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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

|                                               |  |                                                                                         
|---------------------------------------------- |  | ----------------------------------------------------------------------------------------
|x                                              |  | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
|                                               |  |                                                                                         
|For the fiscal year ended December 31, 2002 or
|                                               |  |                                                                                         
|o                                              |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|                                               |  |                                                                                         
|For the transition period from         to     
|                                               |  |                                                                                         
|Commission file number 1-13400                

STRATASYS, INC.

(Exact Name of Registrant as Specified in Its Charter)


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

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

(952) 937-3000
(Registrants Telephone Number, Including Area Code)

Securities Registered Under Section 12(b) of the Act:

|                             |  |                                          
|---------------------------- |  | -----------------------------------------
|Title of Each Class          |  | Name of Each Exchange on Which Registered
|Common stock, $.01 par value |  | The Pacific Exchange Inc.                

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

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes x No o

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act). Yes o No x

The aggregate market value of the Registrants Common Stock held by
non-affiliates of the Registrant as of June 28, 2002, the last business day of
the Registrants most recently completed second quarter, was approximately
$33,321,771. On such date, the closing price of the Registrants Common Stock,
as quoted on the Nasdaq National Market, was $7.54.

The Registrant had 5,468,373 shares of common stock outstanding as of
March 19, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of the Annual Report on Form 10-K is herein incorporated by
reference from the Registrants Definitive Proxy Statement to be filed with the
Securities and Exchange Commission with respect to the Registrants Annual
Meeting of Stockholders scheduled to be held on May 6, 2003.



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TABLE OF CONTENTS



|                                                |                                                                                               |  |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                | ITEM 1. BUSINESS                                                                             
|                                                | ITEM 2. PROPERTIES                                                                           
|                                                | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS                                      
|PART II                                        
|                                                | ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                             
|                                                | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                                                | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                | ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                       
|                                                | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                | ITEM 14: CONTROLS AND PROCEDURES                                                             
|PART 1V                                        
|                                                | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.                    
|CONSOLIDATED BALANCE SHEETS                    
|CONSOLIDATED STATEMENTS OF OPERATIONS          
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                                                | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                   
|SIGNATURES                                     
|CONSENT OF ROTHSTEIN, KASS & COMPANY, P.C.     
|CERTIFICATION OF CEO                           
|CERTIFICATION OF CFO                           



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ITEM 1. BUSINESS.

GENERAL DEVELOPMENT OF BUSINESS

Stratasys manufactures and sells a line of rapid prototyping (RP) and
three dimensional (3-D) printing devices that create physical models from
computerized designs. We were incorporated in Delaware in 1989 and our
executive offices are located in Eden Prairie, Minnesota. Our rapid prototyping
systems are based on our core patented fused deposition modeling
(FDM®)
technology or on our patented Genisys® technology. We sold our first product,
the 3-D Modeler®, commercially in April 1992 and introduced our second product,
the Benchtop, in June 1993. Other significant developments in our business are
set forth below:



| |  |  | In 1996 and 1997, we introduced several enhanced versions of
our FDM system. In 1997, we also introduced our Genisys system,
which we developed from technology that we acquired from
International Business Machines Corporation (IBM) in 1995.                                                                                                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In January 1998, we introduced the FDM Quantum®, which
offered large modeling capabilities (the largest commercial build
envelope in the industry) combined with significant speed and
performance enhancements as compared with the FDM 2000. The FDM
Quantum incorporated MagnaDrive technology that allows the extrusion
heads to move on a bed of air while directed by electro-magnetic
motion-control devices.            
|
| |  |  | In December 1998, we acquired RP technology that we
subsequently used to develop our Prodigy and Dimension systems.                                                                                                                                                                                                                                                                                                           
|
| |  |  | In April 1999, we introduced the GenisysXs. This system
offered enhanced performance and speed improvements over the
original Genisys.                                                                                                                                                                                                                                                                                          
|
| |  |  | In August 1999, we introduced the FDM 3000 system based on
our core FDM technology. The FDM 3000 features a build envelope 60%
larger than our Benchtop systems. In conjunction with the FDM 3000,
we introduced WaterWorks. The patented WaterWorks process allows
for the easy removal of supports from a completed prototype model by
simple immersion into a water-based solution.                                         
|
| |  |  | In July 2000, we introduced Prodigy, which was a low-cost RP
system that produced parts in a durable, plastic compound called
ABS. Prototypes made from ABS can be used for functional testing.
Prodigy offered office modeling, speed, ease of use, and networking
capabilities at a competitive price.                                                                                                                        
|
| |  |  | In November 2000, we introduced the FDM Maxum. Maxum offers
significant speed enhancements over our previously released Quantum
system. Maxum features WaterWorks and InSight, our preprocessing
software that increases build speed and improves the design
engineers control and efficiency over the entire build process.
InSight was separately introduced in February 2001 as a replacement
for our QuickSlice software.
|
| |  |  | In May 2001, we introduced the FDM Titan. Titan is based on
our core FDM technology and offers users the capability to model in
polycarbonate, a durable engineering thermoplastic material that
offers strength and superior heat and chemical resistance. The
capability of modeling in ABS was added to Titan in December 2001.                                                                                             
|
| |  |  | In February 2002, we introduced the Dimension. Dimension
offers ABS modeling capabilities on a desktop 3-D printer platform.
We believe that Dimension, introduced at $29,900, is the lowest
priced system in the rapid prototyping market.                                                                                                                                                                                     





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| |  |  | In March 2002, we introduced the Prodigy Plus. This system
incorporates our WaterWorks soluble support system on the Prodigy
platform, and is further enhanced by the addition of our InSight
software. Commercial shipments commenced in May 2002.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

DESCRIPTION OF BUSINESS

We are a leader in the office prototyping market, which is referred to as
rapid prototyping. We develop, manufacture and market a family of rapid
prototyping devices and 3-D printers 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. Our computerized modeling systems use our proprietary
technology to make models and prototypes directly from a designers
three-dimensional CAD in a matter of hours.

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



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

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

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

APPLICATIONS FOR RAPID PROTOTYPING

RP is the physical modeling of a design using a special class of machine
technology. RP systems take data created from CAD data, CT and MRI scan data or
3-D digitized data to quickly produce models, using an additive approach.
Traditionally, RP has been used by organizations to accelerate product
development. Many companies use RP to test form, fit and function to help
improve the time to market. An emerging market segment for RP systems is Rapid Tooling (RT). Although not clearly defined today, RT is
driven by RP systems and allows for the production of molds directly from CAD
data or indirectly by producing custom mold inserts.

During
the past two years, the largest growth segment of the RP market has
been 3-D printing products. 3-D printers are low cost RP systems (typically
under $50,000) that reside in the design/engineering office
environment,
allowing the product development organizations quick access to an RP system.
Based upon data furnished by Terry Wohlers in his 2002 report, we believe we
have shipped more than 25% of all RP Systems since the industrys inception, an
improvement over the 23% realized through 2001.

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We have shipped over 2,300 systems. A wide variety of design and
manufacturing organizations use our systems.

|                                        |  |                          |  |   |  |                                    
|--------------------------------------- |  | ------------------------ |  | - |  | -----------------------------------
|Current applications include:          
|                                        |  |                          |  |   |  |                                    
|                                       |  | Aerospace                |  |  |  | Automotive                         
|                                        |  |                          |  |   |  |                                    
|                                       |  | Consumer Products        |  |  |  | Business Machines                  
|                                        |  |                          |  |   |  |                                    
|                                       |  | Educational Institutions |  |  |  | Electronics                        
|                                        |  |                          |  |   |  |                                    
|                                       |  | Medical Systems          |  |  |  | Medical Analysis                   
|                                        |  |                          |  |   |  |                                    
|                                       |  | Mold Making              |  |  |  | Tooling                            
|                                        |  |                          |  |   |  |                                    
|Additional future applications include:
|                                        |  |                          |  |   |  |                                    
|                                       |  | Architectural design     |  |  |  | Rapid manufacturing of custom parts
|                                        |  |                          |  |   |  |                                    
|                                       |  | Free-form graphic design |  |  |  | Secondary tooling and mold-making  

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

PRODUCTS

Modeling Equipment

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

Each of our products is based upon our patented FDM process or from
technology acquired from IBM and is sold as an integrated system. The system
consists of the prototyping machine, the software to convert the CAD designs
into a machine compatible format, and modeling materials. Each of our products
is office environment compatible and does not require an operator to be present
while it is running.

Our family of rapid prototyping systems affords a customers product
development team, including engineers, designers and managers, the ability to
create prototypes through all stages of the development cycle. Our products
meet the needs of a very demanding and diverse industrial base by offering a
wide range of capability and price from which to choose. The domestic list prices of our systems range
from $29,900 for a Dimension to $250,000 for the FDM Maxum. We also offer
special pricing for trade-in systems and upgrades.

The Dimension is a 3-D printer allowing a user to create parts in ABS
plastic. ABS offers the part strength required for true form, fit and function
testing. Dimension operates in the office, offering speed, ease of use and
networking capabilities at a competitive price. Dimension features our Catalyst
 software, which offers a single push-button operation by automating all of
the required build procedures. We introduced Dimension in February 2002, although
commercial shipments to selected resellers commenced in December 2001. We
believe that Dimension, at a list price of $29,900, is the lowest-priced system
in the RP market.

The Prodigy Plus is our lowest price FDM System that incorporates our
WaterWorks soluble support system and InSight Software. The patented WaterWorks
process allows for the easy removal of supports from a completed prototype
model by simple immersion into a water-based solution. The support material is
dissolved, resulting in a cleaned prototype that eliminates most
post-processing requirements. Prodigy Plus is further enhanced by the addition
of our InSight software. InSight offers the customer a more flexible array of
features allowing for a range of fully automatic operation to individual and
customized functions for each step of the build process. With the combination
of ABS, WaterWorks and InSight software, the Prodigy Plus offers the customer
hands free operation of the entire

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prototype building process. The Prodigy
Plus was introduced in March 2002, and we have sold it to customers in a number
of industries since that time.

Our FDM benchtop products have a long history of feature improvements
produced to meet customer demands. The FDM 3000 is the latest in the benchtop
product line that offers a greater build envelope of nearly twice the size of
the Dimension and Prodigy Plus and is capable of using a wide range of
materials including ABS, ABSi, elastomer and investment casting wax. In
conjunction with the commercial release of the FDM 3000 in late 1999, we
introduced the WaterWorks support removal system.

The FDM Titan was introduced in the summer of 2001 and provides a unique
set of features that addresses demanding customer requirements. Titan offers
users the capability to model with a wide range of engineering thermoplastic
materials including polycarbonate (PC), ABS, and other thermoplastic
materials that we expect to release, and also offers WaterWorks. These modeling
materials provide superior strength coupled with heat and chemical resistance.
This combination of properties allows engineers and designers a variety of
options to meet demanding industrial prototyping and design requirements. Titan
has a build envelope more than twice the size of the FDM 3000 and uses new
technology based on look ahead motion profiles that provide faster build
speeds. The Titan also incorporates enhanced ease of use features, such as the
InSight software, automatic material loading and supply changeover.

The FDM Maxum offers significant speed and feature detail enhancements
over our previously released products. It incorporates MagnaDrive technology,
which allows the extrusion head to float on a bed of air while being controlled
through electromagnet devices. This offers significant speed and performance
enhancements as compared with our other systems. The Maxum also delivers a fine
feature detail capability allowing customers to make prototypes of very small
parts. This feature was developed in conjunction with Fuji Film Corp of Japan.
Features as small as .005 x .010 may be built allowing for increased
prototyping capabilities for the telecommunications, electrical connector and
camera and photography industries. The FDM Maxum was released in late 2000.

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

Modeling Material

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

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



| |  |  | an elastomer material for applications requiring strength,
durability and flexibility, as used in seals or tubing                                                                                                                        
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | polycarbonate, an engineering thermoplastic material, which
is used commercially for demanding applications in a number of
industries; polycarbonate offers superior impact strength coupled
with resistance to heat and corrosive agents

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| |  |  | the hard polymer material ABS (named for its three initial
monomers, acrylonitrile, butadiene and styrene and which is also
known as an engineering thermoplastic material), which is used
commercially to make products such as cell phones, computer cases
and toys
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | ABSi, a higher grade ABS that is translucent, which features
greater impact strength than ABS; it can also be used in medical
applications including autoclave sterilization                                                                                         
|
| |  |  | a polyester material used for general purpose modeling applications                                                                                                                                                                                                  
|
| |  |  | a release material, which is used for support and removed from the final model                                                                                                                                                                                       
|
| |  |  | a water-soluble material, which is used for support during
the build process and which is later dissolved from the finished
prototype in products that employ our WaterWorks system.                                                                                 
|
| |  |  | an investment casting wax                                                                                                                                                                                                                                            

Each material has specific characteristics that make it appropriate for
various applications. The ability to use different materials allows the user to
match the material to the end use application of the prototype, whether it is a
pattern for tooling, a concept model, or a functional prototype. ABS is also
offered in numerous colors including black, red, blue, yellow and green. We
offer a program to create custom colors for unique customer needs. In 2002, we
announced our intention to introduce polyphenylsulfone (PPSF). A specialty
thermoplastic material, PPSF offers excellent mechanical properties while being
subjected to demanding thermal and chemical environments. PPSF is used to
prototype parts for numerous industries including automotive, fluid and
chemical handling, aerospace, and medical sterilization. We expect to
commercially release PPSF in the second quarter of 2003.

GenisysXs uses only one type of modeling material, a polyester, 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 system. Polyester provides a unique
blend of properties of cost, durability, and easy handling for concept models.

The modeling filament and wafers are consumable products that provide us
additional recurring revenue.

OPERATING SOFTWARE

In addition to the prototyping machines and materials, we offer two
software products that convert the three-dimensional CAD databases into the
appropriate two-dimensional data formats for our family of prototyping
machines. The software products also provide a wide range of features,
including automatic support generation, part scaling, positioning and
nesting,
as well as geometric editing capabilities.

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

InSight is used on the remainder of our products  Prodigy Plus, FDM 3000,
FDM Titan and the FDM Maxum. It has a broad set of features that facilitate the
demanding applications ranging from a single push button for automatic
pre-processing to individual editing and manipulation tools for each process
step.

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

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MARKETING, DISTRIBUTION AND CUSTOMERS

Marketing and Customers

The focus of our marketing begins with the identification of customer
needs. We feature a broad array of products that allow us to meet the precise
needs of engineers, designers, educators, marketers and manufacturers. Our
products range from the Dimension, priced at $29,900, to a high-performance FDM
Maxum, priced at $250,000. We currently have three other products between these
price points, meeting a variety of material, size and performance criteria.

|                                                                |  |                                   |  |   |  |                   
|--------------------------------------------------------------- |  | --------------------------------- |  | - |  | ------------------
|We have sold systems to the following representative customers:
|                                                                |  |                                   |  |   |  |                   
|                                                               |  | General Motors Corporation        |  |  |  | Harley Davidson   
|                                                                |  |                                   |  |   |  |                   
|                                                               |  | Intel                             |  |  |  | Georgia Tech      
|                                                                |  |                                   |  |   |  |                   
|                                                               |  | Boeing                            |  |  |  | Xerox             
|                                                                |  |                                   |  |   |  |                   
|                                                               |  | University of Wisconsin - Madison |  |  |  | InFocus           
|                                                                |  |                                   |  |   |  |                   
|                                                               |  | Callaway Golf                     |  |  |  | Lockheed Martin   
|                                                                |  |                                   |  |   |  |                   
|                                                               |  | Lego                              |  |  |  | Lever             
|                                                                |  |                                   |  |   |  |                   
|                                                               |  | Honda                             |  |  |  | Ford Motor Company
|                                                                |  |                                   |  |   |  |                   
|                                                               |  | St. Jude Medical                  |  |  |  | NASA              

We have also sold systems to service bureaus, universities and
distributors in the United States and abroad. We sell complete rapid
prototyping systems as well as supplies and services.

