Exhibit 99.2

Avatech Management's Discussion and Analysis of Financial Condition and Results
of Operations

Certain statements set forth below constitute "forward-looking statements".
Such forward-looking statements involve known and unknown risk, uncertainties
and other factors including, but not limited to, those discussed in this
quarterly report, that may cause Avatech's actual results, performance or
achievements to be materially different from any future results, performance or
achievements implied by such forward-looking statements. Given these
uncertainties, investors and prospective investors are cautioned not to place
undue reliance on such forward-looking statements. Avatech disclaims any
obligation to update information contained in any forward-looking statement.

Overview

Avatech is a leading design automation solutions provider. Avatech resells
design automation software and supports its customers in the integration of this
software by offering training, technical support and professional services.
Avatech sales are to corporations, government agencies and educational
institutions throughout the United States having industry specific focuses such
as Architecture, Engineering, and Construction (AEC); Manufacturing; Location
Services, Geographic Information Systems (GIS), and Electronic Document
Management (EDM)

Avatech has embarked on a revised business strategy to increase revenue and
profitability in the future. This three-pronged strategy will place increased
emphasis on: (a) the sale of product lifecycle management ("PLM") software,
which Avatech believes will expand its higher margin services business, increase
the average size of sales transactions, and position the Company as a leading
integrator in the PLM market as it grows; (b) expanded high-value service
offerings that target enterprise-wide implementation of PLM products from
Autodesk and other manufacturers; and (c) acquisitions of small consulting
businesses that create sales opportunities for the Autodesk product line in new
geographic areas, or that would allow Avatech to diversity by offering new
products and services.

Product Sales

Avatech product sales are primarily the resale of packaged design software
programs that are installed on a user workstation, on a local area network
server, or in a hosted environment. The programs perform and support a wide
variety of functions related to design, modeling, drafting, mapping, rendering,
and facilities management tasks. Avatech is one of the largest domestic
resellers of design software developed by Autodesk, one of the world's leading
design software and digital content companies for building design and land
development, manufacturing, utilities, telecommunications, wireless data
services and digital media. Approximately 90% of Avatech's total product
revenues are related to Autodesk products.

Product sales also include hardware that Avatech may purchase for the
convenience of its customers. During fiscal 1999, Avatech made a strategic
decision to de-emphasize the resale of hardware products as the future profit
margins for these offerings were deteriorating. Product

hardware sales do not represent a significant percentage of total revenues for
Avatech in any of the periods presented.

Service Revenue

Avatech provides services in the form of training, technical support, and
professional services. Product and process education classes are offered at
Avatech's training facilities or directly at a customer site. Avatech's class
instructors are application engineers who have formal training or industry
experience in the course content. Technical support services are provided
primarily through Avatech's telephone support center located in Omaha, Nebraska.
Through its staff of full time consultants, Avatech provides assistance to
customers making inquiries concerning software products that it sells.
Professional services are project-focused offerings that are fulfilled primarily
with Avatech's own application engineers and programmers and can include
software customization, data migration, computer aided design standards
consulting, workflow analysis, and implementation assistance for complex
software products.

Commission Revenue

Avatech generates sales from the resale of Autodesk software to various
customers of which a portion are considered major accounts. Autodesk considers
certain customers to be major accounts based on specified criteria primarily
sales volume. These customers typically receive certain volume discounts.
Avatech is responsible for managing and reselling product to certain of these
accounts; however, the software product is shipped directly from Autodesk to the
customer. Avatech has received commissions in accordance with the Autodesk
reseller agreement on the product sales price depending upon the product type
and volume. Commission revenues are recognized upon shipment of the product from
Autodesk to the customer.

Cost of Product Sales

Cost of product sales consists of Avatech's cost of purchasing the products
from the software suppliers or hardware manufacturers. Additionally, the
associated shipping and handling costs are included in cost of product sales.

Cost of Service Revenue

Cost of service revenue includes the direct costs associated with the
implementation of software and hardware solutions as well as training, support
services, and professional services. These costs consist primarily of
compensation, benefits, travel and the costs of third-party contractors engaged
by Avatech. Cost of service revenue does not include an allocation of overhead
costs.

