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 September 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  November  5,  1999,  there  were  11,964,625  shares of the
Registrant's  $0.01 par  value  common  stock outstanding.



                                       1
<PAGE>


                           ENGINEERING ANIMATION, INC.

                                    FORM 10-Q

                                TABLE OF CONTENTS


PART I.        FINANCIAL INFORMATION                                        PAGE

Item 1.        Financial Statements

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

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

               Condensed Consolidated Statements of Cash Flows
               For the nine months ended September 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                             9

Item 3.        Quantitative and Qualitative Disclosures about Market Risk     19


PART II.       OTHER INFORMATION

Item 1.        Legal Proceedings                                              20

Item 2.        Changes in Securities and Use of Proceeds                      20

Item 6.        Exhibits and Reports on Form 8-K                               20


SIGNATURES                                                                    21

                                       2
<PAGE>


PART I.    FINANCIAL INFORMATION
Item 1.       Financial Statements
<TABLE>

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

                                                                                   -------------------------------
                                                                                    September 30,   December 31,
                                                                                       1999             1998
                                                                                   --------------   --------------
Assets
Current assets:
<S>                                                                                     <C>              <C>
    Cash and cash equivalents                                                           $ 18,832         $ 23,623
    Short-term investments                                                                   995           11,873
    Accounts receivable:
       Billed                                                                             17,444           26,684
       Unbilled                                                                            4,351            3,595
    Deferred income taxes                                                                  1,208            1,250
    Income taxes receivable                                                                8,005            1,882
    Prepaid expenses and other assets                                                      2,504            1,997
                                                                                   --------------   --------------
       Total current assets                                                               53,339           70,904

Property and equipment, net                                                               21,624           15,848

Other assets:
    Note receivable                                                                        1,408            1,408
    Software development costs, net                                                        2,433            1,679
    Deferred income taxes                                                                    776              769
    Goodwill and developed technology, net                                                12,051           10,973
    Other                                                                                  1,232            1,423
    Net assets of discontinued operations                                                  2,961           12,586
                                                                                  --------------   --------------
       Total assets                                                                     $ 95,824        $ 115,590
                                                                                   ==============   ==============

Liabilities and stockholders' equity
 Current liabilities:
    Accounts payable                                                                     $ 5,084          $ 3,340
    Accrued compensation and other accrued expenses                                        9,485           10,135
    Deferred revenue                                                                       3,605            3,590
    Bank debt, current portion of long-term debt and lease obligations                     4,808            3,327
                                                                                   --------------   --------------
       Total current liabilities                                                          22,982           20,392

Long-term debt and lease obligations due after one year                                    1,133            1,480
Other long-term liabilities                                                                  179              179
Stockholders' equity                                                                      71,530           93,539
                                                                                   --------------   --------------
       Total liabilities and stockholders' equity                                       $ 95,824        $ 115,590
                                                                                   ==============   ==============


See accompanying notes.
</TABLE>

                                       3
<PAGE>

<TABLE>



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


<CAPTION>
                                                        -------------------------------    ------------------------------
                                                        Three months ended September 30,   Nine months ended September 30,
                                                            1999             1998              1999            1998
                                                        --------------   --------------    --------------  --------------
<S>                                                          <C>              <C>               <C>             <C>
     Revenues                                                $ 13,799         $ 23,049          $ 54,267        $ 61,236
     Cost of revenues                                           8,754            5,972            23,634          16,836
                                                        --------------   --------------    --------------  --------------
     Gross profit                                               5,045           17,077            30,633          44,400
     Operating expenses:
        Sales and marketing                                     7,521            5,490            21,515          14,707
        General and administrative                              4,701            2,643            11,070           7,887
        Research and development                                5,490            4,323            14,937          11,330
        Acquisition costs and non-recurring expenses              755            5,686             2,056          12,391
                                                        --------------   --------------    --------------  --------------
     Total operating expenses                                  18,467           18,142            49,578          46,315
                                                        --------------   --------------    --------------  --------------