No customer accounted for more than 10% of sales in 2002, 2001, or 2000.

|                                                                             |  |                         |  |   |  |                          
|---------------------------------------------------------------------------- |  | ----------------------- |  | - |  | -------------------------
|We use a variety of tactical marketing methods to reach potential customers:
|                                                                             |  |                         |  |   |  |                          
|                                                                            |  | Web-based marketing     |  |  |  | Advertisements           
|                                                                             |  |                         |  |   |  |                          
|                                                                            |  | Trade magazine articles |  |  |  | Direct mailings          
|                                                                             |  |                         |  |   |  |                          
|                                                                            |  | Brochures               |  |  |  | Trade show demonstrations
|                                                                             |  |                         |  |   |  |                          
|                                                                            |  | Telemarketing programs  |  |  |  | Web sites                
|                                                                             |  |                         |  |   |  |                          
|                                                                            |  | Videos                  |  |  |  | Broadcast e-mail         
|                                                                             |  |                         |  |   |  |                          
|                                                                            |  | Press releases          |  |  |  | Webinars                 

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

FDM Sales Organization

In early 2003, we consolidated our FDM sales organization by structuring
sales, service, and marketing into one group. The focus of this new
organization is on our high-performance RP systems that feature engineering
modeling materials, high quality surface finish, high accuracy and feature
detail, and excellent throughput. This group will market, sell and service our
Maxum, Titan, FDM 3000, and Prodigy Plus systems.

The FDM sales organization is worldwide. In North America, we have
increased the efficiency of our dedicated direct sales force by reducing the
number of regions from three to two. Both sales management and support have
been consolidated. Regional sales and service offices continue to be located
in Southfield, Michigan and Ontario, California.

Internationally, our third-party distributors continue to sell and service
our products. New distributor relationships have been established in Australia,
Taiwan, China, and Latin America. Sales management and technical support have
been increased to support the growth of our international business.
International sales and service centers continue to be located in Frankfurt,
Germany, and Bangalore, India.

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We have continued to expand our FDM PaidParts business by operating a
dedicated FDM system center at corporate headquarters. An essential objective
of this operation is to increase the number of high quality FDM parts in the
marketplace supporting the expansion of system sales. Various distribution
agreements have been established to accomplish the goals of this business.

In 2003, we expect an increased emphasis on the marketing of FDM
technology through an integrated sales and marketing program. Our new FDM sales
organization will roll out marketing programs throughout 2003, with the
expectation that we will create a solid base for expanding our FDM business in
the future.

3-D Printing Sales Organization

In conjunction with the consolidation of our FDM sales organization, we
also consolidated our 3-D printing sales organization. A worldwide Director of
Sales manages the 3-D printing organization. The Director manages three channel
managers in North America as well as our international regional managers as it
concerns the Dimension.

We use a worldwide reseller network to market, sell, and service the
Dimension system. Each reseller outlet has a Dimension system that is available
for tradeshows, product demonstration, and other promotional activities. As of
early 2003, we had over 80 reseller locations worldwide. Most resellers enjoy a
long-term presence in their respective territories. In addition to the
Dimension, most resellers sell and service a 3-D solid CAD software package.
Most of our North American territories contain a reseller devoted to commercial
accounts as well as a different reseller devoted to the education market.

Dimension can be found at many leading companies. We estimate that 3-D
printers represented approximately 40% of all RP systems sold in 2002, and that
Dimension accounted for over 50% of all 3-D printer systems shipped in 2002.

Customer Support

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

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

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

WARRANTY AND SERVICE

We provide a 90-day warranty on our commercial systems sold domestically
and a one-year warranty on domestic educational sales and systems sold
internationally. In addition, we offer annual service and
maintenance

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contracts for our systems. The service contracts include updates of our software
programs. Annual service contracts for our systems are priced from $1,500 to
$36,000.

MANUFACTURING

Our manufacturing process consists of the assembly of purchased
components. We obtain all parts used in the manufacturing process either from
distributors of standard electrical or mechanical parts or from custom
fabricators of our proprietary designs. We currently operate on a
build-to-forecast basis.

We purchase the major component parts for our FDM and office modeling
equipment from various outside vendors, subcontractors and other sources and
assemble them at our Minnesota facility. Our production floor has been
organized using demand-flow techniques in order to maximize efficiency and
quality. Our Prodigy Plus and Dimension production lines have been planned so
that we could double our current production rates if demand for these products
requires it. Computer-based Material Requirements Planning (MRP) is used in
ordering parts to be delivered on-time to meet forecasted needs. At the
completion of assembly, we perform complete power up and final quality tests to
ensure the quality of our products before shipment to customers.

We maintain an inventory of most of our necessary supplies, which
facilitates the assembly of products required for production. Our sole current
supplier of the X-Y tables for the FDM 3000 system is Asymtek; and our sole
current supplier of the FDM head motors is MircoMo Electronics, Inc. We also
have a sole supplier for two key components of our FDM Maxum system. We
consider these suppliers to be reliable. Nevertheless, we maintain an inventory
of such components to support continued supply. Furthermore, we believe that
the supplier of the X-Y table could be replaced by in-house design and
production of the part within a three-month period, if necessary; and we could
employ FDM head motors from other suppliers by modifications to the design of
the FDM systems. In-house development to replace the vendors of the Maxum
components would take four to eighteen months to accomplish. In regard to other
parts and materials, we use multiple sources of supply and do not believe that
we are dependent on any single supplier. Although we believe that we maintain
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. We
consider our relationships with our suppliers to be good.

RESEARCH AND DEVELOPMENT

We believe that ongoing research and development efforts are essential to
our continued success. Accordingly, our engineering development efforts will
continue to focus on improvements to the FDM technology and development of new
modeling processes, materials, software, user applications and products. We
have devoted significant time and resources to the development of a universally
compatible and user-friendly software system. We continue to standardize on
product platforms leveraging each new design resulting in multiple product
offerings that are developed faster and at reduced expense. The Prodigy Plus
and Dimension products as well as the Catalyst and InSight software products
are examples of this successful strategic initiative. For the years ended
December 31, 2002, 2001 and 2000, our research and development expenses were
approximately $4,688,000, $4,915,000 and $6,367,000, respectively.

Our filament development and production operation is located at our
facility in Eden Prairie, MN. We regard the filament formulation and
manufacturing process as a trade secret and hold patent claims on filament
usage in our products.

INTELLECTUAL PROPERTY

We consider our proprietary technology to be material to the development,
manufacture, and sale of our products and seek to protect our technology
through a combination of patents and confidentiality agreements with our
employees and others. Scott Crump, our President and CEO, was granted two U.S.
patents that cover many claims relating to various aspects of our products, FDM
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 us. In addition, other employees have assigned us
patents and patent applications for other rapid prototyping

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processes and
apparatuses associated with the FDM process. As part of our purchase of rapid
prototyping technology assets from IBM, we were also assigned the rights and
title to three patents developed by IBM, which cover the Genisys system and
which we believe will further augment several of our other product lines. We
recorded these patents domestically and are 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. In total, we currently own 22 primary
U.S. patents and more than 60 foreign patents and patent applications. Corresponding patent applications
covering the same claims that are contained in our issued patents have been
initiated in various foreign countries. Other foreign patent applications have
also been filed, including the patent applications assigned to us by IBM.

|                                   |  |                 |  |   |  |             
|---------------------------------- |  | --------------- |  | - |  | ------------
|Our registered trademarks include:
|                                   |  |                 |  |   |  |             
|                                  |  | Stratasys, Inc. |  |  |  | AutoGen     
|                                   |  |                 |  |   |  |             
|                                  |  | 3D Modeler      |  |  |  | FDMM        
|                                   |  |                 |  |   |  |             
|                                  |  | QuickSlice      |  |  |  | FDC         
|                                   |  |                 |  |   |  |             
|                                  |  | 3D Plotter      |  |  |  | BMD         
|                                   |  |                 |  |   |  |             
|                                  |  | 3D Visualizer   |  |  |  | FDM Quantum 
|                                   |  |                 |  |   |  |             
|                                  |  | FDM             |  |  |  | Genisys     
|                                   |  |                 |  |   |  |             
|Other trademarks include:         
|                                   |  |                 |  |   |  |             
|                                  |  | FDM Maxum       |  |  |  | 3D Printer  
|                                   |  |                 |  |   |  |             
|                                  |  | BASS            |  |  |  | Prodigy     
|                                   |  |                 |  |   |  |             
|                                  |  | Catalyst        |  |  |  | WaterWorks  
|                                   |  |                 |  |   |  |             
|                                  |  | InSight         |  |  |  | SupportWorks
|                                   |  |                 |  |   |  |             
|                                  |  | Prodigy Plus    |  |  |  | Dimension   
|                                   |  |                 |  |   |  |             
|                                  |  | FDM Titan       |  |   |  |             

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

|                                                             |  |                       |  |   |  |                
|------------------------------------------------------------ |  | --------------------- |  | - |  | ---------------
|We have also registered the following Internet domain names:
|                                                             |  |                       |  |   |  |                
|                                                            |  | prototype.com         |  |  |  | webmodeling.com
|                                                             |  |                       |  |   |  |                
|                                                            |  | webprototypes.com     |  |  |  | 3D-fax.com     
|                                                             |  |                       |  |   |  |                
|                                                            |  | 3DPrinter.com         |  |  |  | Stratasys.com  
|                                                             |  |                       |  |   |  |                
|                                                            |  | Dimensionprinting.com |  |   |  |                

WORKING CAPITAL PRACTICES

We do not engage in unusual practices regarding inventories, receivables
or other items of working capital.

BACKLOG

Our total backlog of system orders at December 31, 2002 was approximately
$3,200,000, as compared with approximately $300,000 at December 31, 2001. We
estimate that most of our backlog will ship in the first half of 2003.

COMPETITION

We compete in a marketplace that is still dominated by conventional
methods of model-making and prototype development. Machinists and engineers
working from blueprints or CAD files and using machining or manual methods
generally perform the prototype development and fabrication. We believe that
there is currently no other commercial producer of 3-D modeling devices that
uses a single-step, non-toxic technology similar to our FDM technology. Most
other rapid prototyping or 3-D printing systems involve additional
post-processing steps, such as

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curing the part after construction of the model or prototype. Our FDM
technology does not rely on the laser or light technology used by other
commercial manufacturers in the rapid prototyping industry.

Our competitors employ a number of different technologies in their rapid
prototyping devices. 3-D Systems, D-MEC, Mitsui and Teijin Seiki Co. use
stereolithography in their products. 3-D Systems introduced the first rapid
prototyping product. We believe that 3-D Systems has accounted for
approximately 29% of rapid prototyping units sold to date. DTM Corporation,
purchased by 3-D Systems in 2001, and EOS produce machines that use selective
laser sintering (SLS) to harden powdered material. Z Corp. uses inkjet
technology to sinter powdered materials. Sanders Prototype, Inc., 3-D Systems
and Object Technologies have developed prototyping systems that use inkjet
technology to deposit wax material layer by layer. A smoothing or milling
process is required between each deposited layer to maintain accuracy in these
processes. We believe that our FDM technology has important advantages over our
competitors products. These advantages include:



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

Certain of our competitors have greater financial and marketing resources
than we have. We believe that in 2002 we shipped more units than any other
company in the RP industry, and that we were the second largest in terms of
revenue.

EMPLOYEES

As of March 11, 2003, we had 196 full-time employees and three
subcontractors or temporary employees. While we have separate internal
departments, such as manufacturing, marketing, engineering and sales, many
employees perform overlapping functions within the organization. No employee is
represented by a union, and we have not experienced a work stoppage. We believe
our employee relations are good.

GOVERNMENTAL REGULATION

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



| |  |  | regulations promulgated by federal and state environmental and health agencies
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | the federal Occupational Safety and Health Administration                     
|
| |  |  | laws pertaining to the hiring, treatment, safety and discharge of employees   

AVAILABLE INFORMATION

We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the SECs public reference room at Room 1024, 450 Fifth
Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
information on the public reference room. The SEC maintains a website that
contains annual, quarterly and current reports, proxy statements and other
information that issuers (including Stratasys) file electronically with the
SEC. The SECs website is www.sec.gov.

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

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

FINANCIAL INFORMATION ABOUT OPERATIONS IN THE UNITED STATES AND OTHER COUNTRIES

The information required by this item is incorporated by reference to our
Financial Statements included elsewhere in this report. (See Part IV, Item 15,
Note 13.)




ITEM 2. PROPERTIES.

Our executive offices and production facilities presently comprise
approximately 89,856 square feet in two adjacent buildings in Eden Prairie,
Minnesota, near Minneapolis. We occupy a 27,756 square foot facility under a
lease that expires on July 31, 2004. Current monthly base rent on this facility
is $15,680, which will increase in August 2003 to $16,261 per month. This
facility is used for R&D, administrative, marketing, and sales activities.

On August 1, 2001, we purchased our manufacturing facility and land for
approximately $2,990,000. We had previously leased this facility since October
1996, and prior to 2002 had subleased approximately 25% of this facility. The
facility consists of 62,100 square feet, and is used for machine assembly,
filament production, inventory storage, operations, sales support, and
administration. The facility is subject to a mortgage agreement with a bank
that provided a loan of $2,287,500. Monthly payments on this loan are $18,396,
and the loan is collateralized by the property.

We opened two regional sales offices in 1997. We occupy 2,889 square feet
of space in Southfield, Michigan, a suburb of Detroit. We renewed this lease in
June 2001 for a three-year term that expires on June 14, 2004. Base monthly
rent under this lease is $5,176, which increases to $5,297 per month for a
one-year period commencing in June 2003. We occupy 2,504 square feet of space
in Ontario, California. We renewed this lease on September 1, 2002, for a two
year period expiring on August 31, 2004. Monthly base rent on this facility was
$3,405 through August 2003, and increased to $3,505 per month for the remainder
of the lease. We are also responsible for real estate taxes, insurance,
utilities, trash removal, and maintenance expenses at these facilities.

In November 1997, our German subsidiary entered into a lease to occupy
4,360 square feet of space in Frankfurt, Germany. We renewed the lease in
November 2002 for a period of three years, with base monthly rent of
approximately 5,700.00.




ITEM 3. LEGAL PROCEEDINGS.

We are not a party to any pending legal or administrative proceeding, and
our property is not subject to any such proceeding, other than actions arising
in the ordinary course of our business, which we believe 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, 2002.

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PART II




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

MARKET INFORMATION

Our common stock 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 Exchange Inc. under the symbol SAS.

The
following table sets forth the high and low closing sale prices of our common stock for each quarter from January 1, 2001 through the fiscal
year ended December 31, 2002 reported on the Nasdaq National Market system.

|                                    |  |                         |       |     |  |  |       | 
|----------------------------------- |  | ----------------------- | ----- | --- |  |  | ----- | 
|                                    |  | HIGH                    |       | LOW
|                                    |  |                         |       |    
|                                    |  | CLOSING SALE PRICES ($)
|                                    |  |                        
|Fiscal Year Ended December 31, 2002 |  |                         |       |     |  |  |       | 
|January 1,
2002  March 31, 2002    |  |                         | 10.12 |     |  |  | 6.21  | 
|April 1, 2002  June 30, 2002       |  |                         | 8.80  |     |  |  | 6.05  | 
|July 1, 2002  September 30, 2002   |  |                         | 7.85  |     |  |  | 4.76  | 
|October 1, 2002  December 31, 2002 |  |                         | 9.55  |     |  |  | 4.10  | 
|Fiscal Year Ended December 31, 2001 |  |                         |       |     |  |  |       | 
|January 1, 2001 - March 31, 2001    |  |                         | 3.50  |     |  |  | 2.688 | 
|April 1, 2001 - June 30, 2001       |  |                         | 3.55  |     |  |  | 2.51  | 
|July 1, 2001 - September 30, 2001   |  |                         | 4.93  |     |  |  | 2.84  | 
|October 1, 2001 - December 31, 2001 |  |                         | 7.60  |     |  |  | 2.97  | 

There were approximately 156 stockholders of record of our common stock as
of March 12, 2003.

