<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                      ----------------------------------

                                  FORM 10-KSB
(Mark One)
     [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934 [FEE REQUIRED]
               For the fiscal year ended July 31, 1996

                                       OR
                                        
     [_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
               For the transition period from                to 
                                              --------------    ----------
                                              
                        Commission file number 0-27286
                        ------------------------------

                                 HELISYS, INC.
                (Name of Small Business Issuer in its charter)

            Delaware                                   95-4552813
(State or other jurisdiction of
 incorporation or organization)           (I.R.S. Employer Identification No.)

24015 Garnier Street, Torrance, California               90505
 (Address of principal executive offices)              (Zip Code)

                                (310) 891-0600
               (Issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:         None
Securities registered pursuant to Section 12(g) of the Act:     Common Stock
                                                              (Title of class)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days.  YES [X]   NO [_]

     Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB  [X].

     Issuer's revenues for its most recent fiscal year were $12,322,291

     As of October 21, 1996, the aggregate market value of the voting stock held
by non-affiliates, computed by reference to the price at which the stock was
sold on such date, was approximately $3,946,925.

    3,991,654 shares of Common Stock were outstanding at October 21, 1996.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's definitive Proxy Statement to be filed in
connection with the solicitation of proxies for its Annual Meeting of
Stockholders to be held December 17, 1996 are incorporated by reference in Items
9, 10, 11 and 12 of Part III hereof.


                              Page 1 of 59 Pages

   Exhibit Index is Located on Sequentially Numbered Page 28 of this Report
<PAGE>
 
                               INTRODUCTORY NOTE

     This Annual Report on Form 10-KSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and the Registrant intends
that such forward-looking statements be subject to the safe harbors created
thereby.  These forward-looking statements relate to (i) the introduction of the
Registrant's upgraded technology and the achievement of commercial levels of its
production and sales, (ii) the future development of the Registrant's
technology, and (iii) the need for, and availability of, additional financing.

     The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties.  These forward-
looking statements are based on assumptions that the Registrant will be able to
generate sufficient funds from operations or to obtain sufficient financing to
continue operations, that the Registrant's technology will continue to be
developed, and will not be replaced by new technology, that Registrant will
retain key technical and management personnel, and that there will be no
material adverse change in the Registrant's operations or business.  Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future technology, economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Registrant.  Although
the Registrant believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in forward-
looking statements will be realized.  In addition, the business and operations
of the Registrant are subject to substantial risks which increase the
uncertainty inherent in such forward-looking statements.  See "Business--Certain
Factors That May Affect The Company's Business and Future Results" as well as
the Section entitled "Risk Factors" in the Registrant's Registration Statement
on Form SB-2, as declared effective by the Securities and Exchange Commission on
March 7, 1996 for a more detailed discussion of certain of these risks.  In
light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Registrant or any other person that the
objectives or plans of the Registrant will be achieved.

                                       2
<PAGE>
 
                                    PART I

ITEM 1.  BUSINESS

THE COMPANY

     Helisys, Inc. (the "Company") designs, develops, manufactures and markets
rapid prototyping systems used by manufacturers, design engineering firms,
university research facilities and other businesses to make physical models,
industrial patterns and prototypes directly from a three-dimensional computer-
aided design ("3-D CAD").  Rapid prototyping can significantly reduce the time
and effort required to produce complex models and prototypes and, therefore, can
substantially reduce the cost and shorten the time it takes to bring new
products to market (i.e., "time-to-market").  The Company's rapid prototyping
equipment utilizes the Company's proprietary Laminated Object Manufacturing
("LOM") technology to produce three-dimensional objects which replicate a 3-D
CAD design by sequentially laminating layers of sheet-form material and cutting
each layer with a focused laser beam.  Each successive layer of sheet-form
material is bonded to the stack of previously cut layers, and at the end of the
LOM process, the excess material is removed to reveal the three-dimensional
object.  The objects produced are used in the preliminary testing of the form,
fit or function of a part, the conversion of patterns into usable parts through
secondary processes, such as sand casting, vacuum forming and rubber molding,
and in industrial pattern making and similar applications.  The Company's rapid
prototyping systems have been used in the design, development and manufacture of
a range of products, from golf club heads to automobile engine blocks.  The
Company also sells the sheet-form materials and other consumable materials used
with its LOM systems.

INDUSTRY BACKGROUND

     As a new product progresses from concept to mass production, it typically
moves through four major stages of the product development process:  (i) initial
product design (often using computer-aided design); (ii) functional performance
testing; (iii) low-volume production; and (iv) high-volume production.  By
incorporating rapid prototyping at various stages in the product development
process, manufacturers can significantly reduce the time-to-market of new
products.  In addition, rapid prototyping can improve product quality and reduce
overall product development costs.  Certain products that take weeks or months
to model or prototype with traditional machining techniques can be made in hours
with rapid prototyping systems, often at a substantially lower cost.  Because
the systems run directly from the computer-generated output of a 3-D CAD system,
the prototype, model or pattern can be made as soon as the design is complete.
In addition, industrial objects produced by rapid prototyping often provide
greater detail and precision than would be obtained with traditional methods.
Rapid prototyping technology can also be used to generate complex models,
industrial patterns and prototypes which cannot be made with traditional
methods.

     The rapid prototyping industry is only a decade old and its growth to date
has been related primarily to the increased use of 3-D CAD systems by design
engineers and manufacturers.  The Company believes that the development and
future growth of the emerging rapid prototyping industry will continue to relate
to the expanded use of 3-D CAD systems worldwide.  While there are several
different rapid prototyping technologies in various stages of development, at
least seven companies, in addition to the Company, currently market and sell
commercial rapid prototyping systems in the United States.

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<PAGE>
 
     CURRENT APPLICATIONS OF RAPID PROTOTYPING

     Rapid prototyping systems are currently being used in each stage of the
product development process.

     First Stage - Initial Product Design: Model Making for Form, Fit and
Function Verification.  During the initial stage of the product development
process, rapid prototyping technology offers industrial designers and
manufacturing engineers the ability to quickly produce full-scale physical
models at a lower cost than conventional prototyping methods, such as machining
and hand-carving. Physical models of products such as toys, furniture, shoes and
other consumer products can be produced to allow manufacturers to evaluate the
form, fit and function and other aesthetic properties of a new product.

     Second Stage - Functional Performance Testing: Production of Patterns,
Masters and Molds for Prototype Tooling.  During the functional performance
testing stage, rapid prototyping technology offers industrial designers and
manufacturing engineers the ability to quickly produce prototype parts for
functional testing purposes.  Rapid prototyping technology can be used to create
three-dimensional objects, positive versions of which can be used for patterns
or masters in a variety of secondary tooling applications such as sand casting,
direct investment casting, silicone rubber molding, vacuum forming and plaster
casting.  Negative versions of such three-dimensional objects can also be
produced for use as molds for the injection of wax in the indirect investment
casting process.  Examples of prototypes produced by rapid prototyping
technology include automotive engine components, manufacturing fixtures,
military hardware and medical prosthetics.  Examples of the applications of
industrial patterns produced by rapid prototyping systems include motor
housings, exhaust manifolds, pumps and consumer products.

     Third Stage - Low-Volume Production: Production of Patterns and Masters for
Low-Volume Production Tooling.  Before committing a new product to mass
production, many manufacturers plan low-volume production runs which simulate
the production process and help to identify potential problems with the part's
design or its production process.  During this stage, objects produced by means
of rapid prototyping can be used as industrial patterns or masters in secondary
applications such as sand casting, investment casting, spray metal tooling and
EDM (Electro Discharge Machining) abrading to create near-production-quality
molds.  By replacing more time-consuming conventional industrial pattern making
methods, rapid prototyping technology offers manufacturers the ability to move
through the low-volume production stage and into high-volume production quickly
and inexpensively.

     Fourth Stage - High-Volume Production:  Production of Patterns and Masters
for High-Volume Production Tooling.  In certain instances, rapid prototyping
technology currently is used to create patterns or masters in the development of
final high-volume production tooling.  Due to the high cost and time required to
generate production tooling using conventional methods, there may be a
substantial future market for rapid prototyping technology if it can be applied
successfully to address more high-volume production tooling requirements.

LOM TECHNOLOGY

     Use of the Company's rapid prototyping systems begins with the analysis of
the user's 3-D CAD design and its conversion into a format which may be read by
proprietary software the

                                       4
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Company has developed to interface with its LOM systems.  This software divides
the 3-D CAD design into fine, horizontal "slices," with each layer equal to the
thickness of the sheet-form material to be used.  The Company's patented LOM
process then builds the object by cutting each of these layer-thin cross
sections out of a gradually enlarging stack of paper (or other sheet-form
material).  This stack is supported by an elevator platform in the working
chamber of the LOM system.  A roll of paper (or other sheet-form material) is
mounted on a reel and fed into the working chamber to provide new material for
each layer being cut.  To cut each layer, an X-Y positioning table focuses a low
power laser beam straight down on the sheet-form material, outlines the cross-
sectional data for the layer and cuts parting lines to allow for separation of
excess material from the object when the process is complete.  After a layer has
been cut by the laser beam, the elevator is lowered and the roll of paper (or
other sheet-form material) is advanced and a new layer is pressed on top of the
previous layer.  A heated roller moves over the top of the new layer of sheet-
form material and the combination of heat and pressure bonds each layer together
just before the laser begins to cut a new cross-section out of the new layer.
The process continues until all cross sections are bonded and cut and the object
is contained inside what appears to be a solid block of the sheet-form material
used.  The excess material is then removed from the object at the parting lines
and the object produced is a physical rendering of the 3D-CAD design.  The
majority of materials currently used in connection with the LOM systems are
specially developed papers, and the finished models or other objects constructed
from such papers have the look and feel of lightweight wood.

     A number of different technologies are currently utilized in the rapid
prototyping industry and several additional rapid prototyping technologies are
in various stages of development.  The Company's LOM technology, however, is the
only commercial rapid prototyping technology that produces physical models,
industrial patterns and prototypes through the lamination of sheet-form
materials such as paper and plastic, which are cut by a laser beam.  Kira
Corporation sells systems in Japan which use a knife instead of a laser beam and
which utilize certain other technology which resembles that of the Company.
However, the Company believes that Kira's ability to sell rapid prototyping
systems in the United States may be limited due to the protection afforded by
the Company's patents.  Kinergy Pte Ltd in Singapore offers systems very similar
to the Company's products, although no license arrangements have been reached.
The Company believes that Kinergy's ability to sell rapid prototyping systems in
the US and Japan may be limited due to patent protection in these countries.

     3D Systems, Inc., the current leader in the rapid prototyping industry,
sells rapid prototyping systems which produce three-dimensional plastic objects
by means of stereolithography.  The plastic objects produced begin in liquid
polymer form and are "cured," or hardened, when exposed to an ultraviolet light.
DTM Corporation sells rapid prototyping systems which use lasers to harden
powdered material to form a three-dimensional object.  Stratasys, Inc. sells
rapid prototyping systems which extrude wax, plastic and other polymer filaments
out of a nozzle.  Sanders Prototype, Inc. sells desktop prototype systems which
use ink-jet technology to deposit material layer-by-layer to form a three-
dimensional object.

     Competitors' rapid prototyping technologies provide advantages over the
Company's LOM technology for some applications, such as the ability to operate
in an office environment and the ability to produce three-dimensional objects
without having to remove excess material from the object at the end of the rapid
prototyping process.  The Company, however, believes that its LOM technology
provides certain advantages over other rapid prototyping technologies.  These
advantages include:

                                       5
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          Material Variety: The lamination feature of the LOM process allows
     for a variety of materials to be used in the Company's systems. In concept,
     all sheet-formed material that can be cut by laser and bonded to itself can
     be used in the LOM process. These materials currently include paper and
     plastic film and, in the future, may include ceramic tape, composite
     laminates and metal foil. Although certain of these materials are currently
     only being tested for use with the Company's rapid prototyping systems, the
     Company believes that no other rapid prototyping technology currently on
     the market allows for the potential use of such a variety of raw materials.
     Many of the materials that may be used with the Company's rapid prototyping
     systems are less expensive than the chemical solvents used with the rapid
     prototyping equipment manufactured by certain of the Company's competitors.
     The majority of objects currently being produced by the Company's LOM
     systems are made of various types of paper and have the look and feel of
     lightweight wood. These objects can be finished and painted to give
     customers the ability to evaluate the proposed product's aesthetic
     properties and, unlike objects produced by certain other rapid prototyping
     technologies, can be easily machined or modified to obtain the exact fit
     and form desired.

          Precision:  In certain other rapid prototyping technologies, such as
     stereolithography, raw materials must undergo a phase-change step (e.g.,
     liquid-to-solid or powder-to-liquid-to-solid).  This step causes a change
     in volume as the raw material solidifies.  Consequently, it is difficult to
     maintain desired precision in the object due to possible distortion
     occurring as a result of the change in the object's volume.  Of all of the
     existing commercial rapid prototyping technologies, management believes
     that the LOM process is least affected by this problem, because the raw
     materials used in the LOM process are solid sheets, as opposed to liquids
     or powders.  As a result, practically no phase change occurs during the LOM
     process, except for the reaction of the adhesive.  Objects created by the
     Company's rapid prototyping systems, therefore, are less affected by phase-
     change distortions than those created by competing systems.  For this
     reason, the Company believes that its LOM technology may prove better
     suited than rapid prototyping technologies of certain of its competitors
     for the direct production of final parts for actual end use, if and when
     such direct production becomes feasible.

          Speed:  Most other rapid prototyping processes require time-consuming
     point-by-point material solidification, either by means of laser scanning
     or droplet deposition.  The Company's LOM systems, on the other hand, trace
     or cut the periphery of the object's cross section out of raw sheet-formed
     material, as opposed to creating or "filling-in" the entire surface area of
     the object's cross section.  As a result, the Company's LOM technology is
     faster than that of most competing rapid prototyping technologies.

          Environmental safety:  The Company's consumable sheet materials are
     generally inert and non-toxic.  Therefore, the LOM process does not raise
     the same concerns of possible exposure to toxic chemicals that arise with
     some competitive technologies.

     The Company believes that the foregoing characteristics make the Company's
LOM systems particularly well-suited to the production of large, bulky patterns
in the prototype tooling process.  The Company also believes that its current
systems are capable of producing larger objects than any other commercial rapid
prototyping system currently on the market.  For a discussion of certain
performance and reliability problems that the Company's LOM systems have
experienced in the past, see "Certain Factors That May Affect The Company's
Business and Future Results."