Selling, General and Administrative Expense

Selling, general and administrative expense consists primarily of
compensation and other expenses associated with management, finance, human
resources and information systems. Additionally, advertising and public
relations expense as well as expenses for facilities such as rent and utilities
are included in selling, general and administrative expense. During fiscal 2000,
Avatech instituted an expense reduction program which attributed to a $1.4
million reduction in average annualized selling, general and administrative
expense. More specifically, nearly $900,000 of the reduction was achieved in
salaries and employee benefits by reducing staff during the course of the year.
Additional expense reduction were achieved for professional fees,

telephone, supplies, marketing and travel. Expense reduction measures were
deemed necessary during the later part of fiscal 2000 to help reduce operating
losses arising from a slowdown in sales following a very successful product
release by Autodesk. Additionally, Avatech was in the midst of a consolidation
effort following a period of rapid merger and acquisition activity in the
previous two years. When practicable, targeted expense savings were accelerated
in a effort to bring Avatech to a break even operating level.

Depreciation and Amortization Expense

Depreciation and amortization expense represents the period costs
associated with Avatech's investment in property and equipment consisting
principally of computer equipment, software, furniture and fixtures, and
leasehold improvements. Depreciation and amortization expense is computed using
the straight-line method. Additionally, Avatech leases all of its facilities and
depreciates leasehold improvements over the lesser of the lease term or the
useful life of the asset.

Goodwill is the excess of the purchase price paid over the value of the
identifiable net assets acquired in purchase business combinations and was being
amortized over the expected period of benefit primarily 15 years. As of July 1,
2002, Avatech no longer amortizes this goodwill, but rather makes annual
assessments of impairment.

Interest Expense

Interest expense consists primarily of interest on Avatech's revolving
line-of-credit and subordinated debt, which it incurred to fund operations over
the past three years.

Critical Accounting Policies

General. Avatech's consolidated financial statements are impacted by the
accounting policies used, and the estimates and assumptions made, by management
during their preparation. Critical accounting policies and estimates that impact
the consolidated financial statements are those that relate to software revenue
recognition, estimates of bad debts and estimates of the recoverability of
goodwill. A summary of the significant accounting policies can be found in the
Notes to the Consolidated Financial Statements. Presented below is a description
of the accounting policies that Avatech believes are most critical to
understanding the consolidated financial statements.

Software Revenue Recognition. Avatech derives most of its revenue from the
resale of packaged software programs. Product sales also include hardware that
may be purchased for the convenience of customers. Historically, Avatech has not
experienced significant customer returns. Avatech also earns service revenue
from training and other professional services for the products that are sold.
These services are not essential to the functionality of the software.
Additionally, Avatech offers annual support contracts to its customers for the
software products that it sells. Maintenance and support services are also sold
under hourly billing arrangements.

Revenue from software arrangements is recognized in accordance with the
provisions of Statement of Position No. 97-2, Software Revenue Recognition, as
amended by SOP No 98-9, Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions. Prior to recognizing any revenue under
these arrangements, (1) persuasive evidence of an arrangement must exist, (2)
delivery of the software or service must have occurred, (3) all fees must be
assessed as fixed or determinable and (4) all fees must be probable of
collection.

Determination of criteria (3) and (4) are based on management's judgments
regarding the fixed nature of the fee charged for services rendered and products
delivered and the collectibility of those fees. Should changes in conditions
cause management to determine these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
affected.

Avatech's customer arrangements can involve the sale of two or more
elements. When this occurs, revenue is allocated to each element based on the
relative fair value of each element. Avatech limits the assessment of fair value
to the price that is charged when the element is sold separately. All of the
elements included in the multiple element arrangements have been analyzed, which
may include products that are resold, training and other professional services,
and support services. Avatech has determined that sufficient evidence of the
fair value based on these separate sales exists to allocate revenue to the
specified elements. Training and other professional services revenue is
recognized as services are delivered and support revenue is recognized ratably
over the respective contract term. All unrecognized fees that have been billed
are included in deferred revenue.

Bad Debts. Avatech maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to pay for
products and services that are sold or for disputes that affect its ability to
fully collect its accounts receivable. Avatech estimates this allowance by
reviewing the status of past-due accounts and recording general reserves based
on historical bad debt expense. Avatech's actual experience has not varied
significantly from its estimates. However, if the financial condition of
Avatech's customers were to deteriorate, resulting in their inability to pay for
products or services, Avatech may need to record additional allowances in future
periods. To mitigate this risk, Avatech performs ongoing credit evaluations of
its customers.

