SPATIAL TECHNOLOGY INC, 10KSB, 2000-03-29

SPATIAL TECHNOLOGY INC
10KSB, 2000-03-29
PREPACKAGED SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934

FOR THE TRANSITION PERIOD TO .

COMMISSION FILE NUMBER 0-288-42

SPATIAL TECHNOLOGY INC.
(Name of Small Business Issuer in its charter)

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DELAWARE 84-1035353
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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2425 55TH STREET, SUITE 100, BOULDER, COLORADO 80301
(Address of principal executive offices, including zip code)

(303) 544-2900
(Issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE

Securities registered pursuant to Section 12(g) of the Act:
NONE

Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to be the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

The Issuer's revenues for its most recent fiscal year were: $14,900,000.

The aggregate market value of the voting stock held by non-affiliates of
the Issuer was $53,944,000 as of March 1, 2000.*

The number of shares of Common Stock outstanding was 11,443,823 as of March
1, 2000.

Transitional Small Business Disclosure Format. Yes [ ] No [X]

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 9, 10, 11 and 12) is
incorporated by reference to portions of the Issuer's definitive proxy statement
for the 2000 Annual Meeting of Stockholders which will be filed with the
Securities and Exchange Commission within 120 days after the fiscal year ended
December 31, 1999.
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* Excludes 3,377,414 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds five percent of the shares
outstanding at March 1, 2000. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Issuer, or that such person is controlled by or under common control with
the Issuer.

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SPATIAL TECHNOLOGY INC.

ANNUAL REPORT ON FORM 10-KSB
DECEMBER 31, 1999

TABLE OF CONTENTS

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PART I
Item 1 Description of Business..................................... 1
Item 2 Description of Property..................................... 10
Item 3 Legal Proceedings........................................... 10
Item 4 Submission of Matters to a Vote of Security Holders......... 10

PART II
Item 5 Market for Common Equity and Related Stockholder Matters.... 11
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 7 Financial Statements........................................ 25
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 38

PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act......................................................... 38
Item 10 Executive Compensation...................................... 38
Item 11 Security Ownership of Certain Beneficial Owners and
Management.................................................. 38
Item 12 Certain Relationships and Related Transactions.............. 38
Item 13 Exhibits, Lists and Reports on Form 8-K..................... 39
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Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

Spatial Technology Inc. ("Spatial" or the "Company") develops, markets and
supports Web-based, business-to-business ("B2B") application services for
professional engineers and state-of-the-art component 3D modeling software for
companies involved with 3D application development. The Company operates
predominantly in the manufacturing industry with special focus on the
computer-aided design ("CAD"), manufacturing ("CAM"), engineering ("CAE") and
architecture ("AEC") markets for 3D modeling software and services.

The year 1999 involved an important strategic transition for Spatial as the
Company moved to capitalize on its wealth of proprietary 3D technology and offer
3D Web-based B2B application services in addition to the Company's traditional
OEM business. Spatial successfully launched its first B2B application service,
3Dshare.com, for CAD model interoperability in October 1999 and became the
manufacturing industry's first Web-based application service for professional
engineers. Spatial's 3Dshare.com won several industry awards during the year by
addressing the issue of interoperability of 3D models. Spatial created
3DShare.com as the first Application Service under the PlanetCAD umbrella and is
planning other B2B application services as part of PlanetCAD.

Spatial continued its aggressive development schedule for the Company's
flagship product ACIS 3D Toolkit and related component technology throughout
1999 as evidenced by five significant releases: ACIS 5.0, ACIS 5.1, ACIS 5.2,
ACIS 5.3, and ACIS 6.0. In addition, two releases of the IntraVision family of
viewing products were shipped in 1999: IntraVision 4.0 and IntraVision 4.1.
Through 1999, Spatial continues to lead the 3D modeling field with a total of
550 ACIS licensees, more than 210 ACIS-based applications and over 1.5 million
end-user seats of ACIS-based products.

Spatial also completed two significant acquisitions during the year that
brought strategic products and talented people to the Company. In July, Spatial
acquired Sven Technologies of Palo Alto, California ("Sven") to extend the
Company's line of viewing related products and to secure significant Internet
experience. In December, the Company acquired MetroCAD of Saarbrucken, Germany
to gain expertise and products for creating 3D digital models from clouds of
points gathered from hardware devices such as laser scanners.

Entering 2000, the Company now operates two divisions, the PlanetCAD
Division and the Component Technology Division. The PlanetCAD Division is
focused on the development, marketing, sales, support and integration of 3D B2B
application services and supporting technology. The Component Technology
Division develops, markets and supports 3D component software products for the
Company's traditional OEM software market segment and for the Company's
PlanetCAD Division.

Spatial maintains its corporate office in Boulder, Colorado from which all
executive, marketing, finance, administrative and most research and development
functions are executed. The Company's PlanetCAD Division is based in San
Francisco, California and Boulder, Colorado. The Company has four wholly-owned
subsidiaries: Spatial Technology GmbH (Germany), Spatial Technology K.K.
(Japan), and Spatial Technology Ltd. (England) each of which assist in regional
sales and licensing of the Company's Component Products and PlanetCAD Enterprise
Products, internationally, and InterData Access Inc., also located in Boulder.

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PLANETCAD

3DShare.com is the first application services to be marketed through
PlanetCAD. 3Dshare.com is a 3D model healing and translation service which
enables interoperability among various CAD/CAM/CAE software applications. As of
March 2000, 3Dshare.com had more than 6,000 registered users. However, PlanetCAD
is designed to become a vertical portal and application service provider (ASP)
for manufacturing and design engineers who use mechanical engineering
(CAD/CAM/CAE) software. PlanetCAD will provide a business-to-business (B2B)
platform for delivering a broad set of Web-hosted software applications,
e-commerce, content, and community services to the more than 10 million
professional manufacturing and design engineers worldwide and throughout the
digital manufacturing supply chain.

PlanetCAD will target professional manufacturing and design engineers who
use mechanical engineering software and their managers in the manufacturing
supply chain. In addition to application services, PlanetCAD will generate
revenue from a broad set of hardware, software, and manufacturing services
e-commerce opportunities. PlanetCAD's e-commerce initiatives will target several
multi-billion dollar market segments which are integral to the digital
manufacturing supply chain.

PlanetCAD will provide Web-based application and portal services to the
professional manufacturing and design engineering community throughout the
digital manufacturing supply chain. The division will initially focus in the
area of mechanical engineering software, which is relevant to any engineer
involved in the design or manufacturing of consumer and business products.

PlanetCAD will leverage Spatial's existing base of over 550 component
software licensees with an end-user installed base of over 1,500,000 users to
market its portal site and Web application services. We anticipate PlanetCAD
will generate revenue from four primary sources:

- Application Services. The Company's first web-hosted application,
3DShare.com, was launched in the fourth quarter of 1999. It has won three
industry awards and has registered over 6,000 users during the first
three months in operation. The Company has identified several other
manufacturing and design engineering software technologies and products
which it intends to bring to the market via its ASP platform.

- Enterprise Sales of its Application Services. PlanetCAD intends to embed
its web-application services in an "enterprise wrapper" for intranet
deployment at large customer sites. The Company will sell the enterprise
version, through its own direct sales force, as well as value added
resellers and integrators. Partnerships with first tier hardware
companies like Hewlett Packard will be leveraged to accelerate sales of
the enterprise package.

- e-Commerce. The Company anticipates that its PlanetCAD portal will
generate e-commerce revenues from sales, auctions and brokerage services
of engineering-oriented hardware, software, publications, and services.
PlanetCAD's e-commerce initiatives address several multi-billion dollar
manufacturing market segments, including automobile, aircraft, computer
storage devices and telephone apparatus.

- Advertising. It is expected that PlanetCAD will provide an attractive
targeted audience for advertisers seeking to sell products and services
to manufacturing and design engineers.

COMPONENT TECHNOLOGIES

Since its inception in 1986, the Company has specialized in the design,
development and marketing of the ACIS 3D modeling software and related component
technology. Spatial licenses its 3D software products to OEMs for building
commercially available 3D software products and to large manufacturing companies
for building in-house proprietary 3D applications. The ACIS 3D modeling engine
is also broadly licensed to leading universities and research institutions
worldwide and is the foundation for many of the Company's other products.

The Company licenses its Component Technologies to software developers
using a direct sales force headquartered in Boulder, Colorado with sales offices
in Monchengladbach, Germany and Tokyo, Japan. Development licenses for the ACIS
3D Software vary in price depending on the licensed functionality and
distribution rights. Maintenance services, which include product updates, are
available for an annual fee. Most
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licensees also pay royalties based on a percentage of net revenue received from
applications incorporating the ACIS 3D Software.

The ACIS 3D modeling software is an open, object-oriented technology that
provides state-of-the-art modeling capabilities to numerous popular CAD/CAM/CAE
software applications. The software has been developed in C++ and employs a
modern "plug-in" architecture that lowers the cost for customer integration and
for Spatial's in-house development. Spatial's software runs on Microsoft(R)
Windows NT(TM), Windows(R) and the major Unix(R) operating system platforms.

In 1999, Spatial introduced five product releases of the ACIS 3D Toolkit
and introduced several component software products, including Pro/E(R) and
Catia(R) data translators to ACIS SAT, and JetScream(TM) for client-based high
quality visualization.

Today, there are over 550 ACIS licensees worldwide and over 210
ACIS-enabled applications that serve more than 1.5 million end-users, making
ACIS one of the most widely used 3D modeling kernels in the world. ACIS
end-users can interchange models with other ACIS end-users via the ACIS SAT(TM)
file format. The ACIS SAT file format is key to 3D model interoperability among
ACIS-enabled applications, including ABAQUS/CAE by Hibbit, Karlsson & Sorensen,
Inc., Alibre Design by Alibre Inc., AutoCAD, Inventor and Mechanical Desktop by
Autodesk, Inc., CADKEY by Cadkey, Inc., Space-E by Hitachi Zosen Information
Systems, GSCAD by Intergraph Corporation, IronCAD by Visionary Design Systems,
Inc., Maxwell 3D Field Simulation by Ansoft Corporation, and Vellum Solids by
Ashlar Inc.

PRODUCTS AND TECHNOLOGY

Spatial develops 3D modeling software, complementary products and
consulting services. Spatial's products and services help optimize engineering
processes in companies by enabling commercial software companies to create more
advanced, less expensive product modeling software products, and by enabling
cost-effective access, exchange and sharing of product data throughout the
manufacturing enterprise.

The Company's principal products include the ACIS 3D modeling engine and
associated optional component extensions. The ACIS 3D modeling engine, often
referred to as the ACIS "Kernel", is used for the creation, definition and
manipulation of 3D shapes. ACIS component extensions, also called "Husks",
enhance the modeling engine by providing optional, more advanced or targeted
functionality. The ACIS 3D Toolkit provides a suite of component extensions
packaged with the modeling engine. This packaging allows developers to shorten
the overall development process for 3D software applications, reducing their
development costs and time to market.

The Company's ACIS 3D modeling software is designed as an open,
component-based software technology that is compatible with the most popular
computing platforms. Open architecture allows commercial or corporate software
developers to integrate the ACIS 3D modeling engine and component extensions
with other "best of breed" applications and tools. This allows these developers
to better address the requirements of specific markets, products and
applications. In addition, the ACIS SAT data format has become established as a
de-facto industry standard that allows end-users to share 3D models created with
different ACIS-enabled applications.

The Company's Interoperability Solutions provide product data viewing and
exchange software for end-users in large manufacturing companies.
Interoperability Solutions and consulting services enable customers to optimize
engineering processes by providing efficient methods of sharing and accessing
product data throughout the design and manufacturing process.

In addition, the Company provides consulting services to assist software
developers in the effective use, implementation and deployment of products based
on their enabling products.

ACIS 3D Modeling Engine

The ACIS 3D modeling engine is the Company's flagship product and provides
the foundation for many of the Company's other products. ACIS enables solid,
surface and wire-frame modeling in a single modeling environment. The ACIS 3D
modeling engine uses a boundary-representation data format to accurately
represent

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the volume of a 3D model and uses a mathematical definitions of curves and
surfaces to model the shape of a model. This technique offers greater precision
than other 3D modeling techniques, such as wire-frame, planar-facet and surface
modeling techniques, and is better at producing complex objects with smooth
flowing lines, resulting in richer, more physically realistic models.

The informational completeness of ACIS models allows software applications
to calculate many other physical properties such as strength, center of gravity,
mass, flexibility and momentum. As a result, 3D applications employing ACIS 3D
models can incorporate many operations for building, manipulating and analyzing
3D shapes.

ACIS Component Toolkits

ACIS 3D TOOLKIT

The ACIS 3D Toolkit has been designed for rapid, low cost development of 3D
software applications. The ACIS 3D Toolkit consists of the ACIS 3D modeling
engine and a suite of component extensions to prototype and/or develop
applications that make it easy to create, manipulate, visualize and interact
with 3D models. Component extensions internal to the 3D Toolkit include geometry
construction, which facilitates the creation of geometric shapes, graphical
interaction, a graphical user interface for modeling, and basic rendering, which
applies shading, coloring and other visual features to the model. The ACIS 3D
Toolkit provides a powerful LISP-based scripting language allowing the Company's
customers to quickly prototype ACIS-enabled 3D applications. Applications
developers may also utilize an Applications Procedural Interface and direct C++
access to tightly integrate the functionality of the ACIS 3D modeling software
into their 3D applications.

The Company offers its customers development licenses for the ACIS 3D
Toolkit which range in price depending on the licensed functionality and
distribution rights. Optional maintenance services, including product updates,
are available for an annual fee. In addition, most licensees are required by
their license agreements to pay royalties typically based on a percentage of the
net revenue generated by their sales of applications incorporating the ACIS 3D
Toolkit.

OPTIONAL COMPONENT EXTENSIONS ("HUSKS")

In addition to the component extensions packaged with the ACIS 3D Toolkit,
the Company offers a series of optional component extensions, or "Husks", that
provide more advanced and specifically targeted functionality for the ACIS 3D
Toolkit. The introduction of new component extensions also enables the Company
to market new products to new and existing customers. Optional component
extensions are priced separately from the ACIS 3D Toolkit. Examples of component
extensions include:

- ACIS Advanced Blending Husk. ACIS Advanced Blending Husk extends the
functionality of ACIS 3D Toolkit's standard blending capabilities by
providing the functionality to perform a wide variety of complex blending
operations. It supports a wider variety of blend types for models with
increased topological and geometric complexity. The blend types include
constant radius blends, edge blends, elliptical blends, fixed width
blends, variable radius blends, rounded chamfer cross-sections,
entity-entity blends, and more.

- ACIS Advanced Rendering Husk. ACIS Advanced Rendering Husk is a powerful
rendering and visualization tool. The Husk enables a high-degree of
shading realism and functionality. It also permits more advanced
manipulation of backgrounds, foregrounds, lights, materials, texture
spaces, and shaders. This Husk is ideal for ACIS-enabled applications
that are used to design products, cars, and aircraft; for virtual
reality; and for many other 3D design and modeling applications.

- ACIS Advanced Surfacing Husk. This Husk provides various techniques for
fitting a surface through a set of curves. Skinning, lofting, and net
surfaces are related techniques for creating a face from a wireframe or
group of edges. Skinning passes a surface through a disjoint set of
edges. Lofting starts with a surface and extends this surface to pass
through a disjoint set of edges. Net surfaces stretches a surface across
a set of bi-directional curves, and supports curve directional alignment
and simplification to a plane, when appropriate.

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- ACIS AEC Husk. The ACIS AEC Husk provides a means to simplify the
representation of a model in memory and in the SAT file format. This husk
is intended strictly for architecture, engineering, and construction
applications, where most of the data consists of points and straight line
edges.

- ACIS Cellular Topology Husk. The ACIS Cellular Topology Husk offers the
functionality to decompose a model into smaller subregions or cells. The
benefit of this is that unique information, such as material properties,
can be associated with these cells. Then the material properties can be
tracked as the model changes.

- ACIS Deformable Modeling Husk. ACIS Deformable Modeling Husk brings
powerful, easy-to-use deformable modeling functionality to ACIS-enabled
applications. The Husk is an interactive sculpting tool for creating and
manipulating free-form curves and surfaces. Its local and global editing
features allow you to easily manipulate B-spline and NURB curves and
surfaces to achieve a very high level of artistic design while retaining
the ability to generate a precise machinable surface.

- ACIS Healing Husk. Many 3D models from legacy systems and models that
have been transferred through neutral file formats can have varying
levels of precision. These models can be inaccurate and, consequently,
unusable in many high-performance modeling applications. ACIS Healing
Husk provides the ability to "heal" (correct) these models. The Husk
detects and corrects a large percentage of tolerance inaccuracies in a
model's geometry. Healing allows you to turn these inaccurate models into
precise ACIS models that can easily be shared between different design
environments or with downstream applications that require exact models,
such as CAE and CAM.

- ACIS JetScream Husk. The ACIS JetScream Husk delivers a continuous level
of detail rendering acceleration technology for fast, high-level visual
quality in 3D viewers, large CAD models, complex scenes, and more. By
combining polygon decimation and adaptive polygon refinement, the ACIS
JetScream Husk optimizes the number of polygons displayed, providing
real-time speed and smooth, realistic 3D renderings.

- ACIS Local Operations Husk. ACIS Local Operations Husk provides the
functionality to locally manipulate the geometry of a face or a set of
faces in a prescribed way, with minimal changes to model topology. The
Husk supports moving faces, offsetting faces, rotating faces, tapering
faces, tweaking faces, and offsetting bodies. Local operation results are
fast, easy, accurate, and predictable.

- ACIS Mesh Surfaces Husk. The Mesh Surface Husk provides a surface type
capable of modeling large-scale surfaces without the performance overhead
involved in solid modeling topology. By representing a surface as a
network of planar polygonal elements that share vertices, the Mesh
Surface Husk provides efficient representations of gridded data sets and
large polygonal models for prototyping, geoscience surface modeling, and
animation.

- ACIS Precise Hidden Line Husk. ACIS Precise Hidden Line Husk detects and
removes hidden lines in solids, surfaces, and wires modeled in
ACIS-enabled applications, while maintaining the precision of underlying
geometry. While ACIS 3D Toolkit includes the Faceted Hidden Line
component for quick hidden-line representations, this optional Husk
provides a very advanced degree of drawing precision for a variety of
applications, such as dimensioning or drafting.

- ACIS Shelling Husk. ACIS Shelling Husk is a special type of local
operation that provides the means to create a shelled (thin walled) solid
by offsetting the faces of a sheet or solid body. It defines a "thin
walled" solid model by offsetting all of a solid model's faces by a
specified distance. Adjacent faces, which when offset are no longer
touching, are extended and re-intersected to define the boundary edges
and vertices. Additionally, the Husk provides the functionality to
thicken a single-sided sheet to form a 3D body. The shelling algorithm
handles the disappearance of features that are no longer required, such
as blends. Shelled models are used extensively in any industry
manufacturing injection molded parts. ACIS Local Operations Husk is
required in order to use the ACIS Shelling Husk.

- ACIS Space Warping Husk. This Husk provides the tools for dynamically
modifying a model from an OpenGL view. It overlays a body with a frame
containing handles that can be grabbed with the mouse for

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dynamically twisting a body. This Husk uses the exclusive ACIS Laws
Symbolic Math Interface. Laws are mathematical functions used for solving
complex, global modeling problems.

OPTIONAL TRANSLATOR HUSKS

- ACIS (Direct) CATIA Translator Husk. The ACIS CATIA Translator Husk
converts native CATIA files directly into the ACIS SAT file format. This
optional plug-in component for ACIS also performs limited cleanup and
repair of models and provides user-controlled options to tune the import
of CATIA files.

- ACIS IGES Translator Husk. ACIS IGES Translator Husk provides the
functionality for exchanging geometric data in IGES format, between
heterogeneous proprietary applications and precision ACIS-enabled
applications. The IGES (Initial Graphics Exchange Standard) Husk performs
limited cleanup and repair of models, and compensates for some of the
subtle differences between IGES implementations by the various CAD
applications. It provides user-controlled options to tune the import and
export of IGES files.

- ACIS (Direct) Pro/E Translator Husk. The ACIS Pro/E Translator Husk
converts native Pro/ENGINEER files directly into the ACIS SAT(TM) format.
This optional plug-in component for the ACIS 3D Toolkit(TM) also performs
limited cleanup and repair of models and provides user-controlled options
to tune the import of Pro/ENGINEER files.

