<PAGE>

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                                   UNITED STATES
                         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: December 31, 1997
                                         OR
           [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                          SECURITIES EXCHANGE ACT OF 1934

               For the transition period from ____________ to ____________
                                          
                          COMMISSION FILE NUMBER:  0-27752

                                          
                                          
                                          
                                   ANALOGY, INC. 
               (Exact name of registrant as specified in its charter)
                                              
                                          
               OREGON                                       93-0892014 
     (State or other jurisdiction                        (I.R.S. Employer 
   of incorporation or organization)                    Identification No.)
                                          
                                          
                                          
                                9205 SW GEMINI DRIVE
                              PORTLAND, OREGON  97008
               (Address of principal executive offices and zip code)
                                          
                                   503-626-9700 
                (Registrant's telephone number including area code)




     Indicate by check mark 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 [   ]

     
COMMON STOCK, NO PAR VALUE                               9,252,535
     (Class)                            (Shares outstanding at January 30,1998)

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<PAGE>

                                   ANALOGY, INC.
                                     FORM 10-Q
                                       INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                            PAGE
------------------------------                                            ----
<S>                                                                       <C>
Item 1.  Financial Statements:

             Consolidated Balance Sheets - December 31, 1997
             and March 31, 1997 ........................................   2
             
             Consolidated Statements of Operations - Three Months and 
             Nine Months Ended December 31, 1997 and 1996 ..............   3
             
             Consolidated Statements of Cash Flows - Nine Months
             Ended December 31, 1997 and 1996 ..........................   4
             
             Notes to Consolidated Financial Statements ................   5

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations .....................................   7

PART II - OTHER INFORMATION
---------------------------

Item 4.  Submission of Matters to a Vote of Security Holders ...........  14

Item 6.  Exhibits and Reports on Form 8-K ..............................  14
</TABLE>




                                       1

<PAGE>



                           ANALOGY, INC. AND SUBSIDIARIES
                            CONSOLIDATED BALANCE SHEETS
                                   (In thousands)
                                    (Unaudited)
                                          

<TABLE>
<CAPTION>
                                                  December 31,       March 31,
                                                      1997              1997
                                                  -------------      ----------
      <S>                                         <C>                <C>
      ASSETS
        Current assets:                                        
          Cash and cash equivalents                   $   2,001      $   1,827
          Marketable securities                              --          1,697
          Accounts receivable                            10,835          9,161
          Prepaid expenses                                1,249            886
          Other assets, net                                 483            455
                                                       --------       -------- 
               Total current assets                      14,568         14,026
      
          Furniture, fixtures and equipment, net of 
            accumulated depreciation and amortization 
            of $7,499 and $5,833                          3,960          4,280
          Library costs, net                              3,549          2,729
          Other assets, net                                 826          1,095
                                                      ---------      ---------
                                                      $  22,903      $  22,130
                                                      ---------      ---------
                                                      ---------      ---------
      
      LIABILITIES AND SHAREHOLDERS' EQUITY
        Current liabilities:
          Accounts payable                            $     818          1,301
          Current portion of capital leases                 310            566
          Accrued salaries and benefits                   2,181          2,095
          Accrued expenses                                  259            181
          Unearned revenue                                6,750          5,812
                                                      ---------      ---------
            Total current liabilities                    10,318          9,955
      
         Non-current portion of capital leases              722            499
         Other liabilities                                  117            359
      
      
        Shareholders' equity:
          Common stock, no par value, authorized 
             35,000 shares; 9,194 and 9,118 shares 
             issued and outstanding                      17,367         17,124
          Foreign currency translation                     (223)          (155)
          Accumulated deficit                            (5,398)        (5,652)
                                                      ---------      ---------
            Total shareholders' equity                   11,746         11,317
                                                      ---------      ---------
                                                      $  22,903      $  22,130
                                                      ---------      ---------
                                                      ---------      ---------
</TABLE>
       
                                   
       The accompanying notes are an integral part of these consolidated 
                             financial statements.


                                       2

<PAGE>



                           ANALOGY, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share amounts)
                                    (Unaudited)
                                          


<TABLE>
<CAPTION>
                                                       Three months ended       Nine months ended 
                                                          December 31,             December 31,
                                                      ----------------------    -------------------
                                                        1997          1996         1997     1996
                                                      ---------     --------    ---------  --------
       <S>                                            <C>           <C>          <C>        <C>
       Revenue:                                                
          Product licenses                             $  4,511     $  4,434     $ 11,906   $ 9,987
          Service and other                               3,335        2,382        9,068     6,804
                                                       --------     --------     --------   -------
             Total revenue                                7,846        6,816       20,974    16,791
                                                                                 
       Cost of revenue:                                                          
          Product licenses                                  364          409        1,344     1,160
          Service and other                                 669          629        2,205     1,640
                                                       --------     --------     --------   -------
             Total cost of revenue                        1,033        1,038        3,549     2,800
                                                       --------     --------     --------   -------
             Gross profit                                 6,813        5,778       17,425    13,991
                                                                                 
