10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended June 30, 2010

or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             .

Commission file number: 001-31265

AVATECH SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	84-1035353
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10715 Red Run Blvd, Suite 101, Owings Mills, Maryland	21117
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (410) 581-8080

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨    No  þ

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  ¨    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ¨	Accelerated Filer  ¨
Non-Accelerated Filer  ¨	Smaller Reporting Company  þ

(Do not check if a smaller reporting company)

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

The aggregate market value of the voting and non-voting equity stock held by non-affiliates of the registrant as of September 13, 2010 was approximately $36,313,017.

The number of shares of common stock outstanding as of September 13, 2010 was 51,875,739.

DOCUMENTS INCORPORATED BY REFERENCE

Information required by Part III of this Form 10-K is incorporated therein by reference to the Registrant’s definitive proxy statement to be filed in connection with its 2010 Annual Meeting of Stockholders.

TABLE OF CONTENTS

PART I			4
	ITEM 1.	Business	4
	ITEM 1B.	Unresolved Staff Comments	9
	ITEM 2.	Properties	10
	ITEM 3.	Legal Proceedings	10
	ITEM 4.	(Removed and Reserved)	10
PART II			11
	ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
	ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	ITEM 8.	Financial Statements and Supplementary Data	22
	ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	22
	ITEM 9A.	Controls and Procedures	22
	ITEM 9B.	Other Information	22
PART III			23
	ITEM 10.	Directors, Executive Officers and Corporate Governance	23
	ITEM 11.	Executive Compensation	23
	ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	23
	ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	23
	ITEM 14.	Principal Accounting Fees and Services	23
PART IV			24
	ITEM 15.	Exhibits, Financial Statement Schedules	24
SIGNATURES			26
EXHIBIT INDEX

This Annual Report of Avatech Solutions, Inc. on Form 10-K for the year ended June 30, 2010 may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements”. Statements that are not historical in nature, including those that include the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which Avatech Solutions, Inc. operates, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions; cost of capital, demand for products and services; changes in Avatech Solutions, Inc.’s competitive position or competitive actions by other companies; the ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond the Avatech Solutions, Inc.’s control. Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on the Avatech Solutions, Inc.’s business or operations. Except as required by applicable laws, Avatech Solutions, Inc. does not intend to publish updates or revisions of forward-looking statements it makes to reflect new information, future events or otherwise.

When used throughout this annual report, the terms “Avatech”, “the Company”, “we”, “us” and “our” refer to Avatech Solutions, Inc. and, unless the context clearly indicates otherwise, its consolidated subsidiaries other than Rand Worldwide, Inc. (“Rand Worldwide”).

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PART I

ITEM 1. BUSINESS

Background

Avatech Solutions, Inc. was formed as a Delaware corporation on September 9, 1996. During fiscal years 1997 through 1999, the Company consummated business combinations with 10 companies that provided design automation software, training, technical support, and professional services to corporations, government agencies, and educational institutions throughout the United States.

In November 2002, Avatech Solutions, Inc. completed a merger with PlanetCAD, Inc. (“PlanetCad”) and became a wholly owned subsidiary of PlanetCAD, after which PlanetCAD changed its name to Avatech Solutions, Inc. and the original Avatech Solutions, Inc. changed its name to Avatech Solutions Subsidiary, Inc. As a result of the merger, PlanetCAD’s stockholders retained 25% of the surviving company and, in exchange for all of the common stock of the original Avatech Solutions, Inc., the stockholders of the original Avatech Solutions, Inc. were issued registered shares constituting 75% of the surviving company’s outstanding common stock. The original Avatech Solutions, Inc. was deemed to have acquired PlanetCAD because its stockholders received the majority of the common stock of the surviving company.

Subsequent to the Company’s most recent year end, on August 17, 2010, Avatech Solutions, Inc. acquired Rand Worldwide in a reverse merger transaction that resulted in Rand Worldwide becoming a wholly owned subsidiary of Avatech. In connection with the merger, Rand Worldwide’s stockholders received shares of Avatech common stock representing approximately 66% of the outstanding shares of Avatech common stock and Avatech’s stockholders retained approximately 34% of the outstanding shares of Avatech common stock. When calculated based on the number of shares of Common Stock outstanding on a fully diluted basis on August 17, 2010, the merger consideration is equal to 59.3% of the total common equivalent shares at closing. Because the shares of Avatech common stock issued to Rand Worldwide’s stockholders exceeded 50% of the outstanding shares of Avatech common stock outstanding immediately after the merger, Rand Worldwide was deemed, for accounting and SEC reporting purposes, to be the continuing reporting entity, and the assets and liabilities and the historical operations that will be reflected in our consolidated financial statements going forward will be those of Rand Worldwide. Since Rand is deemed, for accounting purposes, to be the acquiring entity, upon consummation of the merger, there will be purchase accounting adjustments that will affect the carrying amounts of assets and liabilities of Avatech that are currently reported at historical cost as of June 30, 2010. A Form 8-K that includes pro forma financial information is expected to be filed within 71 days after the merger date.

General

The Company is a leader in design, engineering, and facilities management technology solutions with expertise in computer aided design (“CAD”) software, data management, facilities management, and process optimization for the manufacturing, engineering, and building design industries. Avatech specializes in software resale, technology consulting, implementation, integration, training, and technical support solutions that enable clients to more effectively design, develop, and manage projects, products, and facilities. The Company’s clients include corporations, government agencies, and educational institutions nationwide.

The operations of Rand Worldwide are very similar to those of Avatech except that Rand’s annual revenues are approximately 50% greater than those of Avatech and in addition to their operations in the United States, Rand has operations in Canada, Asia and Australia. Rand Worldwide employs approximately 250 people in over 40 sales and client service centers around the world and like Avatech, generates revenues from sources other than through the sale and support of CAD software. However, again like Avatech, most of Rand’s revenues come from the resale of design software developed by Autodesk, Inc. (“Autodesk”) and services supporting that software.

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The Company differentiates itself from traditional product resellers through a wide range of value-added services, consisting primarily of training, technical support, and professional services. It also provides software customization, data migration, computer-aided design standards consulting, process workflow analysis, and implementation assistance for complex design environments. Its strategic focus is to provide clients a competitive advantage with technology solutions that address broad, enterprise-wide initiatives.

Avatech’s sales and service delivery network consists of approximately 106 employees operating out of seventeen business offices across the United States. The Company has a sales database that contains over 300,000 point-of-contact names collected over its history and an active customer list of approximately 30,000 private firms, federal, state, and local agencies, and colleges and universities.

During its fiscal year ended June 30, 2009, Avatech’s operations were significantly affected by the recession which gripped the United States. The business slowdown experienced by the Company’s customer base in the manufacturing, engineering and building sectors resulted in reduced purchases of the products and services that the Company offers. In order to respond to this downturn and the resulting decrease in revenues over prior periods, management implemented a series of tactics including a significant reduction in workforce and an across-the-board reduction of the base pay of all employees.

During fiscal year 2010, the Company’s operations improved as the recession abated and the United States began its economic recovery. Sales levels, while still lower than prior to the recession, began to increase and the Company returned to profitability. For the year ended June 30, 2010, the Company reported net income of approximately $1.3 million and ended the fiscal year with virtually no debt and no outstanding shares of its Series F 10% Cumulative Convertible Preferred Stock (the “Series F Stock”).

The Company’s ongoing strategic plan calls for it to leverage the solid core business base that has been established to profitably grow its product and services offerings in the design engineering market space. Concurrently, Avatech plans to continue to identify and engage in diverse software and services opportunities through strategic relationship development while taking advantage of its established brand, its geographic footprint and technical expertise to accomplish its objectives. Thus, the strategic plan calls for the Company to target specific product lines that will maximize its Autodesk business, to leverage its market position and core competencies, and to grow the Services component of its business. This strategy remains unchanged after the August 2010 merger with Rand except that management believes that the opportunities to execute its strategies have been greatly expanded by the combination of the two organizations.

Avatech has a software development team within its professional services group that is charged with the responsibility of developing software-based solutions for customers that improve the customers’ design workflow processes. These may include sales-oriented configuration tools or engineering-oriented automation and integration tools. The solutions often involve automating or enhancing the software products the Company sells. While focused on professional services, the team has developed a variety of small applications which are packaged and sold commercially to its customers. For example, in June 2009, Avatech sold a software application that its team had developed for $500,000 to Autodesk. It is Avatech’s intention to continue the development of software applications as well as to identify new areas for commercial software development. There can be no assurance that any future sale will result in a similar amount of income to the Company.

The Company’s product sales are somewhat cyclical, and increase when the developer of a specific software product offers a new version, promotions or discontinues support of an older product. As is common among software resellers, the Company purchases products from its suppliers with a combination of cash and credit. The Company allows returns in limited situations.

Products

Substantially all of Avatech’s business consists of the sale of prepackaged software and associated services to customers in the United States. Sales are focused on the following three major product categories and associated value-added services.

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Design Automation. More than 94% of product revenues arise from the resale of design software developed by Autodesk for the building design and land development, manufacturing, utilities, and telecommunications industries, and the delivery of related services from the sales of these products. These product sales are primarily packaged software programs 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, drafting, manufacturing, workflow automation, and document management activities.

Avatech also provides 3D laser scanning products including hardware, software, equipment rentals and training. This solution provides accurate as-builts of existing structures and facilities, resulting in a more accurate and cost effective design.

Data Management. Data management software products help businesses reduce costs, improve quality, strengthen relationships with customers and suppliers, and deliver more innovative products and services to minimize product time-to-market by leveraging the value of existing data.

Facilities Management. Physical assets, such as real estate, buildings, equipment, materials, and furniture are a significant percentage of an organization’s total asset value. These assets are used by many different business units, departments, and individuals, and must be accurately managed in order to extend asset life cycles and keep operating costs at a minimum.

Integrated Workplace Management Systems (“IWMS”) and Computer Aided Facilities Management (“CAFM”) systems enable organizations to make informed strategic and business decisions that optimize return on investment, lower asset lifecycle costs, and increase enterprise-wide productivity and profitability. Organizations of all sizes, spanning the financial, educational, governmental, healthcare, and manufacturing industries, use these solutions to deliver timely, relevant facilities information as part of their strategic business plans.

Geographic Information Systems (“GIS”) permit users to link together disparate data files (maps, aerial photos, tax records, marketing data, etc.) and provide the user with a unified image and knowledge base of a specific geographic location or building location. When combined with information from a facilities management system, information from GIS applications provide an integrated facilities view that allows enhanced analysis in various spatial contexts for professionals responsible for asset tracking, maintenance, emergency preparedness, space allocation, and construction planning.

The Company sells, customizes, and implements IWMS and CAFM solutions through its dedicated salespeople, technical specialists, and a network of strategic partners. It also provides GIS database development services to facilities management customers, both through its employees and strategic partners.

The Company occasionally develops add-ons, utilities and other software complimentary to its resale products or otherwise beneficial to its customer base. Such software is either offered for sale or provided at no cost to customers. During fiscal year 2009, Avatech developed BIMreview software, an enhancement to Autodesk’s Revit^® architectural software. During the fourth quarter of 2009, Autodesk purchased all rights in the BIMreview software for $500,000. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), the Company expenses as incurred the research and development costs of internally developed software until technological feasibility is established. Accordingly, the costs of developing BIMreview software were expensed as research and development when incurred during the first two quarters of fiscal year 2009.

Services

Professional services include project-focused software implementations, software customization, data migration, computer aided design standards consulting, supplemental design staffing, drawing digitization, and symbol library development. The Company employs over forty industry specialists who provide professional services to its design automation customers.

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Avatech offers training courses in thirty nine different subjects related to various software solutions offered at sixteen training facilities and through mobile labs sent to customer sites or other off-site facilities. Training is led by thirty four technical experts that have formal training or proven industry experience in the topics they teach. The Company also provides training services that are highly tailored to meet the needs of a particular customer, including company-specific operational topics, customized product usage, and other general technology or process training. As part of the training offering, the Company has developed and deployed an Internet-based assessment tool that allows its clients to test their employees’ knowledge and ability to use the software tools.

The Company provides end-user telephone support services through its National Support Center (NSC). A staff of full-time technology consultants assists customers with questions about product features, functions, usability issues, and configurations. The NSC offers services through multiple access levels including prepaid services, actual elapsed time, and annual support contracts. Customers can communicate with the NSC through a variety of channels including e-mail, an Internet portal, telephone, and facsimile.

Avatech also offers a consulting services division with a focus on using technology to fulfill strategic objectives. Typical projects target the automation and embedding of design rules, workflows, and standards into technology tools to automate processes and eliminate bottlenecks.

Markets and Competition

Design Automation. In the design automation market, Avatech focuses on providing enterprise solutions to small- and medium-sized businesses with under one billion dollars of annual revenue, primarily in the architecture, engineering, and construction (“AEC”) market and the mechanical design and manufacturing (“MDM”) market. The AEC market is comprised of design services focused on the construction of large physical assets such as buildings, roads, factories, utility companies, and commercial infrastructure projects. The MDM market is primarily focused on the design, tooling, assembly, and testing of instruments, electronic devices, machines, mechanical devices, and power-driven equipment.

While several local and regional competitors exist in the various geographic territories where the Company conducts business, it believes that it has a competitive advantage in terms of geographic reach, comprehensive training and support, and the provision of other products and services, and that it is one of the largest commercial Autodesk resellers in the United States. Two national competitors that could be compared to Avatech in scale, size, geographical reach, and target markets for the resale of Autodesk products are Tata Technologies Company (“Tata”) and Rand Worldwide. As previously discussed, in August 2010, the Company merged with Rand Worldwide.

Tata is a systems integrator for design automation products with offices located in fourteen countries and has headquarters in the United States, London, and India. While the Company believes that Tata has greater revenues than Avatech, the Company estimates that the Autodesk portion of Tata’s business is less than its Autodesk business.

Rand Worldwide is a large, global computer-aided design and engineering technology company that has U.S. offices in the Northern Pacific, Midwest, Northeast and the Southeast. The Company’s Autodesk-related business is concentrated primarily in geographic areas in which Rand Worldwide does not have a significant presence. In addition, Rand Worldwide offers products and services that the Company does not offer. Thus, the merger with Rand Worldwide allowed the Company to not only expand its Autodesk-related business presence but also diversify its products and services.

Data Management. In this market, the Company faces similar competition from local and regional Autodesk resellers in its design automation business.

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Facilities Management. The Company provides IWMS and CAFM solutions to organizations of all sizes, spanning the financial, educational, governmental, healthcare, and manufacturing industries. As a reseller of technology from ARCHIBUS and Idisis, the Company competes with not only competitive applications but also other resellers of the products it represents.

Arrangements with Principal Suppliers

Revenues are primarily derived from the resale of vendor software products and services. These sales are made pursuant to channel sales agreements whereby Avatech is granted the authority to purchase and resell the vendor products and services. Under these agreements, the Company both resells software directly to its customers and acts as a sales agent for various vendors and receives commissions for its sales efforts.

On February 1, 2008, the Company entered into a renewable Authorized Channel Partner Agreement with Autodesk. The renewable agreement dated February 1, 2008 has a term of three years but provides targets for a one-year period. Under this agreement, Autodesk appointed the Company as a non-exclusive partner to market, distribute, and support Autodesk software products and identifies targets for the upcoming year. The Company must achieve yearly minimum revenue in the amount of $300,000 from the sale of Autodesk’s software products in order to be eligible to purchase such products directly from Autodesk. For the year ended June 30, 2010, the Company’s revenue from the sale of Autodesk software and subscriptions was approximately $22.6 million. This agreement authorizes the Company to sell certain software products to certain customers in specific geographic areas of the United States and there are no clauses in this agreement that limit or restrict the services that the Company can offer to customers. The Company fully expects that this agreement will be renewed when it expires in February, 2011.

