UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-22250

3D SYSTEMS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE		95-4431352
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
333 THREE D SYSTEMS CIRCLE ROCK HILL, SOUTH CAROLINA		29730
(Address of Principal Executive Offices)		(Zip Code)

(803) 326-3900

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Shares of Common Stock, par value $0.001, outstanding as of December 31, 2006: 19,085,157

3D SYSTEMS CORPORATION
TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
	Explanatory Statement Regarding Restatement		i
	ITEM 1.	Financial Statements (Unaudited)	1
		Condensed Consolidated Balance Sheets—September 30, 2006 and December 31, 2005 (Restated)	1
		Condensed Consolidated Statements of Operations—Three Months and Nine Months Ended September 30, 2006 and September 30, 2005 (Restated)	2
		Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2006 and September 30, 2005 (Restated)	3
		Condensed Consolidated Statements of Comprehensive Income (Loss)—Three Months and Nine Months Ended September 30, 2006 and September 30, 2005 (Restated)	4
		Notes to Condensed Consolidated Financial Statements—September 30, 2006	5
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	94
	ITEM 4.	Controls and Procedures	94
PART II.	OTHER INFORMATION		103
	ITEM 1.	Legal Proceedings	103
	ITEM 1A.	Risk Factors	103
	ITEM 6.	Exhibits	106
SIGNATURES			108

EXPLANATORY STATEMENT REGARDING RESTATEMENT

Restatement of Condensed Consolidated Financial Statements

On November 3, 2006, we announced that management and the Audit Committee of our Board of Directors had determined, based on information presented by our management in connection with the preparation of our financial statements for the third quarter of 2006, that our financial statements included in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006 contained errors. As a result, the Audit Committee concluded that those financial statements should be restated and that investors should not rely upon those financial statements without taking into account the anticipated adjustments described in our Current Report on Form 8-K filed on November 3, 2006 and the press release filed as an exhibit thereto. The adjustments described in that Form 8-K and related press release are reflected in the restated financial statements included in this Form 10-Q.

We also announced on November 3, 2006 that we were assessing whether our financial statements for prior periods contained errors and as a result should be restated. On December 14, 2006, we announced that management and the Audit Committee had completed our assessment of the prior-period financial statements and that, based on information presented by our management, the financial statements included in our Annual Reports on Form 10-K for the 2004 and 2005 calendar years also contained errors and should be restated. In evaluating the need to restate those periods, we also took into consideration adjustments that had been identified previously as not being material to those periods and have included those adjustments in the restated amounts for the applicable 2005 and 2004 periods.

We identified the errors in the first and second quarter 2006 financial statements primarily as a result of our efforts to remediate the material weaknesses that we previously identified and disclosed in our second quarter 2006 Form 10-Q as well as through our ongoing efforts:

(a) to implement our new ERP system;

(b) to reconcile the records in our new ERP system and those in our legacy systems; and

As part of these efforts, management:

(i) has carried out a comprehensive account reconciliation initiative to test and verify the accuracy and integrity of information recorded by, and data imported and input from our legacy accounting system into, the new ERP system;

(ii) is continuing to train employees in the use of the new ERP system and our established system of internal controls; and

(iii) is continuing to promote strict adherence to those established internal controls.

We have also performed physical inventory counts and undertaken and completed a variety of other confirmatory procedures. See Part I, Item 4, “Controls and Procedures.”

This Quarterly Report on Form 10-Q includes the restated financial information for each period affected by the restatement. That information is also included in Quarterly Reports on Form 10-Q/A for the quarterly periods ended March 31, 2006 and June 30, 2006 that we are filing with the Securities and Exchange Commission. Such restated financial information will also be included in our Annual Report on Form 10-K for the year ended December 31, 2006.

The following table shows the impact of the correction of all errors on income (loss) available to common stockholders on a pretax basis for the full years ended December 31, 2004 and 2005 and for each calendar quarter thereafter through June 30, 2006. It also shows the cumulative impact of prior-period errors on the accumulated deficit in earnings at December 31, 2003, which errors were not material either

individually or in the aggregate. The tax effect of the correction of these errors on each restated period was either minimal or nil.

