<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington D.C. 20549
                                  FORM 10-QSB

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO
     ________________.

                       Commission file number  000-27286
                                               ---------

                                 HELISYS, INC.
       (exact name of small business issuer as specified in its charter)


             Delaware                                  95-4552813
    (State or other jurisdiction         (I.R.S. Employer Identification Number)
   of incorporation or organization)


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

                                (310) 891-0600
                          (Issuer's telephone number)

                                NOT APPLICABLE

             (Former name, former address and former fiscal year,
                         if changed since last report)

Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act 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            
                                        -----          -----  

State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.


           Class                             Outstanding at January 31, 1998
           -----                             -------------------------------
Common Stock, $.001 par value                            4,039,762


                              Page 1 of 20 Pages
                           Exhibit Index on Page 20
<PAGE>
 
                                 HELISYS, INC.
                              INDEX TO FORM 10-QSB

<TABLE>
<CAPTION>


PART I.  FINANCIAL INFORMATION
<S>                                                                                                                 <C>
    Item 1.     Financial Statements

                       Balance Sheets as of July 31, 1997
                       and January 31, 1998 (unaudited)..........................................................   3

                       Statements of Operations (unaudited) for the six months ended January 31,1997 and
                       1998......................................................................................   5

                       Statements of Cash Flows (unaudited) for the six months ended
                       January 31,1997 and 1998..................................................................   6

                       Notes to Financial Statements.............................................................   7

    Item 2.     Management's Discussion and Analysis of Financial
                Condition and Results of Operations..............................................................   8

PART II.  OTHER INFORMATION

    Item 1.     Legal Proceedings................................................................................  17

    Item 2.     Change in Securities.............................................................................  17

    Item 3.     Defaults Upon Senior Securities..................................................................  17

    Item 4.     Submission of Matters to a Vote of Security Holders..............................................  17

    Item 5.     Other Information................................................................................  18

    Item 6.     Exhibits and Reports on Form 8-K.................................................................  18

SIGNATURES.......................................................................................................
</TABLE>

                                       2
<PAGE>
 
                                 HELISYS, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     July 31, 1997      January 31, 1998
                                                                     -------------      ----------------
                                                                                          (unaudited)
<S>                                                                  <C>                <C>
ASSETS
Current assets:
  Cash and cash equivalents....................................         $  626,976           $  405,837
  Accounts receivable, net of allowance for
   doubtful accounts of  $357,000 as of
   July 31, 1997, and $290,272 as of
   January 31, 1998............................................          2,047,480            1,718,084
  Inventories..................................................          2,544,235            2,566,576
  Income tax receivable........................................            578,537              568,576
  Prepaid expenses and other current assets....................             60,619              173,075
                                                                        -------------------------------
   Total current assets........................................          5,857,847            5,432,148
                                                                        -------------------------------

Property, plant and equipment:
  Land.........................................................            838,000              838,000
  Building and improvements....................................          1,344,122            1,344,122
  Office furniture and equipment...............................            582,314              582,314
  Machine and equipment machinery..............................            869,252              639,032
                                                                        -------------------------------
                                                                         3,633,688            3,403,468
  Less - Accumulated depreciation..............................            851,251              820,358
                                                                        -------------------------------
                                                                         2,782,437            2,583,110
                                                                        -------------------------------
Other assets...................................................             26,131               25,749
                                                                        -------------------------------
                                                                        $8,666,415           $8,041,007
                                                                        ===============================
</TABLE>
                See accompanying notes to financial statements.

                                       3
<PAGE>
 
                                 HELISYS, INC.
                                 BALANCE SHEETS
                                        
<TABLE>
<CAPTION>
                                                                   July 31, 1997       January 31, 1998
                                                                -----------------    ---------------------
                                                                                         (unaudited)
<S>                                                             <C>                  <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Current portion of long-term debt and capital lease
  obligation....................................................     $    42,176             $    38,945

  Bank line of credit...........................................               -               1,000,000

 Accounts payable...............................................       1,188,806               1,558,221
 Accrued liabilities............................................         796,496                 504,008
 Customer deposits..............................................          37,497                  52,551
 Deferred maintenance revenue...................................         963,718                 713,066
 Deferred gross profits.........................................         263,860                 154,144
                                                                     -----------------------------------
  Total current liabilities.....................................       3,292,553               4,020,935
                                                                     -----------------------------------

