10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2003

OR

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

Commission file number: 001-31265

Avatech Solutions, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	52-2023997
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

11400-A Cronridge Drive, Owings Mills, MD	21117
(Address of Principal Executive Offices)	(Zip Code)

(410) 581 - 8080

(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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

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

Class	Outstanding at February 13, 2004
Common Stock, par value $.01 per share	9,484,986

1

AVATECH SOLUTIONS, INC. AND SUBSIDIARIES

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets – June 30, 2003 and December 31, 2003 (Unaudited)	3
	Consolidated Statements of Operations – Three months ended December 31, 2003 and 2002 (Unaudited)	5
	Consolidated Statements of Operations – Six months ended December 31, 2003 and 2002 (Unaudited)	6
	Consolidated Statement of Stockholders’ Deficit (Unaudited)	7
	Consolidated Statements of Cash Flows – Six months ended December 31, 2003 and 2002 (Unaudited)	8
	Notes to Consolidated Financial Statements – December 31, 2003 (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 2.	Changes in Securities	25
Item 3.	Defaults upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits and Reports on Form 8-K	26
SIGNATURES		29

2

Part I. Financial Information

Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30, 2003		December 31, 2003
	(audited)		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	540,384	$	486,549
Accounts receivable, less allowance of $160,000 at June 30, 2003 and $136,000 at December 31, 2003		3,393,123		3,874,382
Inventory		146,877		186,487
Prepaid expenses		395,189		469,032
Other current assets		94,258		107,318
Total current assets		4,569,831		5,123,768
Property and equipment:
Computer software and equipment		2,925,159		2,869,085
Office, furniture and equipment		760,020		604,522
Leasehold improvements		207,661		207,661
		3,892,840		3,681,268
Less accumulated depreciation and amortization		3,255,361		3,225,188
		637,479		456,080
Goodwill		52,272		52,272
Other assets		12,385		69,486
Total assets	$	5,271,967	$	5,701,606

See accompanying notes.

3

Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets (Continued)

	June 30, 2003			December 31, 2003
	(audited)			(unaudited)
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable and accrued expenses	$	5,089,207		$	4,672,045
Accrued compensation and related benefits		354,555			381,880
Borrowings under line-of-credit		1,634,709			1,683,370
Notes payable to related parties		—			885,420
Current portion of long-term debt		250,000			77,500
Deferred revenue		736,963			611,037
Other current liabilities		325,920			298,927
Total current liabilities		8,391,354			8,610,179
Long-term debt		—			1,172,500
Notes payable to related parties		966,503			—
Other long-term liabilities		363,307			322,286
Commitments and contingencies		—			—
Minority interest		1,525,000			1,525,000
Stockholders’ deficit:
Series C Convertible Preferred Stock, $0.01 par value; 1,000,000 shares authorized and 172,008 issued at June 30, 2003 and –0– shares authorized and issued at December 31, 2003		1,720			—
Series D Convertible Preferred Stock, $0.01 par value; –0– shares authorized and issued at June 30, 2003 and 1,297,537 shares authorized and issued at December 31, 2003		—			12,975
Common stock, $0.01 par value; 22,500,000 shares authorized; 8,897,874 and 9,478,464 shares issued and outstanding at June 30, 2003 and December 31, 2003, respectively		88,980			94,785
Additional paid-in capital		3,242,454			3,769,983
Accumulated deficit		(9,307,351	)		(9,806,102	)
Total stockholders’ deficit		(5,974,197	)		(5,928,359	)
Total liabilities and stockholders’ deficit	$	5,271,967		$	5,701,606

See accompanying notes.

4

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations

	Three Months Ended December 31,
	2002			2003
	(unaudited and restated)			(unaudited)
Revenues:
Product sales	$	2,948,353		$	5,183,449
Service revenue		1,696,290			1,283,609
Commission revenue		1,040,803			1,400,015
		5,685,446			7,867,073
Cost of revenue:
Cost of product sales		2,081,173			3,933,520
Cost of service revenue		970,441			493,557
		3,051,614			4,427,077
Gross margin		2,633,832			3,439,996
Other expenses:
Selling, general and administrative		2,878,324			3,215,548
Depreciation and amortization		116,056			82,437
		2,994,380			3,297,985
Operating income (loss)		(360,548	)		142,011
Other income (expense):
Minority interest		(17,891	)		(38,125	)
Interest and other income		5,352			5,006
Interest expense		(74,830	)		(95,172	)
		(87,369	)		(128,291	)
Income (loss) from continuing operations before income taxes		(447,917	)		13,720
Income tax expense		10,000			10,000
Income (loss) from continuing operations		(457,917	)		3,720
Income (loss) from operations of discontinued operating segments		(341,812	)		1,005
Net income (loss)		(799,729	)		4,725
Preferred stock dividends		—			10,122
Loss attributable to common stockholders	$	(799,729	)	$	(5,397	)
Loss from continuing operations per common share, basic and diluted	$	(0.06	)	$	(0.00	)
Loss per common share, basic and diluted	$	(0.11	)	$	(0.00	)
Shares used in computation		7,172,370			9,217,874

See accompanying notes.

5

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations

	Six Months Ended December 31,
	2002			2003
	(unaudited and restated)			(unaudited)
Revenues:
Product sales	$	6,055,329		$	8,688,397
Service revenue		3,036,328			2,760,177
Commission revenue		1,927,428			2,284,811
		11,019,085			13,733,385
Cost of revenue:
Cost of product sales		4,138,400			6,414,849
Cost of service revenue		1,809,839			1,553,255
		5,948,239			7,968,104
Gross margin		5,070,846			5,765,281
Other expenses:
Selling, general and administrative		5,767,097			5,718,505
Depreciation and amortization		230,189			149,626
		5,997,286			5,868,131
Operating loss		(926,440	)		(102,850	)
Other income (expense):
Gain on the extinguishment of debt		1,960,646			—
Minority interest		(17,891	)		(76,250	)
Interest and other income		11,960			4,293
Interest expense		(157,233	)		(161,697	)
		1,797,482			(233,654	)
Income (loss) from continuing operations before income taxes		871,042			(336,504	)
Income tax expense		403,000			21,000
Income (loss) from continuing operations		468,042			(357,504	)
Loss from operations of discontinued operating segments		(295,695	)		(141,247	)
Net income (loss)		172,347			(498,751	)
Preferred stock dividends		—			17,379
Net income (loss) attributable to common stockholders	$	172,347		$	(516,130	)
Earnings (loss) from continuing operations per share, basic and diluted	$	0.06		$	(0.04	)
Earnings (loss) per common share, basic and diluted	$	0.02		$	(0.06	)
Shares used in computation		7,172,370			9,177,399

See accompanying notes.

6

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Deficit (Unaudited)

	Convertible Preferred Stock
	Series C					Series D			Common Stock
	Number of Shares		Par Value			Number of Shares	Par Value		Number of Shares	Par Value		Additional Paid-In Capital			Accumulated Deficit			Total
Balance at July 1, 2003	172,008		$	1,720		—	$	—	8,897,874	$	88,980	$	3,242,454		$	(9,307,351	)	$	(5,974,197	)
Issuance of restricted common stock as compensation									580,590		5,805		60,692						66,497
Conversion of Series C Convertible Preferred Stock into Series D Convertible Preferred Stock	(172,008	)		(1,720	)	484,487		4,845					(3,125	)					—
Issuance of Series D Convertible Preferred Stock and warrants to purchase common stock						813,050		8,130					479,700						487,830
Preferred stock dividends													(17,379	)					(17,379	)
Issuance of warrants													7,641						7,641
Net loss																(498,751	)		(498,751	)
Balance at December 31, 2003	—		$	—		1,297,537	$	12,975	9,478,464	$	94,785	$	3,769,983		$	(9,806,102	)	$	(5,928,359	)

See accompanying notes.

7

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	Six Months Ended December 31,
	2002			2003
	(unaudited)
Cash flows from operating activities
Net income (loss)	$	172,347		$	(498,751	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Provision for bad debts		44,565			55,336
Gain on extinguishment of debt		(1,960,646	)		—
Depreciation and amortization		313,642			149,626
Deferred income taxes		373,000			—
Write-off of in-process research and development		282,000			—
Non-cash stock compensation expense		—			66,497
(Gain) Loss on disposal of property and equipment		(3,532	)		14,121
Non-cash interest expense		1,920			29,529
Changes in operating assets and liabilities:
Accounts receivable		363,623			(536,595	)
Inventory		50,619			(39,610	)
Prepaid expenses and other current assets		(394,748	)		(86,903	)
Accounts payable and accrued expenses		742,899			(417,162	)
Accrued compensation and related benefits		(16,988	)		27,325
Deferred revenue		60,661			(125,926	)
Other current liabilities		(165,924	)		(26,993	)
Other long-term liabilities		—			(41,021	)
Net cash used in operating activities		(136,562	)		(1,430,527	)
Cash flows from investing activities
Cash received in merger, net of acquisition costs		343,445			—
Purchase of property and equipment		(75,811	)		(28,525	)
Proceeds from sale of property and equipment		3,532			46,177
Net cash provided by investing activities		271,166			17,652
Cash flows from financing activities
Proceeds from borrowings under line-of-credit		13,618,320			15,066,775
Repayments of borrowings under line-of-credit		(13,607,019	)		(15,011,110	)
Proceeds from issuance of debt		1,175,000			1,000,000
Proceeds from issuance of preferred stock		—			389,999
Payment of preferred stock dividends		—			(17,379	)
Repayments of long-term debt		(1,000,000	)		—
Change in other assets related to financing costs		(1,612	)		(69,245	)
Net cash provided by financing activities		184,689			1,359,040
Net change in cash and cash equivalents		319,293			(53,835	)
Cash and cash equivalents - beginning of period		222,562			540,384
Cash and cash equivalents - end of period	$	541,855		$	486,549

See accompanying notes.

8

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003

1. Basis of Presentation

Avatech Solutions, Inc. (the “Company”) provides design automation software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions throughout the United States.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all adjustments (consisting of normal recurring accruals), which are, in management’s opinion, necessary to present a fair statement of results of the interim periods presented. These financial statements should be read in conjunction with the financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003. Operating results for the three and six months ended December 31, 2003 are not necessarily indicative of results for any future period.

The consolidated financial statements include the accounts of Avatech Solutions, Inc. and its majority owned subsidiaries. One of the Company’s subsidiaries has issued and outstanding preferred stock, which is accounted for as minority interest. All intercompany accounts and transactions between the Company and its consolidated affiliated companies have been eliminated in consolidation.

2. Recent Accounting Pronouncements

FASB Interpretation No. 46

In December 2003, the FASB revised Interpretation No. 46, Consolidation of Variable Interest Entities, and postponed the effective date for certain variable interests. The objective of FASB Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. It requires variable interest entities to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The Company currently does not have any interests in variable interest entities and, therefore, the adoption of FASB Interpretation No. 46 during 2003 did not have an impact on the Company’s financial position or results of operations.

FASB Statement No. 150

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires the issuer to classify a financial instrument that is within the scope of the standard as a liability if the financial instrument embodies an obligation of the issuer. Effective July 1, 2003, the Company adopted the provisions of Statement No. 150, which did not have any impact on its financial position or results of operations.

9

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)

3. Discontinued Operations of Certain Operating Segments

In June 2003, due to poor operating results, the Company closed a total of three offices located in New York, Michigan and Ohio. These locations were authorized software dealers subject to the Company’s channel partner agreement with its principal supplier. By virtue of these closings, the Company is no longer authorized to market or distribute software products subject to the channel partner agreements in those areas.

Additionally, the Company closed another office located in California in August 2003, which was also an authorized software dealer for which the Company is no longer authorized to market or distribute software products subject to the channel partner agreement with its principal supplier. In connection with the closing of the California office in August 2003, the Company did not incur a gain or loss.

The discontinued operations were components of the Company as the operations and cash flows were clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company. The operations and cash flows of the components have been eliminated from the ongoing operations of the Company, and the Company will not have any significant continuing involvement in the operations of the components. Accordingly, the historical results of operations of these components are presented in the accompanying consolidated statements of operations as a separate component of operations classified as discontinued operations. All interim periods in fiscal year 2003 have been restated accordingly.

Summarized operating results of the discontinued operations are as follows:

	Three months ended December 31,					Six months ended December 31,
	2002			2003		2002			2003
Revenue	$	756,451		$	20,236	$	1,281,674		$	71,721
Net income (loss)	$	(341,812	)	$	1,005	$	(295,695	)	$	(141,247	)

4. Debt and Gain on Extinguishment of Debt

On September 11, 2003, the Company entered into a revolving line-of-credit agreement with a financial institution which expires September 2006, but is payable within 60 days of demand by the lender. This line of credit replaced the borrowing facility for $2.0 million that previously existed. The credit extended under this financing agreement is limited to the lesser of $2.0 million or 75% of the Company’s aggregate outstanding eligible accounts receivable. Borrowings under this line-of-credit bear interest at the higher of 7.5% or the prime rate plus 2.0% and are secured by the assets of the Company. In addition, the bank has the right to restrict any prepayment of other indebtedness by the Company.

10

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)

4. Debt and Gain on Extinguishment of Debt (continued)

In November 2003, the lender temporarily raised the credit limits to the lesser of $2.5 million or 75% of the Company’s eligible accounts receivable. These credit terms will revert back to the original $2.0 million limit in February 2004. The balance outstanding under this line-of-credit was $1.7 million at December 31, 2003.

On July 22, 2003, the Company entered into a marketing and channel distribution agreement with a software developer. Under this agreement, Avatech will provide marketing, distribution and related services for the developer’s products. In connection with this agreement, the software developer has agreed to fund certain marketing costs incurred by the Company. Additionally, the arrangement provides for a loan by the software developer to fund working capital needs related to the distribution of these products.

The terms of the loan agreement provide for a loan of $1,500,000 funded in two payments. Initial funding of $1,000,000 occurred on July 25, 2003. The remaining $500,000 of funding was provided on February 5, 2004. The loan agreement provides for repayment of principal plus interest at 6% per annum in thirty-five equal quarterly installments commencing in January 2005. The Company is required to meet certain financial and non-financial covenants in connection with this agreement.

At June 30, 2002, the Company was obligated to one of its suppliers under a note agreement in the amount of $2.96 million, bearing interest at 6.5% per annum. In August 2002, the Company entered into an agreement to extinguish the outstanding $2.96 million debt for a cash payment of $1.0 million and compliance with certain non-financial covenants. The gain on the extinguishment of the debt of $1.96 million was recorded in August 2002.

On January 1, 2004, the Company retired or refinanced $250,000 of subordinated notes payable. The Company paid $51,000 in cash to retire certain notes and issued new subordinated notes totaling $199,000. The new notes mature on July 1, 2005, with installment payments totaling $26,000 due on July 1, 2004. In conjunction with this refinancing, the Company issued 45,000 warrants to purchase common stock for $0.21 per share. These warrants expire on July 1, 2005 and were valued at $7,300.

5. Employee Stock Compensation Plans

The Company records compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Under APB No. 25, compensation expense is recorded over the vesting period to the extent that the fair value of the underlying stock on the date of grant exceeds the exercise or acquisition price of the stock or stock-based award. Financial Accounting Standards Board Statement No. 123, Accounting for Stock Based Compensation (“Statement 123”) encourages companies to recognize expense for stock-based awards based on their estimated fair value on the date of grant. Statement 123 requires the disclosure of pro forma income and earnings per share data in the notes to the financial statement if the fair value method is not adopted.

11

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)

5. Employee Stock Compensation Plans (continued)

The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of Statement 123 to stock-based employee compensation.

	Three Months Ended December 30,						Six Months Ended December 30,
	2002			2003			2002			2003
Net income (loss), as reported	$	(799,729	)	$	1,005		$	172,347		$	(498,751	)
Add: Stock-based employee compensation cost included in net income (loss), net of taxes		—			6,125			—			56,350
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes		(354,497	)		(56,935	)		(402,683	)		(57,258	)
Pro forma net income (loss)	$	(1,154,226	)	$	(46,085	)	$	(230,336	)	$	(499,659	)
Net income (loss) per common share:
Basic and diluted — as reported	$	(0.11	)	$	(0.00	)	$	0.02		$	(0.06	)
Basic and diluted – pro forma	$	(0.16	)	$	(0.00	)	$	(0.03	)	$	(0.06	)

A summary of stock option activity during the six months ended December 31, 2003 and related information is included in the table below:

	Options		Weighted- average Exercise Price
Outstanding at July 1, 2003	554,386		$	1.88
Granted	838,865			0.42
Forfeited	(210,399	)		3.71
Outstanding at December 31, 2003	1,182,852		$	0.50
Exercisable at December 31, 2003	259,084		$	0.78
Weighted-average remaining contractual life	8.8 Years

12

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)

5. Employee Stock Compensation Plans (continued)

Stock Option Cancellation Program and Fiscal Year 2004 Grants

In April 2003, the Company offered its employees a voluntary option to surrender and cancel certain outstanding stock option agreements. Under the terms of the arrangement, the employee, if still employed, was eligible to receive an equivalent number of stock options six months and a day after the specific cancellation periods with an exercise price equal to the market value of the common stock on the grant date. On November 4, 2003, the Company issued 274,486 options under this cancellation program that will vest over periods up to 24 months.

Employee Stock Purchase Plan

On September 24, 2003 the Company amended the Employee Stock Purchase Plan. The Plan allows for the board to provide offering periods, not to exceed 27 months in duration, to employees owning less than 5% of the total combined voting power or value of all classes of stock of the Company. Common shares sold under the Plan shall not exceed in the aggregate 450,000 shares. As of December 31, 2003, common stock sold under the Plan totaled 265,932 shares.

The Company initiated a six-month offering commencing January 1, 2004. Employees eligible to participate under the plan can accumulate funds, up to 15% of their compensation, to purchase common stock through payroll deductions. At the conclusion of the offering, shares will be purchased on behalf of the employees at a price per share equal to the lower of 85% of the quoted market value of the common stock on the first or last day of the offering.

Restricted Stock Award Plan

In July 2003, the Company issued 540,000 shares of restricted common stock with a quoted market value of $0.163 share, to certain officers as compensation. The common stock is restricted based on various vesting periods ranging from twelve to twenty-four months. Compensation expense for these awards of $93,000 is being recognized over the vesting period. The issuance resulted in compensation expense totaling $56,000 for the six months ended December 31, 2003.

6. Stock Dividend

The Company’s board of directors authorized a three-for-one stock split in the form of a stock dividend, which was distributed to stockholders of record as of September 15, 2003 on October 1, 2003. All share and per share data included in the consolidated financial statements have been restated to reflect the stock split.

13

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)

7. Preferred Stock

In the second quarter of fiscal year 2004, in connection with a Series D Convertible Preferred Stock (“Series D”) issuance, shareholders of Series C Convertible Preferred Stock were given the option to convert their shares to Series D Convertible Preferred Stock. On December 31, 2003, 172,008 shares of Series C Convertible Preferred Stock, representing all outstanding shares, were converted into 484,487 shares of Series D.

The Company also issued 813,050 shares of Series D for cash proceeds totaling $390,000 and a reduction in notes payable to a related party of $97,000. In connection with the issuance of Series D, 1.7 million warrants were granted to preferred shareholders. The warrants entitle the holder to purchase common stock at an exercise price of $0.45 per share during the warrant exercise period, not to exceed one year after the date of issuance.

The Series D Convertible Preferred shares outstanding at December 31, 2003 totaled 1,297,537, and were issued with the following terms:

Redemption Feature

The preferred stock is redeemable in the event that the Company is engaged in a business combination that is approved by the board of directors and subsequently submitted and approved by a vote of the Company’s shareholders. Any director who holds shares of Series D is not eligible to vote on the proposed business combination. The redemption price is $0.60 per share plus an amount equal to all declared and unpaid dividends accrued on such shares since the original issue date.

Voting Rights

Each holder of the preferred stock shall vote together with all other classes and series of stock of the Company as a single class on all actions. Each share shall entitle the holder to one vote per share of common stock into which the preferred stock is then convertible on each such action.

Dividend Rate

The holders of the Series D are entitled to receive cumulative dividends at a rate of 10.0% per annum when and as declared by the Board of Directors. Dividends are paid quarterly to preferred shareholders.

Conversion Feature

The preferred stock is convertible at any time beginning 120 days after the original issuance date at the option of the holder and automatically converts into common stock if the common stock trades for more than $2.25 per share for 60 consecutive trading days in such market.

Each share of preferred stock is convertible into shares of common stock by multiplying the appropriate conversion rate in effect by the number of shares of preferred stock being converted. Currently, the conversion rate is two shares of common stock for each share of Series D; however, this rate may be adjusted due to stock splits, dividends, and other events defined in the stock purchase agreement.

14

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)

7. Preferred Stock (continued)

Liquidation Preference

In the event of a liquidation, dissolution or winding up of the Company, the holders of Series D are entitled to receive for each share, prior and in preference to any distribution of any of the assets or surplus funds to the holders of common stock, an amount equal to $0.60 per share plus all accumulated but unpaid dividends. If upon the occurrence of such event, the assets and funds thus distributed among the holders are insufficient to permit the payment of the preferential amount, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the preferred stockholders.

8. Stock Purchase Warrants

As of December 31, 2003, the Company has outstanding warrants to purchase common stock. A summary of the warrants is as follows:

Number of Shares	Exercise Price	Expiration Date
45,000	$  0.01	August 2013
97,200	$  0.27	June 2008
45,000	$  0.21	July 2005
180,000	$43.33	February 2005
1,007,823	$  0.45	December 2004
722,220	$  0.45	November 2004
37,500	$83.33	June 2004
18,750	$  6.67	June 2004
2,153,493

9. Earnings Per Share

Basic earnings (loss) per common share is computed as net income (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share include the potential dilution that would occur from common shares issuable upon the exercise of outstanding stock options and warrants and the conversion of preferred stock. Basic and diluted earnings (loss) per common share are equal for all years presented because the assumed conversion of preferred stock and exercise of options and warrants is antidilutive.

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Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)

9. Earnings Per Share (continued)

The following summarizes the computations of basic and diluted earnings (loss) per share:

	Three Months Ended December 31,						Six Months Ended December 31,
	2002			2003			2002			2003
Numerator used in basic and diluted earnings (loss) per common share:
Income (loss) from continuing operations	$	(457,917	)	$	3,720		$	468,042		$	(357,504	)
Less: preferred stock dividends		—			(10,122	)		—			(17,379	)
Income (loss) from continuing operations available to common stockholders		(457,917	)		(6,402	)		468,042			(374,883	)
Income (loss) from discontinued operations, net of income taxes		(341,812	)		1,005			(295,695	)		(141,247	)
Net income (loss) attributable to common stockholders	$	(799,729	)	$	(5,397	)	$	172,347		$	(516,130	)
Denominator:
Weighted average shares outstanding		7,172,370			9,217,874			7,172,370			9,177,399
Earnings (loss) per common share:
Income (loss) from continuing operations	$	(0.06	)	$	(0.00	)	$	0.06		$	(0.04	)
Income (loss) from operations of discontinued operations, net of income taxes	$	(0.05	)	$	0.00		$	(0.04	)	$	(0.02	)
Earnings (loss) per common share, basic and diluted	$	(0.11	)	$	(0.00	)	$	0.02		$	(0.06	)

10. Income Taxes

Income tax expense for the six months ended December 31, 2002 and 2003 was $403,000 and $21,000, respectively. 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 six months ended December 31, 2002, the Company recorded deferred income tax expense of $373,000 related to the estimated reduction in deferred tax assets in fiscal year 2003. This increase in deferred income tax expense, coupled with certain state tax expense, resulted in the income tax expense for the six months ended December 31, 2002. For the six months ended December 31, 2003, income tax expense related solely to estimated state tax expense for the period.