                                       6
<PAGE>
 
PRODUCTS AND RELATED SERVICES

     The Company's LOM systems are designed by the Company and incorporate
numerous hardware and software components.  The Company's LOM systems, together
with a variety of sheet-form materials, can be used in all stages of the product
development process.  The Company believes that the potential applications of
its LOM technology will increase as additional materials are developed for use
in the LOM process.

     The current systems sold by the Company are the LOM-1015 series and LOM-
2030 series. The LOM-1015 was developed for the production of medium-size parts,
such as appliance components.  The Company's LOM-2030H is the latest-generation
LOM-2030 series system developed for the production of large-size parts, such as
automobile parts or heavy machinery components.  The LOM-1015 was first shipped
in fiscal 1991.  The original system in the LOM-2030 series was first shipped in
fiscal 1993 and the LOM-2030H was first shipped in the first quarter of fiscal
1997.  Both the LOM-1015 series and the LOM-2030 series systems come with a one-
year service contract, as well as a starter kit which includes a roll of sheet-
form material and an additional software license.

     The Company also sells materials and supplies used with its LOM systems,
including two types of paper:  standard performance LOM paper ("LPS paper") and
high performance LOM paper ("LPH paper"), both of which are coated on one side
with a thin layer of heat-activated laminate adhesive.  LPS paper is an industry
commodity paper that has been widely used in the food industry and is available
in varying weights and thicknesses.  LPH paper is a newly developed proprietary
material, which the Company obtains exclusively from Brown-Bridge Industries,
Inc. in Troy, Ohio.  LPH paper is a high performance paper that has a faster
bonding speed than the LPS paper as well as increased adhesive strength.  In
addition to paper material, a very limited quantity of plastic material has been
offered by the Company to specific customers on a trial basis.

     The Company also offers its customers extended service contracts for the
periods following the expiration of the initial one-year service contract.  A
typical service contract includes labor and parts for preventative maintenance,
technical support and repairs.  In the future, the Company may offer additional
service programs under which customers may elect to purchase upgrade kits as
part of the Company's regular service contracts.

     The Company also produces prototypes and models for industrial designers
and engineers on a limited, per-order basis.  The prototypes and models are
produced at the Company's Technical Resource Center ("TRC") located at the
Company's headquarters, which is equipped with several of the Company's LOM
systems.  The TRC is mainly used to provide internal technical training and
testing support to other departments within the Company; however, to fully
utilize the LOM systems when they are not being used for these other purposes,
the TRC also offers LOM services to outside entities on a limited basis.

RESEARCH AND DEVELOPMENT

     The Company's research and development department was formally established
in January 1994, and since that time, much of the Company's research and
development activity has been focused on the development of new materials to be
used in the LOM process and the improvement of the processing speeds of its LOM
systems.  The Company's engineering development efforts

                                       7
<PAGE>
 
will continue to be focused on continued improvements to the LOM technology and
development of new modeling processes, materials, software and products. The
Company's objectives in the development of new products are to produce reliable
products and materials which are precise and resistant to deformity, to increase
the speed of the LOM process and to develop a wide variety of materials, with
enhanced properties, to be used in the LOM process. The Company's software
research and development program is focused on making the Company's LOM systems
easier to use and increasing their precision and reliability.

     The Company has pursued and will continue to pursue government and industry
sponsored research grants to provide funds for continued research and
development. Since November 1994, the Company has performed research under two
government research contracts.  Under one of these research contracts, which was
entered into between the University of Dayton Research Institute ("UDRI") and
the Advanced Research Project Agency, the Company is attempting to develop, on a
subcontract basis with the UDRI, a LOM system capable of utilizing ceramics and
ceramic matrix composites.  Under this subcontract, which is terminable at any
time at the discretion of the UDRI, the Company will receive up to $1,534,000.
Under the other government contract, which was entered into between the Company
and the Aviation Applied Technology Directorate of the United States Army, the
Company is researching the use of polymer composites and metals with its LOM
systems.  Management believes that government and industry sponsorships allow
the Company to pursue ambitious projects with less financial risk.

     The Company believes that ongoing research and development efforts are
essential to its success.  As a result, during 1996 the Company used a portion
of the proceeds of its initial public offering to expand its research and
development efforts, including hiring additional research and development
personnel.

     NEW PRODUCTS

     The Company commenced sales of the LOM-2030H, the latest-generation LOM-
2030, in the first quarter of fiscal 1997.  The Company also plans to release
and commence shipping an enhanced version of the LOM-1015 in the first half of
calendar 1997.  The LOM-2030H and latest version of the LOM-1015 are enhanced
versions of the current LOM-2030 series and LOM-1015 series, and both enhanced
LOM systems have been designed to provide improved speed and reliability over
their first-generation counterparts.  In addition, the Company plans to make
available, for sale, new upgrade options following the respective releases of
the latest-generation LOM systems. These upgrade options will be made available
for sale to owners of earlier generation LOM systems and will consist of
hardware, software, training and installation to enhance the earlier generation
LOM systems.

     NEW MATERIALS

     The Company plans to dedicate much of its research and development efforts
to the testing and development of new materials to be used with its LOM systems,
including moisture resistant papers, plastics, ceramics and ceramic composites,
high performance polymer composites and metals.  In April 1995, the Company
developed a high performance adhesive to be used in conjunction with paper in
the LOM process.

     In addition to developing new materials to be used in the LOM process, the
Company's research and development efforts will also be focused on overcoming
certain problems associated

                                       8
<PAGE>
 
with its current materials. For example, the Company and its customers have
observed swelling of up to 4% in the vertical dimension of the object produced
when ordinary paper sheet materials are used in the LOM process, which the
Company believes is primarily the result of the absorption of atmospheric
moisture by the paper material. Objects produced by the Company's current LOM
systems have also experienced delamination of the object's layers when
temperatures and pressures were not fully compatible with the materials used in
the LOM process. In addition, if flammable paper is used in the LOM process and
a piece of loose paper is exposed to the laser beam, fire can result. The
Company is testing various improved materials to overcome swelling and
delamination problems. Further, the Company recently developed and offered for
sale, flame resistant paper and is testing different designs for its LOM systems
to lessen the likelihood that the material will become loose and ignite in the
LOM process.

MANUFACTURING

     The Company's manufacturing activities consist of manually assembling the
various LOM system components.  The Company currently operates on a build-to-
forecast basis in an effort to minimize inventory costs and lead times for
delivery.  The forecasts are determined by a committee comprised of sales,
finance, manufacturing and engineering personnel, which meets on a bi-weekly
basis.

     The Company purchases the major component parts for the LOM equipment from
various outside vendors, subcontractors and other sources, and assembles them at
the Company's operating facility.  Procurement lead times for the component
parts range from four to 12 weeks.  Although the Company is not dependent on any
single source for any of its component parts, it could take approximately six to
12 weeks for the Company to locate other suppliers of the lasers, machine
enclosures and the motion-control components used in the LOM system, including
the time it would take the Company to test and change the design, if necessary,
of such lasers, machine enclosures and motion-control components.  The Company
performs numerous diagnostic tests and quality control procedures throughout the
assembly process.  Production of a LOM system averages approximately six weeks.

     The Company currently maintains an inventory of most of its necessary
supplies, which facilitates the assembly of products required for up to several
months of production.  In regard to these supplies, the Company uses multiple
sources of supply and does not believe that it is dependent on any single
supplier.  The Company considers its relationships with its suppliers to be
good.

     The LPS paper supplied by the Company to its customers is widely available
from a variety of sources.  The LPH paper is produced and sold to the Company by
Brown-Bridge Industries, Inc. of Troy, Ohio, under an exclusive arrangement.
Although the Company believes that other sources of supply of paper with
attributes similar to LPH paper exist, the Company believes that it would not be
able to secure an alternate supply in the short-term.  The unanticipated loss of
the Company's sole source of supply of LPH paper would have a material adverse
effect on the Company's results of operations unless and until an alternate
source of supply of paper with similar attributes could be obtained.

                                       9
<PAGE>
 
SALES AND MARKETING

     The Company's marketing efforts currently include press releases, trade
magazine articles, customer studies, brochures, direct mailings, trade show
demonstrations and videos.  In the future, the Company intends to implement
additional marketing and promotional activities, including more comprehensive
public relations, increased advertising and direct mail and upgraded and
expanded literature and related collateral sales materials.

     The market for the Company's LOM systems and related materials and supplies
is largely comprised of entities that design and manufacture mechanical products
as well as service bureaus that produce three-dimensional models and prototypes
on a per-order basis.  The Company's potential customers typically have the
ability to generate 3-D CAD designs and have the need to produce at least one
three-dimensional object per week in order to justify the cost of purchasing a
LOM system.  The Company's rapid prototyping systems and related materials are
substantially less expensive than rapid prototyping products and materials sold
by certain of the Company's competitors for use in industrial applications.  The
Company believes that this cost advantage allows the Company's customers to
recapture their investment in the Company's rapid prototyping systems more
quickly than they would had they invested in a competitor's rapid prototyping
system and allows the Company to sell its products to customers who might not
otherwise be in a position to purchase a rapid prototyping system.

     Domestically and in Canada, the Company's sales efforts are conducted by a
direct sales staff currently consisting of five direct sales representatives.
The Company plans to hire an additional four to five persons for managing
channel distribution and direct sales.  The Company is in the process of
engaging sales agents and selected distributors located across the United States
and Canada.  The Company's sales personnel obtain customer leads at trade shows,
from referral agents and from inquiries made by potential customers from
advertising and trade journal articles featuring the technology or customer
application successes.  The customer leads are distributed by the sales
administration personnel to the various sales representatives and agents, who
all report to the Company's Vice President-North American Sales.  The sales
representatives expend most of their sales efforts on those potential customers
whom they consider to be highly likely to buy a LOM system in the near future.

     The manufacturing representatives and representatives evaluate each
potential customer's ability and need to use the Company's LOM systems.  After a
potential customer is qualified, the sales agent or representative demonstrates
the Company's LOM system to the potential customer's executives and technical
personnel while explaining the benefits of the LOM process and advantages as
compared to competing technologies.  The sales cycle typically takes anywhere
from three to 12 months, depending on the size of the potential customer.

     Sales representatives operate under a quota system and their compensation
is comprised of a base salary plus commissions.  Sales representatives are
placed in locations within the United States and Canada where the Company
perceives the greatest demand for rapid prototyping systems.  In several multi-
state territories, direct sales efforts are augmented through independent
manufacturing representatives who work in conjunction with the direct sales
representative assigned to their territory.  The independent manufacturing
representatives are compensated by payment of commissions only and are typically
either individuals or companies in the business of selling capital equipment.
The selected distributors will buy and resell LOM systems to other customers.
This

                                       10
<PAGE>
 
sales structure is further enhanced by the Company's network of referral agents,
which are companies or individuals with a connection to the Company's customer
base.  These referral agents are paid a finder's fee if they introduce a well
qualified prospect to the sales channel.  The Company's products are
manufactured at the Company's Torrance, California, facility.

     The Company sells its products internationally through a network of
distributors and independent sales agents in Asia, including Japan and Korea;
Russia; Australia; Mexico; South America and Western Europe, including Germany,
the United Kingdom, France, Italy and Sweden.  The Company's international sales
force currently consists of nine distributors and eight independent sales
agents.  The distributors sell and service the Company's LOM systems in assigned
territories, under either exclusive or non-exclusive arrangements, depending on
their expertise and the markets they serve.  The distributors purchase the
Company's products at a discount and then resell and service those products in
their assigned territories.  In territories where distributors are not
available, the Company uses a combination of exclusive and non-exclusive
independent sales agents to sell its products and services.  These sales agents
receive a commission based on the final selling price of the product and the
Company is responsible for all future services after the products are sold.
Approximately 60% of the Company's systems net sales for the fiscal year ended
July 31, 1996 were made overseas.  The Company has a relationship with Toyota
Machine Works, Ltd., through which the Company has been able to sell 16 machines
into the Japanese market through July 31, 1996.  The Company believes that in
the future the international market will account for an increased portion of the
rapid prototyping market.  Therefore, the Company believes that it is necessary
to expand its international presence by adding more international sales agents
and distributors as well as Company-employed area sales managers who will manage
a specific international sector, such as Europe, Asia or Latin America.  A
European Sales Manager was hired in April 1996.

     During the year ended July 31, 1996, $1,878,575 (15%) of the Company's
revenues were from one customer.  At July 31, 1996, accounts receivable included
a balance of $221,264 from this major customer.

     The Company sells a significant portion of its products through third-party
resellers and, as a result, maintains receivable balances with major
distributors, each of which may be significant.  If the financial condition and
operations of these distributors deteriorate for any reason, the Company's
operating results could be adversely affected.  The largest distributor's
receivable balance represented 16% of total accounts receivable at July 31,
1996.

COMPETITION

     The predominant methods of model and prototype development involve
machinists and engineers working from blueprints or CAD designs and using
traditional machining methods.  To compete with these methods, the Company must
educate the consumer effectively as to the advantages of rapid prototyping, in
general, and the Company's LOM systems, in particular.

     A number of different technologies are employed in commercial rapid
prototyping devices marketed by the Company's competitors.  Stereolithography is
used in the products of 3D Systems, Inc., Cubital, Ltd., EOS Gmbh, CMET, D-MEC,
Mitsui and Teijin Seiki Company.  3D Systems, Inc. introduced the first rapid
prototyping product.  The Company believes that 3D Systems, Inc. may account for
nearly 50% of worldwide rapid prototyping sales to date.  In addition, DTM
Corporation, in which B.F. Goodrich has a significant ownership interest,
produces rapid prototyping

                                       11
<PAGE>
 
systems that use lasers to sinter or harden powdered material; Stratasys, Inc.
manufactures rapid prototyping systems for use in an office environment that
extrude wax, plastic and other polymer filaments out of a nozzle; and Sanders
Prototype, Inc. has developed a desktop prototyping system which uses ink-jet
technology to deposit material layer by layer.

     The Company believes that no rapid prototyping products technologically
similar to LOM systems have been sold in the United States.  The only competitor
known to have sold machines similar to LOM systems is Kira Corporation, which
currently sells rapid prototyping products in Japan.  In addition, Kinergy Pte.
Ltd. of Singapore has demonstrated a rapid prototyping system with technology
that appears to be similar to the Company's LOM technology; however, the Company
is not aware of any commercial sales of these systems made by Kinergy.  The
Company believes that Kira's and Kinergy's ability to sell rapid prototyping
systems in the United States and Japan may be limited due to the protection
afforded by the Company's patents.  Kira's rapid prototyping machines utilize a
knife to cut the sheet material, and the adhesive is selectively applied to the
sheet material by a xerographic technique.  The Company believes that the
necessity to deposit glue xerographically when using the rapid prototyping
machines produced by Kira limits the number of adhesives and core materials
applicable for use with Kira's machines.

