U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
                           for the fiscal year ended

                                December 31, 1997

                         Commission file number 1-13400

                                 STRATASYS, INC.
                 (Name of Small Business Issuer in its Charter)
            Delaware                                              36-3658792
(State or Other Jurisdiction                                   (I.R.S. Employer
of Incorporation or Organization)                            Identification No.)

14950 Martin Drive, Eden Prairie, Minnesota                          55344
(Address of Principal Executive Offices)                           (Zip Code)

                                 (612) 937-3000
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                             Name of Each Exchange on Which
       Title of Each Class                      Each Class is Registered

  Common Stock, $.01 par value          The Pacific Stock Exchange Incorporated
--------------------------------        ---------------------------------------

              Securities registered under Section 12(g) of the Act:
                          Common Stock, $.01 par value
                                (Title of Class)

            Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 ___

            Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB.

            Revenues for the issuer's most recent fiscal year were $29,636,370.

            The aggregate market value of the voting stock held by
non-affiliates computed by reference to the closing price at which the stock was
sold on March 13, 1998 was $54,866,441.

            As of March 13, 1998, the Issuer had 6,080,146 shares of Common
Stock, $.01 par value, outstanding.

            Transitional Small Business Disclosure Format: Yes ___ No __X__

                       Documents Incorporated by Reference

            Part III of the Annual Report on Form 10-KSB is herein incorporated
by reference from the definitive Proxy Statement to be filed with the Security
and Exchange Commission with respect to the Registrant's Meeting of Stock
holders scheduled to be held on May 14, 1998.

<PAGE>


ITEM  1.   DESCRIPTION OF BUSINESS.

BUSINESS DEVELOPMENT

                Stratasys, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on August 8, 1989. The Company's executive offices are
located in Eden Prairie, Minnesota.

                On October 20, 1994, the Company successfully completed an
initial public offering ("IPO") of 1,380,000 shares of its Common Stock,
including 180,000 shares issued upon exercise of the underwriter's
over-allotment option. The shares of Common Stock were sold at $5.00 per share
with the Company receiving net proceeds of approximately $5,700,000. The
underwriter was also granted warrants to purchase up to 120,000 shares of Common
Stock, exercisable at $7.50 per share, until October 1999, all of which have
been exercised.

                On January 1, 1995, the Company purchased certain rapid
prototyping assets from International Business Machines Corporation ("IBM"),
pursuant to an Assignment and Sale of Rapid Prototyping Technology and Related
Assets Agreement dated as of January 1, 1995.

                In March 1996, the Company announced three new products,
Genisys(R), the FDM(R) 1650, and the FDM(R) 8000, each of which is oriented to
separate stages of a customer's product development cycle. Shipments of the
FDM(R) 1650 and Genisys(R) began in March and June 1996, respectively, and
shipments of the FDM(R) 8000 began in the first quarter of 1997.

                In March 1997, the Company announced the FDM(R) 2000, an
enhanced version of the Company's FDM(R) 1650. The Company began shipping the
FDM(R) 2000 in the first quarter of 1997.

                In November 1997, the Company announced that its MedModeler
system, a rapid prototyping system designed for the medical market for
anatomical part output from MRI and CT scans, was granted 510(k) clearance by
the United States Food and Drug Administration ("FDA").

                In January 1998, the Company introduced the FDM(R) Quantum,
which offers large modeling capabilities (second largest build envelope in the
industry) combined with significant speed and performance enhancements as
compared with the FDM(R) 2000. This product incorporates the new MagnaDrive
technology that allows the extrusion heads to move on a bed of air while
controlled by electro-magnetic homing devices. Commercial shipments are expected
to commence in the first quarter of 1998.

BUSINESS OF THE COMPANY

                The Company is a leader in the three dimensional ("3D") imaging
business, which is referred to as "rapid prototyping". The Company develops,
manufactures and markets a family of rapid prototyping devices 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 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. The Company's computerized
modeling systems use its proprietary technology to make models and prototypes
more directly from a designer's three-dimensional CAD in a matter of hours.

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                The Company believes that its patented fused deposition modeling
("FDM(R)") technology and new Genisys(R) technology are the only rapid
prototyping systems commercially available that can produce parts from plastic
without relying on lasers. This affords the Company a number of significant
advantages over other commercially available three-dimensional rapid prototyping
technologies, which primarily rely 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, the need for relatively little set up of the
system for a particular project, the availability of a variety of modeling
materials and the lack of any need for costly replacement lasers and laser
parts. The 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 the Company's FDM(R) Benchtop systems begins with the creation of a
conceptual geometric model on a CAD workstation. The model is then imported into
the QuickSlice(R) software program, which mathematically slices the conceptual
model into horizontal layers that are downloaded into the system. These rapid
prototyping machines basically draw cross-sections of the model one layer at a
time to create a three-dimensional "blueprint." A spool of thin thermoplastic
modeling material feeds into a moving FDM(R) extruding head, which heats the
material to a semi-liquid state. This semi-liquid material is then extruded and
deposited in ultra-thin flat layers on a base (the "X-Y Stage") in the 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.

                The Genisys(R) modeling process is similar. Genisys(R) uses
AutoGen(R) software to slice the conceptual model created on a CAD workstation
into horizontal layers that are downloaded into Genisys(R). Genisys(R) then uses
wafers of polyester modeling material, rather than spools of filament, to feed
the extrusion head. The extrusion head heats these wafers and, using a precision
hydraulic conical pump, deposits a continuous layer of plastic polymer beads
(much like squeezing toothpaste from a tube) onto the X-Y Stage to create a
three-dimensional model by building up layers. In comparison to the FDM(R)
Benchtop systems, due to its size, Genisys(R) allows the prototype to be created
on a desktop, directly from a workstation, like a 3D printer.

Products

                MODELING EQUIPMENT. The Company has been developing and
improving its line of rapid prototyping products since its inception in 1989.
Since that time, the Company has developed and sold systems including the
3D-Modeler, a smaller benchtop version of the 3D-Modeler called the FDM(R) 1500
Benchtop, introduced in June 1993; an improved benchtop modeler called the
FDM(R) 1600 Benchtop, introduced in November 1994; the Company's Protoslice
operating software package; its successors, QuickSlice(R) and AutoGen(R); and in
some cases, a CAD workstation manufactured by SGI. The FDM(R) 1600 Benchtop
offered customers more features than its predecessor, the FDM(R) 1500, including
dual heads. As such, it had increased hardware and software performance.
Although the Company has discontinued sales of the 3D Modeler, the FDM(R) 1500,
SGI workstations and, in early 1996, the FDM(R) 1600 Benchtop system, it
continues to support and manufacture modeling materials for these systems. In
addition, the Company no longer sells ProtoSlice, the predecessor to
QuickSlice(R).

                In March 1996, the Company introduced three new rapid
prototyping machines for commercial sale. Genisys(R) is a 3D desktop printer,
which uses the rapid prototyping technology developed by IBM that the Company
purchased in 1995. It is useful for the production of conceptual models employed
in the early stages of the design cycle, as it enables a designer to produce
concept iterations at his desk directly from a workstation in a simple
push-button fashion. The FDM(R) 1650 Benchtop can produce functional prototypes
at higher speeds than those of its predecessor, the FDM(R) 1600 Benchtop, and
can accommodate a variety of engineering modeling materials. The third new
product, the FDM(R) 8000, is a rapid prototyping device, which incorporates
QuickSlice(R) software and the filament extrusion method of the Company's FDM(R)
products. It is capable of building prototypes up to 24 inches in size with
throughput comparable to the recently announced Stratasys FDM(R) 2000. The
FDM(R) 8000 builds prototype parts using ABS plastics. Distribution of the
FDM(R) 1650 Benchtop and the Genisys(R) machine

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began in March and June 1996, respectively, while shipment of the FDM(R) 8000
began in the first quarter of 1997.

                The Company announced the FDM(R) 2000 in March 1997. It is an
enhanced version of the FDM(R) 1650, but features a 30% to 40% throughput
improvement over the FDM(R) 1650. Upgraded hardware and software accounts for
the improved performance features. The Company began shipping the FDM(R) 2000 in
the first quarter of 1997. In November 1997, the Company announced that its
MedModeler rapid prototyping system had been granted 510(k) pre-market clearance
from the FDA. The MedModeler is a Benchtop rapid prototyping system designed for
the medical market that creates anatomical part output from computed tomography
("CT") and magnetic resonance imaging ("MRI") devices.

                In January 1998, the Company announced the FDM(R) Quantum.
This system features the second largest build envelope in the industry and
incorporates the newly-developed MagnaDrive technology. The MagnaDrive
technology, which allows the extrusion head to float on a bed of air while being
controlled through electro magnetic devices, offers significant speed and
performance enhancements as compared with the FDM (R) 2000. Commercial
shipments of the Quantum are expected to commence in the first quarter of 1998.

                The Company's family of rapid prototyping systems offers product
designers and developers the ability to create prototypes throughout all stages
of the development cycle as well as a wide range of prices from which to choose.
The domestic prices of the systems start at $45,000 for Genisys(R) and reach
$325,000 for the FDM(R) Quantum. The current domestic price of the FDM(R) 1650
Benchtop is $99,000, while the price of the FDM(R) 2000 is $125,000. By
comparison, the Company's original 3D Modeler sold for between $150,000 and
$180,000. The Company also offers special pricing for trade-in systems and
upgrades. Customers have the option to purchase an entire rapid prototyping
system from the Company or to buy individual components.

                MODELING MATERIAL. FDM(R) technology allows the use of a greater
variety of modeling materials and colors than other technologies. The Company
continues to develop filament modeling materials that meet the customers' needs
for increased speed, strength, accuracy, surface resolution and color. These
materials are processed into its patented filament form, which is then fed into
the 3D Modeler or the FDM(R) Benchtop systems. The Company's spool-based system
has proven to be a significant advantage for its products over Ultra Violet
("UV") polymer systems, because the Company's system allows the user to quickly
change material by simply mounting the spool and threading the desired material
into the FDM(R) devices. Spools weigh from 2.3 pounds to ten pounds , and the
creation of a model may require from 0.1 pound to more than one pound of
filament. Other advantages of the spool-based system over a UV polymer system
are that the spool-based system allows the customer to purchase a single spool
as compared to an entire vat of UV polymer, thereby reducing the customer's
up-front costs, and to use the system in an office environment.