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Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2003 (continued)

11. Liquidity and Capital Resources

During 2003, the Company incurred significant losses from its operations that depleted its capital resources. These losses were incurred primarily due to unexpected declines in revenue and losses and costs related to the acquisition of PlanetCAD Inc. In response, management has taken actions to close under-performing offices, significantly reduce overhead to improve operational efficiency, initiate new revenue programs and obtain additional financing. Management believes that the actions it has taken will allow the Company to aggressively pursue its business plan and return to profitability in the near term.

Based on an evaluation of the likely cash to be generated from operations in the near term and available capital resources, management believes that it has sufficient sources of working capital to fund its operations in the normal course of business through at least July 1, 2004.

12. Contingencies

The Company is a defendant in a lawsuit filed by a vendor for alleged breach of contract. The suit asks for actual damages totaling $178,000. Legal counsel engaged by the Company has advised that at this stage in the proceedings, they cannot offer an opinion as to the probable outcome, and accordingly, no amounts have been accrued at December 31, 2003. The Company believes the suit is without merit and is vigorously defending its position.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.

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 our annual and quarterly reports, that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements implied by such forward-looking statements. These forward-looking statements may generally be identified by the use of the words “may”, “will”, “believe”, “should”, “expects”, “anticipates”, “estimates”, and similar expressions. Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement.

Overview

Avatech Solutions is a leading provider of design automation and data management solutions for the manufacturing, building design, engineering, and total infrastructure and facilities management markets. We specialize in software development, technical support, training and consulting aimed at improving design and documentation efficiencies and the seamless integration of workflow processes. These technology solutions enable our customers to enhance productivity, profitability and competitive position. We are one of the largest Autodesk software integrators worldwide and a leading provider of engineering document management solutions.

During 2003, we revised our growth strategy and began to focus on new ways of expanding our people resources, product offerings, and geographic “footprint.” We plan to increase our efforts to attract and employ highly qualified professionals in specialized areas throughout the organization, including salespeople, applications engineers, and software developers. Our portfolio of products and services has been expanded to include new relationships with other software manufacturers, additional service offerings, and continued development of new proprietary software products to support our entry into the product lifecycle management (PLM) market. Geographic expansion will be supported by targeted mergers and acquisitions, the opening of new locations, and expanded international product distribution relationships. This diversification strategy is intended to match our product and service offerings more precisely with the needs of our customers.

In June 2003, we closed three offices in New York, Michigan and Ohio due to operating performance issues. These locations were authorized software dealers subject to a channel partner agreement with our principal suppliers. In connection with the closure of these locations, we recognized a loss on disposal of approximately $179,000 in June 2003. Additionally, we closed another office located in California in August 2003, which was also subject to the same channel partner agreement. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the results of operations of these operating units are treated as discontinued operations, and reported as a separate component of operating results in our consolidated statements of operations. Our consolidated financial statements for all interim periods in fiscal year 2003 have been restated to consistently present these operations as discontinued operations. Unless otherwise indicated, all amounts included in Management’s Discussion and Analysis of Financial Condition and Results of Operations are from continuing operations. We have included in Note 3 – Discontinued Operations of Certain Operating Segments to the Consolidated Financial Statements a more comprehensive discussion about our discontinued operations.

In July 2003, we entered into a Authorized Reseller Agreement with Dassault Systemes Corp., a French developer and distributor of PLM application software and services, whereby we will market and distribute Dassault’s SMARTEAM PLM products in the United States. In connection with this agreement, Dassault provided us with certain financial assistance to create a dedicated PLM sales force and to conduct related marketing efforts.

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Product Sales. Our product sales consist primarily of 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. We are 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 the our total product revenues are related to the resale of Autodesk products.

Service Revenue. We also provide services in the form of training, technical support, and professional services. Our training offerings include product and process education classes at our training facilities or directly at a customer site. Our class instructors are application engineers who have formal training or industry experience in the course content.

We provide technical support services primarily through our telephone support center located in Omaha, Nebraska. Through our staff of full time consultants, we provide assistance to customers making inquiries related to the software products that we sell.

We also provide project-focused professional consulting services through our own application engineers and programmers, as well as software customization, data migration, computer aided design standards consulting, workflow analysis, and implementation assistance for complex software products.

Commission Revenue. We generate commission revenue from the resale of Autodesk software to various customers, a number of which Autodesk considers to be “major accounts.” Autodesk designates these customers as major accounts based on specific criteria, primarily sales volume, and typically gives these customers volume discounts. We are responsible for managing and reselling Autodesk products to a number of these major account customers; however, software product is shipped directly from Autodesk to the customers. We receive commissions upon shipment of the product from Autodesk to the customer based on the product sales price, the product type, total volume, and overall performance. Additionally, we receive commission revenue from the sale of Autodesk software subscriptions, which entitle the end-user to software upgrades and various support benefits.

Cost of Product Sales. Our cost of product sales consists of the cost of purchasing products from software suppliers or hardware manufacturers. We also include the associated shipping and handling costs 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 us. Our 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. We also include advertising and public relations expenses, as well as expenses for facilities such as rent and utilities, are included in selling, general and administrative expense. Beginning in June 2003, we instituted a number of cost containment measures to align our selling, general and administrative expenses with our current revenue levels. First, we terminated approximately 30 employees in June 2003, which we expect to contribute approximately $1.9 million of reductions in salaries and employee benefits. And second, we reduced our professional fees, telephone, supplies, marketing, and travel expense related to the discontinued operations due to operating performance issues in June and August 2003. We considered these expense reduction measures necessary to help reduce operating losses arising from the prolonged impact of the economic recession impacting the software industry.

Depreciation and Amortization Expense. Depreciation and amortization expense represents the period costs associated with our investment in property and equipment, consisting principally of computer equipment, software, furniture and fixtures, and leasehold improvements. We computed depreciation and amortization expense using the straight-line method. We lease all of our facilities and depreciate leasehold improvements over the lesser of the lease term or the useful life of the asset.

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Interest Expense. Interest expense consists primarily of interest on our revolving line-of-credit and subordinated debt, which we incurred to fund operations over the past three years.

Critical Accounting Policies

General. Our 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 and estimates of bad debts. We discuss all of these critical accounting policies with our Audit Committee on a periodic basis. Presented below is a description of the accounting policies that are most critical to an understanding of our consolidated financial statements.

Software Revenue Recognition. We derive most of our revenue from the resale of packaged software products. Our product sales may also include hardware that we may purchase for the convenience of our customers. Historically, we have not experienced significant customer returns. We earn service revenue from training and other professional services, which often are related to the products that we sell but are not essential to the functionality of the software. We offer annual support contracts to our customers for the software products that we sell, or we offer maintenance and support services under hourly billing arrangements.

We recognize revenue from software arrangements in accordance with the provisions of AICPA 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. We determine whether criteria (3) and (4) have been satisfied based on our judgment regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of such fee. Revenue recognized in a reporting period could be adversely affected if future changes in conditions related to a transaction cause us to determine these criteria are not met. In the past, we have not needed to adjust our reported revenue due to changes in conditions, and we continue to evaluate current conditions that may affect the nature and timing of our revenue recognition.

Our customer arrangements can involve the sale of one or more elements. When this occurs, we allocate revenue to each element based on the relative fair value of each element. We limit the assessment of fair value to the price that we charge when the element is sold separately. All of the elements included in the multiple element arrangements have been analyzed by management, which may include products that are resold, training and other professional services, and support services. We have determined that sufficient evidence of the fair value based on these separate sales exists to allocate revenue to the specified elements. We recognize training and other professional services revenue as services are delivered and recognize support revenue ratably over the respective contract term. We include all unrecognized fees that have been billed in our deferred revenue.

Bad Debts. We maintain an allowance for doubtful accounts for estimated losses which may result from the inability of our customers to pay for purchased products and services or for disputes that affect our ability to fully collect our accounts receivable. We estimate this allowance by reviewing the status of our past-due accounts and record general reserves based on our historical bad debt expense. Our actual experience has not varied significantly from our estimates; however, if the financial condition of our customers were to deteriorate, resulting in their inability to pay for products or services, we may need to record additional allowances in future periods. To mitigate this risk, we perform ongoing credit evaluations of our customers.

Effect of Recent Accounting Pronouncements

FASB Interpretation No. 46. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. The objective of FASB Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. It requires variable interest entities to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The Company currently does not have any interest in variable interest entities and, therefore, the adoption of FASB Interpretation No. 46 during 2003 did not have an impact on the Company’s financial position or results of operations.

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FASB Statement No. 150. In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires the issuer to classify a financial instrument that is within the scope of the standard as a liability if the financial instrument embodies an obligation of the issuer. Effective July 1, 2003, the Company adopted the provisions of Statement No. 150, which did not have any impact on the Company’s financial position or results of operations.

Three and Six Months Ended December 31, 2003 Compared to the Three and Six Months Ended December 31, 2002

Revenues. Total revenues for the three months ended December 31, 2003 increased $2.2 million, or 38%, to $7.9 million, compared to $5.7 million for the same period in 2002. Total revenues for the six months ended December 31, 2003 increased $2.7 million, or 25% to $13.7 million, compared to $11.0 million for the same period in 2002. Our revenues include product sales, service revenue, and commission revenue. The gross margin percentage decreased to 44% for the three months ended December 31, 2003, compared to 46% in the same period in 2002, and decreased to 42% for the six months ended December 31, 2003 compared to 46% in the same period in 2002.

Product sales for the three months ended December 31, 2003 increased $2.2 million, or 76%, to $5.2 million, compared to $2.9 million in the same period in 2002. Product sales for the six months ended December 31, 2003 increased $2.6 million, or 43%, to $8.7 million, compared to $ 6.1 million in the same period in 2002. Our product sales have increased due to increased sales volume caused by several factors. During fiscal year 2004, demand for Autodesk products have increased, caused in part by product upgrades required by our customers in order to continue to receive product maintenance services and an overall improvement in economic conditions. Also, during the month of October 2003, we reduced prices when Autodesk reduced the price we pay for products by 20% under a short-term promotional program. This price reduction, along with additional strategic discounts to certain customers throughout the three months ended December 31, 2003, have contributed to our increase in product sales.

Service revenue for the three months ended December 31, 2003 decreased $413,000, or 24%, to $1.3 million, compared to $1.7 million in the same period in 2002. For the six months ended December 31, 2003, service revenue decreased $277,000, or 9% to $2.8 million, compared to $3.0 million for the same period in 2002. These decreases in service revenue are the result of a change in our strategy in fiscal year 2004 to focus on developing PLM products and services, as discussed in the Overview. In June 2003 and August 2003, we also closed five offices that contributed to a decline in our service revenue.

Commission revenue for the three months ended December 31, 2003 increased $359,000, or 35%, to $1.4 million, compared to $1.0 million in the same period in 2002. For the six months ended December 31, 2003, commission revenue increased $357,000, or 19%, to $2.3 million, compared to $1.9 million for the same period in 2002. The increase in commission revenues is consistent with the revenue increases we experienced in product sales resulting from an improved economy, Autodesk’s promotional activities, and demand caused by customers upgrading their software.

Cost of Revenues and Expenses

Costs of Revenue. Cost of product sales for three months ended December 31, 2003 increased $1.8 million or 89%, to $3.9 million, compared to $2.1 million for the same period in 2002. For the six months ended December 31, 2003, cost of product sales increased $2.3 million, or 55%, to $6.4 million, compared to $4.1 million for the same period in 2002. Although our revenues have increased in fiscal year 2004, our product margins have declined from 31.7% for the six months ended December 31, 2002 to 26.2% for the six months ended December 31, 2003. Our product margins were 24.1% for the three months ended December 31, 2003, compared to 29.4% for the comparative quarter in fiscal year 2003. Our product margins have been decreasing as a result of several factors. Our major vendor, Autodesk, changed our cooperative advertising program to increase the price we pay for Autodesk products, while increasing the payments we receive from Autodesk to support our marketing and advertising efforts. In addition, we have strategically reduced the price we charge our customers for certain products to obtain additional sales volume. We expect that our product margins for the remainder of fiscal year 2004 will stabilize at approximately 25%.

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Cost of service revenue for three months ended December 31, 2003 decreased $477,000, or 49%, to $494,000 compared to $1.0 million for the same period in 2002. For the six months ended December 31, 2003, cost of service revenue decreased $257,000, or 14%, to $1.6 million, compared to $1.8 million for the same period in 2002. Our service revenue margins in the second quarter of fiscal year 2004 improved from 42.8% in 2003 to 61.5%. We attribute this improvement to our improved utilization of our personnel assigned to service activities. To improve our utilization, we reassigned service personnel to other activities, primarily related to developing our capabilities to distribute PLM products and services under our arrangement with Dassault Systemes, as discussed in the Overview. Payroll expenses related to these personnel of approximately $123,000 were included in selling, general and administrative expenses for the quarter ended December 31, 2003.

Selling, General and Administrative Expense. Selling, general and administrative expense for the three months ended December 31, 2003 increased $337,000, or 11.7%, to $3.2 million, compared to $2.9 million for the same period in 2002. We attribute this increase in selling, general and administrative expenses primarily to increases in insurance expense, compensation expense related to the reassignment of personnel previously included in cost of service revenue as discussed above, and bonuses accrued for certain employees under a second quarter bonus program. Selling, general and administrative expense for the six months ended December 31, 2003 decreased $49,000, or 1%, to $5.7 million, compared to $5.8 million for the same period in 2002. Although selling, general and administrative expense increased in the second quarter of 2004, we experienced a net decline in selling, general and administrative expense for the first six months of 2004 as a result of our restructuring efforts in the fourth quarter of 2003, as discussed more fully in our 2003 Annual Report on Form 10-K. We expect that out selling, general and administrative expense for the last six months of 2004 will approximate $5.7 million.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended December 31, 2003 decreased $34,000 or 29%, to $82,000, compared to $116,000 for the same period in 2002. Depreciation and amortization expense for the six months ended December 31, 2003 decreased $81,000, or 35%, to $150,000, compared to $230,000 for the same period in 2002. Depreciation and amortization of property and equipment decreased as a result of reduced capital expenditures for computer equipment and software, an increase in the number of fully depreciated assets compared to the prior period and reductions is depreciable assets from closed offices.

Other Income (Expense). Other income (expense) for the three months ended December 31, 2003 decreased $41,000, or 47%, to $(128,000), compared to $(87,000) for the same period in 2002. For the six months ended December 31, 2003, other income (expense) decreased $2.0 million, or 113%, to $(234,000), compared to $1.8 million for the same period in 2002. Included in other income for the six month period ended December 31, 2002 was a $2.0 million gain from the extinguishment of debt resulting from the payment to a significant supplier of $1.0 million in full satisfaction of a $3.0 million loan made to us by that supplier in 1999. We expect that our interest expense will increase slightly for the remainder of 2004, caused by an increase in our outstanding borrowings. As discussed more fully in Note 4 to the consolidated financial statements, we have borrowed $1.5 million with interest at 6% per annum to assist us with working capital needs, $500,000 of which was received in February 2004.

Income Tax Expense. Income tax expense for the six months ended December 31, 2003 decreased $382,000, or 95%, to $21,000, compared to $403,000 for the same period in 2002. In August 2002, we realized a $2.0 million taxable gain from the extinguishment of certain debt (described above), which resulted in us recording a net deferred tax asset of $373,000 at June 30, 2002. In fiscal year 2003, we recorded deferred income tax expense of $373,000 related to the estimated reduction in deferred tax assets in 2003. Our income tax expense in 2004 is expected to relate solely to state income tax expense, which we expect to approximate $40,000 for the full year.

Liquidity and Capital Resources

Historically, we have financed our operations and met our capital expenditure requirements primarily through cash flows provided by operations and borrowings under short-term and long-term debt arrangements. Because we have incurred significant cumulative losses since 1999, we have depleted our capital base and have relied upon borrowings under our bank line of credit and from our shareholders to satisfy our operating cash needs. Our financing activities resulted in negative working capital of $3.8

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million at June 30, 2003 and $3.5 million at December 31, 2003. Our outstanding debt totaled $2.9 million at June 30, 2003 and $3.9 million at December 31, 2003.

During the first six months of fiscal year 2004, we used $1.4 million of cash in operations. This use of cash was caused by losses before non-cash charges of about $184,000 and uses of working capital of about $1.2 million. Our working capital needs increased as a result of increases in accounts receivable caused by increasing revenues in the second quarter. Our revenues increased about $1.6 million in the first six months of 2004 compared to the last six months of 2003, which led to a corresponding increase in our accounts receivable of about $537,000 since June 30, 2003. In addition, we reduced our accounts payable and accrued expenses by about $417,000 since June 30, 2003, principally because in 2004 we settled and paid certain expenses related to our fiscal year 2003 merger with PlanetCad. We financed these operating cash needs by borrowing $1.0 million from Dassault Systemes and selling preferred stock and warrants to generate $390,000 of cash proceeds. We purchase over 90% of the product we sell from Autodesk, which provides us with the ability to purchase up to $3.0 million of inventory under 60 to 90 day payment terms. Historically, we have been able to manage our average days sales outstanding in a range from 50 to 60 days. Our customary collection terms range from 30 to 60 days for all of our customers.

Our deficiency of working capital is in large part caused by the classification of our line of credit as a current liability due to its terms. Our line of credit with a bank allows us to borrow up to $2.0 million (on November 24, 2003, this line of credit was temporarily increased to $2.5 million), limited to 75% of eligible accounts receivable. The line-of-credit expires in three years and is payable within 60 days of demand. Despite the existence of the 60-day demand provision on this line-of-credit, we do not believe it is likely that the bank will exercise the demand provisions of the agreement. In the event that the bank would do so, we believe that other lenders would provide us with a line of credit with similar terms so long as our financial position and results of operations had not significantly declined.

We also have outstanding borrowings at December 31, 2003 of about $885,000, payable to a director and shareholder, that mature on July 1, 2004. If necessary, we expect that we will be able to refinance the repayment of this note over an extended period. On July 22, 2003, we entered into a loan agreement with Dassault Systemes to borrow up to $1.5 million for working capital purposes. The loan was received in two payments, with the initial funding of $1.0 million occurring on July 25, 2003 and the remaining $500,000 provided on February 6, 2004. The loan agreement requires repayment of principal plus interest at 6% per annum in thirty-five equal quarterly installments beginning in January 2005. We must meet certain financial and non-financial covenants in connection with this agreement.

We expect to generate income from our operations before non-cash charges for the remaining six months of 2004. Our working capital needs are expected to stabilize, and any working capital needs should be met from the $500,000 of borrowings that we made in February 2004 and from our available cash resources and line of credit. We do not have any material commitments to acquire property and equipment, and our capital equipment needs for the next twelve months are expected to be insignificant. Because of our reliance on Autodesk to supply us with the products that we sell, and due to the concentration of our revenues from the sale of Autodesk products, we cannot readily predict our ability to generate sufficient cash from our operations to meet our obligations beyond July 1, 2004. In the event that our operating results do not improve and we are unable to generate cash flows from our operations in the near term, then we may be unable to meet our existing obligations in the normal course of business and expand our operations to allow for continued long-term improvement in operating results.

Below is a summary of our contractual obligations and commitments at December 31, 2003:

	Payments due by Fiscal Period
Contractual Obligations	Total		2004		2005		2006		2007		2008 and thereafter
Long-term debt and line-of-credit	$	3,818,790	$	1,734,620	$	968,812	$	286,786	$	114,286	$	714,286
Operating leases		2,831,144		500,269		679,006		602,263		483,980		565,626
Total obligations	$	6,649,934	$	2,234,889	$	1,647,818	$	889,049	$	598,266	$	1,279,912

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ITEM  3. 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 December 31, 2003, approximately 44.1% 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 changes in the 2003 average interest rate under these borrowings, it is estimated that the Company’s 2003 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.

ITEM  4. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to management in a timely manner. The Company’s Chief Executive Officer and Interim Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report, and believe that the system is operating effectively to ensure appropriate disclosure. There have been no changes in the Company’s internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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Part II. OTHER INFORMATION

Item  1. Legal Proceedings

On October 15, 2003, we were sued by Inter-Tel Leasing, Inc. in the District Court in Harris County, Texas (Case No. 03-57866). The suit claims that we defaulted on the lease of equipment from Inter-Tel and demands $149,617 for the rental of the equipment, immediate possession of the leased property, and attorney fees estimated at $29,923.

We filed an answer, a verified denial and an affirmative defense on December 5, 2003 and have demanded that Inter-Tel dismiss the claim against Avatech because Inter-Tel has named the wrong party in this action. Although Spatial Technology, Inc. (“Spatial Technology”), a predecessor of Avatech, on June 2, 2000, entered into a Lease Agreement with Inter-Tel, Inter-Tel agreed on September 9, 2000 to Spatial Technology’s assignment of the Lease Agreement to Spatial Components, LLC (“Spatial Components”). Spatial Components was a wholly owned subsidiary of Spatial Technology, and was sold to Dassault Systemes Corporation in November of 2000. Spatial Components has since changed its name to Spatial Corp.

Inter-Tel is investigating adding Spatial Corp. as a defendant, but has not yet taken any action. If Inter-Tel does not dismiss the suit against us, we may file a cross-claim against Spatial Corp. We believe that we have meritorious defenses to this claim, but we are unable to assess our potential liability at this time.

Item 2. Changes in Securities

Between November 19, 2003 and December 31, 2003, we issued 1,297,537 shares of our Series D Convertible Preferred Stock in exchange for a prepayment of $97,831 towards the principal of a pre-existing indebtedness to the purchasing stockholder, the surrender of 172,008 outstanding shares of Series C Convertible Preferred Stock, and aggregate cash proceeds of $390,000 to sixteen “accredited investors” as defined by Rule 501 of the Securities Act and one non-accredited investor who was advised by a “purchaser representative” as defined by Rule 501 of the Securities Act. Our Series D Preferred Stock is convertible into common stock at any time beginning 120 days after the date of purchase and must be converted if our shares trade for more than $2.25 per share for sixty consecutive trading days on the NASDAQ national market system. We must redeem this stock under certain circumstances involving a business combination approved by the Board of Directors. These investors also received warrants to purchase in aggregate 1,730,043 shares of our common stock at $0.45 per share, which expire one year from the purchase date of the accompanying Series D Convertible Preferred Stock.

On January 1, 2004, a consolidated subsidiary issued 10% subordinated notes for an aggregate total of $135,000 due on July 1, 2005 to three “accredited investors” in exchange for these investors’ agreement to cancel existing 10% subordinated notes for an aggregate total of $150,000 due on December 31, 2003 and cash totaling $15,000 in aggregate. Two of these 10% notes require an interim payment of $15,000 in aggregate, due on July 1, 2004. Each of these investors also received warrants to purchase 15,000 shares of our common stock at $0.21 per share, which expire on July 1, 2005.

Also on January 1, 2004, the same subsidiary issued 12% subordinated notes for an aggregate total of $63,750 due on July 1, 2005 to three “accredited investors” in exchange for those investors’ agreement to cancel existing 12% subordinated notes for an aggregate total of $75,000 due on December 31, 2003 and cash in the aggregate amount of $11,250. These 12% notes require an interim payment of $11,250 in aggregate, due on July 1, 2004.

Because these issuances were to “accredited investors” within the meaning of Rule 501 under the Securities Act and a non-accredited investor advised by a purchaser representative, within the meaning of Rule 501 under the Securities Act, the offer and sale of these securities were exempt from registration under Rule 506 of the Securities Act.