CUSTOMERS

     The Company's rapid prototyping systems can be utilized by a range of
companies.  The Company's principal customers are automobile manufacturers,
aerospace companies and other large industrial corporations.  These customers
regularly employ 3-D CAD systems in their internal product design and
development activities and may be interested in acquiring rapid prototyping
systems primarily to achieve further improvements in the time-to-market of new
products.  The Company's customer list includes Boeing Aircraft Company, Cobra
Golf Incorporated, Chrysler Corporation, Daimler-Benz, Ford Motor Company,
General Motors Corporation, Hughes Electro-Optical Systems, and Toyota Motor
Corporation.

     The Company also sells its LOM systems to service bureaus that produce
prototypes and models for manufacturers on a per-order basis and to independent
design and engineering firms that, in the past, have utilized traditional
machining methods to produce models and prototypes.  For these customers, the
decision to convert to rapid prototyping systems is based primarily upon cost
considerations and the time required to recoup their investment in rapid
prototyping equipment.

PATENTS AND PROPRIETARY RIGHTS

     The Company considers the protection of its technology to be material to
its business.  The Company's success will depend, in part, on its ability to
obtain patents and protect trade secrets.  In June 1988, Michael Feygin was
issued a United States patent with 80 claims covering, in the United States, the
Company's LOM systems, various aspects of the Company's LOM technology and the
associated modeling process, including the apparatus and method for forming an
integral three-dimensional object out of laminations of the same or gradually-
varying shapes and the bi-material (i.e., adhesive) nature of the materials used
in the LOM process.  This patent was one of the early United States patents
relating to rapid prototyping systems which described, in detail, an apparatus
capable of building three-dimensional objects by means of lamination.  In
October 1994, a second United States patent with 24 claims was issued to Mr.
Feygin covering additional aspects of the LOM technology, including several
selective bonding techniques and the method by which the Company's LOM systems 

                                       12
<PAGE>
 
leave the support material around the three-dimensional object and cross-hatch
such material to allow for the easy removal of the material at the end of the
LOM process. Mr. Feygin was also issued a European patent, a Japanese patent,
and a Canadian patent. The Japanese patent was published on July 24, 1996, and
will become conclusively effective if no opposition is filed within six months
thereafter. The Canadian patent covers various aspects of the LOM technology and
the associated modeling process. All of the foregoing patents have been assigned
to the Company by Mr. Feygin.

     Kira Corporation filed an opposition to the European patent being assigned
to the Company; however, the opposition division of the European patent office
has indicated that the patent will be upheld, with certain amendments that are
to be filed with the European patent office on or before December 19, 1996.
Kira Corporation will have an opportunity to appeal the decision of the
opposition division of the European Patent office to maintain the patent in
amended form.  In addition to seeking United States and European patent
protection for its products, the Company is seeking patent protection in Japan,
Hong Kong and Singapore and may seek patent protection in other foreign
countries on a selective basis in order to protect its proprietary rights.

     There can be no assurance that any patents or claims which are included in
future patent applications will be issued, that any issued patents will provide
the Company with competitive advantages or will not be challenged by third
parties, or that the existing or future patents of third parties will not have
an adverse effect on the ability of the Company to continue to commercialize its
products.  Furthermore, there can be no assurance that other companies will not
independently develop similar products, duplicate any of the Company's products
or design around patents that may be issued to the Company.  The Company has
been advised that there is significant "prior art" with respect to the LOM
process utilized in the Company's LOM systems, and it is possible that claims in
the United States patents relating to the LOM process could be invalidated or
restricted if challenged.  Any finding that the patent claims with respect to
the Company's LOM process are invalid could have a material adverse effect on
the business and prospects of the Company.  An invalidation of the patent claims
relating to the Company's LOM process, however, would not necessarily affect the
other claims in the United States patents relating to the Company's LOM systems.
Litigation may be necessary to enforce any patents issued to the Company or to
determine the scope and validity of others' proprietary rights in court or
administrative proceedings.  Any litigation could result in substantial costs to
the Company and distraction of the Company's management.  An adverse ruling in
any litigation could have a material adverse effect on the Company's business,
financial condition and results of operations.

     The commercial success of the Company also will depend in part on the
Company's not infringing upon patents issued to competitors.  There can be no
assurance that patents belonging to competitors will not require the Company to
alter its products or processes, pay licensing fees or cease development of its
current or future products.  Any litigation regarding infringement could result
in substantial costs to the Company and distraction of the Company's management,
and any adverse ruling in any litigation could have a material adverse effect on
the Company's business, financial condition and results of operations.  Further,
there can be no assurance that the Company will be able to license other
technology that it may require at a reasonable cost or at all.  Failure by the
Company to obtain a license to any technology that it may require to
commercialize its products would have a material adverse effect on the Company's
business, financial condition and results of operations.  In addition, to
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office or in

                                       13
<PAGE>
 
proceedings before foreign agencies with respect to any of its existing patents
or patent applications or any future patents or applications, any of which could
result in substantial costs to the Company and distraction of the Company's
management.

     The Company also relies upon trade secrets, know-how and continuing
technological innovations to develop and maintain its competitive position.  The
Company has not obtained registered trademarks for its corporate name, nor any
other trademark other than Laminated Object Manufacturing(R) and LOM and
Design(R).  There can be no assurance that the registered or unregistered
trademarks or trade names of the Company may not infringe upon third party
rights.  The requirement to change the trademarks or trade name of the Company
could entail significant expenses and could have a material adverse effect on
the Company's business, financial condition and results of operations.  See
"Certain Factors That May Affect The Company's Business and Future Results."

     The Company also seeks to protect its unpatented trade secrets, know-how
and continuing technological innovation, in part, by confidentiality agreements
with its corporate partners, collaborators, employees and consultants.  These
agreements typically provide that all confidential information developed or made
known to the individual or entity during the course of the individual's or
entity's relationship with the Company is to be kept confidential and not
disclosed to third parties except in specific circumstances.  In the case of
employees, the agreements provide that, to the extent permitted by applicable
law, all inventions conceived by the individual are the exclusive property of
the Company.  There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.  Further, there can be no assurance that the Company
will be able to protect its trade secrets or that others will not independently
develop substantially equivalent proprietary information and techniques.

EMPLOYEES

     As of July 31, 1996, the Company had a total of 103 employees, of which 23
were involved in production, shipping, receiving, purchasing, quality and
manufacturing administration, 28 in engineering and research and development, 14
in sales and marketing, 22 in customer support and 16 in general administration.
None of the Company's employees is covered by a collective bargaining agreement.
The Company considers its relationship with its employees to be good.

GOVERNMENT REGULATIONS

     The Company is subject to various local, state and federal laws and
regulations that affect businesses generally, including regulations promulgated
by federal and state environmental and health agencies, the Federal Occupational
Safety and Health Administration and laws pertaining to the hiring, treatment,
safety and discharge of employees.  Historically, regulatory compliance has not
had a material adverse effect on the Company's sales or operations.  The Company
believes it is in compliance with material applicable laws.

CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS

     OPERATING LOSSES; FUTURE PROFITABILITY AND LIQUIDITY UNCERTAIN.  The
Company has experienced significant losses from operations in the most recent
fiscal year and anticipates

                                       14
<PAGE>
 
experiencing further losses in fiscal 1997.  Although the Company anticipates
achieving profitable operations in the future, there can be no assurance that
profitable operations will ever be achieved. The Company's ability to achieve
profitable operations in the future will depend in large part on achieving
significant sales of its latest-generation LOM system machines. There can be no
assurance that, even if the Company generates anticipated product and service
sales, the Company will not continue to incur losses from operations. The
likelihood of the long-term success of the Company must be considered in light
of the expenses, difficulties and delays frequently encountered in the
development and commercialization of new products and competitive factors in the
marketplace. Additionally, the Company used cash of approximately $2.4 million
in operations during fiscal 1996. While the Company expects sales of its
existing products and its latest-generation LOM systems to support current and
future levels of research and development and other expenses, there can be no
assurance that the Company will achieve such sales levels. In November 1996, the
Company's lender withdrew the Company's line of credit. Although the Company
obtained a subsequent $1.5 million line of credit from Cruttenden Roth
Incorporated, if the Company is unable to generate sufficient sales or to reduce
expenses to match its sales levels, the Company will require additional debt or
equity financing to continue operations. There can be no assurance that the
Company will be able to obtain such financing or obtain such financing on terms
acceptable to the Company.

     QUARTERLY FLUCTUATIONS.  The Company's quarterly operating results may
fluctuate significantly due to a variety of factors, including changes in the
Company's sales and customer mix, delays in shipping new systems, the
introduction of new products and new product enhancements by the Company or its
competitors, pricing pressures, increases in expenditures relating to pursuing
the Company's business strategies, general economic conditions and other
factors.  For example, because prospective customers may defer purchasing a LOM
system in anticipation of the release of an improved system, the Company
believes that sales of its existing rapid prototyping systems may decrease in
the periods immediately preceding the introduction of new LOM systems.  In this
respect, the Company believes that sales of its earlier-generation LOM-2030 have
been adversely affected in recent periods because of the pending introduction of
its latest-generation LOM-2030H and expects that its net sales will continue to
be adversely affected during the transition to sales of its latest-generation
LOM-2030H.  In addition, the Company used a portion of the proceeds of its
initial public offering to accelerate certain product development activities.
The Company believes that the timing of these expenditures affected the
Company's results of operations in the last two quarters.  The decline in sales
of earlier-generation LOM-2030 during this transition period, together with
increased product development expenditures, have resulted in net losses for the
Company during this transition period, including the quarter ending July 31,
1996.  The Company may continue to experience net losses in future quarters
until sales of commercial quantities of the Company's latest-generation LOM
systems are achieved, and, even once such sales levels are achieved, net losses
may continue to be experienced for the reasons previously cited.  Accordingly,
there can be no assurance that the Company will be profitable in any quarter.

     EMERGING NATURE OF RAPID PROTOTYPING INDUSTRY; RELIANCE ON SINGLE PRODUCT
LINE.  The rapid prototyping industry is an emerging industry, and the Company
believes that the development and future growth of the rapid prototyping
industry will relate to the general trend toward increased automation of produce
design and manufacturing processes, including the expanded use of 3-D CAD.

                                       15
<PAGE>
 
There can be no assurance that the use of 3-D CAD will continue to expand or
that the rapid prototyping industry otherwise will continue to develop or grow.
See "Industry Background."

     The Company has developed and markets a single product line of rapid
prototyping systems which utilize LOM technology.  The immediate prospects of
the Company will be dependent upon market acceptance of the Company's LOM
technology and systems, including the Company's latest-generation LOM systems.
There can be no assurance that the Company's LOM systems will gain significant
market acceptance or that the introduction of products embodying new or
alternate technologies or the emergence of new industry standards will not
render the Company's systems obsolete and unmarketable.  See "LOM Technology."

     PRODUCT RELIABILITY; ONGOING TECHNICAL CHALLENGES.  Although the LOM
technology utilized in the Company's systems has been in development since 1985,
until recently there has been only limited commercial use of LOM technology in
rapid prototyping applications.  In this respect, certain of the Company's
customers have experienced performance problems with the Company's first-
generation LOM systems, which from time to time have not performed to the
Company's specifications.  The Company believes that it has identified all of
these problems and that the LOM systems currently being marketed by the Company
meet applicable product specifications.  Until there is sufficient customer
experience with the LOM systems sold most recently by the Company, however, the
Company will be unable to determine whether its LOM systems are consistently
performing to specifications.  Furthermore, no assurance can be given that new
problems will not be identified by customers or that any such problems could be
adequately addressed by the Company in a timely manner.  There can be no
assurance, therefore, that the Company's customers will not make claims against
the Company arising from dissatisfaction with the performance of the Company's
LOM systems.  In the first quarter of the fiscal year ending July 31, 1997, the
Company commenced sales of the latest-generation LOM-2030 system, which the
Company believes adequately addresses certain performance problems associated
with its first-generation LOM systems and represents significant improvements in
overall product performance and reliability.  There can be no assurance,
however, that the Company's latest-generation LOM systems will not experience
similar performance or reliability problems.  In addition, the Company is unable
to predict what effect the problems associated with its first-generation LOM
systems will have on the Company's efforts to market and sell its latest-
generation LOM systems.  The immediate prospects for future growth of the
Company are dependent upon market acceptance of its latest-generation rapid
prototyping systems.

     DEPENDENCE ON PROPRIETARY TECHNOLOGY.  The Company's ability to compete in
the market for rapid prototyping products may depend significantly on its
ability to protect its proprietary technology.  The Company seeks to protect its
technology through a combination of patents, copyrights, trade secrets,
proprietary know-how, confidentiality agreements and ongoing development of new
products, features and designs.  Any finding that the patent claims with respect
to the Company's LOM process are invalid could have a material adverse effect on
the business and prospects of the Company.  An invalidation of the patent claims
relating to the Company's LOM process would not, however, affect the other
claims in the United States patents relating to the Company's LOM systems.  The
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States.  The Company could incur
substantial costs in seeking enforcement of its proprietary rights against
infringement or the unauthorized use of its proprietary technology by others or
in defending itself against similar claims of others.  Insofar as the Company
relies on trade secrets and proprietary know-how to maintain its

                                       16
<PAGE>
 
competitive position, there can be no assurance that others may not
independently develop similar or superior technologies or gain access to the
Company trade secrets or know-how.  See "Patents and Proprietary Rights."

     COMPETITION.  The Company's LOM systems compete with traditional
prototyping methods, such as machining, which are currently more widely used
than rapid prototyping systems.  Rapid prototyping systems are designed to be
used primarily with 3-D CAD systems, and there can be no assurance that rapid
prototyping will ever become the predominant method of producing prototypes and
other three-dimensional objects.  Within the rapid prototyping industry, the
Company is not aware of any other companies engaged in the commercial production
of rapid prototyping products using the LOM process.  However, various companies
currently offer, or are developing, rapid prototyping equipment which utilize
alternative technologies, some of which are superior in certain respects to the
Company's LOM technology.  Certain of these companies have significantly greater
financial, product development, manufacturing and marketing resources than the
Company.  Furthermore, the products introduced by any of these companies could
emerge as the industry standard or otherwise render the Company's products
obsolete or unmarketable.  In addition, the Company faces competition with
respect to the sale of sheet materials and other supplies used with its LOM
systems.  There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that the competitive
pressures faced by the Company will not adversely affect its profitability or
results of operations.  See "Competition."

