<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 OCTOBER 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  0-27286
                                                -------

                                 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 October 31, 1998
              -----                 -------------------------------
 
    Common Stock, $.001 par value              4,042,760

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

 
Part I.  Financial Information
 
  Item 1.  Financial Statements
  
              Balance Sheets as of July 31, 1998 (audited)
              and October 31, 1998 (unaudited).........................     3
 
              Statements of Operations (unaudited) for the three 
              months ended October 31, 1997 and 1998...................     5
 
              Statements of Cash Flows (unaudited) for the three 
              months ended October 31, 1997 and 1998...................     6
 
              Notes to Financial Statements............................     7
 
  Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations.........................     9
 
Part II. Other Information
 
  Item 1.  Legal Proceedings...........................................    18
 
  Item 2.  Change in Securities........................................    18
 
  Item 3.  Defaults Upon Senior Securities.............................    18
 
  Item 4.  Submission of Matters to a Vote of Security Holders.........    19
 
  Item 5.  Other Information...........................................    19
 
  Item 6.  Exhibits and Reports on Form 8-K............................    19
 
Signatures.............................................................    20
 
Exhibit Index..........................................................    21
 
Exhibits...............................................................    22
 

                                       2
<PAGE>
 
                                 HELISYS, INC.
                                BALANCE SHEETS

<TABLE>
<CAPTION>
                                                July 31, 1998  October 31, 1998
                                                -------------  ----------------
                                                  (audited)       (unaudited)  
<S>                                             <C>            <C>             
ASSETS                                                                         
Current assets:                                                                
  Cash and cash equivalents....................    $   45,766       $  102,813 
  Accounts receivable, net of allowance for                                    
   doubtful accounts of  $140,840 as of                                        
   July 31, 1998, and $159,169 as of                                           
   October 31, 1998............................     1,414,254        1,210,655 
  Inventories..................................     1,417,379          996,686 
  Prepaid expenses.............................        62,426           61,941 
  Other current assets.........................        17,950                - 
                                                   --------------------------- 
   Total current assets........................     2,957,775        2,372,095 
                                                   ===========================
                                                                               
Property, plant and equipment:                                                 
  Office furniture and equipment...............       583,308          583,308 
  Machinery and equipment......................       669,270          669,270 
                                                   --------------------------- 
                                                    1,252,578        1,252,578 
  Less - Accumulated depreciation..............       791,412          848,505 
                                                   ---------------------------
  Property, plant and equipment, net...........       461,166          404,073 
                                                   --------------------------- 
                                                                               
Other assets...................................        27,365           27,365 
                                                   --------------------------- 
Total                                              $3,446,306       $2,803,533 
                                                   =========================== 
</TABLE>

                See accompanying notes to financial statements.

                                       3
<PAGE>
 
                                 HELISYS, INC.
                                BALANCE SHEETS
                                        
<TABLE>
<CAPTION>
                                                            July 31, 1998   October 31, 1998              
                                                            -------------   ----------------              
                                                              (audited)        (unaudited)                
                                                                                                          
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                      
<S>                                                         <C>                <C>                        
Current liabilities:                                                                                      
  Accounts payable......................................      $ 1,136,992        $   792,257              
  Accrued liabilities...................................          659,956            598,036              
  Customer deposits.....................................           43,722             89,158              
  Deferred maintenance revenues.........................          565,545            501,564              
  Line of credit........................................          369,552            350,052              
  Note payable..........................................          100,000                  -              
                                                              ------------------------------       
    Total current liabilities...........................        2,875,767          2,331,067              
                                                              ------------------------------       
                                                                                                          
Stockholders' equity:                                                                                     
  Preferred stock, $.001 par value                                                                        
    5,000,000 shares authorized, 144,000 issued                                                           
    and outstanding.....................................               80                144              
  Common stock, $.001 par value                                                                           
    Authorized 20,000,000 shares........................                                                  
    Issued and outstanding 4,042,760 shares as of                                                         
    July 31, 1998, and  October 31, 1998 respectively...            4,043              4,043              
                                                                                                          
  Additional paid-in capital............................        6,646,990          7,046,926              
  Accumulated deficit...................................       (6,080,574)        (6,578,647)             
                                                              ------------------------------
    Total stockholders' equity..........................          570,539            472,466              
                                                              ------------------------------
                                                                                                          
Total                                                         $ 3,446,306        $ 2,803,533              
                                                              ==============================
</TABLE>

                 See accompanying notes to financial statements.