Long-term debt and capital lease
 obligation, net of current portion.............................       1,836,995               1,818,906
                                                                     -----------------------------------

Stockholders' equity:
 Preferred stock, $.001 par value
  1,000,000 shares authorized, 80,000 shares issued and
  outstanding as of January 31, 1998............................                                   80

 Common stock, $.001 par value
  Authorized 20,000,000 shares..................................
  Issued and outstanding 4,025,251 shares as of July 31,
  1997, and 4,039,762 of January 31, 1998,
  respectively..................................................           4,026                   4,040
 Additional paid-in capital.....................................       6,008,570               6,645,872
 Accumulated Deficit............................................      (2,445,442)             (4,423,587)
 Deferred compensation..........................................         (30,287)                (25,239)
                                                                     -----------------------------------
  Total stockholders' equity....................................       3,536,867               2,201,166
                                                                     -----------------------------------

                                                                     $ 8,666,415             $ 8,041,007
                                                                     ===================================
</TABLE>


                See accompanying notes to financial statements.

                                       4
<PAGE>
 
                                 HELISYS, INC.
                           STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
 
                                                                        For the                            For the   
                                                                     Three months                         Six Months 
                                                                      January 31,                         January 31,
                                                              -----------------------------------------------------------------
                                                                 1997              1998              1997               1998
                                                                 ----              ----              ----               ----
<S>                                                           <C>               <C>              <C>                <C>
Net sales..............................................       $3,805,717        $2,030,167       $ 5,748,438        $ 4,543,918
                                                              
Cost of sales..........................................        2,304,047         1,545,613         3,741,258          3,366,385
                                                              -----------------------------------------------------------------
  Gross profit.........................................        1,501,670           484,554         2,007,180          1,177,533
                                                              -----------------------------------------------------------------
Operating expenses:                                           
  Selling, general and administrative..................        1,497,594         1,001,418         2,784,186          2,130,686
  Research and development.............................          712,283           318,365         1,521,441            891,157
                                                              -----------------------------------------------------------------
                                                               2,209,877         1,319,783         4,305,627          3,021,843
                                                              -----------------------------------------------------------------
     Loss from operations..............................         (708,207)         (835,229)       (2,298,447)        (1,844,310)
                                                              -----------------------------------------------------------------
Other income (expense):                                       
  Interest/other income................................           18,743               329            51,952             45,450
  Interest/other expense...............................          (77,275)         (113,933)         (142,455)          (179,285)
                                                              -----------------------------------------------------------------
     Loss before income tax benefit....................         (766,739)         (948,833)       (2,388,950)        (1,978,145)
                                                              
Income tax benefit.....................................           16,900                 -           544,900                  -
                                                              -----------------------------------------------------------------
                                                              
     Net loss..........................................       $ (749,839)       $ (948,833)      $(1,844,050)       $(1,978,145)
                                                              =================================================================
     Basic and diluted loss per common share                     
       outstanding.....................................            (0.19)            (0.24)            (0.46)             (0.49)
                                                              =================================================================
     Weighted average number of common shares               
       outstanding.....................................        4,000,000         4,026,075         4,000,000          4,027,696
                                                              =================================================================
</TABLE>


                See accompanying notes to financial statements.