DIVIDENDS

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

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SHARES ISSUABLE UNDER EQUITY COMPENSATION PLANS

The following table summarizes information with respect to options under
our equity compensation plans as of December 31, 2002:

|                                                           |  |                            |         |                      |  |                           |      |  |  |                         |         | 
|---------------------------------------------------------- |  | -------------------------- | ------- | -------------------- |  | ------------------------- | ---- |  |  | ----------------------- | ------- | 
|                                                           |  |                            |         |                      |  |                           |      |  |  | Number of securities   
|                                                           |  |                            |         |                      |  |                           |      |  |  | remaining available for
|                                                           |  | Number of securities to be |         | Weighted-average     |  | future issuance under    
|                                                           |  | issued upon exercise of    |         | exercise price of    |  | equity compensation plans
|                                                           |  | outstanding options,       |         | outstanding options, |  | (excluding securities    
|                                                           |  | warrants and rights        |         | warrants and rights  |  | reflected in column (a)) 
|                                                           |  | (a)                        |         | (b)                  |  | (c)                      
|                                                           |  |                            |         |                      |  |                          
|Equity compensation
plans approved by
security holders     |  |                            | 888,530 |                      |  | $                         | 6.32 |  |  |                         | 803,366 | 
|Equity compensation
plans not approved
by security holders |  |                            | 42,000  |                      |  | $                         | 3.80 |  |  |                         |        | 
|                                                           |  |                            |         |                      |  |                           |      |  |  |                         |         | 
|Total                                                      |  |                            | 930,530 |                      |  | $                         | 6.20 |  |  |                         | 803,366 | 

In separate compensation arrangements, we granted a warrant to
purchase 36,000 shares to an investor relations firm and a
warrant to purchase 6,000 shares
to an engineering consultant.




ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The selected consolidated financial data as of and for the five-year
period ended December 31, 2002, should be read in conjunction with the
Consolidated Financial Statements and related Notes for the year ended December
31, 2002, and the Managements Discussion and Analysis of Financial Condition
and Results of Operations.

|                                              |  |                                          |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        |  
|--------------------------------------------- |  | ---------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ | -
|                                              |  | YEARS ENDED DECEMBER 31,                
|                                              |  |                                         
|                                              |  | (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|                                              |  | 2002                                     |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                              |  |                                          |        |      |  |      |        |      |  |     
|Statement of Operations Data:                 |  |                                          |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        |  
|Sales                                         |  |                                          | 39,808 |      |  |      | 37,572 |      |  |      | 35,611 |  |  |  | 37,587 |  |  |  | 32,437 |  
|Gross Profit                                  |  |                                          | 24,366 |      |  |      | 23,001 |      |  |      | 21,948 |  |  |  | 24,675 |  |  |  | 21,347 |  
|Selling, general and administrative
expenses  |  |                                          | 16,065 |      |  |      | 14,598 |      |  |      | 15,233 |  |  |  | 15,611 |  |  |  | 15,320 |  
|Research and development                      |  |                                          | 4,688  |      |  |      | 4,915  |      |  |      | 6,367  |  |  |  | 6,583  |  |  |  | 5,944  |  
|Purchased in-process research and
development |  |                                          |       |      |  |      |       |      |  |      |       |  |  |  |       |  |  |  | 6,513  |  
|Operating income (loss)                       |  |                                          | 3,613  |      |  |      | 3,488  |      |  |      | 349    |  |  |  | 2,481  |  |  |  | (6,429 | )
|Net income (loss)                             |  |                                          | 3,111  |      |  |      | 2,513  |      |  |      | 988    |  |  |  | 2,144  |  |  |  | (3,318 | )
|Net income (loss) per basic share             |  |                                          | 0.58   |      |  |      | 0.46   |      |  |      | 0.18   |  |  |  | 0.37   |  |  |  | (0.55  | )
|Weighted average basic shares
outstanding     |  |                                          | 5,337  |      |  |      | 5,462  |      |  |      | 5,527  |  |  |  | 5,776  |  |  |  | 6,072  |  
|Net income (loss) per diluted share           |  |                                          | 0.56   |      |  |      | 0.46   |      |  |      | 0.17   |  |  |  | 0.37   |  |  |  | (0.55  | )
|Weighted average diluted shares
outstanding   |  |                                          | 5,595  |      |  |      | 5,493  |      |  |      | 5,684  |  |  |  | 5,779  |  |  |  | 6,072  |  

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|                                       |  |                |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|-------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                       |  | 2002           |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                       |  |                |        |      |  |      |        |      |  |     
|                                       |  | (IN THOUSANDS)
|Balance Sheet Data                     |  |                |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|Working Capital                        |  |                | 23,741 |      |  |      | 21,594 |      |  |      | 20,014 |  |  |  | 19,567 |  |  |  | 18,655 | 
|Total Assets                           |  |                | 43,600 |      |  |      | 41,951 |      |  |      | 37,582 |  |  |  | 37,113 |  |  |  | 41,190 | 
|Long term debt (less current position) |  |                | 2,157  |      |  |      | 2,216  |      |  |      | 130    |  |  |  | 318    |  |  |  | 193    | 
|Stockholders equity                   |  |                | 32,766 |      |  |      | 31,303 |      |  |      | 29,226 |  |  |  | 28,783 |  |  |  | 28,103 | 




ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We develop, manufacture, and market a family of rapid prototyping (RP)
and 3-D printing 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 2002, our
sales growth was derived from a number of industries, including consumer
products, electronics, general manufacturing, medical, automotive, and
aerospace. Educational institutions, government agencies, and service bureaus
were also significant markets for us.

In 2002, our strategy was to expand our position in the 3-D printing
market through the introduction and launch of Dimension, a low-cost 3-D
printer. Our strategy also included the expansion of our position in the RP
market through the growth of our high-performance products, represented by our
Titan, Maxum, FDM 3000, and Prodigy Plus systems. We were largely successful in
both areas. The number of total units shipped increased by over 70% in 2002 as
compared with 2001, and was strongly influenced by the successful product
launch of Dimension. However, we were also successful with sales of our RP
systems, particularly Titan, Maxum, and Prodigy Plus. We believe that the 463
units that we shipped in 2002 was more that any other RP and 3-D printer
manufacturer in the world, and that our unit market share should exceed 35% of
total units shipped in 2002 by all RP and 3-D printing manufacturers.

We were also successful increasing our consumable, maintenance, and
services businesses. Much of this business is derived from our current
installed base, and represents recurring revenue for us. As our installed base
of systems expands, these should continue to be the fastest-growing components
of our business.

Our 2002 strategy also called for us to slow the growth of our operating
expenses, with the intent to keep the growth in our operating expenses less
than the growth of our revenue. However, we were unable to achieve that goal.
While total revenues increased by 6% in 2002 as compared with 2001, operating
income only increased by 3.6% to $3,613,448 from $3,487,807 in the comparable
period. We anticipated that certain Dimension-related product introduction and
launch expenses would be incurred prior to the realization of significant
revenues from Dimension, which occurred. In fact, overall SG&A expenses
increased to $16,065,320 in 2002 from $14,597,862 in 2001, in large part due to
these Dimension expenses. Whereas R&D expenses declined to $4,687,673 in 2002
from $4,915,098 in 2001, the reduction only partially offset the increases in
SG&A expenses. We will continue to focus on our operating expenses in 2003,
with the intent to record greater operating profitability. We cannot, however,
ensure that we will be successful.

In 2002, we focused our new product development on various rapid
prototyping devices, modeling materials, and software enhancements. We
introduced and began shipping Dimension in February 2002. Dimension offers ABS
modeling capabilities in a 3-D printer platform. The part output from
competitive 3-D printers has tended to be extremely fragile. Dimension allows
users to create parts from ABS, which offers part strength required of true
form, fit and function testing. Dimension can be used in an office environment
and is easy to use. We believe that Dimension, introduced at a selling price of
$29,900, is the lowest priced system in the rapid prototyping and 3-D printing
market.

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In March 2002, we introduced Prodigy Plus. This system incorporates our
WaterWorks soluble support system on the Prodigy platform, and is further
enhanced by the addition of our InSight software that offers speed and
performance improvements over those of our Benchtop systems. Commercial
shipments commenced in May 2002.

On various dates in 2002, we introduced several enhancements to Titan,
including: 1) ABS as an available modeling material on this platform; 2)
WaterWorks support removal capabilities; 3) resolution improvements; and 4)
improved software.

Primarily due to sales of Dimension, Prodigy Plus, and Titan, net revenue
in the fourth quarter of 2002 increased to $11,271,417 from $9,957,170 in the
comparable 2001 period. Gross unit shipments in the fourth quarter of 2002
increased to 141 systems from 79 systems in the fourth quarter of 2001. Total
bookings in the quarter exceeded our plan, and our backlog increased to
approximately $3,200,200 as compared with approximately $300,000 at the end of
2001. The growth in backlog was due in part to demand for our Prodigy Plus
system, which exceeded our supply of finished units. Our backlog also consisted
of Dimensions and other high-performance systems, the majority of which is
expected to ship in the first half of 2003.

Our strategy in 2003 will be to continue to expand our position in the 3-D
printing market and our core RP businesses. We anticipate that our expenses
will increase in 2003 over the amounts reported in 2002, but that our revenue
growth will exceed that of the growth of our expenses. This should allow for
increased profitability from operations in 2003 as compared with 2002. We
believe that the 3-D printing market represents a significant growth area and
that Dimension will continue to have a significant positive impact on our 2003
results and beyond. However, we remain fully committed to the growth of our
historic core business, which is currently served by our Titan, Prodigy Plus,
FDM 3000, and Maxum systems. We also believe that our service, consumable, and
maintenance revenues derived from our installed base of systems will also
improve over the results attained in 2002. Our current and future growth is
largely dependent upon our ability to penetrate new markets, and develop and
market new rapid prototyping and 3-D printing systems, materials, applications,
and services that meet the needs of our current and prospective customers. Our
ability to implement our strategy for 2003 is subject to numerous
uncertainties, many of which are described in this Managements Discussion and Analysis of
Financial Condition and Results of Operations and in the section below
captioned Forward Looking Statements and Factors That May Affect Future
Results of Operations. We cannot ensure that our efforts will be successful.

Our operating results could be adversely impacted if the downturn in
general economic conditions experienced by most capital equipment manufacturers
in 2002 were to continue in 2003, or if the geo-political events involving Iraq
were to cause significant economic disruptions in 2003. Our expense levels are
based in part on our expectations of future revenues. While we have adjusted,
and will continue to adjust, our expense levels based on actual and anticipated
revenues, fluctuations in revenues in a particular period could adversely
impact our operating results. Whereas our backlog as of December 31, 2002 was
significantly larger than our backlog as of December 31, 2001, it would not be
sufficient to meet our budgeted revenue targets should new system orders in
2003 decline. These and other factors may lead to operating losses in certain
quarters, and reduced operating and gross profits as compared with the results
reported in 2002.

We believe that there are a number of RP and 3-D printing manufacturers
whose revenues grew between 5% and 30% in 2002. However, the decline in
revenues of the largest company in the industry will likely adversely impact
the industrys growth rate in 2002. We believe that 3-D printers accounted for
approximately 40% of the all RP systems shipped in 2002. Furthermore, we
believe the 3-D printing segment of the RP market is the fastest growing
component of the market, and that our Dimension system, based upon price and
performance, is positioned to capture an increased share of this market. We
believe that there is a long-term trend toward lower-priced rapid prototyping
systems capable of producing functional prototypes. This pricing trend should
lead to growth in the more traditional functional prototyping marketplace as
companies continue to address in-house rapid prototyping and concept-modeling
needs. Certain market segments in the industry have not demonstrated
significant pricing sensitivity. These segments are more interested in modeling
envelope size, modeling material, throughput, part quality, part durability,
rapid manufacturing, and rapid tooling, which should allow growth to continue
for high-performance RP systems such as our Maxum, Titan, and Prodigy Plus
products that address these needs.

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Results of Operations

Twelve months ended December 31, 2002 compared with twelve months ended December 31, 2001

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

|                                              |  |                                          |       |      |  |  |       |  
|--------------------------------------------- |  | ---------------------------------------- | ----- | ---- |  |  | ----- | -
|                                              |  | For the twelve months ended December 31,
|                                              |  | 2002                                     |       | 2001
|                                              |  |                                          |       |     
|Net sales                                     |  |                                          | 100.0 | %    |  |  | 100.0 | %
|Cost of sales                                 |  |                                          | 38.8  | %    |  |  | 38.8  | %
|Gross margin                                  |  |                                          | 61.2  | %    |  |  | 61.2  | %
|Selling, general, and administrative expenses |  |                                          | 40.4  | %    |  |  | 38.9  | %
|Research & development expense                |  |                                          | 11.8  | %    |  |  | 13.1  | %
|Operating income                              |  |                                          | 9.1   | %    |  |  | 9.3   | %
|Other income                                  |  |                                          | .7    | %    |  |  | 0.1   | %
|Income before taxes                           |  |                                          | 9.8   | %    |  |  | 9.4   | %
|Income taxes                                  |  |                                          | 2.0   | %    |  |  | 2.7   | %
|Net income                                    |  |                                          | 7.8   | %    |  |  | 6.7   | %

Net Sales

Net sales for the twelve months ended December 31, 2002, were $39,807,889,
compared with net sales of $37,571,582 for the twelve months ended December 31,
2001. This represents an increase of $2,236,307, or 6.0%. Dimension and Titan
sales were very strong throughout 2002 and exceeded our internal expectations.
Whereas Titan sales exceeded 2001 levels by almost 13%, Dimension was not
commercially available for sale in 2001, so a year-over-year comparison is not
applicable. Revenues from consumables, other services, and maintenance also
increased significantly in the twelve months ended December 31, 2002 as
compared with the same 2001 period. Maintenance and consumable revenues were
enhanced by the larger installed base of systems and continued emphasis on the
sale of maintenance contracts.

Domestic sales accounted for approximately 54% of total revenue in the
twelve months ended December 31, 2002, as compared with approximately 51% in
the twelve months ended December 31, 2001. However, sales of systems were
higher internationally (in terms of both units and revenues) than those of our
domestic sales organization. In the United States, our eastern region recorded
the highest revenues. The central region, dominated by the automotive industry,
was somewhat weak for us in 2002, and recorded revenue that was slightly under
20% of total revenue. Internationally, our Asia Pacific region, which comprises
Japan, China, the Asia Pacific and India, recorded revenues that amounted to
23% of total sales. Europe accounted for approximately 22% of total revenue for
the twelve months ended December 31, 2002, and did not display the
weakness for us that other manufacturing companies had reported. We believe
that sales into our Asia Pacific, European, and domestic regions will remain
strong throughout 2003. However, declining economic conditions in any of these
regions could adversely impact our future sales and profitability.