                Currently, the Company has five modeling materials commercially
available for model generation using its FDM(R) technology: an elastomer
material for applications requiring strength, durability and flexibility, as
used in seals or tubing, an investment casting wax, the hard polymer material
ABS (named for its three initial monomers, acrylonitrile, butadiene and
styrene), which is used commercially to make products such as telephones, a
medical grade ABS (MABS), used for medical applications, and a release material.
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 or a concept model.

                Genisys(R) uses only one type of modeling material, a plastic
polymer, which is manufactured in the form of wafers. A total of 50 wafers are
held in a cassette, which allows the wafers to be fed into the machine and
rapidly extruded in layers. Additional cassettes are easily loaded into the
system. Each cassette contains a memory chip that instructs the system as to the
parameters and melt temperature of the material lot, which optimizes the
automatic build process of the Genisys(R) system.

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                The modeling filament and wafers are consumable products that
provide additional revenue for the Company.

                OPERATING SOFTWARE. The Company offers two software products:
QuickSlice(R) and AutoGen(R). QuickSlice(R) converts three-dimensional
computer models into a format that controls the operation of the Company's
FDM(R) 1650, 2000, 8000 and Quantum modelers. AutoGen(R) performs the
same function for the Genisys 3-D Printer.

                QuickSlice(R) is a simple, easy-to-use software package. The
Company originally sold the QuickSlice(R) software package for $7,000.
QuickSlice(R) 2.0, a modified version of QuickSlice(R), is the operating
software for the Company's FDM(R) 1650 system. The Company also supplies a
library of utility software programs and procedures to simplify the handling of
data and to automate common tasks.

                In 1994, the Company developed and released to the public a
software package called SupportWorks(R). SupportWorks(R) is used in conjunction
with QuickSlice(R) enabling the Company's FDM(R) Benchtop, 8000, and Quantum
systems to automatically generate supports for the models, thereby eliminating
another step in the model-making process. The program originally sold for
approximately $6,000. The Company has now combined QuickSlice(R) and
SupportWorks(R) into a proprietary $15,000 copyrighted package which is sold
under the name QuickSlice(R). The current version is QuickSlice(R) 5.0.

                In 1996, the Company introduced AutoGen(R), software
specifically designed for Genisys(R). AutoGen(R) automatically prepares models
for printing with almost no user interface. The over-all architecture and
detailed design of the AutoGen(R) and Quickslice(R) software were
developed by the Company, which has retained copyright and all other ownership
rights.

Applications of Rapid Prototyping

                Rapid prototyping systems enable engineers and designers to
produce models of their engineering designs faster and cheaper than with
conventional manual methods. The prototypes themselves are used to test the
product or assembly's form, function and fit to specific tolerances. Companies
also use three-dimensional models for tooling as final patterns for a variety of
tooling procedures. In addition, several domestic and international
manufacturers produce one-of-a-kind orthopedic implants for patients using
computed topographic scanning and wax investment casting masters produced with
the Company's FDM(R) systems.

Potential Future Applications

                The Company has positioned its products to be used as devices
that support CAD systems in a variety of design and manufacturing industries,
including automotive, aerospace, consumer products, electronics and medical. The
Company's systems are also used in service bureaus and educational institutions.
Additional future applications may arise in conceptual design, casting,
precision prototypes, consumer packaging, architectural design, rapid
manufacturing of small-volume custom parts and fit, form and function testing,
secondary tooling, and mold-making.

                Among potential medical applications, rapid prototyping could be
used to produce accurate models of internal organs, bones or skulls for
pre-operative evaluations or modeling of prostheses. In such uses, the Company's
products could serve as peripheral devices for "CT" and "MRI" devices. The
Company currently has its MedModeler installed at four such medical beta sites.

<PAGE>


Marketing, Distribution and Customers

                The strategic focus of the Company's marketing efforts begins
with identifying the needs of product managers, conceptual designers, design and
manufacturing engineers and production specialists in manufacturing companies.
The Company then seeks to understand a customer's needs and requirements. To
satisfy those needs, the Company offers a broad array of products, ranging from
the low cost, easy-to-use Genisys 3D Printer, to the large-scale, fast and
precise FDM(R) Quantum. The Company has sold systems to, among other customers,
General Motors Corporation, Ford Motor Company, Chrysler Corporation, Lockheed
Martin, Square D Company, Whirlpool Corporation, Callaway Golf, Snap On Tools,
Biomet, Inc., St. Jude Medical, Motorola, Eastman Kodak Company, Marubeni,
Hewlett-Packard, Brooks Air Force Base, Westinghouse Electric Corporation, Lego,
the Federal Bureau of Investigation (FBI), and NASA, as well as service bureaus,
universities and distributors in the United States and abroad. With the purchase
of rapid prototyping assets from IBM on January 1, 1995, the Company also
received a prospective customer list from IBM. The Company has promoted its
current technology to these prospective customers in an effort to further expand
its customer base. The Company sells both complete rapid prototyping systems and
separate components.

                The Company utilizes a variety of tactical marketing methods to
reach potential customers, including advertising, press releases, trade magazine
articles, customer studies, brochures, direct mailings, telemarketing programs,
trade show demonstrations, videos and a Web site (www.Stratasys.com). In
addition, the Company has developed domestic and international on-site
demonstration capabilities.

                Domestically, the Company sells directly to its customers. In
1997, the Company organized its domestic FDM(R) sales force into three regions.
Salespersons and management reside in the regions they service. In addition,
Genisys(R) resellers have been assigned to managers within this regional
framework. The Company markets internationally through a network of distributors
and sales representatives. During the years ended December 31, 1996 and 1997,
export sales amounted to approximately $8,865,000 and $12,639,000, respectively.

                No customer accounted for more than 10% of sales in 1996 or
1997.

Warranty and Service

                The Company provides a 90-day warranty on its domestic systems
and a one-year warranty on those sold internationally. In addition, the Company
offers annual service and maintenance contracts for its systems. The service
contracts include updates of the Company's software systems. Annual service
contracts for the Company's FDM(R) systems are priced at a range from $10,000 to
$32,000, while annual service contracts for the Genisys(R) system are priced at
$6,000.

Manufacturing

                The Company's manufacturing process consists of the manual
assembly of purchased components. All parts used in the manufacturing process
are obtained from either distributors of standard electrical or mechanical parts
or from custom fabricators of the Company's proprietary designs. The Company
currently operates on a build-to-inventory basis.

                The Company purchases the major component parts for its FDM(R)
and Genisys(R) systems from various outside vendors, subcontractors and other
sources and assembles them at its Minnesota facility. The Company performs
numerous diagnostic tests and quality control procedures throughout the assembly
process in order to assure reliability of its products. Prior to shipment, each
unit is subjected to a test and burn-in procedure to check for defects.
Precision modeling parameters are also checked.

                The Company maintains an inventory of most of its necessary
supplies, which facilitates the assembly of products required for production.
The Company's sole current supplier of the X-Y Stage for the FDM(R) 1650, FDM(R)
2000 and FDM(R) 8000 Benchtop systems is Asymtek; and its sole current

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supplier of the FDM(R) head motors is MircoMo Electronics, Inc. The Company also
has sole suppliers for two key components of its new FDM(R) Quantum system. The
Company considers all of these suppliers to be reliable. Nevertheless, the
Company maintains an inventory of such components to support continued supply.
Furthermore, the Company believes that the supplier of the X-Y Stage could be
replaced by in-house design and production of the part within a three-month
period, if necessary; and the Company could employ FDM(R) head motors from other
suppliers by modifications to the design of the FDM(R) 1650 and 2000 Benchtops
and FDM(R) 8000. In-house development to replace the vendors of the Quantum
components would take four to eighteen months to accomplish. In regard to other
parts and materials, the Company uses multiple sources of supply and does not
believe that it is dependent on any single supplier. Although the Company
believes that it maintains adequate inventories of vendor-specific materials,
the loss of a supplier of such vendor-specific materials or compounds could
result in a delay in the manufacture and delivery of those materials and
compounds resulting from the need to retest and recertify products supplied by
one or more new vendors. The Company considers its relationships with its
suppliers to be good.

Research and Development

                The Company has devoted significant time and resources to the
development of a universally compatible and user-friendly software system. The
Company believes that ongoing research and development efforts are essential to
its continued success. Accordingly, the Company's engineering development
efforts will continue to focus on improvements to the FDM(R) and Genisys(R)
technology and development of new modeling processes, materials, software and
products. To date, much of the Company's activity has been focused on research
and development. For the years ended December 31, 1996 and 1997, the Company's
research and development expenses were approximately $3,374,000 and $5,055,000,
respectively.

                The Company's filament development and production operation is
located at its facility in Eden Prairie, Minnesota. The filament formulation and
manufacturing process is regarded by the Company as a trade secret, and the
Company holds patent claims on filament usage in its products.

Intellectual Property

                The Company considers its proprietary technology to be important
to the development, manufacture, and sale of its products and seeks to protect
its technology through a combination of patents and confidentiality agreements
with its employees and others. Scott Crump, the Company's President, was granted
two U.S. Patents which cover many claims relating to various aspects of its
products, FDM(R) technology and the associated modeling process. The term of one
patent lasts until June 9, 2009, and the term of the other lasts until August
23, 2011. The patents have been assigned to the Company. In addition, other
employees of the Company have assigned to the Company patents and patent
applications for other rapid prototyping process and apparatus associated with
the FDM(R) process. As part of its purchase of rapid prototyping technology
assets from IBM, the Company was also assigned the rights and title to three
patents developed by IBM, which cover the Genisys(R) system and which the
Company believes will further augment its own product lines. The Company
recorded these patents domestically and is in the process of recording them in
certain foreign countries. The terms of these patents extend until June 7, 2005,
April 12, 2011, and May 17, 2011, respectively. In total, the Company currently
owns eleven primary U.S. patents.

                Corresponding patent applications covering the same claims that
are contained in the Company's issued patents have been initiated in various
foreign countries, including Japan and the European Community. Other patent
applications have also been filed, including the patent applications assigned to
the Company by IBM. The Company has registered several trademarks, including
"Stratasys, Inc.," "3D Modeler," "QuickSlice," "3D Plotter," "3D Visualizer",
"FDM", "Genisys", "AutoGen", "FDMM", "FDC", and "BMD". 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 been filed in Japan and the European
Community.