                                       5
<PAGE>
 
                                 HELISYS, INC.
                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                        For the
                                                                                    ----------------
                                                                                    Six Months Ended
                                                                                    ----------------
                                                                                      January 31,
                                                                                    ----------------
                                                                                 1997               1998
                                                                                 ----               ----
<S>                                                                          <C>                 <C>
Cash flows from operating activities:
Net loss..................................................................   $(1,844,050)        $(1,978,145)
Adjustments to reconcile net loss to
 net cash used in operating activities:
  Compensation expense from issuance of stock purchase warrants...........        30,588
  Deferred income taxes...................................................       157,000                   -
  Depreciation............................................................       198,561             194,201
  Amortization of credit facility commitment fee paid with warrants.......                            39,600
  Amortization of deferred compensation...................................             -               5,048
  Net book value of equipment sold to customers...........................                            72,548
  Changes in operating assets and liabilities:
    Accounts receivable...................................................      (253,022)            329,396
    Inventories...........................................................      (420,211)            (89,763)
    Income taxes receivable...............................................      (397,597)              9,961
    Prepaid expenses and other current assets.............................        56,168             (20,056)
    Other assets..........................................................          (871)                382
    Accounts payable......................................................       578,105             369,415
    Accrued liabilities...................................................         3,486            (287,092)
    Customer deposits.....................................................             -              15,054
    Deferred maintenance revenues.........................................       (18,608)           (250,652)
    Deferred gross profits................................................      (137,298)           (109,716)
                                                                             -------------------------------
     Net cash used in operating activities................................    (2,047,749)         (1,699,819)
                                                                             -------------------------------
Cash flows from investing activities:
    Purchases of property, plant and equipment............................       (81,308)                  -
                                                                             -------------------------------
     Net cash used in investing activities................................       (81,308)                  -
                                                                             -------------------------------
Cash flows from financing activities:
  Payments on long term debt and capital lease obligations................       (10,058)            (21,320)
  Net borrowings on bank line of credit...................................             -           1,000,000
  Proceeds from issuance of preferred stock...............................             -             500,000
                                                                             -------------------------------
Net cash (used in) provided by financing activities.......................       (10,058)          1,478,680
                                                                             -------------------------------
  Net decrease in cash...................................................     (2,139,115)           (221,139)
Cash, beginning of period.................................................     2,600,249             626,976
                                                                             -------------------------------
Cash, end of period.......................................................   $   461,134         $   405,837
                                                                             ===============================
Supplemental disclosures of cash flow information:
  Cash paid for interest.................................................    $   115,909         $   108,614
Supplemental disclosures of noncash financing and investing activities:
  Issuance of shares under employee purchase plan.........................        38,859               5,396
  Warrants issued as committment fee to secure credit facilities..........        73,412             132,000
  Inventory transfers to property, plant and equipment....................       110,009              67,422
</TABLE>

                See accompanying notes to financial statements.

                                       6
<PAGE>
 
                                 HELISYS, INC.

                         NOTES TO FINANCIAL STATEMENTS

(1)   BASIS OF PRESENTATION

      The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB.  Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles to be presented for complete financial statements. The accompanying
financial statements include all adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented.  Operating
results for the three month and six month periods ended January 31, 1998, are
not necessarily indicative of the results that may be expected for the year
ending July 31, 1998.  Certain balances of 1997 have been reclassified to
conform with the 1998 presentation.

      The financial statements and related disclosures have been prepared with
the presumption that users of the interim financial information have read or
have access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto included in the
Company's Annual Report on Form 10-KSB as filed with the Securities and Exchange
Commission on December 4, 1997.

      The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. For the years ended July 31, 1996 and
1997 and for the six months ended January 31, 1998 the company reported a net
loss of $886,695, $3,031,671 and $1,978,145 and negative cash flow from
operations of $2,438,241, $1,826,864 and $1,699,819, respectively.
Theseconditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plan to overcome these conditions includes
continuing cost cutting programs implemented in 1997, the proposed sale and
subsequent lease-back of its corporate facilities and raising additional debt
and equity capital to fund operations. In November 1997 the Company secured a
$500,000 infusion of cash ($200,000 of which was advanced to the Company at
October 31, 1997 in the form of a note payable) in exchange for issuing 80,000
shares of convertible preferred stock to an investment banker. Additionally, the
Company amended its existing credit facility and obtained an additional credit
facility from Comerica Bank (the "Bank") in November 1997. These facilities
provided for aggregate maximum borrowings of $1,000,000. In January 1998 the
Company was notified by the Bank that it was in default on its obligations with
the Bank due to the violation of certain financial convenants. As of January 31,
1998 the Company had aggregate borrowings of $1,000,000 outstanding under the
credit facilities. All amounts outstanding under the credit facilities are
classified as current at January 31, 1998. Both credit facilities are
collateralized by substantially all of the Company's assets except the land and
building in Torrance, California. The Bank has currently extended accommodations
to the Company and is involved in ongoing discussions to extend the facilities.
There can be no assurance that the Bank will continue to extend accommodations
or an extension of such facilities will be granted or that the Company will be
successful in returning to profitability, obtaining additional capital or that
the capital will be sufficient to fund the Company's operations until such time
as the Company is able to operate profitably. If the Company is unsuccessful in
extending its agreement with the Bank, in returning to profitable operations or
in raising additional capital, it may be unable to continue as a going concern.

