SECURITIES AND EXCHANGE COMMISSION
                              Washington, D.C. 20549
                                ------------------

                                    FORM 10-Q

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

                 For the quarterly period ended June 30, 1999

                                    OR

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

                     Commission file number 000-27670

                       ENGINEERING ANIMATION, INC.
          [Exact name of registrant as specified in its charter]

                   Delaware                            42-1323712
         (State or other jurisdiction of            (I.R.S. Employer
          incorporation or organization)          Identification Number)

                                 2321 North Loop Drive
                                     Ames, Iowa 50010
                           (Address of principal executive offices)
                                 ----------------------

                                     (515) 296-9908
                     (Registrant's telephone number, including area code)
                                 ----------------------

         Indicate  by check ( X )  whether  the  registrant  (1) has  filed  all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                           Yes   X                    No
                               -----                     ------

         As of August 6, 1999, there were 11,951,367  shares of the Registrant's
$0.01 par value common stock outstanding.


                                       1
<PAGE>







                           ENGINEERING ANIMATION, INC.

                                    FORM 10-Q

                                      INDEX


PART I.        FINANCIAL INFORMATION                                     PAGE

Item 1.        Financial Statements

               Condensed Consolidated Balance Sheets
               At June 30, 1999 and December 31, 1998                         3

               Condensed Consolidated Statements of Operations
               For the three and six months ended June 30, 1999 and 1998      4

               Condensed Consolidated Statements of Cash Flows
               For the six months ended June 30, 1999 and 1998                5

               Notes to Condensed Consolidated Financial Statements           6

Item 2.        Management's Discussion and Analysis of Financial
               Condition and Results of Operations                           10

Item 3.        Quantitative and Qualitative Disclosures about Market Risk    19


PART II.       OTHER INFORMATION

Item 1.        Legal Proceedings                                             20

Item 4.        Submission of Matters to a Vote of Security Holders           20

Item 6.        Exhibits and Reports on Form 8-K                              21


SIGNATURES                                                                   21


                                       2
<PAGE>

<TABLE>

PART I.    FINANCIAL INFORMATION
Item 1.       Financial Statements

                                           ENGINEERING ANIMATION, INC.
                                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                            (in thousands; unaudited)
<CAPTION>

                                                                         ---------------------
                                                                         June 30,  December 31,
                                                                           1999        1998
                                                                         ---------   ---------
Assets
Current assets:
<S>                                                                      <C>        <C>
    Cash and cash equivalents                                            $ 25,544   $ 23,623
    Short-term investments                                                  6,462     11,873
    Accounts receivable:
       Billed                                                              28,498     26,684
       Unbilled                                                             6,125      3,595
    Prepaid expenses and other assets                                       4,753      3,879
                                                                         --------   --------
       Total current assets                                                71,382     69,654

Property and equipment, net                                                20,510     15,848

Other assets:
    Note receivable                                                         1,408      1,408
    Software development costs, net                                         2,224      1,679
    Deferred income taxes                                                   2,010      2,019
    Goodwill and developed technology, net                                  9,672     10,973
    Other                                                                   1,266      1,423
    Net assets of discontinued operations                                    --       12,586
                                                                         --------   --------
       Total assets                                                      $108,472   $115,590
                                                                         ========   ========

Liabilities and stockholders' equity
Current liabilities:
    Accounts payable                                                     $  5,407   $  3,340
    Accrued compensation and other accrued expenses                         8,485     10,135
    Deferred revenue                                                        4,613      3,590
    Bank debt, current portion of long-term debt and lease obligations      4,739      3,327
                                                                         --------   --------
       Total current liabilities                                           23,244     20,392

Long-term debt and lease obligations due after one year                     1,283      1,480
Other long-term liabilities                                                   170        179
Net liabilities of discontinued operations                                     30       --
Stockholders' equity                                                       83,745     93,539
                                                                         --------   --------

       Total liabilities and stockholders' equity                        $108,472   $115,590
                                                                         ========   ========
</TABLE>


See accompanying notes.

                                       3
<PAGE>

<TABLE>


                                         ENGINEERING ANIMATION, INC.
                               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                               (in thousands, except per share data; unaudited)

<CAPTION>

                                                      --------------------   --------------------
                                                           Three months          Six months
                                                          ended June 30,        ended June 30,
                                                        1999         1998      1999        1998
                                                      -------     --------   --------    --------
<S>                                                   <C>         <C>        <C>         <C>
Revenues                                              $ 27,227    $ 20,339   $ 47,575    $ 38,187
Cost of revenues                                         7,810       6,029     14,880      10,864
                                                      --------    --------   --------    --------
Gross profit                                            19,417      14,310     32,695      27,323

Operating expenses:
   Sales and marketing                                   7,761       4,763     14,427       9,217
   General and administrative                            3,626       2,574      6,369       5,244
   Research and development                              4,731       3,690      9,447       7,007
   Acquisition costs and non-recurring expenses            650       2,181      1,301       6,705
                                                      --------    --------   --------    --------

Total operating expenses                                16,768      13,208     31,544      28,173
                                                      --------    --------   --------    --------

Income (loss) from operations                            2,649       1,102      1,151        (850)

Other income, net                                          280         512        624       1,031
                                                      --------    --------   --------    --------


Income from continuing operations before income tax      2,929       1,614      1,775         181