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

<TABLE>
<CAPTION>
                                                              For the
                                                              -------
                                                         Three Months Ended
                                                         ------------------
                                                             October 31,
                                                             -----------
                                                         1997          1998    
                                                         ----          ----
                                                                               
<S>                                                  <C>            <C>
Net sales.........................................   $ 2,513,751    $1,996,143 
                                                                               
Cost of sales.....................................     1,820,772     1,401,670 
                                                     -------------------------
  Gross profit....................................       692,979       594,473 
                                                     -------------------------
                                                                               
Operating expenses:                                                            
  Selling, general and administrative.............     1,129,268       922,376 
  Research and development........................       572,792       169,887 
                                                     -------------------------
                                                       1,702,060     1,092,263 
                                                     -------------------------
     Loss from operations.........................    (1,009,081)     (497,790)
                                                     -------------------------
                                                                               
Other income (expense):                                                        
  Interest and other income.......................        45,120        46,117 
  Interest and other expense......................       (65,351)      (46,401) 
                                                     -------------------------
                                                                               
     Net loss.....................................   $(1,029,312)   $ (498,074) 
                                                     =========================
                                                                               
     Net loss per share...........................         (0.26)        (0.12)
                                                                               
     Weighted average number of common shares
      outstanding basic and diluted...............     4,025,251     4,047,746 
                                                     =========================
</TABLE>

                See accompanying notes to financial statements.

                                       5
<PAGE>
 
                                 HELISYS, INC.
                            STATEMENTS OF CASH FLOWS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                              For the        
                                                              -------        
                                                           Three Months Ended  
                                                           ------------------  
                                                              October 31,      
                                                              -----------
                                                          1997          1998   
                                                          ----          ----
<S>                                                   <C>             <C>      
Cash flows from operating activities:               
Net loss............................................  $(1,029,312)    $(498,074)
Adjustments to reconcile net loss to                                
 net cash used in operating activities:                             
  Depreciation......................................      110,585        57,092
  Amortization of deferred compensation.............        2,524             -
  Changes in operating assets and liabilities:                      
   Accounts receivable..............................     (394,192)      203,599
   Inventories......................................      (24,226)      420,694
   Income taxes receivable..........................        9,961             -
   Prepaid expenses.................................      (12,806)          485
   Other current assets.............................            -        17,950
   Other assets.....................................          382             -
   Accounts payable.................................      443,737      (344,735)
   Accrued liabilities..............................     (177,500)      (61,920)
   Customer deposits................................       (4,999)       45,437
   Deferred maintenance revenues....................     (103,099)      (63,981)
   Deferred gross profits...........................      (15,616)            -
                                                      -------------------------
    Net cash used in operating activities...........   (1,194,561)     (223,453)
                                                      -------------------------
                                                                    
Cash flows from investing activities:                               
   Purchases of property, plant and equipment.......            -             -
                                                       ------------------------
    Net cash (used in) investing activities.........            -             -
                                                                    
Cash flows from financing activities:                               
   Payments on long term debt and capital lease 
    obligations.....................................      (11,222)            -
   Proceeds from issuance of preferred stock........                    400,000
   Net borrowings on bank credit line...............      500,000       (19,500)
   Proceeds from issuance of note payable...........      200,000      (100,000)
                                                       ------------------------
                                                                    
    Net cash provided by (used in) financing      
     activities.....................................      688,778       280,500
                                                       ------------------------
Net increase (decrease) in cash.....................     (505,783)       57,047
Cash, beginning of period...........................      626,976        45,766
                                                       ------------------------
Cash and cash equivalents, end of period............   $  121,193     $ 102,813
                                                       ========================
Supplemental disclosures of cash flow information:                  
   Cash paid during the period for interest.........   $   46,058     $  15,689
</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.  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 period ending October 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending July 31, 1999.  Certain
reclassifications have been made to the 1998 financial statements to conform
with the 1999 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 November 19, 1998.