In connection with the amendment to the credit facilities, the Company issued 
warrants to purchase 100,000 shares of the Company's common stock to an 
investment banker as consideration for the investment banker's guarantee in the 
amount of $500,000 of the credit facilities.  The warrants, which expire in five
years, are exercisable immediately at an exercise price of $1.75 per share.  The
warrants were recorded as additional paid in capital at their estimated fair 
market value of $132,000.  The corresponding commitment fee is included in 
prepaid expenses and other current assets on the Company's balance sheet and is 
being amortized on a straight line basis to other expense on the Company's 
statement of operations over the ten month commitment term. 

(2)  EARNINGS (LOSS) PER COMMON SHARE

     Earnings per share is computed using the weighted average number of shares
outstanding and dilutive stock equivalents from the Company's stock option plan,
calculated using the treasury stock method.  Such common stock equivalents are
excluded from the loss 

                                       7
<PAGE>
 
per share calculation as their effect is anti-dilutive for the periods ending
January 31, 1998 and 1997.

     In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings Per Share" which is required to be adopted for
interim and annual financial statements for fiscal years ending after December
13, 1997. SFAS 128 requires the Company to change the method previously used to
compute earnings per share and to restate all prior periods. Under the
requirements, primary earnings per share has been replaced by basic earnings per
share from which the dilutive effect of stock options will be excluded. There
was no impact of adopting Statement No. 128 for the periods ended January 31,
1998 and 1997 due to the anti-dilutive effect of common stock equivalents during
these periods.

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

     The Company designs, develops, manufactures and markets rapid prototyping
systems used by manufacturers, design engineering firms, universities and others
to make physical models, industrial patterns and prototypes directly from 3-D
CAD files.  The Company's systems use the Company's Laminated Object
Manufacturing ("LOM") technology to produce physical models and other three-
dimensional objects used as models, or in the preliminary testing of the form,
fit or function of a part, or the conversion of patterns into useable parts
through secondary processes, such as sand casting and rubber molding, or in
industrial pattern making and similar applications.  The Company also sells
sheet-form materials and other supplies used with its LOM systems.

     During its early years, the Company obtained government funding to conduct
research and development activities relating to its LOM technology 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.  More recently, the Company has funded its cash requirements primarily
from cash flow from operations, bank credit lines and additional equity
investments.

     The future growth of the Company is dependent upon market acceptance of its
latest-generation rapid prototyping systems, as well as continued sales of
materials and services.  During fiscal year ended July 31,1997 the Company began
to implement cost-cutting programs in an effort to return to profitability.  The
expense reduction process continued into January 1998, as the number of
employees was reduced by approximately 15 percent from the level following the
August 1997 reduction.  The Company began commercial shipment of its latest-
generation rapid prototyping system, the LOM-2030H, in October of 1996. In
addition, the Company commenced shipment of its latest generation LOM-1015 Plus,
its new plastic material handling system in March of 1997 and its new composite
material handling system in November of 1997.  There can be no assurance that
the Company will achieve market acceptance of the LOM-2030H and LOM-1015 Plus or
that sales revenue generated by the LOM-2030H or LOM 1015 Plus and existing
products and services will be commensurate with current and future levels of the
Company's operating expenses.