- ACIS STEP Translator Husk. ACIS STEP Translator Husk provides the
functionality for exchanging geometric data in STEP format, between
heterogeneous proprietary CAD/CAM/CAE products and ACIS-enabled
applications. STEP (Standard for the Exchange of Product model data) is
an international standard that defines a neutral file format for the
exchange of geometric, topological, and annotation data. The ACIS STEP
Translator Husk imports and exports STEP AP203 and STEP AP214.

- ACIS VDA-FS Translator Husk. ACIS VDA-FS Translator Husk provides the
functionality for exchanging geometric data in VDA-FS file format,
between heterogeneous, proprietary applications and precision
ACIS-enabled applications. The Husk performs limited cleanup and repair
of the model, and compensates for some of the subtle differences between
VDA-FS implementations by the various CAD applications. It provides
user-controlled options to tune the import and export of VDA-FS files.

Spatial Deformable Modeler

Spatial Deformable Modeler brings powerful, easy-to-use deformable modeling
functionality to non-ACIS applications. This product is an interactive sculpting
tool for creating and manipulating free-form curves and surfaces. Its local and
global editing features allow you to easily manipulate B-spline and NURB curves
and surfaces to achieve a very high level of artistic design while retaining the
ability to generate a precise machinable surface.

ACIS Interoperability Solutions

The Company develops and markets interoperability solutions to both its
traditional OEM's and to large manufacturing organizations. These
Interoperability Solutions are designed to help customers use and share 3D
content in different areas of an organization. In addition, Interoperability
Solutions create demand for ACIS-enabled applications and ACIS 3D content, thus
driving sales of the Company's ACIS 3D Toolkit and generating royalty revenues
for the Company.

3DSHARE.COM

3Dshare.com, is the CAD/CAM/CAE industry's first-ever Web-based software
application for translating, repairing and improving 3D models. This application
service provides engineers with a cost-effective Web solution for enhancing
translated models, making them more usable in multiple engineering processes,
including design, analysis, and manufacturing.

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INTRAVISION(R)

IntraVISION provides users with a single tool to access various forms of
product data (legacy information, plot files, documents and CAD models) produced
from a variety of different applications, enabling them to share, communicate
and review data used in the creation, support and maintenance of manufactured
products. IntraVISION preserves the intelligence found in the native CAD/CAM
file. This enables users the ability to view, measure, markup and manipulate the
accurate data of original designs and concurrent engineering processes.

INTRAVISION SOFTWARE DEVELOPER'S KIT (IVSDK)

IVSDK is an OEM-enabled version of Spatial's IntraVISION enterprise-wide
viewing solution. IVSDK offers you the ability to embed multi-format viewing,
markup, measurement, and conversion functionality in your software applications;
build your own viewer; create an Internet viewer plug-in; or even add support
for your proprietary file formats.

IGES QUALITY CONTROL AND DEVELOPMENT TOOLS

Composed of three products, the IGES Toolkit provides tools for developing
high-level IGES engineering applications. These components are IGESVIEW, IGES
Parser/Verifier, and IGESXpert. IGESVIEW is a graphics viewer for the display,
interrogation and manipulation of IGES files in their graphical form. The IGES
Parser/ Verifier is a detailed analysis utility for checking conformance of an
IGES file to the IGES specification and to the CALS and JAMA subsets. IGESXpert
is a powerful IGES file browser and editor for the examination, flavoring, and
repair of IGES files.

ACIS 3D OPEN VIEWER

The ACIS 3D Open Viewer is an end-user application that allows users to
view models created by any ACIS-enabled application. ACIS 3D Open Viewer
provides basic visualization functions for 3D CAD models and serves as a
"bridge" to Microsoft Office applications, allowing users to embed 3D content
within their documents and presentations.

Development Consulting Services

Spatial provides consulting services to both Toolkit and Interoperability
products customers to help the full spectrum of Spatial customers integrate
Spatial's products into their enterprise or customize Spatial's products to
address their unique requirements.

Training

Spatial offers comprehensive basic and advanced training classes in the use
of OEM and interoperability products. Seminars and focused training materials
are being developed for component extensions (Husks) to the ACIS 3D toolkit.

OEM Consulting

Expert consultants are available to further accelerate the delivery of
ACIS-enabled applications to market by our OEM customers. These services include
assistance with application design, prototype product and code reviews, and
shared development.

Product Data Consulting

Interoperability customers can avail themselves of our extensive background
in developing and providing a variety of custom solutions to product data
integration problems. Coupled with our Interoperability solutions, Spatial
offerings include:

- Data exchange services

- Viewing and PDM integration
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- Enterprise data modeling

- Development and implementation of data sharing environments

CUSTOMERS

The Company's customer base of over 2,350 licensees, including 550 OEM
customers, falls into one of four categories:

(i) software developers who create commercial ACIS-enabled products
for resale

(ii) large enterprise manufacturing companies who use the Company's
Component Toolkits for internal development of interoperability or 3D
modeling applications

(iii) large enterprise manufacturing companies who use the Company's
Interoperability Solutions to access, exchange and share product data
throughout their engineering and manufacturing processes, to reduce their
cost of innovation and product development

(iv) leading universities and research institutions.

Software application developers represent the majority of the Company's
current customer base and revenue from Component Toolkits. The Company's
Component Toolkit sales to enterprise developers are important because they
create demand for ACIS 3D modeling technology by encouraging additional
commercial software developers to produce more ACIS-enabled applications. In
addition, sales to universities and research institutions have served valuable
roles as (i) a training ground for future software developers for both the
commercial software and enterprise manufacturing industries, (ii) a "global
incubator" for design ideas incorporated by the Company, and (iii) a useful
mechanism to educate staff and students in ACIS 3D modeling technology and
motivate its use in academic research.

In order to encourage the adoption of the ACIS 3D modeling technology by
the CAD market, in June 1991 the Company entered into a strategic relationship
with Autodesk Inc. Pursuant to the Company's agreements with Autodesk, the
Company granted a perpetual nonexclusive license of the ACIS 3D modeling engine
for use in Autodesk's family of products. Autodesk paid the Company an initial
license fee and is required to pay the Company royalties on a quarterly basis
for products sold which incorporate the Company's ACIS 3D modeling software. In
addition, Autodesk is required to pay maintenance fees which entitle Autodesk to
license product upgrades as they are released. Either party may terminate upon
material breach of the agreement. During 1997, 1998 and 1999 Autodesk accounted
for 11%, 11%, and 10% of total revenue, respectively.

RESEARCH AND PRODUCT DEVELOPMENT

The Company believes that its continued growth will depend in large part on
its ability to maintain and enhance its current products, develop new products
and maintain technological competitiveness. The Company has built a development
group with specialized expertise in geometric modeling techniques, advanced
mathematics and C++ programming techniques. Spatial finished 1999 with 83 people
in product development, including third party developers, 25 of whom have
doctorates. The development organization is recognized as one of the technology
centers of excellence for 3D modeling worldwide. During 1997, 1998, and 1999
research and development expenses were $4.6 million, $5.7 million, and $7.7
million, respectively.

During 1999, the Company grew its research and development staff by 47%,
principally to design, develop and implement the Company's Internet based
business strategy. The development effort began in June 1999 and included core
product, middleware and user interface development. The Company's first Web
based product, 3DShare.com was released in November 1999.

To maintain and improve its competitive position, the Company is committed
to providing its customers with technological innovations and product upgrades.
In January 1999, the Company released ACIS 5.0, which extended the functionality
and performance of the product and provided customers with additional
competitive advantages in the 3D marketplace. The Company maintains an
aggressive schedule of follow-up releases, approximately every two to three
months, to extend its position in the marketplace. In December 1999, the Company
released version 6.0 of the ACIS 3D Toolkit, again extending the functionality
and performance of its
8
<PAGE> 11

flagship product. The Company identifies customer requirements for product
enhancements and new products through an analysis of current customer requests
communicated through the Technical Support Department and new customer requests
communicated through the Sales and Marketing Department. In order to enhance the
level of communication with its customers, the Company holds an annual developer
conference. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors -- We Depend on Swift and Timely
Introductions of New Products, -- Our Products May Contain Undetected Errors."

The Company augments its internal development capabilities through a
network of development partners possessing geometric modeling expertise. The
Company has development relationships with recognized leaders in 3D modeling.
The Company typically co-owns the technology with the development partner and
has the exclusive right to market and distribute that technology.

The Company also resells certain rendering component extensions from other
third party software developers. Although the Company has a license to
distribute these products, the developer retains ownership of this software and
there can be no assurance that the Company will be able to control the
development of such extensions.

SALES, MARKETING AND DISTRIBUTION

To date, the Company has focused its sales, marketing and distribution
efforts primarily on the CAD software market. The Company has also marketed and
sold its 3D modeling software to emerging 3D markets including multimedia,
technical documentation, architecture, virtual reality, animation, and
professional filmmaking.

The Company markets its Component Toolkits to software developers worldwide
through a direct sales force serviced by the Company's Boulder, Colorado
facility and its sales offices in Monchengladbach, Germany and Tokyo, Japan. The
Company's sales cycle for new customers of its Component Toolkits is generally
three to nine months. Following identification of a prospect, the Company trains
prospects in design and programming techniques. The sales cycle then entails a
preliminary agreement that, for a fee, entitles the customer to a one to three
month limited license primarily for product evaluation. Following a satisfactory
evaluation, the Company typically licenses the ACIS 3D modeling software and
other components on a non-exclusive, perpetual use basis. The Company generally
ships products as orders are received and, therefore, has little or no backlog.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Our Operating Results Fluctuate Substantially."

The Company believes that users targeted for ACIS Interoperability
Solutions will purchase substantial numbers of products and services over the
Internet. Accordingly, the Company markets ACIS Interoperability Solutions
products and services through the Internet via PlanetCAD, feature story writing
for visual programming trade publications, and attendance at key conferences.
Furthermore, the Company provides add-on Component Products ("plug-ins") through
its web site for purchase and download directly by prospects with little or no
intervention.

The market for the Company's ACIS Interoperability Solutions has
significantly different characteristics than the Component Toolkits. In
addition, the Company anticipates a much broader market base for ACIS
Interoperability Solutions. Spatial uses a multi-channel distribution model for
Interoperability Solutions, employing a combination of the Company's existing
direct sales force and value-added resellers who provide local sales and
support, worldwide.

The Company's sales cycle for Interoperability Solutions is generally
shorter than for Component Toolkits. Smaller unit purchases are often made in a
few weeks, while larger purchases are generally more "corporate" in nature and
often follow the implementation of database, product data management (PDM) and
related software purchases. These large corporate agreements often take many
months to unfold but are typically large in scale and scope.

For its Interoperability Solutions, the Company uses all common
merchandising techniques, such as advertising, direct mail and trade shows, with
good return on marketing investments. The Company also uses extensively a
web-based distribution model for demonstration versions of its Interoperability
Solutions. A typical
9
<PAGE> 12

prospect contacts Spatial either by responding to its direct marketing, or
personally accesses and downloads demonstration versions of one or more
products, after which contact is made to the Company's sales force or VAR
channel.

Spatial's PlanetCAD division primarily targets its marketing efforts at
manufacturing and design engineers. PlanetCAD's marketing efforts are designed
to create brand awareness of PlanetCAD and its various application services, to
attract end users to the PlanetCAD website, and to encourage customers to use
the site. PlanetCAD engaged in a limited set of marketing activities in 1999.
These activities included online and offline advertising, direct e-mail
campaigns, promotions, and public relations. Currently, PlanetCAD customers pay
for its Web-hosted application services using a credit card via a secure server.
Currently PlanetCAD charges its customers on a pay-per-use basis.

CUSTOMER SERVICE AND SUPPORT

The Company believes that customer service and support is critical to the
success of its products. Customer phone calls or e-mails are answered and
managed by support professionals who review customer communications with the
appropriate development group and coordinate the response to the customer.

As part of its licensing arrangements for all products, the Company offers
maintenance services including technical updates and product support. To date, a
majority of customers have purchased these maintenance services which are
offered on a renewable basis for an annual fee. These services allow customers
full access to the products they have licensed, including all new releases,
telephone support and other support required to utilize the Company's products
effectively.

COMPETITION

The markets for the Company's products are highly competitive, subject to
rapid change and characterized by constant demand for new product features and
pressure to accelerate the release of new products and product enhancements and
to reduce prices.

Component Toolkit Competition

A number of companies currently offer products that compete directly or
indirectly with one or more of the Company's products. These companies include,
among others, Shape Data, Ltd. (a subsidiary of Unigraphics.) and Ricoh Corp. In
addition, the Company also competes with in-house proprietary development
programs producing modeling tools and 3D products. While the Company is not
aware of any competitor providing solid modeling tools to the visual programming
market, other companies may have introduced other modeling technologies to this
market. Many of the Company's competitors or potential competitors have or may
have significantly greater financial, management, technical and marketing
resources than the Company. A variety of potential actions by any of the
Company's competitors, including announcement or accelerated introduction of new
or enhanced products or features, increased promotion or a reduction of product
prices could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company's present and future
competitors may be able to develop products comparable or superior to those
offered by the Company or adapt more quickly than the Company to new
technologies or evolving market requirements. The Company believes that the
primary competitive factors affecting the market for the Company's products
include performance, features, quality, name recognition, reputation, access to
channels of distribution, the quality of documentation, customer support and
price. Although the Company believes that it competes favorably with respect to
these factors, there can be no assurance that the Company will be able to
continue to compete effectively with respect to these or any other competitive
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors -- Competition In Our Industry Is
Intense."

10
<PAGE> 13

Internet B2B Competition

PlanetCAD faces potential competition from several fronts, including both
larger mechanical engineering software companies and startups. There are
currently no established manufacturing and design engineering portals or ASPs,
and PlanetCAD is moving quickly to establish itself as the premier player in the
space. While PlanetCAD expects significant competition to emerge, the company
has several unique assets that position it to compete successfully. These
competitive advantages include:

- Access to Spatial's large, existing installed base of 210 ACIS enabled
software applications and over 550 licensees

- First mover advantage

- Exclusive access to proprietary technologies

- Freedom from legacy engineering software infrastructure and economics

- Ability to deliver power clients for non-server side web applications

- Strong relationships with mechanical engineering software 3rd parties

- Neutrality in the marketspace

INTELLECTUAL PROPERTY

The Company regards its technology as proprietary and relies primarily on a
combination of copyright, trademark and trade secret laws, employee and third
party nondisclosure agreements, and other intellectual property protection
methods to protect its products and technology. The Company has no patents with
respect to its ACIS 3D modeling technology. The Company believes that the
ownership of patents is not presently a significant factor in its business and
that its success does not depend on the ownership of patents, but primarily on
the innovative skills, technical competence and marketing abilities of its
personnel. Existing copyright laws afford only limited protection, and it may be
possible for unauthorized third parties to copy the Company's products or to
reverse engineer or obtain and use information that the Company regards as
proprietary. The Company licenses portions of the technology used in the ACIS 3D
modeling engine and component extensions. See "Business -- Research and Product
Development." The Company also resells certain component extensions of third
party software developers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors -- We Are
Dependent on Third Party Developers" and "-- We May Be Exposed To Risks of
Intellectual Property and Proprietary Rights Infringement."

While the Company is not aware that any of its products infringe the
proprietary rights of any third parties, there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects that it could increasingly be subject to
such claims as the number of products and competitors in the 3D modeling
software market grows and the functionality of such products overlaps with other
industry segments. See "Risk Factors -- We May Be Exposed To Risks of
Intellectual Property and Proprietary Rights Infringement."

EMPLOYEES

As of December 31, 1999, the Company had 130 full-time employees, including
78 in product development, quality assurance and technical support, 48 in sales
and marketing and 12 in administration. The Company's employees are not subject
to any collective bargaining agreements, and the Company believes its relations
with its employees are good.

11
<PAGE> 14

ITEM 2. DESCRIPTION OF PROPERTY

The Company's principal executive office is located at 2425 55th Street,
Suite 100, Boulder, Colorado 80301, where the Company leases approximately
23,500 square feet of office space. Monthly lease payments for this facility are
approximately $29,000. The lease for this facility expires in September 2000.
The Company leases approximately 5,120 square feet of additional office space in
Boulder. Monthly lease payments for this space are approximately $5,000. The
Company also leases approximately 3,700 square feet of office space in
Westchester, Illinois and 2,400 square feet in San Francisco, California, at a
monthly rate of approximately $3,000 and $6,000, respectively. In addition, the
Company leases international sales offices in Monchengladbach, Germany and
Tokyo, Japan.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company has been involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this filing, the Company is not a party to any legal proceedings, the
adverse outcome of which would, in management's opinion, have a material adverse
effect on the Company's operating results and financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) The Issuer's Common Stock is listed on the over-the-counter market
through the American Stock Exchange under the symbol "STY". The following table
indicates the high and low sale prices per share reported by the American Stock
Exchange for the period indicated. These prices do not include retail markups,
markdowns or commissions.

<TABLE>
<CAPTION>
1998 1999
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter....................................... $2.69 $1.25 $4.31 $2.69
Second Quarter...................................... $2.75 $1.75 $4.88 $2.56
Third Quarter....................................... $2.63 $1.88 $4.94 $3.25
Fourth Quarter...................................... $3.56 $1.44 $5.88 $2.88
</TABLE>

As of March 1, 2000 there were approximately 103 holders of record of the
Common Stock.

The Company has never declared or paid dividends on its Common Stock. The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.

(b) On February 22, 2000, the Company issued an aggregate of 1,900,000
shares of Common Stock (the "Shares") to certain investors pursuant to the Stock
Purchase Agreement, by and among the Company and the Investors named therein,
dated February 22, 2000. The sale and issuance of such shares was deemed to be
exempt from registration under the Securities Act of 1933 by virtue of Rule 506
of Regulation D thereof. The recipients were all accredited and represented
their intention to acquire the securities for investment only. Appropriate
legends are affixed to the stock certificates issued in such transaction. All
recipients either received adequate information about the Company or had access
to such information.

12
<PAGE> 15

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

The following table sets forth selected financial data of the Company. The
selected financial data as of December 31, 1998 and 1999 and for each of the
years in the three-year period ended December 31, 1999 have been derived from
the Company's consolidated financial statements which have been audited by KPMG
LLP, independent auditors. The data should be read in conjunction with the
consolidated financial statements and related notes included in Item 7 hereof
(in thousands except per share data):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License fees............................... $ 5,318 $ 5,308 $ 4,854 $ 6,253 $ 5,412
Royalties.................................. 1,341 2,243 2,866 3,922 4,875
Services................................... 2,687 3,079 3,164 4,175 4,613
-------- ------- ------- ------- -------
Total revenue...................... 9,346 10,630 10,884 14,350 14,900
Gross profit................................. 8,397 9,612 10,059 13,586 13,768
Operating expenses:
Sales and marketing........................ 3,168 3,840 4,477 5,213 5,918
Research and development................... 3,248 4,167 4,619 5,678 7,742
General and administrative................. 1,284 1,457 2,393 2,097 2,362
Acquired in-process research and
development............................. -- -- 621 -- --
Merger costs............................... -- -- -- 319 500
-------- ------- ------- ------- -------
Total operating expenses........... 7,700 9,464 12,110 13,307 16,522
Earnings (loss) from operations.............. 697 148 (2,051) 279 (2,754)
-------- ------- ------- ------- -------
Net earnings (loss)................ $ 414 $ 11 $(1,820) $ 201 $(2,861)
======== ======= ======= ======= =======
Earnings (loss) per common share(1):
Basic
Earnings (loss) per common share........ $ 0.09 $ 0.00 $ (0.21) $ 0.02 $ (0.31)
Diluted
Earnings (loss) per common share........ $ 0.05 $ 0.00 $ (0.21) $ 0.02 $ (0.31)
Weighted average number of common shares
outstanding(1)
Basic...................................... 4,419 3,411 8,849 9,199 9,345
Diluted.................................... 8,595 6,781 8,849 9,307 9,345
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 225 $ 8,441 $ 5,795 $ 4,534 $ 1,324
Working capital (deficit).................... (1,187) 7,545 5,703 5,349 1,977
Total assets................................. 3,083 11,468 10,751 11,589 10,072
Long-term debt and capital lease
obligation................................. -- 451 249 79 --
Redeemable preferred stock(2)................ 14,155 -- -- -- --
Total stockholders' equity (deficit)......... (14,714) 7,890 7,269 7,802 5,878
</TABLE>

- ---------------

(1) Diluted earnings per share and weighted average common shares outstanding
for 1995 and 1996 gives effect to the conversion of all outstanding shares
of mandatory redeemable preferred stock into 4,099,598 shares of common
stock pursuant to the Company's initial public offering ("IPO") in October
1996. As a result of the IPO in 1996, conversion of preferred stock is not
applicable for 1997, 1998 and 1999.