Income tax expense                                       1,360       1,449      1,169       1,025
                                                      --------    --------   --------    --------

Income (loss) from continuing operations                 1,569         165        606        (844)

Discontinued operations:
   Income (loss) from discontinued operations
      net of tax (see note 2)                           (2,390)        412     (1,927)        774
   Provision for exiting discontinued operations
       including operating losses during phase out
       period, net of tax (see note 2)                  (8,930)       --       (8,930)       --
                                                      --------    --------   --------    --------
Net income (loss)                                     $ (9,751)   $    577   $(10,251)   $    (70)
                                                      ========    ========   ========    ========

Earnings (loss) per share:
   Basic
      Continuing operations                           $   0.13    $   0.01   $   0.05    $  (0.07)
      Discontinued operations                            (0.95)       0.04      (0.92)       0.06
                                                      --------    --------   --------    --------
          Total                                       $  (0.82)   $   0.05   $  (0.87)   $  (0.01)
                                                      ========    ========   ========    ========

   Diluted
      Continuing operations                           $   0.12    $   0.01   $   0.05    $  (0.07)
      Discontinued operations                            (0.90)       0.04      (0.85)       0.06
                                                      --------    --------   --------    --------
          Total                                       $  (0.78)   $   0.05   $  (0.80)   $  (0.01)
                                                      ========    ========   ========    ========

   Weighted average shares outstanding                  11,846      11,540     11,819      11,356
                                                      ========    ========   ========    ========

   Weighted average shares outstanding
      and assumed conversion                            12,566      12,786     12,743      11,356
                                                      ========    ========   ========    ========

</TABLE>

See accompanying notes.

                                       4
<PAGE>

<TABLE>
                                          ENGINEERING ANIMATION, INC.
                                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           (in thousands; unaudited)
<CAPTION>
                                                                                ---------------------
                                                                                     Six months
                                                                                   ended June 30,
Operating activities                                                              1999        1998
                                                                                --------    --------
<S>                                                                             <C>         <C>
Net loss                                                                        $(10,251)   $    (70)
Adjustments to reconcile net loss to net cash provided by (used in)
   operating activities
     Goodwill and developed technology amortization expense                        1,301         538
     Depreciation and other amortization expense                                   3,136       1,921
     Deferred income taxes                                                            (5)       (516)
     Write-off of purchased in-process research
      and development costs                                                         --         1,918
     Provision for exiting discontinued operations including operating losses
      during phase out period                                                     13,750        --
     Changes in operating assets and liabilities
      Billed accounts receivable                                                  (1,902)     (3,368)
      Unbilled accounts receivable                                                 1,010      (5,065)
      Prepaid expenses                                                              (901)       (292)
      Accounts payable                                                             2,442         958
      Accrued expenses                                                            (1,062)     (1,587)
      Income taxes                                                                (5,875)      1,428
      Deferred revenue                                                             1,189        (766)
                                                                                --------    --------
Net cash provided by (used in) operating activities                                2,832      (4,901)
                                                                                --------    --------

Investing activities
Purchases of property and equipment                                               (6,946)     (4,646)
Change in other assets                                                                (4)     (1,181)
Capitalization of software development costs                                        (993)       (259)
Maturities of marketable securities                                               15,000      32,445
Purchases of marketable securities                                                (9,589)    (34,318)
Sense8 cash purchased                                                               --            79
                                                                                --------    --------
Net cash used in investing activities                                             (2,532)     (7,880)
                                                                                --------    --------

Financing activities
Net change in restricted cash                                                         (1)         71
Net change in short-term borrowing                                                 1,500       1,390
Proceeds from long-term debt
   and capital lease obligations                                                    --           380
Payments on long-term debt and capital lease
   obligations                                                                      (283)       (967)
Net proceeds from exercise of options and warrants                                   781       1,609
Net proceeds from issuance of  stock                                                --         1,598
                                                                                --------    --------
Net cash provided by financing activities                                          1,997       4,081
                                                                                --------    --------

Net increase (decrease) in cash and cash equivalents                               2,297      (8,700)
                                                                                --------    --------
Effect of exchange rates                                                            (376)        (23)
Cash and cash equivalents at beginning of period                                  23,623      25,881
                                                                                --------    --------
Cash and cash equivalents at end of period                                      $ 25,544    $ 17,158
                                                                                ========    ========

</TABLE>

See accompanying notes.


                                       5
<PAGE>



Engineering Animation, Inc.
Notes To Condensed Consolidated Financial Statements (Unaudited)

1.       BASIS OF PRESENTATION

         The  consolidated   financial   statements   include  the  accounts  of
Engineering  Animation,  Inc. and the Company's  subsidiaries.  All  significant
intercompany  accounts and transactions  have been eliminated in  consolidation.
The  unaudited  condensed  consolidated  financial  statements  included  herein
reflect all adjustments,  consisting of normal  recurring  accruals which in the
opinion of  management  are  necessary to fairly state the  Company's  financial
position,  results of operations and cash flows for the periods presented. These
financial  statements  should be read in conjunction with the Company's  audited
financial  statements  as included in the  Company's  1998 Annual Report on Form
10-K as filed  with the  Securities  and  Exchange  Commission.  The  results of
operations  for the six month  period  ended June 30,  1999 are not  necessarily
indicative of the results that may be expected for any subsequent quarter or for
the fiscal year ending  December 31, 1999.  The balance sheet as of December 31,
1998 was derived  from audited  financial  statements  but has been  restated to
reflect  net  assets  of  discontinued  operations  as a  separate  line item in
accordance with Accounting Principles Board Opinion 30. The balance sheets as of
June 30, 1999 and  December  31, 1998 do not  include  all the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements.