Gross Profit

Gross profit improved to $24,366,441, or 61.2% of sales, in the twelve
months ended December 31, 2002, compared with $23,000,767, or 61.2% of sales,
in the comparable period of 2001. This represents an increase of $1,365,674, or
5.9%. Gross profit increased due to higher revenues. Although gross profit as a
percentage of sales was identical in both twelve-month periods, in 2002 mix
shifts to products with lower margins, such as the Dimension, were offset by
sales of higher margin Titans, consumables, and maintenance.

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Operating Expenses

SG&A expenses increased to $16,065,320 for the twelve months ended
December 31, 2002, from $14,597,862 for the comparable period of 2001. This
represents an increase of $1,467,458, or 10.1%. Variable commissions,
incentives, and travel expenses were higher in the 2002 period as a result of
increased revenues. Marketing, promotional, and sales expenses associated with
the Dimension product launch also accounted for the increase in SG&A expenses
for the twelve months ended December 31, 2002 as compared with the twelve
months ended December 31, 2001. Additionally, bad debt expense in the 2002
period exceeded $280,000 compared with no bad debt expense in the 2001,
principally the result of a customers bankruptcy in early 2002 and a fourth
quarter adjustment to increase our allowance for doubtful accounts to $338,893.

R&D expenses declined to $4,687,673 for the twelve months ended December
31, 2002 from $4,915,098 for the twelve months ended December 31, 2001. This
amounted to a decrease of $227,425, or 4.6%. On higher revenues, R&D expenses
decreased as a percentage of sales to 11.8% in the twelve months ended December
31, 2002, from 13.1% in the 2001 period. Lower depreciation and material
purchases for R&D projects accounted for much of the expense reduction in the
current twelve-month period.

For the reasons cited above, our operating income for the twelve months
ended December 31, 2002 amounted to $3,613,448, or 9.1% of sales, compared with
operating income of $3,487,807, or 9.3% of sales, for the twelve months ended
December 31, 2001. This represents an increase of $125,641, or 3.6%.

Other Income

Other income netted to $288,436 in the twelve months ended December 31,
2002, compared with other income of $35,250 in the comparable 2001 period.
Interest income declined to $146,419 in the current twelve-month period,
compared with $306,068 in the twelve-month period of 2001. The reduction in
interest income was primarily due to significantly lower interest rates.
Interest expense increased to $178,431 in the twelve months ended December 31,
2002 from $103,732 in the same period of 2001, primarily due to interest
expense on the mortgage of our manufacturing facility. In the twelve months
ended December 31, 2002, we recognized other income of $320,448, principally
due to income from foreign currency transactions related to the euro, which
compared with a loss on foreign currency transactions related to the euro of
$167,086 in the same period of 2001.

Income Taxes

Income tax expense amounted to $791,102, of 2% of sales, in the twelve
months ended December 31, 2002, compared with $1,009,872, or 4.8% of sales, for
the twelve months ended December 31, 2001. The effective tax rate for 2002,
which benefited from R&D tax credits and permanent differences, including those
resulting from the exercise of employee stock options, amounted to 20.3%
compared with an effective tax rate of 28.3% in 2001. We believe that our
effective tax rate should fall between a range of 22% to 27% in 2003.

Net Income

For the reasons cited above, our net income for the twelve months ended
December 31, 2002, amounted to $3,110,782, or 7.8% of sales, compared with net
income of $2,513,185, or 6.7% of sales, in the comparable 2001 period. This
resulted in earnings per diluted common share of $.56 in the twelve months
ended December 31, 2002, compared with earnings per diluted common share of
$.46 for the comparable period ended December 31, 2001.

Twelve months ended December 31, 2001 compared with twelve months ended December 31, 2000.

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

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|                                              |  |                                          |       |      |  |  |       |   
|--------------------------------------------- |  | ---------------------------------------- | ----- | ---- |  |  | ----- | --
|                                              |  | For the twelve months ended December 31,
|                                              |  | 2001                                     |       | 2000
|                                              |  |                                          |       |     
|Net sales                                     |  |                                          | 100.0 | %    |  |  | 100.0 | % 
|Cost of sales                                 |  |                                          | 38.8  | %    |  |  | 38.4  | % 
|Gross margin                                  |  |                                          | 61.2  | %    |  |  | 61.6  | % 
|Selling, general, and administrative expenses |  |                                          | 38.9  | %    |  |  | 42.8  | % 
|Research & development expense                |  |                                          | 13.1  | %    |  |  | 17.9  | % 
|Operating income                              |  |                                          | 9.3   | %    |  |  | 1.0   | % 
|Other income                                  |  |                                          | .1    | %    |  |  | 1.6   | % 
|Income before taxes                           |  |                                          | 9.4   | %    |  |  | 2.6   | % 
|Income taxes                                  |  |                                          | 2.7   | %    |  |  | (.2   | %)
|Net income                                    |  |                                          | 6.7   | %    |  |  | 2.8   | % 

Net Sales

Net sales for the year ended December 31, 2001 were $37,571,582, compared
with sales of $35,610,547 for the year ended December 31, 2000. This represents
an increase of $1,961,035, or 5.5%. Sales of our Benchtop systems were strong
in 2001, and constituted our largest product line. However, sales of these
systems declined when compared with the prior year. Maxum, Titan and Prodigy
system sales also contributed significantly to our 2001 results, with Prodigy
showing the strongest year over year growth of any of our systems that were
available in 2000. Revenues from consumable and maintenance also increased in
the twelve months ended December 31, 2001 as compared with the same 2000
period. Maintenance and materials revenues were enhanced by the larger
installed base of systems, customer satisfaction with ABS, WaterWorks,
polycarbonate, and other material selections, and continued emphasis on the
sale of maintenance contracts.

Our gross shipments of systems amounted to 277 systems in 2001 compared
with 297 systems in 2000. System sales in 2001 included gross shipments of all
systems, including trade-in and upgrades. The average selling price of our
systems increased in 2001 as compared with 2000, and was significantly
influenced by sales of our Titan and Prodigy systems. Product mix can
dramatically affect the average selling price in any period. We ended 2001 with
an order backlog of approximately $300,000 compared with an order backlog of approximately
$7,000,000 at December 31, 2000. However, not all the 2000 backlog shipped in
2001, and a number of customers cancelled orders due to declining business
conditions.

Domestic sales accounted for approximately 51% of total revenue in 2001,
down from the 52% recorded in 2000. In the United States, the eastern and
central regions recorded the highest revenue. Europe accounted for
approximately 21% of total revenue in 2001, an improvement from 19% of revenue
recorded in 2000. Our combined Asia-Pacific region, which comprises Japan,
China, the Far East and India, accounted for approximately 24% of total
revenue, comparable to the 24% attained in 2000. The Asia-Pacific region
benefited from an approximately $1 million order for multiple Maxum systems
that shipped at the end of the year. This was the largest order in the history
of our Company. We believe that 2002 sales into our Asia Pacific and European
regions will remain strong, and that United States market will improve by the
third quarter of the year. However, our future sales and profitability could be
adversely impacted by declining economic conditions in any of these regions.

Gross Profit

Gross profit increased to $23,000,767, or 61.2% of sales, in the year
ended December 31, 2001, compared with $21,948,464, or 61.6% of sales, in the
year ended December 31, 2000. This represents an improvement of $1,052,303, or
4.8%. Gross profit improved due to a shift in our product mix to higher-priced
systems that have better margins. This would include systems such as our Maxum
and Titan, the sales of which were especially strong in the fourth quarter of
the year. Increased overhead expenses and write-offs of approximately $660,000
of inventory for obsolescence and scrap negatively impacted margins
in 2001.

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Operating Expenses

SG&A expenses decreased to $14,597,862 for the year ended December 31,
2001, from $15,232,662 for the year ended December 31, 2000. This represents a
decrease of $634,800, or 4.2%. Reductions to salaries and wages, travel, and
general office expenses accounted for much of the decrease in 2001 as compared
with 2000.

R&D expenses declined to $4,915,098 for the year ended December 31, 2001
from $6,366,800 for the year ended December 31, 2000. The decrease in 2001 from
2000 amounted to $1,451,702, or 22.8%. Decreases for salaries, wages, benefits,
and contract labor accounted for most of the reductions, a direct result of our
January 2001 layoff where we reduced our staff by approximately 8%.

Our operating income for the year ended December 31, 2001 amounted to
$3,487,807, or 9.3% of sales, compared with operating income of $349,002, or
1.0% of sales, for the year ended December 31, 2000.

Other Income

Other income and expense netted to $35,250 in 2001 compared with $576,886
in 2000. Interest income amounted to $306,068 in 2001 compared with $551,841 in
2000. The reduction in interest income was primarily due to the reduction to
interest rates that occurred throughout 2001. Interest expense increased to
$103,732 in 2001 from $69,545 in 2000, primarily due to interest on the
mortgage for the acquisition of our manufacturing facility.

Net Income

For the reasons cited above, net income for 2001 amounted to $2,513,185,
or 6.7% of sales, compared with net income of $988,301, or 2.8% of sales in
2000. This resulted in 2001 income per diluted common and common share
equivalent of $.46 compared income per diluted common and common equivalent
share of $. 17 for the period ended December 31, 2000.

Liquidity and Capital Resources

We have increased our cash and cash equivalents balances to $14,193,590 at
December 31, 2002, from $10,211,398 at December 31, 2001, and $6,737,306 at
December 31, 2000. The net cash provided by our operating activities over the
past three years has amounted to almost $14,000,000, principally derived from
net income and working capital management.

In 2002, net cash provided by our operating activities amounted to
$6,997,129, compared with $6,244,376 in 2001 and $663,286 in 2000. The
principal source of cash from our operating activities has been our net income,
as adjusted to exclude the effects of non-cash charges, and changes in working
capital, primarily inventories and accounts receivable. Our net accounts
receivable balances declined from $12,132,738 in 2001 to $10,640,451 in 2002,
on higher revenues, in large part by instituting tighter controls in our credit
and collections areas. Some of our international distributors, however,
continue to carry high balances, some of which have exceeded our normal terms.
These delays in payment adversely impact our days sales outstanding (DSO).
Nevertheless, DSOs have declined over the past three years, from 119 days in
2000 to 104 days in 2002.

For the years ended December 31, 2000, 2001, and 2002, our inventory
balances have declined to $9,102,818, $6,877,582, and $6,537,4555,
respectively. We have instituted better inventory management, but recognize
that we have opportunities to make considerably more improvement to reduce
overall inventory and improve turns. Over the three-year period, inventory
turns have improved to 2.3 in 2002 from 1.7 in 2000. A significant portion of
our inventory is dedicated to fulfill our service contract and warranty
obligations. As we have introduced several new products over the last several
quarters, there are many more platforms and models to service than in the past,
which increases the requirements to maintain inventory spares.

Our investing activities used cash of $1,166,723 and $4,429,215 in the
twelve months ended December 31, 2002 and 2001, respectively, and provided cash
of $4,445,221 in 2000. Property and equipment acquisitions totaled $602,711 in
2002, $3,928,177 in 2001, and $978,359 in 2000. In 2001, we purchased our
manufacturing facility for

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approximately $3,100,000, which is subject to a
mortgage payable of $2,287,500. Over the three-year period, the majority of
equipment was for manufacturing or engineering, tooling, leasehold
improvements, and for the acquisition of computer systems and software
applications. Payments for intangible assets, including patents and capitalized
software, amounted to $564,012, $501,038, and $577,040 for the years ended
December 31, 2002, 2001,and 2000, respectively. In 2000, the sale and
acquisition of marketable securities provided cash of approximately $6,000,000.

Our financing activities used cash of $1,840,626 and $878,915 in the
twelve months ended December 31, 2002 and 2000, respectively, and provided cash
of $1,670,346 in 2001. We have continued with our stock buyback program over
the three-year period, using cash of $3,742,979 in 2002, $449,439 in 2001, and
$731,135 in 2000. The exercise of stock options and warrants provided cash in
each of the three years, most notably $2,085,288 in 2002. Payments for
obligations under capital leases used cash of $130,320 in 2002, declining from
$187,692 and $230,229 for the years 2001 and 2000, respectively. As of December
31, 2002, we no longer had any outstanding capital leases. As mentioned above,
we received proceeds in 2001 of $2,287,500 for a mortgage payable on our
manufacturing facility, and made payments on this mortgage totaling $52,615 in
2002 and $16,523 in 2001.

For 2003, we expect to use our cash for working capital purposes; for
improvements to our manufacturing facility; for new product and materials
development; for sustaining engineering; for the acquisition of equipment,
including production equipment, tooling, and computers; for the purchase of
intangible assets, including patents; for increased selling and marketing
activities, especially as they relate to the continued Dimension market
development; for acquisitions; and for our common stock buyback program. In
October 2002, our board of directors authorized a continuation of our stock
buyback program by authorizing an additional $1,000,000 to the prior
authorization of $2,000,000, net of the proceeds from the exercise of stock
options. While we believe that the primary source of liquidity during 2003 will
be derived from current cash balances and cash flows from operations, we have
maintained a line of credit for the lesser of $4,000,000 or a defined borrowing base.
To date, we have not borrowed against this credit facility.

As of December 31, 2002, we had gross accounts receivable of $11,177,825,
less an allowance of $537,374 for returns and doubtful accounts. Historically,
our bad debt expense has been minimal. However, in the twelve months ended
December 31, 2002, principally due to the bankruptcy of a customer, we incurred
approximately $280,000 of bad debt expense. Certain customers, especially those
that purchased our Maxum or Titan systems, continue to carry high balances.
Additionally, at December 31, 2002, large balances were concentrated with
certain international distributors, and some of these balances exceed our
payment terms. Default by one or more of these distributors or customers would
result in a significant charge against our current reported earnings. We have
reviewed our policies that govern credit and collections, and will continue to
monitor them in light of current payment status and economic conditions. While
we can give no assurances, we believe that most, if not all, of the accounts
receivable balances will ultimately be collected.

Our total current assets amounted to $32,418,891 at December 31, 2002, the
majority of which consisted of cash and cash equivalents, inventories and
accounts receivable. Total current liabilities amounted to $8,677,488. Our debt
is minimal, consisting of a mortgage payable of $2,218,362. We estimate that we
will spend approximately $1,500,000 in 2003 for facility improvements,
production and R&D equipment, computers and integrated software, and tooling.
As of December 31, 2002, material commitments for inventory purchases from
selected vendors should amount to approximately $2,800,000 for the ensuing
twelve-month period ending December 31, 2003. We intend to finance these
purchases from existing cash or from cash flows from operations.

Inflation

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

Foreign Currency Transactions

Prior to 2001, substantially all of our recognized revenues from foreign
sales were invoiced in United States dollars. Therefore, our exposure to
foreign currency exchange rates was immaterial. Commencing in late 2000 and
continuing throughout 2002, we began to invoice sales to certain European
distributors in euros. Our reported results

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have been subject to fluctuations
based upon changes in the exchange rates of that currency in relation to the
United States dollar. In 2002, income from foreign currency translations
amounted to approximately $320,000, whereas in 2001 we reported a loss from
foreign currency translations of approximately $167,000. We have previously
hedged using forward foreign exchange contracts, although this hedging involved
relatively small positions. We will continue to monitor our exposure to
currency fluctuations, and, when appropriate, may use financial hedging
techniques in the future. Instruments to hedge our risks may include foreign
currency forward, swap, and option contracts. These instruments will be used to
selectively manage risk, but there can be no assurances that we will be fully
protected against material foreign currency fluctuations. Translation exposure
to our balance sheet with respect to foreign operations is not hedged. We
expect to continue to derive most of our revenue from regions where the
transactions are negotiated, invoiced, and paid in US dollars. Fluctuations in
the currency exchange rates in these other countries may therefore reduce the
demand for our products by increasing the price of our products in the currency
of countries in which the local currency has declined in value.