(2) Converted to common stock in 1996.

13
<PAGE> 16

OVERVIEW

Historically, the Company's core business focus has been to provide 3D
modeling software, and while the Company remains committed to providing its
customers with industry-leading open, component 3D modeling technology, the
Company believes there is growing demand from the engineering sector for
web-based business-to-business interoperability solutions and services. This
includes the Company's PlanetCAD suite of internet application services for the
engineering software industry. In order to pursue this opportunity, the Company
expanded its focus in 1999 to encompass its Web-based business-to-business
interoperability solution, 3DShare.com. This expanded focus going forward allows
the Company to increase the business impact its customers derive from its
Web-based interoperability solutions and allowing Customers to leverage these
services to reduce time to market, interact more easily with a broader supplier
base and ensure the best prices.

The Company's Component Technologies business has three sources of revenue:
license fees, royalties, and services, which include maintenance, training and
consulting. License fees consist of fees paid by customers to license the
Company's products for use in customers' product development efforts. Revenue
from license fees is recognized upon completion of a signed contract and
shipment of product. Most licensees also pay royalties based on a percentage of
net revenue received from applications incorporating the ACIS 3D software.
Royalty revenue is generally recognized upon receipt of payment. Maintenance
revenue, consisting of fees received by the Company for customer support and
product upgrades, is generally based on annual contracts recognized ratably over
the period of the contract. Other revenue consists of training and consulting
fees, which is recognized upon completion of a training class or performance of
services, respectively. In addition, the Company expects its PlanetCAD business
model will soon become an important part of the Company's overall revenue model.

For the year ended December 31, 1999, the Company incurred a net loss of
$2.9 million (or $0.31 per share) on total revenue of $14.9 million, as compared
to a profit of $201,000 (or $0.02 per share) on total revenue of $14.4 million
reported for 1998. The net loss for 1999 includes acquired in-process research
and development charges of $500,000 in connection with the acquisition of
certain assets and liabilities of Sven Technologies, Inc. in June 1999.
Additionally, results for 1998 include charges associated with the acquisition
of Inter Data Access, Inc. of approximately $319,000, primarily for legal,
accounting and other costs associated with the integration of the two companies.
Excluding acquired in-process research and development charges in 1999 and
acquisition costs in 1998, the Company incurred a net loss of $2.4 million (or
$0.25 per share) in 1999 as compared to a $520,000 profit in 1998. The net loss
for 1999 reflects slightly increased revenue as compared to 1998, offset by
significantly increased operating expenses including research and development,
in connection with the Company's roll out of its first application service,
3DShare.com, higher cost of sales and lower interest income. In addition, a
significant factor in the Company's performance in 1999 was lower than expected
license revenue resulting from competition and a trend in the high-end software
market towards lower up front license fees in favor of future services and
royalty obligations. Although the Company had been anticipating this trend, it
occurred sooner than expected, and the Company expects this trend to continue in
the engineering software market segment in which it operates.

The Company has experienced in the past and expects to continue to
experience in the future significant fluctuations in quarterly operating results
due to factors within and outside the Company's control. Because the Company's
operating expenses to a large extent are fixed and are based in part on
anticipated revenues, a substantial portion of which may not be generated until
near the end of each quarter, the Company may be unable to adjust spending in
time to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in sales of the Company's products in relation to the
Company's expectations could have a material adverse impact on the Company's
operating results. Additionally, the Company's revenues in the Component
Technologies business are historically based on low volume, high value orders.
Software license fees from a single contract are often in excess of $100,000;
therefore, the receipt, delay or cancellation of a minimal number of customer
orders can have a dramatic impact on license fee revenues in any given period.
See "Risk Factors -- Our Operating Results Fluctuate Substantially."

14
<PAGE> 17

As of December 31, 1999, the Company had net operating loss carryforwards
totaling $16.6 million, which may be used to reduce future income taxes.
Utilization of these net operating loss carryforwards may be limited under
certain circumstances. See Note 6 of Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain statement
of operations data expressed as a percentage of total revenue:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenue:
License fees.............................................. 45% 44% 36%
Royalties................................................. 26 27 33
Services.................................................. 29 29 31
--- --- ---
Total revenue..................................... 100 100 100
Gross profit................................................ 92 95 92
Operating expenses:
Sales and marketing....................................... 41 36 39
Research and development.................................. 42 40 52
General and administrative................................ 22 15 16
Acquired in-process research and development.............. 6 -- --
Merger costs.............................................. -- 2 3
--- --- ---
Total operating expenses.......................... 111 93 110
Earnings (loss) from operations............................. (19)% 2% (18)%
Net earnings (loss)............................... (17)% 1% (19)%
</TABLE>

FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998

Revenue. For the year ended December 31, 1999, total revenue increased 4%
to $14.9 million from $14.4 million reported for 1998, reflecting increased
royalties and services, partially offset by a decline in license fees. License
fees decreased 13% to $5.4 million in 1999 as compared to $6.3 million for 1998
due to a decrease in the average license fees received by the Company per
contract in 1999 as compared to 1998, partially offset by license fees for new
product introductions in 1999. New product introductions in 1999 represented 27%
of license fees versus 39% in 1998. Decreased average license fees resulted from
competition and a trend in the high-end software market towards lower up front
license fees. Royalties advanced 24% to $4.9 million from $3.9 million reported
in 1998, reflecting an increase in the number of the Company's customers
shipping ACIS-based software applications and increased non-refundable prepaid
royalties. Nonrefundable prepaid royalties increased to $1.5 million in 1999
from $330,000 reported in 1998. As a result of the trend in the high-end
software market noted above, the Company expects to continue to include up front
prepaid royalties with its license agreements. Service revenue, derived from the
sale of maintenance contracts and the performance of training and consulting
services, increased 10% to $4.6 million for 1999 as compared to $4.2 million
reported in 1998. The increase in service revenue resulted from growth in the
Company's installed customer base and increased consulting services performed
for these customers.

Geographically, revenue increased in Japan and the United States, partially
offset by decreased revenue in Europe, Canada and Asia during 1999. Domestic
revenue represented 53% of total revenue in 1999, an increase from 51% reported
for 1998, reflecting an 8% increase to $7.9 million in 1999, from $7.3 million
reported in 1998. International revenue remained flat at $7.0 million for 1999
and 1998. Revenue reported for Europe in 1999 decreased 14% to $3.7 million from
$4.4 million reported in 1998. Revenue reported for Japan advanced 52% in 1999
to $3.1 million as compared to $2.0 million reported in the prior year period.
Revenue for other geographic regions, including other parts of Asia and Canada,
decreased 73% to $175,000 for 1999 from $641,000 reported for 1998.

15
<PAGE> 18

Cost of Sales. Total cost of sales increased 48% to $1.1 million for 1999,
as compared to $764,000 reported in 1998. Cost of sales consists of royalty
payments by the Company to third party developers, customer support costs,
manufacturing costs (primarily media duplication, manuals, and shipping) and
amortization of purchased computer software. Total cost of sales increased
primarily due to increased staffing in customer support. Customer support
expense increased $202,000 (or 103%) in 1999 as compared to the prior year as a
result of increased staffing in support of an increase in the Company's
installed customer base and engineering consulting services performed. Purchased
computer software amortization costs increased $71,000 (or 35%) in 1999 as
compared to 1998 as a result of software purchased in connection with the
acquisition of Sven Technologies, Inc., as well as technology purchased in 1998.
As a percent of total revenue, cost of sales increased to 8% in 1999 from 5% in
1998.

Sales and Marketing Expense. For the year ended December 31, 1999, sales
and marketing expense increased 14% to $5.9 million from $5.2 million reported
in 1998. Increased sales and marketing expense for 1999 as compared to 1998 was
due to higher commissions paid in Japan in support of Japan's revenue growth and
an across the board increase in travel related costs. Also contributing to
increased Sales and Marketing expense was the Company's increased investment in
the roll out and marketing of its Internet based business, PlanetCAD. The
Company expects this trend to continue in 2000 as it rapidly moves to gain
market share in the ASP market space. As a percent of revenue, sales and
marketing expense increased from 36% in 1998 to 40% in 1999.

Research and Development Expense. Research and development expense
increased 37% to $7.8 million for 1999 as compared to $5.7 million reported in
1998. Research and development expense was higher in 1999 as compared to 1998
due to increased staffing in support of growing development efforts to enhance
the existing ACIS product line in addition to the development of a new
generation of web based business to business interoperability products.
Increased development efforts on existing products during 1999 produced two
major product releases with significant improvements in performance and
functionality. Additionally, the Company invested $1.7 million in the
development of its web based interoperability product line, producing
3Dshare.com and the supporting ACIS(R) Pro-E, Catia and Step translators. The
Company expects its investment in research and development to increase in 2000
with the continued expansion of software offered from its internet based
business to business ASP model. As a percent of revenue, research and
development expense increased from 40% in 1998 to 52% in 1999. The Company
accounts for software development costs in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, under which the Company is
required to capitalize software development costs after technological
feasibility is established. Capitalizable software development costs incurred to
date have not been significant; therefore, the Company has expensed all of these
costs in the periods incurred.

General and Administrative Expense. General and administrative expense
increased 13% to $2.4 million in 1999 from $2.1 million reported in 1998.
Increased general and administrative expense for 1999 versus 1998 was primarily
due to increased bad debt expense. Bad debt expense in 1999 was $569,000 as
compared to $85,000 in 1998, as the Company recognized the expense related to a
few large balance accounts. The Company believes future charges will not be at
the level incurred in 1999. As a percent of revenue, general and administrative
expense increased from 15% in 1998 to 16% in 1999.

Acquired In-process Research and Development and Merger Costs. Acquired
in-process research and development expense of $500,000 for 1999 relates to the
acquisition of certain assets and liabilities of Sven. Specifically included in
this expense were amounts allocated to three separate projects which had not
reached technological feasibility and had no probable alternative future uses.
At the acquisition date each of these three projects was evaluated and it was
determined that they were between 20% and 30% complete. The projects identified
include development of two software components that would be sold as add-on
extensions ("Husks") to the Company's ACIS 3D Toolkit and viewing product line,
which are referred to as the Level of Detail Husk and Large Model Viewing Husk,
respectively. The third project involves integration of the purchased
technology, as well as the software components noted above, with products and
Internet based services the Company released in the fourth quarter of 1999.
Taking into consideration the percentage of completion, the fair values of the
Level of Detail Husk, Large Model Viewing Husk, and integration project were
determined to be $130,000, $210,000 and $160,000, respectively. The method used
to determine the fair values was a discounted cash flow model, that assumed a
3-5 year period of cash inflow and a 22.5% risk adjusted discount rate. The
expensing of the fair
16
<PAGE> 19

values of the identified projects at the date of acquisition was based on the
Company's evaluation of the nature, timing and status of these projects. The
Company, having substantial experience with the design, development and
marketing of technical software products, concluded that the identified projects
are complex, and the related technology is unique with respect to the computer
engineering market segment in which it operates. Accordingly, the Company
believes there were significant risks associated with completing development of
the identified projects, and that failure to deliver the related products and
services, and to do so according to an established schedule, may have had an
adverse effect on the Company's ability to execute current business strategies.

Merger costs of $319,000 in 1998 related to the acquisition of IDA and
represent legal, accounting and other costs associated with the integration of
the two companies. (See Note 1 and 2 of Notes to Consolidated Financial
Statements.)

Other Income (Expense), Net. Other income reported in 1999 was $139,000 as
compared to $238,000 in 1998, reflecting lower interest income, as a result of
lower cash balances in 1999 as compared to 1998.

Income Tax Expense. The Company's income tax expense decreased to $246,000
for 1999 from $316,000 for 1998 due to income tax expense incurred in 1998 of
approximately $99,000 related to earnings by IDA, whereas no such expense was
incurred in 1999. The Company's net operating loss carry forwards are not
available to offset IDA's taxable income. The remaining amount expensed in 1999
and 1998 includes only withholding taxes on foreign sales. (See Note 6 of Notes
to Consolidated Financial Statements.)

FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997

Revenue. For the year ended December 31, 1998, total revenue increased 32%
to $14.4 million from $10.9 million reported for 1997, reflecting increases in
all revenue categories. License fees increased 29% to $6.3 million in 1998 as
compared to $4.9 million for 1997, as the Company's component and
interoperability product lines both contributed to increased license fees.
Increased license fees were primarily due to an increase in the number of
contracts executed in 1998 as compared to 1997. Additionally, new product
introductions were a driving factor in increased license fees for the component
business during 1998, accounting for more than 40% of new license revenue.
Royalties increased 37% to $3.9 million from $2.9 million reported in 1997,
reflecting an increase in the number of the Company's customers shipping
ACIS-based software applications. Maintenance and other revenue increased 32% to
$4.2 million for 1998 as compared to $3.2 million reported in 1997. Maintenance
and other revenue includes maintenance, training and consulting fees, all of
which increased in 1998 as compared to 1997. Revenue from the Company's OEM
product line increased 28% to $12.4 million as compared to $9.7 million reported
in 1997. Revenue derived from interoperability products and services increased
68% to $2.0 million from $1.2 million in 1997.

Geographically, revenue increased in the United States and Europe during
1998, while Japan was substantially unchanged from the prior year. Domestic
revenue represented 51% of total revenue in 1998, a decrease from the 54%
reported for 1997. However, domestic revenue increased 24% to $7.3 million in
1998 as compared to $5.9 million reported in 1997. International revenue
increased 41%, growing to $7.0 million in 1998 from $5.0 reported in the prior
year due to increased revenue in Europe. Revenue reported for Europe in 1998
increased 61% to $4.4 million from $2.7 million reported in 1997. Revenue
reported for Japan was unchanged at $2.0 million for 1998 and 1997. Revenue for
other geographic regions, including other parts of Asia and Canada, increased
92% to $641,000 for 1998 from $333,000 reported for 1997 due to increased
revenue in Canada.

Cost of Sales. Total cost of sales decreased 7% to $764,000 for 1998, as
compared to $825,000 reported in 1997. Cost of sales consists of royalty
payments by the Company to third party developers, customer support costs,
manufacturing costs (primarily media duplication, manuals, and shipping) and
amortization of purchased computer software. Total cost of sales decreased due
to lower royalty and other manufacturing costs. Royalty expense decreased
$92,000 in 1998 as compared to the prior year due to the acquisition of certain
intellectual property rights from Three-Space Limited ("TSL") in December 1997.
As part of this transaction, the Company's royalty obligation to TSL was
eliminated. (See Note 2 of Notes to Consolidated Financial Statements).
Manufacturing costs decreased $61,000 (or 44%) in 1998 as compared to 1997,
reflecting cost savings derived from the Company's transition to the use of
on-line documentation and use of the internet to

17
<PAGE> 20

deliver certain product releases to its customers. As a percent of total
revenue, cost of sales decreased to 5% in 1998 from 8% in 1997.

Sales and Marketing Expense. For the year ended December 31, 1998, sales
and marketing expense increased 16% to $5.2 million from $4.5 million reported
in 1997. Increased sales and marketing expense for 1998 as compared to 1997 was
due to higher commission and travel related costs associated with increased
revenue. As a percent of revenue, sales and marketing expense decreased from 41%
in 1997 to 36% in 1998.

Research and Development Expense. Research and development expense
increased 23% to $5.7 million for 1998 as compared to $4.6 million reported in
1997. Research and development expense was higher in 1998 as compared to 1997
due to increased staffing in support of increased development efforts for
existing products, as well as for new product offerings, including the ACIS(R)
3D Open Viewer, the ACIS(R) Healing Husk and the ACIS(R) IGES Translator Husk.
Increased development efforts, on existing products during 1998 produced
significantly enhanced functionality and performance, including new bending
functionality, and enhanced blending capabilities. As a percent of revenue,
software development costs decreased from 42% in 1997 to 40% in 1998. The
Company accounts for software development costs in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, under which the Company is
required to capitalize software development costs after technological
feasibility is established. Capitalizable software development costs incurred to
date have not been significant; therefore, the Company has expensed all of these
costs in the periods incurred.

General and Administrative Expense. General and administrative expense
decreased 12% to $2.1 million in 1998 from $2.4 million reported in 1997.
Decreased general and administrative expense for 1998 as compared to 1997
reflected lower payroll related expenses as a result of a decrease in staffing
levels in 1998 as compared to 1997. As a percent of revenue, general and
administrative expense decreased from 22% in 1997 to 15% in 1998.

Acquisition Related Costs. Charges associated with the December 1998
acquisition of IDA were approximately $319,000 and represent legal, accounting
and other costs associated with the integration of the two companies. All of
these costs were charged to operations in December 1998. Acquired in-process
research and development expense of $621,000 in 1997 relates to the acquisition
of certain intellectual property rights from TSL. Specifically included in this
expense were amounts allocated to projects, which had not reached technological
feasibility and had no probable alternative future uses. (See Note 1 and 2 of
Notes to Consolidated Financial Statements.)

Other Income (Expense), Net. Other income reported in 1998 was $238,000 as
compared to $341,000 in 1997, reflecting lower interest income, as a result of
lower cash balances in 1998 as compared to 1997.

Income Tax Expense. The Company's income tax expense increased to $316,000
for 1998 from $110,000 for 1997. Income tax expense for 1998 includes
approximately $100,000 related to earnings by IDA prior to the December 1998
acquisition. The Company's net operating loss carry forwards are not available
to offset IDA's taxable income. The remaining amount expensed in 1998, as well
as the 1997 expense includes only withholding taxes on foreign sales. (See Note
6 of Notes to Consolidated Financial Statements.)

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<PAGE> 21

QUARTERLY RESULTS

The following table sets forth certain quarterly financial data for the
periods indicated. This quarterly information is unaudited. In the opinion of
management, such unaudited information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation for the
periods. The operating results for any quarter are not necessarily indicative of
results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31
1998 1998 1998 1998 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License fees................................ $ 936 $1,759 $1,760 $1,798 $1,670 $1,286 $1,552 $ 904
Royalties................................... 1,002 932 919 1,069 1,277 1,082 1,046 1,470
Services.................................... 954 972 933 1,316 1,104 1,235 1,177 1,097
------ ------ ------ ------ ------ ------ ------ -------
Total revenue......................... 2,892 3,663 3,612 4,183 4,051 3,603 3,775 3,471
Gross profit.................................. 2,736 3,512 3,446 3,892 3,827 3,292 3,470 3,179
Operating expenses:
Sales and marketing......................... 1,241 1,242 1,351 1,379 1,433 1,242 1,494 1,749
Research and development.................... 1,210 1,376 1,464 1,628 1,766 1,664 2,043 2,269
General and administrative.................. 434 594 561 508 475 491 444 952
Acquired in-process research and
development............................... -- -- -- -- -- 500 -- --
Merger costs................................ -- -- -- 319 -- -- -- --
------ ------ ------ ------ ------ ------ ------ -------
Total operating expenses.............. 2,885 3,212 3,376 3,834 3,674 3,897 3,981 4,970
Earnings (loss) from operations............... (149) 300 70 58 153 (605) (511) (1,791)
Net earnings (loss)................... $ (192) $ 244 $ 90 $ 59 $ 60 $ (605) $ (510) $(1,806)
</TABLE>

Until the second quarter in 1999 the Company experienced four quarters of
profitability. The net loss for three consecutive quarters beginning the quarter
ended June 30, 1999 through the quarter ended December 31, 1999 is attributable
to a shortfall in revenue, primarily from license fees as well as slower growth
from royalty and service revenue. Also contributing to the net losses were
higher operating expenses due to increased staffing and marketing activities in
connection with the Company's execution of its Internet based business to
business ASP model. During the quarter ended December 31, 1999, the Company
recognized bad debt expense totaling $383,000. For the quarter ended June 30,
1999, the Company incurred acquired in-process research and development charges
of $500,000 in connection with the acquisition of certain assets and liabilities
of Sven Technology, Inc. During the quarter ended December 31, 1998, the Company
charged approximately $319,000 associated with the acquisition of IDA, primarily
for legal, accounting and other costs associated with the integration of the two
companies.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1999, the Company had $1.3 million in cash and cash
equivalents, reflecting a decrease of $3.2 million from 1998. The decrease in
cash and cash equivalents during 1999 was primarily due to the Company's net
loss and cash used in investing activities.

Net cash used by operating activities in 1999 was $1.6 million, reflecting
a net loss of $2.9 million, offset by non-cash and other adjusting items in
operating activities including depreciation, amortization, accounts receivable
write-off and the write-off of acquired in-process research and development. Net
cash used by operating activities was $150,000 in 1998, reflecting net income of
$201,000 and cash provided by increased deferred revenue and accounts payable
offset by increased accounts receivable and decreased accrued expenses. Net cash
used by operating activities in 1997 was $1.2 million.