         The Company has restated the financial  statements to give  retroactive
effect to the 1998  acquisitions of Variation  Systems  Analysis,  Inc. ("VSA");
Transom  Technologies,  Inc. ("Transom");  and EAI-DELTA GmbH ("DELTA"),  all of
which were accounted for as pooling of interests.  The financial statements also
include the operations of Sense8 Corporation ("Sense8") since June 17, 1998, the
date of its acquisition by the Company. The Sense8 transaction was accounted for
as a purchase.

         Certain  prior year  financial  information  has been  reclassified  to
conform to the 1999 financial statement presentation.

2.       DISCONTINUED OPERATIONS

         EAI announced on July 6, 1999 that it would exit its Interactive  Games
and Science and  Technology  businesses by the end of the first quarter of 2000.
The Company has  established  a provision  for  discontinued  operations  in the
second quarter of 1999 to cover the estimated costs of exiting these  businesses
including operating losses during the phase out period.


                                       6
<PAGE>



         The following table summarizes  revenues from  discontinued  operations
and net income (loss):

<TABLE>
<CAPTION>
                                                                         --------------------   --------------------
                                                                            Three months              Six months
                                                                           ended June 30,            ended June 30,
(in thousands)                                                             1999        1998       1999        1998
                                                                         --------    --------   --------    --------

<S>                                                                      <C>         <C>        <C>         <C>
Revenues from discontinued operations                                    $  2,529    $  5,013   $  6,981    $  9,310
                                                                         ========    ========   ========    ========


Net income (loss) from continuing operations                             $  1,569    $    165   $    606    $   (844)

Discontinued operations:
      Income (loss) from discontinued operations  before tax               (3,855)        664     (3,108)      1,249
      Income tax expense (benefit) of  income (loss)
       from discontinued operations                                        (1,465)        252     (1,181)        475
                                                                         --------    --------   --------    --------
          Net income (loss) from discontinued operations                   (2,390)        412     (1,927)        774
                                                                         --------    --------   --------    --------

      Provision for exiting discontinued operations
         including operating losses during phase out period before tax    (13,750)       --      (13,750)       --
      Income tax  benefit of  provision for exiting
       discontinued operations including  operating
        losses during phase out period                                     (4,820)       --       (4,820)       --
                                                                         --------    --------   --------    --------
          Provision for exiting discontinued operations, net of tax        (8,930)       --       (8,930)       --
                                                                         --------    --------   --------    --------
Net income (loss)                                                        $ (9,751)   $    577   $(10,251)   $    (70)
                                                                         ========    ========   ========    ========
</TABLE>


         During the second quarter of 1999, the Company recorded a provision for
exiting discontinued  operations including operating losses during the phase out
period,  net of tax,  of $8.9  million.  The  provision  includes  accruals  for
severance payments,  asset write downs and estimated operating losses during the
phase out period.


                                       7
<PAGE>


3.       EARNINGS PER SHARE

     The following  table sets forth the computation of earnings per share.
Basic earnings per share are computed using the weighted  average number of
common shares  outstanding.  Diluted  earnings per share are computed using
the  combination  of dilutive  common  share  equivalents  and the weighted
average number of common shares outstanding.

<TABLE>
<CAPTION>
                                                     ----------------------    ----------------------
(in thousands, except per share data)                       Three months             Six months
                                                           ended June 30,          ended June 30,
                                                       1999           1998       1999          1998
                                                     --------      --------    --------      --------

Numerator:

<S>                                                 <C>           <C>          <C>           <C>
     Net income (loss) from continuing operations   $    1,569    $      165   $      606    $     (844)
     Income (loss) from discontinued operations        (11,320)          412      (10,857)          774
                                                    ----------    ----------   ----------    ----------
     Net income (loss)                              $   (9,751)   $      577   $  (10,251)   $      (70)
                                                    ==========    ==========   ==========    ==========

Denominator

     Denominator for basic earnings per share-
       weighted average shares                          11,846        11,540       11,819        11,356

     Stock options and warrants                            720         1,246          924          --
                                                    ----------    ----------   ----------    ----------
     Denominator for diluted earnings per share-
       adjusted weighted average shares and
       assumed conversion                               12,566        12,786       12,743        11,356
                                                    ==========    ==========   ==========    ==========

     Basic earnings (loss) per share
        Continued operations                        $     0.13    $     0.01   $     0.05    $    (0.07)
        Discontinued operations                          (0.95)         0.04        (0.92)         0.06
                                                    ----------    ----------   ----------    ----------
           Total                                    $    (0.82)   $     0.05   $    (0.87)   $    (0.01)
                                                    ==========    ==========   ==========    ==========

     Diluted earnings (loss) per share
        Continued operations                        $     0.12    $     0.01   $     0.05    $    (0.07)
        Discontinued operations                          (0.90)         0.04        (0.85)         0.06
                                                    ----------    ----------   ----------    ----------
           Total                                    $    (0.78)   $     0.05   $    (0.80)   $    (0.01)
                                                    ==========    ==========   ==========    ==========
</TABLE>