ITEM 2.  PROPERTIES

     The Company's headquarters and operating facilities are located in a 43,600
square foot facility in Torrance, California.  The Company moved into the
facility in August 1994 and purchased the facility in November 1994.  The
facility is subject to two loans which aggregated $1,908,000 at July 31, 1996.
The Company believes that, in general, its facility is adequately maintained, is
in good condition and is adequate for the Company's needs in the foreseeable
future.  The Company may expand its manufacturing operations within this
facility in the near future, and if it does so, it will need to store its
inventory of materials and supplies at another location.  The Company believes
that it will be able to secure adequate space for this purpose, if necessary.

     The Company also currently leases 4,800 square feet of office space in
Auburn Hills, Michigan, which serves as a sales office and warehouse.  The
annual rent payment under the lease is $34,800, subject to certain adjustments,
and the lease expires in December 1997.

ITEM 3:  LEGAL PROCEEDINGS

     The Company is not a party to any legal proceedings and does not know of
any pending litigation affecting it or its property, other than the
aforementioned opposition proceeding in the European Patent Office and routine
litigation which is incidental to the Company and its business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended July 31, 1996.

                                       17
<PAGE>
 
                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Since March 8, 1996, the Company's Common Stock has traded on the Nasdaq
National Market.  The following table presents quarterly information on the high
and low closing sales prices of the Company's Common Stock, as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
                                           High     Low
                                          ------   -----
<S>                                       <C>      <C> 
     FISCAL YEAR ENDED JULY 31, 1996
     First Quarter                           N/A     N/A
     Second Quarter                          N/A     N/A
     Third Quarter                        $ 7.75   $4.50
     Fourth Quarter                       $ 5.25   $1.75
</TABLE>

     As of July 31, 1996, there were 24 stockholders of record of the Company's
Common Stock.  The Company has not paid any dividends on its Common Stock since
its inception and does not contemplate or anticipate paying any dividends upon
its Common Stock in the foreseeable future.  It is currently anticipated that
earnings, if any, will be used to finance the development and expansion of the
Company's business.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

     During its early years, the Company obtained government funding to conduct
research and development activities relating to the LOM process.  Commencing in
1991, commercial operations were funded through the receipt of advance deposits
from customers to cover the costs of manufacturing the LOM systems.  On March
12, 1996, the Company consummated its initial public offering of 1,200,000
shares of Common Stock and received proceeds of approximately $6,000,000, prior
to the payment of legal, accounting and other fees in the aggregate amount of
approximately $660,000 incurred in connection therewith.

     In connection with the initial public offering, the Company and a
stockholder of the Company granted the Company's underwriters a 45-day option to
purchase up to 170,000 and 10,000 additional shares of common stock,
respectively, to cover over-allotments, if any, on the terms and conditions as
set forth in the Company's prospectus.  On April 23, 1996, the Company issued
66,111 shares to its underwriters upon exercise of this option, and received net
proceeds of approximately $330,000.

     The future growth of the Company is dependent upon market acceptance of its
latest-generation rapid prototyping machines, as well as continued sales of
released materials and services. In fiscal 1996, the Company significantly
increased its selling and research and development expenditures in preparation
for the introduction of its latest-generation LOM systems.  The Company also
restructured its sales department and increased sales and administrative
expenditures in order to more effectively service its existing customers and to
broaden its sales efforts.  The Company commenced commercial shipments of its
latest-generation LOM system, the LOM-2030H, in October 1996.  There can be no
assurance that the Company will achieve market acceptance of the LOM-2030H or
that sales revenue generated by the LOM-2030H and existing products will be
commensurate with current or future levels of the Company's operating expenses.

                                       18
<PAGE>
 
     The Company has experienced significant losses from operations in the most
recent fiscal year and anticipates experiencing further losses in fiscal 1997.
Although the Company anticipates achieving profitable operations in the future,
there can be no assurance that profitable operations will ever be achieved. The
Company's ability to achieve profitable operations in the future will depend in
large part on achieving significant sales of its latest generation LOM system
machines. Moreover, there can be no assurance that even if the Company generates
anticipated product and service sales, the Company will not continue to incur
losses from operations. The likelihood of the long-term success of the Company
must be considered in light of the expenses, difficulties and delays frequently
encountered in the development and commercialization of new products and
competitive factors in the marketplace. Additionally, the Company used cash of
approximately $2.4 million in operations during fiscal 1996. While the Company
expects sales of its existing products and its latest-generation LOM systems to
support current and future levels of research and development and other
expenses, there can be no assurance that the Company will achieve such sales
levels. In November 1996, the Company's lender withdrew the Company's line of
credit. Although the Company obtained a subsequent $1.5 million line of Credit
from Cruttenden Roth Incorporated, if the Company is unable to generate
sufficient sales or to reduce expenses to match its sales levels, the Company
will require additional debt or equity financing to continue operations. There
can be no assurance that the Company will be able to obtain such financing or
obtain such financing on terms acceptable to the Company.

     Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered a reliable
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods.

ANNUAL RESULTS OF OPERATIONS

     The following table sets forth certain statement of income data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
                                                    Fiscal Year Ended July 31,
                                                  ----------------------------
                                                    1994      1995      1996
                                                  -------    -------   -------
<S>                                               <C>        <C>       <C>
Net sales......................................     100.0%     100.0%    100.0%
Cost of sales..................................      41.6       49.7      53.7
                                                  -------    -------   -------
Gross profit...................................      58.4       50.3      46.3
Selling, general and administrative
   expense.....................................      31.5       30.5      39.4
Research and development
   expense.....................................      10.0       12.2      16.4
                                                  -------    -------   -------
Income (loss) from operations..................      16.9        7.6      (9.5)
                                                  -------    -------   -------
Other income (expense).........................        .2       (1.0)     (1.4)
                                                  -------    -------   -------
Income (loss) before provision (benefit) for
   income taxes and extraordinary item.........      17.1        6.6     (10.9)
                                                  -------    -------   -------
Provision (benefit) for income taxes...........       6.9        2.1      (3.7)
                                                  -------    -------   -------
Income (loss) before extraordinary item........      10.2        4.5      (7.2)
                                                  -------    -------   -------
Extraordinary item, net of taxes...............       1.1         --        --
Net income (loss)..............................      11.3%       4.5%     (7.2%)
                                                  =======    =======   ======= 
</TABLE>

                                       19
<PAGE>
 
COMPARISON OF FISCAL YEARS ENDED JULY 31, 1996 AND JULY 31, 1995

     Net Sales.  The Company's gross sales include sales of LOM systems,
materials used in the LOM process, and services, which consist primarily of
contracts for the repair and maintenance of installed LOM systems.  Net sales
consist of gross sales less the amount of discounts, returns and allowances,
plus any income in excess of costs incurred on research and development grants.
Net sales for the fiscal year ended July 31, 1996 were approximately
$12,322,000, an increase of approximately $846,000 or 7.4%, compared to net
sales of approximately $11,476,000 for the fiscal year ended July 31, 1995.
Though the Company has sold three fewer LOM systems in the fiscal year ended
July 31, 1996 than in the comparable period for 1995, the Company's net sales
increased overall due to several factors.  During fiscal 1996, the Company
raised its sales price per machine by approximately 10% to 25%.  Also, foreign
sales typically have higher margins than domestic sales and during the fiscal
year ended July 31, 1996, foreign sales accounted for approximately 57.9% of
sales as opposed to 39.9% for the fiscal year ended July 31, 1995.  In addition,
62.3% of the Company's LOM system sales in fiscal 1996 were sales of the LOM-
2030 system, as compared to 43.8% of sales in fiscal 1995, and the LOM-2030
system sells for a substantially higher price than the LOM-1015.  Also, sales of
materials and services for the fiscal year ended July 31, 1996 increased by
approximately $857,000, or 44.3%, over sales of materials and services during
the fiscal year ended July 31, 1995, due primarily to the growing number of LOM
systems placed with customers requiring materials and services.

Product Mix Percentage:
-----------------------
<TABLE>
<CAPTION>  
                                           Fiscal Year Ended
                                     -----------------------------
                                     July 31, 1996   July 31, 1995
                                     -------------   -------------
<S>                                  <C>              <C>
     LOM Systems                          77.3%          83.1%
     Materials and Service                22.7%          16.9%
 
LOM System Units Sold During
----------------------------
the Periods Indicated:
---------------------
 

                                       LOM-1015s       LOM-2030s
                                     -------------   -------------
Fiscal Year ended July 31, 1995           36              28
Fiscal Year ended July 31, 1996           23              38
</TABLE>

     As of July 31, 1996 and 1995, the Company had deferred gross profit in the
amount of approximately $446,000 and $384,000, respectively, relating to
shipment of LOM systems subject to agreements providing the customer the right
to exchange such systems for upgraded versions.  This amount increased because
the Company entered into an additional agreement with such provisions and did
not deliver any of the upgraded versions during the fiscal year ended July 31,
1996.

     Gross Profit.  Cost of sales consists primarily of the costs of labor, raw
materials and overhead used in the production of the Company's rapid prototyping
systems.  Gross profit for the fiscal year ended July 31, 1996 was approximately
$5,710,000, a decrease of approximately $58,000 or 1.0%, compared to gross
profit of approximately $5,768,000 for the fiscal year ended July 31,

                                       20
<PAGE>
 
1995.  Gross profit as a percentage of sales decreased from 50.3% in the fiscal
year ended July 31, 1995, to 46.3% in the fiscal year ended July 31, 1996.

     The decrease in gross profit as a percentage of sales was attributable
primarily to higher costs of material and labor for the LOM-2030 systems in
1996.  The number of employees in manufacturing operations increased by three
while customer service added four employees.  The decrease was also partly due
to lower margins normally experienced on sales of materials and services, which
increased to 22.7% of net sales during the fiscal year ended July 31, 1996,
compared to 16.9% of net sales during the fiscal year ended July 31, 1995.  To
the extent that the Company's sales continue to consist of a greater percentage
of LOM-2030s, including the LOM-2030H, as compared to LOM-1015s, and as the
growth rate in sales of materials and services continues to outpace the growth
in total net sales, the Company's gross profit margins are unlikely to increase.
Further, there can be no assurance that the Company will be able to maintain
current levels of gross profit on sales of its LOM-2030H systems as compared to
the LOM-2030s.

     Selling, General and Administrative Expense.  Selling, general and
administrative expense consists primarily of commissions, sales and
administrative salaries, office expenses and general overhead.  Selling, general
and administrative expense for the fiscal year ended July 31, 1996, was
approximately $4,857,000, an increase of approximately $1,362,000, or 39.0%,
compared to approximately $3,495,000 for the fiscal year ended July 31, 1995.

     The increase resulted primarily from the fact that seven additional
selling, general and administrative employees (representing a 77.8% increase in
the number of such employees) were added to the Company's staff during the
fiscal year ended July 31, 1996.  Of these seven employees, one was added to the
Administration department, one was added to the MIS department, four were added
to the Finance department and one was added to the Human Resources department.
Increased spending also occurred in the areas of advertising, commissions,
promotions, trade shows, legal, accounting, and costs associated with increasing
the Company's presence in Europe.  Such additional hirings and increased
expenditures were made to facilitate the introduction and market acceptance of
the LOM-2030H and to adequately support and increase sales to existing customers
with installed LOM systems.  The Company anticipates hiring four to five more
sales representatives, and anticipates additional increased spending on facility
and administrative related expenses through fiscal 1997.  However, should sales
of the LOM-2030H and existing products and services fail to match such levels of
expenditures, management anticipates re-evaluating the Company's expenditure
levels.

     Research and Development Expense.  Research and development expense
consists of engineering costs incurred in the development and enhancement of LOM
systems and new materials research.  Research and development expense also
includes costs expended to secure government grants, which the Company uses to
subsidize certain research activities.  Research and development expense for the
fiscal year ended July 31, 1996 was approximately $2,030,000, an increase of
approximately $633,000, or 45.3%, compared to approximately $1,397,000 for the
fiscal year ended July 31, 1995.  The increase was primarily due to development
costs related to the LOM-2030H as well as the hiring of additional research and
development personnel to perform research and development on new products in
addition to the LOM-2030H and on the testing of new sheet form raw materials to
be used with the Company's LOM systems.

     During the fiscal year ended July 31, 1996, the Company hired 12 additional
research and development employees, representing an 75.0% increase in the number
of such employees.  The

                                       21
<PAGE>
 
Company anticipates hiring approximately two to three more research and
development employees in fiscal 1997, and anticipates additional increased
spending on research and development related expenses. However, should sales of
the LOM-2030H and existing products and services fail to match levels of these
expenditures, management anticipates re-evaluating these expenditure levels.
Approximately 50% of the research and development costs incurred in fiscal 1996
have been expended towards the development of the LOM 2030H, as well as the
testing of new materials. Though these expenditures are unlikely to continue to
be incurred once commercial levels of production of the LOM-2030H are achieved,
there can be no assurance that such expenditures will cease to be necessary or
that additional, similar expenditures will not become necessary for other
reasons.

     Other Income (Expense).  Other expense for the fiscal year ended July 31,
1996, was approximately $167,000, compared to other expense of approximately
$118,000 for the fiscal year ended July 31, 1995.  The change was primarily due
to inclusion of a full year of interest on the long term debt on the building
purchase which was completed in November of 1994 as well as to charges incurred
from drawing on the Company's revolving credit facility.

     Provision (Benefit) for Income Tax.  The effective tax provision (benefit)
for the fiscal year ended July 31, 1996, was (34.0%) as compared to 32.3% for
the fiscal year ended July 31, 1995.  The change was primarily due to the
carryback of current year federal net operating losses, as well as the
suspension of the federal research and development credit during the fiscal year
ended July 31, 1996.  The Company believes that deductible temporary differences
will be utilized primarily by carryback to prior years' taxable income or as
charges against reversals of future taxable temporary differences.  Due to the
carryback of the current years' loss to the previous year, the Company will
recover the maximum amount refundable for taxes it has paid.