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Competition

                The Company competes in a marketplace that is still dominated by
conventional methods of model-making and prototype development, which are
primarily performed by machinists and engineers working from blueprints or CAD
files and using machining or by-hand methods. The Company believes that there is
currently no other commercial producer of three-dimensional modeling devices
that uses a single-step, non-toxic technology similar to the Company's FDM(R)
and Genisys(R) technologies. All other rapid prototyping or 3D printing systems
involve an additional post-processing step, such as curing the part after
construction of the model or prototype. The Company's FDM(R) and Genisys(R)
technologies do not rely on the laser or light technology used by many other
commercial manufacturers in the rapid prototyping industry.

                A number of different technologies are employed in rapid
prototyping devices marketed by the Company's competitors. Stereolithography is
used in the products of 3D Systems, D-MEC, Mitsui and Teijin Seiki Co. 3D
Systems, in which Ciba-Geigy has a substantial interest, introduced the first
rapid prototyping product. The Company believes that 3D Systems accounts for
approximately 32% of sales of rapid prototyping units to date. DTM Corporation
produces machines that use lasers to sinter or harden powdered material.
Helisys, Inc. utilizes lasers to cut and laminate sheets of materials, such as
paper. The Company believes that its FDM(R) technology has important advantages
over the products of these companies, including the ability to be used in an
office environment, the availability of multiple modeling materials and a
one-step process. Sanders Prototype, Inc. ("Sanders"), 3D Systems, and Z-Corp
have developed prototyping systems which use ink-jet technology to deposit wax
material layer by layer which can be used in an office environment. A smoothing
or milling process is required between each deposited layer to maintain accuracy
in these processes. Certain of the Company's competitors have greater financial
and marketing resources than the Company.

                According to a March 1998 report by Wohlers Associates, Inc.,
the Company was the second largest rapid prototyping vendor in the world in
terms of both revenue and units shipped in 1997.

Employees

                As of March 13, 1998, the Company had 166 full-time employees
and 17 subcontractors or temporary employees. While the Company has 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 the Company has not experienced a work
stoppage. The Company believes its employee relations are good.

Governmental Regulation

            GENERAL

                The Company is subject to various local, state and federal laws
and regulations that affect businesses generally, including regulations
promulgated by federal and state environmental and health agencies, the Federal
Occupational Safety and Health Administration and laws pertaining to the hiring,
treatment, safety and discharge of employees.

            FDA REGULATION

                The FDA has the authority to regulate the preclinical and
clinical testing, manufacture, labeling, distribution, and promotion of the
Company's MedModeler as a Class II medical device under the Federal Food, Drug,
and Cosmetic Act of 1976, as amended. Before a new device can be introduced into
the market, the manufacturer must generally obtain prior FDA permission to
market it through either clearance of a 510(k) notification to the FDA or
approval of a pre-market ("PMA") application. A 510(k) clearance will be granted
if the submitted information establishes that the proposed device is
"substantially equivalent" to a legally marketed Class I or II medical device or
to a Class III medical device for which the FDA has not called for PMA's. After
a device receives 510(k) clearance from the FDA, any modification

<PAGE>


that could significantly affect its safety or effectiveness, or would constitute
a major change in the intended use of the device, will require a new 510(k)
submission.

                 In November 1997, the Company announced the FDA granted the
MedModeler 510(k) clearance. The Company has subsequently made modifications to
the MedModeler, which it believes do not require the submission of new 510(k)
notifications. There can be no assurance, however, that the FDA would agree with
the determination by the Company not to submit, or would not require the Company
to submit, a new 510(k) notification for any of these changes. If the FDA
requires the Company to submit a new 510(k) notification for any device
modification, the Company may be prohibited from marketing the modified device
until the 510(k) notification is cleared by the FDA.

                The MedModeler and any other medical devices manufactured or
distributed by the Company will be subject to pervasive and continuing
regulation by the FDA. The Company's manufacturing facility will be subject to
inspection by the FDA to assure compliance with its Quality System Regulation
("QSR"), which imposes testing, control, documentation and other quality
assurance procedures. In addition, the Company will be subject to other
regulatory requirements that usually apply to medical devices marketed in the
United States, including labeling regulations, Medical Device Reporting ("MDR")
regulations (which require that a manufacturer report to the FDA certain types
of adverse events involving its products), and the FDA's prohibitions against
promoting products for unapproved or "off-label" uses. In addition, Class II
devices can be subject to additional special controls that do not apply to Class
I devices, such as performance standards, postmarket surveillance, patient
registries, and FDA guidelines. Failure to comply with applicable requirements
could result in FDA enforcement action, including, among other things, fines,
injunctions, civil penalties, recall or seizure of the products, refusal to
grant pre-market clearances or approvals, withdrawal of marketing approvals and
criminal prosecution. Although the Company believes that any such enforcement
action would not have a material adverse effect on the Company's ability to
market its products other than as medical devices, any such enforcement action
could have a material adverse effect on its ability to market the MedModeler.

                 The MedModeler may be subject in certain instances to
regulation by foreign regulatory authorities to the extent that the Company
seeks to market it outside the United States.


ITEM 2.         PROPERTIES.

                The Company's executive offices and production facilities
presently occupy approximately 87,156 square feet in two adjacent buildings in
Eden Prairie, Minnesota, near Minneapolis. The Company occupies a 27,756 square
foot facility under a lease that expires on July 31, 1999. In October 1996, the
Company leased an additional 59,400 square feet of office and production space
in a building adjacent to its original Eden Prairie premises under a lease
expiring in October 1999. Approximately 40% of the new premises will be sublet
until needed by the Company. The Minnesota facilities are used for machine
assembly and filament production, as well as sales, administration and
operations. The current monthly rent for the premises occupied by the Company
total approximately $35,797. The Company does not require a large space for
production because it assembles its devices from sub-assemblies manufactured by
outside vendors.

                Additional research and development was performed at the
Company's facility in Hawthorne, New York, which occupied approximately 5,710
square feet of space. The Company occupied these premises under a lease that
expired on January 25, 1998, at a monthly rent of $5,353. In the third quarter
of 1997, the Company surrendered the lease on this location and closed the
facility.

                The Company opened two regional sales offices in 1997. In June
1997, the Company entered into a three year lease to occupy 1,912 square feet of
space in Southfield, Michigan, a suburb of Detroit. This lease expires in May
2000, with monthly rent of approximately $3,019. In September 1997, the Company
entered into a three year lease to occupy 2,504 square feet of space in Ontario,
California. The lease expires in May 2000, with base monthly rent of
approximately $3,005. The Company is also

<PAGE>


responsible for real estate taxes, insurance, utilities, trash removal and
maintenance expenses at all of these premises.


ITEM 3.         LEGAL PROCEEDINGS.

                The Company is not a party to any pending legal or
administrative proceeding, and its property is not subject to any such
proceeding, other than actions arising in the ordinary course of the Company's
business, which the Company believes are not material.


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, 1997.


                                     PART II

ITEM 5.         MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

                The Common Stock of the Company is quoted on the National
Association of Securities Dealers, Inc. Automated Quotation System National
Market ("Nasdaq") under the symbol SSYS and is traded on The Pacific Stock
Exchange Incorporated under the symbol SAS.

                The following table sets forth the high and low closing bid
prices of the Company's Common Stock for each quarter from January 1, 1996
through the fiscal year ended December 31, 1997.

                                              High                Low
                                              ----                ---

Fiscal Year Ended December 31, 1997               Bid Prices ($)
-----------------------------------               --------------

January 1, 1997 - March 31, 1997              23.00              16.625
April 1, 1997 - June 30, 1997                 25.75              15.00
July 1, 1997 - September 30, 1997             18.00              13.00
October 1, 1997 - December 31, 1997           17.75              10.25


Fiscal Year Ended December 31, 1996
-----------------------------------

January 1, 1996 - March 31, 1996              23.375             16.375
April 1, 1996 - June 30, 1996                 20.75              15.875
July 1, 1996 - September 30, 1996             24.50              15.375
October 1, 1996 - December 31, 1996           23.00              14.125

                 There were approximately 171 stockholders of record of the
Company's Common Stock as of March 13, 1998.

<PAGE>


DIVIDENDS

                 The Company has not paid or declared any cash dividends to date
and does not anticipate paying any in the foreseeable future. The Company
intends to retain earnings, if any, to support the growth of the Company's
business.

RECENT SALES OF UNREGISTERED SECURITIES

                On November 13, 1997, the Company closed the sale of 206,897
Units consisting of one share of the Company's Common Stock, $.01 par value
("Common Stock"), a one-year warrant to purchase one share of Common Stock at an
exercise price of $14.50 (the "One-Year Warrant"), and a two-year warrant to
purchase one share of Common Stock at an exercise price of $14.50 (the "Two-Year
Warrant"), to one accredited investor for a purchase price of $14.50 per Unit.
The One-Year Warrants and the Two-Year Warrants are immediately exercisable by
the holders by cash payment of the exercise price. In connection with the
investor's subscription for such Units, the Company granted an option, which
expired on November 14, 1997, to purchase up to 148,148 Additional Units having
an aggregate purchase price of $2,000,000 at a purchase price of $13.50 per
Additional Unit. Each Additional Unit consisted of one share of Common Stock, a
one-year warrant to purchase one share of Common Stock at an exercise price of
$13.50 (the "Additional One-Year Warrant"), and a two-year warrant to purchase
one share of Common Stock at an exercise price of $13.50 (the "Additional
Two-Year Warrant"). The purchaser of the Units assigned its option to three
affiliated accredited investors, which exercised the option prior to its
expiration. The closing of the sale of the Additional Units occurred on November
20, 1997. On March 20, 1998, the Company agreed to exchange warrants to purchase
413,794 shares of Common Stock at an exercise price of $14.50 expiring on
October 31, 2000 ("Substitute $14.50 Warrants"), for the One-Year Warrants and
the Two-Year Warrants and to exchange Substitute Warrants to purchase 296,296
shares of Common Stock at an exercise price of $13.50 expiring on October 31,
2000 (the "Substitute $13.50 Warrants") for the Additional One-Year Warrants and
the Additional Two -Year Warrants. In connection with such exchange, the holders
of such warrants agreed not to request a registration of the shares purchased or
the shares of Common Stock issuable under such warrants until after December 31,
1998, and not to sell any of the shares purchased until after that date. The
Company relied upon Rule 506 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), and Section 4(2) of the Securities Act for the
exemption from registration under the Securities Act in connection with the
issuance of the shares of Common Stock, One-Year Warrants, Two-Year Warrants,
the Additional One-Year Warrants, the Additional Two-Year Warrants, the
Substitute $14.50 Warrants and the Substitute $13.50 Warrants.