Customers

The Company markets its products to private companies, public corporations, government agencies, and educational institutions throughout the United States. In the fiscal year ended June 30, 2010, the revenues generated by our top ten customers represented approximately ten percent of consolidated revenues, and no single customer accounted for three percent or more of our consolidated revenues.

Intellectual Property

The Company regards its technology and other proprietary rights as essential to its business. As such, it relies on copyright, trade secret, confidentiality procedures, contract provisions, and trademark law to protect its technology and intellectual property. Avatech has confidentiality agreements with its consultants and corporate partners and controls access to, and distribution of, its products, documentation, and other proprietary information.

Avatech owns several federally registered trademarks, including “AVATECH SOLUTIONS,” and “AVANEWS,” and has other trademark applications pending, but has no patents or patent applications pending. This Annual Report contains trademarks and trade names of Avatech Solutions, Inc. and its affiliates as well as those of other companies. All trademarks and trade names appearing in this report are the property of their respective holders.

Employees

At June 30, 2010, the Company had approximately 147 employees located in seventeen offices throughout the United States, of which 146 are full-time employees. Approximately 27 of its employees are located at its corporate headquarters in Maryland, which also houses a training facility and some sales and technical personnel. None of its employees are represented by collective bargaining agreements, and it has never experienced a work stoppage. The Company believes that its employee relations are good. It is anticipated that the merger with Rand Worldwide added approximately 250 full-time employees.

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Available Information

Avatech maintains an Internet site at www.avatech.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). In addition, stockholders may access these reports and documents on the SEC’s web site at www.sec.gov. The Company’s executive offices are located at 10715 Red Run Blvd, Suite 101, Owings Mills, Maryland 21117 and its telephone number is (410) 581-8080.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.    PROPERTIES

Corporate offices are located in Owings Mills, Maryland where the Company leases approximately 13,430 square feet of office space pursuant to a lease which expires on July 31, 2011. These facilities house executive and primary administrative offices as well as accounting, order processing operations, IT, sales, and marketing. The Company also leases office space at the following locations:

Location	Square Footage	Term
Colorado—Greenwood Village	7,462	12/31/2011
Florida—Tampa	4,103	3/31/2014
Indiana—Indianapolis	3,129	4/30/2013
Illinois—Chicago	2,369	12/31/2011
Iowa—Cedar Rapids	2,465	10/31/2014
Iowa—Des Moines	3,027	7/31/2011
Minnesota—St. Paul	2,782	3/31/2012
Michigan—Troy	5,090	3/31/2014
Nebraska—Omaha	5,473	8/31/2013
North Carolina-Charlotte	3,500	10/31/2010
North Carolina—High Point	1,764	4/30/2011
North Carolina-Raleigh	3,671	11/30/2011
Ohio—Beachwood	2,528	11/30/2010
Texas—Houston	3,384	12/31/2013
Texas—Irving	4,588	4/30/2013
Virginia—Richmond	1,832	9/30/2015
Virginia—Virginia Beach	5,887	10/31/2014

The commercial real estate market is volatile and unpredictable in terms of available space, rental fees, and occupancy rates and preferred locations. The Company cannot be certain that additional space will be available when it is required, or that it will be affordable or in a preferred location.

ITEM 3.    LEGAL PROCEEDINGS

From time to time, the Company is involved in legal matters or named as a defendant in legal actions arising from normal operations, or is presented with claims for damages arising out of the conduct of its business. Management believes that no pending matter, alone or together with other pending matters, is likely to have a material adverse effect on the Company’s future financial condition or results of operations.

ITEM 4. (REMOVED AND RESERVED)

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price Data

Avatech’s common stock is traded through the over-the-counter market and price quotations are published on The Nasdaq Stock Market’s OTC Bulletin Board under the symbol “AVSO.OB”. The common stock is not heavily traded. The following table indicates the high and low bid quotations per share, rounded to the nearest whole cent, as available through the OTC Bulletin Board for each quarterly period within the two most recent fiscal years. These quotations represent prices between dealers and do not reflect retail mark-ups, mark-downs or commissions, and may not represent actual transactions.

Period	High		Low
Fiscal Year Ended June 30, 2010
First Quarter	$	0.60	$	0.30
Second Quarter		0.56		0.26
Third Quarter		0.95		0.26
Fourth Quarter		1.02		0.26
Fiscal Year Ended June 30, 2009
First Quarter	$	1.02	$	0.60
Second Quarter		0.80		0.32
Third Quarter		0.52		0.26
Fourth Quarter		0.50		0.26

Recent Closing Prices

On September 13, 2010, the closing price for our common stock as reported on the OTC Bulletin Board was $0.70.

Dividend Information

The Company has never paid cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Rather, management intends to continue its strategy of retaining earnings for the foreseeable future for use in the expansion and operation of our businesses. The declaration and amount of any future cash dividends is at the discretion of the Company’s Board of Directors. Moreover, without the consent of our senior lender, the Company is prohibited from declaring dividends on the Company’s common stock. Accordingly, there can be no guaranty that stockholders will receive any cash dividends on their common stock in the future.

The Company has outstanding shares of Series D Convertible Preferred Stock (“Series D Stock”) and Series E Convertible Preferred Stock (“Series E Stock”), which are eligible for 10% annual, cumulative dividends. The dividends are payable quarterly as declared by the Board of Directors. These dividends have priority over any declaration or payment of any dividend or other distribution on the common stock.

Until March, 2010, the Company also had outstanding shares of Series F Stock, which were also eligible for 10% annual, cumulative dividends which were paid semi-annually as declared by the Board of Directors. Pursuant to the agreements executed as part of its June 2006 offering of the Series F Stock, the holders of the Series F Stock had the right to request redemptions of up to $500,000 of the Series F Stock each January 1, April 1, July 1 and October 1. Those stockholders expressed their intention of requesting the redemptions until their Series F Stock had been fully redeemed. As of July 1, 2009, 2,000 of the original 4,000 shares of the Series F Stock were outstanding, and all of these were redeemed during fiscal year 2010 for an aggregate redemption price of $2,000,000, plus accumulated dividends of $100,000. The Company has fulfilled all of its obligations with respect to the Series F Stock.

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For the year ended June 30, 2010, dividends totaling $261,000 were paid to the holders of the Series D Stock, Series E Stock and Series F Stock.

Number of Stockholders

As of September 13, 2010, there were 1,454 holders of record of the Company’s common stock, 11 holders of Series D Stock, and 26 holders of Series E Stock.

Equity Compensation Plan Information

The following table provides information, as of June 30, 2010, with respect to all compensation arrangements that we maintain under which shares of common stock may be issued:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) (1)
Equity compensation plans approved by security holders	1,605,177	$	0.93	521,556
Equity compensation plans not approved by security holders	-0-		-0-	-0-
Total	1,605,177	$	0.93	521,556

(1) This amount includes 178,801 shares of stock that may be issued under the Avatech Solutions, Inc. Amended and Restated Restricted Stock Plan, which contemplates the grant of shares of common stock upon such terms, including with respect to forfeiture and restrictions of resale and transfer, as the Board deems appropriate.

Issuer Purchases of Equity Securities

During the fourth quarter of fiscal year 2010, the Company did not purchase any shares of its common stock.

Sales of Unregistered Equity Securities

During the fourth quarter of fiscal year 2010, the Company did not sell any unregistered equity securities.

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ITEM 7. 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.

Material Subsequent Event

On August 17, 2010, Avatech Solutions, Inc. acquired Rand Worldwide in a reverse merger transaction that resulted in Rand Worldwide becoming a wholly owned subsidiary of Avatech. In connection with the merger, Rand Worldwide’s stockholders received shares of Avatech common stock representing approximately 66% of the outstanding shares of Avatech common stock and Avatech’s stockholders retained approximately 34% of the outstanding shares of Avatech common stock. Because the shares of Avatech common stock issued to Rand Worldwide’s stockholders in the merger exceeded 50% of the outstanding shares of Avatech common stock outstanding immediately after the merger, Rand Worldwide is deemed, for accounting and SEC reporting purposes, to be the continuing reporting entity, and the assets and liabilities and the historical operations that will be reflected in our consolidated financial statements going forward will be those of Rand Worldwide. Since Rand is deemed, for accounting purposes, to be the acquiring entity, upon consummation of the merger, there will be purchase accounting adjustments that will affect the carrying amounts of assets and liabilities of Avatech that are currently reported at historical cost as of June 30, 2010. A Form 8-K that includes pro forma financial information is expected to be filed within 71 days after the merger date.

This Item 7 discusses the financial condition and results of operations of Avatech Solutions, Inc. for the year ended June 30, 2010. Where appropriate, however, management has included discussion regarding how it believes the merger may impact various aspects of our future financial condition and/or results of operations.

In connection with the merger, Rand Worldwide changed its fiscal year end to match our fiscal year end, from October 31 to June 30, and SEC rules require us to file a Transition Report on Form 10-K for Rand Worldwide’s transition period of November 1, 2009 to June 30, 2010 on or before November 15, 2010.

Overview

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

The Company’s business strategy is built on three core principles designed to leverage its existing strengths with expected market opportunities:

• Maintain and profitably grow its strong position in the Autodesk software economy.

• Profitably grow its consulting and services business by leveraging its experts in design engineering.

• Acquire and integrate diverse, yet complementary, software and services businesses to extend its product offerings to its large customer base and expand its market potential.

Product Sales- Product sales consist primarily of the resale of packaged design software, including:

• Autodesk design automation software for mechanical, architectural and civil engineering sectors and visualization and animation technology;

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• Autodesk data management software;

• Archibus facilities management software for space planning, strategic planning, and lease/property administration; and

Product sales also include Leica 3D laser scanning equipment for the Architectural, Engineering and Construction sector.

Service Revenue- Avatech provides services in the form of training, consulting services, software development, and technical support to its customers. Avatech employs a technical staff of approximately 46 personnel associated with these types of services.

Commission Revenue- The Company offers Autodesk’s subscription programs, which entitle subscribers to receive software upgrades, web support and eLearning lessons directly from Autodesk. Because Avatech does not participate in the delivery of these subscription products or the web support and eLearning lesson benefits, the Company records the gross profit from the sale of Autodesk software subscriptions as commission revenue. In addition, the Company sells technology upgrades to existing Autodesk customers through the Autodesk Subscription program where the customers receive the latest releases of Autodesk software, incremental product enhancements, personalized web support direct from Autodesk, and self-paced training to help extend its customers skills.

Based on its analysis of the Autodesk Subscription program, Avatech records the net proceeds that it receives from Autodesk for subscription sales in accordance with the provisions of FASB ASC 605, (previously EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent).

Avatech also generates commission revenue from the resale of Autodesk software to various customers, a number of which Autodesk considers “major accounts.” Autodesk designates these customers as major accounts based on specific criteria, primarily sales volume, and typically gives these customers volume discounts. The Company is responsible for managing and reselling Autodesk products to a number of these major account customers; however, software products are shipped directly from Autodesk to the customers. Avatech receives commissions upon shipment of the products from Autodesk to the customer based on the product sales price.

Cost of Product Sales- The cost of product sales consists of the cost of purchasing products from software suppliers or hardware manufacturers as well as the associated shipping and handling costs.

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, travel, literature, and the costs of third-party contractors engaged by the Company. The cost of service revenue does not include an allocation of overhead costs.

Selling, General and Administrative Expenses- Selling, general and administrative expenses consist primarily of compensation and other expenses associated with the Company’s sales force, management, finance, human resources, and information systems. Advertising and public relations expenses and expenses for facilities, such as rent and utilities, are also included in selling, general and administrative expenses.

Depreciation and Amortization Expenses- Depreciation and amortization expenses represent the period costs associated with our investment in property and equipment, consisting principally of computer equipment, software, furniture and fixtures, leasehold improvements and acquired customer lists. The Company computes depreciation and amortization expenses using the straight-line method. Avatech leases all of its facilities and depreciates leasehold improvements over the lesser of the lease term or the estimated useful life of the asset. Total amortization expense for the year ended June 30, 2010 was $212,000. Total depreciation expense for the year ended June 30, 2010 was $370,000.

Interest Expense- For the year ended June 30, 2010, interest expense consisted of interest on a capital lease and maintenance fees on the line of credit.

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Critical Accounting Policies

General- The consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. Critical accounting policies and estimates that impact the consolidated financial statements are those that relate to software revenue recognition, estimates of bad debts and income taxes. All of these critical accounting policies are discussed with and reviewed by the Company’s Audit Committee on a periodic basis. Presented below is a description of the accounting policies that management believes are most critical to an understanding of the consolidated financial statements.

Software Revenue Recognition- The Company derives most of its revenue from the resale of packaged software products, and historically, the Company has not experienced significant customer returns. Avatech earns service revenue from training and other professional services, which often are related to the products that are sold but are not essential to the functionality of the software. Annual support contracts are also offered to customers for the software products that are sold, or the Company offers maintenance and support services under hourly billing arrangements.

Revenue from software arrangements is recognized in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 985 (previously American Institution of Certified Public Accountants (“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. The Company determines whether criteria (3) and (4) have been satisfied based on its judgment regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of such fee. Revenue recognized in a reporting period could be adversely affected if future changes in conditions related to a transaction cause management to determine these criteria are not met. In the past, it has not been necessary to adjust reported revenues due to changes in conditions, and the Company continues to evaluate current conditions that may affect the nature and timing of our revenue recognition.

Customer arrangements can involve the sale of one or more elements (product, service, training, etc.), and are subject to a restrictive returns policy. When this occurs, Avatech allocates revenue to each element if it can reliably determine the relative fair value of each element. The Company limits the assessment of fair value to the price that is charged when the element is sold separately. If the fair value of each element in a multiple element arrangement cannot be reliably determined, and if the fair value of any undelivered element cannot also be reliably determined, all revenue under the arrangement is deferred until such time as the only remaining undelivered element is maintenance, or in the absence of maintenance, implementation services, at which time revenue is recognized over the remaining maintenance or service period. Revenue that is deferred and recognized over a maintenance or service period is recognized in proportion to the services delivered, or ratably if no better measure of performance can be determined. The timing of the revenue that is recognized in future periods from multiple element arrangements with customers will be dependent upon the ability to establish or continue to have vendor-specific objective evidence of the fair value of each of the elements in these types of arrangements. The Company processes product immediately to be shipped to its customers. Performance of services varies based upon timelines agreed upon by both parties.

Bad Debts- The Company maintains an allowance for doubtful accounts for estimated losses which may result from the inability of customers to pay for purchased products and services or for disputes that affect the ability to fully collect accounts receivable. Avatech estimates this allowance by reviewing the status of past-due accounts and records general reserves based on historical bad debt expense. Accounts are considered past due based on the payment terms as stated on the invoice. Actual experience has not varied significantly from estimates; however, if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to pay for products or services, there may be a need to record additional allowances in future periods. To mitigate this risk, the Company performs ongoing credit evaluations of its customers.

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Income Taxes- At June 30, 2010, the Company had federal net operating loss carryforwards totaling approximately $1.0 million, which will begin to expire in 2012. The federal net operating loss carryforwards at June 30, 2010 are subject to a $92,000 annual limitation under Internal Revenue Code Section 382. The Company believes that the merger will not affect the ultimate realization of this carryforward but the final determination has not yet been made.