Item 3. Defaults Upon Senior Securities

None

25

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders was held on October 30, 2003. Of the 9,167,874 shares entitled to vote at the meeting, 5,781,638 voted. The following matters were voted on at the meeting:

	Number of Votes:
Proposal:	In Favor	Against	Abstained
To elect the following persons to the Board of Directors:
W. James Hindman	5,610,514	71,556	99,568
Henry D. Felton	5,608,481	71,556	101,601
George Cox	5,610,514	71,556	99,568
Garnett Y. Clark, Jr.	5,610,514	71,556	99,568
Eugene J. Fischer	5,610,504	71,556	99,578
Donald R. Walsh	5,609,909	71,556	100,173
To ratify the Company’s adoption of its Restricted Stock Award Plan.	4,951,234	149,666	680,738
To ratify the Company’s adoption of its Employee Stock Purchase Plan	5,039,395	61,505	680,738

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits required to be filed by Item 601 of Regulation S-K

Exhibit No.	Description of Exhibit
2.1	Agreement and Plan of Merger a
3.1	Restated Certificate of Incorporation b
3.2	First Amendment to Restated Certificate of Incorporation b
3.3	Reverse Split Amendment to Restated Certificate of Incorporation a
3.4	Amendment of PlanetCAD’s Certificate of Incorporation to change the name of PlanetCAD, Inc. to Avatech Solutions, Inc. a
3.5	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock c
3.6	Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock d
3.7	Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock e
3.8	Certificate of Amendment to Certificate of Designation of Series C Convertible Preferred Stock*
3.9	Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock*
3.10	Certificate of Elimination of Series A Junior Participating Preferred Stock*
3.11	Certificate of Elimination of Series C Convertible Preferred Stock*
3.12	Certificate of Amendment to Certificate of Designation of Series D Convertible Preferred Stock*
3.13	By-Laws b
10.01	Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and Autodesk, Inc. effective as of February 1, 2003 e
10.02	Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and Autodesk, Inc. effective as of February 1, 2004*
10.03	Loan Agreement by and between Avatech Solutions Subsidiary, Inc. and a Strategic Partner dated July 22, as amended (portions of this exhibit have been omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to a request for confidential treatment) f

26

10.04	Security Agreement by and between Avatech Solutions Subsidiary, Inc. and a Strategic Partner dated July 22, 2003 (portions of this exhibit have been omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to a request for confidential treatment) f
10.05	Demand Promissory Note by and between Avatech Solutions Subsidiary, Inc. and Key Bank and Trust in the amount of $2,000,000 dated September 11, 2003 f
10.06	Loan and Security Agreement by and between Avatech Solutions Subsidiary, Inc. and Key Bank and Trust dated September 11, 2003 f
10.07	Master Lease Agreement by and between Allstate Leasing, Inc. and Avatech Solutions, Inc. dated July 17, 2001 a
10.08	Form of Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, Inc. in favor of W. James Hindman dated May 28, 2003 f
10.09	Warrants to purchase up to 32,400 shares of Common Stock issued by Avatech to W. James Hindman dated May 28, 2003 f
10.10	Affidavit and Discharge of Indebtedness by W. James Hindman f
10.11	Form of 10% Subordinated Note with attached Warrant issued by Avatech Solutions, Inc. to certain note holders in connection with Avatech Solutions Subsidiary, Inc.’s 1998 $2,600,000 Subordinated Debt Offering, dated January 1, 2004*
10.12	Form of 12 % Subordinated Note issued by Avatech Solutions, Inc. to certain note holders in connection with Avatech Solutions Subsidiary, Inc.’s 1998 $2,600,000 Subordinated Debt Offering dated January 1, 2004*
10.13	Form of Purchase Agreement for Series D Convertible Preferred Stock*
10.14	2002 Stock Option Plan a
10.15	Restricted Stock Award Plan e
10.16	Employment Agreement by and between Debra Keith and Avatech Solutions, Inc. dated as of April 4, 2003 f
10.17	Employment Agreement by and between Eric L. Pratt and Avatech Solutions, Inc. dated April 15, 2003 g
10.18	Employment Agreement by and between Scott N. Fischer and Avatech Solutions, Inc. dated as of March 17, 2003 f
10.19	Consulting Agreement by and between V. Joel Nicholson and Avatech Solutions, Inc. effective as of June 1, 2003 g
10.20	Employment Agreement by and between Donald R. “Scotty” Walsh and Avatech Solutions, Inc. dated July 1, 2003 f
10.21	Letter Agreement by and between Henry D. Felton and Avatech Solutions, Inc. dated August 21, 2003 f
31.1	Certification of Donald R. “Scotty” Walsh, Chief Executive Officer*
31.2	Certification of Beth O. MacLaughlin, Chief Financial Officer*
32.1	Section 1350 Certifications*

* Filed herewith

a. Incorporated by reference to our Registration Statement on form S-4 filed on May 30, 2002, File No. 333-89386.

b. Incorporated by reference to our Registration Statement on form SB-2 filed on November 21, 2000, File No. 333-50426.

c. Incorporated by reference to our Registration Statement on form 8-A filed on March 11, 2002, File No. 001-31265.

d. Incorporated by reference to our Current Report on form 8-K, filed on May 28, 2002, File No. 001-31265.

27

e. Incorporated by reference to our Amended Registration Statement on form S-1, filed on April 11, 2003, File No. 333-104035.

f. Incorporated by reference to our Annual Report on form 10-K, filed on October 3, 2003, File No. 001-31265.

g. Incorporated by reference to our Amended Registration Statement on form S-1, filed on June 4, 2003, File No. 333-104035.

(b) Reports on Form 8-K

Registrant filed Current Reports on Form 8-K during the quarter for which this report is filed:

On November 14, 2003, we filed a Report on Form 8-K to announce the filing of our Quarterly Report on Form 10-Q for the three-month period ending September 30, 2003.

28

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
Date:	February 13, 2004	By	/s/ Donald R. “Scotty” Walsh
			Donald R. “Scotty” Walsh
			Chief Executive Officer

Date:	February 13, 2004	By	/s/ Beth MacLaughlin
			Beth MacLaughlin
			Interim Chief Financial Officer (principal financial and accounting officer)

29

EX-3.8

EXHIBIT 3.8

CERTIFICATE OF AMENDMENT TO

CERTIFICATE OF DESIGNATIONS

SERIES C CONVERTIBLE PREFERRED STOCK

($0.01 Par Value)

of

AVATECH SOLUTIONS, INC.

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

Avatech Solutions, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:

FIRST: That pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation adopted the following resolution, reducing the number of shares of the Corporation’s Series C Convertible Preferred Stock, par value $0.01, to two hundred and eighty-eight thousand, two hundred and eighty-two (288,282):

RESOLVED: That pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of Article SIXTH, Section 2 of the Corporation’s Amended and Restated Certificate of Incorporation, the number of shares designated as Series C Convertible Preferred Stock shall be reduced to two hundred and eighty-eight thousand, two hundred and eighty-two (288,282), which reduction does not change any of the voting powers, preferences and relative, participating, optional and other special rights of the shares of the Series C Convertible Preferred Stock, and the Chief Executive Officer and the Secretary of the Corporation be, and they hereby are, authorized and directed, in the name and on behalf of the Corporation, to file and amendment to the Certificate of Designations in accordance with the provisions of the Delaware General Corporation Law and to take such actions as they may deem necessary or appropriate to carry out the intent of the foregoing.

SECOND: That the aforesaid resolution was duly and validly adopted in accordance with the applicable provisions of Section 151 of the General Corporation Law of the State of Delaware and the Amended and Restated Certificate of Incorporation and the By-Laws of the Corporation.

THIRD: That the aforesaid amendment shall become effective upon the filing of this Certificate with the office of the Secretary of State of the State of Delaware.

IN WITNESS WHEREOF, said Avatech Solutions, Inc. has caused this Certificate to be executed and attested, this 18th day of November, 2003.

AVATECH SOLUTIONS, INC.
By:	/s/
	Donald R. Walsh Chief Executive Officer

Attest:

/s/

Beth O. MacLaughlin, Secretary

EX-3.9

EXHIBIT 3.9

CERTIFICATE OF DESIGNATIONS

SERIES D CONVERTIBLE PREFERRED STOCK

($0.01 Par Value)

of

AVATECH SOLUTIONS, INC.

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

Avatech Solutions, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:

FIRST: That pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation adopted the following resolutions creating a series of Nine Hundred and Nine Thousand, Two Hundred and Fifty-Five (909,255) shares of Preferred Stock, $0.01 par value per share, designated as Series D Convertible Preferred Stock:

RESOLVED: That, pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of Article SIXTH, Section 2 of the Corporation’s Amended and Restated Certificate of Incorporation, a series of Preferred Stock of the Corporation (the “Series D Convertible Preferred Stock”) be, and it hereby is, created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of the Series D Convertible Preferred Stock, and the qualifications, limitations or restrictions thereof, shall be in substantially the form set forth in Exhibit A attached hereto and incorporated herein by reference, and the Original Series D Issuance Price of such shares shall be two times the last price quoted on the OTC Bulletin Board for the company’s Common Stock, on the last business day prior to the first purchase of the Series D Convertible Preferred Stock, and the Conversion Price per share shall initially be one-half of the Original Series D Issuance Price.

RESOLVED: That attached to and issued with the Series D Convertible Preferred

Stock, shall be a stock purchase warrant to purchase, for 150% of the Conversion Price of the Series D Convertible Preferred Stock (the “Warrant Price”), the number of shares of common stock of the Corporation, par value $0.01, as is obtained by multiplying the Original Series D Issuance Price times the number of shares of Series D Preferred Stock issued in conjunction with such warrant, and dividing the result by the Warrant Price, and that such warrants shall expire twelve months after the date such Series D Preferred Stock is purchased.

RESOLVED: That the Chief Executive Officer and the Secretary of the Corporation be, and they hereby are, authorized and directed, in the name and on behalf of the Corporation, to file the Certificate of Designations in accordance with the provisions of the Delaware General Corporation Law and to take such actions as they may deem necessary or appropriate to carry out the intent of the foregoing resolution.

SECOND: That the aforesaid resolutions were duly and validly adopted in accordance with the applicable provisions of Section 151 of the General Corporation Law of the State of Delaware and the Amended and Restated Certificate of Incorporation and the By-Laws of the Corporation.

THIRD: That the aforesaid designations shall become effective upon the filing of this Certificate with the office of the Secretary of State of the State of Delaware.

IN WITNESS WHEREOF, said Avatech Solutions, Inc. has caused this Certificate to be executed and attested, this 18th day of November, 2003.

AVATECH SOLUTIONS, INC.
By:	/s/
	Donald R. Walsh Chief Executive Officer

Attest:
	/s/
	Beth O. MacLaughlin, Secretary

- 2 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

1. Designation. The Corporation hereby designates a single series of Preferred Stock, the designation of which shall be “Series D Convertible Preferred Stock,” $0.01 par value per share (hereinafter called the “Series D Convertible Preferred Stock”), and the number of authorized shares constituting the Series D Convertible Preferred Stock shall be Nine Hundred and nine thousand, two hundred and fifty-five (909,255) shares.

2. Certain Definitions.

(a) “Board” shall mean the Board of Directors of the Corporation.

(b) “Common Stock” shall mean the Common Stock, $.01 par value, of the Corporation.

(c) “Corporation” shall mean Avatech Solutions, Inc., a Delaware corporation.

(d) “Liquidity Event” shall mean (i) a sale of all or substantially all of the assets or Common Stock of the Corporation, (ii) a merger or consolidation of the Corporation with any other entity that results in the existing holders of Common Stock (on a fully diluted basis) owning less than 50% of the combined entities (on a fully diluted basis), or (iii) a liquidation, dissolution or winding-up of the Corporation.

(e) “Original Issuance Date” for any share of the Series D Convertible Preferred Stock shall mean the date on which such share of the Series D Convertible Preferred Stock was originally issued.

(f) “Original Series D Issuance Price” shall mean two times the last price quoted on the OTC Bulletin Board for the company’s Common Stock, on the last business day prior to the first purchase of the Series D Convertible Preferred Stock, per share of Series D Convertible Preferred Stock, as adjusted to reflect any stock splits, stock dividends or other recapitalizations involving the Series D Convertible Preferred Stock.

(g) “Preferred Stock” shall mean any series of preferred stock of the Corporation.

3. Voting. Except as may be otherwise provided in these terms of the Series D Convertible Preferred Stock or by law, the Series D Convertible Preferred Stock shall vote together with all other classes and series of stock of the Corporation as a single class on all actions to be taken by the stockholders of the Corporation. Each share of Series D Convertible Preferred Stock shall entitle the holder thereof to one vote on each such action per share of Common Stock into which each share of Series D Convertible Preferred Stock is then convertible.

4. Dividends. The holders of the Series D Convertible Preferred Stock shall be entitled to receive, out of funds legally available therefor, quarterly dividends when, as and if declared by the Board, at the rate of ten percent (10.0%) per annum of the Original Series D

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

Issuance Price from the Original Issuance Date. Such dividends are (i) prior and in preference to any declaration or payment of any dividend or other distribution on Common Stock (other than a dividend payable in shares of Common Stock) or on any other class or series of capital stock ranking junior to the Series D Convertible Preferred Stock with respect to dividends, (ii) pari passu with any other shares of Preferred Stock entitled to participate pari passu with the Series D Convertible Preferred Stock with respect to dividends and (iii) subject to the rights of any series of Preferred Stock that ranks, with respect to dividends, senior to the Series D Convertible Preferred Stock. Except as otherwise provided in Section 7 hereof, such dividends shall accrue on each share of Series D Convertible Preferred Stock on a daily basis from the Original Issuance Date whether or not earned or declared and whether or not there shall be net assets or profits of the Corporation legally available for the payment of such dividends. Such dividends shall be cumulative, so that if such dividends with respect to any previous or current dividend period at the rate provided for herein have not been paid on all shares of Series D Convertible Preferred Stock at the time outstanding, the deficiency shall be fully paid on such shares before any distribution shall be paid on, or declared and set apart for, Common Stock or any other class or series of capital stock ranking junior to the Series D Convertible Preferred Stock with respect to dividends. All accrued but unpaid dividends shall be paid, in cash, at or before any Liquidity Event.

5. Liquidation.

(a) Except as otherwise provided in Section 7 hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, after payment or provision for payment of the debts and other liabilities and obligations of the Corporation, the holders of Series D Convertible Preferred Stock shall be entitled to receive for each share of Series D Convertible Preferred Stock, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Common Stock, and subject to the rights of any series of Preferred Stock that ranks, on liquidation, senior to the Series D Convertible Preferred Stock (“Senior Securities”), but pari passu with any other shares of Preferred Stock under the terms of which holders thereof shall be entitled to participate pari passu with the Series D Convertible Preferred Stock upon liquidation, an amount equal to the Original Series D Issuance Price, plus an amount equal to all accumulated but unpaid dividends thereon to and including the date full payment is tendered to the holders of Series D Convertible Preferred Stock (collectively the “Series D Preference Amount”). If upon the occurrence of such event the assets and funds thus distributed among the holders of Series D Convertible Preferred Stock and any other shares of Preferred Stock entitled to participate pari passu with the Series D Convertible Preferred Stock upon liquidation are insufficient to permit the payment to such holders of their full preferential amount described herein, then the entire assets and funds of the Corporation legally available for distribution, after satisfaction of the rights of any Senior Securities, shall be distributed ratably among the holders of the then outstanding Series D Convertible Preferred Stock and any other shares of Preferred Stock entitled to participate pari passu with the Series D Convertible Preferred Stock, upon liquidation, in proportion to the preferential amount that each such holder is otherwise entitled to receive.

(b) For purposes of this Section 5, a liquidation, dissolution or winding up of the Corporation shall include the Corporation’s sale of all or substantially all of its assets. The

- 2 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

Corporation shall not consummate any transaction deemed to constitute a liquidation, dissolution or winding up of the affairs of the Corporation under this subsection (b) until the provisions of this Section 5 have been satisfied.

6. Protective Provisions. So long as any shares of Series D Convertible Preferred Stock remain outstanding, the Corporation shall not, without the vote or written consent of the holders of at least a majority of the then outstanding shares of Series D Convertible Preferred Stock, voting as a single class:

(a) amend the Certificate of Incorporation or the bylaws of the Corporation in any manner that would alter, change or repeal any of the designations, powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof, of the Series D Convertible Preferred Stock, or

(b) effect any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, including the sale of all or substantially all of its assets.

7. Conversion. The holders of shares of Series D Convertible Preferred Stock shall have right, at the times and in the amounts specified in this Section 7, to convert shares of Series D Convertible Preferred Stock into such whole number of shares of Common Stock as is equal to the number of fully paid and non-assessable shares of Common Stock which results from multiplying the number of shares of Series D Convertible Preferred Stock to be converted by the Conversion Ratio (as hereinafter defined) in effect at the time of conversion:

(a) Optional Conversion. Holders of shares of Series D Convertible Preferred Stock may convert any number, or all, of their shares of Series D Convertible Preferred Stock at any time from and after 120 days following the Original Issuance Date.

(b) Mandatory Conversion. Holders of shares of Series D Convertible Preferred Stock must convert all of their shares of Series D Convertible Preferred Stock upon the Corporation’s common stock being listed on the NASDAQ National Market System, and the Corporation’s common stock closing at or in excess of $2.25 per share for 60 consecutive trading days in such market.

(c) Conversion Mechanics.

(i) In the case of a conversion pursuant to Section 7(b) above, the Corporation shall give the holders of the Series D Convertible Preferred Stock written notice of a Mandatory Conversion, as soon as practicable. As soon as practicable after (A) the occurrence of a Mandatory Conversion, or (B) after the Corporation receives written notice of an Optional Conversion, the Corporation shall send written instructions to the holders of the shares of Series D Convertible Preferred Stock being converted (the “Converting Shares”) regarding surrender of certificates representing Converting Shares, and the holders of the Converting Shares shall surrender the certificate(s) evidencing the Converting Shares, which were automatically converted at the principal office of the Corporation (or such other office or agency of the

- 3 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

Corporation as the Corporation may designate by notice in writing to the holders of such class of capital stock) at any time during its usual business hours, together with written notice by the holder of the Converting Shares, giving the name(s) (with addresses) and denominations in which the certificate(s) evidencing the shares of Common Stock shall be issued and instructions for the delivery thereof (the “Notice of Recipients of Common Stock”). If the person(s) named in the Notice of Recipients of Common Stock are not the same as the names of the registered holder of the Converting Shares, the notice provided by the holder of the Converting Shares to the Corporation shall include a duly executed written instrument or instruments of transfer in a form which is reasonably satisfactory to the Corporation. As soon as practicable after receipt by the Corporation of the Notice of Recipients of Common Stock, together with the certificate(s) evidencing the shares of Series D Convertible Preferred Stock which were automatically converted (and written instruments of transfer, if necessary), the Corporation shall be obligated to, and shall, issue and deliver in accordance with such instructions the certificate(s) evidencing the Common Stock issuable upon such conversion.

(ii) All shares of Series D Convertible Preferred Stock which are converted pursuant to this Section 7 as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including rights, if any, to receive notices and to vote, shall immediately cease and terminate as of the effective date of conversion, (or, in the case of a conversion pursuant to a Liquidating Event, as of the closing of the Liquidating Event); except only that the rights of the holders of Series D Convertible Preferred Stock which are converted pursuant to this Section 7 to receive shares of Common Stock in exchange therefor and payment of any accrued and unpaid dividends thereon shall survive the effective date of conversion, or the closing of a Liquidating Event, as applicable.

(iii) Upon any conversion of Series D Convertible Preferred Stock pursuant to this Section 7, no adjustment to the Conversion Price shall be made for any accrued but unpaid dividends on the Series D Convertible Preferred Stock converted or to be converted, which dividends shall be paid in accordance with clause (ii) above.

(iv) Upon the issuance of the Common Stock in accordance with this Section 7, such shares shall be deemed to be duly authorized, validly issued, fully paid and non-assessable.

(d) Conversion Ratio. The “Conversion Ratio” as used in this Section 7 is the Series D Preference Amount divided by the Conversion Price (as defined below) in effect from time to time. The “Conversion Price” per share shall initially be one-half of the Original Series D Issuance Price, and shall be subject to adjustment as hereinafter provided:

(e) Adjustment for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the Original Issuance Date effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock, the applicable Conversion Price then in effect immediately before that subdivision shall be proportionately decreased; conversely, if the Corporation shall at any time or from time to time after the Original Issuance Date effect a combination of the outstanding shares of Common Stock into a smaller number of shares of Common Stock, the applicable Conversion Price then in effect

- 4 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

immediately before the combination shall be proportionately increased. Any adjustment under this Section 7(e) shall become effective at the time the subdivision or combination becomes effective.

(f) Adjustment for Certain Dividends and Distributions. In the event the Corporation at any time or from time to time after the Original Issuance Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the applicable Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the applicable Conversion Price then in effect by a fraction;

(i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or at the close of business on such record date; and

(ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or at the close of business on such record date, plus the number of shares of Common Stock issuable in payment of such dividend or distribution;

provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the applicable Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 7(e) as of the time of actual payment of such dividends or distributions.

(g) Adjustment for Reclassification, Exchange or Substitution. If the Common Stock shall be changed into or exchanged for the same or different number of shares of any class or classes of stock of the Corporation, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares of Common Stock provided for in Section 7(e)), then and in each such event the holder of each share of Series D Convertible Preferred Stock shall have the right thereafter to convert such share into the kind and amounts of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the numbers of shares of Common Stock into which such shares of Series D Convertible Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof.

(h) Adjustments to Conversion Price for Certain Diluting Issues.

(i) Special Definitions. For purposes of this Section 7(h), the following definitions shall apply:

(1) “Additional Common Stock” shall mean all Common Stock issued (or, pursuant to Section 7(h)(iii) below, deemed to be issued) by the Corporation after the Original Issue Date, other than Common Stock issued or issuable:

(A) as a dividend or distribution on the Series D Convertible Preferred Stock;

- 5 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

(B) shares of Common Stock issued upon a subdivision or combination of shares of Common Stock as provided in Section 7(e) above or as a dividend as provided in Section 7(f) above or securities issued pursuant to a recapitalization or other event specified in Section 7(g) above;

(C) shares of Common Stock as compensation to employees, consultants, officers or directors of the Corporation pursuant to stock option, restricted stock, or other equity compensation plans or agreements, as approved by the Board;

(D) shares of Common Stock issued or issuable in a registered public offering;

(E) shares of Common Stock or instruments convertible or exercisable into shares of Common Stock issued to a financial institution in connection with a credit facility or other debt financing, as approved by the Board; and

(F) shares of Common Stock or instruments convertible or exercisable into shares of Common Stock of the Corporation issued in connection with a merger, consolidation, acquisition or similar business combination that has been approved by at least a majority of the then outstanding Series D Convertible Preferred Stock.

(2) “Convertible Securities” shall mean any evidence of indebtedness, shares or other securities, issued after the Original Issue Date, convertible into or exchangeable for Common Stock.

(3) “Options” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Common Stock or Convertible Securities.

(ii) Adjustment of Conversion Price Upon Issuance of Additional Common Stock. If the Corporation issues Additional Common Stock before conversion or redemption of the Series D Convertible Preferred Stock (including Additional Common Stock deemed to be issued pursuant to Section 7(h)(iii) below) for a consideration per share less than the Original Series D Issuance Price of any outstanding share of Series D Convertible Preferred Stock in effect on the date of and immediately prior to such issuance, then, in each such event, the Conversion Price of such share then in effect shall be reduced, concurrently with such issuance, to a price determined by multiplying such Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issuance plus (2) the number of shares of Common Stock which the aggregate

- 6 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

consideration received by the Corporation for the total number of Additional Common Stock so issued would purchase at such Conversion Price in effect immediately prior to such issuance, and (B) the denominator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issuance plus (2) the number of such Additional Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issuance shall be calculated as if any Convertible Securities had been fully converted into shares of Common Stock immediately prior to such issuance and all outstanding Options had been exercised.