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

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

These forward-looking statements include the expected increases in net
sales of RP and 3-D printing systems, services and consumables, and our ability
to maintain our gross margins on these sales. The forward-looking statements
include our assumptions about the size of the RP and 3-D printing market, and
our ability to penetrate, compete, and successfully sell our products in these
markets. They include our plans and objectives to introduce new products, to
control expenses, to improve the quality and reliability of our systems, to
respond to new or existing competitive products, and to improve profitability.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions, among others, that we (1)
will be able to continue to introduce new RP and 3-D printing systems and
materials acceptable to the market, and to continue to improve our existing
technology and software in our current product offerings, (2) will be able to
successfully develop the 3-D printing market and that this market will accept
our products, (3) will be able to maintain our revenues and gross margins on
our present products, (4) will be able to control our operating expenses, (5) will be able to expand our
manufacturing capabilities to meet the expected demand generated by Dimension,
and (6) will be able to retain and recruit employees with the necessary skills
to produce, develop, market, and sell our products.

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

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

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Critical Accounting Policies

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

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

Revenue RecognitionWe recognize revenue when 1) persuasive evidence of a
final agreement exists, 2) delivery has occurred or services have been
rendered, 3) the selling price is fixed or determinable, and 4) collectability
is reasonably assured. Revenue from system sales is primarily recognized at
time of shipment if the shipment conforms to the terms and conditions of the
purchase agreement. Revenue from maintenance contracts is recognized ratably
over the term of the contract, usually one year. On certain sales that require
a one-year warranty rather than our standard 90-day warranty, a percentage of
the selling price that represents the extended warranty is deferred and
recognized ratably over the period of the extended warranty as an implied
maintenance contract. This has had the effect of deferring, as of December 31,
2002, approximately $1,000,000 of revenue that will be recognized in future
periods.

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

We also record a provision for estimated product returns and allowances in
the period in which the related revenue is recorded. This provision against
current gross revenue is based principally on historical rates of returns, but
also factors in changes in the customer base, geographic economic conditions,
and changes in the financial conditions of our customers. If past trends were
to change, we would potentially have to increase or decrease the amount of the
provision for these returns. As of December 31, 2002, our allowance for returns
was $198,481.

Allowance for Doubtful AccountsWhile we evaluate the collectability of a
sale as part of our revenue recognition process, we must also make judgments
regarding the ultimate realization of our accounts receivable and notes
receivable balances. A considerable amount of judgment is required in assessing
the realization of these receivables, including the aging of the receivables
and the creditworthiness of each customer. We may not be able to accurately and
timely predict changes to our customers financial condition. In 2002, a
customers unanticipated bankruptcy resulted in our recording additional bad
debt expense of approximately $200,000. If a customers financial condition
should suddenly deteriorate, calling into question our ability to collect the
receivable, our estimates of the realization of our receivables could be adversely
affected. We would then have to record additional allowances for doubtful
accounts, which could have an adverse effect on our results of operations in
the period affected.

Our allowance for doubtful accounts is adjusted on a quarterly basis using
two methods. First, our overall reserves are based on percentages applied to
certain aged receivable categories that are predominately based on historical
bad debt write-off experience. Then, we make an additional evaluation of
overdue customer accounts, for which we specifically reserve. In our
evaluation, we use a variety of factors such as past payment history, the
current financial condition of the customer, and current economic conditions.
We also evaluate our overall concentration risk, which assesses the total
amount owed by each customer, regardless of its current status. Certain of our
international distributors have carried large balances that have become
overdue. While these distributors have paid down their balances and are still
considered performing, we have either converted certain of these accounts
receivable to notes receivables (some of which are collateralized), or placed
distributors on payment plans that strictly limit the amount of new business
that we will honor unless they adhere to the payment plans. A default by one or
more of these

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distributors could have a material effect, ranging from $200,000
to $800,000, on our reported operating results in the period affected. As of
December 31, 2002, our allowance for doubtful accounts amounted to $338,893.

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

Some of our inventory is returned to us by our customers and refurbished.
This refurbished inventory, once fully repaired and tested, is functionally
equivalent to new production and is utilized to satisfy many of our
requirements under our warranty and service contracts. Upon receipt of the
returned material, this inventory is recorded at a discount from original cost,
and further reduced by estimated future refurbishment expense. While we
evaluate this service material in the same way as our stock inventory (i.e., we
periodically test for obsolescence and excess), this inventory is subject to
changing demand that may not be immediately apparent. Adjustments to this
service inventory, following an obsolescence or excess review, could have an
adverse effect on our reported financial condition in the period when the
adjustments are made.

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

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




ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our cash and cash equivalent investments are exclusively in short-term
money market and sweep instruments with maturities of less than 90 days. These
are subject to limited interest rate risk. A 10% change in interest rates would
not have a material effect on our financial condition or results of operations.
Our mortgage bears interest at a fixed rate of 7.38% through 2006. Therefore,
an immediate 10% change in interest would have no material effect on our
financial condition or results of operations.

Foreign Currency Exchange Rate Risk

We have not historically hedged our sales from and expenses of European
operations that are conducted in euros. Therefore, a hypothetical 10% change in
the exchange rates between the U.S. dollar and the euro could increase or
decrease our earnings before taxes by less than $100,000 for the continued
maintenance of our European facility. We have also historically not hedged our accounts receivable
balances that are denominated in euros. A hypothetical 10% change in the
exchange rates between the US dollar and the euro could increase or decrease
earnings before taxes by between $100,000 and $300,000.

23



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

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




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Incorporated herein by reference to our Definitive Proxy Statement with
respect to our Annual Meeting of Stockholders scheduled to be held May 6, 2003.




ITEM 11. EXECUTIVE COMPENSATION.

Incorporated herein by reference to our Definitive Proxy Statement with
respect to our Annual Meeting of Stockholders scheduled to be held May 6, 2003.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Incorporated herein by reference to our Definitive Proxy Statement with
respect to our Annual Meeting of Stockholders scheduled to be held May 6, 2003.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Incorporated herein by reference to our Definitive Proxy Statement with
respect to our Annual Meeting of Stockholders scheduled to be held May 6, 2003.

24



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##### Table of Contents






ITEM 14: CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of a date within 90 days of the filing date
of this report, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
Exchange Act)) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities Exchange Commission rules and forms.

(b) Changes in Internal Controls

There have been no significant changes in our internal controls or in
other factors that could significantly affect the disclosure controls
subsequent to the Chief Executive Officers and Chief Financial Officers most
recent evaluation, and there have been no corrective actions with regard to
significant deficiencies and material weaknesses in such controls.




PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)  Documents

|                                                                                             |  |  |      | 
|-------------------------------------------------------------------------------------------- |  |  | ---- | 
|1. Financial Statements                                                                     |  |  |      | 
|Independent Auditors Report                                                                  |  |  | F-1  | 
|Consolidated Balance Sheets December 31, 2002 and 2001                                       |  |  | F-2  | 
|Consolidated Statements of Operations Years Ended December 31, 2002, 2001 and 2000           |  |  | F-3  | 
|Consolidated Statements of Stockholders Equity Years Ended December 31, 2002,
2001 and 2000 |  |  | F-4  | 
|Consolidated Statements of Cash Flows Years Ended December 31, 2002, 2001 and 2000           |  |  | F-5  | 
|Notes to Consolidated Financial Statements                                                   |  |  | F-7  | 
|2. Financial Statement Schedule                                                             |  |  |      | 
|Schedule II Valuation and Qualifying Accounts and Reserves                                  |  |  | F-20 | 

Notes

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

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

25



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3.     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)                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                        
|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    |  | Stratasys, Inc. 1998 Incentive Stock Option Plan.(10)                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                        
|10.9    |  | Asset Purchase Agreement between the Company and IBM dated January
1, 1995.(4)                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                        
|10.10   |  | Stratasys, Inc. 2000 Incentive Stock Option Plan.(13)                                                                                                                                                                                                  
|       
|10.11   |  | Stratasys, Inc. 2002 Long-Term Performance and Incentive Plan.(15)                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                        
|10.12   |  | Equipment Lease Agreement between the Company and IBM dated January 1, 1995.(4)                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                        
|10.13   |  | 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)                                                                     
|        |  |                                                                                                                                                                                                                                                        
|10.14   |  | 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)                                                                                     
|        |  |                                                                                                                                                                                                                                                        
|10.15   |  | 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)
|        |  |                                                                                                                                                                                                                                                        
|10.16   |  | Lease between the Company and Welsh Edenvale Partners 86, dated October 9, 1992.(1)                                                                                                                                                                   

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|        |  |                                                                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                               
|NO.     |  | DESCRIPTION                                                                                                                                                                   
|        |  |                                                                                                                                                                               
|10.17   |  | Amendment #4 to Lease between the Company and Welsh Edenvale
Partners 86, dated October 9, 1992, between the Company and
Carpenter Land Company LLP, dated July 27, 1998.(14)
|        |  |                                                                                                                                                                               
|10.18   |  | Warrant Purchase Agreement by and among the Company and certain
holders of the Companys Warrants dated September 30, 1998.(11)                                               
|        |  |                                                                                                                                                                               
|10.19   |  | Technology Sale and Assignment Agreement, between the Company and SEK Technologies LLC, dated as of December 21, 1998.(12)                                                    
|        |  |                                                                                                                                                                               
|10.20   |  | User Agreement, between the Company and SEK Technologies LLC,
dated as of August 21, 1997.(12)                                                                                
|        |  |                                                                                                                                                                               
|10.21   |  | Option Agreement, between the Company and SEK Technologies LLC,
dated August 21, 1997.(12)                                                                                    
|        |  |                                                                                                                                                                               
|10.22   |  | Form of Registration Rights Agreement, between the Company and
holders of Investment Units in SEK Technologies LLC, dated as of
January 4, 1999.(12)                          
|        |  |                                                                                                                                                                               
|21.1    |  | Subsidiaries of the Company.(14)                                                                                                                                              
|        |  |                                                                                                                                                                               
|23.1    |  | Consent of Rothstein, Kass & Company, P.C.                                                                                                                                    
|        |  |                                                                                                                                                                               
|99.1    |  | Certification pursuant to .18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                      
|        |  |                                                                                                                                                                               
|99.2    |  | Certification pursuant to .18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                      



|(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 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
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.                                                            
|    
|(10) |  | Incorporated by reference from the Companys definitive Proxy
Statement on Schedule 14A with respect to the Companys 1998 Annual
Meeting of Stockholders.
|    
|(11) |  | Incorporated by reference from the Companys Form 8-K filed
on October 16, 1998.                                                                          

27



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|(12) |  | Incorporated by reference from the Companys Form 8-K filed
January 15, 1999.                                                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(13) |  | Incorporated by reference from the Companys Registration
Statement on Form S-8 (File No. 333-32782) filed March 17, 2000.                                
|    
|(14) |  | Incorporated by reference from the Companys Form 10-K for
the year ended December 31, 1999.                                                              
|    
|(15) |  | Incorporated by reference from the
Companys definitive Proxy Statement on Schedule 14A with
respect to the Companys 2002 Annual Meeting of Stockholders.

(b)  Reports on Form 8-K

None.

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INDEPENDENT AUDITORS REPORT

Board of Directors
Stratasys, Inc.

We have audited the accompanying consolidated balance sheets of Stratasys, Inc.
and Subsidiaries (the Company) as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders equity, and cash
flows and financial statement schedule for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements and
financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial position of
Stratasys, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein.

/s/ ROTHSTEIN, KASS &
COMPANY

Roseland, New Jersey
January 30, 2003

F-1



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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

|                                                           |                                                                                                                          |                            |            |            |            |   |            |            |            | 
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|December 31,                                               |                                                                                                                          | 2002                       |            | 2001      
|                                                           |                                                                                                                          |                            |            |           
|ASSETS                                                     |                                                                                                                          |                            |            |            |            |   |            |           
|Current assets                                             |                                                                                                                          |                            |            |            |            |   |            |           
|                                                           | Cash and cash equivalents                                                                                                |                            | $          | 14,193,590 |            |   | $          | 10,211,398 |           
|                                                           | Accounts receivable, less allowance for returns and
doubtful accounts of $537,374 in 2002 and $562,888
in 2001           |                            |            | 10,640,451 |            |   |            | 12,132,738 |           
|                                                           | Inventories                                                                                                              |                            |            | 6,537,446  |            |   |            | 6,877,582  |           
|                                                           | Prepaid expenses                                                                                                         |                            |            | 921,404    |            |   |            | 558,879    |           
|                                                           | Deferred income taxes                                                                                                    |                            |            | 126,000    |            |   |            | 246,000    |           
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|                                                           |                                                                                                                          | Total current assets       |            |            | 32,418,891 |   |            |            | 30,026,597 | 
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|Property and equipment,net                                 |                                                                                                                          |                            | 5,937,200  |            |            |   | 6,006,529  |           
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|Other assets                                               |                                                                                                                          |                            |            |            |            |   |            |           
|                                                           | Intangible assets, net                                                                                                   |                            |            | 2,953,401  |            |   |            | 3,288,222  |           
|                                                           | Deferred income taxes                                                                                                    |                            |            | 2,174,000  |            |   |            | 2,363,000  |           
|                                                           | Other                                                                                                                    |                            |            | 116,995    |            |   |            | 266,997    |           
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|                                                           |                                                                                                                          |                            | 5,244,396  |            |            |   | 5,918,219  |           
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|Total assets                                               |                                                                                                                          | $                          | 43,600,487 |            |            | $ | 41,951,345 |           
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|LIABILITIES AND STOCKHOLDERS EQUITY                       |                                                                                                                          |                            |            |            |            |   |            |           
|Current liabilities                                        |                                                                                                                          |                            |            |            |            |   |            |           
|                                                           | Obligations under capital leases                                                                                         |                            | $          |           |            |   | $          | 130,320    |           
|                                                           | Mortgage payable, current portion                                                                                        |                            |            | 61,572     |            |   |            | 54,994     |           
|                                                           | Accounts payable and other current liabilities                                                                           |                            |            | 4,141,635  |            |   |            | 3,736,284  |           
|                                                           | Unearned maintenance revenues                                                                                            |                            |            | 4,474,281  |            |   |            | 4,510,751  |           
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|                                                           |                                                                                                                          | Total current liabilities  |            |            | 8,677,488  |   |            |            | 8,432,349  | 
|Long-term liability,mortgage payable,
less current portion |                                                                                                                          |                            | 2,156,790  |            |            |   | 2,215,983  |           
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|Total liabilities                                          |                                                                                                                          |                            | 10,834,278 |            |            |   | 10,648,332 |           
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|Commitments                                                |                                                                                                                          |                            |            |            |            |   |            |           
|Stockholders equity                                       |                                                                                                                          |                            |            |            |            |   |            |           
|                                                           | Common stock, $.01 par value, authorized 15,000,000 shares;
issued 6,518,200 shares in 2002 and 6,133,294
shares in 2001 |                            |            | 65,182     |            |   |            | 61,333     |           
|                                                           | Capital in excess of par value                                                                                           |                            |            | 35,025,413 |            |   |            | 32,943,974 |           
|                                                           | Retained earnings                                                                                                        |                            |            | 4,908,388  |            |   |            | 1,797,606  |           
|                                                           | Accumulated other comprehensive loss                                                                                     |                            |            | (61,979    | )          |   |            | (72,084    | )         
|                                                           | Less cost of treasury stock, 1,179,237 shares in
2002 and 740,400 shares in 2001                                         |                            |            | (7,170,795 | )          |   |            | (3,427,816 | )         
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|                                                           |                                                                                                                          | Total stockholders equity |            |            | 32,766,209 |   |            |            | 31,303,013 | 
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           
|Total liabilities and stockholders equity                 |                                                                                                                          | $                          | 43,600,487 |            |            | $ | 41,951,345 |           
|                                                           |                                                                                                                          |                            |            |            |            |   |            |           

See accompanying notes to consolidated financial statements.