Recoverability of goodwill and purchased intangible assets- The Company accounts for goodwill and other intangibles under FASB ASC 350 (previously Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets). FASB ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment; while the second phase, if necessary, measures the impairment. Management considers the Company to be a single reporting unit; accordingly, all of the goodwill is associated with the entire company. The Company performs the required impairment analysis of goodwill annually or on an interim basis if circumstances dictate. Any reduction of the enterprise fair value below the recorded amount of equity could require the Company to write down the value of goodwill or purchased intangibles and record an expense for an impairment loss. Management’s analysis of the recoverability of its intangible assets as of June 30, 2010 determined that there was no need for any write downs of its assets.

Selected Revenue Information for Years Ended June 30, 2010 and 2009

The following table sets forth the percentages of total revenue represented by selected items reflected in our audited Consolidated Statements of Operations included elsewhere in this report. The year-to-year comparisons of financial results are not necessarily indicative of future results.

	Year ended June 30,
	2010		2009
Revenue:
Product sales	49.0	%	49.4	%
Service revenue	25.7	%	26.7	%
Commission revenue	25.3	%	22.5	%
Sales of developed software	—	%	1.4	%
Total revenue	100.0	%	100.0	%
Cost of revenue:
Cost of product sales	30.8	%	32.7	%
Cost of service revenue	15.9	%	20.8	%
Total cost of revenue	46.7	%	53.5	%
Gross margin	53.3	%	46.5	%
Other operating expenses:
Selling, general and administrative	44.3	%	45.8	%
Depreciation and amortization	1.9	%	2.0	%
Total other operating expenses	46.2	%	47.8	%
Operating income (loss)	7.1	%	(1.5	)%
Other income (expense):
Interest and other income	(0.0	)%	0.2	%
Interest expense	(0.1	)%	(0.1	)%
Total other income (expense)	(0.1	)%	0.1	%
Income (loss) from before income taxes	7.0	%	(1.4	)%
Income tax (benefit) expense	3.0	%	(0.5	)%
Net income (loss)	4.0	%	(0.9	)%

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Year Ended June 30, 2010 Compared to Year Ended June 30, 2009

Revenue

	Year ended June 30,
	2010		2009		% change
Revenue:
Product sales	$	15,340,000	$	17,516,000	(12.4	)%
Service revenue		8,061,000		9,446,000	(14.7	)%
Commission revenue		7,925,000		7,973,000	(0.6	)%
Sale of developed software		—		500,000	(100.0	)%
Total Revenue:	$	31,326,000	$	35,435,000	(11.6	)%

Revenue: Total revenue for the year ended June 30, 2010 decreased by $4.1 million or 11.6% over the prior fiscal year primarily due to the effects of the national recession on the Company’s customers. While revenues have decreased on an annual basis, the Company’s third and fourth fiscal quarter’s revenues increased 5.0% and 3.7%, respectively, when compared to the same quarters in fiscal year 2009.

Product sales decreased by $2.2 million or 12.4% for the year ended June 30, 2010 as compared to the prior fiscal year. In addition, the Company also reported lower service and commission revenues when compared to the prior fiscal year. These decreases were the direct result of the lingering effects of the recession that gripped the entire United States during much of fiscal year 2010.

During fiscal year 2009, Avatech developed BIMreview software, an enhancement to Autodesk’s Revit^® architectural software and sold this developed software to Autodesk for $500,000. There were no sales of developed software during fiscal year 2010.

Cost of Revenue

	Year ended June 30,
	2010		2009		% change
Cost of revenue:
Cost of product sales	$	9,646,000	$	11,596,000	(16.8	)%
Cost of service revenue		4,987,000		7,384,000	(32.5	)%
Total cost of revenue	$	14,633,000	$	18,980,000	(22.9	)%
Gross margin	$	16,693,000	$	16,455,000	1.4	%

Cost of Revenue: Total cost of revenue decreased by $4.3 million or 22.9% for the year ended June 30, 2010 as compared to the prior fiscal year.

Cost of product sales decreased 16.8% while product sales decreased 12.4% during the year ended June 30, 2010 as compared with the prior fiscal year. Product costs decreased at a higher rate than product revenues due to the receipt of higher sales rebates based on targets established by the Company’s principal supplier, Autodesk, in 2010 when compared to 2009.

Cost of service revenue decreased by 32.5% while service revenue decreased by 14.7% during the year ended June 30, 2010 as compared with the prior fiscal year. Cost of service revenue decreased at a higher rate than service revenue primarily due to reductions in the technical workforce that occurred during the fourth quarter of fiscal year 2009.

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Gross Margin: The Company’s gross margin percentage increased to 53.3% for the year ended June 30, 2010 from 46.5% for the prior fiscal year due to higher sales rebates received in 2010 when compared to 2009 and reductions in the Company’s technical workforce. In addition, the Company’s commission revenues represented a higher proportion of total revenues resulting in a favorable revenue mix and a higher gross margin.

Other Operating Expenses

	Year ended June 30,
	2010		2009		% change
Other operating expenses:
Selling, general and administrative	$	13,871,000	$	16,245,000	(14.6	)%
Depreciation and amortization		582,000		723,000	(19.5	)%
Total other operating expenses	$	14,453,000	$	16,968,000	(14.8	)%

Selling, General and Administrative: Selling, general and administrative expenses for fiscal year 2010 were approximately $13.9 million, compared to $16.2 million for fiscal year 2009, a decrease of $2.4 million or 14.6%. The decrease in selling, general and administrative expenses was primarily the result of the reductions in workforce which occurred during the third and fourth quarters of fiscal year 2009 offset by approximately $300,000 of one-time costs related to the merger that were expensed in the fourth fiscal quarter.

Depreciation and Amortization: Depreciation and amortization expenses for fiscal year 2010 decreased $141,000 over fiscal year 2009 due primarily to a purchased customer list becoming fully amortized during the fourth quarter of fiscal year 2009.

Other Income (Expense)

	Year ended June 30,
	2010			2009			% change
Other income (expense):
Interest and other income	$	14,000		$	51,000		(72.5	)%
Interest expense		(33,000	)		(33,000	)	0.0	%
Total other income (expense)	$	(19,000	)	$	18,000		(205.6	)%

The Company incurred $19,000 in other expense during fiscal year 2010, compared to $18,000 in other income during the prior fiscal year. The decrease in other income was due to decreased interest income resulting from lower cash balances as well as reduced interest rates paid on those balances.

Income Tax Expense

	Year ended June 30,
	2010		2009			% change
Income tax (benefit) expense	$	954,000	$	(182,000	)	(624.2	%)

The Company recorded tax expense of $954,000 during fiscal year 2010 versus an income tax benefit of $182,000 during the prior fiscal year as a result of achieving $2.2 million of income before taxes during fiscal year 2010 versus incurring a loss before income taxes of $495,000 during fiscal year 2009.

At June 30, 2010, the Company’s remaining federal net operating loss carryforwards totaled $1.0 million and were subject to a $92,000 annual limitation. The Company believes that the merger will not affect the ultimate realization of this carryforward but the final determination has not yet been made.

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Year Ended June 30, 2009 Compared to Year Ended June 30, 2008

Revenue

	Year ended June 30,
	2009		2008		% change
Revenue:
Product sales	$	17,516,000	$	27,650,000	(36.7	)%
Service revenue		9,446,000		11,363,000	(16.9	)%
Commission revenue		7,973,000		10,631,000	(25.0	)%
Sale of developed software		500,000		—	100.0	%
Total Revenue:	$	35,435,000	$	49,644,000	(28.6	)%

Revenue: Total revenue for the year ended June 30, 2009 decreased by $14.2 million or 28.6% over the prior fiscal year primarily due to the effects of the national recession on the Company’s customers. The business slowdown experienced by the Company’s customer base in the manufacturing, engineering and building sectors resulted in reduced purchases of the products and services that the Company offers. In an effort to balance its costs against the revenue reductions, the Company implemented reductions in workforce during the third and fourth quarters of fiscal year 2009, a hiring freeze and a temporary 10% base salary reduction for all employees.

Product sales decreased $10.1 million or 36.7% for the year ended June 30, 2009 as compared to the prior fiscal year. In addition, the Company also reported lower service and commission revenues when compared to the same period in the prior fiscal year. These decreases were the direct result of the severe recession affecting the entire United States.

During fiscal year 2009, Avatech developed BIMreview software, an enhancement to Autodesk’s Revit^® architectural software. During the fourth quarter of 2009, Autodesk purchased all rights in the BIMreview software for $500,000. In accordance with U.S. GAAP, the Company expenses as incurred the research and development costs of internally developed software until technological feasibility is established. Accordingly, the costs of developing BIMreview software were expensed as research and development when incurred during the first two quarters of fiscal year 2009.

Cost of Revenue

	Year ended June 30,
	2009		2008		% change
Cost of revenue:
Cost of product sales	$	11,596,000	$	18,801,000	(38.3	)%
Cost of service revenue		7,384,000		8,145,000	(9.3	)%
Total cost of revenue	$	18,980,000	$	26,946,000	(29.6	)%
Gross margin	$	16,455,000	$	22,698,000	(27.5	)%

Cost of Revenue: Total cost of revenue decreased $7.9 million or 29.6% for the year ended June 30, 2009 as compared to the prior fiscal year.

Cost of product sales decreased 38.3% while product sales decreased 36.7% during the year ended June 30, 2009 as compared with the prior fiscal year. Product costs decreased at a higher rate than product revenues due to the receipt of higher sales rebates based on targets established by the Company’s principal supplier, Autodesk, in 2009 when compared to 2008.

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Cost of service revenue decreased by 9.3% while service revenue decreased by 16.9% during the year ended June 30, 2009 as compared with the prior fiscal year. Cost of service revenue decreased at a lower rate then service revenue due to lowered productivity of the services personnel during 2009 due to a reduction in the volume of services work performed during the period.

Gross Margin: The Company’s gross margin percentage increased to 46.4% for the year ended June 30, 2009 from 45.7% for the prior fiscal year primarily due to the additional margin resulting from the $500,000 sale of developed software.

Other Operating Expenses

	Year ended June 30,
	2009		2008		% change
Other operating expenses:
Selling, general and administrative	$	16,245,000	$	18,507,000	(12.2	)%
Depreciation and amortization		723,000		693,000	4.3	%
Total other operating expenses	$	16,968,000	$	19,200,000	(11.6	)%

Selling, General and Administrative: Selling, general and administrative expenses for fiscal year 2009 were approximately $16.2 million, compared to $18.5 million for fiscal year 2008, a decrease of $2.3 million or 12.2%. The decrease in selling, general and administrative expenses was primarily the result of decreased commissions due to lower sales, the reductions in workforce which occurred during the third and fourth quarters of fiscal year 2009, and the temporary 10% base salary reduction affecting all employees.

Depreciation and Amortization: Depreciation and amortization expenses increased $30,000 over fiscal year 2008 due to a new equipment lease.

Other Income (Expense)

	Year ended June 30,
	2009			2008			% change
Other income (expense):
Interest and other income	$	51,000		$	114,000		(55.3	)%
Interest expense		(33,000	)		(28,000	)	17.9	%
Total other income	$	18,000		$	86,000		(79.1	)%

The Company earned $18,000 in other income during fiscal year 2009, compared to $86,000 during the prior fiscal year. The decrease in other income was due to decreased interest income resulting from lower cash balances as well as reduced interest rates paid on those balances.

Income Tax Expense

	Year ended June 30,
	2009			2008		% change
Income tax (benefit) expense	$	(182,000	)	$	493,000	(136.9	%)

The Company recorded a tax benefit of $182,000 during fiscal year 2009 versus income tax expense of $493,000 during the prior fiscal year as a result of the recognition of a $495,000 loss before taxes during fiscal year 2009 versus earning income before income taxes of $3.6 million during fiscal year 2008.

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At June 30, 2009, the Company’s remaining federal net operating loss carryforwards totaled $1.1 million and were subject to a $92,000 annual limitation.

Liquidity and Capital Resources

Historically, the Company has financed its operations and met its capital expenditure requirements primarily through cash flows provided by operations, borrowings under short-term and long-term debt arrangements, and sales of preferred stock.

The Company maintains a line of credit from a bank that provides for up to $5 million of borrowings limited to 80% of the Company’s aggregate eligible accounts receivable. The interest rate is the 30-day London Interbank Offered Rate (LIBOR) plus 2.25%, or 2.60% as of June 30, 2010. The line of credit expires on December 31, 2010 and is secured by all of the Company’s assets, except certain inventories. The Company made no borrowings from the bank under this credit line during fiscal year 2010 and had no outstanding borrowings at June 30, 2010. As required by the loan agreement, Avatech notified and received approval from this bank for the acquisition of Rand Worldwide. Rand Worldwide maintains a line of credit with the same bank, and the bank conditioned its approval of the acquisition on our agreement to combine the credit facilities into a single facility within 120 days of the acquisition. The Company expects to have the new line of credit agreement completed prior to December 31, 2010, the expiration of the current agreement.

The Company’s operating assets and liabilities consist primarily of accounts receivable, accounts payable, and inventory. Changes in these balances are affected principally by the timing of sales and investments in inventory based on expected customer demand. The Company attempts to minimize its inventory levels through arrangements with suppliers to ship products with an average delivery period of two days and centralized inventory management. The Company purchases approximately 95% of its product from one principal supplier which provides it with credit to finance those purchases.

The Company’s investing activities consist principally of investments in computer and office equipment. Cash purchases of equipment for the year ended June 30, 2010 decreased to $97,000 from $134,000 for the same period in 2009. During the third quarter of fiscal year 2010, the Company performed a complete physical inventory of its fixed assets and removed from the Company’s accounts $850,000 of fully depreciated and obsolete computer equipment.

The Company had $33,000 in long-term capital lease obligations for a computer lease agreement at June 30, 2010, and had working capital of $2,218,000.

For the year ended June 30, 2010, the Company used cash of $2,360,000 in financing activities compared with $2,432,000 for the same period in 2009. Also, during the current fiscal year the Company redeemed 2,000 shares of its Series F Stock for a total of $2,000,000 plus accumulated dividends of $100,000, which resulted in a $1,864,000 decrease in the Series F Stock balance and a $135,000 reduction of additional paid-in capital. Pursuant to the agreements executed as part of the Company’s June 2006 offering of the Series F Stock, the holders of the Series F Stock had the right to request redemptions of up to $500,000 of their Series F Stock each January 1, April 1, July 1 and October 1. Those stockholders expressed their intention of requesting the redemptions until their Series F Stock had been fully redeemed. As of June 30, 2010 the Company had fulfilled all of its obligations to the holders of the Series F Stock.

Because the Company is one of the largest resellers of Autodesk software and because Autodesk has continued to state its intention to continue to strengthen its relationships with its resellers, the Company expects to continue to be a leading seller of Autodesk software. The Company entered into a Value Added Reseller Agreement with Autodesk effective February 1, 2010 for an initial term of twelve months that will automatically renew on an annual basis for two additional twelve month periods. The agreement designates Avatech Solutions as an authorized reseller of Autodesk software and prescribes the authorized sales territories, authorized products and services, rebate and incentive program details and marketing support.

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Off Balance Sheet Transactions

The Company is not party to any off-balance sheet transactions as defined in Item 303 of the SEC’s Regulation S-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item may be found immediately after the signatures to this report and is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A.    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 the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls and procedures as of June 30, 2010 was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has concluded that the Company’s disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the fourth quarter of the Company’s last fiscal year, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing of the Company’s internal control over financial reporting as of June 30, 2010. Management’s report on the Company’s internal control over financial reporting is included in Item 8 of this report and is incorporated herein by reference.

ITEM 9B.    OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated herein by reference to the definitive Proxy Statement of the Company to be filed with the Securities and Exchange Commission in connection with the 2010 Annual Meeting of Stockholders (the “Proxy Statement”).