     Loss from operations                                     (13,422)          (1,065)          (18,945)         (1,915)
     Other income, net                                             89              369               715           1,400
                                                        --------------   --------------    --------------  --------------

     Loss from continuing operations before income tax        (13,333)            (696)          (18,230)           (515)

     Income tax expense (benefit)                              (3,719)           1,526            (5,089)          2,551
                                                        --------------   --------------    --------------  --------------

     Loss from continuing operations                           (9,614)          (2,222)          (13,141)         (3,066)

     Discontinued operations:
        Income (loss) from discontinued operations
           net of tax (see note 2)                                  -              189            (1,927)            963
        Provision for exiting discontinued operations
            including operating losses during phase out
            period, net of tax (see note 2)                         -                -            (8,930)              -
                                                        --------------   --------------    --------------  --------------
     Net loss                                                $ (9,614)        $ (2,033)        $ (23,998)       $ (2,103)
                                                        ==============   ==============    ==============  ==============

     Earnings (loss) per share:
        Basic and diluted
           Continuing operations                              $ (0.81)         $ (0.19)          $ (1.11)        $ (0.27)
           Discontinued operations                                  -             0.02             (0.91)           0.09
                                                        --------------   --------------    --------------  --------------
               Total                                          $ (0.81)         $ (0.17)          $ (2.02)        $ (0.18)
                                                        ==============   ==============    ==============  ==============


        Weighted average shares outstanding                    11,937           11,723            11,859          11,479
                                                        ==============   ==============    ==============  ==============

     See accompanying notes.

</TABLE>
                                       4
<PAGE>

<TABLE>

                                             ENGINEERING ANIMATION, INC.
                                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (in thousands; unaudited)
<CAPTION>

                                                                                     --------------------------------
                                                                                          Nine months ended
                                                                                              September 30,
Operating activities                                                                     1999              1998
                                                                                     --------------   ---------------
<S>                                                                                    <C>               <C>
Net loss                                                                                $ (23,998)        $ (2,103)
Adjustments to reconcile net loss to net cash used in
   operating activities
     Goodwill and developed technology amortization expense                                 2,056            1,189
     Depreciation and other amortization expense                                            4,497            3,162
     Deferred income taxes                                                                     (3)            (492)
     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                -
     Loss on disposal of assets                                                               144                -
     Non-cash compensation expense                                                              -            1,248
     Changes in operating assets and liabilities
      Billed accounts receivable                                                            9,423           (8,480)
      Unbilled accounts receivable                                                          2,833           (4,867)
      Prepaid expenses                                                                       (397)            (526)
      Accounts payable                                                                      2,029               92
      Accrued expenses                                                                     (3,852)             790
      Income taxes                                                                        (12,222)           2,793
      Deferred revenue                                                                        181             (749)
                                                                                      ------------     ------------
Net cash used in operating activities                                                      (5,559)          (6,025)
                                                                                      ------------     ------------
Investing activities
Purchases of property and equipment                                                        (9,228)          (7,916)
Change in other assets                                                                        (19)          (1,449)
Capitalization of software development costs                                               (1,404)            (828)
Maturities of marketable securities                                                        20,500           44,951
Purchases of marketable securities                                                         (9,622)         (41,433)
Cash purchased in acquisitions                                                                481               79
Cash consideration for acquisition of Kx                                                   (1,800)               -
                                                                                      ------------    -------------
Net cash used in investing activities                                                      (1,092)          (6,596)
                                                                                      ------------    -------------
Financing activities
Net change in restricted cash                                                                  (2)              69
Net change in short-term borrowing                                                          1,426            2,473
Proceeds from note receivable                                                                   -              116
Proceeds from long-term debt
   and capital lease obligations                                                                -              432
Payments on long-term debt and capital lease
   obligations                                                                               (365)          (1,622)
Dividend distribution                                                                           -              (24)
Net proceeds from exercise of options and warrants                                            960            2,017
Net proceeds from issuance of  stock                                                            -            1,598
                                                                                       -----------    -------------
Net cash provided by financing activities                                                   2,019            5,059
                                                                                       -----------    -------------
Net decrease in cash and cash equivalents                                                  (4,632)          (7,562)
                                                                                       -----------    -------------
Effect of exchange rates                                                                     (159)             204
Cash and cash equivalents at beginning of period                                           23,623           25,881
                                                                                       -----------    -------------
Cash and cash equivalents at end of period                                               $ 18,832         $ 18,523
                                                                                       ===========    =============
See accompanying notes.
</TABLE>