Recoverability of Goodwill. Avatech has remaining goodwill of $0.75 million
at September 30, 2002 that was recorded in connection with two business
combinations that were completed in 1998. As of July 1, 2002, Avatech adopted
Financial Accounting Standards Board Statement No. 142, Goodwill and Other
Intangible Assets ("Statement 142"). Under the new rules, goodwill and other
intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with the Statement.
Accordingly, the Company no longer amortizes this goodwill, but rather makes
annual assessments of impairments. During the second quarter of fiscal 2003, the
Company completed phase one of the transitional impairment tests required by
Statement 142. The Company will complete phase two of the transitional
impairment tests before the end of fiscal year 2003 at which time any impairment
charge for the goodwill will be recorded as of July 1, 2002. In the future, the
Company will be making impairment tests during the fourth quarter of each year.
In making these assessments, Avatech must make subjective judgments regarding
estimated future cash flows and other factors to determine the fair value of the
reporting units of its business that are associated with its remaining goodwill.
It is possible that these judgments may change over time as market conditions or
strategies change, and these changes may cause Avatech to record additional
impairment charges to adjust goodwill to its estimated fair value.

Effect of Recent Accounting Pronouncements

As of July 1, 2002, the Company adopted Financial Accounting Standards Board
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("Statement 144"). Statement 144 supersedes and serves to clarify and
further define the provisions of Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets

and for Long-Lived Assets to Be Disposed Of, and provides a single accounting
model for long-lived assets to be disposed of.

Statement 144 does not apply to goodwill and other intangible assets that are
not amortized, and retains the Company's current policy to recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted future cash flows and to measure the
impairment loss as the difference between the carrying amount and the fair value
of the asset.

In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections (Statement
145). Among other changes, Statement 145 rescinds Statement 4, which required
all gains and losses from extinguishment of debt to be aggregated and classified
as an extraordinary item, net of the related tax effect. Statement 145 provides
that gains and losses from extinguishment of debt should be classified as
extraordinary items only if they are unusual or infrequent, or they otherwise
meet the criteria for classification as an extraordinary item, and observes that
debt extinguishment transactions would seldom, if ever, result in extraordinary
item classification of the resulting gains and losses. Avatech adopted Statement
145 effective July 1, 2002, and upon adoption, the Company expects to report as
other income (expense), any extraordinary losses or gains that it incurs upon
the extinguishment of debt. In August 2002, the Company reported a $2.0 million
gain from the early extinguishment of certain debt.

In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit
or Disposal Activities (Statement 146). Statement 146 supersedes EITF Issue No.
94-3 Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. Statement 146 requires that costs associated with an
exit or disposal plan be recognized when incurred rather than at the date of a
commitment to an exit or disposal plan. Statement 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002,
and early adoption is encouraged. Avatech does not expect that the adoption of
Statement 146 will have a material effect on its reported results of operations
and financial position.

Results of Operations

Three Months Ended September 30, 2002 Compared to the Three Months Ended
September 30, 2001

Revenues

Total revenues for the three months ended September 30, 2002 decreased
$1,670,000, or 22.2%, to $5.9 million, compared to $7.5 million for the same
period in 2001. Overall, the gross margin percentage increased to 45.8% in the
three months ended September 30, 2002, compared to 42.9% in the same period in
2001. For the three months ended September 30, 2002, revenues from product sales
decreased, while revenues from service and commission increased. The decrease in
revenues from product sales was due to weak economic conditions as well as
timing of product upgrade cycles. The increase in revenues from service and
commission was a result of a realigned sales organization and a renewed focus by
Avatech as a full solution, service provider for its customers. Although price
changes occurred throughout the period, they did not have a material effect on
fluctuations in revenues. Improved management over the sales organization

has enhanced sales forecasting to better exploit product sales and service
opportunities to larger customers, which attributed to an increase in commission
and service revenues.

Product sales for the three months ended September 30, 2002 decreased
$1,840,000, or 35.3%, to $3.4 million, compared to $5.2 million in the same
period in 2001. The fluctuation in product sales is primarily attributed to weak
economic conditions causing customers to defer purchasing software products as
well as timing of product upgrade cycles. Sales of hardware products also
declined in this period albeit this only represented $115,000 or 2.2% of the
total decrease in product sales. The remaining decrease in product sales is
attributable to a decline in sales volume on software product sales. Software
products sold represented 97.5% and 96.2% of total product sales for the three
months ending September 30, 2002 and 2001, respectively. Also, the sale of
software developed by Autodesk, Inc. represented 90.2% and 89.8% of total
software sales for the three months ending September 30, 2002 and 2001,
respectively.

Service revenue for the three months ended September 30, 2002 increased
$41,000, or 2.8%, to $1.5 million, compared to $1.46 million in the same period
in 2001. The increase in service revenue is a result of an increase in
professional and technical support service contracts of $88,000 or 14.7%,
partially offset by a decline in training attributable to the decline in
software sales. All of Avatech's professional, technical support and training
services have received additional sales focus as Avatech transitions to a full
solution, service provider of software and services for its customers.