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information provided in Item 5 of Part II of this annual report under the heading “Equity Compensation Plan Information” is incorporated herein by reference. All other information required by this item is incorporated herein by reference to the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated herein by reference to the Proxy Statement.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) and (2). List of Financial Statements and Schedules.

	Page
Financial Statement Schedule II—Avatech Solutions, Inc. and Subsidiaries Valuation and Qualifying Accounts	25
Management’s Report on Internal Control over Financial Reporting	F-2
Report of Independent Registered Public Accounting Firm	F-3
Consolidated Balance Sheets as of June 30, 2010 and 2009	F-4
Consolidated Statements of Operations for the Years Ended June 30, 2010 and 2009	F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2010 and 2009	F-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 2010 and 2009	F-8
Notes to Consolidated Financial Statements	F-9

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(c). Financial Statement Schedule—Schedule II

Avatech Solutions, Inc. and Subsidiaries Valuation and Qualifying Accounts

Description	Balance at beginning of period		Additions					Deductions —describe			Balance at end of period
			Charged to costs and expenses		Charged to other accounts —describe
Year Ended June 30, 2010:
Deducted from assets accounts:
Allowance for doubtful accounts	$	169,000	$	289,000	$	(252,000	)(1)	$	(70,000	)(2 )	$	136,000
Valuation allowance for net deferred tax assets	$	16,000	$	—	$	81,000	(3 )	$	—		$	97,000
Year Ended June 30, 2009:
Deducted from assets accounts:
Allowance for doubtful accounts	$	140,000	$	120,000	$	—		$	(91,000	)(1)	$	169,000
Valuation allowance for net deferred tax assets	$	—	$	—	$	16,000	(3 )	$	—		$	16,000

(1) Account reclassification

(2) Uncollectible accounts written off, net of recoveries

(3) Increase (decrease) in valuation allowance, net of temporary differences

(a)(3) and (b). Exhibits required to be filed by Item 601 of Regulation S-K

The exhibits filed or furnished with this annual report are listed in the Exhibit List that immediately follows the Notes to the Consolidated Financial Statements presented elsewhere in this report, which list is incorporated herein by reference.

25

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

	AVATECH SOLUTIONS, INC.
Date: September 28, 2010	By:	/s/    MARC L. DULUDE
		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:	/s/    RICHARD A. CHARPIE	By:	/s/    GEORGE M. DAVIS
	Director		Director
September 28, 2010		September 28, 2010
By:	/s/    MARC L. DULUDE	By:	/s/    EUGENE J. FISCHER
	Director and Chief Executive Officer		Director
September 28, 2010		September 28, 2010
By:	/s/    SUZANNE MACCORMACK	By:	/s/    LAWRENCE RYCHLAK
	Director		President and Chief Financial Officer
September 28, 2010		September 28, 2010
By:	/s/    CHARLES D. YIE
	Director
September 28, 2010

26

FINANCIAL STATEMENTS

Avatech Solutions, Inc. and Subsidiaries

Index to Audited Consolidated Financial Statements

	Page
Management’s Report on Internal Control Over Financial Reporting	F-2
Report of Independent Registered Public Accounting Firm	F-3
Consolidated Balance Sheets	F-4
Consolidated Statements of Operations	F-5
Consolidated Statements of Stockholders’ Equity	F-6
Consolidated Statements of Cash Flows	F-8
Notes to Consolidated Financial Statements	F-9

F-1

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting because management’s report was not subject to attestation pursuant to Section 989G(a) of the recently-enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits the Company, as a “smaller reporting company”, to provide only this management’s report.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2010 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on its assessment and the foregoing criteria, management has concluded that, as of June 30, 2010, the Company’s internal control over financial reporting is effective.

September 28, 2010

/s/ Marc L. Dulude	/s/ Lawrence Rychlak
Chief Executive Officer	President and Chief Financial Officer

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

Avatech Solutions, Inc.

We have audited the consolidated balance sheets of Avatech Solutions, Inc. and Subsidiaries as of June 30, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the table of contents under Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Avatech Solutions, Inc. is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of Avatech Solutions, Inc.’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avatech Solutions, Inc. and Subsidiaries as of June 30, 2010 and 2009 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Stegman & Company

Baltimore, Maryland

September 20, 2010

F-3

Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30,
	2010			2009
Assets
Current assets:
Cash	$	2,525,000		$	2,716,000
Accounts receivable, less allowance of $136,000 in 2010 and $169,000 in 2009		5,711,000			4,797,000
Other receivables		350,000			480,000
Inventory		30,000			66,000
Prepaid expenses and other current assets		372,000			323,000
Income tax refund receivable		—			388,000
Deferred income taxes, current		203,000			65,000
Total current assets		9,191,000			8,835,000
Property and equipment:
Computer software and equipment		2,169,000			3,611,000
Office furniture and equipment		1,037,000			1,193,000
Leasehold improvements		197,000			197,000
		3,403,000			5,001,000
Less accumulated depreciation and amortization		(2,908,000	)		(4,205,000	)
		495,000			796,000
Customer list, net of accumulated amortization of $1,143,000 in 2010 and $931,000 in 2009		1,044,000			1,256,000
Goodwill		5,968,000			5,968,000
Deferred income taxes, net		188,000			246,000
Other assets		102,000			158,000
Total assets	$	16,988,000		$	17,259,000
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	5,318,000		$	4,654,000
Accrued compensation and related benefits		383,000			415,000
Deferred revenue		1,147,000			1,151,000
Other current liabilities		125,000			118,000
Total current liabilities		6,973,000			6,338,000
Long-term liabilities:
Obligations under capital leases		33,000			160,000
Total liabilities		7,006,000			6,498,000
Series F 10% Cumulative Convertible Preferred Stock		—			1,864,000
Stockholders’ equity:
Convertible Preferred Stock, $0.01 par value; 1,300,537 shares authorized, 1,298,728 shares issued; 1,090,150 shares outstanding with an aggregate liquidation preference of $1,591,000 at June 30, 2010 and June 30, 2009		11,000			11,000
Common stock, $0.01 par value; 80,000,000 shares authorized; issued and outstanding shares of 17,168,162 at June 30, 2010 and 16,960,853 at June 30, 2009		172,000			170,000
Additional paid-in capital		12,406,000			12,590,000
Accumulated deficit		(2,607,000	)		(3,874,000	)
Total stockholders’ equity		9,982,000			8,897,000
Total liabilities and stockholders’ equity	$	16,988,000		$	17,259,000

See accompanying notes.

F-4

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations

	Years ended June 30,
	2010			2009
Revenues:
Product sales	$	15,340,000		$	17,516,000
Service revenue		8,061,000			9,446,000
Commission revenue		7,925,000			7,973,000
Sale of developed software		—			500,000
		31,326,000			35,435,000
Cost of revenue:
Cost of product sales		9,646,000			11,596,000
Cost of service revenue		4,987,000			7,384,000
		14,633,000			18,980,000
Gross margin		16,693,000			16,455,000
Other operating expenses:
Selling, general and administrative		13,871,000			16,245,000
Depreciation and amortization		582,000			723,000
		14,453,000			16,968,000
Operating income (loss)		2,240,000			(513,000	)
Other income (expense):
Interest and other income		14,000			51,000
Interest expense		(33,000	)		(33,000	)
		(19,000	)		18,000
Income (loss) before income taxes		2,221,000			(495,000	)
Income tax expense (benefit)		954,000			(182,000	)
Net income (loss)	$	1,267,000		$	(313,000	)
Earnings (loss) per common share—basic	$	0.06		$	(0.05	)
Earnings (loss) per common share—diluted	$	0.05		$	(0.05	)

See accompanying notes.

F-5

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity

	Preferred Stock				Common Stock			Additional Paid-In Capital			Accumulated Deficit			Total
	Number of Shares		Par Value		Number of Shares	Par Value
Balance at July 1, 2008	1,090,171		$	11,000	16,491,244	$	164,000	$	12,928,000		$	(3,561,000	)	$	9,542,000
Issuance of common stock as compensation	—			—	162,510		2,000		91,000			—			93,000
Issuance of common stock upon the exercise of warrants	—			—	141,852		2,000		79,000			—			81,000
Issuance of common stock under Employee Stock Purchase Plan	—			—	82,939		1,000		47,000			—			48,000
Issuance of common stock upon the exercise of stock options	—			—	50,000		1,000		30,000			—			31,000
Vesting of stock options issued to employees	—			—	—		—		164,000			—			164,000
Conversion of preferred stock into common stock	(21	)		—	32,308		—		—			—			—
Redemption of Series F 10% Cumulative Convertible Preferred Stock	—			—	—		—		(237,000	)		—			(237,000	)
Preferred stock dividends	—			—	—		—		(512,000	)		—			(512,000	)
Net loss	—			—	—		—		—			(313,000	)		(313,000	)
Balance at June 30, 2009	1,090,150		$	11,000	16,960,853	$	170,000	$	12,590,000		$	(3,874,000	)	$	8,897,000

F-6

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity (Continued)

	Preferred Stock			Common Stock			Additional Paid-In Capital			Accumulated Deficit			Total
	Number of Shares	Par Value		Number of Shares	Par Value
Balance at July 1, 2009	1,090,150	$	11,000	16,960,853	$	170,000	$	12,590,000		$	(3,874,000	)	$	8,897,000
Issuance of common stock as compensation	—		—	145,773		1,000		80,000			—			81,000
Issuance of common stock under Employee Stock Purchase Plan	—		—	61,536		1,000		27,000			—			28,000
Vesting of stock options issued to employees	—		—	—		—		105,000			—			105,000
Redemption of Series F 10% Cumulative Convertible Preferred Stock	—		—	—		—		(135,000	)		—			(135,000	)
Preferred stock dividends	—		—	—		—		(261,000	)		—			(261,000	)
Net income	—		—	—		—		—			1,267,000			1,267,000
Balance at June 30, 2010	1,090,150	$	11,000	17,168,162	$	172,000	$	12,406,000		$	(2,607,000	)	$	9,982,000

See accompanying notes.

F-7

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	Years ended June 30,
	2010			2009
Cash flows from operating activities
Net income (loss)	$	1,267,000		$	(313,000	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on disposal of fixed assets		(3,000	)		—
Provision for bad debts, net of recoveries		289,000			95,000
Depreciation and amortization		582,000			723,000
Non-cash stock compensation expense		186,000			257,000
Deferred income taxes, net		(80,000	)		(49,000	)
Changes in operating assets and liabilities
Accounts receivable and other receivables		(1,073,000	)		2,286,000
Inventory		36,000			356,000
Prepaid expenses and other current assets		(49,000	)		64,000
Income tax refund receivable		388,000			(388,000	)
Other assets		56,000			(49,000	)
Accounts payable and accrued expenses		664,000			(2,169,000	)
Accrued compensation and related benefits		(32,000	)		(444,000	)
Deferred revenue		(4,000	)		66,000
Income taxes payable		—			(650,000	)
Other current liabilities		7,000			(6,000	)
Net cash provided by (used in) by operating activities		2,234,000			(221,000	)
Cash flows from investing activities
Purchase of property and equipment		(97,000	)		(134,000	)
Proceeds from asset sale		32,000			15,000
Net cash used in investing activities		(65,000	)		(119,000	)
Cash flows from financing activities
Principal payments on capital lease obligation		(127,000	)		(80,000	)
Proceeds from issuance of common stock to employees and exercise of stock options and warrants		28,000			160,000
Dividends paid to preferred stockholders		(261,000	)		(512,000	)
Redemption of Series F 10% Cumulative Convertible Preferred Stock		(2,000,000	)		(2,000,000	)
Net cash used in financing activities		(2,360,000	)		(2,432,000	)
Net decrease in cash		(191,000	)		(2,772,000	)
Cash—beginning of year		2,716,000			5,488,000
Cash—end of year		2,525,000		$	2,716,000

See accompanying notes.

F-8

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended June 30, 2010 and 2009

1. Summary of Significant Accounting Policies

Nature of Business and Basis of Presentation

Avatech Solutions, Inc. and its Subsidiaries provide design automation software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions throughout much of the United States.

The consolidated financial statements include the accounts of Avatech Solutions, Inc. and its subsidiaries (the “Company” or “Avatech”). All intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash.

Inventory

Inventory consists of computer software and is stated at the lower of first-in, first-out cost, or market.

Property and Equipment

Property and equipment is stated at cost. Depreciation for computer software and equipment and office furniture and equipment is provided for by the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the lesser of the lease term or the useful life of the asset using the straight-line method.

Impairment of Long-Lived Assets Excluding Goodwill

Long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk.

Goodwill

Goodwill is the excess of the purchase price paid over the fair value of the identifiable net assets acquired in purchase business combinations. The Company accounts for goodwill in accordance with Financial Accounting

F-9

Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350 (previously Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets (“ASC 350”). Under ASC 350, goodwill and other intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess.

The carrying amount of goodwill was $5,968,000 as of June 30, 2010 and 2009.

Stock Options and Stock Granted to Employees

The Board of Directors may grant options under the Avatech Solutions, Inc. 2002 Stock Option Plan to purchase shares of the Company’s common stock at a price not less than the fair market value of the common stock at the grant date. The Plan provides for the granting of both incentive stock options and non-qualified stock options to purchase an aggregate of up to 3,100,000 shares of common stock to eligible employees, officers, and directors of the Company. The exercise price of each stock option equals no less than 100% of the market price of the Company’s stock on the date of grant and generally has a maximum term of 10 years. Options generally vest ratably over three or four years, depending on the specific grant award. In addition, the Company may grant shares of stock to directors, officers and employees under the Avatech Solutions, Inc. Amended and Restated Restricted Stock Plan. For the fiscal years ended June 30, 2010, and 2009, the Company issued 145,773, and 112,510, respectively, of fully vested common stock to members of the Board of Directors with an aggregate market value of $81,000 and $68,000. During the fiscal year ended June 30, 2009, the Company granted an award of 100,000 shares of restricted stock with an aggregate market value of $50,000 to the Company’s Chief Executive Officer as part of his compensation agreement. For the fiscal years ended June 30, 2010 and 2009, total stock compensation expense charged against income for these plans was $186,000 and $257,000, respectively.

The Company uses the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards. The following are the assumptions made in computing the fair value of stock-based awards:

	Year Ended June 30
	2010	2009
Average risk-free interest rate	3.25%	3.65%
Dividend yield	0%	0%
Expected life	10.0 years	10.0 years
Expected volatility	103%	103%
Weighted average fair value of granted options	$0.68	$0.48

Revenue Recognition and Accounts Receivable

The Company’s revenue recognition policies are in accordance with FASB ASC 13 (previously Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements) issued by the SEC. This bulletin was amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition, currently FASB ASC 13, and with FASB ASC 985 (previously the American Institution of Certified Public Accountant’s Statement of Position 97-2 “Software Revenue Recognition”).

F-10

Software products are sometimes sold in an arrangement that includes implementation services or maintenance services. Maintenance services are limited to help desk support and training. The Company allocates the total arrangement fee among each element based on vendor-specific objective evidence of the relative fair value of each of the elements. The Company limits its assessment of fair value of each element to the price charged when the same element is sold separately. If the fair value of each element in a multiple element arrangement cannot be reliably determined, and if the fair value of any undelivered element cannot also be reliably determined, all revenue under the arrangement is deferred until such time as the only remaining undelivered element is maintenance, or in the absence of maintenance, implementation services, at which time revenue is recognized over the remaining maintenance or service period. Revenue that is deferred and recognized over a maintenance or service period is recognized in proportion to the services delivered, or ratably if no better measure of performance can be determined.