(iii) Deemed Issuance of Additional Common Stock.

(1) Options and Convertible Securities. If the Corporation, at any time or from time to time after the Original Issuance Date, issues any Options or Convertible Securities, except as described in Section 7(h)(i)(1)(C), or fixes a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the Corporation shall be deemed to have issued Additional Common Stock as of the time of such issuance or, if such a record date has been fixed, as of the close of business on such record date, in the amount and for the consideration per share provided herein.

(A) Number of Additional Shares. The number of shares of Additional Common Stock deemed issued with respect to such Options or Convertible Securities shall be the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options and/or the conversion or exchange of such Convertible Securities.

(B) Consideration Per Share. The consideration per share received by the Corporation for Additional Common Stock deemed to have been issued pursuant to Options and Convertible Securities, shall be determined by dividing: (1) the total amount, if any, received or receivable by the Corporation as consideration for the issuance of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

(2) Adjustments. In any such case in which Additional Common Stock are deemed to be issued:

(A) no further adjustment in the Conversion Price shall be made upon (a) the subsequent issue of Convertible Securities or shares of Common Stock

- 7 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

upon the exercise of such Options or (b) the conversion or exchange of such Convertible Securities;

(B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any decrease in the consideration payable to the Corporation, or increase in the number of shares of Common Stock issuable upon the exercise, conversion or exchange thereof, then the Conversion Price computed upon the original issuance thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities;

(C) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, then the Conversion Price computed upon the original issuance thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities;

(D) if the conversion privilege or similar right represented by any such Convertible Securities shall expire or be cancelled or terminated without having been exercised, the Conversion Price as adjusted upon the original issuance of such Convertible Securities shall be readjusted to the Conversion Price that would have been in effect had an adjustment been made on the basis that the only Additional Common Stock deemed to be issued were the Additional Common Stock, if any, actually issued or sold on the exercise of such conversion or similar right with respect to such Convertible Securities, and such Additional Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation, whether or not converted, for issuing or selling the Convertible Securities; and

(E) no readjustment pursuant to clause 2 above shall have the effect of increasing the Conversion Price above the Conversion Price that would be in effect if such Option or Convertible Securities had not been issued.

(iv) Determination of Consideration. For purposes of this Section 7(h), the consideration received by the Corporation for the issuance of any Additional Common Stock shall:

(1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends;

- 8 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

(2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issuance, as determined in good faith by the Board; and

(3) if Additional Common Stock is issued together with other shares or securities or other assets of the Corporation for consideration that covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board.

(i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 7, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms of this Section 7 and furnish to each holder of Series D Convertible Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the consideration received or to be received by the Corporation for any Additional Common Stock issued or sold or deemed to have been issued or sold, (ii) the Conversion Price at the time in effect for the Series D Convertible Preferred Stock, and (iii) the number of shares of Common Stock and the type and amount, if any, or other property that at the time would be received upon conversion of the Series D Convertible Preferred Stock. Upon the written request of any holder of Series D Convertible Preferred Stock, the Corporation will as soon as reasonably practicable provide to such holder written statement of the Conversion Price at the time in effect for the Series D Convertible Preferred Stock and the number of shares of Common Stock which at the time would be received upon conversion of the Series D Convertible Preferred Stock.

(j) Payment of Taxes. The Corporation will pay all taxes and other governmental charges (other than taxes measured by the revenue or income of the holders of the Series D Convertible Preferred Stock) that may be imposed in respect to the issue or delivery of shares of Common Stock upon conversion of the shares of Series D Convertible Preferred Stock.

(k) Minimum Adjustment. No adjustment of the Conversion Price shall be made in an amount less than $.01 per share; provided, however, that any adjustments which are not required to be made as a result of the operation of this subsection shall be carried forward and shall be taken into account in any subsequent adjustment.

8. Reissue of Shares. Shares of Series D Convertible Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall not be cancelled, retired or eliminated from the shares which the Corporation is authorized to issue, and may be reissued as shares of Series D Convertible Preferred Stock or redesignated as part of another series of preferred stock

9. Exchange for Other Preferred Stock. If the Corporation issues shares of another series of Preferred Stock containing (a) a higher preference for dividends or (b) a lower Conversion Price than the Series D Convertible Preferred Stock, a holder of shares of Series D Convertible Preferred Stock may exchange all, but not less than all, of his shares for the number of shares of such new Preferred Stock that equal the largest whole number equal to or less than

- 9 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

the total amount paid by the holder for his Series D Convertible Preferred Stock divided by the purchase price per share of such new Preferred Stock. In order to exercise this right of exchange, the Purchaser must notify the Corporation in writing of his intent and must sign any agreement the Corporation reasonably requires to effect the exchange, including, but not limited to, any agreement relating to the registration of such stock with the SEC or any State.

10. Redemption. The Corporation shall redeem any outstanding shares of Series D Convertible Preferred concurrently with, or as soon as practicable after, the Corporation is merged with or consolidated into another corporation (“Business Combination”), provided that all of the following conditions are satisfied: (a) the Corporation’s Board of Directors has approved the Business Combination and, if required by Delaware law, has submitted the Business Combination to a vote of the Corporation’s shareholders, and the shareholders have approved the Business Combination, and (b) at the meeting at which the Corporation’s Board of Directors has approved the Business Combination, any director who holds, directly or indirectly, any shares of the Series D Convertible Preferred Stock shall not vote on the proposed Business Combination.

11. Notices. Unless otherwise specified, any notice required by the provisions of these designations shall be deemed given upon the earlier of the following events: (a) personal delivery to the party to be notified, (b) facsimile transmission to the party to be notified (with written or facsimile confirmation of receipt), (c) delivery by an overnight express courier service to the party to be notified (delivery, postage or freight charges prepaid), or (d) on the third business day following deposit in the United States Post Office (if sent by registered or certified mail, return receipt requested, with delivery, postage or freight charges prepaid), addressed in the case of notice to the holders of record of Series D Convertible Preferred Stock to each holder at such holder’s address appearing on the books of the Corporation and in the case of notice to the Corporation to the President at the principal executive offices of the Corporation.

12. Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series D Convertible Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this designation (as such designation may be amended from time to time) and in the Certificate of Incorporation of the Corporation.

13. Headings of Subdivisions. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof.

14. Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series D Convertible Preferred Stock and qualifications, limitations and restrictions thereof set forth in this designation (as such designation may be amended from time to time) is held invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series D Convertible Preferred Stock and qualifications, limitations and restrictions thereof set forth in this designation (as so amended) that can be given effect without the invalid, unlawful or unenforceable voting powers,

- 10 -

Exhibit A to Certificate of

Designations of Avatech Solutions, Inc.

preferences and relative, participating, optional and other special rights of Series D Convertible Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series D Convertible Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional, or other special rights of Series D Convertible Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein.

- 11 -

EX-3.10

EXHIBIT 3.10

CERTIFICATE OF ELIMINATION OF

SERIES A JUNIOR PARTICIPATING PREFERRED STOCK

($0.01 Par Value)

of

AVATECH SOLUTIONS, INC.

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

Avatech Solutions, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:

FIRST: That the Corporation did designate a series of preferred stock known as Series A Junior Participating Preferred Stock on March 11, 2002; and

SECOND: Pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation adopted the following resolution, eliminating the Corporation’s Series A Junior Participating Preferred Stock, par value $0.01, no such shares having been issued, no rights to purchase such shares remain outstanding, and none shall be issued subject to the certificate of designations previously filed with respect to the Series A Junior Participating Preferred Stock:

RESOLVED: That pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of Article SIXTH, Section 2 of the Corporation’s Amended and Restated Certificate of Incorporation, the number of shares designated as Series A Junior Participating Preferred Stock shall be reduced to zero (0), such shares having never been issued and all rights to purchase such shares having been terminated, and that the Chief Executive Officer and the Secretary of the Corporation be, and they hereby are, authorized and directed, in the name and on behalf of the Corporation, to file and amendment

to the Certificate of Designations of Series A Junior Participating Preferred Stock in substantially the form attached hereto as Exhibit A and in accordance with the provisions of the Delaware General Corporation Law, and to take such actions as they may deem necessary or appropriate to carry out the intent of the foregoing.

THIRD: That the aforesaid resolution was duly and validly adopted in accordance with the applicable provisions of Section 151 of the General Corporation Law of the State of Delaware and the Amended and Restated Certificate of Incorporation and the By-Laws of the Corporation.

FOURTH: That the aforesaid amendment shall become effective upon the filing of this Certificate with the office of the Secretary of State of the State of Delaware.

IN WITNESS WHEREOF, said Avatech Solutions, Inc. has caused this Certificate to be executed and attested, this 23rd day of December, 2003.

AVATECH SOLUTIONS, INC.
By:	/s/
	Donald R. Walsh Chief Executive Officer

ATTEST:

/s/

Beth O. MacLaughlin, Secretary

EX-3.11

EXHIBIT 3.11

CERTIFICATE OF ELIMINATION OF

SERIES C CONVERTIBLE PREFERRED STOCK

($0.01 Par Value)

of

AVATECH SOLUTIONS, INC.

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

Avatech Solutions, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:

FIRST: That the Corporation did designate a series of preferred stock known as Series C Convertible Preferred Stock on April 4, 2003, which series was reduced to two hundred and eighty-eight thousand, two hundred and eighty-two (288,282) shares by an Amendment to the Certificate of Designation of Series C Convertible Preferred Stock on November 18, 2003; and

SECOND: One hundred and seventy-two thousand and eight (172,008) shares of Series C Convertible Preferred Stock were issued, and all One hundred and seventy-two thousand and eight (172,008) shares have been surrendered to the Corporation by their holders as of the date hereof and no shares of Series C Convertible Preferred Stock remain outstanding; and

THIRD: That pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation adopted the following resolution, eliminating the Corporation’s Series C Convertible Preferred Stock, par value $0.01, no such shares remaining outstanding as of the

date hereof and none shall be issued subject to the certificate of designations previously filed with respect to the Series C Convertible Preferred Stock:

RESOLVED: That, provided that and immediately after all of the holders of Series C Preferred Stock convert such shares to Series D Preferred Stock, in accordance with the provisions of Article SIXTH, Section 2 of the Corporation’s Amended and Restated Certificate of Incorporation, the number of shares designated as Series C Convertible Preferred Stock shall be reduced to zero (0), which reduction does not change any of the voting powers, preferences and relative, participating, optional and other special rights of the shares of the Series C Convertible Preferred Stock, and no such shares shall hereafter be issued, and that the number of shares designated as Series D Convertible Preferred Stock shall be increased to the maximum available, and that the Chief Executive Officer and the Secretary of the Corporation be, and they hereby are, authorized and directed, in the name and on behalf of the Corporation, to file amendments to the Certificate of Designations of Series C Convertible Preferred Stock and Series D Convertible Preferred Stock in substantially the form attached hereto as Exhibit B and in accordance with the provisions of the Delaware General Corporation Law, and to take such actions as they may deem necessary or appropriate to carry out the intent of the foregoing.

FOURTH: That the aforesaid resolution was duly and validly adopted in accordance with the applicable provisions of Section 151 of the General Corporation Law of the State of Delaware and the Amended and Restated Certificate of Incorporation and the By-Laws of the Corporation.

FIFTH: That the aforesaid amendment shall become effective upon the filing of this Certificate with the office of the Secretary of State of the State of Delaware.

IN WITNESS WHEREOF, said Avatech Solutions, Inc. has caused this Certificate to be executed and attested, this 23rd day of December, 2003.

AVATECH SOLUTIONS, INC.		ATTEST:
By:	/s/	/s/
	Donald R. Walsh	Beth O. MacLaughlin, Secretary
	Chief Executive Officer

- 2 -

EX-3.12

EXHIBIT 3.12

CERTIFICATE OF AMENDMENT TO

CERTIFICATE OF DESIGNATION OF

SERIES D CONVERTIBLE PREFERRED STOCK

($0.01 Par Value)

of

AVATECH SOLUTIONS, INC.

Pursuant to Section 151 of the

General Corporation Law of the State of Delaware

Avatech Solutions, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:

FIRST: That pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation adopted the following resolution, increasing the number of shares of the Corporation’s Series D Convertible Preferred Stock, par value $0.01, designated by the Corporation on November 18, 2003, to one million, two hundred and ninety-seven thousand, five hundred and thirty-seven (1,297,537):

RESOLVED: That, provided that and immediately after all of the holders of Series C Preferred Stock convert such shares

to Series D Preferred Stock, in accordance with the provisions of Article SIXTH, Section 2 of the Corporation’s Amended

and Restated Certificate of Incorporation, the number of shares

designated as Series C Convertible Preferred Stock shall be reduced to zero (0), which reduction does not change any of the voting powers, preferences and relative, participating, optional and other special rights of the shares of the Series C Convertible Preferred Stock, that the number of shares designated as Series D Convertible Preferred Stock shall be increased to the maximum available, and that the Chief Executive Officer and the Secretary of the Corporation be, and they hereby are, authorized and directed, in the name and on behalf of the Corporation, to file amendments to the Certificate of Designations of Series C Convertible Preferred Stock and Series D Convertible Preferred Stock in substantially the form attached hereto as Exhibit B and in accordance with the provisions of the Delaware General Corporation Law, and to take such actions as they may deem necessary or appropriate to carry out the intent of the foregoing.

SECOND: That the aforesaid resolution was duly and validly adopted in accordance with the applicable provisions of Section 151 of the General Corporation Law of the State of Delaware and the Amended and Restated Certificate of Incorporation and the By-Laws of the Corporation.

THIRD: That the aforesaid amendment shall become effective upon the filing of this Certificate with the office of the Secretary of State of the State of Delaware.

IN WITNESS WHEREOF, said Avatech Solutions, Inc. has caused this Certificate to be executed and attested, this 23rd day of December, 2003.

AVATECH SOLUTIONS, INC.
By:	/s/
	Donald R. Walsh
	Chief Executive Officer

Attest:

        /s/

Beth O. MacLaughlin, Secretary

EX-10.02

EXHIBIT 10.02

AUTODESK AUTHORIZED CHANNEL PARTNER AGREEMENT

VALUE ADDED RESELLER

(United States)

This Autodesk Authorized Channel Partner Agreement (“VARAgreement”), effective on February 1, 2004 (“Effective Date”) is made between Autodesk, Inc., a Delaware corporation (“Autodesk”), and Value Added Reseller (“VAR”) as set forth below:

Avatech Solutions Subsidiary, Inc.

11400-A Cronridge Drive

Owings Mills, MD 21117

FAX: 410- 581- 8088

0070000270, 0070001091, 0070001359 & 0070001471                            01

1. Definitions

1.1 “Autodesk Channel Partner Policies and Procedures” shall mean the documents posted to the AACPW, as periodically amended by Autodesk, in its sole discretion, that sets forth the policies and procedures to be followed by VAR, which is hereby incorporated by reference.

1.2 “Autodesk Master Government Reseller (or Master Government Reseller)” shall mean the partner(s) Autodesk contracts with to administer marketing and sales to qualifying government customers.

1.3 “Authorized Location” shall mean each physical location as identified in Exhibit(s) A where VAR is authorized to market and distribute Authorized Products to End Users and offer support thereto, as identified in the Product Requirements Chart covering each such Authorized Product(s).

1.4 “Authorized Product(s)” shall mean the Autodesk software product(s), Updates, Bug Fixes or Enhancements thereto, which (a) VAR has procured directly from Autodesk or from an Autodesk Distribution Partner in accordance with this VAR Agreement, and (b) VAR is authorized to market and distribute to End Users only in accordance with the Product Requirements Chart and Exhibit A(s) which corresponds to such Authorized Product(s).

1.5 “Autodesk Authorized Channel Partner Website (“AACPW”)” shall mean One Team Web or any other successor site as designated by Autodesk. VAR is required to review the AACPW at least weekly.

1.6 “Authorized Territory” shall mean the geographical area of the United States identified in Exhibit A(s) within which VAR is authorized to market and distribute Authorized Products to End Users and offer support thereto corresponding to such Product Requirements Chart.

1.7 “Autodesk Distribution Partner” shall mean any entity currently authorized in writing by Autodesk to distribute Autodesk software products to third parties other than End Users.

1.8 “Autodesk Direct Customer(s)” shall mean any End User to whom Autodesk sells Autodesk software products directly. Autodesk Direct Customers include all named accounts, Autodesk Store customers and all state, local and federal government End Users.

1.9 “Cooperative Marketing Funds” or “Co-op” shall mean funds provided by Autodesk which are made available to VAR for promotion of Authorized Products, under the terms of this VAR Agreement.

1.10 “Co-op Guide” shall mean the document published by Autodesk that sets forth the requirements for obtaining Co-op.

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1.11 “Dedicated Personnel” means that each qualified employee only sells or supports a single Vertical Product in addition to the Horizontal Products.

1.12 “Earnbacks” shall mean credits that VAR may receive, under the terms of this VAR Agreement, upon the achievement of VAR’s Target.

1.13 “End User” shall mean a customer of Autodesk who has acquired a license for one or more Authorized Products from VAR for the personal or business use of such customer and not for transfer or resale.

1.14 “End User License” shall mean the then-current license agreement shipped with, incorporated in, or made available by download with each Authorized Product(s), which sets forth the terms and conditions under which an End User may use such
product(s).

1.15 “End User Records” shall mean the records maintained by VAR that show, at minimum, the name and address of each End User to whom VAR has sold the Authorized Product(s).

1.16 “Extensions” shall mean a license to use a modular addition to a Software Program incorporating corrections or enhancements under the Autodesk Subscription Program which supplement and enhance that Software Program.

1.17 “Government Account Guide” shall mean the document separately published by Autodesk that sets forth the requirements for government accounts, which may be updated by Autodesk from time to time in its sole discretion.

1.18 “Horizontal Products” shall mean AutoCAD, Autodesk VIZ, Autodesk Raster Design, On-Site View and any other Autodesk products as Autodesk may designate in its sole and absolute discretion during the Term.

1.19 “Minimum Purchase Requirement” shall mean the minimum purchase requirements as set forth in the Products Requirement Chart, and/or as set periodically by Autodesk in its sole and absolute discretion.

1.20 “Support Program” means the minimum End User support training, authorization and tracking requirements as set forth in Exhibit E hereto.

1.21 “Product Requirements Chart” shall mean the Exhibit B to this VAR Agreement which sets forth the terms and conditions under which VAR is authorized to market, distribute, and support one or more Authorized Products to End Users. The Product Requirements Chart is supplemented by the detailed Product Requirements Sheets available on the AACPW. VAR may not market or distribute any Authorized Product(s) to End Users until Autodesk has delivered to it a fully executed copy of this VAR Agreement with a completed Exhibit(s) A corresponding to such Authorized Product(s). VAR must continuously meet the requirements set forth in the Product Requirements Chart and the corresponding Products Requirements Sheets for each Authorized Location in which VAR intends to market, distribute, and support the Authorized Products. The Product Requirements Chart and each of the Products Requirements Sheets are hereby incorporated into and made part of this VAR Agreement.

1.22 “QualifiedPersonnel” means that each full-time VAR employee has passed the appropriate Autodesk exam(s), and continues to maintain the appropriate technical skill and product experience as stated in detail in the AACPW.

1.23 “Strategic Account Guide” shall mean the document separately published by Autodesk that sets forth the requirements for strategic accounts which may be updated by Autodesk from time to time in its sole discretion.

1.24 “Target” shall mean the revenue target set by Autodesk based upon purchases of Authorized Product(s).

1.25 “Term” shall mean the period of time beginning with the Effective Date, and shall continue in effect through midnight on January 31, 2005 when it shall then terminate, unless terminated earlier under the provisions of this VAR Agreement.

1.26 “Updates, Bug Fixes, and Enhancements” collectively shall mean additions or corrections to any Authorized Product(s) which (a) Autodesk designates as a modified or updated version of such Authorized Product(s), and (b) requires the End User to whom it is distributed to have previously licensed the Authorized Product(s) corresponding to such modified or upgraded version. In no event shall this include an Extension.

2

1.27 “Value Added Services” shall mean the services, as defined in Section 5.1 below, that VAR must provide to each End User in order to qualify as an VAR.

1.28 “Vertical Products” shall mean Autodesk MapGuide, MapGuide Author, MapGuide Server, MapGuide Viewer, Autodesk On-Site Enterprise, AutoCAD Mechanical, AutoCAD Electrical, Autodesk Data Exchange, IGES Translator, STEP Translator, Autodesk Inventor, Autodesk Inventor Series, Autodesk Inventor Pro, Autodesk Architectural Desktop, Autodesk Architectural Studio, Autodesk Building Systems, Autodesk Revit, Autodesk Land Desktop, Autodesk Civil Design, Autodesk Survey, Autodesk Civil Series, Autodesk Field Survey, Autodesk Map, Autodesk Map Series, Autodesk Envision, CAiCE Visual Survey, CAiCE Visual Roads, CAiCE Visual Survey/Roads, CAiCE Visual Construction, CAiCE Visual Landscape, CAiCE Visual Drainage, CAiCE Visual Bridge, Autodesk Streamline, Buzzsaw and any other Autodesk products that Autodesk may designate in its sole and absolute discretion during the Term.

1.29 All references in this VAR Agreement to the “sale” of or “selling” or “purchase” of Software shall mean the sale or purchase of a license to use such software.

1.30 Vertical Products and Horizontal Products will be collectively referred to as the Authorized Products.

2. Appointment.

2.1 Non-exclusive VAR. Autodesk appoints VAR as a non-exclusive reseller (and on occasion a non-exclusive agent) to, during the Term, market, distribute, and support only the Authorized Products identified on the Product Requirements Chart(s) and Exhibit(s) A, solely to End Users within the Authorized Territory, pursuant to an End User License.

2.2 Retention of Rights by Autodesk. Autodesk reserves the unrestricted right (a) to market, distribute, and support any Authorized Product(s) worldwide in any location, including in the VARs Authorized Territory, directly to End Users or through any other channel, including, but not limited to, original equipment manufacturers, Channel Partners, distributors, on-line sales or retail outlets, and (b) to modify, augment, or otherwise change the methods in which Autodesk markets, distributes, or supports any Authorized Product(s), without any liability to VAR. Autodesk hereby gives VAR notice that it has reserved all Autodesk Direct Customers for direct sales from Autodesk or its designated agents only.

3. Restrictions.

VAR agrees as follows:

3.1 End User License Terms. VAR shall use its best efforts to enforce the terms of the End User License and to advise Autodesk promptly of any known breach of the terms of the End User License.

3.2 Not For Resale or NFR Copies of Software Products. VAR shall not disseminate, distribute, or otherwise provide access to any NFR copy of a software product to any third-party. VAR may use NFR copies for customer demonstrations, internal training and other non-revenue generating activities.

3.3 Restrictions. VAR shall not market, distribute, or support any Authorized Product(s) to or for any third party other than an End User. VAR expressly acknowledges and agrees that VAR is not an Autodesk Distribution Partner and further acknowledges and agrees that the distribution rights granted under Section 2 may not be construed so as to allow VAR to market or distribute Authorized Products to any person or entity other than an End User. This restriction notwithstanding, VAR may permit the financing of any Authorized Products by an End User through a financial institution approved by Autodesk. Such financing shall be restricted to a loan arrangement or permitting an End User to enter into a buy-out lease, provided; however, such financial institution shall not be an End User and shall have no rights to such product as a licensee thereof. In any event, this consent shall not be construed to permit short-term rental of Authorized Products.