                                       8
<PAGE>

4.       COMPREHENSIVE INCOME

         The following table summarizes  comprehensive  income for the three and
six months ended June 30, 1999 and 1998:


<TABLE>

<CAPTION>
                                          ---------------------------------------------
(in thousands)                                Three months              Six months
                                             ended June 30,           ended June 30,
                                            1999         1998       1999        1998
                                          ---------   ---------   ---------   ---------
<S>                                       <C>         <C>         <C>         <C>
Net income (loss) as reported             $ (9,751)   $    577    $(10,251)   $    (70)
Foreign currency translation adjustment        (81)        (21)       (324)        (23)
                                          --------    --------    --------    --------
Total comprehensive income (loss)         $ (9,832)   $    556    $(10,575)   $    (93)
                                          ========    ========    ========    ========
</TABLE>

                                       9
<PAGE>


                           ENGINEERING ANIMATION, INC.

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

Overview

         We provide  Internet-enabled visual process management,  collaboration,
analysis and communication solutions for extended manufacturing enterprises. Our
solutions improve  communication  among engineering,  manufacturing,  marketing,
purchasing,  sales and support teams and their suppliers,  allowing them to work
on their processes  concurrently.  Traditionally,  these processes have involved
sequential steps by separate internal teams that use disparate data creation and
storage systems. Our solutions allow users to view, analyze and communicate data
across extended  enterprises  without extensive  training or expensive  computer
hardware. In addition,  our solutions provide advanced integrated analysis tools
for  improving the  efficiency of product  engineering  and  manufacturing.  Our
solutions  improve  product  quality  while  reducing  errors,  cost and time to
market.

         We announced on July 6, 1999 that we are exiting our Interactive  Games
and Science and  Technology  businesses by the end of the first quarter of 2000.
We have  established  a  provision  for  discontinued  operations  in the second
quarter  of 1999 to cover  the  estimated  costs  of  exiting  these  businesses
including  operating  losses  during the phase out period.  Our prior  financial
results  have been  restated  to reflect the  Interactive  Games and Science and
Technology businesses as discontinued  operations.  We will also discontinue the
use of the EAI Interactive and Software Division names.

         On July 19, 1999,  we  announced a  partnership  with  Hewlett-Packard
Company (HP).  They have agreed to support  e-Vis.com,  our Internet  portal for
enterprise and supplier  collaboration,  integration and  e-services,  with more
than  $150  million  in  hosting  services,  Web  content,   marketing  support,
outsourcing,  consulting,  high-performance  server  platforms  and  use of HP's
secure Internet infrastructure.

         The results of operations below are from our continuing operations
only.

RESULTS OF OPERATIONS

Revenue Recognition

          Our revenues are derived from software licenses,  software development
contracts,  professional  services,  customer support and  maintenance.  We
recognize  software license revenue when an arrangement to deliver software does
not require significant  production,  modification or customization and all four
basic  criteria in the  Statement of Position 97-2 ("SOP 97-2") as issued by the
American  Institute of Certified Public  Accountants  (AICPA) have been met. The
four  basic  criteria  are:  persuasive  evidence  that an  arrangement  exists,
delivery  has  occurred,  fee is fixed or  determinable  and  collectibility  is
probable.   We  recognize  revenues  from  software  development  contracts  and
professional services based upon labor costs incurred and progress to completion
on contracts.  Revenues from customer  support and  maintenance are deferred and
recognized ratably over the period these services are provided.
                                       10
<PAGE>

<TABLE>

<CAPTION>
                                    Revenues

Three months ended June 30,
(in thousands)                                             1999               Change                    1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                    <C>                    <C>
Revenues                                                $27,227                34%                    $20,339
--------------------------------------------------------------------------------------------------------------------


Six months ended June 30,
(in thousands)                                             1999               Change                    1998
--------------------------------------------------------------------------------------------------------------------
Revenues                                                $47,575                25%                    $38,187
--------------------------------------------------------------------------------------------------------------------
</TABLE>

         Revenue  increased 34% to $27.2 million for the three months ended June
30,  1999 from  $20.3  million  for the three  months  ended  June 30,  1998 and
increased 25% to $47.6 million for the six months ended June 30, 1999 from $38.2
million for the six months ended June 30, 1998. The increases were attributed to
growth in sales of software licenses, services and maintenance.

<TABLE>

<CAPTION>
                                Cost of Revenues

Three months ended June 30,
(in thousands)                                              1999              Change                    1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                   <C>                   <C>
Expense                                                  $ 7,810               30%                     $6,029
--------------------------------------------------------------------------------------------------------------------
As a percentage
of  revenues                                                  29%                                          30%

Six months ended June 30,
(in thousands)                                              1999              Change                    1998
---------------------------------------------------------------------------------------------------------------------
Expense                                                  $14,880               37%                    $10,864
---------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                  31%                                      28%

</TABLE>


         Our cost of revenues  include  direct labor and other costs  associated
with funded software  development,  customer support and professional  services,
packaging and  distribution  costs,  royalties and  amortization  of capitalized
software costs.

          Cost of revenues  increased  30% to $7.8  million for the three months
ended June 30, 1999 from $6.0  million for the three months ended June 30, 1998,
primarily  due to higher  compensation  and related  expenses from the increased
number of employees on our professional services team. The cost of revenues as a
percentage of revenues decreased to 29% from 30% for the three months ended June
30, 1999 and 1998.