       Operating expenses:                                                       
          Research and development                        1,587        1,493        4,290     4,133
          Sales and marketing                             3,868        3,286       10,284     9,038
          General and administrative                        727          584        2,151     1,941
          Amortization of intangibles                        92           45          276        45
          Acquired in-process research                                           
            and development                                  --        1,896           --     1,896
                                                       --------     --------     --------    ------
             Total operating expenses                     6,274        7,304       17,001    17,053
                                                       --------     --------     --------    ------
             Operating income (loss)                        539       (1,526)         424    (3,062)
                                                                                 
       Other expense, net                                   (77)         (38)         (83)      (29)
                                                       --------     --------     --------   -------
             Income (loss) before income                                         
                taxes                                       462       (1,564)         341    (3,091)
                                                                                 
       Income tax expense                                   115          111           87       225
                                                       --------     --------     --------    ------
             Net income (loss)                         $    347     $ (1,675)    $    254   $(3,316)
                                                       --------     --------     --------   -------
                                                       --------     --------     --------   -------
                                                                                 
       Basic and diluted net income (loss)                                       
             per share                                 $   0.04     $  (0.19)     $  0.03  $  (0.39)
                                                       --------     --------     --------   -------
                                                       --------     --------     --------   -------
       Weighted average shares outstanding:                                      
            Basic                                         9,193        8,596        9,164     8,422
                                                       --------     --------     --------   -------
                                                       --------     --------     --------   -------
            Diluted                                       9,834        8,596        9,639     8,422
                                                       --------     --------     --------   -------
                                                       --------     --------     --------   -------
</TABLE>


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

                                       3

<PAGE>

                           ANALOGY, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                   (In thousands)
                                    (Unaudited)


<TABLE>
<CAPTION>
                                                                  Nine months ended December 31,
                                                                  ------------------------------
                                                                     1997                 1996
                                                                   --------            ---------
<S>                                                                <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                                                 
  Net income (loss)                                                $    254             $ (3,316)
  Adjustments to reconcile net income (loss)                                          
    to net cash (used in) provided by                                                 
    operating activities:                                                             
       Depreciation and amortization                                  2,843                2,097
       Acquired in-process research and development                       -                1,896
       Foreign currency transaction loss, net                            10                   43
  Changes in operating assets and liabilities:                                        
    Accounts receivable                                              (1,803)                (784)
    Prepaid expenses and other assets                                  (404)                (735)
    Accounts payable and accrued expenses                              (567)                (132)
    Unearned revenue                                                  1,029                 (232)
                                                                   --------              -------
          Net cash provided by (used in) operating activities         1,362               (1,163)
CASH FLOWS FROM INVESTING ACTIVITIES:                                                 
    Purchase of marketable securities                                     -               (5,910)
    Sales of marketable securities                                        -                3,017
    Maturities of marketable securities                               1,700                1,200
    Capital expenditures for furniture, fixtures and equipment       (1,042)              (1,741)
    Capital expenditures for library costs                           (1,712)                (900)
    Net cash acquired in acquisition                                      -                  260
                                                                   --------              -------
          Net cash used in investing activities                      (1,054)              (4,074)
CASH FLOWS FROM FINANCING ACTIVITIES:                                                 
   Payments on subordinated debt                                          -                 (829)
   Principal payments on capital leases                                (352)                (510)
   Common stock offering costs                                            -                  (82)
   Proceeds from exercise of common stock options                       243                   84
                                                                   --------             --------
          Net cash used in financing activities                        (109)              (1,337)
                                                                                      
   Effect of exchange rate changes on cash and cash equivalents         (25)                  14
                                                                   --------             --------
          Net increase (decrease) in cash and cash equivalents          174               (6,560)
   Cash and cash equivalents at beginning of period                   1,827               10,208
                                                                   --------             --------
   Cash and cash equivalents at end of period                      $  2,001             $  3,648
                                                                   --------             --------
                                                                   --------             --------
                                                                                      
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                     
  Cash paid for: Interest                                          $    103             $    151
                 Income taxes                                           125                   62
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:                                       
  Acquisition of equipment under capital lease obligations         $    319             $    693
  Acquisition of Symmetry Design Systems:                                             
    Assets acquired and liabilities assumed, net of cash acquired  $      -             $ (2,421)
    Issuance of common stock                                              -                2,681
                                                                   --------             --------
       Net cash acquired in acquisition                            $      -             $    260
</TABLE>


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

                                       4

<PAGE>


                           ANALOGY, INC. AND SUBSIDIARIES 
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                   (IN THOUSANDS) 

                                                                             
1. BASIS OF PRESENTATION                                                     
                                                                             
The unaudited financial information included herein for the nine months ended 
December 31, 1997 and 1996 was prepared in conformity with generally accepted 
accounting principles. The financial information as of March 31, 1997 is 
derived from the Analogy, Inc. (the "Company") consolidated financial 
statements included in the Company's Annual Report on Form 10-K for the 
fiscal year ended March 31, 1997. Certain information or footnote disclosures 
normally included in financial statements prepared in accordance with 
generally accepted accounting principles have been condensed or omitted, 
pursuant to the rules and regulations of the Securities and Exchange 
Commission. In the opinion of management, the accompanying consolidated 
financial statements include all adjustments necessary (which are of a normal 
and recurring nature) for the fair presentation of the results of the interim 
periods presented. The accompanying consolidated financial statements should 
be read in conjunction with the Company's audited consolidated financial 
statements for the fiscal year ended March 31, 1997, as included in the 
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997.