Revenue from product sales and the sale of developed software is recognized when four criteria are met. These four criteria are (i) a signed purchase order has been obtained (ii) delivery of the software has occurred (iii) the fee is fixed or determinable and (iv) the fee is probable of collection. Software product sales billed and not recognized as revenue are included in deferred revenue. The Company generally does not require collateral for accounts receivable. The Company allows returns from customers in limited situations. The Company has historically not experienced significant returns, and accordingly, allowances for returned products are not recorded.

Maintenance services are sold for stated periods or for stated numbers of hours. Revenues are recognized ratably over the service period for arrangements to provide maintenance over a stated period. Revenues for maintenance billed on an hourly basis are recognized as the services are performed or upon expiration of the service contract. Revenues from implementation and training services are recognized as the services are provided. Advance payments for these services are deferred and revenue is recognized in the periods when the services are performed. Prepaid training and support services offered by the Company are generally subject to an expiration period and a restrictive returns policy.

The Company also receives commissions from vendors for transactions in which the Company essentially acts as an agent for the vendor. In these transactions, the Company does not take title to the product, have responsibility for the delivery of any services, or have risk of loss for collection. These commissions are recorded as revenue when earned.

Allowance for Doubtful Accounts

The Company uses estimates to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its expected net realizable value. The Company estimates the amount of the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection experience has not varied significantly from estimates, due primarily to credit policies, collection experience, and a lack of concentration of accounts receivable. The Company charges-off receivables deemed to be uncollectible to the allowance for doubtful accounts. Accounts receivable balances are not collateralized.

Cost of Product Sales

Cost of product sales includes the costs of purchasing software and hardware from suppliers and the associated shipping and handling costs.

Cost of Service Revenue

Cost of service revenue consists primarily of direct employee compensation of all service personnel, the cost of subcontracted services and direct expenses billable to customers. Cost of service revenue does not include an allocation of overhead costs.

F-11

Warranty Costs

The Company does not provide for warranty costs for its products as such costs are incurred by the manufacturer of the products.

Advertising Costs

Costs incurred for producing and communicating advertisements are expensed as incurred and included in selling, general and administrative expenses in the accompanying statements of operations. Advertising expenses, net of reimbursements from suppliers, approximated $403,000 for the year ended June 30, 2009. Advertising expenses were approximately the same as reimbursements from suppliers for the year ended June 30, 2010.

Business Segment Reporting

The Company’s operations are reviewed by the Company’s chief operating decision maker as a single segment.

Income Taxes

The Company uses the liability method to account for income taxes. Income tax expense includes income taxes currently payable and deferred taxes arising from temporary differences between financial reporting and income tax bases of assets and liabilities. Deferred income taxes are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense, if any, consists of the taxes payable for the current period. Valuation allowances are established when the realization of deferred tax assets are not considered more likely than not.

Recent Accounting Pronouncements

In October 2009, the FASB issued an update regarding multi-deliverable revenue arrangements under ASC 605. ASC 605 provides standards for the accounting for product and services sales individually and not as a whole. In addition, it requires disclosures of the arrangement, including a description, deliverables, timing of such deliverables, and methodologies to estimate the selling price. Compliance is effective for all financial statements issued on or after June 15, 2010. The Company’s adoption of ASC 815 did not have a material effect on the Company’s consolidated financial statements.

Previously in May 2009, the FASB issued ASC 855 (previously SFAS No. 165, “Subsequent Events”). ASC 855 establishes standards for accounting and disclosure of material events that occur after the balance sheet date and their respective evaluation dates. In February 2010, the FASB amended certain provisions of ASC 855. Disclosure of the date through which subsequent events are disclosed is no longer required effective immediately. The Company currently discloses its subsequent events within the established guidelines of ASC 855.

2. Supplemental Disclosure of Cash Flow Information

The Company paid interest of approximately $33,000 and $30,000 in 2010 and 2009, respectively, and paid federal and state taxes of approximately $772,000 and $923,000 in 2010 and 2009, respectively. Total purchases of property and equipment were approximately $97,000 and $492,000 in 2010 and 2009, respectively. Total purchases of property and equipment included non-cash purchases of $0 and approximately $358,000 in 2010 and 2009, respectively.

F-12

3. Borrowings Under Line of Credit

The Company maintains a line of credit from a bank that provides for up to $5 million of borrowings limited to 80% of the Company’s aggregate eligible accounts receivable. The interest rate is the 30-day London Interbank Offered Rate (LIBOR) plus 2.25%, or 2.60% as of June 30, 2010. The loan expired on December 31, 2010 and was secured by all of the Company’s assets, except certain inventories. The Company made no borrowings from the bank under this credit line during fiscal year 2010 and had no outstanding borrowings at June 30, 2010 and 2009. As required by its loan agreement with this bank, Avatech notified and received approval from the bank for its acquisition of Rand Worldwide, Inc. (“Rand Worldwide”) in August 2010 (see Note 15 below). Rand Worldwide maintains a line of credit with the same bank. The bank conditioned its approval on the Company’s agreement to combine the two credit facilities into a single facility within 120 days of the acquisition. The Company expects to have the new line of credit agreement completed prior to December 31, 2010, the expiration of the current agreement.

4. Series F 10% Cumulative Convertible Preferred Stock

In June 2006 the Company issued 4,000 shares of Series F 10% Cumulative Convertible Preferred Stock (the “Series F Stock”) which raised $4,000,000 to pay down debt and to fund an acquisition. In connection with this issuance, the Company granted 800,000 warrants to purchase its common stock at an initial exercise price of $2.40 per share, which expired on June 12, 2010. The exercise price was reduced to $2.30 as a result of the application of anti-dilution provisions that were triggered by a subsequent private placement of common stock.

During the year ended June 30, 2010, the Company redeemed the remaining 2,000 of the original 4,000 shares of Series F Stock for an aggregate redemption price of $2,000,000, plus accumulated dividends of $100,000. As of June 30, 2010, the Company had fulfilled all of its obligations to the holders of the Series F Stock.

The Series F shares had the following terms:

Redemption Feature- The shares of Series F Stock were redeemable in the event that the Company was engaged in a business combination that was approved by the Board of Directors and subsequently submitted and approved by a vote of the Company’s stockholders. In addition, the holders of the shares of Series F Stock had the right to require the Company to redeem up to $500,000 (in the aggregate) per quarter. The Company redeemed all of the remaining shares prior its acquisition of Rand Worldwide. The redemption price was $2.00 per share (upon conversion) plus an amount equal to all declared and unpaid dividends accrued on such shares since the original issue date. The redemption was to be made in cash or common stock, at the Company’s option. Payments in common stock were priced at a 7.5% discount to the market price at that time, and the investors were permitted to convert the amount which the Company would otherwise redeem before redemptions at the conversion price.

Voting Rights- Each holder of the Series F Shares 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. In addition, these holders have special voting rights in connection with certain matters, including the issuance of senior stock or debentures, certain mergers, the dissolution of the Company and any amendment to the charter or the terms of the securities that would impair their rights.

Dividend Rate- The holders of the Series F shares were entitled to receive cumulative dividends at a rate of 10% per annum when and as declared by the Board of Directors. Dividends were paid semi-annually to holders of the Series F shares and were eligible to be paid in cash or the Company’s common stock but payments in common stock are subject to certain conditions. Payments in common stock were to be priced at a 5% discount to the market price at that time.

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Conversion Feature- The Series F shares are convertible at any time at the holders’ option. 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 514 shares of common stock for each share of Series F; however, this rate may be adjusted due to stock splits, dividends, and other events defined in the stock purchase agreement. The Company may force the holders of the issue to convert into its common stock at any time once the market price of the Company’s common stock is greater than $5.00 per share for twenty consecutive trading days.

Put Option- Beginning on July 1, 2008 and on the first business day of each calendar quarter thereafter, each holder of the Series F shares shall have the option to exercise a put option which will require the Company to purchase 12.5% of the aggregate number of shares of Series F Preferred Stock purchased.

Common Stock Warrants- Each holder of Series F shares received common stock warrants which gave the holder the right to purchase 400 shares of the Company’s common stock for each Series F share held. The exercise price of the warrants was $1.95 per share. All such warrants expired on June 12, 2010 without being exercised.

Liquidation Preference- In the event of a liquidation, dissolution or winding up of the Company, the holders of Series F shares 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 $1,000 per share (upon conversion) 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.

As a result of the previously-described put option, the net proceeds from the issuance of the Series F Convertible Preferred Stock were classified as temporary equity in the accompanying consolidated balance sheets as the terms of the issuance do not warrant classification as a liability nor as equity. The Series F shares had a $0.01 par value with 4,000 shares authorized and issued, and 2,000 shares outstanding at June 30, 2009 with an aggregate liquidation preference of $2,000,000 as of June 30, 2009.

5. Preferred Stock

The Company’s preferred stock included in the equity section of the accompanying consolidated balance sheets consists of the following as of June 30, 2010 and 2009:

	June 30
	2010		2009
Series D Convertible Preferred Stock, $0.01 par value; 1,297,537 shares authorized and issued; and 1,089,213 shares outstanding at June 30, 2010 and 2009; aggregate liquidation preference of $654,000 at June 30, 2010 and 2009	$	11,000	$	11,000
Series E Convertible Preferred Stock, $0.01 par value; 3,000 shares authorized; 1,191 shares issued; 937 shares outstanding at June 30, 2010 and 2009; aggregate liquidation preference of $937,000 at June 30, 2010 and 2009		—		—
Total Preferred Stock	$	11,000	$	11,000

At June 30, 2010 and 2009, 1,089,213 shares of Series D Convertible Preferred Stock were outstanding, respectively, with the following terms:

Redemption Feature- The Series D shares are 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 stockholders. Any director who holds shares of Series D is not eligible to vote on the proposed business combination. The redemption price is $0.30 (upon conversion) per share plus an

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amount equal to all declared and unpaid dividends accrued on such shares since the original issue date. The terms of the merger with Rand Worldwide did not trigger any redemption provisions of the Series D shares.

Voting Rights- Each holder of the Series D shares 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. In addition, these holders have special voting rights in connection with certain matters, including the issuance of senior stock or debentures, certain mergers, the dissolution of the Company and any amendment to the charter or the terms of the securities that would impair their rights.

Dividend Rate- The holders of the Series D shares 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 Series D shares are 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. Each Series D share 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 share; however, this rate may be adjusted due to stock splits, dividends, and other events defined in the stock purchase agreement.

Liquidation Preference- In the event of a liquidation, dissolution or winding up of the Company, the holders of Series D shares 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.

In July 2005 the Company issued 1,191 shares of Series E Convertible Preferred Stock which raised $1,191,000 for working capital purposes. In connection with this issuance, the Company granted 366,475 warrants to purchase its common stock at an exercise price of $0.65 per share which expired on July 29, 2008. The Series E shares have the following terms:

Redemption Feature- The Series E shares are 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 stockholders. Any director who holds shares of Series E is not eligible to vote on the proposed business combination. The redemption price is $0.65 per share (upon conversion) plus an amount equal to all declared and unpaid dividends accrued on such shares since the original issue date. The terms of the merger with Rand Worldwide did not trigger any redemption provisions of the Series E shares.

Voting Rights- Each holder of the Series E shares 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. In addition, these holders have special voting rights in connection with certain matters, including the issuance of senior stock or debentures, certain mergers, the dissolution of the Company and any amendment to the charter or the terms of the securities that would impair their rights.

Dividend Rate- The holders of the Series E shares 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 stockholders.

Conversion Feature- The Series E shares are 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. Each Series E share of

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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 1,538.5 shares of common stock for each share of Series E; however, this rate may be adjusted due to stock splits, dividends, and other events defined in the stock purchase agreement.

Common Stock Warrants- Each holder of Series E shares received common stock warrants which give the holder the right to purchase 307.7 shares the Company’s common stock for each Series E share held. The exercise price of the warrants was $0.65 per share and they expired on June 28, 2008.

Liquidation Preference- In the event of a liquidation, dissolution or winding up of the Company, the holders of Series E shares 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 $0.65 per share (upon conversion) 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.

6. Earnings (Loss) Per Share

Basic earnings (loss) per common share is computed as net earnings (loss) available to common stockholders divided by the weighted-average number of common shares outstanding for the period. Such outstanding shares include those issued through Employee Stock Compensation Plans, Board compensation, and the exercise of stock warrants. Diluted earnings (loss) 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. There is no dilutive effect on the earnings (loss) per common share during loss periods, and the dilutive effects of the common stock derivatives were not included for fiscal year 2009 as these options would have an anti-dilutive effect due to the losses of the Company. As of June 30, 2010, 4,008,018 shares of common stock were issuable upon the conversion or exercise of options, warrants and preferred stock. The following summarizes the computations of basic and diluted loss per common share:

	Year ended June 30,
	2010			2009
Numerator:
Net income (loss)	$	1,267,000		$	(313,000	)
Less: preferred stock dividends		(261,000	)		(512,000	)
Net income (loss) available to common stockholders	$	1,006,000		$	(825,000	)
Denominator:
Weighted average shares outstanding—basic		17,114,366			16,815,722
Assumed conversion of preferred stock		3,621,783			—
Effect of outstanding stock options		105,350			—
Effect of outstanding stock warrants		3,560			—
Weighted average shares outstanding—diluted		20,845,059			16,815,722
Basic earnings (loss) per common share	$	0.06		$	(0.05	)
Diluted earnings (loss) per common share	$	0.05		$	(0.05	)
Antidilutive stock options, warrants and conversion rights		1,983,922			4,764,904

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7. Stock Purchase Warrants

As of June 30, 2010, the Company had outstanding warrants to purchase 764,980 shares of common stock. A summary of these warrants is as follows:

Number of Shares	Exercise Price		Expiration Date
38,878	$	0.60	July 1, 2010
726,102	$	1.52	January 29, 2011
764,980

As discussed in Note 15 below, the Company completed its acquisition of Rand Worldwide in August of 2010. On the closing date of the acquisition, the Company and certain common stockholders amended and terminated the Common Stock and Warrant Purchase Agreements and related Investor Rights Agreements dated January 29, 2007 and June 12, 2006 pursuant to which those common stockholders acquired their shares. Those agreements contained certain anti-dilution protections for those stockholders and continuing registration rights. In consideration of the amendments and terminations of these agreements, the Company issued a total of 400,015 shares of common stock to these stockholders. In addition, with respect to those stockholders who invested in the January 29, 2007 offering, the Company amended the warrants to purchase 726,102 shares of common stock by reducing the exercise price from $1.52 per share to $1.11 per share. These warrants expire on January 29, 2011.

8. Director and Employee Stock Compensation Plans

Employee Stock Option Plans

The Board of Directors may grant options under the Avatech Solutions, Inc. 2002 Stock Option Plan (the “Option Plan”) to purchase shares of the Company’s common stock at a price not less than the fair market value of the common stock on the grant date. The Option Plan provides for the granting of both incentive stock options and non- qualified stock options to purchase an aggregate of up to 3,100,000 shares of common stock to eligible employees, officers, and directors of the Company.

A summary of stock option activity and related information is included in the following table:

	2010				2009
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at beginning of year	1,638,173		$	1.12	1,678,205		$	1.11
Granted	37,800			0.75	61,200			0.51
Exercised	—			—	(50,000	)		0.60
Expired	(5,625	)		51.47	—			—
Forfeited	(65,171	)		1.16	(51,232	)		0.62
Outstanding at end of year	1,605,177		$	0.93	1,638,173		$	1.12
Exercisable at end of year	1,289,094		$	0.95	1,232,840		$	1.18
Weighted-average remaining contractual life of outstanding options				6.0 years				6.9 years

The aggregate intrinsic value of the stock options outstanding and exercisable at June 30, 2010 and 2009 was $99,000 and $22,000, respectively. The aggregate intrinsic value of options exercised during the year ended June 30, 2009 was $327,000.