                                       11
<PAGE>

          Cost of  revenues  increased  37% to $14.9  million for the six months
ended June 30, 1999 from $10.9  million for the six months  ended June 30, 1998,
primarily  due to higher  compensation  and related  expenses from the increased
number of employees on our professional services team. The cost of revenues as a
percentage  of revenues  increased to 31% from 28% for the six months ended June
30, 1999 and 1998,  primarily  due to revenue  being lower than  expected in the
first quarter of 1999.

         We capitalize certain software development costs in accordance with the
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer  Software to be Sold,  Leased or Otherwise  Marketed." For the quarters
ended June 30, 1999 and 1998,  we  capitalized  software  costs of $487,000  and
$131,000.  Amortization  expenses for the quarters  ended June 30, 1999 and 1998
were $158,000 and $134,000.  For the six months ended June 30, 1999 and 1998, we
capitalized software costs of $843,000 and $226,000.  Amortization  expenses for
the six months ended June 30, 1999 and 1998 were $305,000 and $271,000.

Operating Expenses
<TABLE>

<CAPTION>
                              Sales and Marketing


Three months ended June 30,
(in thousands)                                              1999             Change                     1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                 <C>                      <C>
Expense                                                   $7,761               63%                     $4,763
--------------------------------------------------------------------------------------------------------------------
As a percentage
of  revenues                                                  29%                                          23%

Six months ended June 30,
(in thousands)                                              1999             Change                     1998
--------------------------------------------------------------------------------------------------------------------
Expense                                                  $14,427               56%                     $9,217
--------------------------------------------------------------------------------------------------------------------
As a percentage
of  revenues                                                  30%                                          24%

</TABLE>


          Sales and marketing  expenses  include  personnel  and facility  costs
related to sales, marketing and customer service activities, as well as
advertising, promotional materials, trade shows, depreciation and other costs.

         Our sales and marketing  expenses increased 63% to $7.8 million for the
three  months  ended June 30, 1999 from $4.8  million for the three months ended
June 30, 1998,  primarily  due to staffing  increases in the sales and marketing
group and related compensation  expense.  Sales and marketing expenses increased
to 29% of total  revenues  for the three months ended June 30, 1999 from 23% for
the three months ended June 30, 1998, primarily due to the staffing increases.

     Our sales and  marketing  expenses  increased  56% to $14.4  million for
the  six months  ended June 30, 1999 from $9.2  million for the six months ended
June 30, 1998  primarily  due to staffing  increases in the sales and  marketing
groupand related  compensation  expense.  Sales and marketing expenses increased
to   30% of total  revenues  for the six months ended June 30, 1999 from 24% for
the six months ended June 30, 1998 primarily due to the staffing increases and
revenue being lower than expected in the first quarter of 1999.

                                       12
<PAGE>

<TABLE>
<CAPTION>

                           General and Administrative


Three months ended June 30,
(in thousands)                                              1999              Change                    1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                     <C>
Expense                                                    $3,626              41%                     $2,574
--------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                    13%                                         13%

Six months ended June 30,
(in thousands)                                              1999              Change                    1998
--------------------------------------------------------------------------------------------------------------------
Expense                                                    $6,369              21%                     $5,244
--------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                    13%                                         14%

</TABLE>


          General and administrative expenses consist primarily of personnel and
facility costs for administrative, systems, legal, executive and accounting
staff,  as  well  as  certain   consulting   expenses,   insurance   costs,
professional fees, depreciation expense, bad debt expense and other costs.

         General and  administrative  expenses increased 41% to $3.6 million for
the three  months  ended June 30, 1999 from $2.6  million  for the three  months
ended June 30, 1998.  The increase was primarily  due to staffing  increases and
related compensation  expense and increased legal and bad debt expense.  General
and  administrative  expenses remained constant at 13% of total revenues for the
three months ended June 30, 1999 and 1998.

         General and  administrative  expenses increased 21% to $6.4 million for
the six months  ended June 30, 1999 from $5.2  million for the six months  ended
June 30, 1998. The increase was primarily due to staffing  increases and related
compensation  expense, and increased legal and bad debt expense partially offset
by  decreases in other types of expenses.  General and  administrative  expenses
decreased  to 13% of total  revenues for the six months ended June 30, 1999 from
14% for the six months ended June 30, 1998.

<TABLE>

<CAPTION>

                            Research and Development

Three months ended June 30,
(in thousands)                                              1999              Change                    1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                     <C>
Expense                                                    $4,731              28%                     $3,690
--------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                    17%                                         18%

Six months ended June 30,
(in thousands)                                              1999              Change                    1998
--------------------------------------------------------------------------------------------------------------------
Expense                                                    $9,447              35%                     $7,007
--------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                    20%                                         18%

</TABLE>


         Research and development expenses focus on software product development
and consist  primarily of personnel  costs,  related  facility costs,  equipment
costs, depreciation and amortization expenses and outside consulting fees.

                                       13
<PAGE>

         Research and development expenses increased 28% to $4.7 million for the
three  months  ended June 30, 1999 from $3.7  million for the three months ended
June 30, 1998, primarily due to increased staffing and related costs and outside
consulting expenses. Research and development expenses decreased to 17% of total
revenues  for the three months ended June 30, 1999 from 18% for the three months
ended June 30, 1998.