Cash used by investing activities was $1.7 million, $1.1 million, and $1.8
million for the years ended December 31, 1999, 1998 and 1997, respectively. Net
cash used by investing activities in 1999 includes $1.0 million used for capital
equipment purchases, including personal computers and networking equipment to
upgrade the Company's infrastructure in support of the execution of its Internet
based business model. In addition, the Company used $219,000 to purchase certain
technologies that are included in purchased computer

19
<PAGE> 22

software, and $500,000 in connection with the Sven acquisition. Net cash used by
investing activities in 1998 includes $629,000 used for capital equipment
purchases, primarily personal computers and networking equipment and $446,000
for additions to purchased computer software. Net cash used by investing
activities in 1997 reflects $910,000 for equipment purchases and $851,000 in
connection with the acquisition of TSL. (See Note 2 of Notes to Consolidated
Financial Statements.)

Net cash provided by financing activities was $51,000 during 1999 as
compared to cash used by financing activities of $7,000 in 1998 and $391,000
provided in 1997. Net cash provided by financing activities in 1999 includes
proceeds from the exercise of common stock options and the issuance of common
stock pursuant to the Company's employee stock purchase plan. Net cash used by
financing activities in 1998 includes principal payments on debt, partially
offset by proceeds from common stock issued pursuant to the Company's employee
stock purchase plan. Net cash provided by financing activities in 1997 reflects
$525,000 from the issuance of common stock for cash and $319,000 in proceeds
from exercise of common stock options and common stock issued under the employee
stock purchase plan. Financing cash proceeds during 1997 were partially offset
by cash used for principal payments on debt of $268,000 and dividend payments of
$185,000.

As of December 31, 1999, the Company had accounts receivable of
approximately $4.2 million for license fees and maintenance and other fees.
Typically, the Company's terms for payment on its accounts receivable are net 45
days from invoicing and shipment, and the Company typically experiences
collection cycles of 45 to 60 days domestically, and longer periods for
international accounts. The Company generally recognizes a substantial portion
of its revenue near the end of each quarter and, as a result, the accounts
receivable outstanding at the end of each quarter have averaged more than 30
days.

As of December 31, 1999, the Company's principal source of liquidity was
cash and cash equivalents totaling $1.3 million.

As indicated in Management's Discussion and Analysis, the Company has
allocated significant research and development resources to its Internet based
business strategy. To capitalize on this market strategy the Company will
continue to invest in its infrastructure, research and development and
marketing. As a result, the Company has been actively pursuing financing
alternatives to meet the capital requirements needed for the execution of this
business strategy. In February 2000, the Company completed a transaction in
which it sold 1.9 million shares of common stock at a price of $3.60 per share
and warrants to purchase 1.2 million shares of common stock at $0.05 per warrant
for $6.9 million. The warrants are exercisable at $6.50 per share. Management
believes that the completion of additional funding, together with existing cash
and cash generated from operations, will be sufficient to meet the Company's
operating and capital requirements for the foreseeable future including at least
the next twelve months.

NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS No. 133) was issued by the
FASB in June 1998. The Company will be required to adopt SFAS No. 133 for the
fiscal year ending December 31, 2001. However, because the Company does not
utilize derivative financial instruments, it does not believe the impact of SFAS
No. 133 will be material to our consolidated financial position or results of
operations.

In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP
98-9 requires use of the "residual method" for recognition of revenue when
vendor-specific objective evidence exists for undelivered elements but does not
exist for delivered elements of a software arrangement. The Company has adopted
SOP 98-9 effective for 1999 and had no material adverse effect on the Company's
consolidated financial statements.

20
<PAGE> 23

RISK FACTORS

OUR OPERATING RESULTS FLUCTUATE SUBSTANTIALLY

Our operating results have fluctuated significantly in the past and we
expect them to continue to fluctuate due to factors that affect two of Spatial's
principal sources of revenue: license fees and royalties and due to the launch
of our Internet business.

Quarterly revenues from royalties may fluctuate significantly. Revenues
from royalties are based on sales by our customers of products incorporating the
ACIS 3D modeling software and, therefore, our customers' sales fluctuations are
reflected in our royalty revenue stream.

Quarterly revenues from license fees may be affected by a number of
factors, including:

- the volume of orders received within a quarter;

- demand for our products and the product mix purchased by our customers;

- competing capital budget considerations of our customers;

- introduction and enhancement of products by us and our competitors;

- market acceptance of new products;

- reviews in the industry press concerning our products or those of our
competitors;

- seasonal factors, such as the timing of new product release, year-end
purchasing and trade shows;

- delays in the introduction or availability of hardware and software
products from third parties;

- changes or anticipated changes in our pricing or that of our competitors;
and

- general economic conditions.

- Acquisitions

In addition, the timing of our license fees fluctuates quarterly because we
generally ship products as we receive orders and, therefore, we have little or
no backlog. Additionally, we have generally shipped products and recognized most
of our license fee revenues near the end of each quarter, thus recognizing the
majority of license fee revenue in the last few days of the quarter. Our
operating expenses are to a large extent fixed and are based in part on
anticipated revenues. As a result, it is difficult for us to reduce expenses in
time to compensate for any unexpected revenue shortfall. Accordingly, any
significant unanticipated shortfall in sales could materially adversely affect
operating results.

Many of these factors are described in more detail in this "Risk Factors"
section.

RISKS ASSOCIATED WITH THE INTERNET

As PlanetCAD is in the early stage of development, we take risks and there
are uncertainties relating to our ability to successfully implement a new
business plan. The business and prospects must be considered in light of the
risks, expenses and difficulties encountered by companies in their early stages
of development, particularly companies in new and rapidly evolving markets such
as Internet services. The risks and uncertainties include, among other things,
the following:

- we may not be able to develop awareness and brand loyalty for our
products and services

- we may not be able to anticipate and adapt to the changing market for
Internet services and e-commerce

- we may not be able to expand our sales and marketing efforts

- we may not be able to continue to upgrade and enhance our technologies to
accommodate expanded service offerings

21
<PAGE> 24

- we may not successfully respond to competitive developments

- we may not be able to develop and renew strategic relationships.

We may not be successful in accomplishing any or all of these objectives,
which could materially harm our business. In this case, the value of your
investment may decline.

WE HAVE A HISTORY OF LOSSES, AND WE EXPECT CONTINUING LOSSES AND WE MAY NEVER
ACHIEVE PROFITABILITY.

- We have not generated enough revenue to cover the substantial amounts we
have invested to create, launch and enhance our Internet business. If our
revenue does not increase substantially, we may never become profitable.
Even if we do achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis in the future. This may, in
turn, cause our stock price to decline. In addition, if we do not achieve
or sustain profitability in the future, we may be unable to continue our
operations.

WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED.

- We believe that our existing capital resources will enable us to maintain
our current and planned operations at least through the end of 2000.
However, if our capital requirements or revenue vary materially from our
current plans or if unforeseen circumstances occur, we may require
additional financing sooner than we anticipate. This financing may not be
available on a timely basis, in sufficient amounts or on terms acceptable
to us. The financing may also dilute existing stockholders.

WE OFFER AN UNDIVERSIFIED PRODUCT LINE TO A CONCENTRATED CUSTOMER BASE

We generate substantially all of our revenues from license fees, royalties
and maintenance and training contracts relating to the ACIS 3D modeling
software. Any decline in demand for the ACIS 3D modeling software could
materially adversely affect our business, operating results and financial
condition. Any of the following factors could cause such a decline in demand:

- failure to achieve market acceptance of any new version of ACIS 3D;

- increased competition;

- technological superiority of a competitor; or

- our failure to release new versions of ACIS 3D modeling software on a
timely basis.

Historically, most of our revenues have come from sales to a few large CAD
software developers such as Autodesk, Baystate Technologies, Inc. and Visionary
Design Systems, Inc. Our growth strategy is to target smaller 3D applications
software developers. This new market segment may have lower profit margins and
higher credit risks than we have experienced previously. Revenues from our
current customers may decline, or we may be unable to expand our customer base
profitably.

WE DEPEND ON SWIFT AND TIMELY INTRODUCTIONS OF NEW PRODUCTS

We compete in an industry faced with evolving standards and rapid
technological developments. New products are introduced frequently and customer
requirements change with technology developments. Our success will depend upon
our ability to anticipate evolving standards, technological developments and
customer requirements and enhance existing products accordingly.

Software development is inherently uncertain. We cannot predict the exact
timing of a new product shipment or version release on any particular platform;
we have experienced delays in the development of certain new products and
product versions. Additionally, we utilize third party development partners to
facilitate the development of product enhancements and new component extensions.
Factors beyond our control may affect our partners' ability to timely deliver
product enhancements and new component extensions. Delays in product

22
<PAGE> 25

development may adversely affect our business, financial condition and operating
results. Negative reviews of new products or product versions could also
materially adversely affect market acceptance.

OUR PRODUCTS MAY CONTAIN UNDETECTED ERRORS

Our software products may contain undetected errors when first introduced
or as new versions are released. In the past, we have discovered software errors
in some new products and enhancements after their introduction. We may find
errors in current or future new products or releases after commencement of
commercial shipments. Any errors, whether we discover them before or after
shipment, may result in delay, which could materially adversely affect our
business, operating results and financial condition. Although we have not
experienced product liability claims by customers in the past as a result of
product errors, such claims might be brought against Spatial in the future.

COMPETITION IN OUR INDUSTRY IS INTENSE

The markets for our products are highly competitive, rapidly changing and
subject to constant technological innovation. Participants in these markets face
constant pressure to accelerate the release of new products, enhance existing
products, introduce new product features and reduce prices. Many of our
competitors or potential competitors have significantly greater financial,
managerial, technical and marketing resources than us. Actions by our
competitors which could materially adversely affect our business, financial
condition and results of operations include:

- a reduction in product prices;

- increased promotion;

- accelerated introduction of, or the announcement of, new or enhanced
products or features;

- acquisitions of software applications or technologies from third parties;
or

- product giveaways or product bundling.

In addition, our present and future competitors may be able to develop
comparable or superior products or respond more quickly to new technologies or
evolving standards. Accordingly, we may be unable to consistently compete
effectively in our markets, competition might intensify or future competition
may develop, all of which could materially adversely affect our business,
financial condition or results of operations.

WE ARE DEPENDENT UPON KEY PERSONNEL AND THE ABILITY TO HIRE ADDITIONAL PERSONNEL

Our executive officers and key employees are vital assets. We do not have
employment agreements with any of our executive officers, except for the
president and chief executive officer.

We also depend on our ability to attract, retain and motivate high quality
personnel, especially management, skilled development personnel and sales
personnel. Competition for skilled development personnel with specialized
experience and training relevant to 3D modeling and web-based software is
intense. There are a limited number of skilled people in the United States with
the skills and training we require. As our sales force has grown, we have
suffered turnover among our United States sales force that has, in some cases,
delayed sales.

The loss of any of our executive officers or other key employees could
materially adversely affect our business, financial condition or operating
results. A failure to recruit executive officers or key sales, management or
development personnel would similarly harm our growth and competitiveness.

WE ARE DEPENDENT UPON THIRD PARTY DEVELOPERS

We rely on a number of development partners and third party licensors for
the development and enhancement of portions of the ACIS 3D modeling software.
Our plans for the future development of the ACIS 3D modeling technology continue
to rely on these development partners and third party licensors for further
product enhancements and extensions. We share ownership of, or rights to, the
technology developed with

23
<PAGE> 26

certain development partners. In certain limited circumstances, these partners
may use this technology to compete with us.

All of our development partners and third party licensors may terminate
these agreements under certain circumstances. We may not be able to continue to
use the services of our development partners to augment our development
capabilities or the technologies of third party licensors in our products, and
we may not be able to replace those services or technologies in a timely manner,
if necessary. The loss of any third party licensees could also result in delays
or cancellations in product shipments until equivalent software can be
identified, licensed or developed and integrated with our products.

WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH

The anticipated growth in our Web-based business may place substantial
demands on our managerial, operational and financial resources. Our future
success will depend upon our ability to:

- continue to enhance our PlanetCAD suite of products

- respond to competitive developments;

- expand our sales and marketing efforts, and

- attract, train, motivate and retain qualified management and engineering
personnel.

Although we believe that our systems and controls are adequate for the
current level of our operations, we anticipate that we may need to add
additional personnel and expand and upgrade our systems and controls to manage
possible future growth. The failure to do so could have a material adverse
effect upon our business, financial condition and results of operations.

In the future, we may acquire additional complementary companies, products
or technologies. Managing acquired businesses entails numerous operational and
financial risks. These risks include the difficulty in assimilating acquired
operations, diversion of management's attention and the potential loss of key
employees or customers of acquired operations. We may not be able to achieve or
effectively manage growth, and failure to do so could materially adversely
affect our operating results.

WE MAY BE EXPOSED TO RISKS OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
INFRINGEMENT

Our proprietary technologies are crucial to our success and ability to
compete. We rely on trade secret and copyright laws to protect our proprietary
technologies, including our source code, but our efforts may be inadequate to
protect our proprietary rights or to prevent others from claiming violations of
their proprietary rights. We have no patents with respect to the ACIS 3D
modeling technology. Further, effective trade secret and copyright protection
may not be available in all foreign countries.

We generally enter into confidentiality or license agreements with
employees, consultants and customers. Additionally, we generally control access
to and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
proprietary information is difficult.

The unauthorized misappropriation of our technology could have a material
adverse effect on our business, financial condition and results of operations.
If we resort to legal proceedings to enforce our proprietary rights, the
proceedings could be burdensome and expensive and could involve a high degree of
risk.

We may also be subject to claims alleging infringement by us of third party
proprietary rights. Litigating such claims, whether meritorious or not, could be
costly. These claims might require us to enter into royalty or license
agreements, the terms of which may be unfavorable to us. If we were found to
have infringed upon the proprietary rights of third parties, we could be
required to pay damages, cease sales of the infringing products and redesign or
discontinue such products, any of which could have a material adverse effect on
our business, financial condition or results of operations.

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<PAGE> 27

A SUBSTANTIAL PORTION OF OUR SALES ARE SUBJECT TO RISKS OF THE INTERNATIONAL
MARKET

International sales represented a substantial portion of our total revenues
in 1999. We believe that international sales will continue to represent a
significant portion of our total revenues. Inherent risks of conducting business
internationally include:

- unexpected changes in regulatory requirements;

- problems and delays in collecting accounts receivable;

- export license requirements, tariffs and other trade barriers;

- difficulties in staffing and managing foreign operations;

- political instability;

- fluctuations in currency exchange rates;

- seasonal reductions in business activity; and

- potentially adverse tax consequences.

This reliance on international sales makes our business results
particularly vulnerable to changes in overseas markets. These changes are
difficult to anticipate and react to and, therefore, may affect us
disproportionately.

Sales of our products currently are denominated principally in U.S.
dollars. Accordingly, any increase in the value of the U.S. dollar as compared
to currencies in our principal overseas markets would increase the foreign
currency-denominated cost of our products, which may decrease our sales in those
markets. We have not engaged in any currency exchange hedging practices.

FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE

Additionally, the Company intends to file a Registration Statement on Form
S-3 in order to register an aggregate of 3,100,000 shares of our common stock no
later than November 2000. After such registration statement becomes effective,
the shares registered thereunder will be eligible for resale in the market
without restriction. Sales of any substantial number of shares of our common
stock in the public market may have an adverse effect on the market price of our
common stock. The average daily trading volume of our common stock has been very
low. Any sustained sales of shares by our existing or future stockholders or any
increase in the average volume of shares traded in the public market may
adversely affect the market price of our common stock.

OUR STOCK PRICE IS HIGHLY VOLATILE

The market price of our common stock has been highly volatile and is likely
to continue to be volatile. Factors affecting our stock price may include:
fluctuations in our operating results, announcements of technological
innovations or new software standards by us or competitors, published reports of
securities analysts, developments in patent or other proprietary rights, changes
in our relationships with development partners and general market conditions,
especially regarding the general performance of comparable technology stocks.
Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of our
operating performance.

25
<PAGE> 28

ITEM 7. FINANCIAL STATEMENTS

SPATIAL TECHNOLOGY INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................
Financial Statements:
Consolidated Balance Sheets, as of December 31, 1998 and
1999...................................................
Consolidated Statements of Operations, years ended
December 31, 1997, 1998 and 1999.......................
Consolidated Statements of Stockholders' Equity, years
ended December 31, 1997, 1998 and 1999.................
Consolidated Statements of Cash Flows, years ended
December 31, 1997, 1998 and 1999.......................
Notes to Consolidated Financial Statements................
</TABLE>

26
<PAGE> 29

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Spatial Technology Inc.:

We have audited the accompanying consolidated balance sheets of Spatial
Technology Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Spatial
Technology Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.

KPMG LLP

Boulder, Colorado
January 27, 2000

27
<PAGE> 30

SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARES)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 4,534 $ 1,324
Accounts receivable, net of allowance of $100 and $199 in
1998 and 1999, respectively............................ 3,981 4,156
Prepaid expenses and other................................ 542 691
-------- --------
Total current assets.............................. 9,057 6,171
Equipment, net (note 3)..................................... 1,392 1,891
Purchased computer software, net (note 2)................... 1,140 2,010
-------- --------
Total Assets...................................... $ 11,589 $ 10,072
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable.......................................... $ 626 $ 1,028
Other accrued expenses.................................... 1,203 1,245
Deferred revenue.......................................... 1,869 1,921
Current maturities of long-term debt (note 4)............. 10 --
-------- --------
Total current liabilities......................... 3,708 4,194
-------- --------
Long-term debt, less current maturities (note 4)............ 79 --
-------- --------
Stockholders' Equity (note 5):
Common stock, $.01 par value; 22,500,000 shares
authorized: 9,239,791 and 9,508,179, shares outstanding
in 1998 and 1999, respectively......................... 92 95
Additional paid-in capital................................ 24,929 25,828
Accumulated deficit....................................... (17,075) (19,936)
Accumulated other comprehensive loss...................... (144) (109)
-------- --------
Total stockholders' equity........................ 7,802 5,878
-------- --------
Commitments and contingencies (note 7)
Total Liabilities and Stockholders' Equity........ $ 11,589 $ 10,072
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

28
<PAGE> 31

SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
License fees.............................................. $ 4,854 $ 6,253 $ 5,412
Royalties................................................. 2,866 3,922 4,875
Services.................................................. 3,164 4,175 4,613
------- ------- -------
Total revenue..................................... 10,884 14,350 14,900
------- ------- -------
Cost of sales:
License fees.............................................. 319 461 539
Royalties................................................. 163 39 9
Services.................................................. 343 264 584
------- ------- -------
Total cost of sales............................... 825 764 1,132
------- ------- -------
Gross profit...................................... 10,059 13,586 13,768
------- ------- -------
Operating expenses:
Sales and marketing....................................... 4,477 5,213 5,918
Research and development.................................. 4,619 5,678 7,742
General and administrative................................ 2,393 2,097 2,362
Acquired in-process research and development (note 2)..... 621 -- 500
Merger costs (note 1)..................................... -- 319 --
------- ------- -------
Total operating expenses.......................... 12,110 13,307 16,522
------- ------- -------
Earnings (loss) from operations................... (2,051) 279 (2,754)
Other income (expense):
Interest income........................................... 382 255 146
Interest expense.......................................... (32) (27) (5)
Other, net................................................ (9) 10 (2)
------- ------- -------
Total other income................................ 341 238 139
------- ------- -------
Earnings (loss) before income taxes............... (1,710) 517 (2,615)
Income tax expense (note 6)................................. 110 316 246
------- ------- -------
Net earnings (loss)............................... $(1,820) $ 201 $(2,861)
======= ======= =======
Other comprehensive income (loss):
Foreign currency translation adjustment................... (35) (29) 35
------- ------- -------
Comprehensive income (loss)............................... $(1,855) $ 172 $(2,826)
======= ======= =======
Earnings (loss) per common share:
Basic..................................................... $ (0.21) $ 0.02 $ (0.31)
Diluted................................................... $ (0.21) $ 0.02 $ (0.31)
Weighted average number of common shares outstanding:
Basic..................................................... 8,849 9,199 9,345
Diluted................................................... 8,849 9,307 9,345
</TABLE>

See accompanying notes to consolidated financial statements.