ITEM 6.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS.

GENERAL

                The Company develops, manufactures, and markets a family of
rapid prototyping devices 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. Historically, the Company's growth
has come from sales to a number of industries, including automotive, consumer
products, electronics, medical, and aerospace. Universities, other educational
institutions, and service bureaus have also been significant markets for the
Company. The Company's current and future growth is largely dependent upon its
ability to penetrate new markets, develop new applications, and develop and
market new rapid prototyping devices that meet the needs of its current and
prospective customers. New product developments will focus on various rapid
prototyping devices, modeling materials, and software enhancements. The Company
anticipates that in 1998, its primary business strategy will focus on expanding
its international and domestic sales of its existing family of rapid prototyping
devices, while maintaining on-going development of new rapid prototyping
equipment, modeling materials, and software. Growth through an appropriate
acquisition may also occur, but the Company can give no assurance that any such
acquisition will be consummated.

<PAGE>


                 The Company introduced two major new products in 1997. In March
1997 the Company introduced the FDM(R) 2000, a Benchtop system that offers
significant speed and performance enhancements over the Company's
FDM(R) 1650. The Company has continued to market the FDM(R) 1650 at a
reduced price of $99,000, while the FDM(R) 2000 is priced at approximately
$125,000. The Company also introduced the FDM(R)8000 in March 1997. This
represented the Company's entrance into the large-envelope modeling market,
previously not served by the Company. The FDM(R) 8000 offers the speed and
performance enhancements offered by the FDM(R)2000, while offering large
envelope modeling capabilities, and has a domestic list price of $200,000. The
Company also announced the MedModeler in the latter part of 1997 and also
introduced an elastomer modeling material. Continuing software enhancements and
other enhancements to improve the performance of the systems, including new tip
dimensionalities allowing for finer feature detail and surface finish on the
model output, were also introduced during the year.

                Net sales of the Company's rapid prototyping devices, modeling
materials, and maintenance have increased each year since 1990. Management
expects, but cannot assure, that this trend will continue. The Company believes
that it shipped more rapid prototyping units than any of its competitors in
1996, and that it recorded the second highest revenues and unit shipments in the
industry in 1997. It can give no assurances, however, that this trend will
continue. The Company's profitability declined in 1997 as compared with 1996, in
spite of the 29.3% revenue growth and gross margins that improved from 65.6% of
sales in 1996 to 67.3% in 1997. The Company significantly expanded its
infrastructure and headcount in anticipation of higher revenues that were not
realized in 1997. In early 1997, the Company moved its manufacturing and service
organizations into a new, adjacent facility, incurring substantial leasehold and
operating expense increases. Sales offices were opened in Michigan and
California at various times during 1997. Preparation to open a European sales
office was also initiated in the later part of 1997. The Company's headcount
expanded from 143 employees at the end of 1996 to 177 employees at the end of
1997, with the majority of these additions occurring in the sales and
engineering departments. Future profitability of the Company will be dependent
upon the Company's ability to control its operating expenses while increasing
revenues. The Company does not believe that meaningful improvements to its gross
margins are achievable, and gross margins could possibly decline in the event
that significant price competition emerges within the industry. While the
Company believes that profitability will improve in 1998 as compared with 1997
as a result of operating expense control, it can give no assurance that these
results will be realized.

                The Company believes that the rapid prototyping industry is
growing at approximately 20-30% per year. It believes that there is a trend
toward lower priced rapid prototyping systems capable of producing functional
prototypes, and that a sizable market exists for concept or visualization 3D
printers. This pricing trend should lead to growth in the more traditional
functional prototyping marketplace as companies continue to address in-house
rapid prototyping needs. Certain market segments in the industry have not
demonstrated pricing sensitivity. These segments are more interested in modeling
envelope size, modeling material variety, throughput, and part quality, which
should allow growth to continue for higher priced rapid prototyping systems
addressing these needs.

<PAGE>


RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996

                The following table sets forth certain statement of income data
as a percentage of net sales for the periods indicated. All items are included
in or derived from the Company's statement of income.

                                                For the years ended December 31,

                                                    1997               1996

   Net sales                                       100.0%             100.0%
   Cost of sales                                    32.7%              34.4%
   Gross margin                                     67.3%              65.6%
   Selling, general, and administrative expenses    49.5%              41.4%
   Research & development expense                   17.1%              14.7%
   Operating income                                  0.7%               9.5%
   Other income                                      1.5%               2.4%
   Income before taxes                               2.2%              11.9%
   Income taxes (benefit)                            0.4%              (3.4%)
   Net income                                        1.7%              15.3%


NET SALES

                Net sales for the year ended December 31, 1997 were $29,636,370,
compared with sales of $22,919,818 recorded for the year ended December 31,
1996. This represents an increase of $6,716,552, or 29.3%. This increase was due
to the Company's successful introduction of the FDM(R) 2000 Benchtop and FDM(R)
8000 systems. Whereas sales of the FDM(R) 1650 continued, the Company saw the
market for this product decline in favor of the faster, higher-priced FDM(R)
2000. Comparative revenue was negatively impacted by weak sales and returns of
Genisys systems, which was impacted by performance and technical issues since
the first quarter of 1997. Maintenance and materials revenue increased
significantly in 1997 as compared with 1996. Maintenance and materials revenues
were enhanced by the larger installed base of systems, customer satisfaction
with the ABS and other materials selection, and increased emphasis on the sale
of maintenance contracts.

                The Company booked 260 orders for new systems in 1997. The
Company sold 245 units in 1997, as compared with sales of 257 units recorded in
1996. Unit sales in 1997 included sales of all systems, including trade-in and
upgrade systems, but excluded returns, substantially all of which were Genisys
systems. As previously disclosed, Genisys was impacted by a number of technical
issues, the most pronounced of which was a pump plugging condition that was
ultimately determined to be caused by contaminated raw materials provided by
outside vendors. Sales in 1997 of Genisys systems were significantly below the
levels attained in 1996. Total FDM(R) unit sales, including trade-ins but
excluding upgrades, increased by approximately 23% over 1996 FDM(R) unit sales.
Total FDM(R) revenue in 1997 increased by approximately 49% over the level
attained in 1996. Consumable and maintenance revenue increased by approximately
72% in 1997 as compared with 1996, and constituted the fastest growing component
of the Company's revenue mix. The Benchtop systems (both the FDM(R) 1650 and
FDM(R) 2000) continued to account for a majority of the Company's 1997 revenue,
but significant revenue was also derived from FDM(R) 8000 system sales.

                Domestic sales accounted for approximately 57% of total revenue,
down from approximately 61% recorded in 1996. In the United States, the eastern
and central regions, including Detroit, recorded the most revenue, while the
western region was weak. The western region was negatively impacted by delays in
the hiring of additional salesmen. By the fourth quarter of 1997, the western
region was fully staffed, with a newly established office in the southern
California area. Europe accounted for approximately 20% of total revenue in
1997, and was the Company's strongest international region. However, total
revenues as a percentage of sales declined from 26% of total revenue recorded in
1996.

<PAGE>


The Company's combined Asia-Pacific region, which comprises Japan, China, the
Far East and India, accounted for approximately 20% of total revenue, up from
the 9.5% attained in 1996. The Company believes that 1998 sales into the East
Asian countries that have been most impacted by the recent currency and economic
turbulence will be weak. These countries include Korea, Indonesia, and Malaysia.

GROSS PROFIT

                Gross profits improved to $19,939,905, or 67.3% of sales, in the
year ended December 31, 1997, compared with $15,031,302, or 65.6% of sales, in
the year ended December 31, 1996, an improvement of $4,908,603, or 32.7%. Gross
profits increased due to the higher average selling price of the FDM(R) 2000 and
FDM(R) 8000 systems in 1997, and were negatively impacted by higher
manufacturing overhead costs associated with the expansion of the Company's
manufacturing facility.

OPERATING EXPENSES

                Selling, general and administrative ("SG&A") expenses increased
to $14,676,175 for the year ended December 31, 1997, from $9,485,519 for the
year ended December 31, 1996. This represents an increase of $5,190,656, or
54.7%. Personnel expenses, commissions, facility expenses and sales-related
travel expenses accounted for much of the increase in 1997.

                Research and development ("R&D") expenses increased to
$5,054,767 for the year ended December 31, 1997 from $3,374,039 for the year
ended December 31, 1996. The increase in 1997 over 1996 amounted to $1,680,728,
or 49.8% Payroll-related expenses and significantly reduced software
capitalization accounted for much of the increase to R&D expenses in 1997.

                The Company's operating income for the year ended December 31,
1997 declined to $208,863 from $2,171,744 the year ended December 31, 1997.

OTHER INCOME

                Other income and expense netted to $435,293 in 1997. Interest
income amounted to $496,813, a decrease of $88,703 compared with 1996. This was
due to a lower average balance of cash and marketable securities. Interest
expense increased by $22,284 to $61,250 in 1997 as the Company increased its
acquisition of equipment under capitalized leases.

NET INCOME

                Net income for 1997 amounted to $514,833 compared with
$3,503,024 in 1996. The 1996 period benefited from a tax benefit of $785,000
resulting in an effective tax rate of (28.9%) as compared with income tax
expense of $129,423, for an effective income tax rate for 1997 of 20%.