Operating results for the nine months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending March 31, 1998, or any portion thereof.

2.  CASH EQUIVALENTS AND MARKETABLE SECURITIES
 
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of 90 days or less; marketable securities consist primarily of
government and corporate securities. The Company's marketable securities were
classified as "available for sale" and accordingly were carried at market value,
which was not materially different from cost at March 31, 1997. 
 
3.  NET INCOME (LOSS) PER SHARE
 
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128). This
Statement supersedes APB Opinion No. 15 and specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. The Company was
required to adopt the provisions of SFAS 128 for the quarter ended December 31,
1997. As it relates to the Company, the principal differences between the
provisions of SFAS 128 and previous authoritative pronouncements are the
exclusion of common stock equivalents in the determination of Basic Earnings Per
Share and the market price at which common stock equivalents are calculated in
the determination of Diluted Earnings Per Share. 

Basic earnings per common share is computed using the weighted average number
of shares of common stock outstanding for the period. Diluted earnings per
common share is computed using the weighted average number of shares of common
stock and dilutive common equivalent shares related to stock options and
warrants outstanding during the period.

                                       5


<PAGE>


The following is a reconciliation of the numerators and denominators of the
basic and diluted computations of earnings per share (in thousands, except for
per share amounts). 

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                      -----------------------------------------------------------
                                          December 31, 1997               December 31, 1996
                                      ---------------------------     ---------------------------
                                      Income            Per Share     Income            Per Share
                                      (Loss)    Shares    Amount      (Loss)    Shares    Amount
                                      ------    ------  ---------     ------    ------  ---------
<S>                                   <C>       <C>     <C>           <C>       <C>      <C>
Basic earnings per share
   Income (loss) available to  
   shareholders                        $347      9,193      $0.04    $(1,675)    8,596     $(0.19)
                                                          ------- 
                                                          ------- 
                                                         
Effect of dilutive securities 
  Stock options and warrants             --        641                    --       --
                                      ------    ------               -------    ------ 
                  
Diluted earnings per share    
  Income (loss) available to 
  shareholders                          $347     9,834      $0.04    $(1,675)    8,596     $(0.19)
                                      ------    ------    -------    -------    ------    -------
                                      ------    ------    -------    -------    ------    -------
</TABLE>

<TABLE>
<CAPTION>
                                                          Nine Months Ended
                                      ------------------------------------------------------------
                                          December 31, 1997               December 31, 1996
                                      ---------------------------    ----------------------------
                                      Income            Per Share    Income             Per Share
                                      (Loss)    Shares    Amount     (Loss)     Shares    Amount
                                      ------    ------  ---------    ------     ------   ---------
<S>                                   <C>       <C>     <C>           <C>       <C>      <C>
Basic earnings per share
  Income (loss) available to  
  shareholders                          $254     9,164      $0.03    $(3,316)    8,422      $(0.39)
                                                          -------
                                                          -------
Effect of dilutive securities 
  Stock options and warrants              --       475                    --       --
                                      ------    ------               -------    ------  
Diluted earnings per share    
  Income (loss) available to  
  shareholders                          $254     9,639      $0.03    $(3,316)    8,422      $(0.39)
                                      ------    ------    -------    -------    ------   ---------
                                      ------    ------    -------    -------    ------   ---------
</TABLE>

The adoption on SFAS 128 had no effect on previously reported loss per share 
amounts for the three and nine month periods ended December 31, 1996. In 
those periods, primary loss per share was the same as basic loss per share 
and fully diluted loss per share was the same as diluted loss per share. 
Losses were reported in both periods, and accordingly the denominator was 
equal to the weighted average outstanding shares with no consideration for 
common stock equivalents as they were anti-dilutive.

4.  EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued Statement of Financial Accounting Standards No. 
130, "Reporting Comprehensive Income" (SFAS 130), which establishes 
requirements for disclosure of comprehensive income. The objective of SFAS 
130 is to report all changes in equity that result from transactions and 
economic events other than transactions with owners. Comprehensive income is 
the total of net income and all other non-owner changes in equity. SFAS 130 
is effective for fiscal years beginning after December 15, 1997. 
Reclassification of earlier financial statements for comparative purposes is 
required. The Company has not quantified the effect of adoption of SFAS 130.

                                       6

<PAGE>

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

GENERAL

The Company develops, markets and supports high-performance software and 
model libraries for the top-down design and behavioral simulation of 
mixed-signal and mixed-technology systems. The Company's core simulator 
product, Saber, was introduced in 1987. In addition to Saber, Analogy offers 
schematic capture and analysis tools and framework integration products 
providing interfaces to the design environments of major electronic design 
automation companies. The Company's fiscal year ends on March 31.