Commission revenue for the three months ended September 30, 2002 increased
$128,000, or 15.0%, to $.99 million, compared to $.86 million in the same period
in 2001. The increase in commission revenues resulted from Avatech's continued
focus on sales to major accounts that provide for commission revenue. The
increase is primarily attributable to Avatech's aggressive sales efforts and its
national network of 21 offices with the capacity to effectively service the
geographic needs of many of these large customers.

Cost of Revenues and Expenses

Costs of Revenue

Cost of product sales for the three months ended September 30, 2002
decreased $1,158,000, or 34.0%, to $2.2 million, compared to $3.4 million for
the same period in 2001. Cost of product sales as a percentage of related
revenue for the three months ended September 30, 2002 increased to 66.7% from
65.3% in the same period in 2001. The increase in cost of product sales as a
percentage of related revenues is attributed to less favorable product mix as
sales of high margin software products declined slightly during the period.

Cost of service revenue for the three months ended September 30, 2002
increased $39,000, or 4.4%, to $.93 million compared to $.89 million for the
same period in 2001. Cost of service revenue as a percentage of related revenue
for the three months ended September 30, 2002 increased slightly to 61.9% from
61.3% in the same period in 2001. The modest increase in cost of service revenue
as a percentage of revenue is primarily attributable to an increase in salary
expenses for application engineers.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended
September 30, 2002 decreased $.26 million, or 7.7%, to $3.1 million, compared to
$3.3 million for the same

period in 2001. Selling, general and administrative expense as a percent of
total revenues was 52.6% during the three months ended September 30, 2002, and
44.3% during the same period in 2001. The increase in selling, general and
administrative expense as a percent of total revenues is attributable to the
fixed cost required to support a nationwide network of 21 offices.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended September
30, 2002 decreased $47,000 or 28.2%, to $119,000, compared to $165,000 for the
same period in 2001. Depreciation and amortization expense of property and
equipment decreased as a result of reduced capital expenditures for computer
equipment and software, and an increase in the number of fully depreciated
assets compared to the prior period. Additionally, amortization expense of
$24,000 on unamortized goodwill was recorded for the three months ended
September 30, 2001. On July 1, 2002, the Company adopted Statement 142 and no
longer amortizes goodwill and other intangible assets deemed to have indefinite
useful lives.

Other Income (Expense)

Other income for the three months ended September 30, 2002 increased $2.0
million to $1.9 million, compared to $(68,000) for the same period in 2001. The
significant increase in other income is attributable to a gain recorded for the
extinguishment of debt. In January 1999, Avatech borrowed $3.0 million from a
junior lender. In August 2002, Avatech executed an agreement to extinguish the
debt for a cash payment of $1.0 million resulting in a $2.0 million gain on the
extinguishment of debt.

Income Taxes

Income tax expense for the three months ended September 30, 2002 was
$393,000. In August 2002, the Company realized a $1.96 million taxable gain from
the extinguishment of certain debt, which resulted in a net deferred tax asset
of $373,000 being recorded at June 30, 2002. During the three months ended
September 30, 2002, the Company recorded deferred income tax expense of $373,000
related to the estimated reduction in deferred tax assets in 2003. This increase
in deferred income tax expense coupled with certain state tax expense resulted
in the additional income tax expense for the three months ended September 30,
2002.

Years Ended June 30, 2002, 2001 and 2000

The following table sets forth the percentages of total revenues
represented by selected items reflected in Avatech's Consolidated Statements of
Operations. The year-to-year comparisons of financial results are not
necessarily indicative of future results.

YEAR ENDED JUNE 30,
--------------------------------------------------------------
2002 2001 2000
------------------ ---------------------- --------------------

Revenue
Product sales ................................ 62.0% 66.4% 67.7%
Service revenue .............................. 21.7% 19.6% 22.7%
Commission revenue ........................... 16.3% 14.0% 9.6%
------------------ ---------------------- --------------------

Total revenue ................................ 100.0% 100.0% 100.0%
------------------ ---------------------- --------------------
Cost of Revenue

Cost of product sales ......................... 41.8% 46.2% 48.9%
Cost of service revenue ....................... 12.7% 12.3% 14.1%
-------------------- -------------------- ----------------------

Total cost of revenue ......................... 54.5% 58.5% 63.0%
-------------------- -------------------- ----------------------

Gross margin .................................. 45.5% 41.5% 37.0%
-------------------- -------------------- ----------------------

Other Expenses
Selling, general and administrative ........... 43.0% 37.3% 39.0%
Depreciation and amortization ................. 2.1% 2.3% 2.1%
Impairment loss ............................... 0.8% - -
-------------------- -------------------- ----------------------