LIQUIDITY AND CAPITAL RESOURCES

                Operating activities during 1997 used cash of $597,363,
primarily reflecting increases in accounts receivable of $1,331,196, inventory
of $2,843,140, and reductions in the Company's accounts payable and other
current liabilities of $556,213. These changes resulted from the increased
volume of business in 1997. This use of cash was partially offset by increases
in unearned maintenance revenue of $1,344,226. In 1996 the Company used cash of
$3,409,541 in its operating activities, principally as a result of increased
accounts receivable and inventories of $8,178,145 and $1,699,176, respectively.
The Company used $185,049 of cash in its 1997 investing activities, including
$2,048,884 used for the acquisition of property and equipment, and $173,635 for
payments for intangible assets. The Company netted $2,131,527 from proceeds from
the sale of marketable securities in the same 1997 period. In the 1996 period
the Company used $2,523,450 of cash in its investing activities, including
$1,432,387 for the acquisition of property and equipment and $822,924 for
payments for intangible assets. In 1997, the Company's financing activities
provided net cash proceeds of $5,933,676, $6,166,806 of which resulted

<PAGE>


from proceeds from the sale of the Company's common stock. In 1996, financing
activities provided net cash proceeds of $5,171,903, $5,350,492 of which was
generated from the sale of the Company's common stock. The net increase in cash
for the year ended December 31, 1997 amounted to $5,151,264 as compared with a
net decrease of $761,088 for the comparable 1996 period. The Company's ending
cash and cash equivalents balances as of December 31, 1997 and 1996 were
$9,116,232 and $3,964,968, respectively.

                At December 31, 1997, the Company's cash, cash equivalents, and
marketable securities balances totaled $13,557,612. These assets will be used by
the Company for working capital purposes, for improvement to facilities, for new
product development, tooling, and introduction, for acquisition of production
equipment and computers, for increased selling and marketing activities, and for
potential acquisitions. Management believes that the Company's revenue from
operations, its current cash and cash equivalents balance, and the proceeds from
the sale of short-term marketable securities should provide sufficient cash
resources to finance its operations for at least 12 months.

                The Company has historically been unable to finance its growth
from cash generated from operations. Furthermore, the Company's working capital
requirements may significantly increase if an acquisition is consummated or if
significant operating losses occur. No assurances can be given as to the
adequacy of the Company's working capital to support the Company's operations
following an acquisition or a period of losses. If the existing cash balances
are insufficient or if working capital requirements are greater than estimated,
the Company could be required to raise additional capital. There can be no
assurance that the Company will be able to raise additional capital or that the
terms upon which such capital will be available to the Company will be
acceptable.

                As of December 31, 1997, the Company had gross accounts
receivable of $12,180,515, less an allowance of $514,461 for returns and
doubtful accounts. Historically, the Company's bad debt expense has been
minimal. However, at December 31, 1997, large balances were concentrated with
certain international distributors. While the Company can give no assurances, it
believes that most, if not all, the accounts receivable balances will ultimately
be collected. The Company has not experienced significant inventory adjustments,
although it can give no assurances that future inventory adjustments caused by
obsolescence, product design changes, declining sales, or other factors, will
not occur.

                The Company's total current assets amounted to $31,993,494 at
December 31, 1997, the majority of which consisted of cash, cash equivalents,
marketable securities, inventory and accounts receivable. Total current
liabilities amounted to $5,636,749, $2,426,270 of which was for unearned
maintenance revenues. The Company's debt is minimal, consisting primarily of
payments due under capital leases. The Company estimates that it will spend
approximately $2,400,000 in 1998 for facility improvements, production and
research and development equipment, computers and integrated software, and
tooling. As of December 31, 1997, material commitments for inventory purchases
from selected vendors for the ensuing nine month period ending September 30,
1998 will amount to approximately $1,035,000.

INFLATION

                Management believes that inflation has not had a material effect
on the Company's operations or on its financial condition.

FOREIGN CURRENCY TRANSACTIONS

                Substantially all of the Company's transactions are negotiated,
invoiced, and paid in US dollars. Fluctuations in the currency exchange rates in
other countries may therefore reduce the demand for the Company's products by
increasing the price of the Company's products in the currency of countries in
which the local currency has declined in value.

<PAGE>


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, estimates or believes or
other similar words are forward-looking statements deemed by the Company to be
covered by and to qualify for the safe harbor protection covered by the safe
harbor protection provided by the Private Securities Litigation Reform Act of
1995 (the "1995 Act"). Investors and prospective investors in the 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 rapid prototyping
systems and services, the ability of the Company to maintain its gross margins
on these sales, and the plans and objectives of management to introduce new
products, control expenses, improve profitability, and consummate acquisitions.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions, among others, that the Company (1) will be
able to continue to introduce new rapid prototyping systems acceptable to the
market and improve existing technology and software in its current product
offering, including the Genisys rapid prototyping system that has been
especially affected by technological problems, (2) will be able to maintain its
gross margins on its present products, (3) will be able to control its operating
expenses, especially its selling, general and administrative expenses and (4)
will be able to retain and recruit employees with the necessary skills to
produce, develop, market, and sell it products. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive, and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes 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 the Company to alter its marketing plans,
capital expenditure budgets or other budgets, which may in turn affect the
Company's results of operations. Due to the factors noted above and elsewhere in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Company's future earnings and stock price may be subject to
significant volatility, particularly on a quarterly basis. Additionally, the
Company may not learn of revenue or earnings shortfalls until late in a fiscal
quarter, since the Company frequently receives the majority of its orders very
late in a quarter. This could result in an immediate and adverse effect on the
trading price of the Company's 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 7.         FINANCIAL STATEMENTS.

                This information appears following Item 13 of this report and is
incorporated herein by reference.


ITEM 8.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE.

                The Company did not have any changes in or disagreements with
its accountants on accounting and financial disclosure.

<PAGE>


                                    PART III

ITEM 9.         DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

                Incorporated herein by reference to the Company's Definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders
scheduled to be held May 14, 1998.


ITEM 10.        EXECUTIVE COMPENSATION.

                Incorporated herein by reference to the Company's Definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders
scheduled to be held May 14, 1998.


ITEM 11.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

                Incorporated herein by reference to the Company's Definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders
scheduled to be held May 14, 1998.


ITEM 12.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

                Incorporated herein by reference to the Company's Definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders
scheduled to be held May 14, 1998.


ITEM 13.        EXHIBITS, LIST AND REPORTS ON FORM 8-K.

(a)             Exhibits

Exhibit No.        Description
-----------        -----------

3.1             Restated Certificate of Incorporation of the Company. (3)

3.2             Amendment to Certificate of Incorporation of the Company. (6)

3.3             By-Laws of the Company. (1)

4.1             Agent's Warrant issued to R.J. Steichen & Company dated November
                12, 1993. (1)

4.2             Agent's Warrant issued to R.J. Steichen & Company dated December
                13, 1993. (1)

4.3             Form of Common Stock purchase warrants issued by the Company
                dated as of November 12, 1993 and December 13, 1993. (1)

4.4             Form of Common Stock purchase warrant issued by the Company in
                its August 1995 private placement (2).

4.5             Form of 3-year Common Stock purchase warrants issued by the
                Company in its November 1995 offering under Regulation D and
                Regulation S. (5)

4.6             Form of 3-month Common Stock purchase warrants issued by the
                Company in its November 1995 offering under Regulation D and
                Regulation S. (5)

<PAGE>


4.7             Form of Placement Agent's warrant issued by the Company in its
                November 1995 offering under Regulation D and Regulation S. (5)

4.8             Form of warrant issued to Sunrise Securities Corp. by the
                Company in connection with its November 1995 offering under
                Regulation D and Regulation S. (5)

4.9             Form of substitute warrant to purchase an aggregate of 413,794
                shares of Common Stock at $14.50 per share expiring on October
                31, 2000.

4.10            Form of substitute warrant to purchase an aggregate of 296,296
                shares of Common Stock at $13.50 per share expiring on October
                31, 2000.

10.1            Non-Competition Agreement between the Company and S. Scott
                Crump, dated October 15, 1990. (1)

10.2            Non-Competition Agreement between the Company and S. Lisa Crump,
                dated October 15, 1990. (1)

10.3            Employee Confidentiality Agreement between the Company and S.
                Scott Crump, dated October 15, 1990. (1)

10.4            Employee Confidentiality Agreement between the Company and Lisa
                Crump, dated October 15, 1990. (1)

10.5            Stratasys, Inc. Employee Stock Option Plan #1. (1)

10.6            Amended and Restated Stratasys, Inc. 1994 Stock Plan. (3)

10.7            Second Amended and Restated Stratasys, Inc. 1994-2 Stock Plan.
                (8)

10.8            Asset Purchase Agreement between the Company and IBM dated
                January 1, 1995. (4)

10.9            Equipment Lease Agreement between the Company and IBM dated
                January 1, 1995. (4)

10.10           Assignment, dated October 23, 1989, from S. Scott Crump to the
                Company with respect to a patent application for an apparatus
                and method for creating three-dimensional objects. (7)

10.11           Assignment, dated June 5, 1992, from S. Scott Crump to the
                Company with respect to a patent application for a modeling
                apparatus for three dimensional objects. (7)

10.12           Assignment, dated June 1, 1994, from S. Scott Crump, James W.
                Comb, William R. Priedeman, Jr., and Robert Zinniel to the
                Company with respect to a patent application for a process and
                apparatus of support removal for three-dimensional modeling. (7)

10.13           Lease between the Company and Richard A. Burke, dated October
                14, 1996. (9)

21.1            Subsidiaries of the Company. (5)

23.1            Consent of Rothstein, Kass & Company, P.C.

27.1            Financial Data Schedule.

<PAGE>


27.2            Financial Data Schedule with restated earnings per share in
                accordance with FAS No. 128 for the year ending December 31,
                1996 and the quarters ending March 31, June 30 and September 30,
                1996.

27.3            Financial Data Schedule with restated earnings per share in
                accordance with FAS No.128 for the quarters ending March 31,
                June 30 and September 30, 1997.

(1)             Incorporated by reference from the Company's Registration
                Statement on Form SB-2 (File No. 33-83638-C) filed September 2,
                1994.

(2)             Incorporated by reference from the Company's Form 8-K, dated
                August 24, 1995.

(3)             Incorporated by reference from the Company's Form 10-KSB for the
                year ended December 31, 1994.

(4)             Incorporated by reference from the Company's Form 8-K, Amendment
                No.2, dated January 1, 1995.

(5)             Incorporated by reference from the Company's Registration
                Statement on Form SB-2 (File No. 33-99108) filed November 8,
                1995.

(6)             Incorporated by reference from the Company's Form 10-QSB for the
                nine months ended September 30, 1995.