The Company's product license revenue consists of license fees for its 
software products and template and component model library subscription fees. 
Service and other revenue consists of software maintenance fees, training, 
consulting and both commercial and governmental contract model development 
and research and development contracts. The Company's software products are 
shipped only after the Company has an executed software license agreement 
with a customer. Revenue from software licenses is recognized upon shipment 
to the customer. Revenue from library subscription fees is typically billed 
annually and the related revenue is recognized ratably over the life of the 
contract, usually twelve months. Maintenance is normally billed in advance 
and recognized ratably over the life of the contract, which is usually twelve 
months. Training, consulting and certain other services revenue is recognized 
as the services or portions thereof have been provided. Revenue from contract 
model development is recognized upon shipment of the underlying models, or 
upon acceptance criteria as agreed to with the customer. The Company received 
a modeling contract from the U.S. Air Force in fiscal year 1997. The Company 
also received a contract from the Defense Advanced Research Projects Agency 
("DARPA") in fiscal year 1997 and a multi-year grant from the National 
Institute of Standards and Technology ("NIST") in fiscal year 1996 which 
provide funding to the Company for research and development. The DARPA 
contract contains cost sharing provisions. 

FORWARD LOOKING STATEMENTS 

This report, including the following discussion and analysis of financial 
condition and results of operations, contains certain statements, trend 
analysis and other information that constitute "forward looking statements" 
within the meaning of the Private Securities Litigation Reform Act of 1995, 
which may involve risks and uncertainties. Such forward looking statements 
include, but are not limited to, statements including the words "anticipate," 
"believe," "estimate," "expect," "plan," "intend" and other similar 
expressions. These forward looking statements are subject to the business and 
economic risks faced by the Company and the Company's actual results of 
operations may differ materially from those contained in the forward looking 
statements. Results of operations for the periods discussed below should not 
be considered indicative of the results to be expected in any future period, 
and fluctuations in operating results may also result in fluctuations in the 
market price of the Company's common stock. Like most high technology 
companies, the Company faces certain business risks that could have adverse 
effects on the Company's results of operations, including those discussed 
below, those discussed in the Company's Annual Report on Form 10-K and those 
discussed  elsewhere in this Report.

The Company's quarterly operating results have in the past and may in the 
future vary significantly depending on factors such as the receipt and timing 
of significant orders, increased competition, the timing of new product 
announcements, changes in pricing policies by the Company or its competitors, 
lengthy sales cycles, lack of market acceptance or delays in the introduction 
of new or enhanced versions of the Company's products, seasonal factors, the 
mix of direct and indirect sales and general economic conditions, and the 
potential effect of the Asian financial crisis. In particular, the Company's 
quarterly operating results have in the past fluctuated as a result of the 
large percentage of orders that are not received by the Company until near 
the end of the quarter. The Company's expense levels are based, in part, on 
its expectations as to future revenue. If revenue levels are below 
expectations, results of operations may be disproportionately affected 
because only a small portion of the Company's expenses varies with its 
revenue. As a result, the Company may not learn of, or be able to confirm, 
revenue or earnings shortfalls until late in the quarter or following the end 
of the quarter. Seasonal factors, particularly decreases in revenues in 
European markets in the second 

                                       7

<PAGE>

fiscal quarter resulting from European holidays in July and August, and 
cyclical economic patterns in the aerospace, defense, automotive or other 
end-user industries also contribute to quarter-to-quarter fluctuations. Any 
shortfall in revenue or earnings from expected levels or other failure to 
meet expectations of the financial markets regarding results of operations 
could have an immediate and significant adverse effect on the trading price 
of the Company's Common Stock in any given period.

RESULTS OF OPERATIONS
     
The following tables set forth for the periods indicated selected items of 
the Company's consolidated statements of operations and such items expressed 
as a percentage of total revenue: 


<TABLE>
<CAPTION>
                                       THREE MONTHS           THREE MONTHS
                                           ENDED                  ENDED
                                        DECEMBER 31,           DECEMBER 31, 
                                           1997                    1996
                                    ------------------      -----------------
<S>                                 <C>                     <C>
STATEMENT OF OPERATIONS DATA:
Revenue: 
  Product licenses                  $  4,511     57.5%      $  4,434   65.1%
  Service and other                    3,335     42.5          2,382   34.9
                                    --------    -----       --------  -----
      Total revenue                    7,846    100.0          6,816  100.0
Cost of revenue:   
   Product licenses                      364      4.7            409    6.0
   Service and other                     669      8.5            629    9.2
                                    --------    -----       --------  -----
      Total cost of revenue            1,033     13.2          1,038   15.2
                                    --------    -----       --------  -----
Gross profit                           6,813     86.8          5,778   84.8
Operating expenses:     
   Research and development            1,587     20.2          1,493   21.9
   Sales and marketing                 3,868     49.3          3,286   48.2
   General and administrative            727      9.3            584    8.6
   Amortization of intangibles            92      1.2             45    0.7
   Acquired in-process research   
      and development                     --       --          1,896   27.8
                                    --------    -----       --------  -----
      Total operating expenses         6,274     80.0          7,304  107.2
                                    --------    -----       --------  -----
Operating income (loss)                  539      6.8         (1,526) (22.4)
Other expense, net                       (77)    (0.9)           (38)  (0.5)
                                    --------    -----       --------  -----
Income (loss) before income taxes        462      5.9         (1,564) (22.9)
Income tax expense                       115      1.5            111    1.7
                                    --------    -----       --------  -----
Net income (loss)                   $    347      4.4%      $ (1,675) (24.6)%
                                    --------    -----       --------  -----
                                    --------    -----       --------  -----
</TABLE>