Total other expenses .......................... 45.9% 39.6% 41.1%
-------------------- -------------------- ----------------------

Income/(loss) from operations ................. (0.4)% 1.9% (4.1)%
-------------------- -------------------- ----------------------

Other Income/(Expense)
Interest and other income/(expense) ........... 0.2% 0.2% (0.2)%
Interest expense .............................. (1.6)% (1.8)% (1.9)%
-------------------- -------------------- ----------------------

(1.4)% (1.6)% (2.1)%
-------------------- -------------------- ----------------------

Income (loss) before income taxes ............. (1.8)% 0.3% (6.2)%

Income tax expense ............................ (1.0)% 0.0% 0.0%
-------------------- -------------------- ----------------------

Net income (loss) ............................. (0.8)% 0.3% (6.2)%
==================== ==================== ======================

Year ended June 30, 2002 Compared to Year Ended June 30, 2001

Revenues

Total revenues for the year ended June 30, 2002 decreased $1.1
million, or 3.4%, to $29.8 million, compared to $30.9 million for the same
period in 2001. Overall, the gross margin percentage increased to 45.5% in
the year ended June 30, 2002, compared to 41.5% in the same period in 2001.
For the year ended June 30, 2002, revenues in two of three
categories--service revenue and commission revenue--increased as a result
of a realigned sales organization and a renewed focus by Avatech as a full
solution, service provider for its customers. Although price changes
occurred throughout the period, they did not have a material effect on
fluctuations in revenues. Avatech realigned its sales organization in
September 2000 and has improved sales forecasting to better exploit sales
opportunities on high margin software products as well as sales to major
accounts, which attributed to an increase in commission revenues.

Product sales for the year ended June 30, 2002 decreased $2.0 million,
or 9.8%, to $18.5 million, compared to $20.5 million in the same period in
2001. The fluctuation in product sales is attributed to a decrease in sales
volume of software sold through the Company's customer base. In June 2001,
Autodesk announced the release of an upgrade to it most popular version of
Computer Aided Design ("CAD") software. Maintenance support on the former
version of CAD software was phased out in January 2002, which resulted in
most major customers purchasing the software upgrades in 2002. The software
sales growth was completely offset by enhanced efforts to sell more
Autodesk major accounts thereby increasing commission revenue, but reducing

product sales as well as a significant decline in the resale of hardware
products. As Autodesk major account sales increased, the level of focus on other
end product sales then diminished and resulted in a $1.6 million or 7.8%
decrease in related revenues. Additionally, hardware sales decreased by
$436,000, or 46.3% in the period of 2002. The Company has de-emphasized the
resale of hardware products to its customers.

Service revenue for the year ended June 30, 2002 increased $443,000, or
7.2%, to $6.5 million, compared to $6.0 million in the same period in 2001. The
increase in service revenue is a direct result of an increase in the number of
training and professional services sold through the Company's expanded customer
base during 2002, which resulted in approximately $250,000 in additional
revenue. Avatech's training and technical support services have received
additional sales focus as Avatech transitions to a full solution, service
provider of software and services for its customers.

Commission revenue for the year ended June 30, 2002 increased $511,000, or
11.8%, to $4.8 million, compared to $4.3 million in the same period in 2001. The
increase in commission revenues resulted from Avatech's realigned sales
organization, which has improved sales to major accounts that provide for
commission revenue.

Cost of Revenues and Expenses

Cost of Revenue

Cost of product sales for the year ended June 30, 2002 decreased $1.8
million, or 12.5%, to $12.5 million, compared to $14.2 million for the same
period in 2001. Cost of product sales as a percentage of related revenue for the
year ended June 30, 2002 decreased to 67.4% from 69.5% in the same period in
2001. The decrease in cost of product sales as a percentage of related revenues
is attributed to an increase in sales of high margin software products.

Cost of service revenue for the year ended June 30, 2002 decreased $41,000,
or 1.1%, to $3.8 million compared to $3.8 million for the same period in 2001.
Cost of service revenue as a percentage of related revenue for the year ended
June 30, 2002 decreased to 58.2% from 63.0% in the same period in 2001. The
decrease in cost of service revenue as a percentage of revenues is attributed to
enhanced efforts to sell higher margin training and professional services rather
than lower margin installations of hardware products.