                                       8
<PAGE>
 
     The Company has experienced significant losses from operations in the two
most recent fiscal years and the two most recent quarters and anticipates
experiencing further losses in fiscal 1998. 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 systems. Moreover, there can be
no assurance that even if the Company generates anticipated product and
materials/services 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 $1.7 million in operations during the six months ended January 31,
1998. 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. The Company issued 80,000 shares of the Company's 
Series A Preferred Stock, par value $.001 per share to an investment banker for 
$500,000, in November 1997.  The initial $200,000 of this investment was 
recorded as a note payable at October 31, 1997, which was repaid during the 
quarter ended January 31, 1998.  Additionally, the Company amended its existing 
credit facility and obtained an additional credit facility from Comerica Bank 
(the "Bank") in November 1997.  These facilities provided for aggregate maximum 
borrowings of $1,000,000.  In January 1998 the Company was notified by the Bank 
that it was in default on its obligations with the Bank due to the violation of
certain financial covenants.  As of January 31, 1998 the Company had aggregate 
borrowings of $1,000,000 outstanding under the credit facilities.  All amounts 
outstanding under the credit facilities are classified as current at January 31,
1998.  Both credit facilities are collateralized by substantially all of the 
Company's assets except the land and building in Torrance, California.  The Bank
has currently extended accommodations to the Company and is involved in ongoing
discussions to extend the facilities. There can be no assurances that the Bank
will continue to extend accommodations or an extension of such facilities will
be granted. If the Company is unable to generate sufficient sales, 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.

RESULTS OF OPERATIONS

     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 three months ended January 31, 1998, were approximately
$2,030,000, a decrease of approximately $1,776,000, or 46.7% compared to net
sales of approximately $3,806,000 for the three months ended January 31, 1998.
This decrease was primarily a result of the decrease in the number of LOM
systems shipped to 13 during the quarter ended January 31, 1998, as compared to
21 systems for the quarter ended January 31, 1997. Sales of materials and
service for the three months ended January 31, 1998, increased by approximately
$524,000, or 82.5% over sales of materials and services in the three months
ended January 31, 1997, primarily due to the increased number of systems in the
field.

     Net sales for the six months ended January 31, 1998, were approximately 
$4,544,000, a decrease of approximately 21.0% compared to net sales of 
$5,748,000 for the six months ended January 31, 1997.  This was primarily due to
the product mix of systems shipped, as 11 1015Plus units were shipped during the
six months ended January 31, 1998 compared to 8 1015Plus units shipped during 
the six months ended January 31, 1997.  The sales decrease can be primarily 
attributed to the lower sales prices of the 1015Plus, increased sales discounts 
given to customers purchasing 2030H systems, continuing softness in the domestic
market, and decreased systems sales in Asia being realized due to the strength 
of the dollar.  Sales of material and service for the six months ended January 
31, 1998 increased by approximately $343,000 or 26.1% due primarily to the 
increased number of machines in the field and more concentrated efforts to sell 
materials and generate service related revenues.
                                       9
<PAGE>
 
<TABLE>
<CAPTION>

Product Mix Percentages:
------------------------                   
                                                              Six Months Ended
                                         ----------------------------------------------------------
                                               January 31, 1997               January 31, 1998
                                               ----------------               ----------------          
<S>                                            <C>                            <C>
LOM Systems                                         76.2%                          58.2%
Materials and Services                              23.8%                          41.8%
</TABLE> 
 

LOM System Units Sold During the
--------------------------------
Periods Installed:
------------------
<TABLE> 
<CAPTION> 
                                                  LOM 1015s                      LOM 2030s
                                                  ---------                      ---------
<S>                                               <C>                            <C>   
Three Months ended January 31, 1997                  6                              15
Three Months ended January 31, 1998                  5                               8
 
Six months ended January 31, 1997                    8                              21
Six months ended January 31, 1998                   11                              17
</TABLE>

As of January 31, 1997 and 1998, the Company had deferred revenue in the amount
of approximately $309,000 and $154,000, respectively, relating to shipment of
LOM systems subject to either agreements providing the customer the right to
exchange such systems for an upgraded version or agreements for which the fees
are not fixed or determinable.

      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 three months ended January 31, 1998, was
approximately $485,000, a decrease of approximately $1,017,000, or 67.8%,
compared to gross profit of approximately $1,502,000 for the three months ended
January 31, 1997.  Gross profit as a percentage of sales decreased from 39.5% in
the three months ended January 31, 1997 to 23.9% in the three months ended
January 31, 1998.  The main contributor was the decrease in Asian systems sales 
over the comparable quarter as a result of fewer machine shipments (21 vs 13).  
The decrease in shipments of the higher price 2030H systems to eight (8) during 
the three months ended January 31, 1998 from 15 during the three months ended 
January 31, 1997 along with increased sales discounts were mainly responsible
for the decrease in gross profit expressed as a percentage of net sales.

