|Shares under option at   December 31, 2004 |  |                       | 811,840   |                          |   | 1.84                                | 
|Granted in 2005                            |  |                       | 623,000   |                          |   | 24.97                               | 
|Exercised in 2005                          |  |                       | (75,370   | )                        |   | 2.00                                | 
|Expired in 2005                            |  |                       | (40,875   | )                        |   | 2.00                                | 
|Forfeited in 2005                          |  |                       | (8,600    | )                        |   | 2.03                                | 
|                                           |  |                       |           |                          |   |                                     | 
|Shares under option at   December 31, 2005 |  |                       | 1,309,995 |                          |   | 1.84                                | 
|Exercised in 2006                          |  |                       | (157,675  | )                        |   | 2.03                                | 
|                                           |  |                       |           |                          |   |                                     | 
|Shares under option at   December 31, 2006 |  |                       | 1,152,320 |                          | $ | 1.84                                | 
|                                           |  |                       |           |                          |   |                                     | 

F-24



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

12.         Stock options and warrants (continued)

|                                           |  | Number   of   Options |           | Per Share   Option Price |   | Weighted   Average   Option   Price | 
|------------------------------------------ |  | --------------------- | --------- | ------------------------ | - | ----------------------------------- | 
|                                           |  |                       |           |                          |   |                                     | 
|Options exercisable at   December 31, 2006 |  |                       | 1,030,170 |                          | $ | 1.84                                | 
|                                           |  |                       |           |                          |   |                                     | 
|Options exercisable at   December 31, 2005 |  |                       | 1,079,100 |                          | $ | 1.84                                | 
|                                           |  |                       |           |                          |   |                                     | 
|Options exercisable at   December 31, 2004 |  |                       | 455,020   |                          | $ | 1.84                                | 
|                                           |  |                       |           |                          |   |                                     | 

The following table summarizes information about stock options outstanding at December 31, 2006:

|                |  | Options Outstanding                             |           | Options Exercisable                                  | 
|--------------- |  | ----------------------------------------------- | --------- | ---------------------------------------------------- | 
|                |  |                                                 |           |                                                      | 
|Exercise Prices |  | Number   Outstanding   at   December 31,   2006 |           | Weighted-   Average   Remaining   Contractual   Life | 
|                |  |                                                 |           |                                                      | 
|$     1.84-3.50 |  |                                                 | 38,520    |                                                      | 
|4.04-8.70       |  |                                                 | 31,200    |                                                      | 
|17.23-26.80     |  |                                                 | 380,150   |                                                      | 
|28.33-35.84     |  |                                                 | 702,450   |                                                      | 
|                |  |                                                 |           |                                                      | 
|                |  |                                                 |           |                                                      | 
|                |  |                                                 | 1,152,320 |                                                      | 
|                |  |                                                 |           |                                                      | 

F-25



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

12.         Stock options and warrants (continued)

The Company, as part of sales of common stock and other agreements, has issued
warrants to purchase the Companys common stock.  The following
summarizes the information relating to warrants issued and the activity during
2006, 2005 and 2004:

|                                                            |  | Number   of
 Warrants |         | Per Share
   Warrant  Price |   | Weighted   Average
   Warrant   Price | 
|----------------------------------------------------------- |  | --------------------- | ------- | --------------------------- | - | ------------------------------------- | 
|                                                            |  |                       |         |                             |   |                                       | 
|Shares under warrants at   January 1, 2004                  |  |                       | 234,000 |                             | $ | 3.33                                  | 
|Exercised in 2004                                           |  |                       | (9,000  | )                           |   | 3.33                                  | 
|                                                            |  |                       |         |                             |   |                                       | 
|Shares under warrants at   December 31, 2006, 2005 and 2004 |  |                       | 225,000 |                             | $ | 23.11                                 | 
|                                                            |  |                       |         |                             |   |                                       | 