Selling, General and Administrative Expense

Selling, general and administrative expense for the year ended June 30,
2002 increased $1.3 million, or 11.2%, to $12.8 million, compared to $11.5
million for the same period in 2001. Selling, general and administrative expense
as a percent of total revenues was 43.0% during the year ended June 30, 2002,
and 37.3% during the same period in 2001. The increase in selling, general and
administrative expense is attributable to the expansion of Avatech's sales force
and technical support staff in its existing locations, as well as the costs
associated with opening three new offices in Chicago, IL, St. Paul, MN, and
Tampa, FL, during the third and fourth quarters of 2001. Avatech's sales force
and support staff increased by approximately 15 employees in 2002 resulting in
an approximate $1.0 million increase in selling, general and administrative
expense. New facilities costs attributed to a $50,000 increase in selling,
general and administrative expense during the same period.

Depreciation and Amortization

Depreciation and amortization expense for the year ended June 30, 2002
decreased $105,000 or 15.1%, to $589,000, compared to $695,000 for the same
period in 2001. Depreciation and amortization expense of property and equipment
decreased as a result of capital expenditures for computer equipment and
software made in 1999 becoming fully depreciated in 2001.

Goodwill Impairment

For the year ended June 30, 2002, Avatech recorded an impairment charge for
the write down of unamortized goodwill to its net realizable value. The
impairment charge was recorded in the third quarter of 2002 upon the recognition
of an impairment indicator. During the period, Avatech evaluated goodwill for
its past business combinations by comparing its best estimate of undiscounted
future cash flows with the carrying value of goodwill. As the carrying value of
goodwill exceeded the estimate of undiscounted future cash flows for one of
these acquired companies, a discounted cash flow analysis was performed which
attributed to the goodwill impairment charge of $283,000 or the amount by which
the carrying value exceeded the fair value of the unamortized goodwill balance
at that time.

Other Income (Expense)

Other expense for the year ended June 30, 2002 decreased $66,000, or 13.5%,
to $426,000, compared to $492,0000 for the same period in 2001. The reduction in
other expense in 2002 is primarily attributable to a reduction in interest
expense resulting from a decrease in the variable interest rate associated with
the revolving line-of-credit.

Income Tax Benefit

In 2002, Avatech recorded an income tax benefit of $285,000. This benefit
includes current income tax expense of $88,000 for state income taxes and a
deferred tax benefit of $373,000. The deferred tax benefit of $373,000 is the
result of a change in the estimate of the amount of net operating loss
carryforwards that will likely be used to reduce 2003 income taxes. This
estimate was revised principally because Avatech recorded a $1.96 million gain
from the extinguishment of certain debt in August 2002, which will increase 2003
taxable income.

Year Ended June 30, 2001 Compared to Year Ended June 30, 2000

Revenues

Total revenues for the year ended June 30, 2001 decreased $2.3 million, or
6.9%, to $30.9 million compared to $33.2 million in the same period in 2000. For
the year ended June 30, 2001, revenues in two of the three categories - product
sales and service revenue - decreased as a result of the general economic
slowdown experienced in the forth quarter of fiscal 2000 as well as the
culmination of the Y2K technology spending. Additionally, the sales cycle for
Autodesk's most popular CAD software product concluded in February 2000, which
contributed to the overall decline in product sales for fiscal 2001. While
revenues declined for the year ended June 2001, the gross margin percentage
increased to 41.5% in 2001 from 37.0% in 2000 principally due to Avatech's
strategic decision to discontinue reselling the low margin hardware products and
focus on selling higher margin software products on both a direct and agency
basis.

Product sales for the year ended June 30, 2001 decreased $1.9 million, or
8.7%, to $20.5 million, compared to $23.4 million in the same period in 2000.
The decrease in product sales is

attributed to the culmination of the Y2K technology spending and the conclusion
of the sales cycle for AutoDesk's most popular CAD software product in February
2000. Additionally, Avatech made a strategic decision to discontinue reselling
the low margin hardware products and focus on selling higher margin software
products. As a result, Avatech experienced a $1.9 million, or 66.8%, decline in
hardware sales.

Service revenue for the year ended June 30, 2001 decreased $1.5 million, or
19.5%, to $6.0 million, compared to $7.5 million in the same period in 2000. The
decrease in service revenue is primarily attributed to a $829,000, or 17.5%,
reduction in training service revenue in 2001. The decline in service revenue is
a result of limited resources available to focus on selling training services.
During fiscal 2000, Avatech experienced exceptional results from training
services due to intense promotional efforts and sales force focus. These efforts
were not sustained in 2001 due to the implementation of certain cost containment
measures. Additionally, support services revenue for the year ended June 30,
2001 decreased $348,000, or 18.9%, due to changes associated with the strategic
decision to discontinue selling hardware.

Commission revenues for the year ended June 30, 2001 increased $1.1
million, or 35.4%, to $4.3 million compared to $3.2 million in the same period
in 2000. The entire increase in commission revenue during 2001 resulted from the
integration of past business combinations, which provided Avatech with the
national network to service and sell to major accounts.