COMPARISON OF FISCAL YEARS ENDED JULY 31, 1995 AND JULY 31, 1994

     Net Sales.  Net sales for the fiscal year ended July 31, 1995 were
approximately $11,476,000, an increase of approximately $5,857,000, or 104.2%,
compared to net sales of approximately $5,619,000 for the fiscal year ended July
31, 1994.  This increase was primarily a result of an increase in sales of LOM
systems, from 36 in the fiscal year ended July 31, 1994 to 64 in the fiscal year
ended July 31, 1995.  This increase in sales of LOM systems was due to increased
marketing efforts and an increase in international sales.  The increased
international sales occurred primarily in Japan as a result of the Company's
non-exclusive distribution arrangement with Toyoda Machine Works, Ltd. Sales in
Japan also may have been benefited by the value of the United States dollar in
Japanese foreign exchange market, which was near historic lows.  Another portion
of the increase in net sales was attributable to an increase in sales of LOM-
2030s as compared to sales of the lower-priced LOM-1015s and an increase in
sales of materials and services in the fiscal year ended July 31, 1995.  Sales
of materials and services increased by approximately $1,192,000 or 160.3%, over
sales of materials and services in the fiscal year ended July 31, 1994, due
primarily to increased sales of paper used in the LOM process, which the Company
believes resulted from a combination of the expanded installed base of the
Company's systems and the development of paper with improved adhesive qualities.
As of July 31, 1995 and 1994, the Company had recorded deferred gross profits in
the amount of approximately $384,000 and $120,000, respectively, relating to
shipments of LOM systems subject to agreements providing the customers the right
to exchange such systems for an upgraded version at no additional cost.

                                       22
<PAGE>
 
     Gross Profit.  Gross profit for the fiscal year ended July 31, 1995 was
approximately $5,768,000, an increase of approximately $2,486,000, or 75.7%,
compared to approximately $3,282,000 for the fiscal year ended July 31, 1994.
Gross profit as a percentage of net sales decreased from 58.4% in the fiscal
year ended July 31, 1994 to 50.3% in the fiscal year ended July 31, 1995.  This
decrease was attributable to a number of factors including $239,000 in special
charges to cost of sales for the fiscal year ended July 31, 1995 to cover the
estimated costs associated with management's decision to offer systems
modifications free of charge to certain owners of the Company's earlier-
generation LOM-2030 systems.  The modifications will be performed to address the
potential for fires to occur within the cabinets of certain LOM-2030 systems.
The Company believes its newer LOM system designs adequately address the problem
to which this modification relates and accordingly does not anticipate the
necessity of offering similar modifications to additional customers free of
charge.  Other factors causing this decrease were lower margins realized on
sales of supplies as compared to LOM systems and salaries relating to additional
manufacturing, installation, training and servicing personnel hired to support
the expanded installed base of the Company's LOM systems.  The Company expects
that as its sales of services and materials increase, gross profit as a
percentage of net sales may decrease due to lower profit margins associated with
such sales.  However, as the Company's LOM systems become more reliable and
require less maintenance, gross margins associated with sales of services may be
expected to increase.

     Selling, General and Administrative Expense.  Selling, general and
administrative expense for the fiscal year ended July 31, 1995 was approximately
$3,495,000, an increase of approximately $1,722,000, or 97.1% compared to
$1,773,000 for the fiscal year ended July 31, 1994.  This increase was
attributable to additional administrative and facility costs incurred to support
the Company's growth, including the addition of sales, marketing and engineering
personnel, expansion and implementation of financial and administrative
controls, and increased legal and accounting fees.

     Research and Development Expense.  Research and development expense for the
fiscal year ended July 31, 1995 was approximately $1,397,000, an increase of
approximately $837,000, or 149.5%, compared to approximately $560,000 for the
fiscal year ended July 31, 1994.  This increase reflects increased costs
associated with the hiring of additional personnel to assist in the development
of the Company's latest-generation LOM systems,the ongoing development of new
products and the testing of new sheet-form raw materials to be used with the
Company's LOM systems.  In addition, during the fiscal year ended July 31, 1995,
the Company incurred increased costs associated with the effort to secure
government grants to subsidize its research activities.

     Other Income (Expense).  Other expense for the fiscal year ended July 31,
1995 was approximately $119,000, compared to other income of approximately
$14,000 for the fiscal year ended July 31, 1994.  The change was primarily due
to interest paid on indebtedness incurred in conjunction with the purchase of
the Company's facility in fiscal 1995.

     Provision for Income Taxes.  Provision for income taxes for the fiscal year
ended July 31, 1995 was $245,000, a decrease of approximately $140,000, or
36.4%, compared to approximately $385,000 for the fiscal year ended July 31,
1994.  The effective tax rate for the fiscal year ended July 31, 1995 was 32.3%
as compared to 40.0% for the fiscal year ended July 31, 1994.  The decrease in
the provision for income taxes was primarily due to increased research and
development credits available to and used by the Company, combined with the
application of deferred taxes.  The provision for income taxes in each year
includes an allowance for research and development credit and items that are
reflected as deferred taxes.

                                       23
<PAGE>
 
QUARTERLY RESULTS OF OPERATIONS

     The Company's quarterly operating results may fluctuate significantly due
to a variety of factors, including changes in the Company's sales and customer
mix, delays in shipping new systems, the introduction of new products and new
product enhancements by the Company or its competitors, pricing pressures,
increases in expenditures relating to pursuing the Company's business
strategies, general economic conditions and other factors.  For example, because
prospective customers may defer purchasing a LOM system in anticipation of the
release of an improved system, the Company believes that sales of its existing
rapid prototyping systems may decrease in the periods immediately preceding the
introduction of new LOM systems.  In this respect, the Company believes that
sales of its earlier-generation LOM systems have been adversely affected in
recent periods because of the pending introduction of its latest-generation LOM
systems and expects that its net sales will continue to be adversely affected
during the transition to sales of its latest generation LOM systems.  In
addition, the Company used a portion of the proceeds of its initial public
offering to accelerate certain product development activities.  The Company
believes that the timing of these expenditures affected the Company's results of
operations in the last two quarters.  The decline in sales of earlier-generation
LOM systems during this transition period, together with increased product
development expenditures, have resulted in net losses for the Company during
this transition period, including the quarter ending July 31, 1996.  Future
quarters may continue to experience net losses until sales of commercial
quantities of the Company's latest generation LOM systems are achieved, and,
even once such sales levels are achieved, net losses may continue to be
experienced for the reasons previously cited.  Accordingly, there can be no
assurance that the Company will be profitable in any quarter.

     A substantial portion of the Company's sales in any quarter arise from a
limited number of orders of LOM systems, priced at approximately $100,000 to
$200,000 each.  Each sale thus may comprise a material portion of the Company's
sales in the fiscal quarter in which the LOM system is shipped, and a decrease
in the number of shipments by the Company in any given quarter would be likely
to have a material adverse effect on the Company's operations for that quarter.
The Company will also continue to incur product development, marketing and
promotional expenses based upon management's expectations as to future sales.
Since many of these expenses are committed in advance, the Company generally is
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in sales.  If operating revenues do not meet the Company's
expectations in any given quarter, operating results may be adversely affected.
There can be no assurance that the  Company will be profitable in any given
quarter.

     The following table sets forth certain quarterly financial data for the
periods presented that have been derived from unaudited financial statements
that, in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
quarterly information.  The operating results for any quarter are not
necessarily indicative of the results to be expected for any future quarter or
for the fiscal year ending July 31, 1997.

                                       24
<PAGE> 
<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED
                                     ------------------------------------------------------------------------------------------- 
                                                       FISCAL 1995                                    FISCAL 1996
                                     --------------------------------------------    -------------------------------------------
                                     OCT. 31,    JAN. 31,    APR. 30,    JUL. 31,    OCT. 31,   JAN. 31,     APR.30,    JUL. 31,
                                       1994        1995        1995        1995        1995       1996        1996        1996
                                     --------    --------    --------    --------    --------   --------    --------    --------
                                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                  <C>         <C>         <C>         <C>         <C>        <C>         <C>         <C>
 
Net sales.........................   $  2,602    $  2,413    $  3,259    $  3,202    $  4,176   $  2,862    $  3,425    $  1,859
Cost of Sales.....................      1,261         917       1,385       2,145       2,226      1,331       1,803       1,252
                                     --------    --------    --------    --------    --------   --------    --------    --------
   Gross profit...................      1,341       1,496       1,874       1,057       1,950      1,531       1,622         607
Selling, general and
 administrative expense...........        630         889         855       1,121         967      1,006       1,065       1,819
Research and development expense..        338         266         193         600         410        429         494         697
                                     --------    --------    --------    --------    --------   --------    --------    --------
 
Income (loss) from operations.....        373         341         826        (664)        573         96          63      (1,909)
Other income (expense)............          3         (46)        (34)        (42)        (36)       (54)        (36)        (41)
                                     --------    --------    --------    --------    --------   --------    --------    --------
Income (loss) before (provision)
 benefit for income taxes.........        376         295         792        (706)        537         42          27      (1,950)
(Provision) benefit for income
 taxes............................       (131)       (101)       (273)        260        (215)       (17)         (7)        696
                                     --------    --------    --------    --------    --------   --------    --------    --------
Net income (loss).................   $    245    $    194    $    519    $   (446)   $    322   $     25    $     20    $ (1,254)
                                     ========    ========    ========    ========    ========   ========    ========    ========
Earnings (loss) per common share:
   Net income (loss) per common
    share outstanding.............   $    .09    $    .07    $    .19    $   (.16)   $    .12   $    .01    $    .01    $   (.32)
                                     ========    ========    ========    ========    ========   ========    ========    ========
Weighted average number of shares
 outstanding......................      2,700       2,700       2,700       2,700       2,700      2,700       3,425       3,975
                                     ========    ========    ========    ========    ========   ========    ========    ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES

     The Company used cash of approximately $2,438,000 in operations during the
fiscal year ended July 31, 1996, and used cash from operating activities of
approximately $31,000 during the fiscal year ended July 31, 1995.  The increase
in the use of cash in 1996 is primarily due to increased expenditures associated
with the transition to sales of the Company's latest generation LOM systems and
related increases in inventories, and to increased expenditures incurred in the
expansion of the Company's infrastructure

     Working capital was approximately $5,338,000 at July 31, 1996, compared to
approximately $847,000 at July 31, 1995.  This increase was primarily due to the
proceeds from the Company's initial public offering.

     Cash used in investing activities, which includes purchases of property,
plant and equipment, was approximately $664,000 for fiscal year ended July 31,
1996, and $519,000 for the fiscal year ended July 31, 1995.  During the fiscal
year July 31, 1995, the Company purchased its facility in Torrance, California,
and certain manufacturing equipment. During the fiscal year ended July 31, 1996,
the Company made additional investments in manufacturing equipment and office
furniture.

     On March 12, 1996, the Company consummated its initial public offering of
1,200,000 shares of Common Stock and received net proceeds of approximately
$5,340,000 (approximately $5,670,000 after receipt of proceeds resulting from
the exercise of the over-allotment option).  Since March of 1996, the Company
has purchased approximately $260,000 worth of office furniture and equipment.
Approximately $3.1 million was used for general working capital purposes.  As of
July 31, 1996, approximately $2,300,000 of the offering proceeds have been
invested in short-term money funds; these remaining proceeds are expected to be
used for general working capital purposes.

                                       25
<PAGE>
 
     As of July 31, 1996, the Company had a secured $3,000,000 revolving credit
facility with City National Bank bearing interest at prime plus one-half of one
percent per annum. This revolving credit facility would have matured in January
1997 and was collateralized by substantially all of the assets of the Company,
except for the Company's building and land. The Company did not comply with
certain financial covenants contained in the line of credit as of July 31, 1996,
nor did it comply with such covenants for the period from August 1, 1996,
through November 1, 1996. As a result, the lender declared the Company in
default of the provisions of the line of credit agreement on November 4, 1996,
and withdrew the credit terms extended to the Company under the line of credit
agreement. As of November 4, 1996, there was no balance outstanding under this
line of credit. The Company has obtained a $1.5 million line of credit from
Cruttenden Roth Incorporated and is exploring additional alternative financing
arrangements. There can be no assurance that the Company will be able to obtain
such alternative additional financing.

     The Company has obtained a $300,000 credit line from Winthrop Financial for
purposes of leasing capital equipment.  The Company has not yet received any
advances under this credit line.

     The Company believes that its existing cash and equivalents remaining from
proceeds of its initial public offering, together with the funds to become
available from a new working capital credit facility which the Company recently
arranged with Cruttenden Roth Incorporated, will be sufficient to meet its
capital and liquidity needs for the next 12 months. However, the Company's
belief is based upon achieving significant sales of its latest generation LOM-
2030 system machines, maintaining gross profit levels, controlling operating
costs and securing a new bank working capital credit facility. Therefore,
management's belief is based on projections which are subject to a high degree
of uncertainty because of the limited sales history of the latest generation
product and because of the uncertainty associated with the Company's ability to
obtain further financing.

     Further, subsequent to July 31, 1996, the Company has continued to
experience significant cash expenditures in conjunction with the introduction of
the LOM-2030H and due to the expansion of the Company's research and development
efforts and infrastructure.  Should the Company's existing cash and equivalents
remaining from the proceeds of its initial public offering and funds available
under the line of credit from Cruttenden Roth become insufficient to finance the
Company's working capital requirements, the Company will be required to raise
additional funds through public or private equity or debt financing. There can
be no assurance that cash flows from the offering and funds available under the
line of credit from Cruttenden Roth will be sufficient to meet future operating
requirements, or, if required, that additional financing will be available, or,
if available, be on terms satisfactory to the Company. Significant additional
dilution may be incurred by current investors as a result of any additional
financing.

ITEM 7.  FINANCIAL STATEMENTS

     The financial statements of the Company required by this Item begin on Page
F-1 of this Report.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.

                                       26
<PAGE>
 
                                   PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(a)OF THE EXCHANGE ACT.

     The information required hereunder is incorporated by reference from the
sections of the Company's Proxy Statement filed in connection with its Annual
Meeting of Stockholders entitled "Nominees" and "Other Executive Officers."

ITEM 10.  EXECUTIVE COMPENSATION

     The information required hereunder is incorporated by reference from the
section of the Company's Proxy Statement filed in connection with its Annual
Meeting of Stockholders entitled "Executive Compensation."

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required hereunder is incorporated by reference from the
section of the Company's Proxy Statement filed in connection with its Annual
Meeting of Stockholders entitled "Security Ownership of Management and Certain
Beneficial Owners."

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required hereunder is incorporated by reference from the
section of the Company's Proxy Statement filed in connection with its Annual
Meeting of Stockholders entitled "Certain Relationships and Related
Transactions."

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     The following documents are filed as part of this Form 10-KSB:

          (a)  Exhibits:
               -------- 

          See Index to Exhibits on Page II-2 of this Annual Report on Form 10-
KSB.

          (b)  Reports on Form 8-K:
               --------------------

          The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report, and none were required.