                                       8

<PAGE>

<TABLE>
<CAPTION>
                                       NINE MONTHS            NINE MONTHS
                                           ENDED                  ENDED
                                        DECEMBER 31,           DECEMBER 31, 
                                           1997                    1996
                                    ------------------      -----------------
<S>                                 <C>                     <C>
STATEMENT OF OPERATIONS DATA:
Revenue: 
  Product licenses                  $  11,906    56.8%      $  9,987    59.5%
  Service and other                     9,068    43.2          6,804    40.5
                                    ---------   -----       --------   -----
      Total revenue                    20,974   100.0         16,791   100.0
Cost of revenue:   
   Product licenses                     1,344     6.4          1,160     6.9
   Service and other                    2,205    10.5          1,640     9.8
                                    ---------   -----       --------   -----
      Total cost of revenue             3,549    16.9          2,800    16.7
                                    ---------   -----       --------   -----
Gross profit                           17,425    83.1         13,991    83.3
Operating expenses:     
   Research and development             4,290    20.5          4,133    24.6
   Sales and marketing                 10,284    49.1          9,038    53.8
   General and administrative           2,151    10.2          1,941    11.5
   Amortization of intangibles            276     1.3             45     0.3
   Acquired in-process research   
      and development                      --      --          1,896    11.3
                                    ---------   -----       --------   -----
      Total operating expenses         17,001    81.1         17,053   101.5
                                    ---------   -----       --------   -----
Operating income (loss)                   424     2.0         (3,062)  (18.2)
Other expense, net                        (83)   (0.4)           (29)   (0.2)
                                    ---------   -----       --------   -----
Income (loss) before income taxes         341     1.6         (3,091)  (18.4)
Income tax expense                         87     0.4            225     1.3
                                    ---------   -----       --------   -----
Net income (loss)                   $     254     1.2%      $ (3,316)  (19.7)%
                                    ---------   -----       --------   -----
                                    ---------   -----       --------   -----
</TABLE>


THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL YEARS 1998 AND 1997 

REVENUE

Total revenue increased 15.1% to $7.8 million in the third quarter of fiscal
year 1998 from $6.8 million in the third quarter of fiscal year 1997, and
increased 24.9% to $20.9 million in the first nine months of fiscal year 1998
from $16.8 million in the first nine months of fiscal year 1997. One customer
accounted for 13% of total revenue in the third quarter of fiscal year 1998. No
one customer accounted for 10% or more of total revenue in the first nine months
of fiscal year 1998 and the third quarter or first nine months of fiscal years
1997.

Product license revenue increased 1.7% to $4.5 million in the third quarter of
fiscal year 1998 from $4.4 million in the third quarter of fiscal year 1997, and
increased 19.2% to $11.9 million in the first nine months of fiscal year 1998
from $10.0 million in the first nine months of fiscal year 1997. The increases
were primarily attributable to continued customer acceptance of the Company's
new SaberDesigner suite of products for the Windows NT operating system,
increased penetration of products into the mixed-signal integrated circuit
market and continued broadening of the Company's customer base. 

Service and other revenue increased 40.0% to $3.3 million in the third quarter
of fiscal year 1998 from $2.4 million in the third quarter of fiscal year 1997,
and increased 33.3% to $9.1 million in the first nine months of fiscal year 1998
from $6.8 million in the first nine months of fiscal year 1997. The increases
were due 

                                      9


<PAGE>


primarily to increased demand for the Company's maintenance and other 
services, growth in the Company's installed base; and revenues from the U.S. 
Air Force under a $2.0 million modeling contract awarded during the first 
quarter of fiscal year 1997 and DARPA under a $1.3 million contract awarded 
in September 1996. The final models under the U.S. Air Force contract are 
expected to be delivered in the fourth quarter of fiscal year 1998, 
therefore, the Company does not expect significant revenues in the fourth 
quarter of fiscal year 1998 or beyond from this source. In addition, revenues 
from the NIST grant and the DARPA contract are expected to decline 
significantly in the fourth quarter of fiscal year 1998 and the first quarter 
of fiscal year 1999, as these awards near expiration. The Company expects to 
continue to grow its maintenance revenues and continues to seek additional 
modeling contracts to replace the U.S. Air Force contract. However, there can 
be no assurance that revenues from the U.S. Air Force, DARPA or NIST will 
replaced.
 