	Accumulated				Effect of Restatement on Income (Loss) Available to Common Stockholders
	Deficit in Earnings				Year Ended				Quarter Ended																Year Ended				Quarter Ended
	December 31,				December 31,				March 31,				June 30,				September 30,				December 31,				December 31,				March 31,				June 30,
	2003				2004				2005				2005				2005				2005				2005				2006				2006
	(Amounts in $000s)
Previously reported		$	(47,442	)		$	1,027			$	783			$	855			$	749			$	6,017			$	8,404			$	(1,244	)	$	(8,944	)
Adjustments:
Credit memos		—				10				(19		)		(79		)		(164		)		(101		)		(363		)		(251		)	(978		)
Royalty income/expense		—				253				5				(17		)		(17		)		(293		)		(322		)		13			81
Recognition of warranty and training revenue		32				220				11				(246		)		13				33				(189		)		121			(101		)
Stock issuance costs		—				—				—				—				—				211				211				—			—
Prepaid materials reconciliation		—				—				—				(29		)		(4		)		(64		)		(97		)		(201		)	(772		)
Depreciation of fixed assets		—				(4		)		(19		)		(37		)		(42		)		(63		)		(161		)		(106		)	(109		)
Accrual for professional services		—				—				—				—				—				(15		)		(15		)		(247		)	—
Inventory usage		—				—				—				—				—				22				22				—			(412		)
Hedging activities		—				—				—				—				—				—				—				—			(256		)
Other		—				(20		)		20				44				(2		)		(16		)		46				(86		)	76
Tax provision		(191		)		—				—				—				—				191				191				53			(113		)
Total adjustments:		(159		)		459				(2		)		(364		)		(216		)		(95		)		(677		)		(704		)	(2,584		)
Restated		$	(47,601	)		$	1,486			$	781			$	491			$	533			$	5,922			$	7,727			$	(1,948	)	$	(11,528	)
Net income (loss) available to common stockholders per share - diluted (as previously reported)						$	0.07			$	0.05			$	0.05			$	0.05			$	0.32			$	0.53			$	(0.08	)	$	(0.55	)
Effect of restatement						0.04				(0.00		)		(0.02		)		(0.02		)		(0.00		)		(0.05		)		(0.05		)	(0.16		)
Net income (loss) available to common stockholders per share - diluted (restated)						$	0.11			$	0.05			$	0.03			$	0.03			$	0.32			$	0.48			$	(0.13	)	$	(0.71	)

As shown in this table, the errors that affect income (loss) available to common stockholders in each restated period primarily include:

· $1.6 million in the aggregate of errors related to credit memoranda issued to customers, of which $1.2 million was attributable to the first and second quarters of 2006, $0.4 million was attributable to the 2005 periods and a nominal credit was attributable to 2004.

· $1.1 million in the aggregate of errors related to the reconciliation of prepaid materials accounts from sub-ledger to general ledger, substantially all of which was attributable to the first and second quarters of 2006, and $0.1 million of which was attributable to the 2005 periods.

· $0.4 million in the aggregate of errors related to additional depreciation expense for items placed in service that had not been removed from construction-in-progress (“CIP”) accounts prior to the restatement, approximately equal amounts of which were attributable to the 2006 and 2005 periods and a nominal amount was attributable to 2004.

· $0.4 million in the aggregate of errors and other adjustments related to inventory, which was primarily attributable to the second quarter of 2006.

· $0.3 million in the aggregate of errors in calculations related to hedging activities on foreign currency transactions, all of which was attributable to the second quarter of 2006.

The aggregate effect of these adjustments was to:

· increase net loss for the quarter ended June 30, 2006 by $2.6 million, or 28.9%, from $8.9 million as originally reported to $11.5 million as restated;

· increase net loss by $0.7 million, or 56.6%, from $1.2 million as originally reported to $1.9 million as restated for the quarter ended March 31, 2006;

· decrease net income by $0.7 million, or 8.1%, from $8.4 million as originally reported to $7.7 million as restated for the year ended December 31, 2005;

· for the respective quarters of 2005:

· decrease net income by 0.2% with net income of $0.8 million both as originally reported and as restated for the quarter ended March 31, 2005;

· decrease net income by $0.4 million or 42.6% and from $0.9 million as originally reported to $0.5 million as restated for the quarter ended June 30, 2005;

· decrease net income by $0.2 million or 28.8% with net income of $0.7 million as originally reported to $0.5 million as restated for the quarter ended September 30, 2005; and

· decrease net income by $0.1 million or 1.6% and from $6.0 million as originally reported to $5.9 million as restated for the quarter ended December 31, 2005; and

· increase net income by $0.5 million, or 44.7%, for the year ended December 31, 2004 from $1.0 million as originally reported to $1.5 million as restated.

On a per share basis, the aggregate effect of these adjustments was to:

· increase diluted net loss per share for the quarter ended June 30, 2006 by $0.16 from $0.55 as originally reported to $0.71 as restated;

· increase diluted net loss per share by $0.05 from $0.08 to $0.13 for the quarter ended March 31, 2006;

· decrease diluted net income per share by $0.05 from $0.53 as originally reported to $0.48 as restated for the year ended December 31, 2005;

· for the respective quarters of 2005:

· there was no change to diluted net income per share for the quarter ended March 31, 2005;

· decrease diluted net income per share by $0.02 from $0.05 as originally reported to $0.03 as restated for the quarter ended June 30, 2005;

· decrease diluted net income per share by $0.02 from $0.05 as originally reported to $0.03 as restated for the quarter ended September 30, 2005;

· there was no change to diluted net income per share for the quarter ended December 31, 2005;

· the sum of diluted net income per share for the four 2005 quarters does not equal the diluted net income per share for the year ended December 31, 2005 due to changes in the weighted average shares outstanding at the end of each quarterly period, which were not affected by the restatement;

· increase diluted net income per share by $0.04 from $0.07 as originally reported to $0.11 as restated for the year ended December 31, 2004.

Compared to the amounts originally reported, the restatement resulted in a $0.3 million increase in cash and cash equivalents at June 30, 2006 and a $0.2 million increase in cash and cash equivalents at March 31, 2006 that arose from the reclassification of certain unrestricted deposits previously erroneously recorded in prepaid expenses and other current assets.