The Company used the Black-Scholes option-pricing model to determine the fair
value of grants made in 2005 and 2004. There were no options granted in 2006.
The following assumptions were applied in determining the pro forma compensation
cost:

|                          |  | 2005          |  | 2004          | 
|------------------------- |  | ------------- |  | ------------- | 
|                          |  |               |  |               | 
|Risk-free interest rate   |  | 2.6%   - 4.0% |  | 2.4%   - 3.7% | 
|Expected option term      |  | 5-6   years   |  | 5-6   years   | 
|Expected price volitility |  | 45%   & 68%   |  | 77%           | 
|Dividend yield            |  | -             |  | -             | 

F-26



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

13.       Litigation

The Company is a party to various legal matters, the outcome of which, in the
opinion of management, will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.

14.       Export sales

Export sales, net were as follows for the years ended December 31:

|             |  | 2006 |            | 2005 |   | 2004       | 
|------------ |  | ---- | ---------- | ---- | - | ---------- | 
|             |  |      |            |      |   |            | 
|Europe       |  | $    | 21,459,208 |      | $ | 17,295,935 | 
|Asia Pacific |  |      | 16,628,696 |      |   | 14,175,649 | 
|Other        |  |      | 4,352,914  |      |   | 3,739,623  | 
|             |  |      |            |      |   |            | 
|             |  | $    | 42,440,818 |      | $ | 35,211,207 | 
|             |  |      |            |      |   |            | 

At December 31, 2006 and 2005, accounts receivable included balances due from
foreign entities of approximately $13,397,000 and $11,670,000, respectively.

15.       Retirement plan

The Company has a defined contribution retirement plan (the Plan)
under the provisions of Section 401(k) of the Internal Revenue Code
(IRC) that covers all eligible employees as defined in the
Plan.  Participants may elect to contribute up to 50% of pre-tax annual
compensation, as defined by the Plan, up to a maximum prescribed by the
IRC.  The Company makes matching contributions equal to the lesser of
$3,000 or 3% of the participants annual compensation.  The Company,
at its discretion, may make additional contributions subject to
limitations.  For the years ended December 31, 2006, 2005 and 2004, the
Company made 401(k) Plan contributions of approximately $440,000, $383,000 and
$320,000, respectively.

F-27



|STRATASYS, INC. AND SUBSIDIARIES          
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          

16.       Quarterly results (unaudited)

|                               |  | First
Quarter |            | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter |           
|------------------------------ |  | ------------- | ---------- | -------------- | - | ------------- |  | -------------- | ----------
|                               |  |               |            |                |   |               |  |                |           
|2006                           |  |               |            |                |   |               |  |                |           
|Net   sales                    |  | $             | 22,223,095 |                | $ | 26,699,285    |  | $              | 25,149,163
|Gross   profit (b)             |  |               | 10,821,379 |                |   | 13,614,296    |  |                | 11,994,160
|Net   income                   |  |               | 2,015,210  |                |   | 2,935,971     |  |                | 2,559,620 
|Net   income per common share: |  |               |            |                |   |               |  |                |           
|Basic                          |  |               | 0.20       |                |   | 0.29          |  |                | 0.25      
|Diluted                        |  |               | 0.20       |                |   | 0.28          |  |                | 0.25      
|2005                           |  |               |            |                |   |               |  |                |           
|Net   sales                    |  | $             | 18,862,819 |                | $ | 20,784,945    |  | $              | 19,681,480
|Gross   profit (b)             |  |               | 10,481,961 |                |   | 11,239,820    |  |                | 9,881,036 
|Net   income                   |  |               | 2,395,952  |                |   | 2,891,162     |  |                | 2,166,182 
|Net   income per common share: |  |               |            |                |   |               |  |                |           
|Basic                          |  |               | 0.23       |                |   | 0.28          |  |                | 0.21      
|Diluted                        |  |               | 0.22       |                |   | 0.27          |  |                | 0.20      

|   
|---
|(a)
|   
|(b)