29
<PAGE> 32

SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARES)

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------ PAID-IN- ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT LOSS EQUITY
--------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997....... 8,385,484 $84 $23,342 $(15,456) $ (80) $ 7,890
Exercise of common stock options
for cash........................ 64,496 1 168 -- -- 169
Common stock issued under employee
stock purchase plan............. 56,964 1 149 -- -- 150
Common stock issued for purchased
computer software (note 2)...... 250,000 2 388 -- -- 390
Common stock issued for cash by
pooled company.................. 435,183 4 521 -- -- 525
Purchase and retirement of
treasury stock by pooled
company......................... (50,779) (1) 1 -- -- --
Net loss.......................... -- -- -- (1,820) -- (1,820)
Foreign currency translation
adjustment...................... -- -- -- -- (35) (35)
--------- --- ------- -------- ----- -------
Balances at December 31, 1997..... 9,141,348 $91 $24,569 $(17,276) $(115) $ 7,269
Exercise of common stock options
for cash........................ 1,625 -- 3 -- -- 3
Common stock issued under employee
stock purchase plan............. 96,818 1 179 -- -- 180
Common stock options issued for
purchased computer software and
services........................ -- -- 178 -- -- 178
Net earnings...................... -- -- -- 201 -- 201
Foreign currency translation
adjustment...................... -- -- -- -- (29) (29)
--------- --- ------- -------- ----- -------
Balances at December 31, 1998..... 9,239,791 $92 $24,929 $(17,075) $(144) $ 7,802
Exercise of common stock options
and warrant for cash............ 53,321 1 97 -- -- 98
Common stock issued under employee
stock purchase plan............. 21,206 -- 43 -- -- 43
Common stock and warrant issued in
connection with Sven
acquisition..................... 193,861 2 759 -- -- 761
Net earnings...................... -- -- -- (2,861) -- (2,861)
Foreign currency translation
adjustment...................... -- -- -- -- 35 35
--------- --- ------- -------- ----- -------
Balances at December 31, 1999..... 9,508,179 $95 $25,828 $(19,936) $(109) $ 5,878
========= === ======= ======== ===== =======
</TABLE>

See accompanying notes to consolidated financial statements.

30
<PAGE> 33

SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $(1,820) $ 201 $(2,861)
Adjustments to reconcile net earnings (loss) to net cash
used by operating activities:
Depreciation and amortization.......................... 312 598 791
Acquired in-process research and development........... 621 -- 500
Write-down of purchased computer software.............. 200 -- --
Provision for, and write-off of, uncollectible accounts
receivable........................................... -- -- 383
Changes in operating assets and liabilities:
Accounts receivable.................................. (858) (1,249) (558)
Prepaid expenses and other........................... (52) (133) (205)
Accounts payable..................................... (155) 320 402
Accrued expenses..................................... 367 (286) (72)
Deferred revenue..................................... 145 399 52
------- ------- -------
Net cash used by operating activities............. (1,240) (150) (1,568)
------- ------- -------
Cash flows from investing activities:
Additions to equipment.................................... (911) (629) (1,009)
Additions to purchased computer software.................. (851) (446) (219)
Cash paid for software in business combination............ -- -- (500)
------- ------- -------
Net cash used by investing activities............. (1,762) (1,075) (1,728)
------- ------- -------
Cash flows from financing activities:
Principal payments on debt................................ (268) (190) (89)
Dividends paid............................................ (185) -- --
Proceeds from issuance of common stock, net............... 525 -- --
Proceeds from exercise of common stock options and
warrants and purchase of common stock for cash......... 319 183 141
------- ------- -------
Net cash provided (used) by financing
activities...................................... 391 (7) 51
------- ------- -------
Foreign currency translation adjustment affecting cash...... (35) (29) 35
------- ------- -------
Net decrease in cash and cash equivalents......... (2,646) (1,261) (3,210)
Cash and cash equivalents at beginning of period............ 8,441 5,795 4,534
------- ------- -------
Cash and cash equivalents at end of period.................. $ 5,795 $ 4,534 $ 1,324
======= ======= =======
Supplemental cash flow information:
Cash paid for interest.................................... $ 27 $ 29 $ 5
======= ======= =======
Cash paid for income taxes................................ $ 145 $ 229 $ 211
======= ======= =======
Supplemental disclosure of non-cash investing activities:
Common stock and warrants issued in business
combination............................................ $ -- $ -- $ 932
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

31
<PAGE> 34

SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Organization and Basis of Financial Statement Presentation

Spatial Technology Inc. (Spatial or the Company) was incorporated under the
laws of the State of Delaware on July 7, 1986 to design, develop, and market 3D
modeling software. Spatial has three wholly owned subsidiaries that assist in
the sales and licensing of the Company's products, including Spatial Technology
Ltd., Spatial Technology GmbH, and Spatial Technology K.K. located in England,
Germany, and Japan, respectively. In addition, the Company operates InterData
Access, Inc. (IDA), a wholly owned subsidiary from its Boulder, Colorado
headquarters. The Company and the subsidiaries currently operate in one business
segment although the Company may establish additional business segments in the
future.

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

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

(b) Earnings (Loss) Per Share

Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed on the basis of the weighted average number of common shares
outstanding plus the dilutive effect of potential common stock, consisting only
of common stock warrants and options. For the years ended December 31, 1997 and
December 31, 1999, diluted loss per share is the same as basic loss per share,
as the effect of potential common stock is antidilutive.

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

(d) Other Comprehensive Income or Loss

Assets and liabilities of the Company's international subsidiaries are
translated into U.S. dollars using current exchange rates in effect at the
balance sheet date, and revenue and expense accounts are translated using a
weighted average exchange rate during the period. Net exchange gains and losses
resulting from such translation are included as a separate component of
stockholders' equity as other comprehensive income or loss. Gains and losses
from foreign currency transactions, when applicable, are included in other
income (expense). There were no significant gains or losses on foreign currency
transactions during the years ended December 31, 1997, 1998 and 1999.

(e) Revenue Recognition

The Company recognizes revenue in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2") which
requires that revenue for licensing, selling, leasing, or otherwise marketing
computer software be recognized when evidence of an arrangement exists, delivery
of the product has occurred, collectibility of the related receivable is assured
and the vendor's fee is fixed or determinable. In addition, revenue is
recognized for the multiple elements of software arrangements based upon the
vendor specific objective evidence of fair value for each element. Accordingly,
revenue from products or services is recognized based upon shipment of products
or performance of services. In December 1998, the American Institute of
Certified Public Accountants ("AICPA") issued SOP No. 98-9, "Modification of SOP

32
<PAGE> 35
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions."
SOP No. 98-9 clarifies certain provisions of SOP No. 97-2, and effectively
defers the required adoption of those provisions until the Company's fiscal year
beginning January 1, 2000. Effective January 1, 1999, the Company adopted the
provision of SOP No. 98-9, and the impact on the Company's results of
operations, financial position or cash flows was not material. License fee
revenue is recognized upon completion of a signed contract and shipment of the
software. Revenue from royalties is generally recognized upon receipt of
payment. Revenue from maintenance contracts is deferred and recognized ratably
over the period of the agreement. Training and consulting revenue is recognized
upon completion of the training or performance of services, respectively.

(f) Equipment and Purchased Computer Software

Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the respective assets, which range
from five to seven years. Purchased computer software represents software
enhancements acquired from third parties, and is amortized over its estimated
useful life of three to seven years, beginning when the software is incorporated
into the Company's products.

(g) Stock-Based Compensation

The Company accounts for its stock-based compensation plans using the
intrinsic value based method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations
(APB 25). The Company has provided pro forma disclosures of net earnings (loss)
and earnings (loss) per share as if the fair value based method of accounting
for these plans, as required by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation (SFAS 123)", had been applied. See
note 5.

(h) Impairment of Long-Lived Assets

The Company accounts for long lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121") which requires that long-lived assets and certain identifiable
intangibles, including goodwill, held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. An impairment loss is
recognized when estimated undiscounted future cash flows expected to be
generated by the asset are less than its carrying value. Measurement of the
impairment loss is based on the fair value of the asset, which is generally
determined using valuation techniques such as discounted present value of
expected future cash flows. In June 1997 the Company charged $200,000 to
operations related to the write-down of purchased computer software as a result
of a change in the Company's product development strategy, and such amount is
included in research and development expense in the accompanying consolidated
financial statements.

(i) Research and Development Costs

Costs to establish the technological feasibility of computer software
products are expensed as incurred. Generally, products are ready for sale upon
establishment of technological feasibility. Accordingly, no software development
costs have been capitalized by the Company in 1997, 1998 and 1999.

(j) Income Taxes

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109). SFAS 109 requires the use of
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory rates
applicable to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
33
<PAGE> 36
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(k) Reclassifications

Certain 1997 and 1998 amounts items have been reclassified to conform to
the 1999 presentation.

(2) ACQUISITIONS AND IN-PROCESS RESEARCH AND DEVELOPMENT

In June 1999 the Company acquired certain assets and liabilities of Sven
Technologies, Inc. ("Sven") for total consideration of $1.4 million, including
$500,000 cash and 193,861 shares of common stock and a warrant to purchase
250,000 shares of common stock at $12.50 per share. The acquisition was
accounted for using the purchase method, and the purchase price was allocated to
the assets acquired based on their estimated fair values, including $932,000 of
purchased computer software and $500,000 of in-process research and development
projects. The purchased computer software will be amortized over seven years.
The Company charged the in-process research and development to operations at the
date of acquisition as such technology had not reached technological feasibility
and had no probable alternative future use by the Company.

The unaudited pro forma combined results of the companies, as if Sven had
been acquired as of January 1, 1998 are as follows (in thousands) :

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
Revenue..................................................... $14,497 $15,014
Net loss.................................................... $ (834) $(3,022)
Loss per share -- basic and diluted......................... $ (0.09) $ (0.32)
</TABLE>

In December 1998, the Company acquired all of the outstanding common stock
of IDA in exchange for 1,400,000 shares of the Company's common stock.
Established in 1983, IDA develops and markets software for the sharing, access
and exchange of electronic product data throughout the manufacturing process.
The merger was accounted for as a pooling of interests and, accordingly, the
financial statements for all periods presented were restated to include the
assets, liabilities and operations of IDA. Total charges associated with the
merger were approximately $319,000 and represent legal, accounting and other
costs associated with the integration of the two companies. These costs were
charged to operations in December 1998.

In December 1997, the Company purchased certain intellectual property
rights from Three-Space Limited (TSL) for $1,241,000, consisting of $851,000 in
cash and 250,000 shares of common stock. The transaction eliminated TSL's joint
ownership rights in ACIS, including the Company's royalty obligation to TSL. The
purchase price was allocated to the technology acquired based on its estimated
fair values, including $620,000 of purchased computer software and $621,000 of
in-process research and development projects. The purchased computer software
will be amortized over seven years. The Company charged the in-process research
and development to operations at the date of acquisition, as such technology had
not reached technological feasibility and had no probable alternative future use
by the Company.

34
<PAGE> 37
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) EQUIPMENT

Equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
Computer equipment.......................................... $ 1,693 $ 2,003
Furniture and office equipment.............................. 669 739
Leasehold improvements...................................... 135 171
------- -------
2,497 2,913
Less accumulated depreciation............................... (1,105) (1,022)
------- -------
$ 1,392 $ 1,891
======= =======
</TABLE>

(4) NOTES PAYABLE

IDA issued subordinated promissory notes to two stockholders. Each
promissory note bore interest at 10% per annum, and requires monthly payments of
$760 through 2005. Both promissory notes were paid in full during 1999.

(5) STOCKHOLDERS' EQUITY

Preferred Stock

In June 1996, the Board of Directors of the Company authorized, at their
discretion, the issuance of up to 2,500,000 shares of preferred stock in one or
more series and to fix the rights, preferences, and privileges of such series.
As of December 31, 1999, no shares of preferred stock were outstanding.

Stock Options

In July 1998, the Board of Directors of the Company approved the 1998
Non-officer Stock Option Plan (1998 Plan). Up to 505,000 shares of Common Stock
may be issued pursuant to the 1998 Plan. Under the 1998 Plan, the Company may
issue nonqualified stock options, which are granted at an exercise price equal
to the fair market value of the stock on the date of grant. Vesting and option
term, which may not exceed ten (10) years from the date of grant, are determined
by the Board of Directors at the time of grant. As of December 31, 1999 options
to purchase 312,200 shares of common stock under the 1998 Plan were outstanding
at a weighted average exercise price of $3.55.

In June 1996, the Board of Directors of the Company approved the 1996
Equity Incentive Plan (1996 Plan). Up to 1,350,000 shares of Common Stock may be
issued pursuant to the 1996 Plan. Under the 1996 Plan the Company may issue
incentive stock options and nonqualified stock options. Incentive stock options
are granted at an exercise price not less than the fair market value of the
stock on the date of grant, vest over a four-year employment period, and are
exercisable over a maximum ten-year employment period. The Company also grants
nonqualified stock options under the 1996 Plan that vest over a four-year period
or earlier upon the attainment of specific performance objectives, and are
exercisable over a maximum ten-year period or upon attainment of such
objectives. As of December 31, 1999 options to purchase 1,268,794 shares of
common stock under the 1996 Plan were outstanding at a weighted average exercise
price of $3.05.

In June 1996, the Board of Directors approved the 1996 Non-Employee
Directors' Stock Option Plan (Directors' Plan). Up to 250,000 shares of Common
Stock may be issued pursuant to the Directors' Plan. Stock options granted under
the Directors' Plan are granted at not less than the fair market value of the
stock on the date of grant and are immediately exercisable over a ten-year
period from date of grant. As of December 31, 1999,

35
<PAGE> 38
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

options to purchase 141,000 shares of common stock under the Directors' Plan
were outstanding at a weighted average exercise price of $3.42.

In August 1996, the Company's Board of Directors approved the termination,
effective upon the initial public offering described above, of the Amended and
Restated 1987 Stock Option Plan (1987 Plan). Under the 1987 Plan the Company
issued incentive stock options and nonqualified stock options. Incentive stock
options were granted at an exercise price not less than the fair market value of
the stock on the date of grant, vest over a four-year employment period, and are
exercisable over either a five-year or ten-year employment period. The Company
also granted nonqualified stock options under the 1987 Plan that vest over a
four-year period or upon the attainment of specific performance objectives, and
are exercisable over a five-year period or upon attainment of such objectives.
As a result of such termination, no additional options may be issued under the
1987 Plan. The options to purchase 51,931 shares of Common Stock at a weighted
average exercise price of $4.05 outstanding as of December 31, 1999 will remain
exercisable until they expire or terminate pursuant to their terms.

A summary of the status of the Company's fixed option plans as of December
31, 1997, 1998 and 1999 and changes during the years then ended is presented
below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICES SHARES PRICES SHARES PRICES
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 889,809 $4.29 1,170,649 $3.18 1,207,930 $2.78
Granted..................... 606,825 1.97 416,800 2.12 658,811 3.93
Exercised................... (64,496) 2.55 (1,625) 1.88 (37,673) 2.59
Forfeited................... (261,489) 4.32 (377,894) 3.28 (55,143) 3.38
---------- ---------- ----------
Outstanding at end of
year...................... 1,170,649 3.18 1,207,930 2.78 1,773,925 3.20
========== ========== ==========
Weighted-average fair value
of options granted during
the year at exercise
prices equal to market
price at grant date....... $ 1.18 $ 1.33 $ 2.71
========== ========== ==========
</TABLE>

The following table summarizes information about fixed stock options
outstanding as of December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- --------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
- -------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$1.63-2.00......................... 591,566 7.8 $1.84 287,312 $1.82
$2.31-3.84......................... 590,783 8.6 3.04 174,159 2.83
$4.13-5.00......................... 591,576 7.1 4.71 372,593 4.82
--------- -------
1,773,925 7.8 3.20 834,064 3.37
========= =======
</TABLE>

36
<PAGE> 39
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of options granted during 1997, 1998 and 1999 was estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997, 1998 and 1999:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate................................... 5.75% 5.19% 6.60%
Expected life............................................. 4 years 4 years 4 years
Volatility................................................ 55% 68% 73%
</TABLE>

Pro forma financial information assuming the use of SFAS 123 in accounting
for stock based compensation is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Net earnings (loss):
As reported............................................. $(1,820) $ 201 $(2,861)
Adjusted pro forma...................................... (2,419) (219) (4,080)
Basic and diluted earnings (loss) per share:
As reported............................................. $ (0.21) $ 0.02 $ (0.31)
Adjusted pro forma...................................... (0.27) (0.02) (0.44)
</TABLE>

Employee Stock Purchase Plan

In June 1996, the Board of Directors approved the Employee Stock Purchase
Plan. Up to 175,000 shares of common stock may be issued pursuant to the plan.
Employees may elect to withhold up to 15% of their compensation for the purchase
of the Company's common stock. The amounts withheld are used to purchase the
Company's common stock at a price equal to 85% of the fair market value of
shares at the beginning or end of each purchase period. During 1997, 1998 and
1999 the Company has issued an aggregate of 174,988 shares at an average price
of $1.85.

Warrants

A summary of outstanding common stock purchase warrants as of December 31,
1999 is as follows:

<TABLE>
<CAPTION>
EXERCISE EXPIRATION
SHARES PRICE DATE
- ------ -------- ----------
<S> <C> <C>
6,666....................................................... $ 8.22 2000
166,665..................................................... 8.22 2001
210,000..................................................... 6.50 2001
22,500...................................................... 8.22 2003
250,000(a).................................................. 12.50 2004
</TABLE>

- ---------------

(a) These warrants were issued in connection with the Sven acquisition, as
described in note 2, and were valued using the Black-Scholes option pricing
model with the following assumptions; no dividends, volatility of 68%, risk
free interest of 6.60% and an expected life of two years.

37
<PAGE> 40
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) TAXES

Tax expense for 1997 and 1999 is comprised solely of taxes on foreign
sales. Tax expense for 1998 consists of foreign taxes for Spatial and federal
and state income tax expense for IDA.

Income tax expense differs from the amount computed by applying the
statutory federal income tax rate to earnings (loss) before income taxes as
follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Expected income tax expense (benefit)....................... $(581) $ 176 $ (889)
Non deductible expenses, net................................ 11 94 9
Change in deferred tax valuation allowance.................. 750 89 1,838
Taxes on foreign sales...................................... 110 95 246
State taxes, net of federal benefit......................... -- 38 (98)
Research and development tax credit......................... (174) (206) (200)
Adjustment of previously provided taxes..................... -- -- (660)
Other, net.................................................. (6) 30 --
----- ----- ------
Actual income tax expense................................... $ 110 $ 316 $ 246
===== ===== ======
</TABLE>

The tax effects of significant temporary differences that result in
deferred tax assets and liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
Accounts receivable, primarily due to differences in
accounting for
bad debts................................................. $ 37 $ 79
Property and equipment, primarily due to differences in
Depreciation.............................................. (51) (20)
Deferred revenue, due to differences in revenue recognition
for financial statement and income tax purposes........... 22 1
Accrued expenses, primarily due to difference in the period
of recognition for financial statement and income tax
purposes.................................................. 122 182
Purchased software, primarily due to differences in carrying
values for financial statement and income tax purposes.... (94) (254)
Acquired in-process research and development, amortized for
income tax purposes....................................... -- 172
Research and development and other tax credit
carryforwards............................................. 1,307 1,896
Net operating loss carryforwards............................ 5,495 6,620
------- -------
Total deferred tax assets......................... 6,838 8,676
Less valuation allowance.................................... (6,838) (8,676)
------- -------
Net deferred tax assets........................... $ -- $ --
======= =======
</TABLE>

At December 31, 1999, the Company had net operating loss carryforwards for
regular income tax purposes of approximately $16,176,000, which if not utilized,
expire in the years 2003 through 2019. The net operating loss carryforwards at
December 31, 1999 are subject to limitation under Section 382 of the Internal
Revenue Code. The Company has provided a valuation allowance for the entire
deferred tax balance due to uncertainty of the realization of the asset.

38
<PAGE> 41
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company also has research and development credit carryforwards for
income tax purposes available totaling approximately $1,495,000, which if not
utilized, expire in the years 2003 through 2019. Approximately $284,000 of the
total credit carryforwards is also subject to limitation under Section 382 of
the Internal Revenue Code.

(7) COMMITMENTS AND CONTINGENCIES

The Company leases its office facilities and various office equipment under
noncancelable operating leases. Future minimum rental payments on these leases
are as follows (in thousands):

<TABLE>
<S> <C>
2000........................................................ $452
2001........................................................ 152
2002........................................................ 105
2003........................................................ 98
Thereafter.................................................. 72
----
$879
====
</TABLE>

Rent expense was approximately $487,000, $528,000 and $555,000 in 1997,
1998 and 1999, respectively.