                                       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 on  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  nine  month  period  ended  September  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  September  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 and
Kx  Verksamhetsutveckling  AB,  ("Kx") since July 27,  1999,  the dates of their
acquisition by the Company. The Sense8 and Kx transactions were accounted for as
purchases.

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

2.       ACQUISITION

         On July 27, 1999, the Company acquired Kx, a privately-held  company in
Gothenburg, Sweden. The acquisition, including transaction costs and assumed net
liabilities,  was valued at approximately $3.1 million. The Company paid cash of
$1.8 million and issued 56,000 shares of common stock in exchange for all of the
outstanding  common  stock of Kx. Kx  provides  integrated  software  solutions,
training and support for manufacturing customers in Scandinavia. The Company has
accounted for the acquisition of Kx as a purchase and all intangibles associated
with this  acquisition are being amortized over 5 years using the  straight-line
method. There was no in-process research and development charged to operations.


                                       6
<PAGE>



3.       DISCONTINUED OPERATIONS

         The  Company  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 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.

         The following table summarizes  revenues from  discontinued  operations
  and net loss for the three and nine months ended, September 30, 1999 and 1998:
<TABLE>
<CAPTION>

                                                                    ------------------------------- --------------------------------
                                                                    Three months ended September 30, Nine months ended September 30,
(in thousands)                                                         1999               1998            1999            1998
                                                                    ------------    ------------   -------------     -----------

<S>                                                                       <C>           <C>             <C>            <C>
Revenues from discontinued operations                                     $ 659         $ 4,696         $ 7,640        $ 14,006
                                                                    ============    ============   =============     ===========


Net loss from continuing operations                                    $ (9,614)       $ (2,222)      $ (13,141)       $ (3,066)

Discontinued operations:
      Income (loss) from discontinued operations  before tax                  -             304          (3,108)          1,553
      Income tax expense (benefit) of  income (loss)
       from discontinued operations                                           -             115          (1,181)            590
                                                                    ------------    ------------   -------------     -----------
       Net income (loss) from discontinued operations                         -             189          (1,927)            963
                                                                    ------------    ------------   -------------     -----------
      Provision for exiting discontinued operations
         including operating losses during phase out period before tax        -               -         (13,750)              -
      Income tax  benefit of  provision for exiting
       discontinued operations including  operating
        losses during phase out period                                        -               -          (4,820)              -
                                                                    ------------    ------------   -------------    ------------
          Provision for exiting discontinued operations, net of tax           -               -          (8,930)              -
                                                                    ------------    ------------   -------------    ------------
Net loss                                                               $ (9,614)       $ (2,033)      $ (23,998)       $ (2,103)
                                                                    ============    ============   =============    ============
</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>


4.       COMPREHENSIVE INCOME
<TABLE>

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

<CAPTION>

                                                      ----------------------------------    ---------------------------------
(in thousands)                                        Three months ended September 30,      Nine months ended September 30,
                                                           1999               1998               1999              1998
                                                      ----------------   ---------------    ---------------   ---------------
<S>                                                          <C>               <C>               <C>                <C>
Net loss as reported                                         $ (9,614)         $ (2,033)         $ (23,998)         $ (2,103)
Foreign currency translation adjustment                           152               227               (172)              204
                                                      ----------------   ---------------    ---------------   ---------------
Total comprehensive loss                                     $ (9,462)         $ (1,806)         $ (24,170)         $ (1,899)
                                                      ================   ===============    ===============   ===============
</TABLE>

                                       8
<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 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 have discontinued the use of the EAI
Interactive and Software Division names.