F-28



|STRATASYS, INC. AND SUBSIDIARIES              
|----------------------------------------------
|                                              
|SCHEDULE II                                   
|VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
|                                              
|                                              
|Years Ended December 31, 2006, 2005, and 2004 
|                                              

|COLUMN A                                       |  | Column B                          |           | Column C                       |   | Column D                     |  | Column E                    |        
|---------------------------------------------- |  | --------------------------------- | --------- | ------------------------------ | - | ---------------------------- |  | --------------------------- | -------
|                                               |  |                                   |           |                                |   |                              |  |                             |        
|DESCRIPTION                                    |  | Balances at   Beginning   of Year |           | Additions -Charged   to Income |   | Deductions   from   Reserves |  | Balances   at End   of Year |        
|                                               |  |                                   |           |                                |   |                              |  |                             |        
|2006                                           |  |                                   |           |                                |   |                              |  |                             |        
|Reserve for bad debts and allowances           |  | $                                 | 1,482,298 |                                | $ | 217,978                      |  | $                           | 603,083
|                                               |  |                                   |           |                                |   |                              |  |                             |        
|Reserve for sales returns and other allowances |  | $                                 | 101,851   |                                | $ | 66,793                       |  | $                           |       
|                                               |  |                                   |           |                                |   |                              |  |                             |        
|2005                                           |  |                                   |           |                                |   |                              |  |                             |        
|Reserve for bad debts and allowances           |  | $                                 | 1,508,517 |                                | $ | 502,326                      |  | $                           | 528,545
|                                               |  |                                   |           |                                |   |                              |  |                             |        
|Reserve for sales returns and other allowances |  | $                                 | 223,313   |                                | $ | 47,051                       |  | $                           | 168,513
|                                               |  |                                   |           |                                |   |                              |  |                             |        
|2004                                           |  |                                   |           |                                |   |                              |  |                             |        
|Reserve for bad debts and allowances           |  | $                                 | 568,886   |                                | $ | 1,138,222                    |  | $                           | 198,591
|                                               |  |                                   |           |                                |   |                              |  |                             |        
|Reserve for sales returns and other allowances |  | $                                 | 198,481   |                                | $ | 24,832                       |  | $                           |       
|                                               |  |                                   |           |                                |   |                              |  |                             |        

F-29



3. Exhibits

|EXHIBIT NO. |       | DESCRIPTION
|----------- | ----- | -----------
|            |       |            
|            | 3.1   |            
|            |       |            
|            | 3.2   |            
|            |       |            
|            | 3.3   |            
|            |       |            
|            | 4.1   |            
|            |       |            
|            | 4.2   |            
|            |       |            
|            | 4.3   |            
|            |       |            
|            | 4.4   |            
|            |       |            
|            | 4.5   |            
|            |       |            
|            | 10.1  |            
|            |       |            
|            | 10.2  |            
|            |       |            
|            | 10.3  |            
|            |       |            
|            | 10.4  |            
|            |       |            
|            | 10.5  |            
|            |       |            
|            | 10.6  |            
|            |       |            
|            | 10.7  |            
|            |       |            
|            | 10.8  |            
|            |       |            
|            | 10.9  |            
|            |       |            
|            | 10.10 |            

42



|EXHIBIT NO. |       | DESCRIPTION
|----------- | ----- | -----------
|            |       |            
|            | 10.11 |            
|            |       |            
|            | 10.12 |            
|            |       |            
|            | 10.13 |            
|            |       |            
|            | 10.14 |            
|            |       |            
|            | 10.15 |            
|            |       |            
|            | 10.16 |            
|            |       |            
|            | 10.17 |            
|            |       |            
|            | 21.1  |            
|            |       |            
|            | 23.1  |            
|            |       |            
|            | 31.1  |            
|            |       |            
|            | 31.2  |            
|            |       |            
|            | 32.1  |            
|            |       |            
|            | 32.2  |            

|   
|---
|(1)
|   
|(2)
|   
|(3)
|   
|(4)
|   
|(5)