(7)             Incorporated by reference from Amendment No. 1 to the Company's
                Registration Statement on Form SB-2 (File No. 33-99108) filed
                December 20, 1995.

(8)             Incorporated by reference from the Company's definitive Proxy
                Statement on Schedule 14A with respect to the Company's 1997
                Annual Meeting of Stockholders.

(9)             Incorporated by reference from the Company's Form 10-KSB for the
                year ended December 31, 1996.


(b)             Reports on Form 8-K

                No Reports on Form 8-K were filed by the Company during the
                quarter ended December 31, 1997

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


CONTENTS

================================================================================



INDEPENDENT AUDITORS' REPORT                                                 F-2

CONSOLIDATED FINANCIAL STATEMENTS
     Balance Sheets                                                          F-3
     Statements of Income                                                    F-4
     Statements of Stockholders' Equity                                      F-5
     Statements of Cash Flows                                          F-6 - F-7
     Notes to Financial Statements                                    F-8 - F-20


<PAGE>


INDEPENDENT AUDITORS' REPORT



Board of Directors
Stratasys, Inc.


We have audited the accompanying consolidated balance sheets of Stratasys, Inc.
and Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity, and cash flows for the years then
ended. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.

                                             /s/ Rothstein, Kass & Company, P.C.
                                                 Rothstein, Kass & Company, P.C.


Roseland, New Jersey
February 3, 1998

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
==============================================================================================================

DECEMBER 31,                                                                         1997             1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>               <C>
ASSETS
CURRENT ASSETS
     Cash and cash equivalents                                                 $   9,116,232     $   3,964,968
     Marketable securities                                                         4,441,380         6,572,907
     Accounts receivable, less allowance for returns and
      doubtful accounts of $514,461 in 1997 and $470,000
      in 1996                                                                     11,666,054        10,607,155
     Inventories                                                                   5,492,130         2,648,990
     Prepaid expenses                                                                226,698           344,101
     Deferred income taxes                                                         1,051,000           945,000
                                                                               -------------------------------
          Total current assets                                                    31,993,494        25,083,121
                                                                               -------------------------------
PROPERTY AND EQUIPMENT, less accumulated
 depreciation and amortization                                                     3,445,265         2,184,165
                                                                               -------------------------------
OTHER ASSETS
     Intangible assets, less accumulated amortization                              3,376,038         4,119,857
     Sundry                                                                          169,633            75,576
                                                                               -------------------------------
                                                                                   3,545,671         4,195,433
                                                                               -------------------------------
                                                                               $  38,984,430     $  31,462,719
                                                                               ===============================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Obligations under capital leases, current portion                         $     144,137     $     186,415
     Accounts payable and other current liabilities                                3,066,342         3,622,555
     Unearned maintenance revenues                                                 2,426,270         1,082,044
                                                                               -------------------------------
          Total current liabilities                                                5,636,749         4,891,014
                                                                               -------------------------------
DEFERRED INCOME TAXES                                                                124,000            71,000
OBLIGATIONS UNDER CAPITAL LEASES, less current portion                               136,314            94,977
                                                                               -------------------------------
                                                                                     260,314           165,977
                                                                               -------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
     Common stock, $.01 par value, authorized 15,000,000 shares,
      issued and outstanding 6,079,659 shares in 1997 and 5,517,309
      shares in 1996                                                                  60,797            55,173
     Capital in excess of par value                                               33,556,084        27,394,902
     Accumulated deficit                                                            (529,514)       (1,044,347)
                                                                               -------------------------------
          Total stockholders' equity                                              33,087,367        26,405,728
                                                                               -------------------------------

                                                                               $  38,984,430     $  31,462,719
                                                                               ===============================
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME

================================================================================

YEARS ENDED DECEMBER 31,                             1997             1996
--------------------------------------------------------------------------------

SALES                                            $ 29,636,370     $ 22,919,818

COST OF SALES                                       9,696,465        7,888,516
                                                 -----------------------------

GROSS PROFIT                                       19,939,905       15,031,302
                                                 -----------------------------

COSTS AND EXPENSES
     Research and development                       5,054,767        3,374,039
     Selling, general and administrative           14,676,175        9,485,519
                                                 -----------------------------
                                                   19,730,942       12,859,558
                                                 -----------------------------

OPERATING INCOME                                      208,963        2,171,744
                                                 -----------------------------

OTHER INCOME (EXPENSE)
     Interest and other income                        496,813          585,516
     Interest expense                                 (61,520)         (39,236)
                                                 -----------------------------
                                                      435,293          546,280
                                                 -----------------------------

INCOME BEFORE INCOME TAXES                            644,256        2,718,024

NCOME TAXES (BENEFIT)                                 129,423         (785,000)
                                                 -----------------------------

NET INCOME                                       $    514,833     $  3,503,024
                                                 =============================

INCOME PER COMMON AND COMMON EQUIVALENT SHARE
 Basic                                           $        .09     $        .67
                                                 =============================

 Diluted                                         $        .09     $        .63
                                                 =============================


WEIGHTED AVERAGE NUMBER OF COMMON AND
 COMMON EQUIVALENT SHARES OUTSTANDING
     Basic                                          5,726,339        5,191,002
                                                 =============================

     Diluted                                        6,016,381        5,585,417
                                                 =============================

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>


STRATASYS, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
====================================================================================================================================

YEARS ENDED DECEMBER 31, 1997 AND 1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                                             CAPITAL IN
                                                PREFERRED STOCK           COMMON STOCK        EXCESS OF    ACCUMULATED
                                              SHARES       AMOUNT       SHARES     AMOUNT     PAR VALUE       DEFICIT      TOTAL
<S>                                           <C>       <C>           <C>        <C>         <C>           <C>           <C>
BALANCES, January 1, 1996                     264,000   $    2,640    4,233,876  $   42,339  $22,024,604   $(4,547,371)  $17,522,212

COMMON STOCK ISSUED UPON CONVERSION
 OF PREFERRED STOCK                          (264,000)      (2,640)     379,437       3,794       (1,154)

SALE OF COMMON STOCK, less related expenses                             901,996       9,020    5,341,472                   5,350,492

COMMON STOCK ISSUED AS COMPENSATION                                       2,000          20       29,980                      30,000

NET INCOME                                                                                                   3,503,024     3,503,024
                                            ----------------------------------------------------------------------------------------

BALANCES, December 31, 1996                      --           --      5,517,309      55,173   27,394,902    (1,044,347)   26,405,728

SALE OF COMMON STOCK, less related expenses                             562,350       5,624    6,161,182                   6,166,806

NET INCOME                                                                                                     514,833       514,833
                                            ----------------------------------------------------------------------------------------

BALANCES, December 31, 1997                      --     $     --      6,079,659  $   60,797  $33,556,084   $  (529,514)  $33,087,367
                                            ========================================================================================
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
==============================================================================================

YEARS ENDED DECEMBER 31,                                              1997             1996
----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                              <C>              <C>
   Net income                                                    $    514,833     $  3,503,024
   Adjustments to reconcile net income to
    net cash used in operating activities:
       Deferred income taxes                                          (53,000)        (874,000)
       Depreciation and amortization                                1,019,973          474,902
       Amortization of intangibles                                    917,454          614,027
       Allowance for sales returns                                     68,000           55,588
       Bad debts                                                      204,297          220,000
       Amortization of discounts on marketable securities                              (30,172)
       Common stock issued for services                                                 30,000
       Other                                                                             5,660
       Increase (decrease) in cash attributable to changes
        in assets and liabilities:
           Accounts receivable                                     (1,331,196)      (8,178,145)
           Inventories                                             (2,843,140)      (1,699,176)
           Prepaid expenses                                           117,403         (221,266)
           Accounts payable and other current liabilities            (556,213)       1,979,543
           Unearned maintenance revenues                            1,344,226          710,474
                                                                 -----------------------------

NET CASH USED IN OPERATING ACTIVITIES                                (597,363)      (3,409,541)
                                                                 -----------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from sale of marketable securities                     35,166,222        1,307,198
   Acquisition of marketable securities                           (33,034,695)      (1,540,885)
   Acquisition of property and equipment                           (2,048,884)      (1,432,387)
   Payments for intangible assets                                    (173,635)        (822,924)
   Payments for sundry assets, net                                    (94,057)         (34,452)
                                                                 -----------------------------

NET CASH USED IN INVESTING ACTIVITIES                                (185,049)      (2,523,450)
                                                                 -----------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Repayments of obligations under capital leases                    (233,130)        (178,589)
   Proceeds from sale of common stock                               6,166,806        5,350,492
                                                                 -----------------------------

NET CASH PROVIDED BY FINANCING ACTIVITIES                           5,933,676        5,171,903
                                                                 -----------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                5,151,264         (761,088)

CASH AND CASH EQUIVALENTS, beginning of year                        3,964,968        4,726,056
                                                                 -----------------------------

CASH AND CASH EQUIVALENTS, end of year                           $  9,116,232     $  3,964,968
                                                                 =============================
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS

================================================================================

YEARS ENDED DECEMBER 31,                             1997        1996
--------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION, cash paid during the year for:
   Interest                                        $     61,520    $     39,236
                                                   ============================

   Income taxes                                    $    202,495    $       --
                                                   ============================


SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND
 FINANCING ACTIVITIES, machinery and equipment
 acquired under capital lease obligations          $    232,189    $    120,012
                                                   ============================


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


1.       NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         OPERATIONS

         Stratasys, Inc. and Subsidiaries (collectively the "Company") develops,
         manufactures 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 worldwide.

         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of
         Stratasys, Inc. and its wholly owned subsidiaries. All material
         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," approximates the carrying amounts presented in the
         consolidated balance sheet.

         CASH EQUIVALENTS

         The Company considers all highly liquid debt instruments purchased with
         a maturity of three months or less to be cash equivalents. Cash
         equivalents include a U.S. Treasury note and money market account. As
         of December 31, 1997, and at various times during the year, 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.

         MARKETABLE SECURITIES

         The Company records its marketable securities in accordance with SFAS
         No. 115, "Accounting for Certain Investments in Debt and Equity
         Securities." Marketable securities have been categorized as available
         for sale and, as a result, are stated at fair value. Realized gains or
         losses are determined on the specific identification method and are
         reflected in income.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


1.       NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (CONTINUED)


         INVENTORIES

         Inventories are stated at the lower of cost, on the first in, first out
         method, or market.