F-2



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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS

|                                              |                                     |      |            |            |   |      |            |            |   |   |            |            |  
|--------------------------------------------- | ----------------------------------- | ---- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|Years Ended December 31,                      |                                     | 2002 |            | 2001       |   | 2000
|                                              |                                     |      |            |            |   |     
|Net sales                                     |                                     | $    | 39,807,889 |            |   | $    | 37,571,582 |            |   | $ | 35,610,547 |           
|Cost of sales                                 |                                     |      | 15,441,448 |            |   |      | 14,570,815 |            |   |   | 13,662,083 |           
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|Gross profit                                  |                                     |      | 24,366,441 |            |   |      | 23,000,767 |            |   |   | 21,948,464 |           
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|Costs and expenses                            |                                     |      |            |            |   |      |            |            |   |   |            |           
|                                              | Research and development            |      |            | 4,687,673  |   |      |            | 4,915,098  |   |   |            | 6,366,800  |  
|                                              | Selling, general and administrative |      |            | 16,065,320 |   |      |            | 14,597,862 |   |   |            | 15,232,662 |  
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|                                              |                                     |      | 20,752,993 |            |   |      | 19,512,960 |            |   |   | 21,599,462 |           
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|Operating income                              |                                     |      | 3,613,448  |            |   |      | 3,487,807  |            |   |   | 349,002    |           
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|Other income (expense)
Interest income        |                                     |      | 146,419    |            |   |      | 306,068    |            |   |   | 551,841    |           
|                                              | Interest expense                    |      |            | (178,431   | ) |      |            | (103,732   | ) |   |            | (69,545    | )
|                                              | Other                               |      |            | 320,448    |   |      |            | (167,086   | ) |   |            | 94,590     |  
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|                                              |                                     |      | 288,436    |            |   |      | 35,250     |            |   |   | 576,886    |           
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|Income before income taxes (benefit)          |                                     |      | 3,901,884  |            |   |      | 3,523,057  |            |   |   | 925,888    |           
|Income taxes (benefit)                        |                                     |      | 791,102    |            |   |      | 1,009,872  |            |   |   | (62,413    | )         
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|Net income                                    |                                     | $    | 3,110,782  |            |   | $    | 2,513,185  |            |   | $ | 988,301    |           
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|Income per common and common equivalent share |                                     |      |            |            |   |      |            |            |   |   |            |           
|                                              | Basic                               |      | $          | 0.58       |   |      | $          | 0.46       |   |   | $          | 0.18       |  
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|                                              | Diluted                             |      | $          | 0.56       |   |      | $          | 0.46       |   |   | $          | 0.17       |  
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|Weighted average number of common and         |                                     |      |            |            |   |      |            |            |   |   |            |           
|common equivalent shares outstanding          |                                     |      |            |            |   |      |            |            |   |   |            |           
|                                              | Basic                               |      |            | 5,336,795  |   |      |            | 5,461,989  |   |   |            | 5,527,144  |  
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           
|                                              | Diluted                             |      |            | 5,594,869  |   |      |            | 5,492,852  |   |   |            | 5,684,318  |  
|                                              |                                     |      |            |            |   |      |            |            |   |   |            |           

See accompanying notes to consolidated financial statements.

F-3



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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|--------------------------------------------- |  | ------------ | --------- | --------- |  | --------- | ------ | ------------- |  | ---------- | ---------- | -------- |  | ----- | ---------- | ------------- |  | ----------- | ------- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | --------- | -
|Years Ended December 31, 2002, 2001, and 2000
|                                             
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  | Accumulated
|                                              |  |              |           |           |  |           |        |               |  | Capital in |            | Retained |  | Other |            |               |  |             |         |   |  |   |            |   |  |  
|                                              |  | Common Stock |           | Excess of |  | Earnings  |        | Comprehensive |  | Treasury   |            |          |  |       |            | Comprehensive
|                                              |  | Shares       |           | Amount    |  | Par Value |        | (Deficit)     |  | Loss       |            | Stock    |  | Total |            | Income       
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |              
|Balances,January 1, 2000                      |  |              | 6,101,961 |           |  | $         | 61,020 |               |  | $          | 32,712,755 |          |  | $     | (1,703,880 | )             |  | $           | (39,608 | ) |  | $ | (2,247,242 | ) |  | $ | 28,783,045 |   |  |   |           |  
|Exercise of stock options and warrants        |  |              | 24,033    |           |  |           | 240    |               |  |            | 82,209     |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   | 82,449     |   |  |   |           |  
|Warrants issued for services                  |  |              |           |           |  |           |        |               |  |            | 112,583    |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   | 112,583    |   |  |   |           |  
|Net income                                    |  |              |           |           |  |           |        |               |  |            |            |          |  |       | 988,301    |               |  |             |         |   |  |   |            |   |  |   | 988,301    |   |  | $ | 988,301   |  
|Other comprehensive loss                      |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Cumulative translation adjustment             |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             | (9,168  | ) |  |   |            |   |  |   | (9,168     | ) |  |   | (9,168    | )
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Total comprehensive income                    |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  | $ | 979,133   |  
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Purchase of 109,400 shares of treasury stock  |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   | (731,135   | ) |  |   | (731,135   | ) |  |   |           |  
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Balances,December 31, 2000                    |  |              | 6,125,994 |           |  |           | 61,260 |               |  |            | 32,907,547 |          |  |       | (715,579   | )             |  |             | (48,776 | ) |  |   | (2,978,377 | ) |  |   | 29,226,075 |   |  |   |           |  
|Exercise of stock options                     |  |              | 7,300     |           |  |           | 73     |               |  |            | 36,427     |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   | 36,500     |   |  |   |           |  
|Net income                                    |  |              |           |           |  |           |        |               |  |            |            |          |  |       | 2,513,185  |               |  |             |         |   |  |   |            |   |  |   | 2,513,185  |   |  | $ | 2,513,185 |  
|Other comprehensive loss                      |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Cumulative translation adjustment             |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             | (23,308 | ) |  |   |            |   |  |   | (23,308    | ) |  |   | (23,308   | )
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Total comprehensive income                    |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  | $ | 2,489,877 |  
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Purchase of 88,400 shares of treasury stock   |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   | (449,439   | ) |  |   | (449,439   | ) |  |   |           |  
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Balances,December 31, 2001                    |  |              | 6,133,294 |           |  |           | 61,333 |               |  |            | 32,943,974 |          |  |       | 1,797,606  |               |  |             | (72,084 | ) |  |   | (3,427,816 | ) |  |   | 31,303,013 |   |  |   |           |  
|Exercise of stock options                     |  |              | 384,906   |           |  |           | 3,849  |               |  |            | 2,081,439  |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   | 2,085,288  |   |  |   |           |  
|Net income                                    |  |              |           |           |  |           |        |               |  |            |            |          |  |       | 3,110,782  |               |  |             |         |   |  |   |            |   |  |   | 3,110,782  |   |  | $ | 3,110,782 |  
|Other comprehensive loss                      |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Cumulative translation adjustment             |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             | 10,105  |   |  |   |            |   |  |   | 10,105     |   |  |   | 10,105    |  
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Total comprehensive income                    |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  | $ | 3,120,887 |  
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Purchase of 438,837 shares of treasury stock  |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   | (3,742,979 | ) |  |   | (3,742,979 | ) |  |   |           |  
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  
|Balances,December 31, 2002                    |  |              | 6,518,200 |           |  | $         | 65,182 |               |  | $          | 35,025,413 |          |  | $     | 4,908,388  |               |  | $           | (61,979 | ) |  | $ | (7,170,795 | ) |  | $ | 32,766,209 |   |  |   |           |  
|                                              |  |              |           |           |  |           |        |               |  |            |            |          |  |       |            |               |  |             |         |   |  |   |            |   |  |   |            |   |  |   |           |  

See accompanying notes to consolidated financial statements.

F-4



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##### Table of Contents






STRATASYS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |            |           |            |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | ---------------------------------------------- | ---------- | --------- | --------- | ---------- | ---------- | --------- | --------- | --------- | ---------- | --------- | ---------- | -
|Years Ended December 31,                            |                                                                                            | 2002                                                                           |                                                | 2001       |           | 2000     
|                                                    |                                                                                            |                                                                                |                                                |            |           |          
|Cash flows from operating activities                |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|                                                    | Net income                                                                                 |                                                                                | $                                              | 3,110,782  |           |           | $          | 2,513,185  |           |           | $         | 988,301    |          
|                                                    | Adjustments to reconcile net income to net
cash provided by(used in) operating activities: |                                                                                |                                                |            |           |           |            |            |           |           |           |            |          
|                                                    |                                                                                            | Deferred income taxes                                                          |                                                |            | 309,000   |           |            |            | 307,000   |           |           |            | (195,000  | )         
|                                                    |                                                                                            | Depreciation                                                                   |                                                |            | 1,502,374 |           |            |            | 1,545,198 |           |           |            | 1,302,893 |           
|                                                    |                                                                                            | Amortization                                                                   |                                                |            | 898,833   |           |            |            | 734,377   |           |           |            | 465,187   |           
|                                                    |                                                                                            | Warrants issued for services                                                   |                                                |            |           |           |            |            |           |           |           |            | 112,583   |           
|                                                    |                                                                                            | Loss on disposal of property and equipment                                     |                                                |            |           |           |            |            | 41,720    |           |           |            | 4,686     |           
|                                                    |                                                                                            | Increase (decrease) in cash attributable to changes
in assets and liabilities: |                                                |            |           |           |            |            |           |           |           |            |           |           
|                                                    |                                                                                            |                                                                                | Accounts receivable                            |            |           | 1,492,287 |            |            |           | (636,223  | )         |            |           | 259,742    |  
|                                                    |                                                                                            |                                                                                | Inventories                                    |            |           | (485,619  | )          |            |           | 1,464,046 |           |            |           | (2,455,553 | )
|                                                    |                                                                                            |                                                                                | Prepaid expenses                               |            |           | (361,899  | )          |            |           | 114,032   |           |            |           | (246,352   | )
|                                                    |                                                                                            |                                                                                | Other assets                                   |            |           | 147,527   |            |            |           | (38,796   | )         |            |           | 154,613    |  
|                                                    |                                                                                            |                                                                                | Accounts payable and other current liabilities |            |           | 420,314   |            |            |           | 7,421     |           |            |           | (119,566   | )
|                                                    |                                                                                            |                                                                                | Unearned maintenance revenues                  |            |           | (36,470   | )          |            |           | 192,416   |           |            |           | 391,752    |  
|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|Net cash provided by (used in) operating activities |                                                                                            |                                                                                | 6,997,129                                      |            |           |           | 6,244,376  |            |           |           | 663,286   |           
|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|Cash flows from investing activities                |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|                                                    | Proceeds from sale of marketable securities                                                |                                                                                |                                                |            |           |           |            |            |           |           |           | 13,500,000 |          
|                                                    | Acquisition of marketable securities                                                       |                                                                                |                                                |            |           |           |            |            |           |           |           | (7,499,380 | )        
|                                                    | Acquisition of property and equipment                                                      |                                                                                |                                                | (602,711   | )         |           |            | (3,928,177 | )         |           |           | (978,359   | )        
|                                                    | Payments for intangible assets                                                             |                                                                                |                                                | (564,012   | )         |           |            | (501,038   | )         |           |           | (577,040   | )        
|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|Net cash provided by (used in) investing activities |                                                                                            |                                                                                | (1,166,723                                     | )          |           |           | (4,429,215 | )          |           |           | 4,445,221 |           
|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|Cash flows from financing activities                |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|                                                    | Proceeds from mortgage payable                                                             |                                                                                |                                                |            |           |           |            | 2,287,500  |           |           |           |            |          
|                                                    | Payments of obligations under capital leases                                               |                                                                                |                                                | (130,320   | )         |           |            | (187,692   | )         |           |           | (230,229   | )        
|                                                    | Payments of mortgage payable                                                               |                                                                                |                                                | (52,615    | )         |           |            | (16,523    | )         |           |           |            |          
|                                                    | Exercise of stock options and warrants                                                     |                                                                                |                                                | 2,085,288  |           |           |            | 36,500     |           |           |           | 82,449     |          
|                                                    | Purchase of treasury stock                                                                 |                                                                                |                                                | (3,742,979 | )         |           |            | (449,439   | )         |           |           | (731,135   | )        
|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|Net cash provided by (used in) financing activities |                                                                                            |                                                                                | (1,840,626                                     | )          |           |           | 1,670,346  |            |           |           | (878,915  | )         
|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|Effect of exchange rate changes on cash             |                                                                                            |                                                                                | (7,588                                         | )          |           |           | (11,415    | )          |           |           | (24,645   | )         
|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|Net increase in cash and cash equivalents           |                                                                                            |                                                                                | 3,982,192                                      |            |           |           | 3,474,092  |            |           |           | 4,204,947 |           
|Cash and cash equivalents,beginning of year         |                                                                                            |                                                                                | 10,211,398                                     |            |           |           | 6,737,306  |            |           |           | 2,532,359 |           
|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |           
|Cash and cash equivalents,end of year               |                                                                                            | $                                                                              | 14,193,590                                     |            |           | $         | 10,211,398 |            |           | $         | 6,737,306 |           
|                                                    |                                                                                            |                                                                                |                                                |            |           |           |            |            |           |           |           |            |          

See accompanying notes to consolidated financial statements.

F-5



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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

|                                                                       |                                                    |      |   |           |  |      |   |         |  |  |   |         | 
|---------------------------------------------------------------------- | -------------------------------------------------- | ---- | - | --------- |  | ---- | - | ------- |  |  | - | ------- | 
|Years Ended December 31,                                               |                                                    | 2002 |   | 2001      |  | 2000
|                                                                       |                                                    |      |   |           |  |     
|Supplemental disclosures of cash flow                                  |                                                    |      |   |           |  |      |   |         |  |  |   |        
|information, cash paid during the year for:                            |                                                    |      |   |           |  |      |   |         |  |  |   |        
|                                                                       | Interest                                           |      | $ | 177,739   |  |      | $ | 89,298  |  |  | $ | 69,545  | 
|                                                                       |                                                    |      |   |           |  |      |   |         |  |  |   |         | 
|                                                                       | Income taxes                                       |      | $ | 1,180,637 |  |      | $ | 138,692 |  |  | $ | 253,265 | 
|                                                                       |                                                    |      |   |           |  |      |   |         |  |  |   |         | 
|Supplemental disclosure of noncash investing and
financing activities: |                                                    |      |   |           |  |      |   |         |  |  |   |        
|                                                                       | Machinery and equipment transferred from
inventory |      | $ | 825,755   |  |      | $ | 761,190 |  |  | $ |        | 
|                                                                       |                                                    |      |   |           |  |      |   |         |  |  |   |         | 

F-6











See accompanying notes to consolidated financial statements.



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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of operations and summary of significant accounting policies

Nature of Operations

Stratasys, Inc. and Subsidiaries (collectively the Company) develops,
manufactures and markets a family of rapid prototyping systems (RPS) and
devices that permit engineers and designers to create physical models and
prototypes, made of various materials, utilizing three dimensional Computer
Aided Design (3D CAD) files at a CAD workstation. The Company sells these
devices and the related consumable materials and maintenance worldwide.

Principles of Consolidation

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

Fair Value of Financial Instruments

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

Cash Equivalents

The Company considers all highly-liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.

Accounts Receivable

The Company carries its accounts receivable at cost less an allowance for
returns and doubtful accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for returns and doubtful
accounts based on a history of returns, past write-offs and collections and
current credit conditions.