The Company executed a long-term development agreement with Three-Space
Limited, a United Kingdom corporation (TSL), in 1989 (the 1989 Development
Agreement) obligating the Company to pay approximately $30,000 per month for
specified research and marketing activities. In connection with the acquisition
discussed in Note 2, the Company terminated the 1989 Development Agreement and
entered into a Software Consulting Agreement with substantially the same
financial obligation to the Company. Expenses under the 1989 Development
Agreement and the software consulting agreement were approximately $327,000,
$400,000 and $398,000 in 1997, 1998 and 1999, respectively.

The Company has entered into various licensing agreements, which require
the Company to pay royalties on each sale of the licensed software products.
Royalty expense under these agreements is included in costs of sales and totaled
approximately $383,000, $291,000 and $349,000 in 1997, 1998 and 1999,
respectively.

(8) REVENUE, SIGNIFICANT CUSTOMERS AND CONCENTRATION OR CREDIT RISK

Revenue by geographic area is summarized as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
United States........................................... $ 5,893 $ 7,331 $ 7,926
Europe.................................................. 2,699 4,355 3,734
Japan................................................... 1,959 2,023 3,065
Other................................................... 333 641 175
------- ------- -------
Total......................................... $10,884 $14,350 $14,900
======= ======= =======
</TABLE>

39
<PAGE> 42
SPATIAL TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Earnings (loss) from operations by geographic area is summarized as follows
(in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
United States........................................... $ 4,209 $ 5,369 $ 5,385
Europe.................................................. 1,457 2,771 2,145
Japan................................................... 894 960 1,586
Other................................................... 255 533 123
------- ------- --------
6,815 9,633 9,239
Unallocated corporate expenses.......................... (8,866) (9,354) (11,993)
------- ------- --------
Total......................................... $(2,051) $ 279 $ (2,754)
======= ======= ========
</TABLE>

Substantially all of the company's identifiable assets relate to domestic
operations.

During 1997, 1998 and 1999 one customer accounted for 11%, 11% and 10% of the
Company's revenue in each year, respectively.

The Company is exposed to potential concentrations of credit risk from its
accounts receivable with its various customers. The Company's accounts
receivable are from both large multinational corporate customers and smaller
companies in a variety of industries, with no concentration in a single
industry. However, the Company is subject to credit risk due to economic events
or circumstances in the various international and domestic markets in which the
Company operates. To reduce this risk, the Company evaluates the
creditworthiness of its customers prior to the shipment of software or
performance of services.

(9) SUBSEQUENT EVENT

In February 2000 the Company issued 1.9 million shares of common stock and
warrants to purchase 1.2 million shares of common stock at an exercise price of
$6.50 per share for total consideration of $6.9 million. The warrants are
exercisable beginning August 2000 through their expiration in February 2005.

40
<PAGE> 43

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

Not applicable.

PART III

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

The information concerning directors and executive officers is set forth in
the Proxy Statement under the headings "Proposal 1 -- Election of Directors" and
"Management", which information is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management", which information is
incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Transactions",
which information is incorporated herein by reference.

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

(a) Exhibits

41
<PAGE> 44

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4* -- 1996 Amended and Restated 1987 Stock Option Plan of the
Registrant (the "Restated Plan"), including form of
Incentive Stock Option and Nonstatutory Stock Option
under the Restated Plan.
10.5* -- 1996 Equity Incentive Plan (the "Incentive Plan"),
including form of Incentive Stock Option and Nonstatutory
Stock Option under the Incentive Plan of the Registrant.
10.6* -- 1996 Non-Employee Directors' Stock Option Plan of the
Registrant (the "Directors' Plan"), including form of
Nonstatutory Stock Option under the Directors' Plan.
10.7* -- Employee Stock Purchase Plan of the Registrant and
related offering document.
10.8* -- Employment Agreement between the Registrant and Karlheinz
Peters, dated as of May 5, 1993.
10.9 -- [Intentionally omitted]
10.10* -- Lease Agreement between the Registrant and Cottonwood
Development Partners, dated June 29, 1990, as amended.
10.11 -- [Intentionally omitted]
10.12 -- [Intentionally omitted]
10.13* -- Warrant to Purchase 15,648 shares of Common Stock issued
by the Registrant to New York Life Insurance Company.
10.14 -- [Intentionally omitted]
10.15* -- Warrant to Purchase 100,000 shares of Next Preferred
Stock issued by the Registrant to New York Life Insurance
Company.
10.16* -- Warrant to Purchase 200,000 shares of Next Preferred
Stock issued by the Registrant to Nazem & Company II,
L.P.
10.17* -- Warrant to Purchase 200,000 shares of Next Preferred
Stock issued by the Registrant to Benefit Capital
Management Corporation.
10.18* -- Warrant to Purchase 20,000 shares of Next Preferred Stock
issued by the Registrant to Silicon Valley Bank.
10.19* -- Warrant to Purchase 37,500 shares of Next Preferred Stock
issued by the Registrant to Benefit Capital Management
Corporation.
10.20* -- Warrant to Purchase 30,000 shares of Next Preferred Stock
issued by the Registrant to New York Life Insurance
Company.
10.21* -- Development Agreement between the Registrant and
Three-Space Limited, dated June 26, 1987, as amended.
10.22* -- Marketing Agreement between the Registrant and
Three-Space Limited, dated May 31, 1989, as amended.
10.23* -- Consultancy Agreement between the Registrant and D-Cubed
Ltd., dated June 19, 1991, as amended.
10.24* -- Technology Development and Royalty Agreement between the
Registrant and Autodesk, Inc., dated June 27, 1991, as
amended.
10.25* -- Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank, dated as of
August 15, 1995, as amended.
10.26* -- Ninth Amendment to the Development Agreement between the
Registrant and Three-Space Limited, dated June 26, 1987,
as theretofore amended (Exhibit 10.21 to this
Registration Statement) dated September 11, 1996.
10.27** -- Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank, dated as of
August 15, 1995, as amended.
</TABLE>

42
<PAGE> 45

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.28** -- Separation and Release Agreement between the Registrant
and Jerry T. Sisson, dated as of June 23, 1997.
10.29** -- Employment Agreement between the Registrant and R. Bruce
Morgan, dated as of July 1, 1997.
10.30*** -- Technology Purchase Agreement, by and between the
Registrant and TSL, dated as of December 31, 1997.
10.30a**** -- Amendment to Loan and Security Agreement between the
Registrant and Silicon Valley Bank, dated as of August
15, 1995, as amended.
10.31*** -- Registration Rights Agreement, by and between the
Registrant and TSL, dated as of December 31, 1997.
10.32*** -- Software Consulting Agreement, by and between the
Registrant and TSL, dated December 31, 1997.
10.33***** -- Stock Purchase Agreement, by and among the Registrant,
InterData Access, Inc., and Shareholders of InterData
Access, Inc., dated December 23, 1998.
10.34***** -- Escrow Agreement, by and among the Registrant, InterData
Access, Inc., and Shareholders of InterData Access, Inc.,
dated December 23, 1998.
10.35****** -- Asset purchase agreement, by and between the Company and
Sven Technologies, Inc., dated as of June 29, 1999.
10.36 -- Securities Purchase Agreement, by and between the Company
and Purchasers , dated as of February 22, 2000.
21.1* -- List of Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
27 -- Financial Data Schedule
</TABLE>

- ---------------

* Incorporated by reference to the Issuer's Registration Statement on Form
SB-2, File No. 333-5416-D, as amended.

** Incorporated by reference to the Issuer's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1997.

*** Incorporated by reference to the Issuer's Report on Form 8-K dated
December 31, 1997.

**** Incorporated by reference to the Issuer's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998.

***** Incorporated by reference to the Issuer's Report on Form 8-K dated
December 23, 1998.

****** Incorporated by reference to the issuers report on Form 8-K dated July
14, 1999 as amended.

(b) Reports on Form 8-K

None

43
<PAGE> 46

SIGNATURES

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

SPATIAL TECHNOLOGY INC.

By: /s/ R. BRUCE MORGAN
----------------------------------
R. Bruce Morgan
President, Chief Executive Officer
and Director
(Principal Executive and Financial
Officer)

By: /s/ TODD S. LONDA
----------------------------------
Todd S. Londa
Vice President, Administration
and Corporate Controller
(Principal Accounting Officer)

March 28, 2000

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ RICHARD M. SOWAR Chairman, Director and Chief March 28, 2000
- ----------------------------------------------------- Technology Officer
Richard M. Sowar

/s/ R. BRUCE MORGAN President, Chief Executive March 28, 2000
- ----------------------------------------------------- Officer and Director
R. Bruce Morgan (Principal Executive and
Financial Officer)

/s/ PHILIP E. BARAK Director March 28, 2000
- -----------------------------------------------------
Philip E. Barak

/s/ GENE FISCHER Director March 28, 2000
- -----------------------------------------------------
Gene Fischer

/s/ H. ROBERT GILL Director March 28, 2000
- -----------------------------------------------------
H. Robert Gill

/s/ M. THOMAS HULL Director March 28, 2000
- -----------------------------------------------------
M. Thomas Hull

/s/ FRED F. NAZEM Director March 28, 2000
- -----------------------------------------------------
Fred F. Nazem
</TABLE>

44
<PAGE> 47

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3(i).1* -- Restated Certificate of Incorporation.
3(i).2* -- [Intentionally Omitted]
3(i).2(a)* -- Certificate of Correction to the Restated Certificate of
Incorporation.
3(i).2(b)* -- Certificate of Amendment to the Restated Certificate of
Incorporation.
3(i).2(c)* -- Certificate of Amendment to the Restated Certificate of
Incorporation.
3(i).2(d)* -- Certificate of Amendment to the Restated Certificate of
Incorporation.
3(i).3* -- Form of Restated Certificate of Incorporation to be
effective upon the closing of this offering to which this
Registration Statement relates.
3(ii).4* -- By-laws of the Registrant, as amended.
3(ii).5* -- Form of By-laws to be effective upon the closing of this
offering to which this Registration Statement relates.
4.1* -- Reference is made to Exhibits 3(i).1 through 3(ii).2.
4.2 -- [Intentionally Omitted]
10.1* -- Form of Indemnification Agreement entered into between
the Registrant and its directors and officers, with
related schedule.
10.2* -- Investment Agreement, dated as of August 12, 1986.
10.3* -- Investors' Rights Agreement, dated as of February 4,
1993.
10.4* -- 1996 Amended and Restated 1987 Stock Option Plan of the
Registrant (the "Restated Plan"), including form of
Incentive Stock Option and Nonstatutory Stock Option
under the Restated Plan.
10.5* -- 1996 Equity Incentive Plan (the "Incentive Plan"),
including form of Incentive Stock Option and Nonstatutory
Stock Option under the Incentive Plan of the Registrant.
10.6* -- 1996 Non-Employee Directors' Stock Option Plan of the
Registrant (the "Directors' Plan"), including form of
Nonstatutory Stock Option under the Directors' Plan.
10.7* -- Employee Stock Purchase Plan of the Registrant and
related offering document.
10.8* -- Employment Agreement between the Registrant and Karlheinz
Peters, dated as of May 5, 1993.
10.9 -- [Intentionally omitted]
10.10* -- Lease Agreement between the Registrant and Cottonwood
Development Partners, dated June 29, 1990, as amended.
10.11 -- [Intentionally omitted]
10.12 -- [Intentionally omitted]
10.13* -- Warrant to Purchase 15,648 shares of Common Stock issued
by the Registrant to New York Life Insurance Company.
10.14 -- [Intentionally omitted]
10.15* -- Warrant to Purchase 100,000 shares of Next Preferred
Stock issued by the Registrant to New York Life Insurance
Company.
10.16* -- Warrant to Purchase 200,000 shares of Next Preferred
Stock issued by the Registrant to Nazem & Company II,
L.P.
10.17* -- Warrant to Purchase 200,000 shares of Next Preferred
Stock issued by the Registrant to Benefit Capital
Management Corporation.
10.18* -- Warrant to Purchase 20,000 shares of Next Preferred Stock
issued by the Registrant to Silicon Valley Bank.
</TABLE>
<PAGE> 48

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.19* -- Warrant to Purchase 37,500 shares of Next Preferred Stock
issued by the Registrant to Benefit Capital Management
Corporation.
10.20* -- Warrant to Purchase 30,000 shares of Next Preferred Stock
issued by the Registrant to New York Life Insurance
Company.
10.21* -- Development Agreement between the Registrant and
Three-Space Limited, dated June 26, 1987, as amended.
10.22* -- Marketing Agreement between the Registrant and
Three-Space Limited, dated May 31, 1989, as amended.
10.23* -- Consultancy Agreement between the Registrant and D-Cubed
Ltd., dated June 19, 1991, as amended.
10.24* -- Technology Development and Royalty Agreement between the
Registrant and Autodesk, Inc., dated June 27, 1991, as
amended.
10.25* -- Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank, dated as of
August 15, 1995, as amended.
10.26* -- Ninth Amendment to the Development Agreement between the
Registrant and Three-Space Limited, dated June 26, 1987,
as theretofore amended (Exhibit 10.21 to this
Registration Statement) dated September 11, 1996.
10.27** -- Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank, dated as of
August 15, 1995, as amended.
10.28** -- Separation and Release Agreement between the Registrant
and Jerry T. Sisson, dated as of June 23, 1997.
10.29** -- Employment Agreement between the Registrant and R. Bruce
Morgan, dated as of July 1, 1997.
10.30*** -- Technology Purchase Agreement, by and between the
Registrant and TSL, dated as of December 31, 1997.
10.30a**** -- Amendment to Loan and Security Agreement between the
Registrant and Silicon Valley Bank, dated as of August
15, 1995, as amended.
10.31*** -- Registration Rights Agreement, by and between the
Registrant and TSL, dated as of December 31, 1997.
10.32*** -- Software Consulting Agreement, by and between the
Registrant and TSL, dated December 31, 1997.
10.33***** -- Stock Purchase Agreement, by and among the Registrant,
InterData Access, Inc., and Shareholders of InterData
Access, Inc., dated December 23, 1998.
10.34***** -- Escrow Agreement, by and among the Registrant, InterData
Access, Inc., and Shareholders of InterData Access, Inc.,
dated December 23, 1998.
10.35****** -- Asset purchase agreement, by and between the Company and
Sven Technologies, Inc., dated as of June 29, 1999.
10.36 -- Securities Purchase Agreement, by and between the Company
and Purchasers , dated as of February 22, 2000.
21.1* -- List of Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
27 -- Financial Data Schedule
</TABLE>

- ---------------

* Incorporated by reference to the Issuer's Registration Statement on Form
SB-2, File No. 333-5416-D, as amended.

** Incorporated by reference to the Issuer's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1997.
<PAGE> 49

*** Incorporated by reference to the Issuer's Report on Form 8-K dated
December 31, 1997.

**** Incorporated by reference to the Issuer's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998.

***** Incorporated by reference to the Issuer's Report on Form 8-K dated
December 23, 1998.

****** Incorporated by reference to the issuers report on Form 8-K dated July
14, 1999 as amended.

<PAGE> 1

EXHIBIT 10.36

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of February
18, 2000, by and among Spatial Technology Inc., a corporation organized under
the laws of the State of Delaware (the "COMPANY"), and the purchasers (the
"PURCHASERS") set forth on Schedule 1 attached hereto.

WHEREAS:

A. The Company and each Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("REGULATION D"), as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "SECURITIES ACT").

B. Each Purchaser desires to purchase, severally and not jointly,
subject to the terms and conditions stated in this Agreement, (i) the number of
shares of the Company's common stock, par value $.01 per share (the "COMMON
STOCK") set forth opposite such purchaser's name on Schedule 1 at a purchase
price of $3.60 per share, and (ii) warrants in the form attached hereto as
Exhibit A (including any warrants issued in replacement thereof, the
"WARRANTS"), to acquire shares of Common Stock in a ratio of one Warrant per
1.5833 shares of Common Stock acquired hereby (rounded up to the next whole
Warrant) at a purchase price of $.05 per Warrant. The shares of Common Stock
issuable upon exercise of or otherwise pursuant to the Warrants are referred to
herein as the "WARRANT SHARES."

C. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws.

NOW, THEREFORE, the Company and the Purchasers hereby agree as follows:

<PAGE> 2

1. CERTAIN DEFINITIONS.

For purposes of this Agreement, the following terms shall have the
meanings ascribed to them as provided below:

"BUSINESS DAY" shall mean any day on which the American Stock Exchange
("AMEX") or, if the Common Stock is not then traded on the AMEX, other principal
United States securities exchange or trading market on which the Common Stock is
listed or traded is open for trading.

"INVESTMENT AMOUNT" shall mean the dollar amount to be invested in the
Company at the Closing for the Shares and the Warrants pursuant to this
Agreement by any Purchaser, as set forth opposite such Purchaser's name on
Schedule 1.

"MATERIAL ADVERSE EFFECT" shall mean any material adverse effect on (i)
the Securities, (ii) the ability of the Company to perform its obligations
hereunder (including the issuance of the Shares and the Warrants), under the
Warrants (including the issuance of the Warrant Shares) or under the
Registration Rights Agreement or (iii) the business, operations, properties or
financial condition of the Company and its subsidiaries, taken as a whole.

"PRO RATA AMOUNT" shall mean, with respect to any Purchaser, a
percentage computed by dividing (x) the number of shares of Common Stock of the
Company then owned by such Purchaser, together with the number of shares of
Common Stock of the Company which such Purchaser is then entitled to acquire
through the exercise or conversion of outstanding securities of the Company by
(y) the total number of then outstanding shares of Common Stock of the Company.

"SECURITIES" shall mean the Shares, the Warrants and the Warrant
Shares.

"SHARES" means the shares of Common Stock to be issued and sold by the
Company and purchased by the Purchasers at the Closing.

"TRADING DAY" shall mean a Business Day on which at least 10,000 shares
of Common Stock are traded on the principal United States securities exchange or
trading market on which such security is listed or traded.

2. PURCHASE AND SALE OF SHARES AND WARRANTS.

a. Generally. Except as otherwise provided in this Section 2 and
subject to the satisfaction (or waiver) of the conditions set forth in Section 6
and Section 7 below, each Purchaser shall purchase the number of Shares and
Warrants determined as provided in

<PAGE> 3

this Section 2, and the Company shall issue and sell such number of Shares and
Warrants to each Purchaser for such Purchaser's Investment Amount as provided
below.

b. Number of Closing Shares and Warrants; Form of Payment; Closing
Date.

i. On the Closing Date (as defined below), the Company shall
sell and each Purchaser shall buy (A) the number of Shares set forth opposite
such Purchaser's name on Schedule 1 at a purchase price of $3.60 per share and
(B) a number of Warrants in a ratio of one Warrant per 1.5833 Shares to be
purchased by such Purchaser (rounded up to the next whole Warrant) at a purchase
price of $.05 per Warrant. On the Closing Date, each Purchaser shall pay the
Company an amount equal to such Purchaser's Investment Amount.

ii. On the Closing Date, each Purchaser shall pay its
Investment Amount by wire transfer to the Company, in accordance with the
Company's written wiring instructions against delivery of certificates
representing the Shares and duly executed Warrants being purchased by such
Purchaser, and the Company shall deliver such Shares and Warrants against
delivery of the such Purchaser's Investment Amount.

iii. Subject to the satisfaction (or waiver) of the conditions
thereto set forth in Section 6 and Section 7 below, the date and time of the
sale of the Shares and the Warrants pursuant to this Agreement (the "CLOSING")
shall be 12:00 p.m. New York City Time on February 18, 2000 or such other date
or time as the parties may mutually agree ("CLOSING DATE"). The Closing shall
occur at the offices of Heller Ehrman White & McAuliffe, 711 Fifth Avenue, 5th
Floor, New York, New York 10022, or at such other place as the parties may
otherwise agree.