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All options granted have an exercise price equal to the fair value of the Company’s common stock on the date of grant. Exercise prices for options outstanding as of June 30, 2010 ranged from $0.167 to $7.07 as follows:

Range of Exercise Prices	Options Outstanding	Weighted Average Exercise Prices of Options Outstanding	Weighted Average Remaining Contractual Life of Options Outstanding	Options Exercisable	Weighted Average Exercise Prices of Options Exercisable	Weighted Average Remaining Contractual Life of Options Exercisable
$0.167 – 0.34	102,557	$0.29	3.4 years	102,557	$0.29	3.4 years
0.35 – 0.75	318,600	0.58	6.1 years	312,600	0.58	6.1 years
0.76 – 0.91	738,000	0.86	6.5 years	438,625	0.86	6.0 years
1.05 – 7.07	446,020	1.46	5.9 years	435,312	1.45	5.8 years
	1,605,177			1,289,094

Assuming that no additional share-based payments are granted after June 30, 2010, unamortized stock compensation expense of $160,000 will be recognized in the statement of operations over a weighted average period of 3.8 years.

Employee Stock Purchase Plan

The Company’s Board of Directors adopted, and its stockholders subsequently approved, the Employee Stock Purchase Plan (the “ESPP”), under which, as amended, 2,000,000 shares of common stock are reserved for issuance. As of June 30, 2010, 797,494 shares were available for future issuance.

The ESPP is administered by the Compensation Committee of the Board of Directors. Generally, each offering is of six months’ duration, but can extend as long as twenty-seven months. Eligible employees who work a minimum of 20 hours a week may purchase up to 15% of their compensation in common stock at a price equal to 85% of the lower of the fair value of the common stock at the beginning or end of the offering period. Employees may purchase up to $25,000 of common stock in any calendar year under the ESPP.

As of June 30, 2010, there was no liability for employees’ ESPP withholdings, as all shares of common stock purchased under the ESPP for the year ended June 30, 2010 had been issued.

Restricted Stock Award Plan

In May 2003, the Company’s Board of Directors adopted, and its stockholders subsequently approved, the Avatech Solutions, Inc. Restricted Stock Award Plan, which was amended and restated on August 23, 2005 (the “Stock Plan”). Officers, directors, key employees and consultants of the Company are eligible to receive stock awards under the Stock Plan, but employees and consultants may receive grants only if they already are stockholders or hold options to purchase shares of common stock at the time of grant. Vesting for restricted stock awards granted under the Stock Plan may vary, but awards will generally vest based on continued service of the recipient or achievement of specific performance goals. The Company has reserved a total of 1,200,000 shares of common stock for issuance under the Stock Plan and 178,801 shares were available for future issuance as of June 30, 2010.

During fiscal year 2010, the Company issued 145,773 shares of common stock to certain directors under the Stock Plan as compensation for service on the Company’s Board of Directors. In addition, in accordance with the compensation agreement with the Company’s prior Chief Executive Officer, George Davis, the Company granted Mr. Davis an award of 100,000 shares of restricted stock, with 50,000 shares issued in January 2009 and the remaining 50,000 issued on July 1, 2009. All of the restricted shares were valued at quoted market prices on the date of grant and had a weighted-average fair value of $0.57 per share. For the years ended June 30, 2010 and 2009, the Company recorded aggregate expense of $81,000 and $118,000, respectively, for common stock grants to officers and directors.

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9. Shares Reserved for Future Issuance

At June 30, 2010, the Company has reserved 5,993,815 shares of common stock for future issuance upon the exercise of stock options granted under the Stock Option Plan, the exercise of outstanding common stock purchase warrants, the vesting of restricted stock awards, purchases under the ESPP and the conversion of Series D Stock, and Series E Stock.

10. Income Taxes

The components of the income tax provision (benefit) are as follows:

	Year ended June 30
	2010			2009
Federal tax	$	708,000		$	(197,000	)
State tax		246,000			15,000
Total	$	954,000		$	(182,000	)
	Year ended June 30
	2010			2009
Current	$	873,000		$	(132,000	)
Deferred		(81,000	)		(50,000	)
Total	$	954,000		$	(182,000	)

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	Year ended June 30
	2010		2009
Deferred tax assets:
Net operating loss carryforward	$	435,000	$	479,000
Accrued compensation		11,000		—
Accrued professional fees		93,000		16,000
Nonqualified stock options		63,000		57,000
Allowance for doubtful accounts		52,000		65,000
Excess of book over tax depreciation and amortization		63,000		57,000
Excess of book over tax lease expense		48,000		74,000
Other assets		115,000		112,000
Total deferred tax assets		880,000		860,000
Deferred tax liabilities:
Customer list		392,000		459,000
Accrued bonuses		—		73,000
Total deferred tax liabilities		392,000		532,000
Deferred tax assets, net of liabilities		488,000		328,000
Valuation allowance		97,000		16,000
Net deferred tax assets	$	391,000	$	312,000

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The Company’s provision for income taxes resulted in effective tax rates attributable to loss from continuing operations before cumulative effect of change in accounting principal that varied from the statutory federal income tax rate of 34%, as summarized in the table below.

	Year ended June 30
	2010			2009
Expected federal income tax expense (benefit) from continuing operations at 34%	$	755,000		$	(168,000	)
Expenses not deductible for income tax purposes		36,000			64,000
Amendment of prior year return		—			(70,000	)
State income taxes, net of federal benefit		104,000			2,000
Change in valuation allowance for deferred tax assets		81,000			16,000
Other		(22,000	)		(26,000	)
Income tax expense (benefit)	$	954,000		$	(182,000	)

Income tax expense includes current state income taxes of approximately $192,000 and $24,000 for 2010, and 2009, respectively.

At June 30, 2010, the Company has federal net operating loss carryforwards totaling approximately $1.0 million, which will begin to expire in 2012. The federal net operating loss carryforwards at June 30, 2010 are subject to a $92,000 annual limitation under Internal Revenue Code Section 382.

11. Commitments and Contingencies

Operating Leases

The Company leases certain office space and equipment under noncancellable operating lease agreements that expire in various years through 2014, and generally do not contain significant renewal options. Future minimum payments under all noncancellable operating leases with initial terms of one year or more consisted of the following at June 30, 2010:

Year ending June 30:
2011	$	1,206,000
2012		799,000
2013		584,000
2014		322,000
2015		81,000
Thereafter		8,000
Total minimum lease payments	$	3,000,000

Rent expense consisted of the following:

	Year ended June 30
	2010		2009
Office space	$	1,220,000	$	1,300,000
Equipment		72,000		166,000
	$	1,292,000	$	1,466,000

There was no rent paid to a related party for the years ended June 30, 2010 and 2009.

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Capital Leases

In October of 2008, the Company acquired new computer equipment for its training facilities and incurred a capital lease obligation of $358,000 to finance the acquisition. This capital lease obligation totaled $160,000 as of June 30, 2010. Approximately $127,000 represents the short term balance of the lease and is reflected in other current liabilities with the remaining long term portion ($33,000) shown as Obligations Under Capital Leases in the accompanying balance sheets. Payments are made quarterly through September 2011 and depreciation expense on this equipment was approximately $90,000 as of June 30, 2010. Future minimum payments consisted of the following at June 30, 2010:

Year ending June 30:
2011	$	137,000
2012		34,000
Total minimum lease payments		171,000
Less:
Taxes		5,000
Imputed interest		6,000
Present value of future minimum lease payments	$	160,000

12. Employee Benefit and Incentive Compensation Plans

Effective January 1, 1998, the Company adopted the Avatech Solutions, Inc. 401(k) Retirement Savings Plan and Trust (the “401(k) Plan”). The 401(k) Plan is a defined contribution plan, which covers substantially all employees of the Company, or its wholly-owned subsidiaries, who have attained age 21 and have completed three months of service. Participants may elect a pre-tax payroll deduction up to $16,500 (if under age 50), or $22,000 (if age 50 or older by December 31^st of any calendar year). As amended, the 401(k) Plan provides that the Company will match 100% of the participant salary deferrals up to 3% of a participant’s compensation and 50% of the next 2% of a participant’s compensation, or a total possible maximum matching contribution of 4% of a participant’s compensation, for all participants. The Company may also make discretionary profit-sharing contributions to the 401(k) Plan for all participants who are employed on the last day of the plan year but has not done so for the plan years ended December 31, 2009 and 2010. The total amount recorded by the Company as expense during the fiscal years ended June 30, 2010 and 2009 was approximately $284,000 and $420,000, respectively.

13. Significant Supplier

Approximately 93% of the Company’s inventory purchases for the years ended June 30, 2010 and 2009 were from one vendor, and approximately 89% of accounts payable at June 30, 2010 and 2009 were due to this vendor. Approximately 93% of the Company’s total product revenues are related to this supplier’s products.

14. Liquidity and Capital Resources

The Company currently has debt of $160,000 related to a capital lease at June 30, 2010. In addition, the Company had a working capital surplus of approximately $2,218,000. The Company’s management believes that its near-term needs can be met from its available cash resources, cash flows from operations and its line of credit.

15. Subsequent Event

On August 17, 2010, Avatech Solutions, Inc. completed its acquisition of Rand Worldwide in a reverse merger transaction, which resulted in Rand Worldwide becoming a wholly owned subsidiary of the Company. After the merger, the Company changed its name to Rand Worldwide, Inc. In connection with the merger, Rand Worldwide’s stockholders received shares of Avatech common stock representing approximately 66% of the

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outstanding shares of Avatech common stock and Avatech’s stockholders retained approximately 34% of the outstanding shares of Avatech common stock. When calculated based on the number of shares of Common Stock outstanding on a fully diluted basis on August 17, 2010, the merger consideration is equal to 59.3% of the total common equivalent shares at closing. Because the shares of Avatech common stock issued to Rand Worldwide’s stockholders exceeded 50% of the outstanding shares of Avatech common stock outstanding immediately after the merger, Rand Worldwide was deemed, for accounting and SEC reporting purposes, to be the continuing reporting entity, and the assets and liabilities and the historical operations that will be reflected in Avatech’s consolidated financial statements going forward will be those of Rand Worldwide. Since Rand is deemed, for accounting purposes, to be the acquiring entity, upon consummation of the merger, there will be purchase accounting adjustments that will affect the carrying amounts of assets and liabilities of Avatech that are currently reported at historical cost as of June 30, 2010. A Form 8-K that includes pro forma financial information is expected to be filed within 71 days after the merger date.

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EXHIBIT INDEX

Exhibit	Description
3.1(i)	Restated Certificate of Incorporation of Spatial Technology, Inc. (incorporated by reference to Exhibit 3(i).1 to the Registration Statement on Form SB-2 filed by Spatial Technology, Inc. on November 21, 2000, File No. 333-50426)
3.1(ii)	Certificate of Amendment to the Restated Certificate of Incorporation of Spatial Technology, Inc., changing Spatial Technology, Inc.’s name to PlanetCad, Inc. (incorporated by reference to Exhibit 3(i).2 to the Registration Statement on Form SB-2 filed by PlanetCad, Inc. on November 21, 2000, File No. 333-50426)
3.1(iii)	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 4.2 of the Registration Statement on Form 8-A filed by PlanetCad, Inc. on March 11, 2002, File No. 001-31265)
3.1(iv)	Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by PlanetCad, Inc. on May 28, 2002)
3.1(v)	Certificate of Amendment of Restated Certificate of Incorporation of PlanetCad, Inc. (incorporated by reference to Annex G of the Pre-Effective Amendment No. 2 on Form S-4/A filed by PlanetCad, Inc. on September 13, 2002, File No. 333-89386)
3.1(vi)	Certificate of Amendment of Certificate of Incorporation, changing PlanetCad, Inc.’s name to Avatech Solutions, Inc. (filed herewith)
3.1(vii)	Certificate of Designations—Series C Convertible Preferred Stock (incorporated by reference to Exhibit 3.6A of the Pre-Effective Amendment No. 1 on Form S-1/A filed by Avatech Solutions, Inc. on April 11, 2003, File No. 333-104035)
3.1(viii)	Certificate of Amendment to Certificate of Designations—Series C Convertible Preferred Stock (incorporated by reference to Exhibit 3.8 of the Quarterly Report on Form 10-Q filed by Avatech Solutions, Inc. on February 13, 2004)
3.1(ix)	Certificate of Designations of Series D Convertible Preferred Stock (incorporated by reference to Exhibit 3.9 of the Quarterly Report on Form 10-Q filed by Avatech Solutions, Inc. on February 13, 2004)
3.1(x)	Certificate of Elimination of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.10 of the Quarterly Report on Form 10-Q filed by Avatech Solutions, Inc. on February 13, 2004
3.1(xi)	Certificate of Amendment to Certificate of Designation of Series D Convertible Preferred Stock (incorporated by reference to Exhibit 3.12 of the Quarterly Report on Form 10-Q filed by Avatech Solutions, Inc. on February 13, 2004)
3.1(xii)	Certificate of Elimination of Series C Convertible Preferred Stock (incorporated by reference to Exhibit 3.11 of the Quarterly Report on Form 10-Q filed by Avatech Solutions, Inc. on February 13, 2004)
3.1(xiii)	Certificate of Amendment to the Restated Certificate of Incorporation of Avatech Solutions, Inc. (incorporated by reference to Exhibit 3.13 of the Pre-Effective Amendment No. 1 on Form S-1/A filed by Avatech Solutions, Inc. on July 19, 2004, File No. 333-114230)
3.1(xiv)	Certificate of Designations of Series E Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on May 9, 2005)
3.1(xv)	Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series F 10% Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on June 19, 2006)

Exhibit	Description
3.2	Bylaws (incorporated by reference to Exhibit 3(ii).1 to the Registration Statement on Form SB-2 filed by Spatial Technology, Inc. on November 21, 2000, File No. 333-50426)
4.1	Form of Amended and Restated Warrant (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)
9.1	Stockholders’ Agreement by and among Avatech Solutions, Inc., RWWI Holdings LLC and certain holders of common stock dated as of August 17, 2010 (incorporated by reference to Exhibit 9.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)
10.1	Lease between Merritt-DM1, LLC and Avatech Solutions, Inc. effective June 1, 2004 (incorporated by reference to Exhibit 10.7 to the Pre-Effective Amendment No. 1 on Form S-1/A filed by Avatech Solutions, Inc. on July 19, 2004, File No. 333-114230)
10.2	Form of Preferred Stock Purchase Agreement for Series D Convertible Preferred Stock (incorporated by reference to Exhibit 10.13 of the Quarterly Report on Form 10-Q filed by Avatech Solutions, Inc. on February 13, 2004)
10.3	Form of Preferred Stock Purchase Agreement for Series E Convertible Preferred Stock (filed herewith)
10.4	Avatech Solutions, Inc. 2002 Stock Option Plan (incorporated by reference to Annex F of the Registration Statement on Form S-4 filed by Avatech Solutions, Inc. on May 30, 2002, File No. 333-89386)
10.5	Form of First Amendment to Stock Option (incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)
10.6	Avatech Solutions, Inc. Restricted Stock Award Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 filed by Avatech Solutions, Inc. on February 10, 2006, File No. 333-131721)
10.7	Form of Restricted Stock Award (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on January 12, 2009)
10.8	Avatech Solutions, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 4 of the Registration Statement on Form S-8 filed by Avatech Solutions, Inc. on December 4, 2007 File No. 333-147823)
10.9	Employment Agreement between Avatech Solutions, Inc. and George Davis dated 28, 2010 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on June 29, 2010)
10.10	Employment Agreement between Marc L. Dulude and Rand Worldwide, Inc. dated August 17, 2010 (incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)
10.11	Amended and Restated Employment Agreement between Avatech Solutions, Inc. and Lawrence Rychlak dated August 17, 2010 (incorporated by reference to Exhibit 10.6 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)
10.12	Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)
10.13	Revolving Loan Promissory Note issued by Avatech Solutions Subsidiary, Inc. and Avatech Solutions Subsidiary, Inc. to Mercantile Safe-Deposit & Trust Co. dated January 27, 2006 (incorporated by reference to Exhibit 10.50 of the Registration Statement on Form S-1 filed by Avatech Solutions, Inc. on February 10, 2006, File No 333-131720)
10.14	Loan and Security Agreement among Avatech Solutions Subsidiary, Inc., Avatech Solutions Subsidiary, Inc. and Mercantile Safe-Deposit & Trust Co., dated January 27, 2006 (incorporated by reference to Exhibit 10.51 of the Registration Statement on Form S-1 filed by Avatech Solutions, Inc. on February 10, 2006, File No 333-131720)