The restatement also resulted in a $0.3 million increase in cash and cash equivalents at March 31, 2005, a $0.2 million increase in cash and cash equivalents at June 30, 2005, September 30, 2005 and December 31, 2005 and a $0.2 million increase in cash and cash equivalents at December 31, 2004

iii

primarily as a result of the reclassification of certain amounts previously erroneously recorded as prepaid expenses and other current assets, as discussed above. See Note 2 to the Condensed Consolidated Financial Statements.

The restatement also resulted in a $0.2 million reduction to the ending retained earnings balance at December 31, 2003 for errors related to prior periods that we believe are immaterial individually and in the aggregate.

As a result of the errors mentioned above, we have restated:

· our historical consolidated balance sheets as of December 31, 2004, the last calendar day for each quarter in 2005, including December 31, 2005, and the first two quarters in 2006;

· our consolidated statements of operations for the years ended December 31, 2004 and 2005, each quarter ended in 2005 and the first two quarters in 2006; and

· our consolidated statements of cash flows for the year ended December 31, 2004, the three, six and nine months ended March 31, 2005, June 30, 2005 and September 30, 2005, respectively, and for the year ended December 31, 2005, and the three and six months ended March 31, 2006 and June 30, 2006, respectively.

The restated consolidated financial information is set forth in Note 2 to the Condensed Consolidated Financial Statements below and is further discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As disclosed in the Form 10-Q filed with respect to the periods ended June 30, 2006, management determined that control deficiencies existed relating to the design and implementation of controls regarding our procedures for (a) reconciling and compiling the financial records and (b) processing and safeguarding of inventory that constituted, either individually or in the aggregate, material weaknesses in our internal control over financial reporting. In the course of our efforts to remediate those deficiencies and these weaknesses, we determined the existence of the errors discussed above, which led to the determination to carry out the restatement discussed above. We also identified additional control deficiencies with respect to the third quarter of 2006 that we believe, taken together with the material weaknesses that we previously disclosed in the second-quarter Form 10-Q, constitute individually or in the aggregate additional material weaknesses with respect to those matters. These additional deficiencies relate to (a) a deficiency in the invoicing and processing of accounts receivable and the application of customer payments and (b) deficiencies in the timeliness and accuracy of our period-end financial statement closing process and the monitoring of our accounting function and oversight of financial controls. We have taken steps to remediate certain of these deficiencies, and we are taking steps to remediate the others. See Part I, Item 4, “Controls and Procedures,” of this Form 10-Q for additional information.

As used in this Form 10-Q, the terms “we,” “us,” “our” and the “Company” refer to 3D Systems Corporation and our consolidated subsidiaries, and all dollar amounts other than per share amounts are in thousands, unless otherwise noted.

Item 1. Financial Statements

3D SYSTEMS CORPORATION
Condensed Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(in thousands, except par value)
(unaudited)

	September 30, 2006				December 31, 2005
					Restated
ASSETS
Current assets:
Cash and cash equivalents		$	5,280			$	24,328
Accounts receivable, net of allowance for doubtful accounts of $2,659 (2006) and $990 (2005)		26,840				32,766
Inventories, net of reserves of $1,294 (2006) and $1,317 (2005)		26,252				14,810
Deferred tax assets		—				2,500
Prepaid expenses and other current assets		6,263				9,275
Restricted cash—short term		1,200				—
Assets held for sale, net		3,454				—
Total current assets		69,289				83,679
Property and equipment, net		24,446				11,992
Intangible assets, net		6,875				8,577
Goodwill		45,180				44,747
Restricted cash—long term		—				1,200
Other assets, net		419				985
		$	146,209			$	151,180
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	3,552			$	207
Current portion of capitalized lease obligation		60				—
Accounts payable		17,059				11,684
Accrued liabilities		13,659				12,316
Customer deposits		2,363				1,945
Deferred revenue		11,034				13,725
Total current liabilities		47,727				39,877
Long-term debt, less current portion		18				3,568
Capitalized lease obligation, less current portion		8,859				—
Convertible subordinated debentures		15,354				22,604
Other liabilities		1,093				1,001
		73,051				67,050
Authorized 5,000 preferred shares; Series B convertible redeemable preferred stock, authorized 2,670 shares in 2005, issued and outstanding 0 and 2,617, 2006 and 2005, respectively		—				15,242
Stockholders’ equity:
Common stock, $0.001 par value, authorized 60,000 shares; issued and outstanding 19,085 (2006) and 15,302 (2005)		19				15
Additional paid-in capital		131,702				106,530
Deferred compensation		—				(1,461		)
Treasury stock, at cost; 29 shares (2006) and 12 shares (2005)		(29		)		(12		)
Accumulated deficit in earnings		(58,496		)		(35,175		)
Accumulated other comprehensive income (loss)		(38		)		(1,009		)
Total stockholders’ equity		73,158				68,888
		$	146,209			$	151,180

See accompanying notes to condensed consolidated financial statements.