         Research and development expenses increased 35% to $9.4 million for the
six months  ended June 30, 1999 from $7.0  million for the six months ended June
30,  1998,  primarily  due to increased  staffing and related  costs and outside
consulting expenses. Research and development expenses increased to 20% of total
revenues  for the six  months  ended  June 30,  1999 from 18% for the six months
ended June 30, 1998.

<TABLE>
<CAPTION>

               Acquisition Costs and Non-recurring Expenses


Three months ended June 30,
(in thousands)                                               1999            Change                     1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>                      <C>
Expenses                                                     $650             (70)%                    $2,181
--------------------------------------------------------------------------------------------------------------------
As a percentage
of  revenues                                                    2%                                         11%

Six months ended June 30,
(in thousands)                                              1999             Change                     1998
--------------------------------------------------------------------------------------------------------------------
Expenses                                                   $1,301             (81)%                    $6,705
--------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                     3%                                         18%

</TABLE>


         Goodwill  and  developed  technology   amortization  was  $650,000  and
$263,000  for the three months ended June 30, 1999 and 1998 and was $1.3 million
and $538,000 for the six months ended June 30, 1999 and 1998.

                                       14
<PAGE>

         In the second  quarter of 1998,  a charge of $1.9  million was incurred
for in-process  research and  development  related to the acquisition of Sense8,
which was accounted for as a purchase.

         In the first quarter of 1998,  we formed  strategic  partnerships  with
General  Electric  Corporate  Research and Development and  Hewlett-Packard
Company to license technology to incorporate into VisProducts(R)  software. Both
agreements are accounted for as  non-recurring  charges to purchased  technology
expense in the first quarter of 1998 in the aggregate amount of $4.2 million.


LIQUIDITY AND CAPITAL RESOURCES

         The following  discussion of liquidity and capital resources is for our
combined continuing and discontinued operations.

         As of June 30, 1999, we had $32 million in cash,  cash  equivalents and
short-term  investments.  We  consider  all  highly  liquid  investments  with a
maturity of three  months or less when  purchased to be cash  equivalents.  Cash
equivalents are carried at cost, which approximates market value.

     Net cash  provided by  operating  activities  was $2.8  million for the six
months  ended June 30,  1999.  Net cash used in  operating  activities  was $4.9
million  for the six  months  ended  June 30,  1998.  The  increase  in net cash
provided by operating  activities  was  primarily due to lower growth during the
first six months of 1999 in overall accounts receivable balances compared to the
first six months of 1998.  During the second  quarter of 1999,  $3.1  million of
accounts receivable  attributed to license and deferred  maintenance revenue was
sold to a third party finance  company on a  non-recourse  basis.  The effect of
increased income taxes  receivable on net cash provided by operating  activities
was offset by an increase in accounts  payable.  Excluding cash flows related to
acquisition  costs and  non-recurring  expenses,  net cash provided by operating
activities  during the first six months of 1999 and 1998 were $4.5  million  and
$0.9 million.

         Net cash used in  investing  activities  was $2.5  million  for the six
months  ended  June 30,  1999.  This was  primarily  due to a $6.9  million
increase of property and equipment  because of the  expansion of our  facilities
and purchases of computer  equipment.  This was offset by net  maturities in our
short-term  investments of $5.4 million. For the six months ended June 30, 1998,
we used cash of $7.9 million in investing activities.  This was primarily due to
increasing our short-term investment portfolio by $1.9 million and to increasing
our  property  and  equipment  $4.6  million  relating to the  expansion  of our
facilities and purchases of computer equipment.
                                       15
<PAGE>

         Net cash  provided by  financing  activities  was $2.0 million and $4.1
million  for the six  months  ended  June 30,  1999 and 1998.  For the first six
months of 1999,  the main  financing  source  was  proceeds  from  stock  option
exercises and net increases in short-term  borrowings.  For the first six months
of 1998, the main financing  sources were proceeds from stock option  exercises,
issuance of stock and net increases in short-term borrowings.  We have two lines
of credit totaling $4.5 million, all of which was utilized as of June 30, 1999.

         We plan to invest in sales,  marketing  and  research  and  development
infrastructure.  This will include investments in existing and advanced areas of
technology  that could  include  using cash to  acquire  technology  and to fund
ventures and other strategic  opportunities.  We intend to continue additions to
property  and  equipment,  including  new or expanding  facilities  and computer
systems  for  research  and  development,   sales  and  marketing,  support  and
administrative staff.

         We have not paid any cash  dividends  and do not  currently  anticipate
paying cash dividends in the future. There can be no assurance that we will ever
pay a cash dividend.

         We believe our current cash and short-term  investment balances will be
sufficient  to meet  anticipated  cash needs for  working  capital  and  capital
expenditures for at least the next twelve months. There can be no assurance that
additional  capital  beyond the amounts  currently  forecasted by us will not be
required or that any such  required  additional  capital  will be  available  on
reasonable terms, if at all, at such time as we may require it.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

         This  report and  statements  we or our  representatives  make  contain
forward-looking  statements  that involve  risks and  uncertainties.  We develop
forward-looking statements by combining currently available information with our
beliefs and  assumptions.  These  statements  often  contain words like believe,
expect,  anticipate,  intend,  contemplate,  seek,  plan,  estimate  or  similar
expressions.  Forward-looking  statements do not guarantee  future  performance.
Recognize these statements for what they are and do not rely upon them as facts.