Exhibit	Description
10.15	Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary, Inc. and Mercantile Safe-Deposit & Trust Co. dated May 30, 2006 (incorporated by reference to Exhibit 10.57 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on June 8, 2006)
10.16	Second Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary, Inc and Mercantile Bank & Trust Co., dated December 31, 2006 (incorporated by reference to Exhibit 10.16 of the Quarterly Report on Form 10-Q filed by Avatech Solutions, Inc. on November 14, 2007)
10.17	Third Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary, Inc and PNC Bank, National Association, dated December 31, 2008 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on January 30, 2009)
10.18	Fourth Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary, Inc and PNC Bank, National Association, dated December 23, 2009 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on December 30, 2009)
10.19	Fifth Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary, Inc and PNC Bank, National Association, dated August 17, 2010 (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)
10.20	Autodesk Authorized Value Added Reseller Agreement between Avatech Solutions Subsidiary, Inc. and Autodesk, Inc, dated February 1, 2010 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on May 17, 2010)
10.21	Registration Rights Agreement between Avatech Solutions, Inc. and RWWI Holdings LLC, dated August 17, 2010 (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K of Avatech Solutions, Inc. filed on August 17, 2010)
10.22	Omnibus Waiver and Termination Agreement among Avatech Solutions, Inc., Pacific Asset Partners and Sigma Opportunity Fund, LLC, dated August 17, 2010 (filed herewith)
10.23	Omnibus Waiver and Termination Agreement among Avatech Solutions, Inc., Sigma Opportunity Fund, LLC, Garnett Y. Clark, Jr., Robert Post and George Davis, dated August 17, 2010 (filed herewith)
21.1	Subsidiaries of Avatech Solutions, Inc. (filed herewith)
23.1	Consent of Stegman & Company (filed herewith)
31.1	Rule 15d-14(a) Certifications by Chief Executive Officer (filed herewith)
31.2	Rule 15d-14(a) Certifications by Chief Financial Officer (filed herewith)
32.1	Section 1350 Certifications (furnished herewith)

EX-10.3

Exhibit 10.3

PREFERRED STOCK PURCHASE AGREEMENT

AVATECH SOLUTIONS, INC.

This Preferred Stock Purchase Agreement (this “Agreement”) is made and entered into as of the      day of                 , 2005, 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 E 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 $1,000, per share of Series E 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 100,000,000 shares, of which: (a) 80,000,000 shares are Common Stock, of which              shares are issued and outstanding and              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) 1,297,537 are designated as Series D Convertible Preferred Stock, 1,297,537 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 2004 Annual Report on SEC Form 10-K and its Proxy Statement relating to its 2004 Annual Meeting of Shareholders, along with the Company’s Quarterly Report for the period ending March 31, 2005 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, provided that this representation and warranty shall not include any term or provision of any financing arrangement which shall be paid or discharged in full simultaneously with the Closing.

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

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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, 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 or shall be inapplicable as of the time of Closing by virtue of the simultaneous discharge of indebtedness of the Company. 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.

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(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.

(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

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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 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) (g) 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 counsel, and Purchasers and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

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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 eighty (180) days after the Closing a registration statement 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 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

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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 180 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 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,

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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 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).

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(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.

(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.

- 10 -

(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 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

- 11 -

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 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

- 12 -

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 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,

- 13 -

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 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.

- 14 -

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

COMPANY:		PURCHASER:
AVATECH SOLUTIONS, INC.
By:
	Donald R. “Scotty” Walsh Chief Executive Officer	Signature
		Name and Title:
		Address of Purchaser:

- 15 -

SCHEDULE 1

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

EX-10.22

Exhibit 10.22

OMNIBUS WAIVER AND TERMINATION AGREEMENT

August 17, 2010

Reference is made to (i) the Common Stock and Warrant Purchase Agreement, dated June 12, 2006, by and among Avatech Solutions, Inc. (the “Company”) and the purchasers named therein (the “Purchasers”) (the “Stock Purchase Agreement”) and (ii) the Investor Rights Agreement, dated June 12, 2006, among the Company and the Purchasers (the “Rights Agreement,” and together with the Stock Purchase Agreement the “Financing Agreements”); and (iii) the warrants to purchase the Company’s common stock, $0.01 par value per share (the “Common Stock”) sold to the Purchasers under the Stock Purchase Agreement (the “Warrants”).

This Omnibus Waiver and Termination Agreement (this “Omnibus Termination”) is made and entered into effective as of August 17, 2010 by and among the Company and the Purchasers.

RECITALS

WHEREAS, in connection with and as a condition to the completion of the acquisition by the Company of Rand Worldwide, Inc. (“RWW”) in a reverse merger transaction, pursuant to which the Company will issue shares of its Common Stock (the “Merger Shares”) to the sole stockholder of RWW (the “Strategic Transaction”), the Company and the Purchasers wish to terminate the Financing Agreements and to waive all rights arising thereunder prior to the date hereof; and

WHEREAS, in connection with the Strategic Transaction, pursuant to a Registration Rights Agreement with the sole stockholder of RWW, the Company will agree to file a registration statement with the Securities and Exchange Commission within 75 days of the consummation of the Strategic Transaction to register the Merger Shares for resale (the “Registration Statement”); and

WHEREAS, in consideration of the terminations and waivers described above, the Company wishes to issue to the Purchasers certain shares of its Common Stock; and

WHEREAS, the Warrants have terminated in accordance with their terms; and

WHEREAS, the undersigned represent all of the parties to the Financing Agreements; and

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties hereto agree as follows:

1. Waiver under Financing Agreements. Each of the undersigned Purchasers hereby waives any rights, including, without limitation, any of the rights set forth in Articles V and VII of the Stock Purchase Agreement, arising as a result of or in connection with (i) any failures by the Company to comply with any of the provisions of either of the Financing Agreements prior to the date hereof; or (ii) the Strategic Transaction or the other transactions contemplated thereby.

2. Termination of Financing Agreements. The Financing Agreements are hereby terminated, and from and after the date hereof, the Financing Agreements shall be of no further force and effect, and each of the parties thereto shall be released and discharged from all duties and obligations thereunder.

3. Issuance of Common Stock. In consideration of the covenants and agreements set forth in Sections 1 and 2 hereof, the Company hereby agrees to issue to each Purchaser that number of shares of Common Stock set forth on Schedule I hereto upon receipt of an investor representation letter from each Purchaser in the form attached hereto as Exhibit A.

4. Piggy-Back Registration. The Company shall include and register for resale in the Registration Statement (i) the shares of Common Stock issued to the Purchasers pursuant to Section 3 hereof and (ii) the Registrable Securities (as defined in the Rights Agreement); provided, however, that the Company shall not be required to include and register any of such securities that are eligible for resale without restriction pursuant to Rule 144 under the Securities Act of 1933, as amended.

5. Miscellaneous. This Omnibus Termination may be executed in two or more counterparts, and shall be governed by and construed in accordance with the laws of the State of Delaware and the laws of the United States applicable therein (without giving effect to any choice or conflict of laws provision or rule that would cause the application of the laws of any other jurisdiction) and shall be treated in all respects as a Delaware contract.

[Signature page follows.]

IN WITNESS WHEREOF, the parties hereto have caused this Omnibus Waiver and Termination Agreement to be duly executed by their respective authorized persons as of the date first indicated above.

COMPANY:

AVATECH SOLUTIONS, INC.
By:	/s/ Lawrence Rychlak
Name:	Lawrence Rychlak
Title:	President and Chief Financial Officer

PURCHASERS:

PACIFIC ASSET PARTNERS
By:	/s/ Robert M. Stafford
Name:	Robert M. Stafford
Title:	General Partner

SIGMA OPPORTUNITY FUND, LLC

By: Sigma Capital Advisors, LLC, as managing member
By:	/s/ Thom Waye
Name:	Thom Waye
Title:	Managing Member

[SIGNATURE PAGE TO OMNIBUS WAIVER AND TERMINATION AGREEMENT – 2006 COMMON STOCK AND

WARRANT PURCHASE AGREEMENT AND INVESTOR RIGHTS AGREEMENT]

Schedule I

Purchaser	Number of Shares of Common Stock
Pacific Asset Partners	97,312
Sigma Opportunity Fund, LLC	97,312
Total:	194,624

I-1

Exhibit A

August 17, 2010

Avatech Solutions, Inc.

10715 Red Run Boulevard, Suite 101

Owings Mills, Maryland 21117

Attention: Corporate Secretary

Ladies and Gentlemen:

This letter agreement is being furnished to Avatech Solutions, Inc., a Delaware corporation (the “Company”), in connection with the execution and delivery of that certain Omnibus Waiver and Termination Agreement of even date herewith (the “Termination Agreement”) by the undersigned purchasers (each, a “Purchaser” and collectively, the “Purchasers”).

RECITALS

R.1 Each of the Purchasers purchased shares of common stock of the Company (the “Common Stock”) pursuant to that certain Common Stock and Warrant Purchase Agreement, dated as of June 12, 2006 (the “Purchase Agreement”), by and among the Company and the Purchasers.

R.2 In connection with and as a condition to the completion of the acquisition by the Company of Rand Worldwide, Inc. (“RWW”) in a reverse merger transaction pursuant to which the Company will issue shares of its Common Stock to the sole stockholder of RWW (the “Strategic Transaction”), the Company and the Purchasers have agreed to terminate the Purchase Agreement and the related Investor Rights Agreement and to waive all rights arising thereunder prior to the date hereof, including with respect to the Strategic Transaction, pursuant to the Termination Agreement.

R.2 The Termination Agreement provides that the Company will issue shares of its Common Stock (the “Additional Shares”) to the Purchasers in the amounts set forth in Schedule 1 hereto in consideration for the agreements and covenants contained therein.

R.3 The Purchasers desire to make certain representations and warranties to the Company, and to make certain agreements, as a condition to receiving the Additional Shares.

REPRESENTATIONS, ACKNOWLEDGEMENTS AND COVENANTS

1. Representations and Warranties of the Purchasers. Each Purchaser represents and warrants to the Corporation that each of its representations and warranties made in Sections 4.1, 4.3, 4.4, 4.5, 4.6 and 4.7 of the Purchase Agreement is true, complete and accurate in all material respects as if made on the date hereof. A copy of these representations and warranties is attached hereto as Exhibit A.

A-1

2. Acknowledgments. Each Purchaser hereby acknowledges and understands that:

(a)(i) The Additional Shares have not been registered under the Securities Act of 1933, as amended (the “Act”), or any applicable State securities laws (the “State Acts”), (ii) the Corporation has not agreed to register the Additional Shares for distribution in accordance with the provisions of the Act and the State Acts or agreed to comply with any exemption under the Act and the State Acts for the transfer of the Shares, and (iii) the Additional Shares may not be offered or sold in the United States or to U.S. persons unless registered under the Act, or pursuant to an exemption from the registration requirements of the Act.

(b) By virtue of certain rules governing the resale of “restricted securities” (and each Purchaser acknowledges that the Additional Shares are “restricted securities” within the meaning of the rules and regulations under the Act), each Purchaser may be required to hold the Additional Shares issued to such Purchaser (the “Purchaser’s Shares”) for a period of not less than six months before any sale or other disposition of the Purchaser’s Shares may take place, and even then such Purchaser may sell or otherwise dispose of the Purchaser’s Shares only upon the issuance of an opinion of counsel to the Corporation that the Purchaser’s Shares intended to be sold or disposed of may be sold or disposed of without registration under the Act or the State Acts.

(c) The Purchaser is solely responsible for compliance with the laws (including, without limitation, securities laws) of any jurisdiction outside of the United States and is not relying on the Corporation to comply with such laws.

(d) The Corporation will refuse to register any transfer of all or any portion of the Purchaser’s Shares unless made pursuant to registration under the Act or any available exemption from registration under the Act.

3. Covenants. Each Purchaser agrees that it will not take, or cause to be taken, any action with respect to the Purchaser’s Shares that would cause such Purchaser to be deemed an “underwriter” as defined in Section 2(11) of the Securities Act. Without limiting the foregoing, each Purchaser agrees that it will not sell or otherwise transfer the Purchaser’s Shares unless they are registered under the Act and the securities acts of any other appropriate jurisdiction, unless an exemption from such registration is available.

4. Restrictive Legends. The Purchaser’s Shares shall bear the following legend:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO AVATECH SOLUTIONS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

A-2

5. Binding Effect; Successors and Assigns. This terms of this letter shall be binding upon the Purchasers and their respective successors and permitted assigns, and will inure to the benefit of the Corporation and its successors and assigns.

6. Miscellaneous.

(a) In this letter, the singular shall include the plural and the masculine gender shall include the feminine and neuter and vice versa, as the context requires.

(b) Each provision of this letter shall be considered separable and if for any reason any provision or provisions hereof are determined to be invalid or contrary to applicable law, such invalidity shall not impair the operation of or affect the remaining portions of this letter.

(c) Paragraph titles are for descriptive purposes only and shall not control or alter the meaning of this letter as set forth in the text.

(d) Capitalized terms used but not defined herein or in the Schedules and Exhibits hereto shall have the meanings given such terms in the Purchase Agreement.

(e) This letter shall be construed in accordance with the laws of the State of New York without regard to principles of conflict of laws.

[SIGNATURES APPEAR ON NEXT PAGE]

A-3

[SIGNATURE PAGE]

HOLDERS: SIGMA OPPORTUNITY FUND, LLC
By:	Sigma Capital Advisors, LLC, as managing member
By:
Name:	Thom Waye
Title:	Managing Member

PACIFIC ASSET PARTNERS

By:

Name:

Title:

RECEIVED AND ACCEPTED THIS 17^th DAY OF AUGUST, 2010.

AVATECH SOLUTIONS, INC.

By:
Name:	Lawrence Rychlak
Title:	President and Chief Financial Officer

A-4

SCHEDULE 1

ADDITIONAL SHARES

Purchaser	Number of Shares of Common Stock
Pacific Asset Partners	97,312
Sigma Opportunity Fund, LLC	97,312
Total:	194,624

A-5

EXHIBIT A

REPRESENTATIONS AND WARRANTIES

ARTICLE IV—REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

Each Purchaser, for itself only, hereby severally and not jointly, represents and warrants to the Seller as follows:

4.1 Existence and Power. The Purchaser is duly organized, validly existing and in good standing under the laws of the jurisdiction of such Purchaser’s organization. The Purchaser has all powers required to carry on such Purchaser’s business as now conducted.