     The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. For the years ended July 31, 1996,
1997, 1998 and for the three months ended October 31, 1998 the company reported
a net loss of $886,695, $3,031,671, $3,635,132 and $498,074 and negative cash
flow from operations of $2,438,241, $1,826,864, $1,926,875 and $223,453,
respectively. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plan to overcome these
conditions include continuing cost cutting programs implemented in 1997, the
sale and subsequent lease-back of it corporate facilities which was consummated
in July 1998 and raising additional debt and equity capital to fund operations.

     In November 1997, to cure the covenant defaults with its Bank, the Company
amended its existing Primary Facility (from $1,500,000 to $500,000) and obtained
an additional line of credit facility for $500,000 (the "Secondary Facility")
with the Bank.  These facilities provided for maximum aggregate borrowings of
$1,000,000 and were guaranteed, in part by an investment banker.  The Primary
Facility was repaid in July 1998 upon the sale of the Company's building.

     In connection with the amendment to the credit facilities, the investment
banker agreed to guarantee up to $500,000 of the line of credit facility with
the bank in exchange for a five year warrant to purchase 100,000 shares of the
Company's common stock at an exercise price of $1.75 per share (which exercise
price is subject to adjustment), plus $10,000 in cash.  Additional consideration
of 10,000 five year warrants to purchase the Company's common stock at $1.75 per
share will be granted to the investment banker for each $100,000 that the

                                       7
<PAGE>
 
Company borrows under the secondary line of credit facility up to the $500,000
guaranteed.  As of October 31, 1998, the Company is obligated to issue 50,000
warrants in conjunction with the borrowing of $500,000 against the line of
credit facility.

     At October 31, 1998 the Company's borrowings under the Secondary Facility
with the Bank, bearing interest at prime plus one-half percent amounted to
$350,052. This revolving credit facility is subject to a forbearance agreement
with the Bank that expires on January 15, 1999. Monthly payments of $6,500, plus
interest, were commenced effective August 1, 1998 against the balance
outstanding under the Secondary Facility (Primary Facility was repaid in July
1998 upon the sale of the Company's building). All amounts outstanding under the
credit facilities are classified as current at October 31, 1998. The Bank has
currently entered into a forbearance agreement with the Company that extends the
Secondary Facility through January 15, 1999.

     The Secondary Facility is collateralized by substantially all assets of the
Company, except for the land and the building (sold July 1998).  Under the
Facility the Company is subject to certain financial covenants.  The major
financial covenants  include 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 October 31,
1998, and accordingly, is subject to a forbearance agreement with its bank for
periods up to and including January 15, 1999. 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.

 
(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 per share calculation as their effect is anti-dilutive
for the periods ending October 31, 1998 and 1997.

     In February 1997, the Financial Accounting Standards Board issue Statement
No. 128, "Earnings Per Share," which is required to be adopted for interim and
annual financial statements for fiscal years ending after December 31, 1997.
SFAS requires the Company to change the method currently used to compute
earnings per share and to restate all prior periods. Under the requirements,
primary earnings per share was replaced by basic earnings per share from which
the dilutive effect of stock options is excluded. There was no impact of

                                       8
<PAGE>
 
adopting Statement No. 128 for the periods ended October 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, molds, industrial patterns and prototypes directly from
3-D CAD files.  The Company's systems use the Company's 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 usable 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 Laminated Object
Manufacturing ("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.
Further staff reductions took place in August 1997 as the number of employees
was reduced by approximately 10 percent and March 1998 as the number of
employees was reduced again by approximately 24%.  The Company began commercial
shipment of its latest-generation rapid prototyping systems, the LOM-2030H, in
October of 1996.  In addition, the Company commenced shipment of its latest
generation LOM-1015 Plus and new plastic material in March of 1997 and new
composite material in November of 1997.  There can be no assurance that the
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.