         IMPAIRMENT OF LONG-LIVED ASSETS

         The Company 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.

         DEPRECIATION AND AMORTIZATION

         Depreciation and amortization is computed using the straight line
         method over the estimated useful lives of the assets ranging from 3-5
         years.

         INTANGIBLE ASSETS

         Intangible assets are being amortized over their estimated useful lives
         using the straight line method as follows:

                RPS Technology                                     11 years
                Capitalized software development costs              3 years
                Patents                                            17 years
                Copyrights and licensed internal code               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.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


1.       NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (CONTINUED)

         UNEARNED MAINTENANCE REVENUES

         Maintenance revenues are amortized over the term of the related
         maintenance contracts, principally one year.

         REVENUE RECOGNITION

         The Company recognizes revenues from the sale of RPS machines when
         shipped. The Company has established warranty programs which enable
         customers to return a RPS machine. The Company establishes valuation
         allowances for estimated returns at the time of shipment. In addition,
         reserves for customer discounts are recorded when revenues are
         recognized.

         Software revenues are recorded based on Statement of Position 91-1 (SOP
         91-1), "Software Revenue Recognition," which provides for recognizing
         revenues from software product sales when a non-cancelable license
         agreement has been signed, the product has been delivered, all
         significant obligations have been satisfied and collectibility of the
         receivable is reasonably certain. The Company sells its software as an
         integral part of the RPS machines.

         Service revenues, excluding maintenance contracts, are recognized at
         the time the services are performed.

         RESEARCH AND DEVELOPMENT COSTS

         Expenditures for research, development and engineering of products and
         manufacturing processes are expensed as incurred.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


1.       NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (CONTINUED)

         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 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.

         INCOME PER COMMON SHARE

         Effective December 31, 1997, the Company adopted Statement of Financial
         Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS
         No. 128 requires dual presentation of basic and diluted income per
         share for all periods presented. Basic income per 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 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 shared in the income
         of the Company. Prior period income per share information has been
         restated as required by SFAS No. 128. The difference between the number
         of shares used to compute basic income per share and diluted income per
         share relates to additional shares to be issued (290,042 in 1997 and
         394,415 in 1996) upon the assumed exercise of stock options and
         warrants, net of shares hypothetically repurchased at the average
         market price with the proceeds of exercise.

         USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
         accepted accounting principles 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 financial statements and the reported amounts of revenues
         and expenses during the reporting period. Actual results could differ
         from those estimates.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


2.       ACCOUNTS RECEIVABLE

         At December 31, 1997 and 1996, accounts receivable included balances
         due from foreign entities of approximately $5,732,000 and $3,711,000,
         respectively.


3.       INVENTORIES

         Inventories consist of the following at December 31:

                                   1997             1996

            Finished goods      $  2,318,013   $  1,295,803
            Work in process          276,366        264,259
            Raw materials          2,897,751      1,088,928
                                ---------------------------
                                $  5,492,130   $  2,648,990
                                ===========================


4.       PROPERTY AND EQUIPMENT

         Property and equipment consist of the following at December 31:

                                                     1997            1996

            Machinery and equipment             $  1,108,874    $    706,411
            Computer equipment and
             software                              1,813,069       1,061,312
            Office equipment                         460,456         235,572
            Leasehold improvements                   911,618         383,430
            Equipment under capital leases           851,950         635,155
                                                ----------------------------
                                                   5,145,967       3,021,880
            Accumulated depreciation
             and amortization (including
             $154,881 in 1997 and $218,597
             in 1996 under capital leases)         1,700,702         837,715
                                                ----------------------------
                                                $  3,445,265    $  2,184,165
                                                ============================

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


5.       INTANGIBLE ASSETS

         Intangible assets consist of the following at December 31:

                                                  1997            1996

            RPS Technology                  $  2,558,532   $  2,558,532
            Capitalized software
             development costs                 2,009,739      1,886,768
            Patents                              495,881        445,868
            Copyrights and licensed
             internal code                        56,856         56,856
            Other                                 17,488         16,837
                                            ---------------------------
                                               5,138,496      4,964,861
            Accumulated amortization           1,763,458        845,004
                                            ---------------------------
                                            $  3,376,037   $  4,119,857
                                            ===========================


         For the years ended December 31, 1997 and 1996, amortization for
         computer software development costs charged to operations was $639,219
         and $339,960, respectively.

         Included in research and development costs for the years ended December
         31, 1997 and 1996 are computer software development expenditures of
         $1,625,188 and $414,026, respectively.


6.       ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES

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

                                                  1997           1996

            Trade                            $  1,474,061   $  1,753,643
            Compensation and related
             benefits                             928,656      1,056,552
            Reserve for warranty expenses         225,425        362,912
            Other                                 438,200        449,448
                                             ---------------------------

                                             $  3,066,342   $  3,622,555
                                             ===========================

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


7.       OBLIGATIONS UNDER CAPITAL LEASES

         Aggregate minimum lease payments for obligations under capital leases
         in the years subsequent to December 31, 1997 are as follows:

            YEAR ENDING DECEMBER 31
                       1998                                 $   186,966
                       1999                                     115,430
                       2000                                      34,428
                                                            -----------
            Total minimum lease payments                        336,824
            Less amounts representing interest                   56,373
                                                            -----------
            Present value of minimum lease payments             280,451
            Less current portion                                144,137
                                                            -----------

                                                            $   136,314
                                                            ===========


8.       INCOME TAXES

         The tax effects of principal temporary differences are shown in the
         following table at December 31:

                                                        1997            1996

            Net operating loss
             carryforwards                         $     54,000   $    142,000
            Depreciation                               (116,000)      (139,000)
            Amortization                                 (8,000)        68,000
            Allowance for doubtful accounts             188,000        142,000
            Reserve for warranty expenses                92,000        147,000
            Reserve for sales returns, net               21,000         24,000
            Federal minimum tax credit
             carryforwards                               74,000         14,000
            Research and development tax
             credit carryforwards                       622,000        476,000
                                                   ---------------------------

                                                   $    927,000   $    874,000
                                                   ===========================

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


8.       INCOME TAXES (CONTINUED)

         At December 31, 1997, the Company had state net operating loss
         carryforwards of approximately $824,000, which can be utilized against
         future taxable income and expire in various years through 2009.

         At December 31, 1997, the Company had research and development tax
         credit carryforwards of approximately $622,000, which can be utilized
         against future federal income tax and expire in various years through
         2017.

         The components of income taxes (benefit) for the years ended December
         31, 1997 and 1996 are as follows:

                                              1997               1996

            FEDERAL
             Current                     $    175,423     $          -
             Deferred                        (102,000)         (699,000)
                                         ------------------------------
                                               73,423          (699,000)
                                         ------------------------------

            STATE AND OTHER
              Current                           7,000            82,000
              Deferred                         49,000          (168,000)
                                         ------------------------------
                                               56,000           (86,000)
                                         ------------------------------

                                         $    129,423     $    (785,000)
                                         ==============================

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


8.       INCOME TAXES (CONTINUED)

         A reconciliation of income tax expense to the federal statutory rate is
         as follows for the years ended December 31:

                                                       1997              1996

            Federal statutory rate                     34.0 %           34.0 %

            Foreign sales corporation exclusion        (2.7)

            Loss of foreign subsidiary                  9.0

            State income tax                            0.7              2.0

            Change in valuation allowance                              (66.7)

            Permanent differences and other             3.4              1.8

            Utilization of research and
              development credit                      (24.4)
                                                    ----------------------------

            Effective income tax rate                  20.0 %          (28.9)%
                                                    ============================


9.       COMMITMENTS AND CONTINGENCIES

         The Company leases its facilities under leases which expire through
         2000.

         Aggregate future minimum annual rental payments are as follows:

            YEAR ENDING DECEMBER 31,         1998           1999         2000

              Minimum rentals            $  674,658     $  482,062    $  51,952
              Less: sublease payments       (84,000)       (84,000)
                                         --------------------------------------

              Net rental payments        $  590,658     $  398,062    $  51,952
                                         ======================================


         Rent expense for the years ended December 31, 1997 and 1996 was
         approximately $800,000 and $364,000, respectively.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


10.      PREFERRED STOCK

         On January 1, 1996, the holder of the preferred stock converted all
         264,000 shares of the Company's preferred stock into 379,437 shares of
         the Company's common stock.


11.      COMMON STOCK

         In 1996, the Company's Certificate of Incorporation was amended to
         increase the number of authorized shares of common stock to 15,000,000.

         During 1996, the Company issued 2,000 shares of common stock as
         compensation to the Chief Operating Officer of the Company and charged
         operations for $30,000.

         During 1997 and 1996, stock options to purchase 200,298 and 240,353
         shares, respectively, of the Company's common stock were exercised with
         proceeds to the Company of approximately $1,156,000 and $1,198,000,
         respectively. In addition during 1997 and 1996, warrants to purchase
         7,007 and 662,643 shares of the Company's common stock were exercised
         with net proceeds to the Company of approximately $31,000 and
         $4,153,000, respectively.


12.      STOCK OPTIONS AND WARRANTS

         The Company has established three employee stock option plans, the
         Stratasys, Inc. Employee Stock Option Plan #1 (Plan 1), Stratasys, Inc.
         1994 Stock Plan (Plan 2) and Stratasys, Inc. 1994 -2 Stock Plan (Plan
         3). The three plans provide for the granting of options to qualified
         employees of the Company, independent contractors, consultants and
         other persons to purchase 1,300,000 shares of common stock.

         All the options under Plan 1 have been granted and the plan expires
         April 19, 2001. Under Plan 2, 177,042 options have been granted. Since
         the adoption of Plan 3, options to purchase an aggregate of 1,019,428
         shares of common stock have been granted. All options under the above
         plans are granted at a price not less than the fair market value of the
         Company's common stock at dates of grant and are exercisable over five
         years.