4.2 [Intentionally Omitted].

4.3 Investment. The Purchaser is acquiring the securities described herein for its own account and not with a view to, or for sale in connection with, any distribution thereof, nor with the intention of distributing or reselling the same, provided, however, that by making the representation herein, the Purchaser does not agree to hold any of the securities for any minimum or other specific term and reserves the right to dispose of the securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. The Purchaser is aware that none of the securities has been registered under the Securities Act or under applicable state securities or blue sky laws. The Purchaser is an “Accredited Investor” as such term is defined in Rule 501 of Regulation D, as promulgated under the Securities Act (including without limitation, if the Purchaser is an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 and a self-directed plan, then investment decisions are made solely by persons that are “Accredited Investors”).

4.4 Reliance on Exemptions. The Purchaser understands that the Shares and Warrants are being offered and sold to such Purchaser in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Seller is relying upon the truth and accuracy of, and such Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of such Purchaser to acquire the securities.

4.5 Experience of the Purchaser. The Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. The Purchaser is able to bear the economic risk of an investment in the securities and, at the present time, is able to afford a complete loss of such investment.

4.6 General Solicitation. The Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

A-6

4.7 Residence. The Purchaser, if a U.S. investor, is a resident of the U.S. state indicated in the address specified on such Purchaser’s signature page attached hereto.

A-7

EX-10.23

Exhibit 10.23

OMNIBUS WAIVER AND TERMINATION AGREEMENT

August 17, 2010

Reference is made to (i) the Common Stock and Warrant Purchase Agreement, dated January 29, 2007, by and among Avatech Solutions, Inc. (the “Company”) and the purchasers named therein (the “Purchasers”) (the “Stock Purchase Agreement”), (ii) the Investor Rights Agreement, dated January 29, 2007, among the Company and the Purchasers (the “Rights Agreement,” and together with the Stock Purchase Agreement the “Financing Agreements”); and (iii) the warrants to purchase the Company’s common stock, $0.01 par value per share (the “Common Stock”) sold to the Purchasers under the Stock Purchase Agreement (the “Warrants”).

This Omnibus Waiver and Termination Agreement (this “Omnibus Termination”) is made and entered into effective as of August 17, 2010 by and among the Company and the Purchasers.

RECITALS

WHEREAS, in connection with and as a condition to the completion of the acquisition by the Company of Rand Worldwide, Inc. (“RWW”) in a reverse merger transaction, pursuant to which the Company will issue shares of its Common Stock (the “Merger Shares”) to the sole stockholder of RWW (the “Strategic Transaction”), the Company and the Purchasers wish to terminate the Financing Agreements and to waive all rights arising thereunder prior to the date hereof (except for the rights arising under the Warrants, which are preserved as amended and restated as of the date hereof); and

WHEREAS, in connection with the Strategic Transaction, pursuant to a Registration Rights Agreement with the sole stockholder of RWW, the Company will agree to file a registration statement with the Securities and Exchange Commission within 75 days of the consummation of the Strategic Transaction to register the Merger Shares for resale (the “Registration Statement”); and

WHEREAS, in connection with the transactions contemplated herein, the Company and each of the Purchasers have agreed to amend and restate the Warrants; and

WHEREAS, in consideration of the terminations, waivers and amendments described above, the Company wishes to issue to the Purchasers certain shares of its Common Stock; and

WHEREAS, the undersigned represent all of the parties to the Financing Agreements; and

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties hereto agree as follows:

1. Waiver under Financing Agreements. Each of the undersigned Purchasers hereby waives any rights, including, without limitation, any of the rights set forth in Articles V and VII of the

Stock Purchase Agreement, arising as a result of or in connection with (i) any failures by the Company to comply with any of the provisions of either of the Financing Agreements prior to the date hereof; or (ii) the Strategic Transaction or the other transactions contemplated thereby.

2. Termination of Financing Agreements. The Financing Agreements are hereby terminated, and from and after the date hereof, the Financing Agreements shall be of no further force and effect, and each of the parties thereto shall be released and discharged from all duties and obligations thereunder.

3. Issuance of Common Stock. In consideration of the covenants and agreements set forth in Sections 1 and 2 hereof, the Company hereby agrees to issue to each Purchaser that number of shares of Common Stock set forth on Schedule I hereto upon receipt of an investor representation letter from each Purchaser in the form attached hereto as Exhibit A.

4. Piggy-Back Registration. The Company shall include and register for resale in the Registration Statement (i) the shares of Common Stock issued to the Purchasers pursuant to Section 3 hereof and (ii) the Registrable Securities (as defined in the Rights Agreement); provided, however, that the Company shall not be required to include and register any of such securities that are eligible for resale without restriction pursuant to Rule 144 under the Securities Act of 1933, as amended.

5. Miscellaneous. This Omnibus Termination may be executed in two or more counterparts, and shall be governed by and construed in accordance with the laws of the State of Delaware and the laws of the United States applicable therein (without giving effect to any choice or conflict of laws provision or rule that would cause the application of the laws of any other jurisdiction) and shall be treated in all respects as a Delaware contract.

[Signature page follows.]

2

IN WITNESS WHEREOF, the parties hereto have caused this Omnibus Waiver and Termination Agreement to be duly executed by their respective authorized persons as of the date first indicated above.

COMPANY:

AVATECH SOLUTIONS, INC.

By:	/s/ Lawrence Rychlak
Name:	Lawrence Rychlak
Title:	President and Chief Financial Officer
PURCHASERS:
SIGMA OPPORTUNITY FUND, LLC
By: Sigma Capital Advisors, LLC, as managing member
By:	/s/ Thom Waye
Name:	Thom Waye
Title:	Managing Member
/s/ Garnett Y. Clark, Jr.
Garnett Y. Clark, Jr.
/s/ Robert Post
Robert Post
/s/ George Davis
George Davis

[SIGNATURE PAGE TO OMNIBUS WAIVER AND TERMINATION AGREEMENT – 2007 COMMON STOCK AND

WARRANT PURCHASE AGREEMENT AND INVESTOR RIGHTS AGREEMENT]

3

Schedule I

Purchaser	Number of Shares of Common Stock
Sigma Opportunity Fund, LLC	186,719
Garnett Y. Clark, Jr.	3,112
Robert Post	3,112
George Davis	12,448
Total:	205,391

I-1

Exhibit A

August 17, 2010

Avatech Solutions, Inc.

10715 Red Run Boulevard, Suite 101

Owings Mills, Maryland 21117

Attention: Corporate Secretary

Ladies and Gentlemen:

This letter agreement is being furnished to Avatech Solutions, Inc., a Delaware corporation (the “Company”), in connection with the execution and delivery of that certain Omnibus Waiver and Termination Agreement of even date herewith (the “Termination Agreement”) by the undersigned purchasers (each, a “Purchaser” and collectively, the “Purchasers”).

RECITALS

R.1 Each of the Purchasers purchased shares of common stock of the Company (the “Common Stock”) pursuant to that certain Common Stock and Warrant Purchase Agreement, dated as of January 29, 2007 (the “Purchase Agreement”), by and among the Company and the Purchasers.

R.2 In connection with and as a condition to the completion of the acquisition by the Company of Rand Worldwide, Inc. (“RWW”) in a reverse merger transaction pursuant to which the Company will issue shares of its Common Stock to the sole stockholder of RWW (the “Strategic Transaction”), the Company and the Purchasers have agreed to terminate the Purchase Agreement and the related Investor Rights Agreement and to waive all rights arising thereunder prior to the date hereof, including with respect to the Strategic Transaction, pursuant to the Termination Agreement.

R.2 The Termination Agreement provides that the Company will issue shares of its Common Stock (the “Additional Shares”) to the Purchasers in the amounts set forth in Schedule 1 hereto in consideration for the agreements and covenants contained therein.

R.3 The Purchasers desire to make certain representations and warranties to the Company, and to make certain agreements, as a condition to receiving the Additional Shares.

REPRESENTATIONS, ACKNOWLEDGEMENTS AND COVENANTS

1. Representations and Warranties of the Purchasers. Each Purchaser represents and warrants to the Corporation that each of its representations and warranties made in Sections 4.1, 4.3, 4.4, 4.5, 4.6 and 4.7 of the Purchase Agreement is true, complete and accurate in all material respects as if made on the date hereof. A copy of these representations and warranties is attached hereto as Exhibit A.

A-1

2. Acknowledgments. Each Purchaser hereby acknowledges and understands that:

(a)(i) The Additional Shares have not been registered under the Securities Act of 1933, as amended (the “Act”), or any applicable State securities laws (the “State Acts”), (ii) the Corporation has not agreed to register the Additional Shares for distribution in accordance with the provisions of the Act and the State Acts or agreed to comply with any exemption under the Act and the State Acts for the transfer of the Shares, and (iii) the Additional Shares may not be offered or sold in the United States or to U.S. persons unless registered under the Act, or pursuant to an exemption from the registration requirements of the Act.

(b) By virtue of certain rules governing the resale of “restricted securities” (and each Purchaser acknowledges that the Additional Shares are “restricted securities” within the meaning of the rules and regulations under the Act), each Purchaser may be required to hold the Additional Shares issued to such Purchaser (the “Purchaser’s Shares”) for a period of not less than six months before any sale or other disposition of the Purchaser’s Shares may take place, and even then such Purchaser may sell or otherwise dispose of the Purchaser’s Shares only upon the issuance of an opinion of counsel to the Corporation that the Purchaser’s Shares intended to be sold or disposed of may be sold or disposed of without registration under the Act or the State Acts.

(c) The Purchaser is solely responsible for compliance with the laws (including, without limitation, securities laws) of any jurisdiction outside of the United States and is not relying on the Corporation to comply with such laws.

(d) The Corporation will refuse to register any transfer of all or any portion of the Purchaser’s Shares unless made pursuant to registration under the Act or any available exemption from registration under the Act.

3. Covenants. Each Purchaser agrees that it will not take, or cause to be taken, any action with respect to the Purchaser’s Shares that would cause such Purchaser to be deemed an “underwriter” as defined in Section 2(11) of the Securities Act. Without limiting the foregoing, each Purchaser agrees that it will not sell or otherwise transfer the Purchaser’s Shares unless they are registered under the Act and the securities acts of any other appropriate jurisdiction, unless an exemption from such registration is available.

4. Restrictive Legends. The Purchaser’s Shares shall bear the following legend:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO AVATECH SOLUTIONS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

A-2

5. Binding Effect; Successors and Assigns. This terms of this letter shall be binding upon the Purchasers and their respective successors and permitted assigns, and will inure to the benefit of the Corporation and its successors and assigns.

6. Miscellaneous.

(a) In this letter, the singular shall include the plural and the masculine gender shall include the feminine and neuter and vice versa, as the context requires.

(b) Each provision of this letter shall be considered separable and if for any reason any provision or provisions hereof are determined to be invalid or contrary to applicable law, such invalidity shall not impair the operation of or affect the remaining portions of this letter.

(c) Paragraph titles are for descriptive purposes only and shall not control or alter the meaning of this letter as set forth in the text.

(d) Capitalized terms used but not defined herein or in the Schedules and Exhibits hereto shall have the meanings given such terms in the Purchase Agreement.

(e) This letter shall be construed in accordance with the laws of the State of New York without regard to principles of conflict of laws.

[SIGNATURES APPEAR ON NEXT PAGE]

A-3

[SIGNATURE PAGE]

PURCHASERS: SIGMA OPPORTUNITY FUND, LLC
By:	Sigma Capital Advisors, LLC, as managing member
By:
Name:	Thom Waye
Title:	Managing Member
Garnett Y. Clark, Jr.
George Davis
Robert Post

RECEIVED AND ACCEPTED THIS 17^th DAY OF AUGUST, 2010.

AVATECH SOLUTIONS, INC.

By:
Name:	Lawrence Rychlak
Title:	President and Chief Financial Officer

A-4

SCHEDULE 1

ADDITIONAL SHARES

Purchaser	Number of Shares of Common Stock
Sigma Opportunity Fund, LLC	186,719
Garnett Y. Clark, Jr.	3,112
Robert Post	3,112
George Davis	12,448
Total:	205,391

A-5

EXHIBIT A

REPRESENTATIONS AND WARRANTIES

ARTICLE IV—REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

Each Purchaser, for itself only, hereby severally and not jointly, represents and warrants to the Seller as follows:

4.1 Existence and Power. The Purchaser is duly organized, validly existing and in good standing under the laws of the jurisdiction of such Purchaser’s organization. The Purchaser has all powers required to carry on such Purchaser’s business as now conducted.

4.2 [Intentionally Omitted].

4.3 Investment. The Purchaser is acquiring the securities described herein for its own account and not with a view to, or for sale in connection with, any distribution thereof, nor with the intention of distributing or reselling the same, provided, however, that by making the representation herein, the Purchaser does not agree to hold any of the securities for any minimum or other specific term and reserves the right to dispose of the securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. The Purchaser is aware that none of the securities has been registered under the Securities Act or under applicable state securities or blue sky laws. The Purchaser is an “Accredited Investor” as such term is defined in Rule 501 of Regulation D, as promulgated under the Securities Act (including without limitation, if the Purchaser is an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 and a self-directed plan, then investment decisions are made solely by persons that are “Accredited Investors”).

4.4 Reliance on Exemptions. The Purchaser understands that the Shares and Warrants are being offered and sold to such Purchaser in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Seller is relying upon the truth and accuracy of, and such Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of such Purchaser to acquire the securities.

4.5 Experience of the Purchaser. The Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. The Purchaser is able to bear the economic risk of an investment in the securities and, at the present time, is able to afford a complete loss of such investment.

4.6 General Solicitation. The Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

A-6

4.7 Residence. The Purchaser, if a U.S. investor, is a resident of the U.S. state indicated in the address specified on such Purchaser’s signature page attached hereto.

A-7

EX-21.1

Exhibit 21.1

Subsidiaries

Avatech Solutions Subsidiary, Inc.

Rand Worldwide, Inc.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the following Registration Statements filed by Avatech Solutions, Inc. of our report dated September 20, 2010 with respect to the consolidated financial statements and schedules of Avatech Solutions, Inc., which appears in this Annual Report of Avatech Solutions, Inc. on Form 10-K for the year ended June 30, 2010:

Registration Statements on Form S-8:

REGISTRATION NUMBER	NAME
333-107017	Restricted Stock Award Plan
333-108354	2002 Stock Option Plan
333-131721	Restricted Stock Award Plan
333-147823	Amended Employee Stock Purchase Plan

/s/ Stegman & Company                    

Baltimore, Maryland

September 28, 2010

EX-31.1

Exhibit 31.1

Certifications of the Chief Executive Officer

Pursuant to Securities Exchange Act Rules 13a-1 and 15d-14

As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Marc L. Dulude, certify that:

1. I have reviewed this Annual Report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 functions):

(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: September 28, 2010	/s/    MARC L. DULUDE
	Chief Executive Officer

EX-31.2

Exhibit 31.2

Certifications of the Chief Financial Officer

Pursuant to Securities Exchange Act Rules 13a-1 and 15d-14

As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Lawrence Rychlak, certify that:

1. I have reviewed this Annual Report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 functions):

(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: September 28, 2010	/s/    LAWRENCE RYCHLAK
	President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certifications of Periodic Report by the Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Avatech Solutions, Inc. (the “Company”) on Form 10-K for the year ending June 30, 2010 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: September 28, 2010	/s/    MARC L. DULUDE
	Chief Executive Officer
	/s/    LAWRENCE RYCHLAK
	President and Chief Financial Officer