Inventories

Inventories are stated on the first-in, first-out method, at the lower of cost,
or market. Inventory costs are comprised of material, direct labor and
overhead.

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 less accumulated depreciation and
amortization. Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the assets ranging from
2-30 years.

F-7





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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Intangible Assets

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

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

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

Unearned Maintenance Revenues

Maintenance revenues are recognized on a straight-line basis over the term of
the related maintenance contracts, which are typically one to two years.

Revenue Recognition

The Company recognizes revenues from the sale of RPS machines when shipped.
The Company establishes allowances for estimated returns at the time of
shipment. Service revenues, excluding maintenance contracts, are recognized at
the time the services are performed.

Advertising

Advertising costs are charged to operations as incurred and were approximately
$854,000, $584,000, and $704,000 for 2002, 2001 and 2000, respectively.

Research and Development Costs

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

Income Taxes

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

F-8





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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Income Per Common Share

The Company complies with SFAS No. 128, Earnings Per Share. 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 share in the income of the Company. 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 upon the
assumed exercise of stock options and warrants, net of shares hypothetically
repurchased at the average market price with the proceeds of exercise of
258,074 in 2002, 30,863 in 2001, and 157,174 in 2000.

Stock-Based Compensation

The Company follows SFAS No. 123 Accounting for Stock-Based Compensation.
The provisions of SFAS No. 123 allow companies to either expense the estimated
fair value of stock options or to continue to follow the intrinsic value method
set forth in APB Opinion 25, Accounting for Stock Issued to Employees (APB
25) but disclose the pro forma effect on net income (loss) had the fair value
of the options been expensed. The Company has elected to continue to apply APB
25 in accounting for its stock option incentive plans.

Use of Estimates

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

Comprehensive Income

The Company complies with SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes rules for the reporting and display of comprehensive income
and its components; however, the compliance with this Statement has no impact
on the Companys net income or stockholders equity. SFAS No. 130 requires the
Companys change in the foreign currency translation adjustment to be included
in other comprehensive income.

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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Accounts receivable

At December 31, 2002 and 2001, accounts receivable included balances due from
foreign entities of approximately $6,388,000 and $8,096,000, respectively.

3. Inventories

Inventories consist of the following at December 31:

|               |  |      |           |      |  |   |           | 
|-------------- |  | ---- | --------- | ---- |  | - | --------- | 
|               |  | 2002 |           | 2001
|               |  |      |           |     
|Finished goods |  | $    | 2,869,223 |      |  | $ | 3,009,943 | 
|Raw materials  |  |      | 3,668,223 |      |  |   | 3,867,639 | 
|               |  |      |           |      |  |   |           | 
|               |  | $    | 6,537,446 |      |  | $ | 6,877,582 | 
|               |  |      |           |      |  |   |           | 

4. Property and equipment

Property and equipment consists of the following at December 31:

|                                          |  |      |            |      |  |   |            | 
|----------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                          |  | 2002 |            | 2001
|                                          |  |      |            |     
|Machinery and equipment                   |  | $    | 5,678,761  |      |  | $ | 4,458,475  | 
|Building                                  |  |      | 2,330,953  |      |  |   | 2,330,953  | 
|Land                                      |  |      | 694,876    |      |  |   | 694,876    | 
|Computer equipment and software           |  |      | 3,376,780  |      |  |   | 3,249,933  | 
|Office equipment                          |  |      | 840,747    |      |  |   | 809,666    | 
|Leasehold improvements                    |  |      | 1,324,587  |      |  |   | 1,292,437  | 
|                                          |  |      |            |      |  |   |            | 
|                                          |  |      | 14,246,704 |      |  |   | 12,836,340 | 
|Accumulated depreciation and
amortization |  |      | 8,309,504  |      |  |   | 6,829,811  | 
|                                          |  |      |            |      |  |   |            | 
|                                          |  | $    | 5,937,200  |      |  | $ | 6,006,529  | 
|                                          |  |      |            |      |  |   |            | 

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STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Intangible assets

Intangible assets consist of the following at December 31:

|                                       |  |                 |           |              |  |                 |           |              |  |   |           |  |  |   |           | 
|-------------------------------------- |  | --------------- | --------- | ------------ |  | --------------- | --------- | ------------ |  | - | --------- |  |  | - | --------- | 
|                                       |  | 2002            |           | 2001        
|                                      
|                                       |  | Gross           |           | Accumulated  |  | Gross           |           | Accumulated 
|                                       |  | Carrying Amount |           | Amortization |  | Carrying Amount |           | Amortization
|                                       |  |                 |           |              |  |                 |           |             
|RPS technology                         |  | $               | 2,858,532 |              |  | $               | 1,913,071 |              |  | $ | 2,858,532 |  |  | $ | 1,647,895 | 
|Capitalized software
development costs |  |                 | 3,622,518 |              |  |                 | 2,836,218 |              |  |   | 3,329,699 |  |  |   | 2,362,938 | 
|Patents                                |  |                 | 1,809,243 |              |  |                 | 595,638   |              |  |   | 1,538,933 |  |  |   | 436,502   | 
|Trademarks                             |  |                 | 17,227    |              |  |                 | 9,192     |              |  |   | 16,344    |  |  |   | 7,951     | 
|                                       |  |                 |           |              |  |                 |           |              |  |   |           |  |  |   |           | 
|                                       |  |                 | 8,307,520 |              |  | $               | 5,354,119 |              |  |   | 7,743,508 |  |  | $ | 4,455,286 | 
|                                       |  |                 |           |              |  |                 |           |              |  |   |           |  |  |   |           | 
|Accumulated amortization               |  |                 | 5,354,119 |              |  |                 |           |              |  |   | 4,455,286 |  |  |   |           | 
|                                       |  |                 |           |              |  |                 |           |              |  |   |           |  |  |   |           | 
|                                       |  | $               | 2,953,401 |              |  |                 |           |              |  | $ | 3,288,222 |  |  |   |           | 
|                                       |  |                 |           |              |  |                 |           |              |  |   |           |  |  |   |           | 
|Aggregate amortization expense         |  | $               | 898,833   |              |  |                 |           |              |  | $ | 734,377   |  |  |   |           | 
|                                       |  |                 |           |              |  |                 |           |              |  |   |           |  |  |   |           | 

For the years ended December 31, 2002, 2001 and 2000, amortization of
capitalized software development costs charged to operations was $473,280,
$334,590 and $97,611, respectively.

Estimated amortization expense for the five years subsequent to December 31,
2002 is as follows:

|                         |  |   |         | 
|------------------------ |  | - | ------- | 
|Year ending December 31, |  |   |         | 
|                         |  |   |         | 
|2003                     |  | $ | 940,000 | 
|2004                     |  |   | 780,000 | 
|2005                     |  |   | 467,000 | 
|2006                     |  |   | 352,000 | 
|2007                     |  |   | 200,000 | 

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STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Credit line

The Company has an available line of credit from a financial institution for
the lesser of $4,000,000 or a defined borrowing base. The credit line bears
interest at defined rates based upon two different indexes and expires in June
2003. No amounts were outstanding at December 31, 2002 and 2001.

7. Accounts payable and other current liabilities

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

|                                               |  |      |           |      |  |   |           | 
|---------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                               |  | 2002 |           | 2001
|                                               |  |      |           |     
|Trade                                          |  | $    | 673,607   |      |  | $ | 697,608   | 
|Compensation, commissions
and related benefits |  |      | 2,683,150 |      |  |   | 2,063,501 | 
|Reserve for warranty expenses                  |  |      | 92,963    |      |  |   | 134,529   | 
|Other                                          |  |      | 691,915   |      |  |   | 840,646   | 
|                                               |  |      |           |      |  |   |           | 
|                                               |  | $    | 4,141,635 |      |  | $ | 3,736,284 | 
|                                               |  |      |           |      |  |   |           | 

8. Mortgage payable

In August 2001, the Company obtained a mortgage from a bank of $2,287,500 for
the purchase of land and building used in the Companys manufacturing
operations, which was previously leased. The loan is payable in monthly
installments of $18,396, including interest of 7.38% per annum, with a final
payment in July 2006. The loan is collateralized by the property.

Annual principal payments subsequent to December 31, 2002 are as follows:

|                         |  |   |           |  |  |  |  | 
|------------------------ |  | - | --------- |  |  |  |  | 
|Year ending December 31, |  |   |           |  |  |  |  | 
|                         |  |   |           |  |  |  |  | 
|2003                     |  | $ | 61,572    | 
|2004                     |  |   | 63,712    | 
|2005                     |  |   | 68,576    | 
|2006                     |  |   | 2,024,502 | 
|                         |  |   |           | 
|                         |  | $ | 2,218,362 | 
|                         |  |   |           | 

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STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Income taxes

The components of the Companys deferred tax assets (liabilities) at December
31, 2002 and 2001 are as follows:

|                                                  |  |      |           |      |  |   |           |  
|------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | -
|                                                  |  | 2002 |           | 2001
|                                                  |  |      |           |     
|Net operating loss carryforwards                  |  | $    |          |      |  | $ | 80,000    |  
|Depreciation                                      |  |      | 49,000    |      |  |   | 198,000   |  
|Amortization                                      |  |      | 47,000    |      |  |   | (32,000   | )
|Allowance for doubtful accounts                   |  |      | 125,000   |      |  |   | 118,000   |  
|Reserve for warranty expenses                     |  |      | 35,000    |      |  |   | 50,000    |  
|Reserve for sales returns, net                    |  |      | 73,000    |      |  |   | 90,000    |  
|Unrealized gain on foreign currency               |  |      | (107,000  | )    |  |   | (12,000   | )
|Federal minimum tax credit
carryforwards          |  |      | 156,000   |      |  |   | 162,000   |  
|Research and development tax
credit carryforwards |  |      | 1,922,000 |      |  |   | 1,955,000 |  
|                                                  |  |      |           |      |  |   |           |  
|                                                  |  | $    | 2,300,000 |      |  | $ | 2,609,000 |  
|                                                  |  |      |           |      |  |   |           |  

At December 31, 2002, the Company had research and development tax credit
carryforwards of approximately $1,922,000 which can be utilized against future
federal income tax and expire in various years through 2021.

Income before income taxes (benefit) consists of the following:

|              |  |      |           |      |  |      |           |  |  |   |         | 
|------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|              |  | 2002 |           | 2001 |  | 2000
|              |  |      |           |      |  |     
|United States |  | $    | 3,758,912 |      |  | $    | 3,446,884 |  |  | $ | 822,354 | 
|Foreign       |  |      | 142,972   |      |  |      | 76,173    |  |  |   | 103,534 | 
|              |  |      |           |      |  |      |           |  |  |   |         | 
|              |  | $    | 3,901,884 |      |  | $    | 3,523,057 |  |  | $ | 925,888 | 
|              |  |      |           |      |  |      |           |  |  |   |         | 

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STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Income taxes (continued)

The components of income taxes (benefit) for the years ended December 31, 2002,
2001 and 2000 are as follows:

|         |         |  |      |         |      |  |      |           |   |  |   |          |  
|-------- | ------- |  | ---- | ------- | ---- |  | ---- | --------- | - |  | - | -------- | -
|         |         |  | 2002 |         | 2001 |  | 2000
|         |         |  |      |         |      |  |     
|Current  |         |  |      |         |      | 
|         | Federal |  | $    | 409,369 |      |  | $    | 620,803   |   |  | $ | 51,831   |  
|         | State   |  |      | 33,325  |      |  |      | 46,714    |   |  |   | 42,765   |  
|         | Foreign |  |      | 39,408  |      |  |      | 35,355    |   |  |   | 37,991   |  
|         |         |  |      |         |      |  |      |           |   |  |   |          |  
|         |         |  |      | 482,102 |      |  |      | 702,872   |   |  |   | 132,587  |  
|         |         |  |      |         |      |  |      |           |   |  |   |          |  
|Deferred |        
|         | Federal |  |      | 214,000 |      |  |      | 383,000   |   |  |   | (231,000 | )
|         | State   |  |      | 95,000  |      |  |      | (76,000   | ) |  |   | 36,000   |  
|         |         |  |      |         |      |  |      |           |   |  |   |          |  
|         |         |  |      | 309,000 |      |  |      | 307,000   |   |  |   | (195,000 | )
|         |         |  |      |         |      |  |      |           |   |  |   |          |  
|         |         |  | $    | 791,102 |      |  | $    | 1,009,872 |   |  | $ | (62,413  | )
|         |         |  |      |         |      |  |      |           |   |  |   |          |  

A reconciliation of the statutory federal income tax rate and the effective tax
rate follows:

|                                                                 |  |      |      |      |  |      |      |   |  |  |       |   
|---------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ----- | --
|                                                                 |  | 2002 |      | 2001 |  | 2000
|                                                                 |  |      |      |      |  |     
|Federal statutory rate                                           |  |      | 34.0 | %    |  |      | 34.0 | % |  |  | 34.0  | % 
|Foreign sales corporation
exclusion                              |  |      | (2.0 | )    |  |      | (3.1 | ) |  |  | (3.0  | ) 
|Earnings of subsidiaries taxed
at other than U.S. statutory rate |  |      | 0.2  |      |  |      | 0.1  |   |  |  | (1.5  | ) 
|State income taxes, net of
federal effect                        |  |      | 1.1  |      |  |      | (0.8 | ) |  |  | 8.5   |   
|Permanent differences and other                                  |  |      | (8.7 | )    |  |      | 6.0  |   |  |  | 4.2   |   
|Utilization of research and
development tax credit               |  |      | (4.3 | )    |  |      | (7.5 | ) |  |  | (48.9 | ) 
|                                                                 |  |      |      |      |  |      |      |   |  |  |       |   
|Effective income tax rate                                        |  |      | 20.3 | %    |  |      | 28.7 | % |  |  | (6.7  | )%
|                                                                 |  |      |      |      |  |      |      |   |  |  |       |   

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STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Commitments

The Company rents certain of its facilities under leases, which expire through
2005.

Aggregate future minimum annual rental payments in the years subsequent to
December 31, 2002 are approximately as follows:

Year
ending December 31,

|     |  |   |         | 
|---- |  | - | ------- | 
|2003 |  | $ | 351,000 | 
|2004 |  |   | 277,000 | 
|2005 |  |   | 51,000  | 

Rent expense for the years ended December 31, 2002, 2001 and 2000 was
approximately $512,000, $654,000 and $666,000, respectively.

11. Stock options and warrants

The Company has various stock option plans that have been approved by
shareholders. The plans provide for the granting of options to buy
the Companys common stock
to qualified employees of the Company, independent contractors, consultants,
and other persons to purchase up to 2,550,000 shares of common stock. Of the
2,550,000 options available for grant, 1,746,634 options have been granted,
leaving 803,366 options left to be granted by the Company. No stock-based
employee compensation cost is reflected in net income, as all options under the
plans are granted at a price not less than the fair market value of the
Companys common stock at the date of grant. All options are principally
exercisable over five years. All options granted are net of terminations and
expirations.