Revenues recognized under these contracts were as follows 
(dollars in thousands):

<TABLE>
<CAPTION>
     
                               Three months ended     Nine months ended
                                 December 31,           December 31,
                                 1997    1996           1997     1996
                                 ----    ----          ------   ------
          <S>                    <C>     <C>           <C>      <C>
          NIST                   $130    $139          $  579   $  553
          U.S. Air Force          625      --           1,244      631
          DARPA                   228     118             743      238
                                 ----    ----          ------   ------
             Totals              $983    $257          $2,566   $1,422
                                 ----    ----          ------   ------
                                 ----    ----          ------   ------
</TABLE>

In addition to revenues received under the NIST grant, and under the 
contracts with the U.S. Air Force and DARPA, the Company received other 
revenues from the U.S. government or its subcontractors during the first nine 
months of fiscal years 1998 and 1997. Total revenues from U.S. 
government-related sources, including the previously mentioned specific 
awards, accounted for approximately 12.5% of total revenues in the first nine 
months of fiscal year 1998, and approximately 18.2% of total revenues in the 
first nine months of fiscal year 1997. While the cancellation or reduction of 
projects being undertaken by the U.S. government requiring products or 
services of the type provided by the Company, or the Company's failure to 
obtain awards of such projects, could have an adverse effect on the Company's 
business, financial condition and results of operations; the Company 
continues to broaden its customer base which it believes will lessen the 
effect of such project cancellations or reductions. 

International revenue was $8.1 million (39% of total revenue) in the first 
nine months of fiscal year 1998 compared to $7.4 million (44% of total 
revenue) in the first nine months of fiscal year 1997. International revenue 
decreased as a percentage of total revenue primarily as a result of increased 
sales in the United States in fiscal year 1998. The Company sells its 
products and services through its wholly-owned subsidiaries in Europe and 
through distributors in Asia. The Company is monitoring the Asian financial 
situation and the potential impact on its customers, and does not currently 
anticipate a significant impact from such crisis on its results of operations 
for fiscal year 1998.

COST OF REVENUE

Total cost of revenue was approximately $1.0 million in the third quarters of 
fiscal year 1998 and 1997, and increased 26.8% to $3.5 million in the first 
nine months of fiscal year 1998 from $2.8 million in the first nine months of 
fiscal year 1997.

Cost of product license revenue consists primarily of documentation expense, 
media manufacturing costs, supplies, shipping expense and the amortization of 
component and template model library costs and royalty payments. The Company 
does not capitalize development costs for software products since the time 
between the establishment of a working model of the software product and its 
commercialization is typically of a short duration. Cost of product license 
revenue decreased to 8.1% of product license revenue in the third quarter of 
fiscal year 1998 from 9.2% in the third quarter of fiscal year 1997, and 
decreased slightly to 11.3% of product license revenue in the first nine 
months of fiscal year 1998 from 11.6% in the first nine months of fiscal year 


                                       10

<PAGE>


1997. Costs such as documentation expense and supplies are expensed as 
incurred, which may not necessarily relate to the number of product licenses 
shipped during the period.

Cost of service and other revenue consists primarily of maintenance and 
customer support expenses (including product enhancements and improvements, 
bug fixes, telephone support, installation assistance and on-site support), 
contract model development costs associated with the U.S. Air Force and DARPA 
contracts and the NIST grant, and the direct cost of providing services such 
as training and consulting. The costs associated with service and other 
revenue as a percentage of total revenue are typically higher than the costs 
of product license revenue. Cost of service and other revenue decreased to 
20.1% of service and other revenue in the third quarter of fiscal year 1998 
from 26.4% in the third quarter of fiscal year 1997. This decrease was 
primarily attributable to increased engineering efforts, related to expanded 
testing and check-out procedures, expended in the third quarter of fiscal 
year 1997 on the U.S. Air Force B-2 modeling contract, which were not 
incurred during the third quarter of fiscal year 1998. In addition, 
maintenance revenue earned in the third quarter of fiscal year 1998 increased 
compared to maintenance revenue earned in the third quarter of fiscal 1997. 
Cost of service and other revenue increased slightly to 24.3% of service and 
other revenue in the first nine months of fiscal year 1998 from 24.1% of 
service and other revenue in the first nine months of fiscal year 1997. The 
NIST grant and the U.S. Air Force contract will be completed during the 
fourth quarter of fiscal year 1998 and the first quarter of fiscal year 1999, 
accordingly costs of services related to these contracts are not expected to 
be incurred beyond the first quarter of fiscal year 1999. Costs related to 
revenue under the DARPA contract are also expected to decrease significantly 
over the next three fiscal quarters, as the contract expires in October 1998.