3. THE PURCHASER'S REPRESENTATIONS AND WARRANTIES.

Each Purchaser severally and not jointly represents and warrants to the
Company as follows:

a. Purchase for Own Account. The Purchaser is purchasing the Securities
for the Purchaser's own account and not with a present view towards the
distribution thereof. The Purchaser understands that the Purchaser must bear the
economic risk of this investment indefinitely, unless the Securities are
registered pursuant to the Securities Act and any applicable state securities or
blue sky laws or an exemption from such registration is available, and that the
Company has no present intention of registering any such Securities other than
as contemplated by the Registration Rights Agreement. Notwithstanding anything
in this Section 3(a) to the contrary, by making the foregoing representation,
the Purchaser does not agree to hold the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in

<PAGE> 4

accordance with or pursuant to a registration statement or an exemption from
registration under the Securities Act and any applicable state securities laws.

b. Information. The Purchaser has been furnished all materials relating
to the business, finances and operations of the Company and its subsidiaries and
materials relating to the offer and sale of the Securities which have been
requested by the Purchaser. The Purchaser has been afforded the opportunity to
ask questions of the Company and has received satisfactory answers to any such
inquiries. Neither such inquiries nor any other due diligence investigation
conducted by the Purchaser or its counsel or any of its representatives shall
modify, amend or affect the Purchaser's right to rely on the Company's
representations and warranties contained in Section 4 below.

c. Governmental Review. The Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.

d. Authorization; Enforcement. The Purchaser has the requisite power
and authority to enter into and perform its obligations under this Agreement and
to purchase the Shares and the Warrants in accordance with the terms hereof.
This Agreement has been duly and validly authorized, executed and delivered on
behalf of the Purchaser and is a valid and binding agreement of the Purchaser
enforceable against the Purchaser in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and other laws affecting creditors' rights and remedies generally and
to general principles of equity (regardless of whether enforcement is sought in
a proceeding at law or in equity).

e. Transfer or Resale. The Purchaser understands that (i) except as
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the Securities Act or any state securities laws,
and may not be transferred unless (a) subsequently registered thereunder, (b)
the Purchaser shall have delivered to the Company an opinion of counsel
reasonably acceptable to the Company (which opinion shall be in form, substance
and scope customary for opinions of counsel in comparable transactions) to the
effect that the Securities to be sold or transferred may be sold or transferred
under an exemption from such registration, or (c) sold under Rule 144
promulgated under the Securities Act (or a successor rule); and (ii) neither the
Company nor any other person is under any obligation to register such Securities
under the Securities Act or any state securities laws or to comply with the
terms and conditions of any exemption thereunder, in each case, other than
pursuant to the Registration Rights Agreement. Notwithstanding the foregoing, no
such registration statement or opinion of counsel shall be necessary for a
transfer by a Purchaser which is (A) a partnership to its partners or former
partners in accordance with partnership interests, (B) a corporation to its
stockholders in accordance with their interest in the corporation, (C) a limited
liability

<PAGE> 5

company to its members or former members in accordance with their interest in
the limited liability company, or (D) to the Purchaser's family member or trust
for the benefit of an individual Purchaser.

f. Legends. The Purchaser understands that the Shares and the Warrants
and, until such time as the Shares and Warrant Shares have been registered under
the Securities Act as contemplated by the Registration Rights Agreement or
otherwise may be sold by the Purchaser under Rule 144, the certificates for the
Shares and Warrant Shares may bear a restrictive legend in substantially the
following form:

The securities represented by this certificate have
not been registered under the Securities Act of
1933, as amended, or the securities laws of any
state of the United States. The securities
represented hereby may not be offered or sold in the
absence of an effective registration statement for
the securities under applicable securities laws
unless offered, sold or transferred under an
available exemption from the registration
requirements of those laws.

The legend set forth above shall be removed and the Company
shall issue a certificate without such legend to the holder of any
Security upon which it is stamped, if, (a) the sale of such Security
is registered under the Securities Act, (b) such holder provides the
Company with an opinion of counsel, in form and substance customary
for opinions of counsel in comparable transactions, to the effect that
a public sale or transfer of such Security may be made without
registration under the Securities Act or (c) such holder provides the
Company with reasonable assurances that such Security can be sold
under Rule 144(k). The Purchaser agrees to sell all Securities,
including those represented by a certificate(s) from which the legend
has been removed, pursuant to an effective registration statement or
under an exemption from the registration requirements of the
Securities Act. The legend shall be removed when such Security may be
sold pursuant to an effective registration statement or sold under
Rule 144(k).

g. Accredited Investor Status. The Purchaser is an
"ACCREDITED INVESTOR" as that term is defined in Rule 501(a) of
Regulation D. The Purchaser is not registered as a broker or dealer
under Section 15(a) of the Securities Exchange Act of 1934, as
amended, or a member of the National Association of Securities
Dealers.

h. Company Reliance. The Purchaser understands that the
Shares are being offered and sold and the Warrants are being issued to
it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and
that the Company is relying upon the truth and accuracy of, and the
Purchaser's compliance with, the representations, warranties,
agreements, acknowledgments, and

<PAGE> 6

understandings of the Purchaser set forth herein in order to determine
the availability of such exemptions and the eligibility of the
Purchaser to acquire the Shares and the Warrants.

4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each Purchaser as
follows:

a. Organization and Qualification. The Company is a
corporation, and each of its subsidiaries is an entity, duly organized
and existing under the laws of the jurisdiction in which it is
organized, and has the requisite corporate power to own its properties
and to carry on its business as now being conducted. The Company and
each of its subsidiaries is duly qualified as a foreign entity to do
business and is in good standing in every jurisdiction in which the
nature of the business conducted by it makes such qualification
necessary and where the failure so to qualify would have a Material
Adverse Effect. The SEC Documents set forth the name of each of the
Company's subsidiaries and its jurisdiction of organization. Each of
the Company's subsidiaries are wholly-owned.

b. Authorization; Enforcement. (i) The Company has the
requisite corporate power and authority to enter into and perform its
obligations under this Agreement, the Warrants and the Registration
Rights Agreement, to issue and sell the Shares and the Warrants in
accordance with the terms hereof and to issue the Warrant Shares upon
exercise of the Warrants in accordance with the terms of the Warrants;
(ii) the execution, delivery and performance of this Agreement, the
Warrants and the Registration Rights Agreement by the Company and the
consummation by it of the transactions contemplated hereby and thereby
(including, without limitation, the reservation for issuance and
issuance of the Shares and the issuance of the Warrants, and the
reservation for issuance and issuance of the Warrant Shares) have been
duly authorized by the Company's Board of Directors and no further
consent or authorization of the Company, its Board of Directors or its
stockholders is required; (iii) this Agreement has been duly executed
and delivered by the Company; and (iv) this Agreement constitutes,
and, upon execution and delivery by the Company of the Registration
Rights Agreement and the Warrants, such agreements will constitute,
valid and binding obligations of the Company enforceable against the
Company in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and other laws affecting creditors' rights and
remedies generally and to general principles of equity (regardless of
whether enforcement is sought in a proceeding at law or in equity).

c. Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of 25,000,000 shares, consisting
of two classes: 22,500,000 shares of Common Stock and 2,500,000 shares
of Preferred Stock. According to a certificate from the Company's
transfer agent dated February 18, 2000, an aggregate of 9,543,823
shares

6
<PAGE> 7

of the Company's Common stock were issued and outstanding as of the
date of such transfer agent certificate. No shares of the Company's
Preferred Stock are outstanding as of the date hereof. As of the date
hereof, there is an aggregate of 2,882,411 shares of the Company's
Common Stock reserved for issuance under the Company's option plans
and employee stock purchase plan. All of such outstanding shares of
the Company's capital stock have been, or upon issuance will be,
validly issued, fully paid and nonassessable. Except as set forth in
this Section 4(c) or on Schedule 4(c), no shares of capital stock of
the Company (including the Shares or the Warrant Shares) or any of the
subsidiaries are subject to preemptive rights or any other similar
rights of the stockholders of the Company or any liens or
encumbrances. Except for the Securities and as disclosed in this
Section 4(c) or Schedule 4(c), as of the date of this Agreement, (i)
there are no outstanding options, warrants, scrip, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exercisable or exchangeable
for, any shares of capital stock of the Company or any of its
subsidiaries, or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or such subsidiaries, and (ii) there are
no agreements or arrangements under which the Company or any of its
subsidiaries is obligated to register the sale of any of its or their
securities under the Securities Act (except the Registration Rights
Agreement). Except as set forth on Schedule 4(c), there are no
securities or instruments containing price-based antidilution or
similar provisions that may be triggered by the issuance of the
Securities in accordance with the terms of this Agreement, the
Warrants or the Registration Rights Agreement and the holders of the
securities and instruments listed on such Schedule 4(c) have waived
any rights they may have under such antidilution or similar provisions
in connection with the issuance of the Securities in accordance with
the terms of this Agreement, the Warrants or the Registration Rights
Agreement. The Company has made available to each Purchaser and
counsel for the Purchasers true and correct copies of the Company's
Certificate of Incorporation as in effect on the date hereof
("CERTIFICATE OF INCORPORATION"), the Company's By-laws as in effect
on the date hereof (the "BY-LAWS") and all other instruments and
agreements governing securities convertible into or exercisable or
exchangeable for capital stock of the Company, except for stock
options granted under any employee benefit plan or director stock
option plan of the Company.

d. Issuance of Shares. The Shares are duly authorized and
when issued and paid for in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable, and free from all
taxes, liens, claims and encumbrances, and will not be subject to
preemptive rights or other similar rights of stockholders of the
Company and will not impose personal liability upon the holder
thereof. The Warrant Shares are duly authorized and reserved for
issuance, and, upon exercise of the Warrants in accordance with the
terms thereof, will be validly issued, fully paid and non-assessable
and free from all taxes and liens, claims and encumbrances and will
not be subject to preemptive rights

7
<PAGE> 8

or other similar rights of stockholders of the Company and will not
impose personal liability upon the holder thereof.

e. No Conflicts. The execution, delivery and performance of
this Agreement, the Registration Rights Agreement and the Warrants by
the Company, and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the
reservation for issuance and issuance of the Shares, the Warrant
Shares and the issuance of the Warrants) will not (i) conflict with or
result in a violation of the Certificate of Incorporation or By-laws
or (ii) conflict with, or constitute a default (or an event which,
with notice or lapse of time or both, would become a default) under,
or give to others any rights of termination, amendment, acceleration
or cancellation of any agreement, indenture or instrument to which the
Company or any of its subsidiaries is a party, or result in a
violation of any law, rule, regulation, order, judgment or decree
(including United States federal and state securities laws and
regulations and AMEX regulations) applicable to the Company or any of
its subsidiaries or by which any property or asset of the Company or
any of its subsidiaries is bound or affected (except, with respect to
clause (ii), for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually
or in the aggregate, have a Material Adverse Effect). Neither the
Company nor any of its subsidiaries is in violation of its Certificate
of Incorporation, By-laws and other organizational documents and
neither the Company nor any of its subsidiaries is in default (and no
event has occurred which, with notice or lapse of time or both, would
put the Company or any of its subsidiaries in default) under, nor has
there occurred any event giving others (with notice or lapse of time
or both) any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the
Company or any of its subsidiaries is a party, except for actual or
possible violations, defaults or rights as would not, individually or
in the aggregate, have a Material Adverse Effect. The businesses of
the Company and its subsidiaries are not being conducted in violation
of any law, ordinance or regulation of any governmental entity, except
for actual or possible violations, if any, the sanctions for which
either singly or in the aggregate would not have a Material Adverse
Effect. Except as specifically contemplated by this Agreement and as
required under the Securities Act and any applicable state securities
laws, the Company is not required to obtain any consent, approval,
authorization or order of, or make any filing or registration with,
any court or governmental agency or any regulatory or self regulatory
agency in order for it to execute, deliver or perform any of its
obligations under this Agreement (including, without limitation, the
issuance and sale of the Shares and Warrants as provided hereby), or
the Warrants (including the issuance of the Warrant Shares), in each
case in accordance with the terms hereof or thereof. The Company is
not in violation of the listing requirements of the AMEX and does not
reasonably anticipate that the Common Stock will be delisted by AMEX
in the foreseeable future based on its rules (and interpretations
thereof) as currently in effect.

8
<PAGE> 9

f. SEC Documents; Financial Statements. Since October 1996,
the Company has timely filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant
to the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), and has filed all registration statements and other documents
required to be filed by it with the SEC pursuant to the Securities Act
(all of the foregoing filed prior to the date hereof, and all exhibits
included therein and financial statements and schedules thereto and
documents incorporated by reference therein, being hereinafter
referred to herein as the "SEC DOCUMENTS"). The Company has made
available to each Purchaser and to counsel for the Purchasers true and
complete copies of the SEC Documents not filed on EDGAR and requested
by Purchasers, except for the exhibits and schedules thereto and the
documents incorporated therein. The SEC Documents available to the
Purchasers through the EDGAR archives of the SEC are true and complete
copies of all SEC Documents filed by the Company through EDGAR. As of
their respective dates, the SEC Documents complied in all material
respects with the requirements of the Exchange Act or the Securities
Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of
the SEC Documents, at the time they were filed with the SEC, contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading. Any statements made in any such SEC
Documents that are or were required to be updated or amended under
applicable law have been so updated or amended. As of their respective
dates, the financial statements of the Company included in the SEC
Documents complied in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC
applicable with respect thereto. Such financial statements have been
prepared in accordance with United States generally accepted
accounting principles, consistently applied, during the periods
involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all
material respects the consolidated financial position of the Company
and its subsidiaries as of the dates thereof and the results of their
operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal and recurring year-end audit
adjustments). Except as set forth in the SEC Documents, the Company
has no liabilities, contingent or otherwise, other than (i)
liabilities incurred in the ordinary course of business subsequent to
the date of such SEC Documents and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be
reflected in such SEC Documents, which liabilities and obligations
referred to in clauses (i) and (ii), individually or in the aggregate,
are not material and would not have a Material Adverse Effect.

9
<PAGE> 10

g. Absence of Certain Changes. Except as disclosed in the SEC
Documents, since September 30, 1999, there has been no change or
development which individually or in the aggregate has had or could
have a Material Adverse Effect.

h. Absence of Litigation. Except as disclosed in the SEC
Documents and set forth on Schedule 4(h), there is no action, suit,
proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending
or, or to the knowledge of the Company, threatened against or
affecting the Company, or any of its subsidiaries, or any of their
directors or officers in their capacities as such except as would not
have a Material Adverse Effect.

i. Intellectual Property. The Company and each of its
subsidiaries owns or is licensed to use all patents, patent
applications, trademarks, trademark applications, trade names, service
marks, copyrights, copyright applications, licenses, permits, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures) and
other similar rights and proprietary knowledge (collectively,
"INTANGIBLES") necessary for the conduct of its business as now being
conducted and as proposed to be conducted. Neither the Company nor any
of its subsidiaries is infringing or in conflict with any other person
with respect to any Intangibles. Neither the Company nor any of its
subsidiaries has received written notice that it is infringing upon
third party Intangibles. Neither the Company nor any of its
subsidiaries has entered into any consent, indemnification,
forbearance to sue or settlement agreements with respect to the
validity of the Company's or such subsidiary's ownership or right to
use its Intangibles and, to the knowledge of the Company, there is no
basis for any such claim to be successful. The Intangibles are valid
and enforceable, and no registration relating thereto has lapsed,
expired or been abandoned or canceled or is the subject of
cancellation or other adversarial proceedings, and all applications
therefor are pending and in good standing. The Company has complied,
in all material respects, with its contractual obligations relating to
the protection of the Intangibles used pursuant to licenses. To the
Company's knowledge, no person is infringing on or violating the
Intangibles owned or used by the Company.

j. Agreements. Except as filed as Exhibits to the SEC
Documents or as set forth in Schedule 4(j), there are no agreements,
understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which the Company or any of its
subsidiaries is a party or by which it is bound which may involve (i)
obligations (contingent or otherwise) of, or payments to, the Company
in excess of $250,000 (other than licenses pursuant to license
agreements entered into in the ordinary course of the Company's
business) or (ii) the license of any patent, copyright, trade secret
or other proprietary right to or from the Company (other than licenses
pursuant to license agreements entered into in the ordinary course of
the Company's business), or (iii) provisions restricting or affecting
the development, manufacture or distribution of the

10
<PAGE> 11

Company's or its subsidiaries' products or services, or (iv)
indemnification by the Company or any subsidiary with respect to
infringements of proprietary rights (other than indemnification
obligations arising from purchase or sale agreements entered into in
the ordinary course of business) or (v) transactions between the
Company and any of the Company's or its subsidiaries' officers,
directors, affiliates, or any affiliates thereof (other than pursuant
to employment agreements or stock or benefit plans), or (vi)
employment of the Company's officers or (vii) incurrence of any
indebtedness for money borrowed or any other liabilities (other than
with respect to dividend obligations, distributions, indebtedness and
other obligations incurred in the ordinary course of business or as
disclosed in the SEC Documents) individually in excess of $250,000 or,
in the case of indebtedness and/or liabilities individually less than
$250,000, in excess of $500,000 in the aggregate, or (viii) the making
of any loans or advances to any person, other than ordinary advances
for travel expenses, or (ix) the sale, exchange or other disposition
of any of its assets or rights, other than licenses in the ordinary
course of business.

k. Foreign Corrupt Practices. Neither the Company, or any of
its subsidiaries, nor any director, officer, agent, employee or other
person acting on behalf of the Company or any of its subsidiaries has,
in the course of such person's actions for, or on behalf of, the
Company, or any of its subsidiaries, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses
relating to political activity; made any direct or indirect unlawful
payment to any foreign or domestic government official or employee
from corporate funds; violated or is in violation of any provision of
the United States Foreign Corrupt Practices Act of 1977; or made any
bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.

l. Environment. Except as disclosed in the SEC Documents (i)
there is no environmental liability, nor, to the knowledge of the
Company, factors likely to give rise to any environmental liability,
affecting any of the properties of the Company or any of its
subsidiaries that, individually or in the aggregate, would have a
Material Adverse Effect and (ii) neither the Company nor any of the
subsidiaries has violated any environmental law applicable to it now
or previously in effect, other than such violations or infringements
that, individually or in the aggregate, have not had and will not have
a Material Adverse Effect.

m. Title. The Company does not own any real property. Any
real property and facilities held under lease by the Company or any of
its subsidiaries are held by the Company or such subsidiary under
valid, subsisting and enforceable leases with such exceptions which
have not had and will not have a Material Adverse Effect.

n. Insurance. The Company and its subsidiaries maintain such
insurance relating to their business, operations, assets,
key-employees and officers and directors as

11
<PAGE> 12

is appropriate to their business, assets and operations, in such
amounts and against such risks as are customarily carried and insured
against by owners of comparable businesses, assets and operations, and
such insurance coverages will be continued in full force and effect to
and including the Closing Date other than those insurance coverages in
respect of which the failure to continue in full force and effect
could not reasonably be expected to have a Material Adverse Effect.

o. Disclosure. All information relating to or concerning the
Company and its subsidiaries set forth in this Agreement or provided
to the Purchaser in writing in connection with the transactions
contemplated hereby is true and correct in all material respects and
the Company has not omitted to state any material fact necessary in
order to make the statements made herein or therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
information contained within any of the foregoing related to future
events, or the projected future financial performance of the Company,
including any financial projections, or descriptions of potential
strategic or business relationships between the Company and third
parties.

p. No Brokers. The Company has not engaged any person to
which or to whom brokerage commissions, finder's fees, financial
advisory fees or similar payments are or will become due in connection
with this Agreement or the transactions contemplated.

q. Tax Status. The Company and each of its subsidiaries has
made or filed all federal, state and local income and all other tax
returns, reports and declarations required by any jurisdiction to
which it is subject and has paid all taxes and other governmental
assessments and charges, shown or determined to be due on such
returns, reports and declarations, except those being contested in
good faith, and has set aside on its books provisions adequate for the
payment of all taxes for periods subsequent to the periods to which
such returns, reports or declarations apply. There are no unpaid taxes
claimed to be due by the taxing authority of any jurisdiction. The
Company has not executed a waiver with respect to any statute of
limitations relating to the assessment or collection of any federal,
state or local tax. Except as set forth in Schedule 4(q), none of the
Company's tax returns has been or is being audited by any taxing
authority.

r. No General Solicitation. Neither the Company nor any
person participating on the Company's behalf in the transactions
contemplated hereby has conducted any "general solicitation" or
"general advertising" as such terms are used in Regulation D, with
respect to any of the Securities being offered hereby.

s. No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has,
directly or indirectly, made any offers or

12
<PAGE> 13

sales of any security or solicited any offers to buy any security
under circumstances that would require registration of the Securities
being offered hereby under the Securities Act or cause this offering
of Securities to be integrated with any prior offering of securities
of the Company for purposes of the Securities Act or any applicable
stockholder approval provisions, including, without limitation, the
applicable AMEX regulations.

t. Form S-3 Eligibility. The Company is currently eligible to
register the resale of its Common Stock on a registration statement on
Form S-3 under the Securities Act. Except as set forth on Schedule
4(t), to the knowledge of the Company, there exist no facts or
circumstances (including without limitation any required approvals or
waivers of any circumstances that may delay or prevent the obtaining
of accountant's consents) that would prohibit or delay the preparation
and filing of a registration statement on Form S-3 with respect to the
Registrable Securities (as defined in the Registration Rights
Agreement).

u. Qualified Small Business. The Company represents and
warrants to the Purchasers that, to the best of its knowledge, the
Securities should qualify as "Qualified Small Business Stock" as
defined in Section 1202(c) of the Internal Revenue Code of 1986, as
amended (the "CODE") as of the date hereof. The Company will use
reasonable efforts to comply with the reporting and record keeping
requirements of Section 1202 of the Code, any regulations promulgated
thereunder and any similar state laws and regulations, and agrees not
to repurchase any stock of the Company if such repurchase would cause
such Shares not to so qualify as "Qualified Small Business Stock."

v. Real Property Holding Corporation. Neither the Company nor
any subsidiary of the Company is a real property holding corporation
within the meaning of Section 897(c)(2) of the Code and any
regulations promulgated thereunder.

w. ERISA. The Company has complied in all material respects
with the applicable rules and regulations of the Employee Retirement
Income Security Act of 1974, as amended, with respect to any employee
benefit plans subject thereto.

x. Small Business Concern. The Company together with its
"affiliates" (as that term is defined in Section 121.103 of Title 13
of the Code of Federal Regulations (the "FEDERAL REGULATIONS")), is a
"small business concern" or within the meaning of the Small Business
Investment Act of 1958, as amended (the "SMALL BUSINESS ACT"), and the
regulations promulgated thereunder, including Section 121.301 of Title
13 of the Federal Regulations (a "SMALL BUSINESS CONCERN"). The
information delivered to each Purchaser that is a licensed Small
Business Investment Company (an "SBIC PURCHASER") on SBA Forms 480,
652 and 1031 delivered in connection herewith is true and correct. The
Company is not ineligible for financing by any SBIC Purchaser pursuant
to Section

13
<PAGE> 14

107.720 of Title 13 of the Federal Regulations. The Company
acknowledges that each SBIC Purchaser is a Federal licensee under the
Small Business Act.