3.4 Agency Authorization. This VAR Agreement allows VAR to act as Autodesk’s non-exclusive agent to assist with sales activities to Autodesk Direct Customers at Autodesk’s sole discretion. Unless otherwise directed by Autodesk in writing, VAR may only engage in sales activities for Authorized Products to such Autodesk Direct Customers as Autodesk’s agent and may not sell Authorized Products from its commercial inventory to Autodesk Direct Customers. Failure to comply with the foregoing shall subject VAR to termination. In the event Autodesk allows any Autodesk Direct Customer to make periodic payments on any sale for which VAR is eligible to receive an agency commission, any such agency

3

commission so paid shall be made ratably on a periodic schedule commensurate with the customer pay schedule and only if Autodesk actually collects from the customer on the amount(s) due in each instance.

(a) Strategic Accounts. From time to time Autodesk may allow VAR to act as its non-exclusive agent in sales to Autodesk Strategic Account Customers, for the delivery and support of Autodesk products for which VAR has a current authorization. VAR may receive a commission based on receipt and approval by Autodesk of all supporting documentation from VAR evidencing its performance of Value Added Services to the respective strategic account as outlined in the Strategic Account Guide.

(b) Government. Autodesk has currently designated DLT Solutions, Inc. (“DLT”) as its Master Government Reseller. Autodesk shall provide thirty (30) day written notice to VAR of any change in Autodesk’s designated Master Government Reseller. VAR may receive a commission on orders placed with DLT by government End Users for which VAR has fulfilled obligations as set forth in the Government Account Guide.

(c) Online Store. From time to time Autodesk may allow VAR to act as its non-exclusive agent in sales to Autodesk direct online store customers, for the pre and post sale support of Autodesk products in VAR’s territory for software products for which VAR is currently authorized. VAR may receive a commission based on receipt and approvals by Autodesk of all back up documentation from VAR evidencing its performance of Value Added Services to the respective End User.

3.5 License Acquisition Limitation. VAR shall not purchase, license or otherwise acquire or attempt to acquire licenses for Authorized Products from (i) an End User, (ii) an agent acting on behalf of an End User, or (iii) any person or party other than Autodesk or an Autodesk Authorized Distribution Partner.

3.6 Unauthorized Acquisition. VAR shall not attempt to upgrade, exchange, or otherwise procure an economic benefit from any Authorized Product(s) purchased, licensed, or otherwise acquired from (i) an End User, (ii) an agent acting on behalf of an End User, or (iii) any person or party other than Autodesk or an Autodesk Authorized Distribution Partner.

3.7 No Mischaracterization. VAR shall not attempt to mischaracterize an Update, Bug Fix, Enhancement, or Extension as a stand-alone, fully paid-up license to the corresponding Authorized Product(s) for the purpose of attempting to upgrade, exchange, or otherwise procure an economic benefit from such Update, Bug Fix, Enhancement, or Extension.

3.8 ExportLimitations. VAR shall not market, distribute, or support any Authorized Product(s) (i) to any entity purporting to be an End User but which is either known to VAR or known to Autodesk and communicated to VAR to have the intent to, or have attempted to, sublicense such Authorized Product(s) to bona fide End Users or other third parties, or (ii) to any End User or other third party who intends to export the Authorized Products, without written authorization from Autodesk.

3.9 Territory Limitations. VAR shall not attempt to market or distribute Authorized Product(s) other than from the Authorized Location and in the Authorized Territory as outlined in Exhibit(s) A, unless authorized by Autodesk in writing. Any advertising, including but not limited to, trade magazine and web based advertising, which may be seen by customers outside of VAR’s Authorized Territory, must contain a disclaimer notifying such customers that VAR may not sell to customers outside of VAR’s Authorized Territory. VAR shall refrain from marketing or promoting, in any manner, brokering or attempting to broker, solicit or arrange for the sale of any Authorized Product(s) other than the Authorized Product(s) for which VAR has been approved in

Exhibit(s) A.

3.10 Remedy for Violation. In addition to all other remedies available to Autodesk at law or in equity or this VAR Agreement, including termination, in the event that VAR violates any of the provisions of this subsection 3 or the Autodesk Channel Partner Policies and Procedures, VAR shall pay to Autodesk, as liquidated damages and not as a penalty, an amount equal to the difference between the then-current Autodesk suggested retail price and the price VAR actually paid for the Autodesk software product used, procured or distributed in contravention of this Section 3 or the sum of $500.00 for each copy of the Autodesk software product used, procured or distributed in contravention of this Section 3, whichever is greater. Additionally, VAR shall not be eligible for Co-op for, at minimum, the remainder of the Autodesk fiscal quarter in which the violation occurred (or the remainder of the Autodesk fiscal quarter in which Autodesk learned of such violation by VAR) and the subsequent Autodesk fiscal quarter.

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3.11 Modifications to Agreement. Autodesk reserves the right, in its sole and exclusive discretion, to amend, supplement, change or discontinue any part of this VAR Agreement, any exhibits or amendments thereto, on thirty (30) day notice to VAR. The notice may come in the form of an updated posting to AACPW.

3.12 Quote Expirations: All VAR’s who submit customer quotes on any sale: (a) to Autodesk Direct Customers pursuant to this agency authorization, (b) on any Autodesk Subscription Program offering, (c) on any Autodesk support offering, or (d) for any Autodesk services offering must include an expiry date of not more then 30 days from the date of customer quote on such customer quote. If the commercial customer quote includes both software and one of the foregoing then the customer quote must have the prescribed expiry. VAR may adopt an expiry date shorter the thirty days on any customer quote in its discretion.

4.1 Agency Commission Recovery. For all agency sale commissions paid pursuant to this VAR Agreement, in the event the commissioned product or service is returned or cancelled for any reason or Autodesk is unable to collect from the End User, Autodesk may recover from the VAR, by means of a deduction from future commissions, that portion of the commission attributable, on a straight-line basis, to: (a) in the case of a product or service with an expiration date, the period from the date of return or cancellation to the date on which the product or service would have expired; or (b) for a product with a perpetual license, the period from the date the product was delivered to VAR by Autodesk to the date the product was returned, assuming a useful life of twenty-four (24) months for the product. In the event such agency commission is paid to VAR pursuant to a revenue authorization obligation, then Autodesk may recover the pro rata portion of such commission which is attributable on a straight-line basis, for the period from the date of termination until the date when the revenue would have been fully recognized.

4.2 Earnback Issuance and Recovery. Earnback credits shall be issued ONLY IF VAR is in compliance with all the terms and conditions of this Agreement. In the event that VAR is not in such compliance at the time such earnback credit should be issued, the credit will not be issued and VAR will forfeit that earnback credit. Forfeited Earnback credits are not recoverable. For any earnbacks paid pursuant to this VAR Agreement in the event VAR subsequently fails to timely meet payment requirements for the order(s) supporting such earnbacks, Autodesk reserves the right to recover from VAR any or all such earnbacks.

5. VAR Obligations.

VAR agrees to perform all of the following obligations in good faith:

5.1 Value Added Services. VAR is required to provide Value Added Services beyond mere product fulfillment to End Users. Value Added Services include, but are not limited to, a) assessing each End User’s software needs via the telephone or in person as further described on AACPW, b) providing product demonstrations, c) recommending the appropriate Authorized Product(s) to an End User based upon End User’s needs and d) offering pre and post-sales technical support. VAR shall be required to maintain written records that demonstrate these Value Added Services were offered for each sale of Authorized Products to an End User. Autodesk reserves the right to contact End Users to validate that such Value Added Services were provided and require VAR to provide Autodesk with evidence of Value Added Services upon request.

5.2 Support. At minimum, VAR must offer support services at the level defined by the Support Services Program and outlined in Exhibit E.

5.3 Reporting. VAR shall provide sell through reports, forecasts, inventory reports, and personnel reports pursuant to the Autodesk Channel Partner Policies and Procedures on a quarterly basis at its own expense and in the format requested by Autodesk. Failure to provide any required report may be considered a breach of this VAR Agreement by Autodesk and shall constitute termination for cause.

5.4 End User Records. As between Autodesk and VAR, Autodesk shall be the exclusive owner of the End User Records and the End User Records shall be treated by VAR as Autodesk’s valuable trade secret. VAR may not use the End User Records for any reason except promotion, sale and support of the Authorized Products pursuant to this VAR Agreement without the prior written consent of Autodesk.

5.5 Opt-Out Requirement. In using End User Records for the promotion, sale and support of the Authorized Products pursuant to this VAR Agreement, VAR shall, at minimum, utilize the following; (i) an “unsubscribe” or “opt-out” option on every marketing piece sent to End User regardless of form, (ii) a limitation on marketing contact with End Users to no more

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frequently than one time per calendar month. Additionally, VAR shall comply with any and all federal, state, county, and local laws, statutes, ordinances, and regulations that are related to privacy, customer data and anything thereto related and shall hereby indemnify Autodesk for any failure of it to do so.

5.6 Product Requirements Chart. Each Authorized Location of VAR shall continuously comply with the specific requirements (“Product Requirements”) set forth in each Product Requirements Chart and the Product Requirement Sheets, as amended by Autodesk from time to time in its sole and absolute discretion.

5.7 Minimum Purchase Requirements. VAR agrees to satisfy all Minimum Purchase Requirements as outlined in Exhibit B.

5.8 Approvals. VAR shall obtain and maintain at its own expense all approvals, consents, permissions, licenses, and other governmental or other third party approvals necessary to enable VAR to market, distribute, and support the software products for which VAR is authorized in accordance with this VAR Agreement. VAR shall comply with all applicable federal, state, county, and local laws, statutes, ordinances, and regulations that apply to the activities of VAR including relevant privacy and piracy laws.

5.9 Marketing Activities. VAR shall use its best efforts to actively market, promote, and distribute, at VAR’s expense, the Authorized Products only within the Authorized Territory under the terms of this VAR Agreement and the applicable Product Requirement Sheet(s), Strategic Account Guide and/or Government Account Guide.

5.10 Updates, Bug Fixes, and Enhancements. VAR, at its own expense, shall be responsible for distribution and support of any Updates and/or Bug Fixes to any Authorized Product(s) that VAR has sold to an End User promptly after delivery to VAR of such Update or Bug Fix. Autodesk reserves the right to distribute Updates, Bug Fixes, and Enhancements to End Users directly or through alternative channels, including, but not limited to, electronic distribution. VAR shall promptly notify Autodesk of any defect in any Authorized Product(s) which is discovered by or reported to VAR.

5.11 Autodesk Channel Partner Policy and Procedures. VAR shall comply with all terms and conditions of all current Autodesk Channel Partner Policies and Procedures. Failure to abide by such policies and procedures shall be considered a breach of this VAR Agreement and shall constitute termination for cause. Autodesk reserves the right to modify such policies and procedures at anytime by posting an update to AACPW.

5.12 Fulfillment of Rebate Coupons. From time to time Autodesk may run a promotion whereby End Users may receive a rebate offer for Authorized Products. Autodesk appoints VAR as a non-exclusive agent for the fulfillment of rebate claims (“Rebate Claims”) submitted by End Users for the various promotions (“Promotions”). VAR shall pay to an End User who has submitted a Rebate Claim, the specified dollar amount as set forth on the rebate coupon, according to the terms and conditions stated on the rebate coupon. VAR shall only pay End User for Rebate Claims that have been received for the Promotions for which VAR has been authorized by Autodesk. VAR shall pay a rebate to End User only if the rebate coupons have been completely filled out by the End User, if all required documentation is attached, and the Rebate Claim was postmarked or received prior to the expiration date printed on the rebate coupon, unless otherwise instructed by Autodesk. After submission to Autodesk of all required End User documentation by VAR, Autodesk shall credit VAR’s account for the amount of the rebate coupon.

5.13 VAR’s Office. VAR shall maintain an office within a commercial facility for each authorized location that is suitable to adequately represent Authorized Products and reflect a professional image to End Users. Such office may not be a home-office. VAR shall submit to Autodesk photographs of VAR’s office along with this VAR Agreement. In the event that VAR loses its commercial office, VAR shall have thirty (30) days in which to establish a new office as defined above. The establishment of a new office that is more than five miles from VAR’s Authorized location is subject to written approval by Autodesk.

5.14 Updated Financial Statements. VAR shall be required to submit updated financial statements to Autodesk, within five (5) business days following Autodesk’s request during the term of this VAR Agreement.

5.15 Breach of Obligations. In the event that VAR breaches any of the terms under this Section 5, in addition to all other remedies available to Autodesk at law or in equity or pursuant to this VAR Agreement, at Autodesk’s sole discretion, Autodesk may terminate this VAR Agreement.

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6. Audit Rights. In addition to Autodesk’s audit rights under Section 5 of this VAR Agreement, Autodesk, in its sole and absolute discretion, may conduct an audit of the financial and other records of VAR for the purpose of validating or augmenting the VAR reports identified above in Section 5 and otherwise ensuring that VAR is complying with the terms of this VAR Agreement. Autodesk shall bear the cost of such audit, unless the audit determines that VAR has underpaid Autodesk by more than five percent (5%) for any Autodesk fiscal quarter OR unless such audit reveals the VAR is not in compliance with this VAR Agreement. In the event of an underpayment by VAR, VAR shall pay to Autodesk the full amount of any underpayment disclosed by such audit, plus interest at the rate of 1.5% per month or the highest rate allowed by law, whichever is lower, within five (5) days of Autodesk’s notification of such underpayment as well as bearing the costs of the audit. In the event a breach of this VAR Agreement is discovered, VAR shall bear the cost of the audit in addition to all other rights Autodesk has under this VAR Agreement, at law or in equity.

6.1 Investigations. From time to time Autodesk shall conduct investigations related to, among other things, alleged piracy and gray market sales. In the event VAR is found to be involved in any activity Autodesk investigates hereunder, in addition to all other rights and remedies available to Autodesk pursuant to this VAR Agreement, at law or in equity, VAR shall reimburse Autodesk for the costs of such investigation.

7. Sales Toolkit and Support

7.1 Sales Toolkit. VAR shall purchase from Autodesk at the price of $495.00 each year this VAR Agreement is in force, one VAR sales toolkit per Authorized Location that will include one NFR copy of certain Authorized Products and certain marketing materials as deemed appropriate by Autodesk. Autodesk reserves the right to distribute Updates, Bug Fixes, and Enhancements to End Users directly or through alternative channels, including, but not limited to, electronic distribution.

7.2 Support. Pursuant to the terms and conditions of this VAR Agreement, VAR will be granted access to all Autodesk self service support tools as made available on the VAR support portal at www.autodesk.com (or any other site as designated by Autodesk.)

8. VAR Purchases

8.1 Purchase of Authorized Products. Unless otherwise designated in an Addendum to this Agreement, VAR may only procure Authorized Products from an Autodesk Authorized Distribution Partner in accordance with this VAR Agreement, the Authorized Products Requirements Charts and Exhibit(s) A.

8.2 Taxes. As between VAR and Autodesk, VAR shall be responsible for the collection and payment of all federal, state, county, or local taxes, fees, and other charges, including all applicable income and sales taxes, as well as all penalties and interest, with respect to the Authorized Products.

8.3 Software Product Returns. Autodesk shall post any then-current End User software product returns policies on the AACPW or any Autodesk site as designated by Autodesk. Autodesk reserves the right to change, amend or discontinue any End User software product returns policies on thirty (30) day notice.

9. Commissions, Earnbacks and Co-op.

9.1 Commissions. VAR may receive a commission for various activities, provided that VAR is authorized to sell such products and VAR complies with all terms and conditions for receiving a commission, as set forth in the then current documentation (including but not limited to Autodesk Strategic Account Guide, Autodesk Government Account Guide, and other relevant information published on AACPW). The commission structure is set forth in Exhibit C. Autodesk reserves the right to pay no commissions, or reduced commissions, if VAR fails to adequately perform the required sales, support and marketing activities as set forth in the AACPW. Autodesk reserves the right in its sole and absolute discretion to change the commission structure upon thirty (30) day notice. Changes to the commission structure shall be posted on AACPW. Any commission to be paid to VAR by Autodesk pursuant to this Agreement shall first be credited to VAR’s account with Autodesk.

9.2 Targets and Earnbacks. In the event VAR achieves its quarterly Target, VAR shall be eligible to receive Earnbacks. Earnback percentages shall be posted to AACPW. Targets shall be assigned to VAR by Autodesk for each quarter. Target

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attainment shall be based upon Commercial sales by VAR to End Users of Authorized Products. Please refer to Exhibit D for Earnback Eligibility and payout information. In the event VAR is not in compliance with any material term or condition of this Agreement or earnback eligibility, then such earnback eligibility shall be permanently forfeited.

9.3 Co-op. VAR shall receive Co-op pursuant to the Autodesk Co-op Guide which shall be distributed separately from this VAR Agreement, but which terms are hereby incorporated by reference. The terms and conditions of Co-op eligibility shall be described in the Co-op Guide and is subject to change at Autodesk’s sole discretion. Failure to comply with the requirements of the Autodesk Co-op Guide shall result in the loss or reduction of Co-op for one or more Autodesk fiscal quarters and may result in termination from the Co-op program.

10. Trademarks. During the term of this VAR Agreement, VAR shall have a nonexclusive, nontransferable right to indicate to the public that it is an Autodesk Authorized VAR and to advertise the Authorized Products within the United States under the trademarks and slogans adopted by Autodesk from time to time (“Trademarks”). VAR’s use of the Trademarks in any literature, promotion, or advertising shall be in accordance with Autodesk guidelines for such usage. VAR shall not contest, oppose, or challenge Autodesk’s ownership of the Trademarks. All representations of Autodesk Trademarks that VAR intends to use shall be exact copies of those used by Autodesk, or shall first be submitted to the appropriate Autodesk personnel for approval of design, color, and other details, such approval shall not be unreasonably withheld. If any of the Autodesk Trademarks are to be used in conjunction with another trademark on or in relation to the Authorized Products, then the Autodesk Trademarks shall be presented equally legibly, equally prominently, but nevertheless separated from the other so that each appears to be a trademark in its own right, distinct from the other mark. All use of the Trademarks shall inure to the sole benefit of Autodesk. Effective upon the termination of this VAR Agreement, VAR shall immediately cease all usage of Autodesk Trademarks.

11. Title and Proprietary Rights. The Authorized Products and other materials included in or incorporated in the Authorized Products and included on an Autodesk web site (collectively the “Materials”) remain at all times the property of Autodesk. VAR acknowledges and agrees that Autodesk holds the copyright to the Materials and, except as expressly provided herein, VAR is not granted any other right or license to patents, copyrights, trade secrets, or trademarks with respect to the Materials. VAR shall take all reasonable measures to protect Autodesk’s proprietary rights in the Materials and shall not copy, use or distribute the Materials, or any derivative thereof, in any manner or for any purpose, except as expressly authorized in this VAR Agreement. VAR shall not disassemble, decompile, or reverse-engineer the Materials, including any Authorized Product(s) source code, or otherwise attempt to discover any Autodesk trade secret or other proprietary information, or hack, impede, change or interfere with any Autodesk web site. VAR acknowledges that Autodesk has an Anti-Piracy Program and VAR agrees to review and follow the Anti-Piracy Program guidelines as published by Autodesk from time to time. VAR shall notify Autodesk promptly in writing upon its discovery of any unauthorized use of the Authorized Products or infringement of Autodesk’s patent, copyright, trade secret, trademark, or other intellectual property rights. VAR shall not distribute any Authorized Product(s) to any person or entity if VAR is aware that such person or entity may be involved in potential unauthorized use of the Materials or other infringement of Autodesk’s proprietary rights.

12. Customer Data. All customer data, including End User Records, is and shall remain the sole and exclusive property of Autodesk and VAR shall have no right, title or interest in or to such customer data. All customer data is Autodesk confidential information. On occasion and at Autodesk’s sole discretion, VAR may have access to Autodesk’s customer database. VAR’s access to such database shall be limited to customers with which VAR has a pre-existing business relationship. In the event that VAR loses its authorization for any Authorized Product(s), Autodesk reserves the right to provide another Autodesk Authorized Reseller with access to Autodesk’s customer database for the customers to which VAR can no longer sell such Authorized Product(s). Autodesk does not represent or warrant to VAR that the information in Autodesk’s customer database is current, correct or complete and Autodesk shall have no liability to VAR for any information contained in the Autodesk’s customer database. Autodesk shall have no liability for VAR’s violation of any laws in connection with customer contact including, but not limited to, privacy laws, National “Do Not Call List” regulations and Federal and State “Spam” and fax blast rules.

13. Warranty and Limitations of Warranty. Autodesk makes certain limited warranties to the End User in the End User License and disclaims all other warranties. VAR SHALL NOT MAKE ANY WARRANTY OR REPRESENTATION ACTUALLY, APPARENTLY OR OSTENSIBLY ON BEHALF OF AUTODESK. EXCEPT FOR THE EXPRESS END USER WARRANTY REFERRED TO HEREIN, AUTODESK MAKES NO OTHER WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, BY STATUTE OR OTHERWISE, REGARDING THE AUTHORIZED

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PRODUCTS. AUTODESK EXPRESSLY EXCLUDES ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR NONINFRINGEMENT.

14. Indemnity

14.1 Infringement Indemnity by Autodesk. Autodesk shall indemnify, hold harmless, and defend, at its expense, VAR from any action brought against VAR which alleges that any Authorized Product(s) infringes a registered United States patent, copyright, or trade secret, provided that VAR promptly notifies Autodesk in writing of any claim, gives Autodesk sole control of the defense and settlement thereof, and provides all reasonable assistance in connection therewith. If the Authorized Product is finally adjudged to so infringe, Autodesk, at its exclusive option, (a) shall procure for VAR the right to continue distribution of such Authorized Product(s); (b) shall modify or replace such Authorized Product(s) with a non-infringing product; or (c) shall authorize return of the Authorized Products and terminate this VAR Agreement. Autodesk shall have no liability regarding any claim (i) arising out of the use of the Authorized Products in combination with other products, or modification of the Authorized Products, if the infringement would not have occurred but for such combination, modification, or usage, or (ii) for use of the Authorized Products which does not comply with the terms of the End User License or this VAR Agreement. THE FOREGOING STATES VAR’S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO CLAIMS OF INFRINGEMENT OF THIRD PARTY PROPRIETARY RIGHTS OF ANY KIND.

14.2 Indemnity by VAR. VAR agrees to indemnify, hold harmless and defend Autodesk from any cost, loss, liability, or expense, including court costs and reasonable fees for attorneys or other professionals, arising out of or resulting from (a) any claim or demand brought against Autodesk or its directors, employees, or agents by a third party arising from or in connection with any breach by VAR of the terms of this VAR Agreement or any End User License, (b) any action brought by an End User or Autodesk Distribution Partner except as set forth in Section 14.1 above, (c) any breach by VAR of any provision of this VAR Agreement including, but not limited to, confidentiality and trade secrets, or (d) any negligent or willful act or omission by VAR, VAR’s employees, or VAR’s sales channel including, but not limited to, any act or omission that contributes to (i) any bodily injury, sickness, disease, or death; (ii) any injury or destruction to tangible property or loss of use resulting there from; or (iii) any violation of any statute, ordinance or regulation including but not limited to privacy laws.