                                       27
<PAGE>
 
                               Index to Exhibits
                               -----------------
<TABLE> 
<CAPTION> 
       Exhibit
       Number                Description of Document
       ------                -----------------------
       <S>     <C> 
         2.1   Agreement and Plan of Merger between the Registrant and Helisys,
               Inc., a California corporation, effective November 22, 1995./(1)/

         3.1   Certificate of Incorporation of Registrant./(1)/

         3.2   Bylaws of Registrant./(1)/

         4.1   Form of Representative's Warrant Agreement by and between the
               Registrant and Cruttenden Roth Incorporated./(1)/

        10.1   1995 Stock Incentive Plan./(1), (2)/

        10.2   Employee Stock Purchase Plan./(1), (2)/

        10.3   Form of Directors' and Officers' Indemnification Agreement./(1)/

        10.4   Agreement dated February 28, 1995, between the Aviation Applied
               Technology Directorate and the Registrant./(1)/

        10.5   Agreement dated August 31, 1994, between the University of Dayton
               Research Institute and the Registrant./(1)/

        10.6   Intentionally Omitted.

        10.7   Joint Development and Distribution Agreement for EX85Z Adhesive,
               dated March, 1995, between Brown-Bridge Industries, Inc. and the
               Registrant./(1)/

        10.8   Consulting Agreement dated November 1, 1995 between L.A.
               Delmonico Consulting, Inc. and the Registrant.

        10.9   Professional Services Contract dated March 7, 1996 among Rose &
               Crangle, Ltd., the Registrant, Robert D. Crangle and Michael
               Feygin.

        16.1   Letter from BDO Seidman, LLP on changes in certifying
               accountant./(1)/

        21.1   Subsidiaries of the Registrant./(1)/

        24.1   Power of Attorney. (included on signature page hereto).

        27.1   Financial Data Schedule
</TABLE> 
______________

                                       28
<PAGE>
 
(1)  Incorporated by reference to the same numbered exhibit of the Company's
     Registration Statement on Form SB-2, No. 33-99244-LA.
(2)  These exhibits are identified as management contracts or compensatory plans
     or arrangements of the Company pursuant to item 13(a) of Form 10-KSB.

                                       29
<PAGE>
 
                                  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 thereunto duly authorized, in the City of
Torrance, State of California, on November 12, 1996.

                                    HELISYS, INC.


Dated:  November 12, 1996           By:  /s/ MICHAEL FEYGIN
                                         ------------------------------------
                                         Michael Feygin
                                         Chairman, President, Chief Executive
                                         Officer and Director

     We, the undersigned directors and officers of Helisys, Inc., do hereby
constitute and appoint Michael Feygin and Dave T. Okazaki our true and lawful
attorneys and agents, with full powers of substitution to do any and all acts
and things in our name and behalf in our capacities as directors and officers
and to execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents may deem necessary or advisable
to enable said corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Annual Report on Form 10-KSB,
including specifically but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments hereto; and we do hereby ratify and confirm all that said attorneys
and agents, shall do or cause to be done by virtue hereof.

     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.
<TABLE>
<CAPTION>

<S>                         <C>                              <C>  
/s/ MICHAEL FEYGIN          Chairman, President, Chief       November 12, 1996
-------------------------   Executive Officer and Director
Michael Feygin              (Principal Executive Officer)
 
/s/ DAVE T. OKAZAKI         Chief Financial Officer,         November 12, 1996
-------------------------   Secretary and Director
                            (Principal Financial and
                            Principal Accounting Officer)
 
/s/ ROBERT CRANGLE          Director                         November 12, 1996
-------------------------
Robert Crangle
 
                            Director                         November __, 1996
-------------------------
Louis A. Delmonico
 
/s/ FREDERICK M. HANEY      Director                         November 12, 1996
-------------------------
Frederick M. Haney
</TABLE>

                                       30
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
<TABLE> 
<CAPTION> 
                                                                        Page
                                                                        ----
<S>                                                                     <C>
Report of Independent Public Accountants..............................  F-1

Balance Sheet as of July 31, 1996.....................................  F-2
 
Statements of Operations for the years ended July 31, 1995 and 1996...  F-3
 
Statements of Stockholders' Equity for the years ended July 31, 1995
 and 1996.............................................................  F-4
 
Statements of Cash Flows for the years ended July 31, 1995 and 1996...  F-5
 
Notes to Financial Statements.........................................  F-6
 
</TABLE>
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders of
Helisys, Inc.:

We have audited the accompanying balance sheet of Helisys, Inc., as of July 31,
1996, and the related statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended July 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Helisys, Inc., at July 31,
1996, and the results of its operations and its cash flows for each of the two
years in the period ended July 31, 1996, in conformity with generally accepted
accounting principles.






                                                  ARTHUR ANDERSEN LLP

Orange County, California
November 12, 1996

                                      F-1
<PAGE>
 
                                 HELISYS, INC.

                                 BALANCE SHEET

<TABLE>
<CAPTION>
 
                                                                                                   JULY 31,
                                        ASSETS                                                       1996
                                        ------                                                   ------------  
<S>                                                                                              <C>
Current assets:
  Cash and cash equivalents...................................................................   $ 2,600,249
  Accounts receivable, net of allowance for doubtful accounts of $120,000.....................     2,408,315
  Inventories.................................................................................     2,287,197
  Income tax receivable.......................................................................       894,670
  Prepaid expenses............................................................................       146,061
  Deferred income taxes.......................................................................       545,553
                                                                                                 -----------
    Total current assets......................................................................     8,882,045
                                                                                                 -----------
Property, plant and equipment:
  Land........................................................................................       838,000
  Building and improvements...................................................................     1,344,122
  Office furniture and equipment..............................................................       471,130
  Machinery and equipment.....................................................................       695,693
                                                                                                 -----------
                                                                                                   3,348,945
  Less--Accumulated depreciation..............................................................       460,233
                                                                                                 -----------
                                                                                                   2,888,712
                                                                                                 -----------
Other assets..................................................................................        31,101
                                                                                                 -----------
                                                                                                 $11,801,858
                                                                                                 ===========
 
 
                          LIABILITIES AND STOCKHOLDERS' EQUITY
                          ------------------------------------
Current liabilities:
  Current portion of long-term debt and capital lease obligation..............................   $    41,892
  Accounts payable............................................................................     1,402,571
  Accrued liabilities.........................................................................       903,367
  Customer deposits...........................................................................        50,000
  Deferred maintenance revenues...............................................................       699,699
  Deferred gross profits......................................................................       446,158
                                                                                                 -----------
    Total current liabilities.................................................................     3,543,687
                                                                                                 -----------
Long-term debt and capital lease obligation, net of current portion...........................     1,887,882
                                                                                                 -----------
Commitments and contingencies (Note 9)
Stockholders' equity:
  Preferred stock, $.001 par value: 1,000,000 shares authorized, none issued or outstanding               --
  Common stock, $.001 par value: 20,000,000 shares authorized, 3,991,654 shares issued
    and outstanding...........................................................................         3,992
Additional paid-in capital....................................................................     5,871,083
Retained earnings.............................................................................       586,229
Advance to stockholder........................................................................       (40,536)
Deferred compensation.........................................................................       (50,479)
                                                                                                 -----------
    Total stockholders' equity................................................................     6,370,289
                                                                                                 -----------
                                                                                                 $11,801,858
                                                                                                 ===========
</TABLE>

       The accompanying notes are an integral part of this balance sheet.

                                      F-2
<PAGE>
 
                                 HELISYS, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                            FOR THE YEAR ENDED
                                                                   ----------------------------------
                                                                        JULY 31,           JULY 31,
                                                                          1995               1996
                                                                   -------------------   ------------
<S>                                                                <C>                   <C>
Net sales.......................................................          $11,475,834    $12,322,291
Cost of sales...................................................            5,707,871      6,612,206
                                                                          -----------    -----------
    Gross profit................................................            5,767,963      5,710,085
                                                                          -----------    -----------
Operating expenses:
  Selling, general and administrative...........................            3,495,468      4,857,033
  Research and development......................................            1,396,639      2,029,849
                                                                          -----------    -----------
                                                                            4,892,107      6,886,882
                                                                          -----------    -----------
    Income (loss) from operations...............................              875,856     (1,176,797)
                                                                          -----------    -----------
Other income (expense):
  Interest income...............................................               15,729         62,733
  Interest expense..............................................             (134,210)      (229,631)
                                                                          -----------    -----------
                                                                             (118,481)      (166,898)
                                                                          -----------    -----------
    Income (loss) before provision (benefit) for income taxes...              757,375     (1,343,695)
Provision (benefit) for income taxes............................              245,000       (457,000)
                                                                          -----------    -----------
    Net income (loss)...........................................          $   512,375    $  (886,695)
                                                                          ===========    ===========
 
Earnings (loss) per common share:
    Net income (loss) per common share..........................          $       .19    $      (.28)
                                                                          ===========    ===========
    Weighted average number of common shares....................            2,700,000      3,200,000
                                                                          ===========    ===========
 
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>
 
                                 HELISYS, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

                   FOR THE YEARS ENDED JULY 31, 1995 AND 1996
<TABLE>
<CAPTION>
                                                        COMMON STOCK
                                    COMMON STOCK         SUBSCRIBED       ADDITIONAL                  ADVANCE       
                                ------------------   ------------------    PAID-IN      RETAINED        TO         DEFERRED
                                 SHARES     AMOUNT     SHARES    AMOUNT    CAPITAL      EARNINGS    STOCKHOLDER  COMPENSATION
                                ---------   ------   ---------   ------   ----------    ----------  -----------  ------------
<S>                             <C>         <C>      <C>         <C>      <C>           <C>         <C>          <C>
Balance at July 31, 1994.....   2,486,188   $2,486    213,812    $  214   $   32,945    $  960,549  $        --  $         --
  Net income.................          --       --         --        --           --       512,375           --            --
  Common stock issued to
     employees...............     159,116      159   (159,116)     (159)          --            --           --
                                ---------   ------   ---------   -------  ----------    ----------  -----------  ------------

Balance at July 31, 1995.....   2,645,304    2,645     54,696        55       32,945     1,472,924           --            --
  Net loss...................          --       --         --        --           --      (886,695)          --            --
  Common stock issued in
     connection with initial
     public offering, net....   1,266,111    1,267         --        --    5,674,728            --           --            --
  Issuance of subscribed
     shares..................      54,696       55    (54,696)      (55)          --            --           --            --
  Common stock issued to
     employees under stock
     purchase plan...........      25,543       25         --        --       75,965            --           --            --
  Advance to stockholder.....          --       --         --        --       18,750            --      (40,536)           --
  Deferred compensation on
     stock options awarded
     to employees............          --       --         --        --       68,695            --           --       (68,695)
  Amortization of deferred
     compensation on stock
     options awarded to
     employees...............          --       --         --         --          --            --           --        18,216
                                ---------   ------   --------    -------  ----------    ----------  -----------  ------------

Balance at July 31, 1996.....   3,991,654   $3,992         --    $    --  $5,871,083   $   586,229  $   (40,536) $    (50,479)   
                                =========   ======   ========    =======  ==========   ===========  ===========  ============
</TABLE> 
<TABLE> 
<CAPTION> 
                                   TOTAL
                                ----------  
<S>                             <C>
Balance at July 31, 1994.....   $  996,194
Net income.................        512,375
  Common stock issued to 
     employees...............           --
                                ----------
Balance at July 31, 1995.....    1,508,569
  Net loss...................     (886,695)
  Common stock issued in
     connection with initial
     public offering, net....    5,675,995
  Issuance of subscribed
     shares..................           --
  Common stock issued to
     employees under stock
     purchase plan...........       75,990
  Advance to stockholder.....      (21,786)
  Deferred compensation on
     stock options awarded
     to employees............           --
  Amortization of deferred
     compensation on stock
     options awarded to
     employees...............       18,216
                                ----------
Balance at July 31, 1996.....   $6,370,289
                                ==========
</TABLE> 

  The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>
 
                                 HELISYS, INC.

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                       FOR THE YEAR ENDED
                                                                             ----------------------------------
                                                                                  JULY 31,           JULY 31,
                                                                                    1995               1996
                                                                             ----------------      ------------
<S>                                                                          <C>                   <C>
Cash flows from operating activities:
  Net income (loss).......................................................   $   512,375           $  (886,695)
  Adjustments to reconcile net income (loss) to net cash
    used in operating activities:
     Depreciation.........................................................       144,251               313,255
     Amortization of deferred compensation................................            --                18,216
     Noncash compensation to shareholder..................................            --                18,750
     Loss on disposition of property, plant and equipment.................            --                24,099
     Changes in operating assets and liabilities:
       Accounts receivable................................................    (1,285,548)              (67,878)
       Inventories........................................................      (461,674)             (882,596)
       Income tax receivable..............................................            --              (894,670)
       Prepaid expenses...................................................        16,060               (88,085)
       Deferred income taxes..............................................      (459,339)               (6,878)
       Other assets.......................................................        (3,960)                 (141)
       Accounts payable...................................................       569,948               119,861
       Accounts payable-related parties...................................      (134,230)                   --
       Accrued liabilities................................................       572,586                67,352
       Income taxes payable...............................................      (101,449)                   --
       Customer deposits..................................................        13,390              (433,820)
       Deferred gross profits.............................................       263,860                62,418
       Deferred maintenance revenues......................................       323,070               198,571
                                                                             -----------           ----------- 
          Net cash used in operating activities...........................       (30,660)           (2,438,241)
                                                                             -----------           ----------- 
Cash flows from investing activities:
  Purchases of property, plant and equipment..............................      (518,773)             (663,750)
                                                                             -----------           ----------- 
Cash flows from financing activities:
  Proceeds from notes payable.............................................       858,000                    --
  Payments on long-term debt..............................................      (877,072)              (30,830)
  Payments on capital lease obligation....................................       (15,252)              (23,214)
  Proceeds from initial public offering of common stock, net..............            --             5,675,995
  Proceeds from issuance of common stock under employee
    stock purchase plan...................................................            --                75,990
  Net advance to shareholder secured by common stock......................            --               (40,536)
                                                                             -----------           ----------- 
          Net cash (used in) provided by financing activities.............       (34,324)            5,657,405
                                                                             -----------           ----------- 
Net (decrease) increase in cash...........................................      (583,757)            2,555,414
Cash and cash equivalents, beginning of period............................       628,592                44,835
                                                                             -----------           ----------- 
Cash and cash equivalents, end of period..................................   $    44,835           $ 2,600,249
                                                                             ===========           =========== 
Supplemental disclosures of cash flow information:
  Cash paid during the period for interest................................   $   134,210           $   229,631
  Cash paid during the period for income taxes............................       863,100               387,242
 
Supplemental disclosures of noncash financing and investing activities:
  Notes payable issued in connection with the
    purchase of land and building.........................................   $ 1,930,500                    --
  Equipment purchased under capital lease obligation......................        60,642                    --
  Deferred loan fees incurred in connection with
    refinancing a note payable............................................        27,000                    --
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>
 
                                 HELISYS, INC.