43



|(6)  | Incorporated by reference from the Companys definitive Proxy Statement on
Schedule 14A with respect to the Companys 1997 Annual Meeting of
Stockholders.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                           
|(7)  | Incorporated by reference from the Companys definitive Proxy Statement on
Schedule 14A with respect to the Companys 1998 Annual Meeting of
Stockholders.
|     |                                                                                                                                                           
|(8)  | Incorporated by reference from the Companys Registration Statement on Form
S-8 (File No. 333-32782) filed March 17, 2000.                                
|     |                                                                                                                                                           
|(9)  | Incorporated by reference from the Companys Form 10-K for the year ended
December 31, 1999.                                                              
|     |                                                                                                                                                           
|(10) | Incorporated by reference from the Companys definitive Proxy Statement on
Schedule 14A with respect to the Companys 2002 Annual Meeting of
Stockholders.
|     |                                                                                                                                                           
|(11) | Incorporated   by reference from the Companys Form 8-K filed on August 19, 2003.                                                                         
|     |                                                                                                                                                           
|(12) | Incorporated by reference from the Companys form 8-K filed on August 25,
2003.                                                                           
|     |                                                                                                                                                           
|(13) | Incorporated by reference from the Companys Registration Statement on Form
S-3 (File No. 333-108816) filed September 15, 2003.                           
|     |                                                                                                                                                           
|(14) | Incorporated by reference from Amendment No. 1 to the Companys
Registration Statement on Form S-3 (File No. 333-108816) filed October 16,
2003.          
|     |                                                                                                                                                           
|(15) | Incorporated   by reference from the Companys Form 10-K for the year ended December 31,   2004.                                                          

44



SIGNATURES

In accordance with
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

| | STRATASYS, INC.
| | ---------------
| |                
| |                
| | By:            
| |                
| |                
| |                

Dated: March 14, 2007

In accordance with
the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

| | /s/ S. SCOTT CRUMP        |  | Chairman of   the Board of Directors, President, Chief Executive Officer, Treasurer,   (Principal Executive Officer) |  | March 14,   2007
| | ------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----------------
| |                           |  |                                                                                                                      | 
| | S. Scott Crump            |  |                                                                                                                      | 
| |                           |  |                                                                                                                      |  |                 
| | /s/ ROBERT F. GALLAGHER   |  | Chief   Financial Officer (Principal Financial and Accounting Officer)                                               |  | March 14,   2007
| |                           |  |                                                                                                                      | 
| | Robert F. Gallagher       |  |                                                                                                                      |  |                 
| |                           |  |                                                                                                                      |  |                 
| | /s/ RALPH E. CRUMP        |  | Director                                                                                                             |  | March 14, 2007  
| |                           |  |                                                                                                                      |  |                 
| | Ralph E. Crump            |  |                                                                                                                      |  |                 
| |                           |  |                                                                                                                      |  |                 
| | /s/ EDWARD J. FIERKO      |  | Director                                                                                                             |  | March 14, 2007  
| |                           |  |                                                                                                                      |  |                 
| | Edward J. Fierko          |  |                                                                                                                      |  |                 
| |                           |  |                                                                                                                      |  |                 
| | /s/ CLIFFORD H. SCHWIETER |  | Director                                                                                                             |  | March 14, 2007  
| |                           |  |                                                                                                                      |  |                 
| | Clifford H. Schwieter     |  |                                                                                                                      |  |                 
| |                           |  |                                                                                                                      |  |                 
| | /s/ ARNOLD J. WASSERMAN   |  | Director                                                                                                             |  | March 14, 2007  
| |                           |  |                                                                                                                      |  |                 
| | Arnold J. Wasserman       |  |                                                                                                                      |  |                 
| |                           |  |                                                                                                                      |  |                 
| | /s/ GREGORY L. WILSON     |  | Director                                                                                                             |  | March 14, 2007  
| |                           |  |                                                                                                                      |  |                 
| | Gregory L. Wilson         |  |                                                                                                                      |  |                 

45