15. Limitation of Liability.

Autodesk’s Liability. AUTODESK’S ENTIRE CUMULATIVE LIABILITY ARISING OUT OF THIS VAR AGREEMENT, INCLUDING THE ORDER, DELIVERY OR NON-DELIVERY OF ANY AUTHORIZED PRODUCT(S), SHALL NOT EXCEED THE GREATER OF: (A) THE VAR COST OF SOFTWARE PRODUCTS BY VAR IN THE SIX (6) MONTHS PRECEDING THE EVENT OR, (B) $500.00, WHICH EVER IS LESS. IN NO EVENT SHALL AUTODESK BE LIABLE FOR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES ARISING OUT OF THIS VAR AGREEMENT, HOWEVER CAUSED, WHETHER FOR BREACH OF CONTRACT, TORT, (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL THEORY, AND WHETHER OR NOT AUTODESK HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FUNDAMENTAL BREACH, BREACH OF A FUNDAMENTAL TERM OR FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.

16. Confidentiality

16.1 Confidential Information. As used in this VAR Agreement, confidential information shall mean any information (a) designated as confidential orally or in writing by either party hereto, (b) related to any Authorized Product(s), (c) related to Autodesk’s business, or (d) other information received by VAR by virtue of VAR’s relationship with Autodesk including, but not limited to, product plans, product designs, product costs, product prices, product names, finances, marketing plans, business opportunities, Autodesk customer data, personnel, research, development, customer data or know-how (“Confidential Information”).

16.2 Limitations on Disclosure and Use of Confidential Information. Each party shall exercise reasonable care to prevent the unauthorized disclosure of Confidential Information by employing no less than the same degree of care employed by such party to prevent the unauthorized disclosure of its own Confidential Information. Confidential Information disclosed under this VAR Agreement shall only be used by the receiving party in the furtherance of this VAR Agreement or the performance of its obligations hereunder. Neither party shall disclose the terms of this VAR Agreement

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to any third party without the prior written consent of the other, except pursuant to a valid and enforceable order of a court or government agency.

16.3 Exceptions. Confidential Information does not include information which (a) is rightfully received by the receiving party from a third party without restriction or violation of confidentiality, (b) is known to or developed by the receiving party independently without use of the Confidential Information, (c) is or becomes generally known to the public by other than a breach of duty hereunder by the receiving party, or (d) has been approved in advance for release by written authorization of the non-disclosing party.

17. Term, Termination, and Other Remedies

17.1 Term. This VAR Agreement, when fully executed by the parties, shall begin on the Effective Date, and shall continue in effect through midnight on January 31, 2005 when it shall then terminate, unless terminated earlier under the provisions of this VAR Agreement.

17.2 Termination for Breach. Either party may terminate this VAR Agreement upon thirty (30) days advance written notice to the other party if the other party breaches any term or condition of this VAR Agreement and fails to cure such breach to the reasonable satisfaction of the non-breaching party within the thirty (30) day written notice period.

17.3 Termination for Insolvency. Autodesk may immediately terminate this VAR Agreement with or without notice if VAR becomes insolvent, or the subject of a voluntary or involuntary petition in bankruptcy or any proceeding relating to insolvency, receivership, liquidation, or assignment for the benefit of creditors, if that proceeding is not dismissed with prejudice within sixty (60) days after filing. In addition to the foregoing, in the event VAR either voluntarily files for protection against its creditors under the United States Bankruptcy Code or is the subject of an involuntary petition in bankruptcy, VAR agrees that Autodesk shall be entitled to all rights to retain the benefits of this VAR Agreement which are set forth in 11 U.S.C. 365(n). No right granted to Autodesk under 11 U.S.C. 365(n) shall be deemed to have been waived either expressly or by implication without a written agreement confirming such waiver.

17.4 Termination for Customer Dissatisfaction. In consideration for its authorization, Autodesk is relying upon VAR to behave in a professional and upstanding manner in its relationship with all End Users. Failure to attain a high level of customer satisfaction shall be considered a material breach of this VAR Agreement, and Autodesk reserves the right to terminate this VAR Agreement in the event that Autodesk receives customer dissatisfaction complaints from an End User, regarding VAR.

17.5 Termination for Failure to Meet Minimum Purchase Requirements

(a) Purchase Requirement Minimums. Failure by VAR to achieve the Purchase Requirement Minimums may result in the termination of this VAR Agreement or the applicable Autodesk Product authorization by Autodesk, in its sole discretion.

17.6 Breach of Other Agreements with Autodesk. In the event VAR has any other current agreements of any other type with Autodesk (“Other Autodesk Agreement”), the breach of any term of any such Other Autodesk Agreement may, at Autodesk’s option, be deemed a breach of this VAR Agreement and shall permit Autodesk to terminate this VAR Agreement in the same manner as if a breach of the terms of this VAR Agreement had occurred. Any alleged breach by Autodesk of any Other Autodesk Agreement shall not be deemed a breach of this VAR Agreement by Autodesk and shall not constitute cause for termination by VAR or support an allegation by VAR of damages under this VAR Agreement.

17.7 Breach of Product Requirements Chart, Suspension of Product Authorization and Partial Termination. Autodesk, at its sole discretion, may exercise its termination rights or suspension of product authorization under this Section 17 solely with respect to the Product Requirements Chart, Authorized Locations, Authorized Territories, or Authorized Products, or with respect to any Other Autodesk Agreement, which partial termination shall not affect this VAR Agreement’s application to the remaining Product Requirements Chart, Authorized Locations, Authorized Territories, or Authorized Products, or affect any remaining part of any Other Autodesk Agreement.

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17.8 Effect of Termination

(a) Monies Due and Payable. Notwithstanding any credit terms previously established with VAR or any other provision of this VAR Agreement, upon notice of termination of this VAR Agreement, all monies owed by VAR to Autodesk shall become immediately due and payable. Overdue amounts shall be subject to a late payment charge of one and one-half percent (1.5%) per month, or the maximum amount allowed by law, whichever is less.

(b) Fulfillment of VAR Orders. Upon delivery of notice of a breach or notice of termination of this VAR Agreement, Autodesk Authorized Distribution Partners shall not be obligated to fulfill any orders received subsequent to the effective date of termination. In Autodesk’s sole discretion, Autodesk and Autodesk Authorized Distribution Partners may continue to fulfill orders provided that VAR (i) submits prepayments for any such order and (ii) pays all outstanding obligations to Autodesk prior to any shipment and/or Autodesk Authorized Distribution Partner.

(c) Return of Materials. Within thirty (30) days after the termination of this VAR Agreement, VAR, at its own expense, shall return to Autodesk, all Autodesk Confidential Information, data, photographs, samples, literature and sales aids, and any other property of Autodesk then in VAR’s possession.

17.9 Attorneys’ Fees for Collections. In any action brought by Autodesk to collect monies due under this VAR Agreement, Autodesk shall be entitled to recover all costs and attorneys’ fees incurred in maintaining such action.

17.10 No Termination Compensation. Except as expressly set forth herein, the parties expressly agree that no damages, indemnity or termination benefits whatsoever (including without limitation, any compensation for goodwill established by VAR during the term of this VAR Agreement or for any lost profits or expenses of VAR) shall be due or payable to VAR by reason of any termination of this VAR Agreement in accordance with its terms, and VAR expressly waives the application of any statute, law or custom to the contrary.

17.11 Other Remedies. In addition to the right to terminate this VAR Agreement, Autodesk reserves all rights and remedies available to Autodesk at law or in equity, including the right to seek damages and injunctive relief for breach or threatened breach of this VAR Agreement by VAR.

17.12 Reapplication Post Termination. In the Event this VAR Agreement is terminated or VAR loses one or more product authorizations for any reason, VAR may not reapply for any Autodesk Channel Partner program, including any then existing VAR program, for a minimum of six (6) months after the effective date of the termination. Nothing herein shall require Autodesk to consider VAR for any Autodesk Channel Partner program.

17.13 Surviving Provisions. The terms and conditions, which by their nature should survive, shall survive and continue after termination of this VAR Agreement.

18. General Provisions

18.1 Assignment. VAR acknowledges that Autodesk is relying upon VAR’s reputation, business standing, and goodwill under VAR’s present ownership in entering into this VAR Agreement. Accordingly, VAR agrees that its rights and obligations under this VAR Agreement may not be transferred or assigned and its duties may not be delegated directly or indirectly without the prior written consent of Autodesk in its sole and absolute discretion. VAR shall notify Autodesk promptly in writing of any change of ownership of VAR or of any sale of all or substantially all of VAR’s assets. VAR acknowledges that any change of ownership, sale of all or substantially all of VAR’s assets, or attempted assignment by VAR of this VAR Agreement, or any part thereof, without Autodesk’s prior written consent may result in immediate termination of this VAR Agreement by Autodesk. Autodesk may assign or otherwise transfer its rights and obligations to successors-in-interest (whether by purchase of stock or assets, merger, operation of law, or otherwise) of that portion of its business related to the subject matter hereof. Subject to the restrictions set forth in this Section 18.1, all of the terms and conditions of this VAR Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective successors and permitted assigns of the parties hereto.

18.2 Dispute Resolution

(a) The parties will attempt in good faith to promptly resolve any controversy or claim arising out of or relating to this VAR Agreement through negotiations between the parties before resorting to other remedies available to them. Any such dispute shall be referred to appropriate senior executives of each party who shall have the authority to resolve the matter. If the senior executives are unable to resolve the dispute, the parties may by agreement refer the matter to an appropriate forum of alternative dispute resolution ranging from mediation to arbitration. If the parties cannot resolve the matter or if

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they cannot agree upon an alternative form of dispute resolution, then either party may pursue resolution of the matter through litigation pursuant to Section 18 herein.

(b) The forgoing shall not apply to a dispute or controversy involving either party’s Confidential Information or intellectual property. In the event of such a dispute or controversy, either may immediately seek any legal and/or equitable remedies it deems necessary.

18.3 Venue/Choice of Law. This VAR Agreement shall be construed in accordance with the laws of the State of California (excluding rules regarding conflicts of law) and the United States of America. The parties hereby submit to the exclusive personal jurisdiction of and venue in the Superior Court of the State of California, County of Marin or County of Santa Clara, and the United States District Court for the Northern District of California in San Francisco.

18.4 Publicity. VAR may not issue any press release or any other public announcement regarding this VAR Agreement or any aspect of its relationship with Autodesk without the prior written consent of Autodesk, which may be withheld in its sole discretion. Additionally, VAR is prohibited from utilizing the Autodesk stock ticker (“ADSK”) in any press release or other public announcement unless such release is a joint release with Autodesk or Autodesk otherwise permits same, for each single release, in writing in advance.

18.5 Notices. Any notices required under the terms of this VAR Agreement will be given in writing either (a) to the persons at the addresses set forth below, or to such other address as either party may substitute by written notice to the other in the manner contemplated herein, and will be deemed served when received by Autodesk from VAR or when sent to VAR by Autodesk, or (b) by facsimile, and will be deemed served when received by Autodesk from VAR or when sent to VAR by Autodesk.

If to Autodesk:                     Autodesk, Inc.

111 McInnis Parkway

San Rafael, California 94903

Attn: General Counsel

Facsimile: (415) 507-6126

If to VAR, to the address and facsimile number identified on the first page of this VAR Agreement. Additionally, Autodesk may notify VAR of any changes by posting such changes to AACPW.

18.6 Independent Contractors. In performing their respective duties under this VAR Agreement, each of the parties will be operating as an independent contractor. Nothing contained herein will in any way constitute any association, partnership, or joint venture between the parties hereto, or be construed to evidence the intention of the parties to establish any such relationship. Neither of the parties will hold itself out in any manner that would be contrary to the provisions of this Section 18.6.

18.7 Entire Agreement. This document, together with its exhibits, contains the entire agreement and understanding between VAR and Autodesk concerning the subject matter of this VAR Agreement including, but not limited to, its duration and manner of expiration, termination, and Autodesk’s sole and absolute discretion in determining to offer, or accept any extension of this VAR Agreement. This document supercedes all prior communications, discussions, negotiations, proposed agreements and all other agreements, whether written or oral, excepting solely all prior confidentiality and nondisclosure agreements to the extent they are not expressly superceded by this VAR Agreement. Autodesk has not made and VAR has not relied upon any representations not expressly set forth in this document in making this VAR Agreement. This VAR Agreement may be amended or interpreted only by a writing signed both by authorized individuals for Autodesk and VAR. It is the express intent of the parties that this VAR Agreement and any amendment thereto shall be interpreted solely by reference to their written terms. Any handwritten or typed changes to this VAR Agreement must be initialed by both parties in order to become effective.

18.8 Severability. In the event that it is determined by a court of competent jurisdiction as a part of a final non-appealable judgment that any provision of this VAR Agreement or part thereof is invalid, illegal, or otherwise unenforceable, such provision will be enforced or reformed as nearly as possible in accordance with the stated intention of the parties, while the remainder of this VAR Agreement will remain in full force and effect.

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18.9 Construction. This VAR Agreement has been negotiated by the parties and their respective counsel. This VAR Agreement will be interpreted in accordance with its terms and without any strict construction against either party. Ambiguity will not be interpreted against the drafting party.

18.10 Counterparts. This VAR Agreement may be executed in separate counterparts and shall become effective when the separate counterparts have been exchanged between the parties.

18.11 Force Majeure. Except for the failure to make payments, neither party will be liable for any loss, damage or penalty resulting from delays or failures in performance resulting from acts of God, supplier delay or other causes beyond the non-performing party’s reasonable control and not caused by the negligence of the non-performing party, provided that the non-performing party promptly notifies the other party of the delay and the cause thereof and promptly resumes performance as soon as it is possible to do so.

18.12 Waiver. The waiver of any breach or default will not constitute a waiver of any other right in this VAR Agreement or any subsequent breach or default. No waiver shall be effective unless in writing and signed by an authorized representative of the party to be bound. Failure to pursue, or delay in pursuing, any remedy for a breach shall not constitute a waiver of such breach.

The undersigned are duly authorized to execute this VAR Agreement on behalf of their respective parties.

AUTODESK, INC.		VAR
By:		By:
	Steve Blum
	Printed Name		Printed Name
	Vice President, Americas Sales
	Title		Title
	Date		Date

13

EXHIBITS REDACTED

14

AUTODESK AUTHORIZED CHANNEL PARTNER AGREEMENT

Autodesk Direct VAR Addendum

(United States)

In addition to the terms and conditions set forth in the Autodesk Authorized Channel Partner Agreement (the “VARAgreement”), with the effective date of February 1, 2004, and the requirements as outlined in Exhibit A of this addendum, to remain as a Direct VAR, Autodesk Value Added Reseller (“VAR”) shall comply with the following:

1. Authorized Products And Territory.

(a) Vertical Requirement. In order to achieve and maintain Direct VAR status, VAR must be authorized for and actively carry and market Vertical Product(s).

(b) Authorized Territory. Direct VAR’s Authorized Territory for all Authorized Products is defined in Exhibit A of the FY05 VAR Agreement.

2. Minimum Staffing. In addition to the Product Authorization requirements in Exhibit B of the VAR Agreement, Direct VAR shall have at a minimum – one dedicated Sales Support/Administrative representative, two accredited full-time Post-Sales Technical Support Engineers.

3. Training. Direct VAR must survey all training participants, track their satisfaction and report back to Autodesk via website survey site.

4. Credit Establishment. VAR shall provide Autodesk with all reasonable financial information, including but not limited to financial statements, letter(s) of credit, credit reports, federal tax return(s) and any other documents reasonably requested by Autodesk to allow Autodesk to establish credit for VAR. VAR may not purchase direct from Autodesk pursuant to this VAR Agreement until a credit account has been established. Autodesk may cancel or suspend credit to VAR at any time, in its sole discretion.

5. Prices and Orders. The prices paid by VAR shall be the prices reflected on the VAR Price List as posted to the AACPW. Autodesk may change prices at any time effective thirty (30) days after publication of a new VAR Price List or other similar notice to VAR. Purchase orders must be in writing (including facsimile, telex, telecopy or electronic communication such as email, but only if such form of electronic communication has been previously agreed to by Autodesk) and must request a delivery date during the Term of this VAR Agreement. Autodesk reserves the right to accept or reject orders, in whole or in part, and shall make reasonable commercial efforts to advise VAR promptly of any order rejected hereunder. Upon acceptance by Autodesk, purchase orders shall be binding as to the products and services ordered and place of delivery, but not as to any other term appearing on such purchase order. Autodesk reserves the right to reject any order or to cancel any order previously accepted if Autodesk determines that VAR is in breach under this VAR Agreement.

6. Shipment. Autodesk will ship orders to the address designated in VAR’s purchase order F.O.B. or Free Carrier Autodesk’s manufacturing plant, at which time risk of loss shall pass to VAR. All freight, insurance, customs duties, and other shipping expenses shall be paid by VAR.

7. Security Interest. As security for VAR’s payment of all monetary obligations to Autodesk, VAR hereby grants to Autodesk a security interest in all of VAR’s inventory purchased from Autodesk (“VAR’s Inventory”), all of VAR’s accounts receivable evidencing any obligation to VAR for payment for Authorized Products sold, and all proceeds of any character, whether cash or non-cash, arising from the disposition of VAR’s Inventory and accounts. VAR agrees to execute all documents necessary to perfect Autodesk’s security interest described herein upon request by Autodesk.

8. VAR Orders, Payment Terms and Returns

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8.1 Purchase of Authorized Products. VAR may procure Authorized Products from Autodesk or an Autodesk Authorized Distribution Partner in accordance with this VAR Agreement, the Authorized Products Requirements Charts and Exhibit(s) A. Only those product purchased directly from Autodesk will count towards Target Attainment and Earnback credits.

8.2 Payment. Autodesk shall submit an invoice to VAR upon shipment of an order or partial order. If Autodesk elects to grant credit to VAR, all invoiced amounts shall be due and payable net thirty (30) days from the date of invoice. If VAR fails to pay any invoiced amounts when due, Autodesk may at its sole and absolute discretion, and in addition to any other remedies available to it at law or in equity or under this VAR Agreement, revoke or suspend VAR’s credit terms, require further assurances from VAR that such invoiced amounts shall be paid, require VAR to purchase all Authorized Products through an Autodesk Authorized Distribution Partner and/or terminate this VAR Agreement. Overdue amounts shall be subject to a late payment charge of one and one-half percent (1.5%) per month or the highest rate allowed by law, whichever is lower. Additionally, any invoice not paid by VAR with in sixty (60) days shall, in Autodesk’s sole and absolute discretion, cause VAR to forfeit any and all Earnbacks achieved by VAR in the previous fiscal quarter and lose eligibility for Earnbacks for the current quarter. Additionally, Autodesk may terminate this VAR Agreement for failure to pay.

8.3 Software Product Returns. Autodesk shall post any then-current software product returns policies on the AACPW or any Autodesk site as designated by Autodesk. Autodesk reserves the right to change, amend or discontinue any software product returns policies on thirty (30) day notice.

8.4 Autodesk Account Balance. In the event VAR has a balance on an Autodesk account, VAR must be current on payments, and remain current on payments against any such balance. In the event payments fall in arrears on such balance, such failure will be considered a material breach.

9. Audit Rights. In addition to Autodesk’s audit rights under Section 6 of the VAR Agreement, Autodesk, in its sole and absolute discretion, may conduct an audit of all relevant records of VAR for the purpose of validating or augmenting the VAR reports exhibiting value add services and ensuring that VAR is complying with the terms of this Autodesk Direct VAR Addendum and the VAR Agreement. Autodesk shall bear the cost of such audit, unless the audit determines that VAR has breached this Autodesk Direct VAR Addendum or the VAR Agreement, in which case VAR shall bear the cost of the audit.

10. Termination and Other Remedies

10.1 Breach of Obligations. In the event that VAR breaches any of the terms of the Agreement or this Autodesk Direct VAR Addendum, including any payment or value add service obligations, at Autodesk’s sole discretion, VAR shall not be eligible for commissions on some or all accounts for which it has provided value add services, or will receive only a proportional amount of the commission. In addition, Autodesk may, in its sole and absolute discretion, terminate the Agreement and/or this Autodesk Direct VAR Addendum.

10.2 Termination for Dissatisfaction. Autodesk may immediately terminate this Autodesk Direct VAR Addendum and/or the Agreement if Autodesk receives a complaint or other registration of dissatisfaction regarding VAR from any customer account for which VAR has been adding value add services pursuant to this Autodesk Direct VAR Addendum.

10.3 Breach of Payment Obligations. In the event that VAR breaches any of the terms of this VAR Agreement, including any payment obligations, at Autodesk’s sole discretion, VAR shall not be eligible for Co-op for the remainder of the fiscal quarter in which the violation occurred (or the quarter in which Autodesk discovered the violation) and the subsequent fiscal quarter. In addition, Autodesk may, in its sole and absolute discretion, terminate this VAR Agreement for failure to pay.

10.4 De-authorization of Direct VAR Status. VAR’s status as a Direct VAR and/or VAR’s authorization to distribute and market the software products may be terminated independently on a product by product basis, or in conjunction with Autodesk’s termination of the VAR Agreement.

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10.5 In the event that the Agreement is terminated, this Autodesk Direct VAR Addendum shall concurrently terminate.

10.6 Effect of Termination

(a) Monies Due and Payable. Notwithstanding any credit terms previously established with VAR or any other provision of the VAR Agreement, upon notice of termination of this VAR Agreement, all monies owed by VAR to Autodesk shall become immediately due and payable. Overdue amounts shall be subject to a late payment charge of one and one-half percent (1.5%) per month, or the maximum amount allowed by law, whichever is less.

(b) Fulfillment of VAR Orders. Upon delivery of notice of a breach or notice of termination of this VAR Agreement, Autodesk shall not be obligated to fulfill any orders by VAR. Additionally, Autodesk and Autodesk Authorized Distribution Partners shall not be obligated to fulfill any orders received by Autodesk or Autodesk Authorized Distribution Partners subsequent to the effective date of termination. In Autodesk’s sole discretion, Autodesk and Autodesk Authorized Distribution Partners may continue to fulfill orders provided that VAR (i) submits prepayments for any such order and (ii) pays all outstanding obligations to Autodesk prior to any shipment and/or Autodesk Authorized Distribution Partner.

(c) Return or Depletion of Inventory. Subject to the limitations set forth below, upon termination, Autodesk, at its sole discretion, may either (i) repurchase all or any part of VAR’s inventory of Authorized Products at the price paid by VAR to Autodesk and/or (ii) allow VAR to continue to distribute those Authorized Products in inventory until the inventory is depleted, subject to the terms and conditions set forth in this VAR Agreement and whatever additional terms and conditions may be imposed by Autodesk in its sole and absolute discretion. Except as expressly set forth above, under no circumstances shall VAR be entitled to a refund for all or any portion of the Authorized Products in VAR’s inventory.

11. Effective Date and Modification. The effective date of this Autodesk Direct VAR Addendum is February 1, 2004 (“Effective Date”). These authorization requirements for the Autodesk Direct VAR may be modified at any time by Autodesk by forwarding a revised Autodesk Direct VAR Addendum to VAR.

Except as modified in this Autodesk Direct VAR Addendum, the VAR Agreement shall remain in full force and effect.

The Undersigned are duly authorized to execute this Autodesk Direct VAR Addendum on behalf of their respective parties.

