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U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

STRATASYS, INC.

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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ITEM 1. BUSINESS.

GENERAL DEVELOPMENT OF BUSINESS

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

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

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

DESCRIPTION OF BUSINESS

     We are a leader in the office prototyping market, which is referred to as rapid prototyping. We develop, manufacture and market a family of rapid prototyping devices and 3-D printers that enable engineers and designers to create physical models, tooling and prototypes out of plastic and other materials directly from a computer-aided design (“CAD”) workstation. In many industries, the models and prototypes required in product development are produced laboriously by hand-sculpting or machining, a traditional process that can take days or weeks. Our computerized modeling systems use our proprietary technology to make models and prototypes directly from a designer’s three-dimensional CAD in a matter of hours.

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

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

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

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

APPLICATIONS FOR RAPID PROTOTYPING

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

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

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

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

PRODUCTS

Modeling Equipment

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

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

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

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

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

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

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

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

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

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

Modeling Material

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

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

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

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

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

     GenisysXs uses only one type of modeling material, a polyester, which is manufactured in the form of wafers. A total of 50 wafers are held in a cassette, which allows the wafers to be fed into the machine and rapidly extruded in layers. Additional cassettes are easily loaded into the system. Each cassette contains a memory chip that instructs the system as to the parameters and melt temperature of the material lot, which optimizes the automatic build process of the Genisys system. Polyester provides a unique blend of properties of cost, durability, and easy handling for concept models.

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

OPERATING SOFTWARE

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

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

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

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

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MARKETING, DISTRIBUTION AND CUSTOMERS

Marketing and Customers

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

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

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

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

FDM Sales Organization

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

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

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

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

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

3-D Printing Sales Organization

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

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

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

Customer Support

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

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

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

WARRANTY AND SERVICE

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

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

MANUFACTURING

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

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

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

RESEARCH AND DEVELOPMENT

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

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

INTELLECTUAL PROPERTY

     We consider our proprietary technology to be material to the development, manufacture, and sale of our products and seek to protect our technology through a combination of patents and confidentiality agreements with our employees and others. Scott Crump, our President and CEO, was granted two U.S. patents that cover many claims relating to various aspects of our products, FDM technology and the associated modeling process. The term of one patent lasts until June 9, 2009, and the term of the other lasts until August 23, 2011. The patents have been assigned to us. In addition, other employees have assigned us patents and patent applications for other rapid prototyping

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processes and apparatuses associated with the FDM process. As part of our purchase of rapid prototyping technology assets from IBM, we were also assigned the rights and title to three patents developed by IBM, which cover the Genisys system and which we believe will further augment several of our other product lines. We recorded these patents domestically and are in the process of recording them in certain foreign countries. The terms of these patents extend until June 7, 2005, April 12, 2011, and May 17, 2011. In total, we currently own 22 primary U.S. patents and more than 60 foreign patents and patent applications. Corresponding patent applications covering the same claims that are contained in our issued patents have been initiated in various foreign countries. Other foreign patent applications have also been filed, including the patent applications assigned to us by IBM.

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

WORKING CAPITAL PRACTICES

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

BACKLOG

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

COMPETITION

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

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

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

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

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

EMPLOYEES

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

GOVERNMENTAL REGULATION

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

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

AVAILABLE INFORMATION

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

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

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

FINANCIAL INFORMATION ABOUT OPERATIONS IN THE UNITED STATES AND OTHER COUNTRIES

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

ITEM 2. PROPERTIES.

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

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

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

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

ITEM 3. LEGAL PROCEEDINGS.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.

     No matter was submitted to a vote of stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 2002.

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PART II

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

MARKET INFORMATION

     Our common stock is quoted on the National Association of Securities Dealers, Inc. Automated Quotation System National Market (“Nasdaq”) under the symbol SSYS and is traded on The Pacific Exchange Inc. under the symbol SAS.

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

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

DIVIDENDS

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

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SHARES ISSUABLE UNDER EQUITY COMPENSATION PLANS

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

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

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

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