Cost of Revenue and Expenses

Cost of Revenue

Cost of product sales for the year ended June 30, 2001 decreased $2.0
million, or 12.2%, to $14.2 million compared to $16.2 million for the same
period in 2000. Cost of product sales as a percentage of related revenue
decreased to 69.5% in 2001 from 72.3% in 2000. The decrease in cost of product
sales as a percentage of revenues is attributable to the application of
earn-backs and other rebates received from Autodesk as a result of Avatech
achieving its sales quotas in fiscal 2001. These earn-backs and rebates are
offset against cost of product sales in the period in which they are earned.

Cost of service revenue for the year ended June 30, 2001 decreased
$851,000, or 18.2%, to $3.8 million compared to $4.7 million for the same period
in 2000. Cost of service revenue as a percentage of related revenue remained
relatively constant at 63.0% in 2001 in comparison to 62.0% in 2000.

Selling, General and Administrative Expense

Selling, general and administrative expense for the year ended June 30,
2001 decreased $1.4 million, or 10.8%, to $11.5 million, compared to $12.9
million for the same period in 2000. Selling, general and administrative expense
as a percent of total revenues was 37.3% in 2001 compared 39.0% in 2000. The
reduction in selling, general and administrative expense in 2001 is attributable
to an expense reduction program that was implemented in the fourth quarter of
2000. The expense reduction program coupled with a 6.9% decrease in total
revenues attributed to the favorable decline in the ratio of selling, general
and administrative expenses to revenues for the year ended June 30, 2001 in
comparison to the year ended June 30, 2000.

Depreciation and Amortization

Depreciation and amortization expense for the year ended June 30, 2001
increased $3,000, or 0.3%, to $695,000 compared to $692,000 for the same period
in 2000. Depreciation and amortization expense for 2001 remained consistent with
2000 as few additions to property and equipment were needed.

Other Income (Expense)

Other expense for the year ended June 30, 2001 decreased $211,000, or
30.0%, to $492,000 compared to $703,000 for the same period in 2000. The
reduction in other expense is primarily attributable to a decrease in interest
expense of 13.6% or $87,000 in 2001. The reduction in interest expense is a
result of refinancing of Avatech's revolving line-of-credit to provide for a
lower interest rate.

Liquidity and Capital Resources

Historically, Avatech has financed its operations and met its capital
expenditure requirements primarily through cash flows provided by operations and
borrowings under short-term and long-term debt arrangements. Avatech had a
deficiency of working capital of $3.3 million at September 30, 2002. Current
liabilities include $1.3 million of borrowings under a line-of-credit from a
senior lender as well as $750,000 of subordinated notes and a $500,000 note
payable to a related party. In October 2000, Avatech entered into a $4.0 million
revolving line-of-credit agreement with a senior lender that expires in October
2003, but is payable within 60 days of demand. Borrowings under the
line-of-credit bear interest at the senior lender's prime rate plus 1.5%. The
amount of outstanding borrowings is limited to 75% of eligible accounts
receivable.

In January 1999, Avatech borrowed $3.0 million from a junior lender. In
August 2002, Avatech executed an agreement to extinguish the debt for a cash
payment of $1.0 million and compliance with certain non-financial covenants.
Avatech borrowed $500,000 from each of PlanetCAD and James Hindman, an Avatech
director, to make the cash payment. On November 19, 2002 the merger with
PlanetCAD was completed and the loan from PlanetCAD eliminated, as Avatech
became a subsidiary of PlanetCAD. Mr. Hindman's loan matures on July 1, 2003.
The loan bears simple interest at a rate of 15.0% on outstanding principal
balance of the loan and is subordinate to Avatech's senior lender.

Avatech also has outstanding $1.7 million of 10% subordinated notes. The
notes were to mature on July 1, 2003 and interest is payable quarterly until
maturity or prepayment. On November 19, 2002 with the completion of the merger
with PlanetCAD, subordinated noteholders owning an aggregate of $1.4 million of
subordinated notes outstanding at September 30, 2002 exchanged their notes for
preferred stock. As a result of these exchanges, Avatech's liabilities at
September 30, 2002 have been reduced by $1,425,000 while the Company's working
capital position improved, and Avatech expects to reduce its interest expense by
$152,500 per year due to this exchange.