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STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Stock options and warrants (continued)

The following summarizes the information relating to outstanding stock options
and the activity during 2002, 2001 and 2000:

|                                         |  |        |           |              |  |        |             |         |  |          |       | 
|---------------------------------------- |  | ------ | --------- | ------------ |  | ------ | ----------- | ------- |  | -------- | ----- | 
|                                         |  |        |           |              |  |        |             |         |  | Weighted
|                                         |  | Number |           |              |  |        |             | Average
|                                         |  | of     |           | Per Share    |  | Option
|                                         |  | Shares |           | Option Price |  | Price 
|                                         |  |        |           |              |  |       
|Shares under option
at January 1, 2000   |  |        | 1,408,539 |              |  | $      | 1.59-$23.56 |         |  | $        | 7.09  | 
|Granted in 2000                          |  |        | 104,232   |              |  |        | 2.34-11.31  |         |  |          | 7.23  | 
|Exercised in 2000                        |  |        | (19,048   | )            |  |        | 1.59-7.13   |         |  |          | 3.09  | 
|Expired in 2000                          |  |        | (17,000   | )            |  |        | 5.38-5.38   |         |  |          | 5.38  | 
|Forfeited in 2000                        |  |        | (152,096  | )            |  |        | 4.44-23.56  |         |  |          | 18.45 | 
|                                         |  |        |           |              |  |        |             |         |  |          |       | 
|Shares under option
at December 31, 2000 |  |        | 1,324,627 |              |  |        | 1.59-21.81  |         |  |          | 7.12  | 
|Granted in 2001                          |  |        | 283,650   |              |  |        | 2.76-6.24   |         |  |          | 3.08  | 
|Exercised in 2001                        |  |        | (7,300    | )            |  |        | 5.00-5.00   |         |  |          | 5.00  | 
|Expired in 2001                          |  |        | (100,300  | )            |  |        | 5.25-17.50  |         |  |          | 10.55 | 
|Forfeited in 2001                        |  |        | (42,100   | )            |  |        | 2.34-9.13   |         |  |          | 5.82  | 
|                                         |  |        |           |              |  |        |             |         |  |          |       | 
|Shares under option
at December 31, 2001 |  |        | 1,458,577 |              |  |        | 1.59-21.81  |         |  |          | 6.73  | 
|Granted in 2002                          |  |        | 56,500    |              |  |        | 5.00-9.38   |         |  |          | 6.58  | 
|Exercised in 2002                        |  |        | (384,906  | )            |  |        | 2.91-8.00   |         |  |          | 5.42  | 
|Expired in 2002                          |  |        | (227,120  | )            |  |        | 5.00-21.44  |         |  |          | 9.00  | 
|Forfeited in 2002                        |  |        | (14,521   | )            |  |        | 2.91-20.63  |         |  |          | 8.01  | 
|                                         |  |        |           |              |  |        |             |         |  |          |       | 
|Shares under option
at December 31, 2002 |  |        | 888,530   |              |  | $      | 1.59-$21.81 |         |  | $        | 6.32  | 
|                                         |  |        |           |              |  |        |             |         |  |          |       | 
|Options exercisable at
December 31, 2002 |  |        | 616,930   |              |  | $      | 1.59-$21.81 |         |  | $        | 6.46  | 
|                                         |  |        |           |              |  |        |             |         |  |          |       | 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Stock options and warrants (continued)

The Company, as part of sales of common stock and other agreements, has issued
warrants to purchase the Companys common stock. The following summarizes the
information relating to warrants issued and the activity during 2002, 2001 and
2000:

|                                                    |  |        |          |               |  |         |             |         |  |          |       | 
|--------------------------------------------------- |  | ------ | -------- | ------------- |  | ------- | ----------- | ------- |  | -------- | ----- | 
|                                                    |  |        |          |               |  |         |             |         |  | Weighted
|                                                    |  | Number |          |               |  |         |             | Average
|                                                    |  | of     |          | Per Share     |  | Warrant
|                                                    |  | Shares |          | Warrant Price |  | Price  
|                                                    |  |        |          |               |  |        
|Shares under warrants
at January 1, 2000            |  |        | 236,355  |               |  | $       | 5.00-$15.44 |         |  | $        | 12.48 | 
|Issued in 2000                                      |  |        | 121,000  |               |  |         | 3.60-7.00   |         |  |          | 5.58  | 
|Exercised in 2000                                   |  |        | (13,000  | )             |  |         | 5.00-5.00   |         |  |          | 5.00  | 
|Expired in 2000                                     |  |        | (69,355  | )             |  |         | 14.00-15.44 |         |  |          | 14.10 | 
|Forfeited in 2000                                   |  |        | (60,000  | )             |  |         | 7.00-7.00   |         |  |          | 7.00  | 
|                                                    |  |        |          |               |  |         |             |         |  |          |       | 
|Shares under warrants
at December 31, 2000
and 2001 |  |        | 215,000  |               |  |         | 3.60-13.88  |         |  |          | 10.06 | 
|Expired in 2002                                     |  |        | (173,000 | )             |  |         | 5.00-13.88  |         |  |          | 11.57 | 
|                                                    |  |        |          |               |  |         |             |         |  |          |       | 
|Shares under warrants
at December 31, 2002          |  |        | 42,000   |               |  | $       | 3.60-$5.00  |         |  | $        | 3.80  | 
|                                                    |  |        |          |               |  |         |             |         |  |          |       | 

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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Stock options and warrants (continued)

Had compensation cost for the Companys five stock option plans been determined
based on the fair value, at the grant or issue date, in 2002, 2001 and 2000
and, consistent with the provisions of SFAS No. 123, the Companys net income
and income per share would have been reduced to the pro forma amounts indicated
below:

|                                                                                                                            |  |      |           |      |  |      |           |  |  |   |         | 
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|                                                                                                                            |  | 2002 |           | 2001 |  | 2000
|                                                                                                                            |  |      |           |      |  |     
|Net income, as reported                                                                                                     |  | $    | 3,110,782 |      |  | $    | 2,513,185 |  |  | $ | 988,301 | 
|Deduct: Total stock based
compensation expense determined
under fair value method for all
awards, net of related tax effect |  |      | 457,000   |      |  |      | 526,000   |  |  |   | 451,800 | 
|                                                                                                                            |  |      |           |      |  |      |           |  |  |   |         | 
|Net income, pro forma                                                                                                       |  | $    | 2,653,782 |      |  | $    | 1,987,185 |  |  | $ | 536,501 | 
|                                                                                                                            |  |      |           |      |  |      |           |  |  |   |         | 
|Earnings per share:                                                                                                         |  |      |           |      |  |      |           |  |  |   |         | 
|Basic income per share -
as reported                                                                                        |  | $    | 0.58      |      |  | $    | 0.46      |  |  | $ | 0.18    | 
|                                                                                                                            |  |      |           |      |  |      |           |  |  |   |         | 
|Diluted income per share -
as reported                                                                                      |  | $    | 0.56      |      |  | $    | 0.46      |  |  | $ | 0.17    | 
|                                                                                                                            |  |      |           |      |  |      |           |  |  |   |         | 
|Basic income per share -
pro forma                                                                                          |  | $    | 0.50      |      |  | $    | 0.36      |  |  | $ | 0.10    | 
|                                                                                                                            |  |      |           |      |  |      |           |  |  |   |         | 
|Diluted income per share -
pro forma                                                                                        |  | $    | 0.47      |      |  | $    | 0.36      |  |  | $ | 0.09    | 
|                                                                                                                            |  |      |           |      |  |      |           |  |  |   |         | 

The Company used the Black-Scholes option-pricing model to determine the fair
value of grants made in 2002, 2001 and 2000. The following assumptions were
applied in determining the pro forma compensation cost:

|                          |  |           |           |         |  |         |      |   |  |  |      |  
|------------------------- |  | --------- | --------- | ------- |  | ------- | ---- | - |  |  | ---- | -
|                          |  | 2002      |           | 2001    |  | 2000   
|                          |  |           |           |         |  |        
|Risk-free interest rate   |  |           | 4.19-4.49 | %       |  |         | 5.00 | % |  |  | 5.94 | %
|Expected option term      |  | 5-6 years |           | 4 years |  | 4 years
|Expected price volitility |  |           | 83        | %       |  |         | 83   | % |  |  | 62   | %
|Dividend yield            |  |           |          |         |  |         |     |   |  |  |     |  

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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Export sales

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

|             |  |      |            |      |  |      |            |  |  |   |            | 
|------------ |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|             |  | 2002 |            | 2001 |  | 2000
|             |  |      |            |      |  |     
|Europe       |  | $    | 8,817,770  |      |  | $    | 8,017,111  |  |  | $ | 6,657,860  | 
|Asia Pacific |  |      | 9,091,108  |      |  |      | 9,916,468  |  |  |   | 8,642,917  | 
|Other        |  |      | 1,512,068  |      |  |      | 1,350,352  |  |  |   | 3,305,884  | 
|             |  |      |            |      |  |      |            |  |  |   |            | 
|             |  | $    | 19,420,946 |      |  | $    | 19,283,931 |  |  | $ | 18,606,661 | 
|             |  |      |            |      |  |      |            |  |  |   |            | 

13. Quarterly results (unaudited)

|     |                                                       |         |   |           |       |         |   |            |      |         |   |            |      |  |   |            |      | 
|---- | ----------------------------------------------------- | ------- | - | --------- | ----- | ------- | - | ---------- | ---- | ------- | - | ---------- | ---- |  | - | ---------- | ---- | 
|     |                                                       |         |   | First     |       | Second  |   | Third      |      | Fourth 
|     |                                                       |         |   | Quarter   |       | Quarter |   | Quarter    |      | Quarter
|     |                                                       |         |   |           |       |         |   |            |      |        
|2002 |                                                      
|     | Net sales                                             |         | $ | 6,396,389 |       |         | $ | 10,111,608 |      |         | $ | 12,028,475 |      |  | $ | 11,271,417 |     
|     | Gross profit                                          |         |   | 3,946,254 |       |         |   | 5,819,280  |      |         |   | 7,701,580  |      |  |   | 6,899,327  |     
|     | Net income (loss)                                     |         |   | (724,926  | )     |         |   | 517,851    |      |         |   | 1,723,214  |      |  |   | 1,594,643  |     
|     | Income (loss) per
common and common
equivalent share: |         |   |           |       |         |   |            |      |         |   |            |      |  |   |            |     
|     |                                                       | Basic   |   |           | (0.14 | )       |   |            | 0.10 |         |   |            | 0.32 |  |   |            | 0.30 | 
|     |                                                       | Diluted |   |           | (0.14 | )       |   |            | 0.09 |         |   |            | 0.31 |  |   |            | 0.29 | 
|2001 |                                                      
|     | Net sales                                             |         | $ | 8,687,689 |       |         | $ | 9,223,715  |      |         | $ | 9,703,008  |      |  | $ | 9,957,170  |     
|     | Gross profit                                          |         |   | 5,098,476 |       |         |   | 5,532,138  |      |         |   | 5,931,270  |      |  |   | 6,438,883  |     
|     | Net income                                            |         |   | 197,818   |       |         |   | 416,309    |      |         |   | 979,667    |      |  |   | 919,391    |     
|     | Income per
common and common equivalent share:        |         |   |           |       |         |   |            |      |         |   |            |      |  |   |            |     
|     |                                                       | Basic   |   |           | 0.04  |         |   |            | 0.08 |         |   |            | 0.18 |  |   |            | 0.16 | 
|     |                                                       | Diluted |   |           | 0.04  |         |   |            | 0.08 |         |   |            | 0.18 |  |   |            | 0.16 | 

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##### Table of Contents



STRATASYS, INC. AND SUBSIDIARIES

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

|            |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |         | 
|----------- | ---------------------------------------------- | -------- | ----------- | --------- | ----------- | -------- | ---------- | --------- | -------- |  | - | --------- |  |  | - | ------- | 
|COLUMN A    |                                                | Column B |             | Column C  |             | Column D |            | Column E 
|            |                                                |          |             |           |             |          |            |          
|            |                                                |          | Balances at |           | Additions - |          | Deductions |           | Balances
|            |                                                |          | Beginning   |           | Charged     |          | from       |           | at End  
|DESCRIPTION |                                                | Of Year  |             | to Income |             | Reserves |            | of Year  
|            |                                                |          |             |           |             |          |            |          
|2002        |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |        
|            | Reserve for bad debts and allowances           |          | $           | 317,955   |             |          | $          | 281,732   |          |  | $ | 260,794   |  |  | $ | 338,893 | 
|            |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |        
|            | Reserve for sales returns and other allowances |          | $           | 244,933   |             |          | $          | 102,366   |          |  | $ | 148,818   |  |  | $ | 198,481 | 
|            |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |        
|2001        |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |        
|            | Reserve for bad debts and allowances           |          | $           | 264,260   |             |          | $          | 60,000    |          |  | $ | 6,305     |  |  | $ | 317,955 | 
|            |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |        
|            | Reserve for sales returns and other allowances |          | $           | 194,099   |             |          | $          | 390,880   |          |  | $ | 340,046   |  |  | $ | 244,933 | 
|            |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |        
|2000        |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |        
|            | Reserve for bad debts and allowances           |          | $           | 300,000   |             |          | $          | 1,489     |          |  | $ | 37,229    |  |  | $ | 264,260 | 
|            |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |        
|            | Reserve for sales returns and other allowances |          | $           | 120,833   |             |          | $          | 1,766,397 |          |  | $ | 1,693,131 |  |  | $ | 194,099 | 
|            |                                                |          |             |           |             |          |            |           |          |  |   |           |  |  |   |        

F-20



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##### Table of Contents






SIGNATURES

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

|                      |                 |                          |  |  |  | 
|--------------------- | --------------- | ------------------------ |  |  |  | 
|                      | STRATASYS, INC.
|                      |                 |                          |  |  |  | 
|                      | By:             | /s/ S. Scott Crump       |  |  |  | 
|Dated: March 25, 2003 |                 | 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.

|                                               |  |                                                                                                                 |  |                
|---------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ---------------
|/s/ S. Scott CrumpS. Scott Crump               |  | Chairman of the Board of Directors,President, Chief
Executive Officer,
Treasurer,
(Principal Executive
Officer) |  | March  25, 2003
|                                              
|                                               |  |                                                                                                                 |  |                
|                                              
|/s/ Thomas W. StenoienThomas W. Stenoien       |  | Executive Vice
President and Chief
Financial Officer
(Principal Financial
and Accounting
Officer)               |  | March 25, 2003 
|                                              
|                                               |  |                                                                                                                 |  |                
|                                              
|/s/ Ralph E. CrumpRalph E. Crump               |  | Director                                                                                                        |  | March 25, 2003 
|                                              
|                                               |  |                                                                                                                 |  |                
|                                              
|/s/ Edward J. FierkoEdward J. Fierko           |  | Director                                                                                                        |  | March 25, 2003 
|                                              
|                                               |  |                                                                                                                 |  |                
|                                              
|/s/ Clifford H. SchwieterClifford H. Schwieter |  | Director                                                                                                        |  | March 25, 2003 
|                                              
|                                               |  |                                                                                                                 |  |                
|                                              
|/s/ Arnold J. WassermanArnold J. Wasserman     |  | Director                                                                                                        |  | March 25, 2003 
|                                              
|                                               |  |                                                                                                                 |  |                
|                                              
|/s/ Gregory L. WilsonGregory L. Wilson         |  | Director                                                                                                        |  | March 25, 2003 





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##### Table of Contents



CERTIFICATIONS

I, S. Scott Crump, certify that:

1.     I have reviewed this annual report on Form 10-K of Stratasys, Inc.
(the registrant);

2.     Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of and for the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors:

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal control; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                                                        
|-------------------- |  | -----------------------------------------------------------------------
|Date: March 25, 2003 |  | /s/ S. Scott Crump
S. Scott Crump
President and Chief Executive Officer





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##### Table of Contents



I, Thomas W. Stenoien, certify that:

1.     I have reviewed this annual report on Form 10-K of Stratasys, Inc.
(the registrant);

2.     Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of and for the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors:

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal control; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                                                  
|-------------------- |  | -----------------------------------------------------------------
|Date: March 25, 2003 |  | /s/ Thomas W. Stenoien
Thomas W. Stenoien
Chief Financial Officer