3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 2006 and September 30, 2005
(in thousands, except per share amounts)
(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006			2005		2006			2005
				Restated					Restated
Revenue:
Products	$	22,732		$	22,874	$	65,917		$	65,465
Services	8,738			9,299		26,327			29,576
Total revenue	31,470			32,173		92,244			95,041
Cost of sales:
Products	13,349			10,930		40,849			33,482
Services	7,381			6,568		21,214			19,896
Total cost of sales	20,730			17,498		62,063			53,378
Gross profit	10,740			14,675		30,181			41,663
Operating expenses:
Selling, general and administrative	13,821			9,960		34,788			28,607
Research and development	3,856			3,429		10,087			8,805
Severance and restructuring	1,745			42		5,663			49
Total operating expenses	19,422			13,431		50,538			37,461
Income (loss) from operations	(8,682		)	1,244		(20,357		)	4,202
Interest (income) expense and other, net	336			199		661			682
Income (loss) before provision for income taxes	(9,018		)	1,045		(21,018		)	3,520
Provision for income taxes	2,241			100		2,303			447
Net income (loss)	(11,259		)	945		(23,321		)	3,073
Preferred stock dividends	—			412		1,414			1,268
Net income (loss) available to common stockholders	$	(11,259	)	$	533	$	(24,735	)	$	1,805
Net income (loss) available to common stockholders per share—basic	$	(0.61	)	$	0.04	$	(1.48	)	$	0.12
Net income (loss) available to common stockholders per share—diluted	$	(0.61	)	$	0.03	$	(1.48	)	$	0.11

See accompanying notes to condensed consolidated financial statements.

3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and September 30, 2005
(in thousands)
(unaudited)

	September 30, 2006				September 30, 2005
					Restated
Cash flows from operating activities:
Net income (loss)		$	(23,321	)		$	3,073
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Provision for deferred income taxes		2,605				—
Depreciation and amortization		4,415				4,812
Bad debt provision		1,282				16
Adjustments to inventory reserves		(61		)		(720		)
Stock-based compensation expense		1,909				699
Gain on disposition of property and equipment		(34		)		(54		)
Changes in operating accounts:
Accounts receivable		5,530				(697		)
Lease receivables		177				344
Inventories		(12,265		)		(5,206		)
Prepaid expenses and other current assets		2,933				(4,910		)
Other assets		716				229
Accounts payable		5,274				1,009
Accrued liabilities		1,111				(2,507		)
Customer deposits		398				1,228
Deferred revenue		(2,932		)		(906		)
Other liabilities		(32		)		(466		)
Net cash used in operating activities		(12,295		)		(4,056		)
Cash flows from investing activities:
Purchases of property and equipment		(7,697		)		(1,786		)
Additions to licenses and patents		(305		)		(504		)
Proceeds from the sale of property and equipment		248				98
Software development costs		(485		)		(635		)
Net cash used in investing activities		(8,239		)		(2,827		)
Cash flows from financing activities:
Stock option, stock purchase plan and restricted stock proceeds		2,716				8,020
Repayment of long-term debt		(205		)		(177		)
Payments under obligation to former 3D Systems SA stockholders		—				(585		)
Payments of preferred stock dividends		(785		)		(785		)
Stock issuance costs		—				(211		)
Payment of accrued liquidated damages		—				(36		)
Net cash provided by financing activities		1,726				6,226
Effect of exchange rate changes on cash		(240)				385
Net decrease in cash and cash equivalents		(19,048		)		(272		)
Cash and cash equivalents at the beginning of the period		24,328				26,505
Cash and cash equivalents at the end of the period		$	5,280			$	26,233
Supplemental Cash Flow Information:
Interest payments		$	903			$	762
Income tax payments		902				1,296
Non-cash items:
Capitalized lease obligations		8,919				—
Conversion of 6% convertible subordinated debentures		7,250				100
Conversion of Series B convertible preferred stock		15,240				26
Accrued dividends on preferred stock		—				1,211
Accreted dividends on preferred stock		1,003				—
Transfer of equipment from inventory to property and equipment, net(a)		1,834				2,066
Transfer of equipment to inventory from property and equipment, net(b)		543				586

(a) Inventory is transferred from inventory to property and equipment, net at cost when the Company requires additional machines for training, demonstration or short-term rentals.

(b) In general, an asset is transferred from property and equipment, net into inventory at its net book value when the Company has identified a potential sale for a used machine. The machine is removed from inventory upon recognition of the sale.

See accompanying notes to condensed consolidated financial statements.

3D SYSTEMS CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months and Nine Months Ended September 30, 2006 and September 30, 2005
(in thousands)
(unaudited)

	Three Months Ended September 30,							Nine Months Ended September 30,
	2006			2005				2006			2005
				Restated							Restated
Net income (loss)	$	(11,259	)		$	945		$	(23,321	)	$	3,073
Foreign currency translation	(130		)		(96		)	973			(1,074		)
Comprehensive income (loss)	$	(11,389	)		$	849		$	(22,348	)	$	1,999

See accompanying notes to condensed consolidated financial statements.

3D SYSTEMS CORPORATION
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2006 and 2005
(amounts in thousands, except per share data)
(unaudited)

(1) Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of 3D Systems Corporation and its subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reporting. Accordingly, they omit certain footnotes and other financial information that are required for complete financial statements. In management’s opinion, after giving effect to the restatement presented in Note 2, all adjustments considered necessary for a fair presentation of the condensed consolidated financial position as of September 30, 2006, the condensed consolidated results of operations for the three-month and nine-month periods ended September 30, 2006 and September 30, 2005, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2006 and September 30, 2005 have been included.