  The Company has experienced significant losses from operations in the three
most recent fiscal years and anticipates experiencing further losses in fiscal
1999.  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 

                                       9
<PAGE>
 
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 $223,000 in operations during the three months ended October 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 November 1997 the Company amended its existing credit facility and obtained
an additional credit facility from Comerica Bank.  These facilities provide for
aggregate maximum borrowings of $1,000,000, but the Company is subject to a
forbearance agreement that expires on January 15, 1999 as a result of violating
certain financial covenants that support the credit lines.  In addition, the
Company sold 80,000 shares of the Company's Convertible Series A preferred
stock, $.001 par value ("Preferred Stock"), to an investment banker for $500,000
in November 1997 and 64,000 shares of the Company's Preferred Stock to investors
for $400,000 in September 1998.  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.

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 October 31, 1998 were approximately $1,996,000, a decrease of
approximately $518,000, or 20.6%, compared to net sales of approximately
$2,514,000 for the three months ended October 31, 1997.  This decrease was
primarily a result of the decrease in the number of LOM systems shipped to 9
during the quarter ended October 31, 1998, as compared to 15 systems for the
quarter ended October 30, 1997.  Sales of materials and service for the three
months ended October 31, 1998 increased by approximately $47,000, or 5.5% over
sales of materials and services in the three months ended October 31, 1997,
primarily due to the increased number of systems that have been sold.

<TABLE>
<CAPTION>
Product Mix Percentages:
------------------------
                                       Three months Ended
                              ------------------------------------
                              October 31, 1997    October 31, 1998
                              ----------------    ----------------
<S>                           <C>                 <C>
LOM Systems                         65.8%               54.5%
Materials and Service               34.2%               45.5%
</TABLE>

                                       10
<PAGE>
 
LOM System Units Sold During the
--------------------------------
Periods Indicated:
------------------
                                             LOM 1015s    LOM 2030s
                                             ---------    ---------

Three Months ended October 31, 1997              6            9
Three Months ended October 31, 1998              4            5


As of October 31, 1998 and 1997, the Company had deferred revenue in the amount
of approximately $-0- and $248,244, respectively, relating to shipment of LOM
systems subject to agreements providing the customer the right to exchange such
systems for an upgraded version.

  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 October 31, 1998 was
approximately $594,000, a decrease of approximately $99,000, or 14.2%, compared
to gross profit of approximately $693,000 for the three months ended October 31,
1997.  Gross profit as a percentage of sales increased to 29.8% in the three
months ended October 31, 1998 as compared to 27.6% in the three months ended
October 31, 1997.  Increased margins in the sale of materials and services were
the main contributors to the increase.  However, gross margins continue to be
low for LOM systems as a result of price concessions due to the strength of the
dollar in the overseas market and the Asian financial crisis.

  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 October 31, 1998 was
approximately $922,000, a decrease of approximately $207,000, or 18.3%, compared
to approximately $1,129,000 for the three months ended October 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 approximately
10% were instituted in January 1997 and August 1997 along with another reduction
of approximately 24% in March 1998.

  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 October 31, 1998 was approximately $170,000, a decrease of approximately
$403,000, or 70.3%, compared to approximately $573,000 for the three months
ended October 31, 1997.  The decrease was primarily due to the reduction and
elimination of a number of development projects.  These engineering development
cost reductions along with 

                                       11
<PAGE>
 
the staff reductions of approximately 10% were instituted in August 1997 along
with a March 1998 reduction of approximately 24% were mainly responsible for the
reduction in expenses.