         During 1997, the Company granted non-qualified stock options to
         purchase 206,897 shares of common stock at an exercise price of $13.50
         per share. These options are immediately exercisable and expire one
         year from the date of issue. The option price per share for all grants
         were not less then the market price of the Company's common stock at
         the date of grant.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================


12.      STOCK OPTIONS AND WARRANTS (CONTINUED)

         The following summarizes the information relating to outstanding stock
         options and the activity during 1997 and 1996:

                                                                        WEIGHTED
                                          NUMBER                        AVERAGE
                                            OF          PER SHARE       EXERCISE
                                          SHARES       OPTION PRICE      PRICE

            Shares under option
             at January 1, 1996          733,902     $1.59 -  $20.69    $ 11.39
            Granted in 1996              314,414     15.56 -   23.13      17.53
            Exercised in 1996           (240,353)     1.59 -    6.00       5.27
            Forfeited in 1996            (75,064)     5.25 -   23.13      18.25
                                       ----------------------------------------

            Shares under option
             at December 31, 1996        732,899      1.59 -   21.44      10.15
            Granted in 1997              845,471     10.94 -   23.75      14.97
            Exercised in 1997           (200,298)     1.59 -   16.63       9.18
            Forfeited in 1997           (300,274)     5.38 -   16.62      12.73
                                       ----------------------------------------

            Shares under option
             at December 31, 1997      1,077,798     $1.59 -  $23.75    $ 14.09
                                       ========================================

            Shares exercisable at
             December 31, 1997           516,286     $1.59 -  $23.75    $ 11.89
                                       ========================================

<PAGE>


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 outstanding warrants and the
         activity during 1997 and 1996:

                                                                       WEIGHTED
                                        NUMBER                         AVERAGE
                                        OF            PER SHARE        EXERCISE
                                        SHARES      WARRANT PRICE       PRICE

            Shares under warrants
             at January 1, 1996        899,048    $ 3.00  -  $21.00    $  8.86

            Granted in 1996             13,000     18.50  -   18.50      18.50

            Exercised in 1996         (661,643)     3.00  -   18.00       6.36
                                       ---------------------------------------

            Shares under warrants
             at December 31, 1996      250,405      5.80  -   21.00      15.95

            Granted in 1997            710,090     13.50  -   14.50      14.08

            Exercised in 1997           (7,007)     5.80                  5.80
                                       ---------------------------------------

            Shares under warrants
             at December 31, 1997      953,488    $ 5.80  -  $21.00    $ 14.60
                                       =======================================

            Shares exercisable at
             December 31, 1997         953,488    $ 5.80  -  $21.00    $ 14.60
                                       =======================================


         The warrants outstanding at December 31, 1997 expire between July 1998
         and March 2001.

         The Company has adopted the disclosure-only provisions of SFAS No. 123,
         " Accounting for Stock-Based Compensation." Accordingly, no
         compensation cost has been recognized for the Company's three stock
         option plans and stock purchase warrants.

<PAGE>


STRATASYS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================




12.      STOCK OPTIONS AND WARRANTS (CONTINUED)

         Had compensation cost for the Company's three stock option plans and
         stock purchase warrants been determined based on the fair value at the
         grant date of awards in 1997 and 1996 consistent with the provisions of
         SFAS 123, the Company's net income and earnings per share would have
         been reduced to the pro forma amounts indicated below:

                                                          1997           1996

            Net Income - as reported                  $  514,833    $  3,503,024
            Net income (loss) - pro forma               (271,113)      2,865,041
            Diluted earnings per share - as reported         .09             .63
            Diluted earnings (loss) per share -
             pro forma                                      (.05)            .51


13.      EXPORT SALES

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

                                                        1997            1996

             Europe                                $  5,735,000    $  5,916,000
             Asia                                     6,057,000       2,180,000
             Other                                      847,000         769,000
                                                   ----------------------------

                                                   $ 12,639,000    $  8,865,000
                                                   ============================


14.      QUARTERLY RESULTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                       MARCH 31        JUNE 30     SEPTEMBER 30    DECEMBER 31
<S>                                 <C>            <C>            <C>            <C>
            1997
              Net sales             $   5,208,527  $   6,965,334  $   7,345,471  $  10,117,038
              Gross profit              3,445,164      4,651,832      4,559,308      7,283,601
              Net income (loss)          (404,414)       (82,884)        50,763        951,368
              Income (loss) per
               common share:
                 Basic                       (.07)          (.01)           .01            .16
                 Dilutive                    (.07)          (.01)           .01            .16

            1996
              Net sales             $   2,752,465  $   5,316,879  $   4,402,436  $  10,448,038
              Gross profit              1,844,062      3,446,578      2,905,016      6,835,646
              Net income                   10,163        572,911         63,847      2,856,103
              Income per common
               share:
                 Basic                         -             .11            .01            .52
                 Dilutive                      -             .10            .01            .52
</TABLE>

<PAGE>


                                   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.



Dated:  March 26, 1998

                                         STRATASYS, INC.

                                         By: /s/ S. Scott Crump
                                             -------------------------
                                             S. Scott Crump, President


         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.

<TABLE>
<S>                                 <C>                                         <C>
/s/ S. Scott Crump                  Chairman of the Board of Directors,         March  26, 1998
------------------------------      President, Chief Executive Officer,
S. Scott Crump                      Treasurer, (Principal Executive Officer)



 /s/ Thomas W. Stenoien             Chief Financial Officer                     March 26, 1998
 -------------------------          (Principal Financial Officer)
Thomas W. Stenoien



/s/ Ralph E. Crump                  Director                                    March 26, 1998
-----------------------------
Ralph E. Crump



/s/ Clifford H. Schwieter           Director                                    March 26, 1998
---------------------------
Clifford H. Schwieter



/s/ Arnold J. Wasserman             Director                                    March 26, 1998
-------------------------
Arnold J. Wasserman



/s/ Gregory L. Wilson               Director                                    March 26, 1998
---------------------------
Gregory L. Wilson

</TABLE>

<PAGE>


EXHIBIT INDEX


Exhibit No.     Description
-----------     -----------

3.1             Restated Certificate of Incorporation of the Company. (3)


3.2             Amendment to Certificate of Incorporation of the Company. (6)


3.3             By-Laws of the Company. (1)


4.1             Agent's Warrant issued to R.J. Steichen & Company dated November
                12, 1993. (1)


4.2             Agent's Warrant issued to R.J. Steichen & Company dated December
                13, 1993. (1)


4.3             Form of Common Stock purchase warrants issued by the Company
                dated as of November 12, 1993 and December 13, 1993. (1)


4.4             Form of Common Stock purchase warrant issued by the Company in
                its August 1995 private placement (2).


4.5             Form of 3-year Common Stock purchase warrants issued by the
                Company in its November 1995 offering under Regulation D and
                Regulation S. (5)


4.6             Form of 3-month Common Stock purchase warrants issued by the
                Company in its November 1995 offering under Regulation D and
                Regulation S. (5)


4.7             Form of Placement Agent's warrant issued by the Company in its
                November 1995 offering under Regulation D and Regulation S. (5)


4.8             Form of warrant issued to Sunrise Securities Corp. by the
                Company in connection with its November 1995 offering under
                Regulation D and Regulation S. (5)


4.9             Form of substitute warrant to purchase an aggregate of 413,794
                shares of Common Stock at $14.50 per share expiring on October
                31, 2000.


4.10            Form of substitute warrant to purchase an aggregate of 296,296
                shares of Common Stock at $13.50 per share expiring on October
                31, 2000.

<PAGE>


10.1            Non-Competition Agreement between the Company and S. Scott
                Crump, dated October 15, 1990. (1)


10.2            Non-Competition Agreement between the Company and S. Lisa Crump,
                dated October 15, 1990. (1)


10.3            Employee Confidentiality Agreement between the Company and S.
                Scott Crump, dated October 15, 1990. (1)


10.4            Employee Confidentiality Agreement between the Company and Lisa
                Crump, dated October 15, 1990. (1)


10.5            Stratasys, Inc. Employee Stock Option Plan #1. (1)


10.6            Amended and Restated Stratasys, Inc. 1994 Stock Plan. (3)


10.7            Second Amended and Restated Stratasys, Inc. 1994-2 Stock Plan.
                (8)


10.8            Asset Purchase Agreement between the Company and IBM dated
                January 1, 1995. (4)


10.9            Equipment Lease Agreement between the Company and IBM dated
                January 1, 1995. (4)


10.10           Assignment, dated October 23, 1989, from S. Scott Crump to the
                Company with respect to a patent application for an apparatus
                and method for creating three-dimensional objects. (7)


10.11           Assignment, dated June 5, 1992, from S. Scott Crump to the
                Company with respect to a patent application for a modeling
                apparatus for three dimensional objects. (7)


10.12           Assignment, dated June 1, 1994, from S. Scott Crump, James W.
                Comb, William R. Priedeman, Jr., and Robert Zinniel to the
                Company with respect to a patent application for a process and
                apparatus of support removal for three-dimensional modeling. (7)


10.13           Lease between the Company and Richard A. Burke, dated October
                14, 1996. (9)

<PAGE>


21.1            Subsidiaries of the Company. (5)


23.1            Consent of Rothstein, Kass & Company, P.C.


27.1            Financial Data Schedule.


27.2            Financial Data Schedule with restated earnings per share in
                accordance with FAS No. 128 for the year ending December 31,
                1996 and the quarters ending March 31, June 30 and September 30,
                1996.


27.3            Financial Data Schedule with restated earnings per share in
                accordance with FAS No.128 for the quarters ending March 31,
                June 30 and September 30, 1997.


(1)             Incorporated by reference from the Company's Registration
                Statement on Form SB-2 (File No. 33-83638-C) filed September 2,
                1994.


(2)             Incorporated by reference from the Company's Form 8-K, dated
                August 24, 1995.


(3)             Incorporated by reference from the Company's Form 10-KSB for the
                year ended December 31, 1994.


(4)             Incorporated by reference from the Company's Form 8-K, Amendment
                No.2, dated January 1, 1995.


(5)             Incorporated by reference from the Company's Registration
                Statement on Form SB-2 (File No. 33-99108) filed November 8,
                1995.


(6)             Incorporated by reference from the Company's Form 10-QSB for the
                nine months ended September 30, 1995.


(7)             Incorporated by reference from Amendment No. 1 to the Company's
                Registration Statement on Form SB-2 (File No. 33-99108) filed
                December 20, 1995.


(8)             Incorporated by reference from the Company's definitive Proxy
                Statement on Schedule 14A with respect to the Company's 1997
                Annual Meeting of Stockholders.


(9)             Incorporated by reference from the Company's Form 10-KSB for the
                year ended December 31, 1996.