“Autodesk” AUTODESK, INC.		“VAR” Company:
By:		By:
	Steve Blum
			Printed Name
	Vice President–Americas Sales
	Title		Title
	Date		Date

3

EXHIBIT A

DIRECT VAR REQUIREMENTS CHART

Must be Vertically Authorized and meet the following requirements:

	Yearly Revenue Minimum Commitment	Additional Personnel	Facility	Marketing		Other
Required of all Direct VAR	>$1M annual commercial purchases or approved for Premier Solutions Provider Level. (Based on revenue totals from Q4FY03, Q1FY04, Q2FY04, Q3FY04)	—  Two accredited full- time post-sale support engineers per company —  One dedicated Sales Support/Administration Rep.	Support lab with systems capable of running all supported products	—  Must submit quarterly marketing/sales plans —  Minimum Marketing budget greater or equal to 6% —  Designated and approved marketing contact		Must have good credit standing with Autodesk
Support Offerings and Requirements	Workstation	Response Time	Call Tracking	Customer Satisfaction		Satellite Office
Required of all Reseller Partners	Full Internet access, email and workstation dedicated solely to support	SLA initial response within 4 hours by accredited technician; resolution within 72 hours	Call Tracking and Reporting System in place	Must survey all training participants, track satisfaction and report to Autodesk via Autodesk Training Survey website.		Requirements met by HQ location.
Training Center Requirements	Facility	Class Offerings	Trainer		Satellite Office
Required of all Reseller Partners	5-seat training lab capable of running current Autodesk products	Must be able to offer customized classes on the products within the Vertical markets	Resellers must have access to a qualified trainer, provide name and submit a training plan		Each VAR satellite must have a training lab or reseller can use a portable training lab.

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EX-10.11

EXHIBIT 10.11

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND APPLICABLE LAWS OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

Avatech Solutions Subsidiary, Inc.

10% SUBORDINATED NOTE

Note:	Owings Mills, Maryland
$42,500.00	As of January 1, 2004

Avatech Solutions Subsidiary, Inc., a Delaware corporation (the “Company”), the principal office of which is located at 11400A Cronridge Drive, Owings Mills, Maryland 21117, for value received, hereby promises to pay to                      or his registered assigns, the sum of Forty-Two Thousand, Five Hundred Dollars ($42,500.00) (The “Principal Amount”), or such lesser amount as shall then equal the outstanding principal amount hereof. Any outstanding principal and any unpaid interest hereon shall be due and payable on the earlier to occur of:

(i) Seven Thousand Five Hundred Dollars ($7,500.00) on July 1, 2004, and the remaining Thirty-Five Thousand Dollars ($35,000.00) and any unpaid interest hereon, accrued as set forth in Section 2 below, on the maturity date, which is July 1, 2005; or

(ii) when declared due and payable by the Holder upon the occurrence of an Event of Default (as defined below).

Payment for all amounts due hereunder shall be made by mail to the registered address of the Holder. This Note is one of an issue of the Company’s 10% Subordinated Notes in the original aggregate principal amount of $1,500,000.

The following is a statement of the rights of the Holder of this Note and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees:

1. Definitions. As used in this Note, the following terms, unless the context otherwise requires, have the following meanings:

(i) “Company” includes any corporation which shall succeed to or assume the obligations of the Company under this Note.

(ii) “Holder,” when the context refers to a holder of this Note, shall mean any person who shall at the time be the registered holder of this Note.

2. Interest. The Company shall pay simple interest at the rate of ten percent (10%) per annum on the principal of this Note outstanding during the period beginning on the date of issuance of this Note and ending on the date that the principal amount of this Note becomes due and payable. Interest shall be payable on the calendar quarter, commencing on March 31, 2004 until maturity or earlier prepayment.

3. Events of Default. If any of the events specified in this Section 3 shall occur (herein individually referred to as an “Event of Default”), the Holder of the Note may, so long as such condition exists, declare the entire principal and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company:

(i) Default in the payment of the principal and unpaid accrued interest of this Note when due and payable if such default is not cured by the Company within ten (10) days after the Holder has given the Company written notice of such default; or

(ii) The institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Act, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of the Company, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by the Company in furtherance of any such action; or

(iii) If within sixty (60) days after the commencement of an action against the Company (and service of process in connection therewith on the Company) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of the Company or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within sixty (60) days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated; or

(iv) Any declared default of the Company under any Senior Indebtedness (as defined below) that gives the holder thereof the right to accelerate such Senior Indebtedness, and such Senior Indebtedness is in fact accelerated by the holder.

4. Subordination. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all of the Company’s Senior Indebtedness, as hereinafter defined.

4.1 Senior Indebtedness. As used in this Note, the term “Senior Indebtedness” shall mean the principal of and unpaid accrued interest on: (i) all indebtedness of the Company to: banks, commercial finance lenders, insurance companies, other financial

institutions regularly engaged in the business of lending money; vendors or business partners from whom the Company has borrowed money; or affiliates of the Company, which is for money borrowed by the Company (whether or not secured), and (ii) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for or to refinance such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior Indebtedness by a guarantor.

4.2 Default on Senior Indebtedness. If there should occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation or any other marshalling of the assets and liabilities of the Company, or if this Note shall be declared due and payable upon the occurrence of an Event of Default with respect to any Senior Indebtedness, then (i) no amount shall be paid by the Company in respect of the principal of or interest on this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder of this Note that shall assert any right to receive any payments in respect of the principal of and interest on this Note, except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding. If there occurs an event of default that has been declared in writing with respect to any Senior Indebtedness, or in the instrument under which any Senior Indebtedness is outstanding, permitting the holder of such Senior Indebtedness to accelerate the maturity thereof, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, or all Senior Indebtedness shall have been paid in full, no payment shall be made in respect of the principal of or interest on this Note, unless within three (3) months after the happening of such event of default, the maturity of such Senior Indebtedness shall not have been accelerated.

4.3 Effect of Subordination. Subject to the rights, if any, of the holders of Senior Indebtedness under this Section 4 to receive cash, securities or other properties otherwise payable or deliverable to the Holder of this Note, nothing contained in this Section 4 shall impair, as between the Company and the Holder, the obligation of the Company, subject to the terms and conditions hereof, to pay to the Holder the principal hereof and interest hereon as and when the same become due and payable, or shall prevent the Holder of this Note, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law.

4.4 Subrogation. Subject to the payment in full of all Senior Indebtedness and until this Note shall be paid in full, the Holder shall be subrogated to the rights of the holders of Senior Indebtedness (to the extent of payments or distributions previously made to such holders of Senior Indebtedness pursuant to the provisions of Section 4.2 above) to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness. No such payments or distributions applicable to the Senior Indebtedness shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the Holder, be deemed to be a payment by the Company to or on account of this Note; and for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which the Holder would be entitled

except for the provisions of this Section 4 shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the Holder, be deemed to be a payment by the Company to or on account of the Senior Indebtedness.

4.5 Undertaking. By its acceptance of this Note, the Holder agrees to execute and deliver such documents as may be reasonably requested from time to time by the Company or the lender of any Senior Indebtedness in order to implement the foregoing provisions of this Section 4.

5. Prepayment. The Company may at any time prepay in whole or in part the principal sum, plus accrued interest to date of payment, of this Note.

6. Assignment. Subject to the restrictions on transfer described in Section 8 below, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, personal and legal representatives, and transferees of the parties.

7. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and holders of all then outstanding Notes.

8. Transfer of this Note. With respect to any offer, sale or other disposition of this Note, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such Holder’s counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such Holder that such holder may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 8 that the opinion of counsel for the holder is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.

9. Treatment of Note. To the extent permitted by generally accepted accounting principles, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities.

10. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if telegraphed or mailed by registered or certified mail, postage prepaid, at the respective addresses of the parties as set forth herein. Any party hereto maybe notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail or telegraphed in the manner set forth above and shall be deemed to have been received when delivered.

11. No Stockholder Rights. Nothing contained in this Note shall be construed as conferring upon the Holder or any other person the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company; and no dividends or interest shall be payable or accrued in respect of this Note or the interest represented hereby.

12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, excluding that body of law relating to conflict of laws.

13. Heading; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.

IN WITNESS WHEREOF, the Company has caused this Note to be issued as of this 1^st day of January, 2004.

AVATECH SOLUTIONS SUBSIDIARY, INC.
By:	/s/
	Donald R. (Scotty) Walsh, Chief Executive Officer

Name of Holder:

Do not detach this warrant without consulting the Company.

No. W –              15,000 Shares

Avatech Solutions, Inc.

A Delaware Corporation

Common Stock, Par Value $.01 per share

Stock Purchase Warrant

This warrant is issued to the registered holder of $42,500 principal amount of the 10% Subordinated Notes (individually, a “Note” and collectively, the “Notes”), of Avatech Solutions Subsidiary, Inc., a Delaware corporation (the “Company”), dated as of January 1, 2004, bearing (except for the prefix letter “W”) the same designating number as noted above and to which note this warrant pertains. The Note is one of an issue of Notes of the Company with an aggregate principal amount of $1,500,000.

The bearer of this warrant is entitled, upon presentation of the Note (if the Note is then outstanding) and upon surrender of this warrant at the offices of the Company, to subscribe for, purchase and receive Fifteen Thousand (15,000) shares of the Common Stock of Avatech Solutions, Inc. (“Avatech”) for a purchase price of Twenty-One Cents ($0.21) per share provided, however, no fractional shares will be issued. Upon such payment, Avatech agrees to cause to be issued in the name of the registered holder, or his or her nominee, a certificate or certificates duly representing the shares so purchased.

In the event of the declaration and payment of share dividends by Avatech on its Common Stock, or any split-up of the Common Stock, or recapitalization of Avatech which changes the issued and outstanding shares of Common Stock, additional shares of Avatech may be deliverable to the holder of this warrant upon the exercise of it without additional consideration, or the exercise price per share may be adjusted in the appropriate manner.

The purchase privilege herein contained shall expire on July 1, 2005. If the Note to which this warrant is attached shall be prepaid, the purchase privilege shall nevertheless continue until said date.

Nothing contained in this warrant shall affect or limit the Note to which it pertains.

Dated as of January 1, 2004

Avatech Solutions, Inc.
By:	/s/
	Donald R. (Scotty) Walsh Chief Executive Officer

EX-10.12

EXHIBIT 10.12

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND APPLICABLE LAWS OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

Avatech Solutions Subsidiary, Inc.

12% SUBORDINATED NOTE

Note:	Owings Mills, Maryland
$21,250.00	As of January 1, 2004

Avatech Solutions Subsidiary, Inc., a Delaware corporation (the “Company”), the principal office of which is located at 11400A Cronridge Drive, Owings Mills, Maryland 21117, for value received, hereby promises to pay to                      or his registered assigns, the sum of Twenty-One Thousand Two Hundred and Fifty Dollars ($21,250.00) (The “Principal Amount”), or such lesser amount as shall then equal the outstanding principal amount hereof. Any outstanding principal and any unpaid interest hereon shall be due and payable on the earlier to occur of:

(i) Three Thousand Seven Hundred and Fifty Dollars ($3,750.00) on July 1, 2004, and the remaining Seventeen Thousand Five Hundred Dollars ($17,500.00) and any unpaid interest hereon, accrued as set forth in Section 2 below, on the maturity date, which is July 1, 2005; or

(ii) when declared due and payable by the Holder upon the occurrence of an Event of Default (as defined below).

Payment for all amounts due hereunder shall be made by mail to the registered address of the Holder. This Note is one of an issue of the Company’s 10% Subordinated Notes in the original aggregate principal amount of $1,500,000.

The following is a statement of the rights of the Holder of this Note and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees:

1. Definitions. As used in this Note, the following terms, unless the context otherwise requires, have the following meanings:

(i) “Company” includes any corporation which shall succeed to or assume the obligations of the Company under this Note.

(ii) “Holder,” when the context refers to a holder of this Note, shall mean any person who shall at the time be the registered holder of this Note.

2. Interest. The Company shall pay simple interest at the rate of twelve percent (12%) per annum on the principal of this Note outstanding during the period beginning on the date of issuance of this Note and ending on the date that the principal amount of this Note becomes due and payable. Interest shall be payable on the calendar quarter, commencing on March 31, 2004 until maturity or earlier prepayment.

3. Events of Default. If any of the events specified in this Section 3 shall occur (herein individually referred to as an “Event of Default”), the Holder of the Note may, so long as such condition exists, declare the entire principal and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company:

(i) Default in the payment of the principal and unpaid accrued interest of this Note when due and payable if such default is not cured by the Company within ten (10) days after the Holder has given the Company written notice of such default; or

(ii) The institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Act, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of the Company, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by the Company in furtherance of any such action; or

(iii) If within sixty (60) days after the commencement of an action against the Company (and service of process in connection therewith on the Company) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of the Company or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within sixty (60) days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated; or

(iv) Any declared default of the Company under any Senior Indebtedness (as defined below) that gives the holder thereof the right to accelerate such Senior Indebtedness, and such Senior Indebtedness is in fact accelerated by the holder.

4. Subordination. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all of the Company’s Senior Indebtedness, as hereinafter defined.

4.1 Senior Indebtedness. As used in this Note, the term “Senior Indebtedness” shall mean the principal of and unpaid accrued interest on: (i) all indebtedness of the Company to: banks, commercial finance lenders, insurance companies, other financial institutions regularly engaged in the business of lending money; vendors or business partners from whom the Company has borrowed money; or affiliates of the Company, which is for money borrowed by the Company (whether or not secured), and (ii) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for or to refinance such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior Indebtedness by a guarantor.

4.2 Default on Senior Indebtedness. If there should occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation or any other marshalling of the assets and liabilities of the Company, or if this Note shall be declared due and payable upon the occurrence of an Event of Default with respect to any Senior Indebtedness, then (i) no amount shall be paid by the Company in respect of the principal of or interest on this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder of this Note that shall assert any right to receive any payments in respect of the principal of and interest on this Note, except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding. If there occurs an event of default that has been declared in writing with respect to any Senior Indebtedness, or in the instrument under which any Senior Indebtedness is outstanding, permitting the holder of such Senior Indebtedness to accelerate the maturity thereof, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, or all Senior Indebtedness shall have been paid in full, no payment shall be made in respect of the principal of or interest on this Note, unless within three (3) months after the happening of such event of default, the maturity of such Senior Indebtedness shall not have been accelerated.

4.3 Effect of Subordination. Subject to the rights, if any, of the holders of Senior Indebtedness under this Section 4 to receive cash, securities or other properties otherwise payable or deliverable to the Holder of this Note, nothing contained in this Section 4 shall impair, as between the Company and the Holder, the obligation of the Company, subject to the terms and conditions hereof, to pay to the Holder the principal hereof and interest hereon as and when the same become due and payable, or shall prevent the Holder of this Note, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law.

4.4 Subrogation. Subject to the payment in full of all Senior Indebtedness and until this Note shall be paid in full, the Holder shall be subrogated to the rights of the holders of Senior Indebtedness (to the extent of payments or distributions previously made to such holders of Senior Indebtedness pursuant to the provisions of Section 4.2 above) to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness. No such payments or distributions applicable to the Senior Indebtedness shall, as between the Company and its creditors, other than the holders of

Senior Indebtedness and the Holder, be deemed to be a payment by the Company to or on account of this Note; and for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which the Holder would be entitled except for the provisions of this Section 4 shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the Holder, be deemed to be a payment by the Company to or on account of the Senior Indebtedness.

4.5 Undertaking. By its acceptance of this Note, the Holder agrees to execute and deliver such documents as may be reasonably requested from time to time by the Company or the lender of any Senior Indebtedness in order to implement the foregoing provisions of this Section 4.

5. Prepayment. The Company may at any time prepay in whole or in part the principal sum, plus accrued interest to date of payment, of this Note.

6. Assignment. Subject to the restrictions on transfer described in Section 8 below, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, personal and legal representatives, and transferees of the parties.

7. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and holders of all then outstanding Notes.

8. Transfer of this Note. With respect to any offer, sale or other disposition of this Note, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such Holder’s counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such Holder that such holder may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 8 that the opinion of counsel for the holder is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.

9. Treatment of Note. To the extent permitted by generally accepted accounting principles, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities.

10. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if telegraphed or mailed by registered or certified mail, postage prepaid, at the respective addresses of the parties as set forth herein. Any party hereto maybe notice so given change its

address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail or telegraphed in the manner set forth above and shall be deemed to have been received when delivered.

11. No Stockholder Rights. Nothing contained in this Note shall be construed as conferring upon the Holder or any other person the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company; and no dividends or interest shall be payable or accrued in respect of this Note or the interest represented hereby.

12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, excluding that body of law relating to conflict of laws.

13. Heading; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.

IN WITNESS WHEREOF, the Company has caused this Note to be issued as of this 1^st day of January, 2004.

AVATECH SOLUTIONS SUBSIDIARY, INC.
By:	/s/
	Donald R. (Scotty) Walsh, Chief Executive Officer

Name of Holder:

EX-10.13

EXHIBIT 10.13

PREFERRED STOCK PURCHASE AGREEMENT

AVATECH SOLUTIONS, INC.

This Preferred Stock Purchase Agreement (this “Agreement”) is made and entered into as of the 31st day of December, 2003, by and among Avatech Solutions Inc., a Delaware corporation (the “Company”), and each of the persons and/or entities identified on Schedule 1 hereto (the “Purchasers”).

RECITALS

WHEREAS, the Company wishes to sell to the Purchasers shares of Series D Convertible Preferred Stock (the “Shares”), pursuant to the terms and conditions set forth below; and

WHEREAS, the Purchasers wish to purchase the Shares on the terms and subject to the conditions set forth below;

AGREEMENT

NOW THEREFORE, in consideration of the mutual covenants, agreements, conditions, representations, and warranties contained in this Agreement, the Company and the Purchasers hereby agree as follows:

SECTION 1: PURCHASE AND SALE OF PREFERRED STOCK.

1.1. Authorization of Shares. On or after the Closing Date (as defined in Section 1.4), (a) the Company shall have authorized the issuance of the Shares to Purchasers, and (b) the Company shall have reserved the proper number of shares of Common Stock of the Company issuable upon conversion of the Shares (the “Conversion Shares”). The Shares shall have the rights, preferences, privileges and restrictions set forth in a certificate of designations filed with the Secretary of the State of Delaware, substantially in the form attached hereto as Exhibit A (the “Designation”).

1.2. Purchase and Sale. Subject to the terms and conditions hereof, the Company agrees to issue to each Purchaser that number of Shares set forth opposite each Purchaser’s name on Schedule 1. In exchange for the issuance of the Shares, each Purchaser agrees to purchase the Shares at a purchase price of $0.60, per share of Series D Convertible Preferred Stock, for a total price as set forth opposite the Purchaser’s name on Schedule 1 (the “Total Purchase Price”).

1.3. Warrants. Each Share shall be accompanied by a warrant to purchase Common Stock of the Company on the terms and conditions set forth in the Warrant attached hereto as Exhibit B (the “Warrants”). On or after the Closing Date (as defined in Section 1.4), the Company shall have reserved the proper number of shares of Common Stock of the Company issuable upon exercise of the Warrants (the “Warrant Shares”).

1.4. Closing. The issuance of the Shares and Warrants under this Agreement (the “Closing”) shall take place at the time and place agreed on between the Purchaser and the Company (the “Closing Date”). At or as soon as practicable after the Closing, subject to the terms and conditions hereof, the Company will deliver to each Purchaser a certificate representing the number of Shares set forth opposite that Purchaser’s name on Schedule 1, against delivery to the Company of this executed Agreement, and the Purchaser will deliver the Total Purchase Price to the Company.

1.5. Covenants of the Company related to Conversion. The Company agrees, at all times from the Closing Date until all of the Shares are converted into Conversion Shares, to reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the Conversion of the Shares into Conversion Shares, the number of shares of its common stock as are then required to effect the conversion of all outstanding Shares.

1.6. Covenants of the Company related to exercise of Warrants. The Company agrees, at all times from the Closing Date until all of the Warrants are exercised or have expired, to reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of the Warrants, the number of shares of its common stock as are then required to effect the exercise of all outstanding Warrants.

SECTION 2: REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company hereby represents and warrants to each Purchaser as follows:

2.1. Organization, Good Standing, and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement and to file the Designation (collectively, the “Preferred Stock Agreement”), to issue and sell the Shares and Warrants, to carry out the provisions of the Preferred Stock Agreement, and to carry on its business as presently conducted. The Company is duly qualified and is authorized to do business and is in good standing in each jurisdiction in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary; except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business.

2.2. Capitalization. The authorized capital stock of the Company, immediately prior to the Closing and prior to filing the Designation, consists of a total of 23,797,537 shares, of which: (a) 22,500,000 shares are Common Stock, of which 9,167,877 shares are issued and outstanding and 6,449,930 shares of which are reserved for future issuance upon the exercise of any stock options granted under the 1996, 1998, and 2002 Stock Option Plans, the Avatech Solutions, Inc. Employee Stock Purchase Plan and the Avatech Solutions, Inc. Restricted Stock Award Plan, and upon the exercise of outstanding warrants; and (b) 288,285 are designated as Series C Convertible Preferred Stock, 172,008 of which are issued and outstanding. All issued and outstanding shares of the Company’s Common and Preferred Stock (x) have been duly authorized and validly issued, (y) are fully paid and nonassessable, and (z) were issued in compliance with all applicable state and federal laws concerning the issuance of securities. The

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Conversion Shares and the Warrant Shares have been duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the Designation, the Conversion Shares and the Warrant Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances, provided, however, that the Conversion Shares and the Warrant Shares may be subject to restrictions on transfer under state and federal securities laws.

2.3. Authorization. All corporate action on the part of the Company, its officers, directors, and stockholders necessary for the authorization of this Agreement and the Designation, the performance of all obligations of the Company thereunder, and the authorization, sale, issuance, and delivery of the Shares, Warrants, Conversion Shares, and Warrant Shares thereto have been taken or will be taken prior to the Closing. This Agreement, when executed and delivered, will be a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, (b) general principles of equity that restrict the availability of equitable remedies, and (c) applicable law related to the enforceability of the indemnification provisions set forth in Section 5 of this Agreement. The sale of the Shares and the subsequent conversion of the Shares into Conversion Shares and the sale of the Warrants and the Warrant Shares issuable on exercise of the Warrants are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with.

2.4. Proxy Statement and Annual Report. The Company’s 2003 Annual Report on SEC Form 10-K and its Proxy Statement relating to its 2003 Annual Meeting of Shareholders, along with the Company’s Quarterly Report for the period ending September 30, 2003 on SEC Form 10-Q, was provided to each Purchaser and are available at http://www.sec.gov. The Annual Report, Quarterly Report, and Proxy Statement contain information regarding the current businesses of the Company and certain information regarding future plans of the company.

2.5. Compliance With Other Instruments. The Company is not in violation of or default under (a) any term of its certificate of incorporation or bylaws, (b) any judgment, decree, order, writ or, to the Company’s knowledge, or (c) any statute, rule or regulation applicable to the Company, which violation of or default under would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company. The execution, delivery, and performance of and compliance with the Preferred Stock Agreement and the issuance and sale of the Shares, Warrants, Conversion Shares, and Warrant Shares pursuant thereto will not, with or without the passage of time or giving of notice, result in any such material violation or be in conflict with or constitute a default under any such term or result in the creation of any mortgage, pledge, lien, encumbrance, or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture, or non-renewal of any permit license, authorization, or approval applicable to the Company, its business or operations, or any of its assets or properties.

2.6. Litigation. Except as set forth in the Annual Report, Quarterly Report, and Proxy Statement, there are no actions, suits, or legal, administrative, or other proceedings or investigations pending or, to the Company’s knowledge, threatened before any court, agency, or other tribunal to which the Company is a party or against or affecting any of the property, assets,

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businesses, or financial condition of the Company. The Company is not in default with respect to any order, writ, injunction, or decree of any federal, state, local, or foreign court, department, agency, or instrumentality to which it is a party.