         Forward-looking    statements   involve   risks,    uncertainties   and
assumptions,  including,  but not limited to, those discussed in this report. We
will not update the forward-looking statements, even if they become incorrect or
misleading.  We make these  statements  under the  protection  afforded  them by
Section 21E of the  Securities  Exchange  Act of 1934,  as  amended.  Because we
cannot predict all of the risks and uncertainties that may affect us, or control
the ones we do predict,  these risks and  uncertainties can cause our results to
differ materially from the results we express in our forward-looking statements.

                                       16
<PAGE>


Variability of Operating Results

         We historically have experienced fluctuations in our quarterly revenues
and operating  results and we expect to experience  fluctuations  in the future.
Since our quarterly and annual  revenues and operating  results vary, we believe
that period-to-period comparisons of results are not necessarily meaningful. You
should not rely on  period-to-period  comparisons  as  indicators  of our future
performance.

         In addition to general economic conditions, the following factors
affect our revenues:

     *    difficulties in forecasting the volume and timing of customer orders;
     *    the  timing of our introduction of new products relative to our
          competitors' introduction of similar products;
     *    our arrangements with distributors to market our products;
     *    customer budgets;  and
     *    our ability to competitively price our products and services.


Year 2000 Readiness

         During the second  quarter of 1999, we continued  evaluating the effect
of Year 2000 issues on our core software products,  mission critical facilities,
databases, and hardware and software systems. Under a plan formulated in 1998 to
coordinate   our  Year  2000  efforts   company-wide,   the  Vice  President  of
Administration continues to direct a task force comprised of high level managers
that oversees the  evaluation of our products,  facilities  and  operations.  In
general, the plan called for creating an inventory of current products,  mission
critical  facilities,  databases  and systems;  analyzing our state of knowledge
regarding their Year 2000 readiness;  gathering  additional  information through
contacts or testing, where needed;  assessing whether a risk existed and what to
do about it; and developing and implementing remedies, where needed.

         Our business has  continued to change since the  implementation  of the
plan. We have taken that into consideration as we have applied the plan. To keep
the public  informed of our progress,  we have  developed a location  within our
Internet  Web  site  for  communicating  our  Year  2000  readiness   disclosure
information.

         Products:  We  consider  a product  Year 2000 ready if it is capable of
correctly  processing,  providing and receiving date data within and between the
20th and 21st centuries, and during 1999, 2000 and leap year calculations.  This
assumes that our product is used in accordance with its associated documentation
and all other  hardware and software  products  used with our software  properly
exchange accurate date data with it. As we test our software,  we coincidentally
test third party software included in our products.

                                       17
<PAGE>

         Although  we  have  completed  the  initial   inventory,   testing  and
evaluation of our core  software  products,  some testing  efforts will continue
throughout the remainder of the year.  Additionally,  some of our customers have
tested and will continue to test our products.  Collectively, we have identified
only a few Year  2000  issues  associated  with  some of our  products  and have
offered our customers a patch or an upgrade for these  products.  We have posted
to our Web site the Year 2000 readiness  status of these  products.  We estimate
the total cost of our having  evaluated and tested our current  products at less
than $20,000.

         Facilities:  We lease  offices  in about 30  locations  throughout  the
world. Of these offices, we have identified our mission critical facilities.  We
consider an office to be mission  critical if it  supports  approximately  15 or
more employees or if it supports a critical function or contract.

         We have  prepared  an  inventory  of the mission  critical  information
technology  ("IT") and  non-IT  systems  for the  mission  critical  facilities.
Generally,  we consider a  location's  telecommunications,  utilities,  HVAC and
security systems as mission critical  systems.  We have continued our efforts to
gather Year 2000 information on these systems from landlords and suppliers.  For
some of the  suppliers,  we are depending  upon their Web site  disclosures  for
their Year 2000 assurances;  for others,  we have written to them or spoken with
them  directly.  We will continue to gather and review the  information  through
1999  as it is  updated  by  the  landlords  and  suppliers  to  assess  whether
contingency  planning is needed.  The costs  associated with these activities to
date have been nominal.

         Systems:  Our business  utilizes Unix,  database and personal  computer
(PC)  software/hardware  systems.  Management of these systems is centralized in
our corporate headquarters.  We evaluated these systems and determined that most
required  software  upgrades  (patches) to address Year 2000 issues.  Generally,
systems manufacturers have made patches available for free over the Internet. We
install these  patches as they are made  available by the  manufacturers.  Where
patches are not  available,  we have  implemented  alternative  actions  such as
internal testing, or phase-out or replacement of equipment.

         Due to  obsolescence, we have either patched or will phase out by the
end of 1999 our Unix Systems.  We estimate the total cost to install the Unix
system patches at less than $10,000.

         Our centralized  databases include the accounting,  human resources and
payroll systems.  Although we have done some database testing,  we are primarily
relying on the statements of the suppliers of these systems regarding their Year
2000 readiness.

         Nearly every employee is dependent upon a PC for the performance of his
or her daily work.  Most,  if not all of these PCs,  needed to be patched.  With
over 60% of these  PCs  already  patched,  we have  scheduled  this  project  to
continue into September 1999.
We estimate the total cost for the PC upgrading at less than $25,000.