          On July 19, 1999,  we announced a  relationship  with  Hewlett-Packard
Company (HP). HP agreed to support e-Vis.com, our Internet portal for enterprise
and supplier collaboration, integration and E-services. HP has agreed to provide
hosting  services,  Web  content,  marketing  funds  and  support,   consulting,
high-performance   server   platforms   and   use  of   HP's   secure   Internet
infrastructure,  all of which has been estimated to have a value  exceeding $150
million during the agreement.

         On July 27, 1999,  we acquired Kx  Verksamhetsutveckling  AB,  ("Kx") a
privately-held  company  in  Gothenburg,  Sweden.  The  acquisition,   including
transaction costs and assumed net liabilities,  was valued at approximately $3.1
million.  We paid cash of $1.8 million and issued  56,000 shares of common stock
in exchange for all the outstanding  common stock of Kx. Kx provides  integrated
software  solutions,   training  and  support  for  manufacturing  customers  in
Scandinavia.  We have accounted for the  acquisition of Kx as a purchase and all
intangibles  associated with the purchase are being amortized over 5 years using
the  straight-line  method.  There was no  in-process  research and  development
charged to operations.

         We announced  in October  1999 that we are  aligning our products  into
three key areas:  E-Services,  which  includes  e-Vis.com  for  secure  Internet
collaboration,  Open  Enterprise  Visualization  for viewing,  distributing  and
analyzing  product  design data;  and Open  Virtual  Factory for  enhancing  the
efficiency and quality of  manufacturing  operations  and processes.  We plan to
continue to expand our  professional  services team in response to  requirements
for customized systems integration and deployment support.  Our management teams
and sales forces in North America and Europe are being realigned for consistency
with the new business  structure.  This realignment permits each management team
and its sales  personnel  to focus more  intently  on their  respective  product
areas.

                                       9
<PAGE>

         Many of the expenses we incur in our  operations  are of a fixed nature
and are  not  directly  correlated  with  revenues.  We are  slowing  additional
resource  expansion in some areas of our  operations  until we achieve  expected
results.

RESULTS OF OPERATIONS

         The results of operations below are from our continuing operations only
and include the operating results of Kx beginning July 27, 1999

Revenues

         Our revenues are derived from software licenses,  software  development
contracts, professional services, customer support and maintenance. We recognize
software  license  revenues  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 amended,  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.

                                    REVENUES
<TABLE>
<CAPTION>

Three months ended September 30,
(in thousands)                                             1999               Change                   1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                   <C>                    <C>
Revenues                                                $13,799               (40)%                  $23,049
--------------------------------------------------------------------------------------------------------------------------

Nine months ended September 30,
(in thousands)                                             1999               Change                   1998
-------------------------------------------------------------------------------------------------------------------------
Revenues                                                $54,267               (11)%                  $61,236
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


         Revenues  decreased  40% to $13.8  million for the three  months  ended
September 30, 1999 from $23.0  million for the three months ended  September 30,
1998 and decreased 11% to $54.3 million for the nine months ended  September 30,
1999 from $61.2  million for the nine  months  ended  September  30,  1998.  The
decreases were primarily attributed to lower sales of software licenses in 1999.