The financial information for the first six months of 2006 contained in the condensed consolidated financial statements for the nine months ended September 30, 2006 and the financial information in the condensed consolidated financial statements for the 2005 periods set forth herein have been restated, as described in Note 2 below.

The results set forth in the condensed consolidated statements of operations for the three months and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated balance sheet at December 31, 2005 has been derived from the Company’s annual historical financial statements, as adjusted for the restatement set forth in Note 2, at that date but omits certain of the information and footnotes required by GAAP for complete financial statements.

Certain amounts in the 2005 condensed consolidated financial statements, as restated, have been reclassified in order to conform with the 2006 presentations.

The Company is responsible for the unaudited condensed consolidated financial statements included in this document. As these are condensed financial statements, they should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and the information set forth in Note 2.

(2) Financial Statement Restatement

On November 3, 2006, the Company announced that management and the Audit Committee of the Board of Directors had determined, based on information presented by management in connection with the preparation of the Company’s financial statements for the third quarter of 2006, that its financial statements included in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006 contained errors and should be restated.

3D SYSTEMS CORPORATION
Notes to Condensed Consolidated Financial Statements (Continued)
For the Three and Nine Months Ended September 30, 2006 and 2005
(amounts in thousands, except per share data)
(unaudited)

The Company also announced at that time that it was assessing whether its financial statements for prior periods should be restated. On December 14, 2006, the Company announced that management and the Audit Committee had completed their assessment of the prior-period financial statements and that, based on information presented by management, the Company’s financial statements included in its Annual Reports on Form 10-K for the 2004 and 2005 calendar years also contained errors and should be restated. In evaluating the need to restate those periods, the Company also took into consideration adjustments that had been identified previously as not being material to those periods, and those adjustments are included in the restated amounts for the applicable 2005 and 2004 periods.

The Company has identified and evaluated the errors noted in its prior-period financial statements and has corrected those errors through adjustments reflected in the restated historical consolidated financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154 (“SFAS No. 154”), “Accounting Changes and Error Corrections.” The Company also assessed on a quarterly basis the materiality of prior-period misstatements that were previously identified but not corrected because they were originally considered to be immaterial. As a result of the Company’s analysis of errors identified during the third quarter of 2006 that were attributable to prior periods as well as previously unadjusted amounts attributable to prior periods, the Company concluded that the prior-period impact was material in the second and fourth quarters of 2005 as well as for the years ended December 31, 2005 and 2004. Therefore, the restated financial information set forth herein reflects adjustments to correct or record all such previously unadjusted amounts.

At the end of the second quarter of 2006, the Company first identified and disclosed control deficiencies in its procedures for (a) reconciling and compiling its financial records for the second quarter of 2006 and (b) processing and safeguarding inventory for the period ended June 30, 2006 that it concluded constituted, individually or in the aggregate, material weaknesses.

With respect to the Company’s procedures for compiling and reconciling its financial records for the second quarter of 2006, the Company determined that the material weaknesses primarily arose as a result of the following contributing factors:

· inexperience and lack of training of personnel with respect to the closing procedures required under the Company’s new enterprise resource management (“ERP”) system;

· unfamiliarity with the reports generated by its new ERP system such that their utility in compiling and reconciling financial data was not fully recognized in connection with the quarter-end closing process;

· the combination of starting up its new ERP system, addressing problems with supply chain and order processing and fulfillment activities, and conflicting demands on its employees’ time;

· human errors in entering, completing and correcting product and vendor data in the ERP system; and

· difficulties in consolidating European financial information and in the U.S. consolidation process.

With respect to inventory accounting matters, the Company determined that the material weaknesses relating to that matter primarily resulted from three fundamental sources:

· insufficient planning and execution of the conversion from the Company’s legacy systems to its new ERP system;

· errors or corruption in the data migrated from its legacy accounting systems to its new ERP system; and

· data that was missing from, and errors in inputting data into, its new ERP system.

The Company also noted that such inventory accounting matters also arose out of the significant operational difficulties that the Company encountered in taking, processing and filling orders on its new ERP system during the second quarter of 2006 both directly and through certain of its third-party suppliers to end users, including a logistics and warehousing firm that the Company employed beginning in the second quarter of 2006.

As the Company prepared its financial statements for the periods ended September 30, 2006, it discovered errors in its financial statements for the periods ended March 31, 2006 and June 30, 2006 and for prior periods that are discussed below in this Note 2 and that led to the restatement of its financial statements set forth herein. The Company identified these errors primarily as a result of its efforts to remediate the material weaknesses that it disclosed with respect to the second quarter of 2006 and through its efforts to implement its new ERP system, to reconcile the records in its new ERP system with those in its legacy systems, and to test its internal controls in the context of its new ERP system environment.

In connection with the identification of these errors and the preparation of the Company’s third-quarter financial statements, it identified additional control deficiencies that it believes, taken together with the material weaknesses that it previously disclosed with respect to the second quarter of 2006, constitute individually or in the aggregate material weaknesses with respect to those matters. These additional deficiencies relate to (a) a deficiency in the invoicing and processing of accounts receivable and the application of customer payments and (b) deficiencies in the timeliness and accuracy of its period-end financial statement closing process and the monitoring of its accounting function and oversight of financial controls.