  Loss from Operations.  Loss from operations for the three months ended October
31, 1998 was $497,790, compared to a loss of $1,009,081 for the three months
ended October 31, 1997.  The loss resulted primarily from sluggish sales as a
result of the effects of the summer holidays that impacted foreign revenues,
continuing softness in the domestic market, the lower margins being realized
from the sale of systems due to the strength of the dollar and the Asian
financial crisis.  However, the loss was less than the comparable quarter during
the prior year primarily due to cost containment actions that have been
implemented.

  Other Income (Expense), Net.  Other expense for the three months ended October
31, 1998 was approximately $0 as compared to approximately $20,000 for the three
months ended October 31, 1997.  The decrease in expense was primarily due to
$35,000 in miscellaneous income received from a strategic partner for technical
support and information that was provided by the Company.

  Benefit for Income Tax.  There was no tax provision or benefit from income
taxes recorded for the three months ended October 31, 1998, or for the three
months ended October 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 $223,000 in operations during the three
months ended October 31, 1998, and used cash from operating activities of
approximately $1,195,000 for the three months ended October 31, 1997.  These
operating cash flow changes are consistent with the operating losses incurred by
the Company, as well as increases in sales along with decreases in accounts
receivable, inventories and accounts payable.

  Working capital was approximately $82,000 at July 31, 1998, compared to
approximately $41,000 at October 31, 1998.  This decrease was primarily due to
the increased net loss experienced during the three months ended October 31,
1998.

  Cash used in investing activities, which includes purchases of property, plant
and equipment, was $0 and $0 for the three months ended October 31, 1998, and
October 31, 1997, respectively.  The Company anticipates that its capital
expenditures for the fiscal year ending July 31, 1999 will be minimal, if
anything at all.

  In November 1997, the Company sold 80,000 shares of the Company's Preferred
Stock to an investment banker for $500,000.  The shares of Preferred Stock were
originally convertible into common stock at the rate of 5 shares of common stock
per share of Preferred Stock, and are now convertible (along with all of the
Company's Preferred Stock) at the rate of 25 shares of common stock per share of
Preferred Stock.

                                       12
<PAGE>
 
  Also, in November 1997 the Company amended its existing credit facility (the
"Primary Facility") and obtained an additional credit facility (the "Secondary
Facility") from Comerica Bank (the "Bank").  These facilities provide for
aggregate maximum borrowings of $1,000,000.  The Primary Facility was extended
to June 1998, and provided for maximum borrowings of $500,000, subject to
borrowing base limitations for eligible accounts receivable.  The Secondary
Facility, which expired in August 1998, provided for maximum borrowings of
$500,000.  Both credit facilities are collateralized by substantially all the
company assets except the land and building. As of October 31, 1998 the Company
had approximately $350,000 in outstanding borrowings under the Secondary
Facility.  The Primary Facility was repaid in July 1998 upon the sale of the
Company's building.

  The amount outstanding under the credit facility is classified as current at
October 31, 1998 due to violation of certain financial covenants.  The Bank has
currently entered into a forbearance agreement with the Company that extends the
Secondary Facility through January 15, 1999.  There can be no assurance that the
Bank will continue to extend such accommodations.  If the Company is unable to
generate sufficient cash flow from operations, 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.

  In September 1998, the Company sold 64,000 shares of the Company's Preferred
Stock to investors for $400,000.  Purchasers of the Preferred Stock in the
transaction also received warrants to purchase 800,000 shares of the Company's
Common Stock at a purchase price of $0.35 per share.  Pursuant to this
transaction, each share of the Preferred Stock issued (including the 80,000
shares of Series A Preferred Stock issued to the investment banker in November
1997) is convertible into 25 shares of the Company's Common Stock. Each holder
of Preferred Stock is entitled to a number of votes equal to five times the
number of shares of Common Stock into which each share of the Preferred Stock is
convertible.  The number of votes that the holders of the Preferred Stock are
entitled decreases as the share price of the Company's Common Stock increases.
The documents evidencing this transaction, including the Certificate which
details the voting rights of the holders of the Preferred Stock, are attached to
the Schedule 13D filed by Telantis Venture Partners V, Inc. and Robert F.
Meyerson on September 24, 1998.  This transaction was disclosed on the Company's
Current Report on Form 8-K filed October 9, 1998, which is incorporated by
reference herein.