                                       10
<PAGE>



                                COST OF REVENUES
<TABLE>
<CAPTION>

Three months ended September 30,
(in thousands)                                               1999             Change                       1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                        <C>
Expense                                                    $8,754              47%                       $5,972
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of  revenues                                                   63%                                           26%

Nine months ended September 30,
(in thousands)                                              1999              Change                      1998
-------------------------------------------------------------------------------------------------------------------------
Expense                                                   $23,634              40%                      $16,836
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                    44%                                           27%
</TABLE>


         Our cost of revenues  includes 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  47% to $8.8  million for the three months
ended  September 30, 1999 from $6.0 million for the three months ended September
30, 1998,  primarily due to personnel  increases  and related  expenses from the
increased  number of employees  on our  professional  services  team and royalty
expense.  Our cost of revenues as a percentage of revenues increased to 63% from
26% for the three months ended  September  30, 1999 and 1998,  primarily  due to
revenues being lower than expected in the third quarter of 1999.

         Cost of  revenues  increased  40% to $23.6  million for the nine months
ended  September 30, 1999 from $16.8 million for the nine months ended September
30, 1998,  primarily due to personnel  increases  and related  expenses from the
increased  number of employees  on our  professional  services  team and royalty
expense.  The cost of revenues as a percentage of revenues increased to 44% from
27% for the nine months  ended  September  30, 1999 and 1998,  primarily  due to
revenues being lower than expected in 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 September 30, 1999 and 1998, we capitalized software costs of $412,000 and
$358,000.  Amortization  expenses for the quarters ended  September 30, 1999 and
1998 were  $204,000 and $126,000.  For the nine months ended  September 30, 1999
and  1998,  we  capitalized   software  costs  of  $1.3  million  and  $585,000.
Amortization expenses for the nine months ended September 30, 1999 and 1998 were
$508,000 and $397,000.


                                       11
<PAGE>


Operating Expenses

                              SALES AND MARKETING
<TABLE>
<CAPTION>



Three months ended September 30,
(in thousands)                                               1999             Change                        1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                <C>                         <C>
Expense                                                     $7,521             37%                         $5,490
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of  revenues                                                    55%                                            24%

Nine months ended September 30,
(in thousands)                                               1999             Change                        1998
-------------------------------------------------------------------------------------------------------------------------
Expense                                                    $21,515             46%                        $14,707
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of  revenues                                                   40%                                             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, travel, depreciation and other
costs.

         Our sales and marketing  expenses increased 37% to $7.5 million for the
three  months  ended  September  30, 1999 from $5.5 million for the three months
ended September 30, 1998,  primarily due to personnel increases in the sales and
marketing  groups and related  expenses and  increased  marketing  expenditures.
Sales and marketing  expenses  increased to 55% of total  revenues for the three
months ended  September  30, 1999 from 24% for the three months ended  September
30, 1998, primarily due to the personnel increases and revenues being lower than
expected in the third quarter of 1999.

         Our sales and marketing expenses increased 46% to $21.5 million for the
nine months  ended  September  30,  1999 from $14.7  million for the nine months
ended September 30, 1998,  primarily due to personnel increases in the sales and
marketing  groups and related  expenses and  increased  marketing  expenditures.
Sales and  marketing  expenses  increased to 40% of total  revenues for the nine
months ended September 30, 1999 from 24% for the nine months ended September 30,
1998,  primarily  due to the personnel  increases and revenues  being lower than
expected in 1999.


                                       12
<PAGE>



                           GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>

Three months ended September 30,
(in thousands)                                              1999              Change                       1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                        <C>
Expense                                                    $4,701              78%                        $2,643
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                   34%                                             11%

Nine months ended September 30,
(in thousands)                                              1999              Change                       1998
-------------------------------------------------------------------------------------------------------------------------
Expense                                                   $11,070              40%                        $7,887
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                    20%                                            13%
</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 78% to $4.7 million for
the three months ended September 30, 1999 from $2.6 million for the three months
ended September 30, 1998. The increase was primarily due to personnel  increases
and related  expenses,  increased  outside  professional  services  and bad debt
expense.  General and administrative expenses increased to 34% of total revenues
for the three  months  ended  September  30, 1999 from 11% for the three  months
ended September 30, 1998,  primarily due to the personnel increases and revenues
being lower than expected in the third quarter of 1999.