With respect to the deficiency in the Company’s procedures for the processing of and accounting for accounts receivable and the application of customer payments, the Company determined that this material weakness resulted in the following errors in the Company’s financial statements:

· The Company experienced errors in the invoicing and recording of customer billings, in the application of customer payments and in the reconciliation of customer accounts. These matters required the Company to issue and record credit memoranda for the benefit of customers for product returns, pricing adjustments, changes to service contracts, freight-related matters and other similar matters that are discussed elsewhere in this Note 2. The Company also identified cash that it had received but which had not been applied to customer accounts or the related accounts receivable.

· Some customer contracts had not been fully integrated and reflected in its new ERP system.

· Certain tax-exempt customers were charged sales tax in error and certain customers were inadvertently not billed for sales tax on their purchases.

With respect to the deficiency in the timeliness and accuracy of the Company’s period-end financial statement closing process and the monitoring of its accounting function and oversight of financial controls, it determined that this material weakness primarily arose as a result of the following contributing factors:

· The combination of its relocation to Rock Hill, South Carolina, and the difficulties that it encountered in implementing its new ERP system;

· The loss of certain experienced accounting and other personnel who did not relocate to Rock Hill;

· Inexperience and lack of training of newly hired personnel with respect to its existing system of internal controls and the closing procedures required under its new ERP system;

· Unfamiliarity with the reports generated by its new ERP system such that their utility in compiling and reconciling financial data was not fully recognized in connection with the quarter-end closing process;

· The combination of starting up its new ERP system, addressing problems with supply chain and order processing and fulfillment activities, and conflicting demands on its employees’ time;

· Human errors in entering, completing and correcting product and vendor data in the ERP system; and

· Contrary to its policies and procedures, a lack of consistent and effective review and supervision of account reconciliations and data entries at various levels of its accounting organization to confirm, analyze and reconcile account balances that adversely affected its financial reporting and disclosure controls.

The material weaknesses described in this Note 2, combined with the time needed to complete the Company’s assessment of the need to restate its financial statements, rendered it unable to complete its financial statements for the periods ended September 30, 2006 on a timely basis and also necessitated significant additional resources and efforts to complete its third-quarter financial statements.

The Company also undertook a review of the potential effect of the financial statement errors that it discovered on prior periods. As discussed elsewhere in this Note 2, on November 3, 2006, it announced that management and the Audit Committee of its Board of Directors had determined, based on information presented by its management in connection with the preparation of its financial statements for the third quarter of 2006, that its financial statements as of and for the quarters ended March 31, 2006 and June 30, 2006 should be restated as a result of the errors in them that the Company had discovered, and on December 14, 2006, it announced that management and the Audit Committee had completed their assessment of the Company’s prior-period financial statements and that, based on information presented by management, the Company’s financial statements as of and for the years ended December 31, 2004 and 2005 also contained errors and should be restated. As discussed elsewhere in this Note 2, in evaluating the

need to restate those periods, the Company also took into consideration audit adjustments that had been identified previously as not being material to those periods, and it has included those adjustments in the restated amounts for the applicable 2005 and 2004 periods.

The restatement of the errors and previously unrecorded audit adjustments that the Company identified included the following:

· Errors in the invoicing and recording of customer billings, in the application of customer payments and in the reconciliation of customer accounts that were corrected by the issuance and recording of credit memoranda for the benefit of customers for product returns, pricing adjustments, changes to service contracts, freight-related matters and other similar matters.

· Errors related to the timing of recognition of royalty income and expense.

· Errors related to the timing of the recognition of warranty and training revenue.

· Errors related to securities issuance costs that arose as a result of expensing such costs rather than applying such costs against the net proceeds of sale of the related securities.

· Errors related to prepaid materials that arose from the incomplete reconciliation of such accounts between the sub-ledger and the general ledger for the affected periods.

· Errors related to the failure to record depreciation expense for assets that had been placed in service but which remained recorded in the Company’s construction-in-progress (“CIP”) accounts.

· Errors related to the timing of expenses for certain unrelated third party professional services.

· Errors related to accounts payable that arose from the incomplete reconciliation of such accounts between the sub-ledger and the general ledger for each applicable period.

· Errors related to inventory usage that arose from variances identified between actual and recorded inventory values following the Company’s conducting physical inventory counts to test the accuracy of the recorded inventory data.

· Errors related to hedging activities for foreign currency transactions that arose from mechanical errors in accumulating spreadsheet data as well as the recording of net unrealized losses on foreign exchange hedges that had previously been excluded from the consolidated statement of operations.

· Errors related to foreign income tax expense that relate to a previously identified adjustment related to periods prior to 2004 but that was not deemed material to those periods.

The deficiencies and errors described above were identified during the Company’s preparation of its financial statements and in reviewing the effectiveness of the design and operation of its disclosure controls and procedures as of and for the periods ended September 30, 2006. The Company performed additional detailed transaction reviews and control activities in connection with reconciling and compiling its financial records. Such procedures were undertaken in order to confirm that the Company’s financial statements for the three months and nine months ended September 30, 2006 were free of material errors.

As a result of this effort, the Company identified several reconciliation issues and accounting shortcomings, including:

· Some accounts had not been adequately reconciled in accordance with the Company’s policies and procedures.