For the three months ended September 30, 2002 Avatech generated $0.34
million of cash from operations. For the comparable three-month period in 2001,
Avatech used $0.44 million of cash in its operations. Net cash provided by (used
in) operating activities was $1.1 million in 2002, $(0.4) million in 2001, and
$0.2 million in 2000. Cash flow from operations before working capital changes
improved from a deficit of $1.3 million in 2002 to surpluses of $0.9

million in 2001 and $0.4 million in 2002, followed by a $0.5 million deficit for
the three months ended September 30, 2002. Avatech's operating assets and
liabilities consist primarily of accounts receivable, accounts payable, and
inventory. Changes in these balances are affected by the timing of sales and
investments in inventory based on expected customer demand. Inventory levels are
minimized through arrangements with suppliers to ship products with an average
delivery period of two days and centralized inventory management.

For the three-month period ended September 30, 2002, cash provided by
operations was positively affected by decreases in accounts receivable of $0.65
million. Accounts receivable, net of allowance for doubtful accounts, decreased
approximately 15.4% for the period ended September 30, 2002. Day sales
outstanding (DSO's) in receivables increased to 54 days as of September 30, 2002
from 52 days as of September 30, 2001. The decrease in the accounts receivable
balance is primarily attributable to lower sales in September 2002 due economic
weakness and the timing of product upgrade cycles. The Company's customary
collection terms range from 30 to 60 days for all of its customers.

Avatech's investment activities consist principally of investments in
computer and office equipment. Avatech acquired $0.04 million of fixed assets
during the three months ended September 30, 2002, and acquired fixed assets of
$0.3 million in 2002, $0.4 million in 2001 and $0.5 million in 2000. Avatech has
no outstanding purchase commitments at September 30, 2002, and expects total
fixed asset purchases in 2002 to be less than $0.4 million.

As described more fully above, Avatech's financing activities in all
periods have consisted principally of borrowings and repayments under its lines
of credit. Net borrowings (repayments) under lines of credit were $(0.1) million
for the three months ended September 30, 2002, $(0.5) million in 2002, $0.7
million in 2001, and $(0.7) million in 2000. At September 30, 2002, Avatech had
additional borrowing availability under its line of credit of $0.37 million.

As of the date of this report, Avatech and PlanetCAD have unpaid expenses
due to professional firms totaling approximately $.8 million that were incurred
in connection with the merger completed on November 19, 2002. Management
believes that these fees are excessive and plans to vigorously negotiate the
amounts due and related payment terms with all of the service providers. It is
believed that the Company will be successful in negotiating reduced fees and
extended payment terms.

Because of the demand provisions of the line-of-credit and the lending
agreement, and uncertainties surrounding the ability of Avatech to obtain the
needed cash, there is substantial doubt about the ability of Avatech to continue
as a going concern if the lenders exercise their demand rights under the
agreement. Although management cannot control the actions of these lenders, it
believes that they will not demand repayment of outstanding borrowings in the
next 12 months. One of the Company's directors or officers has expressed their
intention of lending the Company, up to $500,000, to fund any needed working
capital deficiencies. Based on an evaluation of the likely cash generated from
operations in the near term, available capital resources and the timing of cash
payments to vendors, management believes that it has sufficient sources of
working capital to fund its operations in the normal course of business through
at least June 30, 2003. The Company has engaged an investment banking firm to
assist in obtaining long-term financing. Additionally, the Company plans to
raise between $1.0 million to $2.0 million of short term financing on acceptable
terms by June 30, 2003.

Below is a summary of the Company's contractual obligations and commitments at
September 30, 2002:

Payments due by Period

Contractual Obligations
Total 2003 2004 2005 2006
- ------------------------------------------------------------------------------------------------------------

Long-term debt $1,422,426 $1,422,426 $ - $ - $ -
Operating leases 1,220,911 609,841 469,621 115,934 25,515
--------------------------------------------------------------------
Total obligations $2,643,337 $2,032,267 $ 469,621 $ 115,934 $ 25,515
====================================================================

Quantitative and Qualitative Disclosures about Market Risk

Avatech is exposed to market risk from changes in interest rates associated
with its variable rate line-of-credit facility. At September 30, 2002,
approximately 32.5% of the Company's outstanding debt bears interest at variable
rates. Accordingly, the Company's earnings and cash flow are affected by changes
in interest rates. Assuming the current level of borrowings at variable rates
and assuming a 100 basis point change in the 2002 average interest rate under
these borrowings, it is estimated that the Company's 2002 interest expense and
net income would have changed by less than $20,000. In the event of an adverse
change in interest rates, management would likely take actions to further
mitigate its exposure. However, due to the uncertainty of the actions that would
be taken and their possible effects, the analysis assumes no such actions.
Further the analysis does not consider the effects of the change in the level of
overall economic activity that could exist in such an environment.