         General and administrative  expenses increased 40% to $11.1 million for
the nine months ended  September  30, 1999 from $7.9 million for the nine months
ended September 30, 1998. The increase was primarily due to personnel  increases
and related  expenses,  increased  outside  professional  services  and bad debt
expense.  General and administrative expenses increased to 20% of total revenues
for the nine months ended  September 30, 1999 from 13% for the nine months ended
September 30, 1998,  primarily due to the personnel increases and revenues being
lower than expected in 1999.

<TABLE>
<CAPTION>

                            RESEARCH AND DEVELOPMENT

Three months ended September 30,
(in thousands)                                              1999              Change                       1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                        <C>
Expense                                                    $5,490              27%                        $4,323
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                    40%                                            19%

Nine months ended September 30,
(in thousands)                                              1999              Change                       1998
-------------------------------------------------------------------------------------------------------------------------
Expense                                                   $14,937              32%                       $11,330
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                    28%                                            19%
</TABLE>


                                       13
<PAGE>

         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.

         Research and development expenses increased 27% to $5.5 million for the
three  months  ended  September  30, 1999 from $4.3 million for the three months
ended  September  30, 1998,  primarily  due to personnel  increases  and related
expenses and increased  outside  consulting  expenses.  Research and development
expenses increased to 40% of total revenues for the three months ended September
30, 1999 from 19% for the three months ended  September 30, 1998,  primarily due
to the personnel  increases and revenues  being lower than expected in the third
quarter of 1999.

         Research and  development  expenses  increased 32% to $14.9 million for
the nine months ended  September 30, 1999 from $11.3 million for the nine months
ended  September  30, 1998,  primarily  due to personnel  increases  and related
expenses and increased  outside  consulting  expenses.  Research and development
expenses  increased to 28% of total revenues for the nine months ended September
30, 1999 from 19% for the nine months ended September 30, 1998, primarily due to
the personnel increases and revenues being lower than expected in 1999.


                  ACQUISITION COSTS AND NON-RECURRING EXPENSES
<TABLE>
<CAPTION>


Three months ended September 30,
(in thousands)                                              1999              Change                     1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>                        <C>
Expenses                                                    $755              (87)%                      $5,686
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of  revenues                                                   5%                                            25%

Nine months ended September 30,
(in thousands)                                              1999              Change                     1998
-------------------------------------------------------------------------------------------------------------------------
Expenses                                                  $2,056              (83)%                     $12,391
--------------------------------------------------------------------------------------------------------------------------
As a percentage
of revenues                                                    4%                                            20%
</TABLE>

         Goodwill  and  developed  technology   amortization  was  $755,000  and
$651,000  for the three months  ended  September  30, 1999 and 1998 and was $2.1
million and $1.2 million for the nine months ended September 30, 1999 and 1998.

         In the third quarter of 1998, we incurred acquisition and non-recurring
expenses  of $5.0  million  in  conjunction  with  the  acquisitions  of VSA and
Transom, both of which were accounted for as pooling of interests.

         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.

                                       14
<PAGE>

         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 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  September  30,  1999,  we  had  $19.8  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 used in operating activities was $5.6 million and $6.0 million
for the nine months ended  September 30, 1999 and 1998.  The effect of increased
income  taxes  receivable  on net cash  provided  by  operating  activities  was
partially  offset by an increase in accounts  payable and a decrease in accounts
receivable.  During  the  second  quarter  of 1999,  $3.1  million  of  accounts
receivable  attributed to software license and deferred  maintenance revenue was
sold to a third party finance  company on a non-recourse  basis.  Excluding cash
flows related to  acquisition  costs,  non-recurring  expenses and  discontinued
operations,  net cash used by operating  activities during the first nine months
of 1999 was $1.9 million and net cash  provided by operating  activities  during
the first nine months of 1998 were $3.2 million.