· Certain accounts contained unreconciled differences that had not been timely resolved in accordance with the Company’s policies and procedures, including credits for the benefit of customers and cash that had not been applied to customer accounts or the related accounts receivable.

· Certain fixed assets that had been placed in service remained recorded in construction-in-progress (“CIP’’) resulting in a failure to depreciate those items beginning when they were placed in service.

· Some service contracts had not been fully integrated and reflected in the Company’s new ERP system.

· Certain tax-exempt customers were charged sales tax in error and certain customers were inadvertently not billed for sales tax on their purchases.

The Company also identified variances in recorded versus actual inventory values. The Company conducted physical inventory counts during the third quarter of 2006 to test the accuracy of the recorded inventory data. As a result, the Company identified variances between the inventory data in the Company’s records compared to the inventory values determined through the physical counts. The Company determined that the discrepancy in recorded versus actual third quarter inventory values resulted from:

· Errors or corruption in the data migrated from the Company’s legacy accounting systems to the new ERP system implemented in the second quarter of 2006;

· Errors in processing, shipping and properly recording orders by the Company’s third party logistics and warehousing provider; and

· Failure to properly record certain orders that were shipped directly from the Company’s third-party suppliers to the end users.

As a result, the Company concluded that the variances within the cost of sales account should be written off in order to fairly state the inventory value in the consolidated financial statements.

The following table shows the impact of the correction of all errors on income (loss) available to common stockholders for the full year ended December 31, 2004, for each calendar quarter in 2005, for the full year ended December 31, 2005 and for the first two quarters of 2006, as well as the cumulative impact of prior-period errors on retained earnings at December 31, 2003. The tax effect of the correction of these errors on each restated period was either minimal or nil.

	Accumulated				Effect of Restatement on
	Deficit in				Income (Loss) Available to Common Stockholders
	Earnings				Year Ended				Quarter Ended																Year Ended				Quarter Ended
	December 31,				December 31,				March 31,				June 30,				September 30,				December 31,				December 31,				March 31,				June 30,
	2003				2004				2005				2005				2005				2005				2005				2006				2006
	(amounts in $000s)
Previously reported		$	(47,442	)		$	1,027			$	783			$	855			$	749			$	6,017			$	8,404			$	(1,244	)	$	(8,944	)
Adjustments:
Credit memos		—				10				(19		)		(79		)		(164		)		(101		)		(363		)		(251		)	(978		)
Royalty income/expense		—				253				5				(17		)		(17		)		(293		)		(322		)		13			81
Recognition of warranty and training revenue		32				220				11				(246		)		13				33				(189		)		121			(101		)
Stock issuance costs		—				—				—				—				—				211				211				—			—
Prepaid materials reconciliation		—				—				—				(29		)		(4		)		(64		)		(97		)		(201		)	(772		)
Depreciation of fixed assets		—				(4		)		(19		)		(37		)		(42		)		(63		)		(161		)		(106		)	(109		)
Accrual for professional services		—				—				—				—				—				(15		)		(15		)		(247		)	—
Inventory usage		—				—				—				—				—				22				22				—			(412		)
Hedging activities		—				—				—				—				—				—				—				—			(256		)
Other		—				(20		)		20				44				(2		)		(16		)		46				(86		)	76
Tax provision		(191		)		—				—				—				—				191				191				53			(113		)
Total adjustments:		(159		)		459				(2		)		(364		)		(216		)		(95		)		(677		)		(704		)	(2,584		)
Restated		$	(47,601	)		$	1,486			$	781			$	491			$	533			$	5,922			$	7,727			$	(1,948	)	$	(11,528	)
Net income (loss) available to common stockholders per share—diluted (as previously reported)						$	0.07			$	0.05			$	0.05			$	0.05			$	0.32			$	0.53			$	(0.08	)	$	(0.55	)
Effect of restatement						0.04				(0.00		)		(0.02		)		(0.02		)		(0.00		)		(0.05		)		(0.05		)	(0.16		)
Net income (loss) available to common stockholders per share—diluted (restated)						$	0.11			$	0.05			$	0.03			$	0.03			$	0.32			$	0.48			$	(0.13	)	$	(0.71	)

As shown in this table, the errors affecting income (loss) available to the common stockholders reflected in the restated financial information primarily include:

· $(1,582) in the aggregate of errors related to credit memoranda issued to customers, of which $(1,229) was attributable to the 2006 periods, $(363) was attributable to the 2005 periods (mainly the third and fourth quarters of 2005) and a $10 credit was attributable to 2004;

Such credit memoranda were issued to customers mainly for product returns or pricing adjustments as well as for changes to service contracts and freight-related matters. Error corrections related to credit memoranda were posted to revenue or the related cost of sales in the period to which they related in carrying out the restatement;

· $25 in the aggregate of errors related to the timing of recognition of royalty income and expense, of which $94 of expense was attributable to the 2006 periods, $(322) was attributable to the 2005 periods (mainly the fourth quarter of 2005) and $253 was attributable to 2004;

These errors arose from the timing of the recording of and misclassification of such revenue and cost of sales;

· $51 in the aggregate of errors related to the recognition of warranty and training revenue, of which $20 was attributable to the 2006 periods, $(189) was attributable to the 2005 periods (mainly the second quarter of 2005) and $220 was attributable to 2004;

These errors arose from the incorrect timing of recording such revenue to the appropriate period;

· $211 of errors related to securities issuance costs, all which was attributable to the fourth quarter of 2005;

These errors arose because such costs were originally expensed rather than charged to additional paid-in capital and applied against the net proceeds of sale of the related securities;

· $131 in the aggregate of errors related to tax adjustments, of which $191 related to foreign income tax provisions related to the fourth quarter of 2005, and $53 and $(113) related to the net consolidated tax effect of the restatement adjustments for the first and second quarters of 2006, respectively.