  There can be no assurance that the Company will be successful in returning to
profitability or obtaining additional capital or that capital raised will be
sufficient to fund the Company's operations until such time that the Company is
able to operate profitably.  If the Company is unsuccessful in returning to
profitable operations or in raising additional capital it may be unable to
continue as a going concern.

  The Company believes that the funds from operations and equity investments
will be sufficient 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 

                                       13
<PAGE>
 
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.
Significant additional dilution may be incurred by investors in this offering as
a result of additional financing.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

  In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share."  The
statement was effective for interim periods and fiscal years ending after
December 15, 1997.  The implementation of this statement by the Company during
the period ended October 31, 1998 did not have a material effect on the
Company's financial statements.

  In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards  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 November
19, 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 Company's products and services, including the LOM 2030H and
LOM 1015Plus and uncertainty of the introduction and acceptance of the Company's
plastic and composite materials, potential development of similar products by
competitors, and potential future capital requirements and uncertainty of
additional funding.

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 three months ended October 31, 1998 and anticipates experiencing
further losses in fiscal 1999. 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, materials and service.  There can be
no assurance that, even if the Company generates anticipated product and service
sales, 

                                       14
<PAGE>
 
the Company will not continue to incur losses from operations. The likelihood of
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.

     The Company used cash of approximately $1,926,000 in operations in fiscal
1998 and $223,000 during the three months ended October 31, 1998. While the
Company expects sales of its existing products and 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 pay $350,052 under its existing
line of credit with Comerica Bank. If the Company is unable to generate
sufficient sales or to reduces 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 financing on terms acceptable to the Company.

     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.  Due to the sales pricing of the LOM systems and the long sales cycle
for the products, quarterly results may be adversely affected if orders are not
received and shipped prior to the end of the forecasted 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 a given
quarter.

     Emerging Nature of the Rapid Prototyping Industry; Reliance on a 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 of increased automation of product
design and manufacturing processes, including the expanded use of 3-D CAD.
There can be no assurance that the rapid prototyping industry otherwise will
continue to develop and 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
acceptance or that the introduction of 

                                       15
<PAGE>
 
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 Changes. 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 customers experienced
past performance problems with the Company's first generation LOM systems, which
from time to time did not perform 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.
However, 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 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 of LOM 2030 systems, which the Company
believes adequately addresses certain performance problems associated with the
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 are dependent
on the market acceptance of its latest-generation rapid prototyping systems.

     Dependency on Proprietary Technology. The Company's ability to compete in
the market for rapid prototyping products is dependent significantly on its
ability to protects its proprietary technology. The Company seeks to protect its
proprietary 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 the prospects of the Company. An
invalidation of the patent claims relating to the Company's LOM process would
not, however, affect the other claims on the United States patents relating to
the LOM systems. The laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do 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's trade secrets or know-how.

                                       16
<PAGE>
 
YEAR 2000 ISSUE
 
     The Company is currently in the process of addressing a potential problem
that is facing all users of automated information systems. This problem is
commonly known as the "Year 2000" or "Y2K" problem and results from the use of
two digits rather than four digits to identify a year in the date field in many
computer software and hardware systems. As a result, certain date-sensitive
software does not recognize "00" as 2000, and may produce errors in information
or systems failures. The Company relies on its internal computer systems in
financial systems (such as general ledger, accounts payable, accounts
receivable, inventory and order management), customer services, infrastructure
and network and telecommunication equipment. The Company is currently in the
process of conducting a comprehensive review of its internal systems and, at the
present time, does not believe that the Year 2000 problem will pose significant
operational problems for the Company. The Company currently estimates that its
costs associated with Year 2000 compliance, including any costs associated with
the consequences of incomplete or untimely resolution of Year 2000 compliance
issues, are not material to the Company's business, its financial condition or
results of operations. However, the Company cannot be sure that it has fully
identified the impact of the Year 2000 problem on the Company's internal systems
and has not concluded that it can resolve all of the issues that may arise in
connection with the Year 2000 problem without disruption of its business or
without incurring significant expense. At a minimum, the Company estimates that
the software necessary to resolve certain Year 2000 problems associated with the
Company's internal systems will cost at least $80,000 to $100,000.