RESEARCH AND DEVELOPMENT

Research and development expense includes all costs associated with 
development of new products and technology research. The costs classified in 
this category primarily include such items as salaries, fringe benefits, 
depreciation of capital equipment and an allocation of facilities and systems 
support costs used in research and development. Research and development 
expenses increased 6.3% to $1.6 million in the third quarter of fiscal year 
1998 from $1.5 million in the third quarter of fiscal year 1997, and 
increased 3.8% to $4.3 million in the first nine months of fiscal year 1998, 
from $4.1 million in the first nine months of fiscal year 1997. The increases 
were primarily attributable to increases in research and development 
personnel and increased salaries. As a percentage of total revenue, research 
and development costs decreased to 20.2% in the third quarter of fiscal year 
1998 from 21.9% in the third quarter of fiscal year 1997, and decreased to 
20.5% in the first nine months of fiscal year 1998 from 24.6% in the first 
nine months of fiscal year 1998, primarily as a result of increased revenue 
in  fiscal year 1998.

The NIST grant and the U.S. Air Force contract will be completed during the 
fourth quarter of fiscal 1998 and the first quarter of fiscal 1999, and the 
DARPA contract will expire in October 1998. These contracts and grant have 
provided contract modeling and research and development revenue to the 
Company, as described above under the headings "General" and "Revenue." 

SALES AND MARKETING

Sales and marketing expense consists primarily of salaries, commissions and 
travel expenses for sales and marketing personnel, and advertising and public 
relations expenses. Sales and marketing expense increased 17.7% to $ 3.9 
million in the third quarter of fiscal year 1998 from $3.3 million in the 
third quarter of fiscal year 1997, and increased 13.8% to $10.3 million in 
the first nine months of fiscal year 1998 from $9.0 million in the first nine 
months of fiscal year 1997. The increases primarily resulted from increases 
in sales commissions, personnel, salaries, travel, and the establishment of  
a new telemarketing function early in fiscal 1998. As a percentage of total 
revenue, sales and marketing expenses increased to 49.3% in the third quarter 
of fiscal year 1998 from 48.2% in the third quarter of fiscal year 1997, and 
decreased to 49.0% in the first nine months of fiscal year 1998 from 53.8% in 
the first nine months of fiscal year 1997, due to increased revenue in fiscal 
year 1998.


                                       11

<PAGE>


GENERAL AND ADMINISTRATIVE

General and administrative expense includes costs associated with the 
Company's executive staff, legal, accounting, corporate systems, facilities 
and human resources departments. General and administrative expenses 
increased 24.5% to $727,000 in the third quarter of fiscal year 1998 compared 
to $584,000 in the third quarter of fiscal year 1997, and increased 10.8% to 
$2.2 million in the first nine months of fiscal year 1998 compared to $1.9 
million in the first nine months of fiscal year 1997. The increases primarily 
resulted from increased depreciation related to the investment in application 
software and equipment associated with updating corporate information systems 
in fiscal year 1997 and general and administrative expenses of Symmetry 
Design Systems, Inc., which was acquired in November 1996. As a percentage of 
total revenue, general and administrative expenses increased to 9.3% in the 
third quarter of fiscal year 1998 from 8.6% in the third quarter of fiscal 
year, and decreased to 10.2% in the first nine months of fiscal year 1998 
from 11.5% in the first nine months of fiscal year 1997, primarily due to 
increased revenue in fiscal year 1998. These changes were primarily as result 
of the above explanations, offset by increased revenue in fiscal year 1998.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

In connection with the acquisition of Symmetry Design Systems, Inc. in 
November 1996, the Company acquired the ongoing research and development 
activities of Symmetry resulting in a one-time pre-tax charge of $1.9 million 
related to the write off of certain in-process research and development 
costs. The value assigned to the in-process research and development 
represents those research and development efforts in process at the 
acquisition date for which technological feasibility had not yet been 
established and which had no alternative future uses. Accounting rules 
require that such costs be charged to expense as incurred. The Company 
currently believes that these research and development efforts will result in 
commercially viable products over the next one to three years. 

OTHER INCOME (EXPENSE), NET

Other income (expense), net primarily consists of interest income on cash, 
cash equivalents and marketable securities offset by interest expense 
associated with capital leases and the effects of foreign currency 
transaction gains and losses. Other expense, net was $77,000 and $38,000 in 
the third quarter of fiscal years 1998 and 1997, respectively. Other expense, 
net was $83,000 and $29,000 in the first nine months of fiscal years 1998 and 
1997, respectively. These changes were primarily attributable to reduced 
interest income resulting from a lower level of cash, cash equivalents and 
marketable securities held during the periods, offset by the effect of other  
individually insignificant items.

INCOME TAX EXPENSE (BENEFIT)

The Company provided for foreign income and withholding taxes of $161,000 and 
$225,000 in the first nine months of fiscal years 1998 and 1997, 
respectively. During fiscal year 1998 the Company recorded a benefit from the 
utilization of net operating loss carryforwards, which it believes will be 
realized in the fiscal year. The Company's effective tax rate is very 
sensitive to shifts in income and losses among the various countries in which 
the Company does business, since in some countries the Company is in a tax 
paying position while in other countries the Company has operating loss 
carryforwards available to offset taxable income.