                         NOTES TO FINANCIAL STATEMENTS
                   FOR THE YEARS ENDED JULY 31, 1995 AND 1996

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    a. Organization
 
       Helisys, Inc.'s predecessor, Hydronetics, Inc., was incorporated in
Illinois in 1985 to engage in Laminated Object Manufacturing research and
development activities. Helisys, Inc. (the Company) was reincorporated in
California in 1990.  The Company designs, develops, manufactures and markets
rapid prototyping machines that are used by design engineers and manufacturers
to make physical models, industrial patterns, and prototypes directly from an
engineer's or industrial designer's three-dimensional computer-aided design (3-D
CAD). The Company's rapid prototyping equipment utilizes the Company's
proprietary Laminated Object Manufacturing (LOM) technology. The Company's LOM
technology is a rapid prototyping technology that produces physical models,
industrial patterns, and prototypes through the lamination of sheet-formed
materials such as paper and plastic. The Company also sells the consumable
materials used with its LOM systems.  The principal markets for the Company's
products are industrial manufacturing companies, custom prototype shops, and
educational institutions worldwide.

    b. Significant Risk Factor

       The Company incurred a net loss of $886,695 for the fiscal year ended
July 31, 1996, and is expected to incur additional losses subsequent to fiscal
year 1996. The Company has also had recurring negative cash flows from
operations of $30,660, and $2,438,241 for the years ended July 31, 1995 and
1996, respectively. Due in part to the losses during the fiscal year ended July
31, 1996, the Company was in violation of its bank line of credit facility. On
November 4, 1996, the Company's lender withdrew the Company's line of credit. As
of July 31, 1996, no amounts were outstanding under the line. On November 12,
1996, the Company obtained a commitment for a $1,500,000 line of credit from an
investment banker and is exploring alternative financing arrangements (See Note
3).

       The ability of the Company to attain profitability is dependent, in part,
upon market acceptance of its latest generation rapid prototyping machines (the
LOM 2030H), as well as continued sales of materials and services, maintaining
gross profit levels, controlling operating costs and the securing of an
additional working capital bank credit facility as needed.

       If management's plans in connection with these matters are not
successful, the Company will be required to scale back efforts in research and
development and reduce certain selling, general and administrative expenses. In
addition, the Company may be required to raise additional funds through public
or private equity or debt financing. There can be no assurance that the
Company's cash and cash equivalents, together with funds available under the
$1,500,000 facility, will be sufficient to meet future operating requirements,
or, if required, that additional financing will be available.

    c. Accounting Estimates
 
       The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reported period. Actual
results could differ from estimated amounts.

    d. Inventories
 
       Inventories are stated at lower of cost (determined by first-in, first-
out method) or market. Inventory costs include the cost of material, labor, and
manufacturing overhead.

                                      F-6
<PAGE>
 
                                 HELISYS, INC.

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


  e. Property, Plant and Equipment
 
     Property, plant and equipment are recorded at cost. Additions and
betterments are capitalized. Maintenance and repairs are charged directly to
expense as incurred. When assets are disposed, the related cost and accumulated
depreciation are removed from the accounts and any resulting gains or losses are
included in the statements of operations. Depreciation is provided using the
straight-line method over the following estimated useful lives:

<TABLE> 

     <S>                                              <C>
     Building and improvements......................      30 years
     Office furniture and equipment.................  3 to 5 years
     Machinery and equipment........................  3 to 5 years

</TABLE> 

     The Company estimates depreciation on property, plant and equipment based
on estimated useful lives. The actual useful lives and recoverability of values
of property, plant and equipment may vary from the Company's estimates. In the
event that future facts and circumstances indicate that the cost of property,
plant and equipment may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required.
 
  f. Revenue Recognition
 
     Revenue from the sale of rapid prototyping systems and related products is
recognized upon shipment and satisfaction of significant customer requirements.
During fiscal years ended July 31, 1995, and prior, the Company shipped certain
rapid prototyping systems to customers, subject to agreements providing the
rights to exchange the systems for upgraded versions. In instances where units
are shipped subject to such exchanges, gross profits are deferred until the
exchange is completed or the right to exchange has expired. Revenue from annual
product maintenance and warranty contracts is recognized ratably over the
contract period (generally, 12 months).

     Deferred gross profits consist of the following at July 31, 1996:

<TABLE> 

       <S>                                              <C>
       Deferred revenues............................    $ 581,518
       Deferred costs...............................     (135,360)
                                                        ---------
                                                        $ 446,158
                                                        =========
</TABLE> 

  g. Concentration of Credit Risk
 
     Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and trade
receivables.
 
     The Company maintains its cash and cash equivalents in bank accounts which,
at times, may exceed federally insured limits.  The Company has not experienced
any losses in such accounts.  The Company does not believe it is exposed to any
significant credit risk on cash and equivalents.

     The Company grants credit to domestic and foreign customers.  Credit is
extended based on an evaluation of each customer's financial condition. To
reduce credit risk in connection with sales of LOM systems, the Company may,
depending upon the circumstances, require deposits prior to shipment and may
retain a security interest in the LOM equipment until fully paid.  The Company
often requires international customers to furnish letters of credit. To date,
the Company has not incurred any significant credit related losses.  Exposure to
losses on receivables is principally dependent on each customer's financial
condition.  The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses. The actual credit losses experienced by the
Company may vary from its allowances for anticipated losses.

                                      F-7
<PAGE>
 
                                 HELISYS, INC.

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The Company's customers are dispersed across various geographic areas. The
Company does not believe there is significant credit risk concentration in any
single geographic area (see Notes 10 and 16).

  h. Research and Development Costs

     Research and development costs are expensed as incurred except for those
costs that are reimbursable under specific contracts. As of July 31, 1995 and
1996, the Company had one significant research and development contract in
process. The contract provides for cost reimbursement plus a fixed fee and is
performed on a best efforts basis with no guarantee of ultimate success. Costs
related to research and development contracts are included in inventory and
charged to cost of sales upon recognition of the related revenues. Revenues on
research and development contracts are recognized as work is performed and is
estimated based on the relationship of cost incurred to date to total estimated
costs to be incurred on the contract. These estimates are subject to the
Company's progress and could materially vary from time to time. Costs incurred
and gross profit recognized on research and development contracts are as
follows:
<TABLE>
<CAPTION>
                                          JULY 31,   JULY 31,
                                            1995       1996
                                          --------   --------
<S>                                       <C>        <C>
     Cost incurred to date.............   $352,000   $809,000
                                          ========   ========
     Gross profit recognized to date...   $ 33,000   $ 73,000
                                          ========   ========
</TABLE>
  i. Income Taxes

     Income taxes are accounted for by the asset and liability approach in
accordance with SFAS No. 109, "Accounting for Income Taxes."  Deferred taxes
represent the expected future tax consequences when the reported amounts of
assets and liabilities are recovered or paid.  They arise from differences
between the financial reporting and tax basis of assets and liabilities and are
adjusted for changes in tax laws and tax rates if and when those changes are
enacted.  The provision (benefit) for income taxes represents the total of
income taxes paid or payable (receivable) for the current year, plus the change
in deferred taxes during the year.

  j. Cash and Cash Equivalents

     The Company considers all short-term deposits with an original maturity of
three months or less to be cash equivalents.  This caption includes cash and
short-term money funds.

  k. Impact of Recently Issued Accounting Standards

     The Financial Accounting Standards Board (FASB) issued SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of," in March 1995.  SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. SFAS No. 121 is
not expected to have a material effect on the Company's financial statements.

     In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation."  Under SFAS No. 123, companies have the option to implement a
fair value-based accounting method or continue to account for employee stock
options and stock purchase plans as prescribed by Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees."  Companies are
permitted to continue using the method of accounting described in APB No. 25 but
are required to disclose pro forma net income and earnings per share determined
as if the fair value method of SFAS No. 123 had been used to

                                      F-8
<PAGE>
 
                                 HELISYS, INC.

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

measure compensation cost. SFAS No. 123 is effective for financial statements
for fiscal years beginning after December 15, 1995. The Company has not made a
determination as to whether it will adopt the new fair value accounting rules.
The Company has not assessed the impact on net income (loss) and earnings (loss)
per share of adopting the new fair value accounting rules.

  l. Stock Split

     As described in Note 14, in November 1995 the Company effected a 2,486.188-
for-one split of its common stock. All share and per share amounts included in
the accompanying financial statements and footnotes have been restated to
reflect the stock split and the corresponding change in par value.

  m. Net Income (Loss) Per Common Share

     Net income (loss) per share of common stock is computed based upon the
number of shares of common stock outstanding. All shares are treated as
outstanding in determining earnings (losses) per share for all periods
presented. No effect has been given to options outstanding under the Company's
stock incentive plans as no material dilutive effect would result from the
exercise of these options.

2.  INVENTORIES

     Inventories consist of the following at July 31, 1996:
<TABLE>
<CAPTION>
 
<S>                                                <C>
       Raw materials............................   $  514,975
       Work-in-process..........................      865,345
       Finished systems.........................      473,467
       Field engineering parts and components...      433,410
                                                   ----------
                                                   $2,287,197
                                                   ==========
</TABLE>

3.  LINE OF CREDIT

     The Company had a revolving line of credit facility with a bank (the
Facility) which would have expired in January 1997. At July 31, 1996, the
Facility bore interest at the bank's prime rate of interest (8.25 percent at
July 31, 1996), plus one-half of one percent. Borrowings under the Facility were
limited to $3,000,000, including amounts outstanding under any standby letters
of credit. At July 31, 1996, the Company had no outstanding borrowings on the
line.

     The Facility was collateralized by substantially all assets of the Company,
except for land and the building which serves as a warehouse facility and
corporate offices.  Under the Facility, the Company was subject to certain
financial covenants.  The major financial covenants included requirements for
maintaining defined levels of tangible net worth and working capital, as well as
various ratios, including the current ratio and the senior liabilities to
tangible net worth ratio.

     The Company did not comply with certain financial covenants at July 31,
1996, and accordingly, had received waivers with respect to such covenants from
its bank for periods up to and including July 31, 1996. On November 4, 1996, the
lender withdrew the availability of the facility. The Company is pursuing
renegotiations of the existing credit facility as well as exploring alternative
financing arrangements (see Note 1). On November 12, 1996, the Company obtained
a commitment for an unsecured, $1,500,000 line of credit agreement from an
investment banker. The agreement has no financial covenants. Amounts advanced
under the line of credit bear interest at the rate of 10 percent annually.
Additionally, the Company is required to pay points equal to three percent of
all amounts advanced under the facility at the time such advances are made. All
amounts advanced under the line of credit are due, together with interest, one
year from the date of the advances. Additionally, the line will be available
until the earlier of (i) such date that the Company obtains a new bank revolving
credit facility or (ii) July 31, 1997. As consideration for extending credit,
the lender will receive five year warrants to purchase 50,000 shares of the
Company's stock at a strike price of $2.75 per share. Additional consideration
of 50,000 warrants to purchase the Company's stock at $2.75 per share will be
granted the lender for each $500,000 increment advanced under the line (See Note
15).

                                      F-9
                                                                                
   
<PAGE>
 
                                 HELISYS, INC.

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4.  ACCRUED LIABILITIES

     Accrued liabilities consist of the following at July 31, 1996:
<TABLE>
<CAPTION>
<S>                                      <C>
       Accrued commissions............   $113,069
       Accrued salaries and bonuses...     59,325
       Accrued vacation...............    132,919
       Accrued warranty...............    455,583
       Other accrued liabilities......    142,471
                                         --------
                                         $903,367
                                         ========
</TABLE>

5.  LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION

     During October 1994 the Company exercised an option to purchase land and
the building which serves as a warehouse facility and corporate offices. The
total purchase price aggregated $2,095,000, of which $1,930,500 was funded by
bank borrowings evidenced by two notes payable secured by a first and second
trust deed. Subsequent to the purchase, one of the notes aggregating $858,000
was refinanced by the Company with funds received from the United States Small
Business Administration.

     Additionally, the Company leases certain equipment under a noncancellable
capital lease. Below is a summary of the equipment which have been capitalized
and included in property, plant and equipment in the accompanying balance sheet
at July 31, 1996:

<TABLE> 
<S>                                                                  <C>
       Cost........................................................  $   60,642
       Less:  Accumulated depreciation.............................      38,744
                                                                     ----------
                                                                     $   21,898
                                                                     ==========
</TABLE> 
 
     Long-term debt and the capital lease obligation consist of the following as
 of July 31, 1996:
<TABLE> 
<S>                                                                                                     <C>
     Note payable to bank, due November 1, 2009.  The note bears interest at an
       annual rate of 9.47 percent with principal and interest payments of
       $9,484 per month through November 1, 2009, and all unpaid principal
       balance due at maturity.  Secured by deed of trust and other assets, as
       defined by the note, and guaranteed by the majority stockholder...............................   $1,051,983
     Note payable to U.S. Small Business Administration, due February 1, 2015.
       Interest accrues at 8.224 percent per year.  Monthly principal and
       interest payments are $7,955.  Secured by second trust deed...................................      855,614
     Capital lease obligation, maturing in November 1997.  Secured by certain
       equipment.  Payable in quarterly installments, including principal and
       interest, of $5,940.  The loan bears interest at 11.47 percent per year.......................       24,067
                                                                                                        ----------
                                                                                                         1,931,664
     Less:  Amount representing interest included in capital lease obligation........................        1,890
                                                                                                        ----------
                                                                                                         1,929,774
     Less:  Current portion..........................................................................       41,892
                                                                                                        ----------
                                                                                                        $1,887,882
                                                                                                        ==========
</TABLE>

                                     F-10
<PAGE>
 
                                 HELISYS, INC.

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


Subsequent to July 31, 1996, the Company entered into a $300,000 line of credit
agreement with a financial institution for purposes of leasing capital
equipment.  There were no amounts outstanding under the line at October 1, 1996.
The credit agreement requires monthly repayment of outstanding principal amounts
over a twenty-four month term and the annual interest rate is based on a three-
year treasury rate.


     Future minimum principal payments for long-term debt and the capital lease
obligation at July 31, 1996, are as follows:

<TABLE>

<S>                                              <C>
       1997...................................   $   41,892
       1998...................................       42,400
       1999...................................       42,004
       2000...................................       45,831
       2001...................................       50,010
       Thereafter.............................    1,707,637
                                                 ----------
                                                 $1,929,774
                                                 ==========
</TABLE>

     The note payable to the U.S. Small Business Administration provides for a
prepayment penalty in the event the note is prepaid before the maturity date, as
defined under the agreement.