     Even if the Company's internal systems are not materially affected by the
Year 2000 problem, the Company could be affected through disruption in the
operation of the enterprises with which the Company interacts. The Company is
therefore in the process of assessing possible effects on the Company's
operations with respect to the Year 2000 readiness of customers, suppliers,
creditors, financial organizations and domestic and international governments on
which the Company directly and indirectly relies. The Company's reliance on the
enterprises, and therefore, on the proper functioning of their information and
computer systems, means that failure by these enterprises to address their
potential Year 2000 problems could have a material adverse impact on the
Company's operations. The potential impact and related costs of such failures
are not known at this time.

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings.

          None.

Item 2.   Changes in Securities.

     On September 14, 1998, the Company sold 64,000 shares of the Company's
Preferred Stock to investors for $400,000.  The investors in the transaction
were Telantis Venture 

                                       17
<PAGE>
 
Partners V, Inc. and Visalia Trust (collectively, the "Purchasers"). In addition
to receiving the shares of Preferred Stock in the transaction, the Purchasers
received warrants to purchase an aggregate of 800,000 shares of the Company's
Common Stock at a purchase price of $0.35 per share (the "Warrants").

     The sale of the Preferred Stock and the Warranty was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended
("Securities Act") on the basis that such transaction met the requirements of
Rule 506 of Regulation D of the Securities Act.

     Each share of the Preferred Stock (including the 80,000 shares of Preferred
Stock issued to the investment banker in November 1997) is convertible into 25
shares of the Company's Common Stock, and each holder of Preferred Stock is
entitled to a number of votes equal to five times the number of shares of Common
Stock into which each share of the Preferred Stock is convertible.  The number
of votes that the holders of the Preferred Stock are entitled decreases as the
share price of the Company's Common Stock increases.

     The documents evidencing this transaction, including the Certificate which
details the voting rights of the holders of the Preferred Stock, are attached to
the Schedule 13D filed by Telantis and Robert F. Meyerson on September 24,1998.
The transaction was also disclosed on the Company's Current Report on Form 8-K
filed October 9, 1998, which is incorporated by reference herein and noted below
in Item 6.

Item 3.   Defaults Upon Senior Securities.

          None.

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

          None.

Item 5.   Other Information.

          None.

Item 6.   Exhibits and Reports on Form 8-K

          (a) Exhibits

          See Exhibit Index on Page 16.

          (b) Reports on Form 8-K

The Company filed three reports on Form 8-K for the quarter ended October 31,
1998:

                                       18
<PAGE>
 
     1. Resignation of Deloitte & Touche LLP as auditors of the Company. Filed
September 23, 1998.  No financials were filed with this 8-K.

     2. Sale of Preferred Stock and Warrants/Resignation of Directors. Filed
October 7, 1998.  No financials were filed with this 8-K.

     3. Engagement of Stonefield Josephson, Inc. as auditors of the Company.
Filed October 16, 1998. No financials were filed with this 8-K.
 

                                       19
<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: December 21, 1998                  By: /s/ DAVE T. OKAZAKI
                                             ------------------------
                                             Dave T. Okazaki
                                             Chief Financial Officer

                                       20
<PAGE>
 
                                  Exhibit Index


Exhibit                                                                Page
Number        Description                                             Number
-------       -----------                                             ------

27.1          Financial Data Schedule                                   22

                                       21