5. COVENANTS.

a. Best Efforts. The parties shall use their best efforts
timely to satisfy each of the conditions set forth in Section 6 and
Section 7 of this Agreement.

b. Form D; Blue Sky Laws. The Company agrees to file a Form D
with respect to the Securities as required under Regulation D and to
provide a copy thereof to each Purchaser and to counsel for the
Purchasers as soon as practicable after such filing. The Company
shall, on or before the Closing Date, take such action as the Company
shall reasonably determine is necessary to qualify the Securities for
sale to the Purchasers pursuant to this Agreement under applicable
securities or "blue sky" laws of the states of the United States or
obtain exemption therefrom, and shall provide evidence of any such
action so taken to each Purchaser and counsel for the Purchasers as
soon as practicable after such filing.

c. Reporting Status. So long as a Purchaser beneficially owns
any Securities or has the right to acquire any Securities pursuant to
this Agreement, the Company shall timely file all reports required to
be filed with the SEC pursuant to the Exchange Act, and shall not
terminate its status as an issuer required to file reports under the
Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination.

d. Use of Proceeds. The Company shall use the net proceeds
from the sale of the Shares and the Warrants in order to fund the
Company's sales and marketing activities, to launch its PlanetCAD
initiative, for working capital and for other general corporate
purposes, including potential strategic acquisitions, but in no event
shall the Company use such net proceeds to repurchase any outstanding
securities of the Company or for any other distribution with respect
to outstanding securities of the Company.

e. Expenses. At the Closing, the Company shall pay the
reasonable fees and expenses of one counsel to the Purchasers, not to
exceed $25,000, and shall reimburse the Purchasers at Closing for the
cost of consulting by Russ Henke, not to exceed $5,000 (the
"EXPENSES").

f. Reservation of Shares. The Company has and shall at all
times have authorized and reserved for the purpose of issuance a
sufficient number of shares of Common Stock to provide for the
issuance of the Shares as provided in Section 2 hereof, and the full
exercise of the Warrants and the issuance of the Warrant Shares in
connection therewith and as otherwise required hereby and by the
Warrants. The Company shall not reduce the number of shares of Common
Stock reserved for issuance under this

14
<PAGE> 15

Agreement (except as a result of the issuance of the Shares
hereunder), the Warrants (except as a result of the issuance of the
Warrant Shares upon the exercise of the Warrants) or the Registration
Rights Agreement, without the consent of the Purchasers.

g. Listing. Promptly after the Closing Date, the Company
shall secure the listing of the Shares and Warrant Shares, in each
case, upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed or
quoted (subject to official notice of issuance) and shall maintain, so
long as any other shares of Common Stock shall be so listed, such
listing of all Shares from time to time issuable hereunder and all
Warrant Shares from time to time issuable upon exercise of the
Warrants. The Company will use its best efforts to continue the
listing and trading of its Common Stock on the AMEX, (or, if listing
is moved, the New York Stock Exchange ("NYSE") or the Nasdaq National
Market ("NASDAQ")) and will comply in all material respects with the
Company's reporting, filing and other obligations under the bylaws or
rules of the AMEX.

h. Corporate Existence. So long as any Purchaser beneficially
owns any Securities or has the right to acquire any Securities
pursuant to this Agreement, the Warrants or the Registration Rights
Agreement, the Company shall maintain its corporate existence, except
in the event of a merger, consolidation or sale of all or
substantially all of the Company's assets, as long as the surviving or
successor entity in such transaction assumes the Company's obligations
hereunder and under the Warrants and under the agreements and
instruments entered into in connection herewith.

i. No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, shall,
directly or indirectly, make any offers or sales of any security or
solicit any offers to buy any security under circumstances that would
require registration of the Securities being offered hereby under the
Securities Act or cause this offering of Securities to be integrated
with any prior or future offering of securities of the Company for
purposes of the Securities Act or any applicable stockholder approval
provisions, including, without limitation, the applicable AMEX
regulations.

j. Designation of Director. For so long as the Purchasers
collectively own 10% of the Company's outstanding Common Stock,
Capstone Ventures SBIC, L.P. ("CV") shall have the right to designate
(the "Designation Rights") a representative to the Company's Board of
Directors. The Company shall take all necessary corporate action to
cause such nomination to be made at the next annual stockholder
meeting for which the annual proxy has not yet been mailed. The CV
Director shall be compensated in accordance with the Company's
compensation and benefit plans for its outside directors. Subject to
applicable fiduciary duties, the Company shall nominate such designees
or

15
<PAGE> 16

designee on management's slate of directors at succeeding annual
meetings of stockholders.

k. Restrictions on Purchase. Each Purchaser agrees not to
purchase any shares of the Company's Common Stock in the open market
or in privately negotiated transactions from non-affiliates for a
period of one year from the Closing Date, without the prior approval
of the Board of Directors of the Company.

l. President of Planet CAD Division. The Company will use its
best efforts to recruit and retain a senior executive with Internet
experience to serve as President of the PlanetCAD division of the
Company as soon as practicable after the Closing Date.

m. Indemnification by the Company. The Company shall
indemnify, defend and hold each Purchaser, and each of their
respective affiliates, officers, directors, stockholders, employees
and agents, harmless with respect to any and all demands, claims,
actions, suits, proceedings, assessments, judgments, costs, losses,
damages, liabilities and expenses (including, without limitation,
reasonable attorneys' fees) ("LOSSES") asserted against, resulting
from, imposed upon or incurred by any such indemnified party directly
relating to or arising out of: (a) the inaccuracy of any
representation or warranty of the Company contained herein or in any
instrument or certificate delivered pursuant to this Agreement, and
(b) the breach of any covenant or agreement by the Company.

n. Indemnification by the Purchasers. Each Purchaser,
severally but not jointly, shall indemnify, defend and hold the
Company, and its affiliates, officers, directors, stockholders,
employees and agents, harmless with respect to any and all Losses
asserted against, resulting from, imposed upon or incurred by any such
indemnified party directly relating to or arising out of: (a) the
inaccuracy of any representation or warranty of such Purchaser
contained herein or in any instrument or certificate delivered
pursuant to this Agreement, and (b) the breach of any covenant or
agreement by such Purchaser.

o. Certain Covenants Relating to SBA Matters.

i. Use of Proceeds. The proceeds from the issuance
and sale of the Securities pursuant to this Agreement (the "PROCEEDS")
shall be used by the Company for its growth, modernization or
expansion. Specifically, the proceeds shall be used as set forth in
Section 5(d). The Company shall provide each SBIC Purchaser and the
SBA reasonable access to the Company's books and records for the
purpose of confirming the use of Proceeds.

16
<PAGE> 17

ii. Business Activity. For a period of one year
following the Closing, the Company shall not change the nature of its
business activity if such change would render the Company ineligible
as provided in 13 C.F.R. Section 107.720.

iii. Compliance. So long as any SBIC Purchaser holds
any securities of the Company, the Company will at all times comply
with the non-discrimination requirements of 13 C.F.R. Parts 112, 113
and 117.

iv. Information for SBIC Investor. Within forty-five
(45) days after the end of each fiscal year and at such other times as
an SBIC Investor may reasonably request, the Company shall deliver to
such SBIC Purchaser a written assessment, in form and substance
satisfactory to such SBIC Purchaser, of the economic impact of such
SBIC Purchaser's financing specifying the full-time equivalent jobs
created or retained in connection with such investment, and the impact
of the financing on the Company's business in terms of profits and on
taxes paid by the Company and its employees. Upon request, the Company
agrees to promptly provide each SBIC Purchaser with sufficient
information to permit such Purchaser to comply with their obligations
under the Small Business Act, and the regulations promulgated
thereunder and related thereto; provided, however, each SBIC Purchaser
agrees that it will protect any information which the Company labels
as confidential to the extent permitted by law. Any submission of any
financial information under this Section shall include a certificate
of the company's president, chief executive officer, treasurer or
chief financial officer.

v. Books and Records. The Company agrees to provide
each SBIC Purchaser and/or the SBA's examiners access to its books and
records for the purposes of verifying the certifications made under
Section 107.610 of Title 13 of the Federal Regulations.

6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

The obligation of the Company hereunder to issue and sell
Shares and Warrants to a Purchaser at the Closing hereunder is subject
to the satisfaction, at or before the Closing Date, of each of the
following conditions thereto; provided, however, that these conditions
are for the Company's sole benefit and may be waived by the Company at
any time in its sole discretion.

a. The applicable Purchaser shall have executed the signature
page to this Agreement and the Registration Rights Agreement, and
delivered the same to the Company.

b. The applicable Purchaser shall have delivered such
Purchaser's Investment Amount in accordance with Section 2(b) above.

17
<PAGE> 18

c. The representations and warranties of the applicable
Purchaser shall be true and correct in all material respects as of the
date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and correct
as of such date), and the applicable Purchaser shall have performed,
satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the applicable Purchaser at or prior to
the Closing Date.

d. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which prohibits the consummation of
any of the transactions contemplated by this Agreement.

7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE SHARES AND
WARRANTS.

The obligation of each Purchaser hereunder to purchase Shares
and Warrants to be purchased by it hereunder is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for such Purchaser's
sole benefit and may be waived by such Purchaser at any time in such
Purchaser's sole discretion:

a. The Company shall have executed the signature pages to
this Agreement and the Registration Rights Agreement, and delivered
the same to the Purchaser.

b. The Company shall have instructed its transfer agent to
issue to the Purchaser duly executed certificates representing the
number of Shares and shall have delivered to the Purchaser duly
executed Warrants as provided in Section 2(b) above.

c. Trading in the Common Stock (or on AMEX generally) shall
not have been suspended or be under threat of suspension by the SEC or
AMEX.

d. The representations and warranties of the Company shall be
true and correct in all material respects as of the date when made and
as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date, which
representations and warranties shall be true and correct as of such
date) and the Company shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with
by the Company at or prior to the Closing Date. The Purchaser shall
have received a certificate, executed on behalf of the Company by its
Vice President, Administration and Corporate Controller, dated as of
the Closing Date, to the

18
<PAGE> 19

foregoing effect and attaching true and correct copies of the
resolutions adopted by the Company's Board of Directors authorizing
the execution, delivery and performance by the Company of its
obligations under this Agreement, the Warrants and the Registration
Rights Agreement.

e. No statute, rule, regulation, executive order, decree,
ruling, injunction, action, proceeding or interpretation shall have
been enacted, entered, promulgated, endorsed or adopted by any court
or governmental authority of competent jurisdiction or any
self-regulatory organization, or the staff of any thereof, having
authority over the matters contemplated hereby which questions the
validity of, or challenges or prohibits the consummation of, any of
the transactions contemplated by this Agreement.

f. The Purchaser shall have received an opinion of the
Company's counsel, dated as of the Closing Date, in form and substance
acceptable to counsel for the Purchasers.

g. From the date of this Agreement through the Closing Date,
there shall not have occurred any Material Adverse Effect.

h. The Company shall have provided advance notice to AMEX of
the issuance of the Shares and provided the Purchaser with oral or
written evidence of the Company's compliance with all applicable rules
of AMEX.

i. Each of the other Purchasers shall have delivered to the
Company its Investment Amount and, with respect to the Closing, the
aggregate amount to be invested in the Company by all of the
Purchasers shall equal approximately $6.9 million.

8. GOVERNING LAW; MISCELLANEOUS.

a. Governing Law; Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of
Delaware.

b. Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been
signed by each party and delivered to the other party. This Agreement,
once executed by a party, may be delivered to the other parties hereto
by facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement. In the event any
signature is delivered by facsimile transmission, the party using such
means of delivery shall cause the manually executed Execution Page(s)
hereof to be physically delivered to the other party within five (5)
days of the execution hereof.

19
<PAGE> 20

c. Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.

d. Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of
the remainder of this Agreement or the validity or enforceability of
this Agreement in any other jurisdiction.

e. Entire Agreement; Amendments; Waiver. This Agreement and
the instruments referenced herein contain the entire understanding of
the parties with respect to the matters covered herein and therein
and, except as specifically set forth herein or therein, neither the
Company nor the Purchasers make any representation, warranty, covenant
or undertaking with respect to such matters. No provision of this
Agreement may be waived or amended other than by an instrument in
writing signed by the Company and by the Purchasers representing at
least two-thirds of the aggregate Investment Amounts. Any waiver by
the Purchasers, on the one hand, or the Company, on the other hand, of
a breach of any provision of this Agreement shall not operate as or be
construed to be a waiver of any other breach of such provision of or
any breach of any other provision of this Agreement. The failure of
the Purchasers, on the one hand, or the Company, on the other hand to
insist upon strict adherence to any term of this Agreement on one or
more occasions shall not be considered a waiver or deprive that party
of the right thereafter to insist upon strict adherence to that term
or any other term of this Agreement.

f. Notices. Any notices required or permitted to be given
under the terms of this Agreement shall be sent by certified or
registered mail (return receipt requested) or delivered personally or
by courier or by confirmed telecopy, and shall be effective five days
after being placed in the mail, if mailed, or upon receipt or refusal
of receipt, if delivered personally or by courier or confirmed
telecopy, in each case addressed to a party. The addresses for such
communications shall be:

If to the Company:

Spatial Technology Inc.
2425 55th Street, Ste. 100
Boulder, CO 80301
Telephone No.: 303-544-2900
Facsimile No.: 303-544-3005
Attention: Chief Executive Officer

20
<PAGE> 21

With a copy to:

Cooley Godward LLP
2595 Canyon Blvd., Ste 250
Boulder, CO 80302
Telephone No.: 303-546-4000
Facsimile No.: 303-546-4099
Attention: Michael L. Platt, Esq.

If to the Purchaser, to the address set forth under the Purchaser's
name on the Execution Page hereto executed by such Purchaser, with a
copy to:

Heller Ehrman White & McAuliffe
711 Fifth Avenue, 5th Floor
New York, NY 10022
Telephone No.: 212-832-8300
Facsimile No.: 212-832-3353
Attention: Stephen M. Davis, Esq.

Each party shall provide notice to the other parties of any
change in address.

g. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and
assigns. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the
Purchasers.

h. Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any
provision hereof be enforced by any other person.

i. Survival. The representations and warranties of the
Company and the agreements and covenants set forth in Sections 4, 5
and 8 shall survive the Closing notwithstanding any due diligence
investigation conducted by or on behalf of the Purchasers. Moreover,
none of the representations and warranties made by the Company herein
shall act as a waiver of any rights or remedies a Purchaser may have
under applicable federal or state securities laws. The Company agrees
to indemnify and hold harmless each Purchaser and each of such
Purchaser's officers, directors, employees, partners, members, agents
and affiliates for loss or damage relating to the Securities purchased
hereunder arising as a result of or related to any breach by the
Company of any of its representations or covenants set forth herein,
including advancement of expenses as they are incurred.

21
<PAGE> 22

j. Publicity. The Company and CV on behalf of the Purchasers
shall have the right to review and comment upon the issuance of any
press releases, or the filing of any SEC or AMEX filings, or any other
public statements with respect to the transactions contemplated
hereby. CV shall be provided documents to review at least 48 hours
prior to the filing or other issuance thereof except that draft press
releases shall be provided to CV at least 24 hours prior to issuance.
Within the time period required by the SEC, the Company shall file a
Current Report on Form 8-K or other appropriate form with the SEC
disclosing the transactions contemplated hereby, if required in the
judgment of counsel to the Company.

k. Further Assurances. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and
shall execute and deliver all such other agreements, certificates,
instruments and documents, as the other party may reasonably request
in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated
hereby.

l. Termination. In the event that the Closing Date shall not
have occurred on or before February 28, 2000, unless the parties agree
otherwise, this Agreement shall terminate at the close of business on
such date. Notwithstanding any termination of this Agreement, any
party not in breach of this Agreement shall preserve all rights and
remedies it may have against another party hereto for a breach of this
Agreement prior to or relating to the termination hereof.

m. Equitable Relief. The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to a
Purchaser by vitiating the intent and purpose of the transactions
contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations hereunder will be
inadequate and agrees, in the event of a breach or threatened breach
by the Company of the provisions of this Agreement, that a Purchaser
shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without
any bond or other security being required.

n. Determinations. Except as otherwise expressly provided
herein, all consents, approvals and other determinations (other than
amendments to the terms and provisions of this Agreement) to be made
by the Purchasers pursuant to this Agreement and all waivers to or of
any provisions in this Agreement prior to the Closing Date shall be
made by Purchasers that have agreed to invest a majority of the
aggregate Investment Amounts to be invested by all Purchasers and
except as otherwise expressly provided herein, all consents, approvals
and other determinations (other than amendments to the terms and
provisions of this Agreement) to be made by the Purchasers pursuant to
this Agreement and all waivers to or of any provisions in this
Agreement after the Closing

22
<PAGE> 23

Date shall be made by Purchasers that have invested a majority of the
aggregate Investment Amounts invested by all Purchasers. Amendments to
the terms and provisions of this Agreement shall be made by the
Company and by the Purchasers representing at least two-thirds of the
aggregate Investment Amounts as provided in Section 8(e) hereof.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

23
<PAGE> 24

IN WITNESS WHEREOF, the undersigned Purchasers and the
Company have caused this Securities Purchase Agreement to be duly
executed as of the date first above written.

SPATIAL TECHNOLOGY INC.

By:
------------------------------------
Name: R. Bruce Morgan
Title: President and Chief Executive Officer

THE PURCHASERS:

By:
------------------------------------

<PAGE> 25

SCHEDULE I

- ----------------------------------------------------------------------------------------
INVESTMENT AMOUNT ($) NUMBER OF SHARES NUMBER OF WARRANTS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------

- ----------------------------------------------------------------------------------------

- ----------------------------------------------------------------------------------------
TOTAL 6,900,000 1,900,000 1,200,000
- ----------------------------------------------------------------------------------------
</TABLE>

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Spatial Technology Inc.:

We consent to incorporation by reference in the registration statements (No.
333-72757) on Form S-3 and (No. 333-85939) on Form S-8, of Spatial Technology
Inc. of our report dated January 27, 2000, relating to the consolidated balance
sheets of Spatial Technology Inc. and subsidiaries as of December 31, 1998, and
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999, which report appears in the December 31, 1999, annual report
on Form 10-KSB of Spatial Technology Inc.

KPMG LLP

Boulder, Colorado
March 27, 2000

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,324
<SECURITIES> 0
<RECEIVABLES> 4,355
<ALLOWANCES> (199)
<INVENTORY> 0
<CURRENT-ASSETS> 6,171
<PP&E> 2,913
<DEPRECIATION> (1,022)
<TOTAL-ASSETS> 10,072
<CURRENT-LIABILITIES> 4,194
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 5,783
<TOTAL-LIABILITY-AND-EQUITY> 10,072
<SALES> 0
<TOTAL-REVENUES> 14,900
<CGS> 0
<TOTAL-COSTS> 1,132
<OTHER-EXPENSES> 15,953
<LOSS-PROVISION> 569
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> (2,615)
<INCOME-TAX> 246
<INCOME-CONTINUING> (2,861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,861)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)

</TABLE>