6.  INCOME TAXES

     The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
 
                                                JULY 31,     JULY 31,
                                                  1995         1996
                                               ---------    --------- 
<S>                                            <C>          <C>
     Current:
       Federal..............................   $ 568,682    $(450,122)
       State................................     135,657           --
                                               ---------    ---------
                                                 704,339     (450,122)
                                               ---------    ---------
     Deferred:
       Federal..............................    (365,050)      (6,878)
       State................................     (94,289)          --
                                               ---------    ---------
                                                (459,339)      (6,878)
                                               ---------    ---------
     Provision (benefit) for income taxes...   $ 245,000    $(457,000)
                                               =========    =========
</TABLE>
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
 
                                                              JULY 31,
                                                                1996
                                                              --------
<S>                                                           <C>
 
       Allowance for doubtful accounts.....................   $ 47,993
       Inventory adjustments...............................     87,575
       Depreciation........................................    (17,841)
       Accrued expenses....................................    248,747
       Deferred gross margins..............................    179,079
       Net operating loss carryforward.....................     13,312
                                                              --------
                                                               558,865
       Less valuation allowance............................    (13,312)
                                                              --------
                                                              $545,553
                                                              ========
</TABLE>

                                     F-11
<PAGE>
 
                                 HELISYS, INC.

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


     The valuation allowance relates to deferred tax assets established under
SFAS No. 109 for state net operating loss carryforwards of $13,312.  These
unutilized loss carryforwards, which will expire through July 31, 2001, will be
carried to future years for possible utilization.  No benefit for these
carryforwards has been recognized in the financial statements.  No other
valuation allowances were deemed necessary as all deductible temporary
differences will be utilized primarily by carryback to prior years' taxable
income or as charges against reversals of future taxable temporary differences.
Due to the carryback of the current years' loss to the previous year, the
Company will recover the maximum amount refundable for taxes it has paid.

     Although the Company believes that it is probable that net deferred tax
assets of $545,553 will be realized on future tax returns, the deferred tax
assets may not be realized if the Company does not generate future taxable
income, if the operating loss carryforwards expire, or if changes in tax laws
are enacted.

     The reconciliations of the overall effective tax rate to the Federal
statutory rate of 34% are as follows:

<TABLE>
<CAPTION>
 
                                                                         JULY 31,     JULY 31,
                                                                           1995         1996
                                                                         ---------   ----------
<S>                                                                      <C>         <C>
       Federal income tax provision (benefit).........................     34.0 %      (34.0)%
       State income tax provision (benefit), net of federal benefit...      5.5           --
       Research and development credit................................     (9.3)          --
       Other (including permanent differences)........................      2.1           --
                                                                           ----        -----
       Effective income tax provision (benefit).......................     32.3 %      (34.0)%
                                                                           ====        =====
 </TABLE>

7.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value because of the
short maturity of these items.  The fair value of long-term debt and capital
lease obligations approximates recorded value because there have not been any
significant changes in market conditions or specific circumstances since the
instruments were recorded at fair value.

8.  RELATED PARTY TRANSACTIONS

     A stockholder of the Company owns 50% of a firm that provided consulting
services to the Company during the fiscal years ended July 31, 1995 and 1996.
The Company paid such firm aggregate fees and reimbursed expenses of $76,125 and
$106,935 in each of the fiscal years ended July 31, 1995 and July 31, 1996,
respectively.

     A director of the Company provided consulting services to the Company
during the fiscal year ended July 31, 1996.  The fees paid to the director
totaled $32,128 during the fiscal year ended July 31, 1996.

     A stockholder of the Company was the president of a sales agency which
represented the Company prior to the stockholder's joining the Company as an
employee. The total fees paid to this sales agency totaled $23,997 and $60,036
during each of the years ended July 31, 1995, and July 31, 1996, respectively.

                                     F-12
<PAGE>
 
                                 HELISYS, INC.

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


9.  COMMITMENTS AND CONTINGENCIES

    a. Operating Leases


       The Company leases certain facilities and certain equipment under
noncancellable operating lease agreements which expire at various dates through
March 1999.

       A schedule of future minimum lease payments under noncancellable
operating leases at July 31, 1996, is as follows:

<TABLE>
<S>                                                  <C>
       1997.......................................   $61,639
       1998.......................................    24,867
       1999.......................................     2,479
                                                     -------
                                                     $88,985
                                                     =======
</TABLE>

       Rental expense for the years ended July 31, 1995 and 1996, amounted to
$30,555 and $64,797, respectively.

    b. Legal Proceedings


       The Company is subject to various legal actions arising out of the
conduct of its business, including those actions related to patent infringement.
No amounts were accrued for these actions at July 31, 1996. An opposition has 
been filed against the Company's European patent. However, the Company expects 
that the European patent will be upheld. The Company has also been advised that
there is significant "prior art" in the United States relating to the LOM
process. Any finding that patent claims with respect to Company's LOM process
are invalid could have a material adverse effect on the Company's operations.
However, the Company believes that the results of any pending legal proceedings
will not have a material adverse effect on the Company's operations.


10.  MAJOR CUSTOMERS

       During the year ended July 31, 1996, $1,878,575 (15%) of the Company's
revenues were from one customer. At July 31, 1996, accounts receivable included
balances of $221,264 from this major customer.

       The Company sells a significant portion of its products through third-
party resellers and, as a result, maintains individually significant receivable
balances with major distributors. If the financial condition and operations of
these distributors deteriorate below critical levels, the Company's operating
results could be adversely affected. One distributor receivable balance
represented 16 percent of total accounts receivable at July 31, 1996.

11.  MAJOR SUPPLIER

       Certain paper products used in the Company's LOM systems are purchased
from a sole vendor under an exclusive arrangement. Although the Company believes
that other sources of supply of paper with attributes similar to the paper
exists, the Company believes that it would not be able to secure an alternate
supply in the short-term. The unanticipated loss of the Company's sole source of
supply of paper would have a material adverse effect on the Company's results of
operations unless and until an alternate source of supply of paper with similar
attributes could be obtained.

                                     F-13
<PAGE>
 
                                 HELISYS, INC.
                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

12.  COMPENSATION PLANS

     a. 1995 Stock Incentive Plan

        The Company adopted a Stock Incentive Plan (the Plan) in October 1995,
and has reserved 200,000 shares of the Company's common stock for issuance
pursuant to the plan.

     Under the Plan, the Executive Committee is authorized to grant options to
purchase shares of common stock, including options qualifying as "incentive
stock options" under Section 422 of the Internal Revenue Code of 1986, as
amended, and options that do not so qualify (Nonstatutory Options).
 
     No stock option may be exercised after ten years from the date of grant and
all incentive stock options granted to a 10% stockholder shall expire within
five years from the date of grant. The purchase price of common stock subject to
an incentive stock option shall not be less than 100% of the fair market value
of such common stock on the date of grant unless such incentive stock option is
granted to a 10% stockholder, in which case, the purchase price shall not be
less than 110% of the fair market value of such common stock on the date of
grant. Nonstatutory Options will have an exercise price determined by the
Executive Committee, but shall not be less than 85% of the fair market value of
such common stock on the date of grant.

     The following table summarizes the activity in the plan for the periods
indicated:
<TABLE>
<CAPTION>
                                         OPTIONS      EXERCISE PRICE
                                       OUTSTANDING      PER SHARE
                                       ------------   --------------
<S>                                    <C>            <C>
     Outstanding at July 31, 1995...            --                --
       Granted......................       159,670         2.50-5.50
       Canceled.....................        (7,270)        4.09-5.50
       Exercised....................            --                --
                                           -------         ---------
     Outstanding at July 31, 1996...       152,400         2.50-5.50
                                           =======         =========
</TABLE>
     At July 31, 1996, 11,100 options were exercisable, and 47,600 options were
available for granting under the Plan.

  b. 1995 Employee Stock Purchase Plan

     The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in October 1995, covering an aggregate of
100,000 shares of common stock. The Purchase Plan, which is intended to qualify
as an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code, will be implemented by six-month offering periods with purchases occurring
at six-month intervals. The Purchase Plan will be administered by the Executive
Committee of the Board of Directors of the Company. The Purchase Plan permits
eligible employees to purchase common stock through payroll deductions, which
may not exceed 15% of an employee's compensation. The price of common stock
purchased under the Purchase Plan will be 85% of the lower of the fair market
value of the common stock at the beginning of the six-month offering period or
the applicable purchase date. The Purchase Plan will terminate in December 2005.
At July 31, 1996, 25,543 shares had been purchased, and 74,457 shares were
available for purchase under the Purchase Plan.

13.  EMPLOYEE BENEFIT PLAN

     In July 1995, the Company adopted a 401(k) profit sharing plan (the Plan)
for its employees. To be eligible, full time employees must be at least 21 years
of age. Participants may contribute up to 15% of compensation, as defined by the
Plan. Participants' contributions are fully and immediately vested and non-
forfeitable.
                                     F-14
<PAGE>
 
                                 HELISYS, INC.

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


14.  COMMON STOCK ISSUED AS COMPENSATION

     During fiscal year 1992, the Company granted two executives 159,116 shares
of common stock as compensation. These shares were issued to the executives
during the fiscal year ended July 31, 1995. The shares of common stock awarded
were subject to restrictions on transfer and were subject to risk of forfeiture
until vested over a specified period of time. The shares were also subject to
forfeiture and reversion by the Company in the event of specified events. The
cost of stock awards was determined at the date of grant. At such date, the
stock awards were considered to have nominal value.

15.  STOCKHOLDERS' EQUITY

     On October 30, 1995, the Board of Directors of the Company approved a
2,486.188-for-one split of the Company's common stock, which took effect in
November 1995. The stockholders approved a proposal to amend the Company's
articles of incorporation to increase the number of authorized shares from
1,000,000 to 20,000,000, of which 2,700,000 were issued and outstanding at 
July 31, 1995, and 300,000 were reserved for issuance under the Company's
employee stock purchase and incentive plans (see Note 11). The stated par value
of each share was changed from no par value to $.001 in connection with the
stock split.
 
     The Company reincorporated in the State of Delaware effective in November
1995. In connection with the reincorporation, the Board of Directors and
shareholders approved an amendment to the articles of incorporation to authorize
1,000,000 shares of $.001 par value preferred stock. The Board of Directors is
authorized to issue preferred stock in one or more series and to fix the powers,
designations, preferences and rights of each series. All references to preferred
stock in the accompanying financial statements reflect the November 1995
authorization for this class of stock.

     On March 12, 1996, the Company consummated its initial public offering of
1,200,000 shares of common stock and received net proceeds of approximately
$6,000,000 prior to the payment of legal, accounting and other fees in the
aggregate amount of approximately $660,000 incurred in connection therewith.

     In connection with the initial public offering, the Company and a
stockholder of the Company granted the Company's underwriters a 45-day option to
purchase up to 170,000 and 10,000 additional shares of common stock,
respectively, to cover over-allotments, if any, on the terms and conditions as
set forth in the Company's prospectus.  On April 23, 1996, the Company issued
66,111 shares to its underwriters upon their exercise of this option, and
received net proceeds of approximately $330,000 after deduction of associated
expenses.

     Pursuant to the Company's initial public offering in March 1996, the
Company issued 84,000 warrants to its underwriters at an exercise price of $6.60
per share, exercisable in March 1997 and expiring in March 2001.  None of these
warrants have been exercised as of July 31, 1996.

     On November 12, 1996, the Company entered into an unsecured $1,500,000 line
of credit facility with an investment banker. In consideration for the
commitment, the Company issued 50,000 warrants to the lender at an exercise
price of $2.75 per share, exercisable immediately and expiring in November 2001.
For each $500,000 increment advanced to the Company, an additional 50,000
warrants at an exercise price of $2.75 per share, exercisable immediately and
expiring five years from the date of issuance, will be issued to the lender.

16.  PRODUCT RELIABILITY MATTERS

     Since 1992 when the Company commenced production of its first-generation
LOM 2030's, there have been reported instances of fires occurring within the
cabinets of these systems. The Company believes that such fires may have
resulted when the cutting laser beam accidentally came in contact with a loose,
unbonded piece of paper which had been improperly fed into the LOM system. To
address this problem, the Company has developed and is testing flame resistant
paper and has changed the design of its LOM systems to decrease the likelihood
that paper material will become loose and ignite during the LOM process. Since
the development of the new product, no cases of fire have been reported.

                                     F-15
<PAGE>
 
                                 HELISYS, INC.

                 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)



     The Company determined that it will modify its first-generation LOM 2030's
to substantially reduce the likelihood that burning material will be pulled
outside of the LOM cabinet.  The Company estimates the costs of performing the 
modifications to be approximately $239,000 and has accrued this amount as of
July 31, 1996. The ultimate costs of modifying the machines to adequately
address the aforementioned problem may vary materially from the Company's 
estimate.

     The Company has not taken any specific actions or expended any of the
amounts accrued to perform the necessary modifications.  Although the Company
carries product liability insurance coverage, if the Company fails to perform
the necessary modifications, the insurance carrier may assert certain defenses
over the extent of such coverage in the event the Company experiences product
liability claims resulting from the occurrence of fires in the systems.  No 
amount has been accrued for this contingency.

17.  GEOGRAPHICAL SALES INFORMATION
 
     All of the Company's assets are devoted to the manufacture and sale of LOM
systems, together with related supplies and services.

     Summarized sales data for the Company are as follows:
<TABLE>
<CAPTION>
 
                                      NORTH
                                     AMERICA      EUROPE       JAPAN        OTHER        TOTAL
                                   ----------   ----------   ----------   ----------   -----------
<S>                                <C>          <C>          <C>          <C>          <C>           
     For the year ended July 31, 
      1995
 
         Products...............   $5,464,648   $1,895,007   $1,051,455   $1,129,682   $ 9,540,792
         Supplies and services..    1,434,947      348,540       45,710      105,845     1,935,042
                                   ----------   ----------   ----------   ----------   -----------
                                   $6,899,595   $2,243,547   $1,097,165   $1,235,527   $11,475,834
                                   ==========   ==========   ==========   ==========   ===========
 
     For the year ended July 31, 
      1996
 
         Products...............   $3,583,429   $3,440,716   $1,652,823   $  853,470   $ 9,530,438
         Supplies and services..    1,600,439      860,803      124,792      205,819     2,791,853
                                   ----------   ----------   ----------   ----------   -----------
                                   $5,183,868   $4,301,519   $1,777,615   $1,059,289   $12,322,291
                                   ==========   ==========   ==========   ==========   ===========
 
</TABLE>

                                     F-16