         Contingency Plan: Our products are based on software that is relatively
new. This, plus the relatively few Year 2000 issues that have been identified to
date through internal and external testing of our products,  leads us to believe
that the most reasonably  likely worst case scenario for us does not involve our
products.  Instead,  a worst  case  scenario  is more  likely to arise  from the
failure   of   externally    supplied    services,    such   as   utilities   or
telecommunications, over which we have no control.

                                       18
<PAGE>

         We have developed a model contingency plan for these types of Year 2000
issues. Our facilities will be implementing  facility-specific  versions of this
plan during the third and fourth quarters of 1999.

         We can not ensure that we have  identified  and  assessed all Year 2000
issues  that may  affect  us.  We also can not  ensure  that we have  adequately
addressed the Year 2000 issues that we have identified. Any of these failures or
oversights  could  materially   adversely  affect  our  business  operations  or
financial statements.

         For a more complete  discussion  of other risk factors  affecting  the
Company,  see the Company's  1998 Annual Report on Form 10-K.


Item 3.       Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Rates

         Our revenue  originating outside the U.S. for both the first six months
of 1999 and 1998 was 28% of total  revenue.  International  sales  are made
mostly from our foreign  subsidiaries in local currency.  Certain  international
sales are  denominated in U.S.  dollars.  Our  subsidiaries  incur most of their
expenses in local currency.

         Our   international   business  is  subject  to  risks  typical  of  an
international  business,  including,  but not  limited  to:  differing  economic
conditions,  changes in  political  climate,  differing  tax  structures,  other
regulations  and  restrictions  and  foreign  currency  volatility.  Our largest
foreign  currency  exposure is from the German Deutsche Mark. Our future results
could be adversely impacted by changes in these or other factors.

Interest Rates

         We invest our cash in a variety  of  financial  instruments,  including
bank time  deposits  and fixed rate  obligations  of  governmental  entities and
agencies.  These investments are denominated in U.S.  dollars.  Cash balances in
foreign  currencies   overseas  are  operating  balances  and  are  invested  in
short-term time deposits of the local operating bank.

         Investments in fixed rate interest earning  instruments  carry a degree
of interest rate risk.  Fixed rate  securities  may have their fair market value
adversely  impacted  due to a rise in  interest  rates.  Due in  part  to  these
factors,  our future  investment  income may fall short of  expectations  due to
changes in interest rates or we may suffer losses in principal if forced to sell
securities  that have seen a decline in market  value due to changes in interest
rates.  Interest  rate  risk  is  mitigated  by  the  short-term  nature  of our
investments. Our investment securities are held for purposes other than trading.



                                       19
<PAGE>



PART II. OTHER INFORMATION

Item 1.       Legal Proceedings

         Six class action  lawsuits have been  consolidated in the United States
District  Court for the  Southern  District of Iowa.  The actions are  purported
class actions of all persons who purchased our common stock between February 19,
1998 and April 6, 1999. The named defendants  include the Company and certain of
its executive  officers.  The complaints  allege  various  violations of federal
securities laws and seek  unspecified  damages.  Lead counsel for the plaintiffs
has been  appointed.  We believe that the  allegations are totally without merit
and intend to oppose the actions vigorously.

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

         At the Annual  Meeting of  Stockholders  of the Company held on May 11,
1999, the  stockholders  of the Company (1) elected Matthew M. Rizai and Michael
M. Crow as directors of the Company to hold office until the 2002 annual meeting
of stockholders  (subject to the election and  qualification of their successors
or their earlier death,  resignation or removal); (2) approved the amendment and
restatement  of the Stock  Option Plan to increase the number of shares that may
be issued under the Plan from  1,785,000  to  2,335,000  and to make a technical
amendment to the Plan; and (3) ratified the  appointment of Ernst & Young LLP as
auditors. The votes were as follows:

<TABLE>

<CAPTION>
                                                                                         Withheld/
                                                     Votes for         Votes against      Abstain

(1)Election of director:
<S>                                                   <C>                  <C>                <C>
    Matthew M. Rizai                                  9,919,072                    -       112,467
    Michael   M. Crow                                 9,917,183                    -       114,356

(2) Approval of amendment and  restatement  of the
    Stock Option Plan to increase number of shares
    that may be issued                                7,184,834            2,660,055       186,650

(3) Ratification of the appointment
      of Ernst & Young LLP as auditors                9,698,469               53,471       279,599

</TABLE>


                                       20
<PAGE>


Item 6.       Exhibits and Reports on Form 8-K

(a)      Exhibits

                  See index to exhibits.


         (b)      Reports on Form 8-K

                  Form  8-K  filed  July  9,  1999,  relating  to the  Company's
                  announcement  July 6,  1999 of its exit  from the  Interactive
                  Games and Science and Technology businesses.


                             SIGNATURES


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

Date: August 12, 1999                          ENGINEERING ANIMATION, INC.
     ----------------
                                                    (Registrant)

                                              By:    /s/  Jerome M. Behar
                                                       -------------------
                                                          Jerome M. Behar
                                                  Vice President of Finance and
                                                       Chief Financial Officer
                                                   (Duly Authorized Officer and
                                                    Principal Financial Officer)





                                       21
<PAGE>



                                INDEX TO EXHIBITS


10.1     Employment Letter to Robert Nierman, dated as of April 16, 1999.+

27.1     Financial Data Schedule

27.2     Financial Data Schedule

27.3     Financial Data Schedule

27.4     Financial Data Schedule

27.5     Financial Data Schedule


         --------------------
+ Denotes compensatory agreement.