These errors relate to an amount previously identified that related to periods prior to 2004 which was originally not deemed material to those periods. Such adjustments have been included in the restated amounts herein for the applicable period;

· $(1,070) in the aggregate of errors related to prepaid materials, of which $(973) was attributable to the 2006 periods and $(97) was attributable to the 2005 periods;

These errors arose from the incomplete reconciliation of prepaid materials between the sub-ledger and the general ledger for each period;

· $(380) in the aggregate of errors related to depreciation expense, of which $(215) was attributable to the 2006 periods, $(161) was attributable to the 2005 periods and $(4) was attributable to 2004;

These errors related to depreciation expense for assets placed in service but which remained recorded in the Company’s CIP accounts;

· $(262) of errors related to accrued professional services, of which $(247) was attributable to the 2006 period and $(15) was attributable to 2005 periods;

These errors arose from the correction of the treatment of previously incurred accounting fees;

· $(390) of errors related to inventory, which was primarily attributable to the second quarter of 2006;

These errors arose from variances identified between actual and recorded inventory values as a result of the Company’s conduct of physical inventory counts to test the accuracy of the recorded inventory data;

· $(256) of errors related to hedging activities on foreign currency transactions, all of which was attributable to the second quarter of 2006;

These errors arose from mechanical errors in accumulating spreadsheet data as well as the recording of net unrealized losses on foreign exchange hedges which had previously been excluded from the consolidated statement of operations; and

· $16 in the aggregate of errors for other adjustments related to cost of sales, selling, general and administrative expenses, other income and expense and taxes, of which $(10) was attributable to the 2006 periods, $46 was attributable to the 2005 periods and $(20) was attributable to 2004;

The impact of these adjustments on the consolidated statements of operations for the years ended December 31, 2004 and 2005 is as follows:

	2004 Year Ended										2005 Year Ended
	As Previously			Restatement							As Previously				Restatement
	Reported			Adjustments				Restated			Reported				Adjustments				Restated
Consolidated Statement of Operations	December 31										December 31
	(amounts in $000s)
Revenue:
Products		$	83,976		$	231			$	84,207		$	100,396			$	(615	)		$	99,781
Services		41,403			—				41,403			39,274				23				39,297
Total revenue		125,379			231				125,610			139,670				(592		)		139,078
Cost of sales:
Products		43,898			(234		)		43,664			49,973				359				50,332
Services		25,390			—				25,390			26,567				17				26,584
Total cost of sales		69,288			(234		)		69,054			76,540				376				76,916
Gross profit		56,091			465				56,556			63,130				(968		)		62,162
Operating expenses:
Selling, general and administrative		39,411			4				39,415			40,382				(38		)		40,344
Research and development		10,474			—				10,474			12,176				—				12,176
Severance and restructuring		605			—				605			1,227				—				1,227
Total operating expenses		50,490			4				50,494			53,785				(38		)		53,747
Income from operations		5,601			461				6,062			9,345				(930		)		8,415
Interest and other expense, net		1,979			2				1,981			762				(62		)		700
Income before provision for (benefit from) income taxes		3,622			459				4,081			8,583				(868		)		7,715
Provision for (benefit from) income taxes		1,061			—				1,061			(1,500		)		(191		)		(1,691		)
Net income		2,561			459				3,020			10,083				(677		)		9,406
Preferred stock dividends		1,534			—				1,534			1,679				—				1,679
Income available to common shareholders		$	1,027		$	459			$	1,486		$	8,404			$	(677	)		$	7,727
Net income available to common stockholders per share—basic		$	0.08		$	0.03			$	0.11		$	0.56			$	(0.04	)		$	0.52
Net income available to common stockholders per share—diluted		$	0.07		$	0.04			$	0.11		$	0.53			$	(0.05	)		$	0.48

The changes to the consolidated statements of operations reflected in the table above include:

· For the year ended December 31, 2004, the changes arising from the restatement primarily relate to the following:

· Revenue increased by $231, or 0.2%, for the year. The increase in revenue primarily relates to a $220 adjustment of amortization for warranty and training revenue.

· Cost of sales decreased by $234, or 0.3%. This decrease primarily relates to a $254 adjustment of royalty expense that was overstated in 2004 and understated in 2005.

· As a result of these changes, net income increased by $459, or 44.7%.

· For the year ended December 31, 2005, the changes arising from the restatement are discussed following the next table.

The impact on the condensed consolidated statements of operations each quarterly period in 2005 as a result of the restatement is as follows:

2005 Quarter Ended

As Previously
Reported

Restatement
Adjustments

Restated

As Previously
Reported

Restatement
Adjustments

Restated

As Previously
Reported

Restatement
Adjustments

Restated

As Previously
Reported

Restatement
Adjustments

Restated

Consolidated Statement of Operations