LIQUIDITY AND CAPITAL RESOURCES 

The Company has financed its operations since inception with private equity 
investments, cash from operations, subordinated debt, bank loans, capital 
equipment leases, accounts receivable financing and in March 1996, with an 
initial public offering of common stock which resulted in net proceeds to the 
Company of approximately $9.4 million.


                                       12


<PAGE>


Net cash provided by operating activities was $1.4 million in the first nine 
months of fiscal year 1998. This primarily resulted from net income for the 
period, adjustments for depreciation and amortization, and an increase in 
unearned revenue offset by an increase in accounts receivable, primarily 
attributable to increased sales levels.

Net cash used in investing activities was $1.1 million in the first nine 
months of fiscal year 1998, which primarily included capital expenditures for 
the upgrade of corporate information systems and capital expenditures 
associated with the investment in the Company's component and template model 
libraries, offset by maturities of investments in marketable securities. 

Net cash used in financing activities was $109,000 in the first nine months 
of fiscal year 1998, which included payments on capital lease obligations, 
offset by proceeds from the exercise of stock options.
     
The Company has an operating line of credit with a bank which allows the 
Company to receive advances of up to $3.0 million based on eligible accounts 
receivable and is secured by accounts receivable, furniture, fixtures and 
equipment and general intangibles. Interest is payable monthly at the bank's 
prime rate plus 1%. The line of credit facility requires the Company to 
maintain certain financial and other covenants and matures on March 9, 1998. 
No amounts were outstanding under this facility at December 31, 1997.

The Company has a lease line of credit, which allows for the lease of up to 
$1,000,000 of computers and related equipment, under which $281,000 was 
outstanding at December 31, 1997. Amounts borrowed under the lease line of 
credit are to be repaid over 36 months. The lease line of credit expires 
March 31, 1998. In connection with the negotiation of the lease line of 
credit the Company issued warrants to purchase 10,000 shares of its common 
stock at $7.50 per share which expire on June 23, 2001.

The Company has made an assessment of the effect of the Year 2000 issue on 
its systems, equipment and software products. Based on this assessment, the 
Company believes that its software applications, operational programs and its 
software products will properly recognize calendar dates beginning in the 
Year 2000, and accordingly does not currently expect to incur material costs 
in connection with the Year 2000 issue. 

The Company believes its existing cash, cash equivalents and marketable 
securities, combined with amounts available under its operating line of 
credit and lease line of credit, and cash flows expected to be generated by 
operations, will be sufficient to meet its anticipated cash needs for working 
capital and capital expenditures for the next 12 months.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued Statement of Financial Accounting Standards No. 
130, "Reporting Comprehensive Income" (SFAS 130), which establishes 
requirements for disclosure of comprehensive income. The objective of SFAS 
130 is to report all changes in equity that result from transactions and 
economic events other than transactions with owners. Comprehensive income is 
the total of net income and all other nonowner changes in equity. SFAS 130 
is effective for fiscal years beginning after December 15, 1997. 
Reclassification of earlier financial statements for comparative purposes is 
required. The Company has not quantified the effect of adoption of SFAS 130.


                                      13

<PAGE>

                         PART II - OTHER INFORMATION


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

The Company's annual meeting of shareholders was held on July 22, 1997. The
following matters were submitted to shareholders for their consideration:

      1.  With respect to the two nominees for three-year terms as director
     identified in the Company's Proxy Statement; John H. Faehndrich received
     6,506,138 votes and 875,093 votes were withheld and Martin Vlach received
     6,069,649 votes and 1,311,582 votes were withheld.    
      
      2.  The amendments to the Company's Amended and Restated 1993 Stock
     Incentive Plan Incentive Plan were approved as follows: 6,235,499 shares
     were voted in favor, 1,084,771 shares were voted in opposition and 26,761
     shares abstained.
      
      3.  The appointment of KPMG Peat Marwick, LLP as the Company's independent
     auditors for the fiscal year ending March 31, 1998 was ratified as follows:
     7,369,480 shares were voted in favor, 3,226 shares were voted in opposition
     and 8,525 shares abstained.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The exhibits filed as part of this report are listed below:
     
     Exhibit No.
     ----------- 
     27      Financial Data Schedule

(b) Reports on Form 8-K

A Report on Form 8-K, containing the Company's earnings release for the quarter
and nine months ended December 31, 1997, under Item 5, was filed on January 27,
1998.









                                      14

<PAGE>


     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.

Dated: February 10, 1998           


                              ANALOGY, INC.

                              By: /s/ GARY P. ARNOLD
                                  -------------------
                                  Gary P. Arnold
                                  Chairman of the Board, President
                                  and Chief Executive Officer
                                  (Principal Executive Officer)

          
                              
                              By: /s/ TERRENCE A. RIXFORD
                                  -----------------------
                                  Terrence A. Rixford
                                  Vice President, Finance and Administration
                                  (Principal Financial Officer)








                                      15