      Gross profit for the six months ended January 31, 1998, was approximately
$1,178,000, a decrease of approximately $829,000, or 41.3%, compared to gross
profit of approximately $2,007,000 for the six months ended January 31, 1997.
Gross profit as a percentage of sales decreased from 34.9% in the six months
ended January 31, 1997 to 25.9% in the six months ended January 31, 1998. The
gross profit decrease can be primarily attributed to the lower sales price of
the 1015Plus, sales discounts given to customers purchasing 2030H systems and
lower margins being realized from the sale of systems in Asia due to the
strength of the dollar. Additionally, during the six months ended January 31,
1998 the Company sold four LOM systems that were included in property, plant and
equipment at an aggregate net book value of approximately $72,548 to three
customers at an aggregate sales price of $344,100. The sales price and net book
value was reflected as sales and cost of sales in the statement of operations
and favorably impacted the gross margin by approximately 4.3%.

      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 three months ended 

                                       10
<PAGE>
 
January 31, 1998, was approximately $1,001,000, a decrease of approximately
$497,000, or 33.2%, compared to approximately $1,498,000 for the six months
ended January 31, 1997. Selling, general and administrative expense for the six
months ended January 31, 1998, was approximately $2,131,000, a decrease of
approximately $654,000, or 23.5%, compared to approximately $2,784,000 for the
six months ended January 31, 1997. The decrease is mainly attributable to the
cost reduction efforts the Company instituted beginning in January 1997 and the
savings is related to the reduction of employees and employee related expenses.
Staff reductions of 2, 3 and 2 persons were instituted in January 1997, August
1997 and in January 1998, respectively.

      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. To the extent that grants are awarded to
the Company, the costs incurred in performing the grant are offset by income
received from the grant. Research and development expense for the three months
ended January 31, 1998, was approximately $318,000, a decrease of approximately
$394,000, or 55.3%, compared to approximately $712,000 for the three months
ended January 31, 1997. Research and development expense for the six months
ended January 31, 1998, was approximately $891,000, a decrease of approximately
$630,000, or 41.4%, compared to approximately $1,521,000 for the six months
ended January 31, 1997. The decrease was primarily due to the reduction and
elimination of the development costs of the latest-generation 2030H, which began
shipment in October 1996, and the new 1015 Plus which was introduced in March
1997, as well as cost reductions and staff reductions which were instituted in
January 1997, August 1997 and January 1998.

      Income (Loss) from Operations.  Loss from operations for the three months 
ended January 31, 1998, was $835,000, compared to a loss of $708,000 for the 
three months ended January 31, 1997.  The loss resulted primarily from decreased
systems sales, lower margins being realized from the sale of systems due to the 
strength of the dollar and sales discounts given to customers.

      Loss from operations for the six months ended January 31, 1998, was 
$1,844,000, compared to a loss of $2,298,000 for the six months ended January 
31, 1997.  The loss resulted primarily from a shift in product mix.  However,
the operating loss was less than the comparable six months period due to the 
continuing cost reduction programs implemented by the Company since January 
1997.

                                       11
<PAGE>
 
      Other Income (Expense), net. Other expense, net for the three months ended
January 31, 1998, was approximately $114,000 as compared to approximately
$59,000 for the three months ended January 31, 1997. Other expense for the six
months ended January 31, 1998, was approximately $134,000 as compared to
approximately $91,000 for the six months ended January 31, 1997. The increase in
expense was primarily due to amortization of credit facility commitment fees
paid with warrants in November 1997, increased bank charges, reduced interest
income from marketable securities and miscellaneous tax refunds during the six
months ended January 31, 1998.

      (Provision) Benefit for Income Taxes. There was no tax provision or
benefit from income taxes recorded for the three months ended January 31, 1998,
as compared with a benefit for taxes of $17,000 for the three months ended
January 31, 1997. There was no tax provision or benefit from income taxes
recorded for the six months ended January 31, 1998, as compared with a benefit
for taxes of $545,000 for the six months ended January 31, 1997. No benefit was
provided due to the limited remaining available loss carryback and the
uncertainty of realizing loss carryforwards.