         Net cash used in  investing  activities  was $1.1  million for the nine
months  ended  September  30,  1999.  This was  primarily  due to a $9.2 million
increase of property and equipment  related to the  expansion of our  facilities
and purchases of computer  equipment,  a cash outflow of $1.8 million related to
the  purchase of Kx and software  development  costs of $1.4  million.  This was
partially  offset  by net  maturities  in our  short-term  investments  of $10.9
million.  For the nine months ended  September  30,  1998,  we used cash of $6.6
million in  investing  activities.  This was  primarily  due to  increasing  our
property and equipment  $7.9 million  related to the expansion of our facilities
and purchases of computer equipment. This was partially offset by net maturities
in our short-term investments of $3.5 million

         Net cash  provided by  financing  activities  was $2.0 million and $5.1
million for the nine months  ended  September  30, 1999 and 1998.  For the first
nine months of 1999, the main financing  sources were proceeds from stock option
exercises and net increases in short-term borrowings.  For the first nine months
of 1998, the main financing  sources were proceeds from stock option  exercises,
issuance of stock and net increases in short-term borrowings.

         We believe that our current  cash and  short-term  investment  balances
will be  sufficient  to meet  anticipated  cash needs for  working  capital  and
capital expenditures through the next twelve months. We have two lines of credit
with commercial  banks totaling $4.5 million,  both of which were fully utilized
as of September 30, 1999. One of the lines of credit,  totaling $1.0 million, is
secured and expires on December  30,  1999.  The other line of credit,  totaling
$3.5 million,  is unsecured and expires on May 31, 2000. We are  negotiating  to
extend these lines of credit and to secure additional sources of capital.  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 times as we
may require it.

                                       15
<PAGE>

         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.

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.

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.


                                       16
<PAGE>


Year 2000 Readiness

         During the third 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 continued 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.

         We have  completed the  inventory,  testing and  evaluation of our core
software  products.  Additional  testing  efforts will continue  throughout  the
remainder of the year. In some  situations,  our  customers  have tested and are
continuing to test our products.  Collectively,  we have  identified  only a few
Year 2000  issues  associated  with some of our  products.  We have  offered our
customers a patch or an upgrade for these products.  Our Web site sets forth 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.

                                       17
<PAGE>

          We have  either  patched or will phase out by the end of 1999 our Unix
systems  due to  obsolescence.  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. Over 98%
of these PCs have been patched.  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.

         We have developed a model contingency  planning guideline for Year 2000
issues,  which our facilities will be implementing  during the fourth quarter 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.


                                       18
<PAGE>


Item 3.       Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Rates

         Our revenues  originating outside the U.S. for the first nine months of
1999 and 1998 were 32% and 23% of total revenues.  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

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

         On October 15, 1999,  and October 29,  1999,  actions were filed in the
United States  District Court for the Southern  District of Iowa which named the
Company and certain of its  executive  officers as  defendants.  The actions are
purported  class  actions of all persons who  purchased our common stock between
July 29, 1999 and October 1, 1999. The complaints  allege various  violations of
federal  securities  laws and seek  unspecified  damages.  We  believe  that the
allegations are not supportable and we will defend vigorously.


Item 2.       Changes in Securities and Use of Proceeds

         On July 27, 1999,  the Company  issued 56,000 shares of common stock to
acquire  Kx   Verksamhetsutveckling  AB  ("Kx"),  a  privately-held  company  in
Gothenburg,  Sweden, in a transaction,  including  transaction costs and assumed
net liabilities, valued at approximately $3.1 million, including $1.8 million in
cash.  Our  acquisition  of Kx has been  accounted for as a purchase.  We issued
common stock to the Kx stockholders using the registration  exemption under Rule
903 of Regulation S of the Securities Act of 1933, as amended.


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.



                                       20
<PAGE>



                                   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: November 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

10.2     Addendum  To Employment Agreement with Jerome M. Behar, dated
          August 2, 1999.+

10.3     Employment Agreement with Robert Nierman, dated  April 21, 1999.+

27.1     Financial Data Schedule

27.2     Financial Data Schedule

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


                                       22