2.7. Governmental Approvals: Third Party Consents. Except for certain filings required by federal and state securities laws, all consents, approvals, or authorizations of, or registrations, qualifications, designations, declarations, or filings with, any federal or state governmental authority, and all consents, approvals, or authorizations of any third party required in connection with the execution of the Preferred Stock Agreement and the performance of the transactions contemplated thereby (including the issuance and sale of the Shares, Warrants, Conversion Shares, and Warrant Shares) have been obtained by the Company or shall be obtained prior to the Closing. The Company has, or has rights to acquire, all licenses, permits, and other similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the operation or condition, financial or otherwise, of the Company, and it is not in default in any material respect under any of such licenses, permits, or other similar authority.

2.8. Offering Valid. Assuming the accuracy of the representations and warranties of Purchasers contained in Section 3 hereof, the offer, sale, and issuance of the Shares, Warrants, Conversion Shares, and Warrant Shares will be exempt from the registration requirements of the Securities Act of 1933 (the “Securities Act”) and will have been registered or qualified or are exempt from registration and qualification under the registration, permit, or qualification requirements of all applicable state securities laws.

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

2.10. No Registered Offering. Neither the Company, any of its affiliates, nor any person acting on its or their behalf, has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security under circumstances that would require registration of the Shares being offered hereby under the Securities Act.

SECTION 3: REPRESENTATIONS AND WARRANTIES OF PURCHASERS.

Each Purchaser hereby represents and warrants to the Company as follows:

3.1. Requisite Power and Authority.

(a) If the Purchaser is an individual, the Purchaser has all requisite power and authority under all application provisions of law to execute and deliver this Agreement and to carry out the provisions hereof.

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(b) If the Purchaser is a corporation, limited liability company, or limited partnership, the Purchaser is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its formation and has all requisite limited liability company, partnership, or corporate power and authority to own its assets and operate its business. If the Purchaser is a corporation, limited liability company, or limited partnership, the Purchaser has all necessary corporate, limited liability company, or partnership power and authority under all applicable provisions of law to execute and deliver this Agreement and to carry out the provisions hereof. All action on Purchaser’s part required for the lawful execution and delivery of this Agreement has been or will be effectively taken prior to the Closing.

(c) Upon its execution and delivery, this Agreement will be a valid and binding obligation of Purchaser, enforceable in accordance with its terms, except as limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, (b) general principles of equity that restrict the availability of equitable remedies and (c) applicable law related to the enforceability of the indemnification provisions set forth in Section 5 of this Agreement.

3.2. Investment Representations. Purchaser understands that the Shares have not been registered under the Securities Act. Purchaser also understands that the Shares, Warrants, Conversion Shares, and/or Warrant Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser’s representations contained in this Agreement. Each Purchaser, as to itself, hereby represents and warrants to the Company as follows:

(a) Acquisition for Own Account. Purchaser is acquiring the Shares and Warrants for the Purchaser’s own account for investment purposes only, and not with a view towards their distribution.

(b) Accredited Investor. Purchaser represents that it is an “accredited investor” within the meaning of Regulation D under the Securities Act.

(c) Company Information. Purchaser has had an opportunity to ask questions of and receive answers from, directors, officers and management of the Company relating to the Company’s business, management and financial affairs and to the terms and conditions of this investment. Purchaser has had a chance to review the Annual Report, Quarterly Report, and Proxy Statement provided to the Purchaser.

(d) Rule 144. Purchaser acknowledges and agrees that the Shares, Warrants, Conversion Shares, and/or Warrant Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act, which permits limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company; the resale occurring not less than one year after a party has purchased and paid for the security to be sold; the sale being through an unsolicited “broker’s transaction” or in transactions directly with a market maker (as said term is defined

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under the Securities Act); and the number of securities being sold during any three-month period not exceeding specified limitations.

(e) Residence. The residence of Purchaser (if an individual), or the office or offices of Purchaser in which its investment decision was made is located at the address or addresses of Purchaser as stated on the signature pages hereto.

SECTION 4: CONDITIONS TO CLOSING.

4.1. Conditions to Purchasers’ Obligations at the Closing. Purchasers’ obligations to accept the Shares at the Closing, are subject to the satisfaction, at or prior to the Closing, of the following conditions:

(a) Representations and Warranties True; Performance of Obligations. The representations and warranties made by the Company in Section 2 hereof shall be true and correct in all material respects as of the Closing, with the same force and effect as if they had been made as of the applicable closing date, and the Company shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing.

(b) Legal Investment. On the Closing Date, the issuance of the Shares and Warrants and the proposed issuance of the Conversion Shares and Warrant Shares, shall be legally permitted by all laws and regulations to which Purchasers and the Company are subject.

(c) Consents, Permits, and Waivers. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Preferred Stock Agreement (except for such as may be properly obtained subsequent to the Closing.

(d) Filing of Designation. The Designation shall have been filed with the Secretary of State of the State of Delaware.

(e) Corporate Documents. The Company shall have delivered, to Purchasers or their counsel, copies of all corporate documents of the Company, as Purchasers shall have reasonably requested.

(f) Reservation of Conversion Shares and Warrant Shares. The Conversion Shares issuable upon conversion of the Shares and the Warrant Shares issuable on exercise of the Warrants shall have been duly authorized and reserved for issuance upon such conversion.

(g) Closing Certificates. The Company shall have delivered to Purchasers:

(i) a certificate of the Secretary of the Company dated as of the Closing Date, certifying as to the incumbency of the officers of the Company executing the Agreement and attaching thereto a copy of the Designation, as filed with the Secretary of State of the State of Delaware, and a copy of the resolutions or consent of the board of directors of the Company authorizing and approving the Company’s execution, delivery and performance of this Agreement and the filing of the Designation; and

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(ii) a certificate, executed by the Chief Executive Officer of the Company as of the Closing Date, certifying as to the fulfillment of all of the conditions of Purchasers’ obligations under this Agreement.

(h) Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to Purchasers and their special counsel, and Purchasers and their special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

4.2. Conditions to Obligations of the Company at Closing. The Company’s obligation to issue the Shares at the Closing, is subject to the satisfaction, on or prior to the Closing, of the following conditions:

(a) Representations and Warranties True; Performance of Obligations. The representations and warranties made by Purchasers in Section 3 hereof shall be true and correct in all material respects at the Closing, with the same force and effect as if they had been made on and as of the Closing Date, and Purchasers shall have performed all obligations and conditions herein required to be performed or observed by Purchasers on or prior to the Closing.

(b) Filing of Designation. The Designation shall have been filed with the Secretary of State of the State of Delaware.

(c) Consents, Permits, and Waivers. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Preferred Stock Agreement (except for such as may be properly obtained subsequent to the Closing.

SECTION 5: COVENANTS OF THE PARTIES FOR THE REGISTRATION PERIOD.

5.1. Covenants of the Company to Register the Conversion Shares and Warrant Shares.

(a) The Company shall file with the SEC, on or prior to the date which is one hundred and twenty (120) days after the Closing a registration statement on Form S-1 (or, if Form S-1 is not then available, on such form of registration statement as is then available, to effect a registration (the “New Registration Statement”) of all of the shares covering the resale of the Registrable Securities (as defined below). The New Registration Statement (and each amendment or supplement thereto and each request for acceleration of effectiveness thereof) shall be provided to (and subject to the review by) the Purchasers and a single firm of counsel designated by the Purchasers (the “Purchasers’ Counsel”) at least five business days prior to its filing or other submission in the case of the New Registration Statement, and at least two business days prior to its filing (or such lesser time as may be necessary) in the case of each amendment or supplement thereto.

(b) “Registrable Securities” means the Conversion Shares, Warrant Shares, and any shares of capital stock issued or issuable, from time to time (with any adjustments), as a

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distribution or in exchange for or otherwise with respect to the foregoing; provided, however, that Registrable Securities shall not include any such Registrable Securities that (i) have previously been registered pursuant to the Securities Act, (ii) are eligible for public resale under Rule 144(k) under the Securities Act, or (iii) are eligible for public resale under the Securities Act pursuant to an exemption from registration under the Securities Act.

(c) The Purchasers may offer and sell the Registrable Securities pursuant to the New Registration Statement in an underwritten offering. In any such underwritten offering, the Purchasers who hold a majority in interest of the Registrable Securities subject to such underwritten offering, shall have the right to select the Purchasers’ Counsel and an investment banker or bankers and manager or managers to administer the offering, which investment banker or bankers or manager or managers shall be reasonably satisfactory to the Company. In the event that any Purchasers elect not to participate in such underwritten offering, the New Registration Statement covering all of the Registrable Securities shall contain appropriate plans of distribution reasonably satisfactory to the Purchasers participating in such underwritten offering and the Purchasers electing not to participate in such underwritten offering (including, without limitation, the ability of nonparticipating Purchasers to sell from time to time and at any time during the effectiveness of such New Registration Statement).

(d) In connection with the registration of the Registrable Securities, the Company has the following obligations:

(i) The Company will prepare and file with the SEC, on or before 120 days following the Closing, the New Registration Statement, and will use its best efforts to cause such New Registration Statement to become effective as soon as practicable after such filing. The Company will keep such New Registration Statement effective pursuant to Rule 415 at all times until the earlier of (A) the date on which all of the Registrable Securities (in the reasonable opinion of counsel to the Purchasers) may be immediately sold to the public without registration or restriction pursuant to Rule 144(k) under the Securities Act and (B) such time as all the Registrable Securities have been sold (the “Registration Period”).

(ii) The Company will prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the New Registration Statement and the prospectus used in connection with the New Registration Statement as may be necessary to keep the New Registration Statement effective at all times during the Registration Period and, during such period, will comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the New Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the New Registration Statement.

(iii) The Company will furnish to each Purchaser whose Registrable Securities are included in the New Registration Statement and to Purchasers’ Counsel promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one copy of the New Registration Statement and any amendments thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto. At the request of any Purchaser, the Company will provide to that Purchaser (A) a copy of each letter

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written by or on behalf of the Company to the SEC or the staff of the SEC no later than the date of submission of such letter (including, without limitation, any request to accelerate the effectiveness of any New Registration Statement or amendments thereto), and, promptly upon receipt, each item of correspondence from the SEC or the staff of the SEC, in each case relating to the New Registration Statement (other than any portion, if any, thereof which contains information for which the Company has sought confidential treatment), and the Company will cooperate with each Purchaser in making all reasonable modifications requested by such Purchaser or Purchasers’ Counsel to any portion of any letter or other correspondence from the Company to the SEC that addresses the transactions contemplated by this Agreement, (B) on or as soon as practicable after the date the New Registration Statement (or any amendments to the New Registration Statement) becomes effective (the “New Registration Effective Date”), a notice stating that the New Registration Statement or amendment has been declared effective, and (C) such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as such Purchaser may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Purchaser.

(iv) The Company will use its best efforts to (A) register and qualify the Registrable Securities covered by the New Registration Statement under the securities or “blue sky” laws of those jurisdictions in the United States as each Purchaser who holds Registrable Securities being offered reasonably requests, (B) prepare and file in those jurisdictions any amendments (including post-effective amendments) and supplements to the registrations or qualifications as may be necessary to maintain the effectiveness of the registrations or qualifications during the Registration Period, (C) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (D) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in the requested jurisdictions; provided, however, that the Company will not be required in connection herewith or as a condition thereto to (V) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 5.1(d)(iv), (W) subject itself to general taxation in any such jurisdiction, (X) file a general consent to service of process in any such jurisdiction, (Y) provide any undertakings that cause the Company undue expense or burden, or (Z) make any change in its certificate of incorporation or bylaws, which in each case the board of directors of the Company determines to be contrary to the best interests of the Company and its stockholders.

(v) In the event that the Purchasers who hold a majority in interest of the Registrable Securities being offered in an offering select underwriters for the offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering.

(vi) As promptly as practicable after becoming aware of such event, the Company will notify each Purchaser by telephone or facsimile of the happening of any event of which the Company has knowledge and as a result of which the prospectus included in the New Registration Statement, as then in effect, includes an untrue statement or omission of a material fact required to be stated therein or necessary to make the statements therein not misleading and will use its best efforts promptly to prepare a supplement or amendment to the New Registration

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Statement to correct the untrue statement or omission and deliver the number of copies of any supplement or amendment to each Purchaser as the Purchaser may reasonably request.

(vii) The Company will use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of the New Registration Statement and, if such an order is issued, to obtain the withdrawal of the order at the earliest practicable date (including in each case by amending or supplementing such New Registration Statement) and to notify each Purchaser who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of the order and its resolution (and if the New Registration Statement is supplemented or amended, deliver such number of copies of any supplement or amendment to each Purchaser as the Purchaser may reasonably request).

(viii) In the event of an underwritten offering, at the request of any Purchaser whose Registrable Securities are included in the Registration Statement, the Company shall furnish, on the New Registration Effective Date (A) an opinion, dated as of the New Registration Effective Date, from counsel representing the Company, addressed to the Purchaser in the form delivered to the underwriters, if any opinion is delivered to the underwriters and (B) a letter, dated as of the New Registration Effective Date, from the Company’s independent certified public accountants in the form delivered to the underwriters, if any such “Comfort Letter” is delivered to the underwriters.

(ix) The Company will provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the New Registration Effective Date.

(x) The Company will cooperate with the Purchasers who hold Registrable Securities being offered and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing the Registrable Securities to be offered pursuant to the New Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or the Purchasers may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Purchasers may request, and, within three (3) business days after the New Registration Effective Date, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Purchasers whose Registrable Securities are included in such New Registration Statement) an opinion of such counsel that such Registrable Securities have been registered under the Securities Act and that the restrictive legends on the certificates representing such Registrable Securities may be removed.

(xi) At the request of Purchasers who hold a majority-in-interest of the Registrable Securities, the Company will prepare and file with the SEC any amendments (including post-effective amendments) and supplements to the New Registration Statement and the prospectus used in connection with the New Registration Statement as are necessary to change the plan of distribution set forth in the New Registration Statement.

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(xii) The Company will comply with all applicable laws related to the New Registration Statement and the offer and sale of securities and all applicable rules and regulations of governmental authorities in connection therewith (including without limitation the Securities Act and the Exchange Act, and the rules and regulations promulgated by the SEC).

(e) All reasonable expenses incurred by the Company or the Purchasers in connection with registrations, filings or qualifications pursuant to this Section 5 (excluding brokers’ fees, underwriting discounts and commissions, and similar selling expenses), including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, the fees and disbursements of counsel for the Company, and the fees and disbursements of Purchasers’ Counsel, not in excess of $15,000, shall be borne by the Company.

5.2. Covenants of The Purchasers Related to Registration. In connection with the registration of the Registrable Securities, the Purchasers shall have the following obligations.

(a) The obligation of the Company under this Agreement to complete the registration of the Registrable Securities of a particular Purchaser is expressly conditioned on (i) the provision by the Purchaser to the Company of all information regarding itself, the Registrable Securities held by it, and the intended method of disposition of the Registrable Securities held by it as are reasonably required to effect the registration of such Registrable Securities and (ii) the execution by the Purchaser of all documents in connection with the registration as the Company may reasonably request. At least five (5) business days before the first anticipated filing date of the New Registration Statement the Company will notify each Purchaser of any information the Company requires from each such Purchaser.

(b) Each Purchaser, by the Purchaser’s acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the New Registration Statement, unless the Purchaser has notified the Company in writing of such Purchaser’s election to exclude all of the Purchaser’s Registrable Securities from the New Registration Statement.

(c) In the event that Purchasers holding a majority in interest of the Registrable Securities being offered determine to engage the services of an underwriter, each Purchaser agrees to enter into and perform such Purchaser’s obligations under an underwriting agreement, in usual and customary form, including, without limitation, indemnification and contribution obligations, with the underwriter(s) of such offering and the Company, and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Purchaser has notified the Company in writing of the Purchaser’s election not to participate in such underwritten distribution.

(d) A Purchaser may not participate in any underwritten distribution under this Agreement unless the Purchaser (i) agrees to sell the Purchaser’s Registrable Securities on the basis provided in any underwriting arrangements in usual and customary form entered into by Company, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts

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and commissions and any expenses in excess of those payable by the Company pursuant to Section 5.1(d).

5.3. Mutual Indemnification Related to Registration.

(a) Indemnification by the Company. In the event of any registration of Registrable Securities under the Securities Act pursuant to this Agreement, to the full extent permitted by law, the Company agrees to indemnify each Purchaser, its affiliates, and their officers, directors, trustees, partners, employees, advisors and agents (including brokers or dealers acting on their behalf), and each person who controls the Purchaser (within the meaning of the Securities Act and the Exchange Act) against all losses, claims, damages, liabilities and expenses caused by (i) any violation by the Company of the Securities Act, the Securities Exchange Act of 1934 (the “Exchange Act”), any state securities or blue sky laws or any rule or regulation thereunder or (ii) any untrue or allegedly untrue statement of material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act, any prospectus or preliminary prospectus contained therein or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which such statements were made, provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon (i) an untrue or allegedly untrue statement or omission or alleged omission resulted from information that the Purchaser furnished in writing to the Company expressly for use therein or (ii) an untrue statement or alleged untrue statement or omission or alleged omission that was contained in a preliminary prospectus and corrected in a final prospectus, and such seller failed to deliver a copy of the final prospectus, which was provided to seller in a timely manner and in accordance with the delivery requirements of the Securities Act. In connection with a firm or best efforts underwritten offering, to the extent customarily required by the managing underwriter, the Company will indemnify the underwriters, their officers and directors and each person who controls the underwriters (within the meaning of the Securities Act and the Exchange Act), to the extent customary in such agreements.

(b) Indemnification by Purchasers. In connection with any registration statement, each participating Purchaser will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any registration statement or prospectus and each Purchaser agrees to indemnify, to the extent permitted by law, the Company, its directors, officers, trustees, partners, employees, advisors and agents (including brokers or dealers acting on their behalf), and each person who controls the Company (within the meaning of the Securities Act and the Exchange Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or allegedly untrue statement of a material fact or any omission or alleged omission to state a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto necessary to make the statements therein not misleading in light of the circumstances under which such statements were made, but only to the extent that the untrue or allegedly untrue statement or omission or alleged omission is contained in or omitted from any information or affidavit the Purchaser furnished in writing to the Company expressly for use therein and only in an amount not exceeding the net proceeds received by the Purchaser with respect to securities sold pursuant to such registration statement. In connection with a firm or best efforts underwritten offering, to

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the extent customarily required by the managing underwriter, each participating Purchaser will indemnify the underwriters, their officers and directors and each person who controls the underwriters (within the meaning of the Securities Act and the Exchange Act), to the extent customary in such agreements.

(c) Indemnification Proceedings. Any person entitled to indemnification under this Agreement will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in the indemnified party’s reasonable judgment a conflict of interest may exist between the indemnified and indemnifying parties with respect to the claim, permit the indemnifying party to assume the defense of the claim with counsel reasonably satisfactory to the indemnified party. If the indemnifying party does not assume the defense, the indemnifying party will not be liable for any settlement made without its consent (but that consent may not be unreasonably withheld). No indemnifying party will consent to entry of any judgment or will enter into any settlement without the consent of the indemnified party (i) that does not include as an unconditional term thereof the claimant’s or plaintiff’s release of the indemnified party from all liability concerning the claim or litigation or (ii) that contains any admission of guilt on the part of any indemnified party. An indemnifying party who is not entitled to or elects not to assume the defense of a claim will not be under an obligation to pay the fees and expenses of more than one counsel in each applicable jurisdiction for all parties indemnified by the indemnifying party with respect to the claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between the indemnified party and any other indemnified party with respect to the claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of no more than one additional counsel for the indemnified parties.

(d) Contribution. If the indemnification provided for in Section 5.3(a) or 5.3(b) is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, (the “Unindemnified Losses”) then each party responsible for indemnification under Section 5.3(a) or 5.3(b) shall contribute to the amount paid or payable by the indemnified party as a result of any Unindemnified Losses in the proportion appropriate to reflect the relative fault of the Company and the participating Purchasers in connection with the statements or omissions that resulted in the Unindemnified Losses, as well as any other relevant equitable considerations. The relative fault of the Company and the participating Purchasers will be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the participating Purchasers and the parties’ relative intent, knowledge, and opportunity to correct the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact.

The parties to this Agreement agree that it would not be just and equitable if contribution pursuant this Section 5.3(d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding anything to the contrary in this Agreement, no Purchaser contributing pursuant to this Section 5.3(d) will be required to contribute any amount in excess of the lesser of (i) the net proceeds of the offering (before deducting expenses, if any) received by that Purchaser, less the amount of any damages that the Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission

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or alleged omission and (ii) the proportion of the total losses, claims, damages, liabilities or expenses indemnified against equal to the proportion of the total amount of securities sold under such registration statement sold by the participating Purchaser. Notwithstanding any other provision of this Agreement, no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

SECTION 6. MISCELLANEOUS.

6.1. Governing Law. This Agreement shall be governed by the laws of the State of Maryland as such laws are applied to agreements between Maryland residents entered into and performed entirely in Maryland, without reference to the law of conflicts, except that the Delaware General Corporation Law will govern as to matters of corporate law.

6.2. Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Shares from time to time.

6.3. Entire Agreement. This Agreement, the Designation, Exhibits, Schedules and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein.

6.4. Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

6.5. Amendment. This Agreement may be amended or modified only upon the written consent of the Company, and the holders representing at least a majority of the Shares (treated as if converted and including any Conversion Shares into which the Shares have been converted, and also including those Warrant Shares which have been issued on due exercise of the applicable Warrants), except that Schedule 1 of this Agreement may be amended prior to the Closing Date to add or remove a Purchaser or change the number of Shares purchased by a Purchaser with the written consent of the Company and the affected Purchaser(s).

6.6 Delays or Omissions. The failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. It is further agreed that any waiver of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing.

6.7 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given upon the earlier of receipt or (a) the day sent by confirmed facsimile if sent during normal business hours of the recipient, and if not, then on the next business day, (b) three business days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (c) one day after deposit with a nationally recognized overnight

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courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at its principal place of business and to Purchasers at the addresses set forth on the signature pages hereto or at such other address as the Company or Purchaser may designate by ten days advance written notice to the other parties hereto pursuant to this Section 6.7.

6.8. Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

6.9. Counterparts. This Agreement may be delivered via facsimile and may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

6.10. Pronouns. All pronouns contained herein, and any variations thereof, shall be deemed to refer to the masculine, feminine or neutral, singular or plural, as the identity of the parties hereto may require.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date above first written.

COMPANY:		PURCHASER:
AVATECH SOLUTIONS, INC.
By:	/s/
	Donald R. “Scotty” Walsh Chief Executive Officer	Address:

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SCHEDULE 1

Purchaser	Shares	Purchase Price
1.      ______________________________	_______	_______
2.      ______________________________	_______	_______
3.      ______________________________	_______	_______
4.      ______________________________	_______	_______
5.      ______________________________	_______	_______
6.      ______________________________	_______	_______
7.      ______________________________	_______	_______
TOTAL:	_______	_______

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Donald R. Walsh, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Avatech Solutions, Inc.;

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

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

Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: February 13, 2004	/s/ Donald R. Walsh
	Donald R. Walsh Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Beth O. MacLaughlin, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Avatech Solutions, Inc.;

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

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

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: February 13, 2004	/s/ Beth MacLaughlin
	Beth MacLaughlin Chief Financial Officer

EX-32.1

EXHIBIT 32.1

SECTION 1350 CERTIFICATIONS

In connection with the Quarterly Report of Avatech Solutions, Inc. (the “Company”) on Form 10-Q for the period ending December 31, 2003 as filed with the Securities and Exchange Commission and to which this Certification is an exhibit (the “Report”), the undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods reflected therein.

Date: February 13, 2004	/s/ Donald R. Walsh
	Donald R. Walsh Chief Executive Officer
	/s/ Beth MacLaughlin
	Beth MacLaughlin Chief Financial Officer