      

LIQUIDITY AND CAPITAL RESOURCES

      The Company used cash of approximately $1.7 million in operations during
the six months ended January 31, 1998, and used cash from operating activities
of approximately $2.0 million for the six months ended January 31, 1997.

      Working capital was approximately $1,319,000 at January 31, 1998, compared
to approximately $2,565,000 at July 31, 1997. This decrease was primarily due to
the decreases in accounts receivable and an increase in bank borrowings and
accounts payable.

      Cash used in investing activities, which includes purchases of property,
plant and equipment, was approximately $0 and $81,000 for the six months ended
January 31, 1998, and January 31, 1997, respectively.

      In November 1997 the Company amended its existing credit facility and
obtained an additional credit facility from Comerica Bank. 

                                       12
<PAGE>
 
     These facilities provided for aggregate maximum borrowings of $1,000,000. 
In January 1998 the Company was notified by the Bank that it was in default on 
its obligations with the Bank due to the violation of certain financial 
covenants.  As of January 31, 1998 the Company had aggregate borrowings of 
$1,000,000 outstanding under the credit facilities.  All amounts outstanding 
under the credit facilities are classified as current at January 31, 1998.  Both
credit facilities are collateralized by substantially all of the Company's 
assets except the land and building in Torrance, California.  The Bank has 
currently extended accommodations to the Company and is involved in ongoing 
discussions to extend the facilities.

     In addition, the Company issued 80,000 shares of the Company's preferred
Series A stock, par value $.001 to an investment banker for $500,000, in
November 1997.  The initial $200,000 of this investment was recorded as a note
payable at October 31, 1997.  The note was repaid during the three months ended
January 31, 1998.

     The Company believes that the net proceeds from the anticipated sale of
its corporate facilities together with funds from operations will be sufficient
to repay the amounts owing on its current credit facility as well as to meet its
capital needs for existing operations and future anticipated growth of the
Company for the next 3 to 6 months. To the extent that such amounts are
insufficient to repay such amounts or 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 such
additional financing will be available, if needed, or, if available, will be on
terms satisfactory to the Company. 

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     The Financial Accounting Standards Board (FASB) issued SFAS No. 130,
"Reporting for Comprehensive Income" and No. 131 " Disclosure about Segments of
an Enterprise and Related Information," in June 1997.  These statements are
effective for financial statements issued for periods beginning after December
15, 1997.  The Company has not yet analyzed the impact of adopting these
statements.

FORWARD-LOOKING STATEMENTS

     This 10-QSB report contains forward-looking statements that involve risk
and uncertainties. As discussed below in "Certain Factors That May Affect The
Company's Business and Future Results" and in the Company's Annual Report on
Form 10-KSB, as filed with the Securities and Exchange Commission on December 4,
1998, and other periodic filings with the Securities and Exchange Commission,
the Company's future operating results are uncertain and may be impacted by the
following factors, among others: uncertainty of market acceptance of the LOM
2030H, uncertainty of the introduction and acceptance of the latest generation
LOM 1015 Plus and plastic materials, potential development of similar products
by competitors, and potential future capital requirements and uncertainty of
additional funding.

                                       13
<PAGE>
 
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 the six months ended January 31, 1998 and anticipates
experiencing further losses in fiscal 1998.  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 $1.8 million
in operations during fiscal 1997 and $1.7 million during the six months ended
January 31, 1998.  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 addition the Company is obligated to
repay $1.0 million under its existing line of credit with Comerica Bank. If the
Company is unable to generate sufficient sales or to reduce expenses to enable 
it to repay such amount, 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 recent 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 six 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 six months and three months
ended January 31, 1998.  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

                                       14
<PAGE>
 
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.
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.

     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.

     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 

                                       15
<PAGE>
 
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 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.

     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.

                                       16
<PAGE>
 
PART II.  OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS
 
            None.

ITEM 2.     CHANGES IN SECURITIES.

            In November 1997, the Company sold 80,000 shares of Series A 
Preferred Stock to Walter Cruttenden, III ("Purchaser"), for an aggregate of 
$500,000, or $6.25 per share. Each share of Series A Preferred Stock is 
convertible into 5 shares of the Company's Common Stock, at the Purchaser's 
election. Based on representations made by the Purchaser which states that the 
Purchaser is an "accredited investor" as such term is defined in Rule 501 of
Regulation D of the 1933 Act, such sale was exempt from the registration
requirement of the 1933 Act by virtue of the provisions of Regulation D.

            In November 1997, the Company sold a warrant to the Purchaser to
purchase 100,000 shares of the Company's Common Stock at an exercise price equal
to $1.75 per share. Such warrant was issued as consideration for the Purchaser's
execution of a guaranty, pursuant to which the Purchaser guaranteed the 
Company's repayment of $500,000 to Comerica Bank under its existing line of 
credit. Based on representations made by the Purchaser which states that the 
Purchaser is an "accredited investor" as such term is defined in Rule 501 of 
Regulation D of the 1933 Act, such sale was exempt from the registration 
requirement of the 1933 Act by virtue of the provisions of Regulation D.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES.
 
            None.

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

            The Company's Annual Meeting of Stockholders was held on February 4,
1998, (the "Annual Meeting"). At the Annual Meeting the following persons were
nominated to serve as members on the Company's board of Directors: Michael
Feygin, Robert Crangle, Dave Okazaki, B. Allen Lay and Frederick Haney.

             The matters voted on at the Annual Meeting (and the voting results)
were as follows:

<TABLE>
<CAPTION>
                                           
                                                                      VOTES WITHHELD/           BROKER         
                              VOTES FOR        VOTES AGAINST            ABSTENTIONS           NON-VOTES   
                             ------------   -------------------   ------------------------   ----------- 
<S>                          <C>            <C>                   <C>                        <C>
 
1.  ELECTION OF DIRECTORS:
    ----------------------
        Michael Feygin        2,459,196                0                     0                   0
        Robert Crangle        2,459,196                0                     0                   0
        Dave Okazaki          2,459,196                0                     0                   0
        B. Allen Lay          2,459,196                0                     0                   0
        Frederick Haney       2,459,196                0                     0                   0
 
2.  AMENDMENT TO 1995
    STOCK PLAN:               2,424,046           35,000                   150                   0
    ---------- 
 
3.  AMENDMENT TO
    EMPLOYEE
    STOCK PURCHASE PLAN:      2,458,846              200                   150                   0
    --------------------  
 
4.  AMENDMENT TO
    CERTIFICATE OF
    INCORPORATION:            2,424,046           35,000                   150                   0
    --------------
</TABLE>

                                       17
<PAGE>
 
Item 5.   Other Information.

          None.

Item 6.   Exhibits and Reports on Form 8-K

          (A)  Exhibits

          See Exhibit Index on Page 20.

          (B)  Reports on Form 8-K

          On November 25, 1997, the Company filed a Current Report on Form 8-K
with the Commission, reporting that the Nasdaq Stock Market ("Nasdaq") advised
the Company on November 18, 1997 that its securities would be de-listed as a
result of the Company's failure to file with the Commission and Nasdaq its
Annual Report on Form 10-KSB for the fiscal year ended July 31, 1997.

          On November 26, 1997, the Company filed a Current Report on Form 8-K
with the Commission, reporting that the proposed Nasdaq de-listing, reported by
the Company in its Form 8-K filed November 25, 1997, was stayed until December
18, 1997, on which date a hearing was scheduled with Nasdaq.

          On November 26, 1997, the Company filed a Current Report on Form 8-K
with the Commission, reporting that the Company issued 80,000 shares of the
Company's convertible Series A Preferred Stock, $.001 par value, to an
investment banker for $500,000. The shares of preferred stock are convertible
into common stock at the rate of five shares of common stock per share of
preferred stock.

                                       18
<PAGE>
 
                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                              HELISYS, INC.



Date:  March 20, 1998         By: /s/ DAVE T. OKAZAKI
                                  ---------------------------
                                  Dave T. Okazaki
                                  Chief Financial Officer

<PAGE>
 
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>


  Exhibit                                                     Page
  Number             Description                             Number
  ------             -----------                             ------    
<S>                  <C>                                     <C>
   27                Financial Data Schedule
</TABLE>