<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, 1998
                                       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
                             BEAVERTON, 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                           9,504,899
         (Class)                       (Shares outstanding at February 2, 1999)

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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, 1998
and March 31, 1998..............................................................................2

Consolidated Statements of Operations - Three Months and Nine Months
ended December 31, 1998 and 1997................................................................3

Consolidated Statements of Cash Flows -Nine Months
ended December 31, 1998 and 1997................................................................4

Notes to Consolidated Financial Statements......................................................5

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

Item 3.  Quantitative and Qualitative Disclosure About  Market Risk.............................15


PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K.......................................................15
</TABLE>


                                       1
<PAGE>

                         PART I - FINANCIAL INFORMATION


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

<TABLE>
<CAPTION>
                                                                    December 31,             March 31,
                                                                        1998                    1998
                                                                  ------------------        -------------
<S>                                                               <C>                       <C>
   ASSETS
     Current assets:                                                                         
        Cash and cash equivalents                                   $       1,226           $      8,130
        Accounts receivable                                                 6,534                  3,946
        Prepaid expenses                                                    1,245                  1,160
        Other assets, net                                                   1,772                    506
                                                                        ----------            -----------
            Total current assets                                           10,777                 13,742

     Furniture, fixtures and equipment, net of accumulated
         depreciation and amortization of $9,803 and $8,073                 2,789                  3,811
     Library costs, net                                                     4,269                  3,924
     Other assets, net                                                      2,027                  1,498
                                                                        ----------            -----------
                                                                        ----------            -----------
                                                                    $      19,862           $     22,975
                                                                        ----------            -----------
                                                                        ----------            -----------

   LIABILITIES AND SHAREHOLDERS' EQUITY
     Current liabilities:
       Accounts payable and accrued expenses                        $       1,290           $      1,895
       Current portion of capital leases                                      349                    536
       Accrued salaries and benefits                                        2,463                  2,726
       Unearned revenue                                                     8,217                  7,254
                                                                        ----------            -----------
         Total current liabilities                                         12,319                 12,411

    Non-current portion of capital leases                                     287                    454
    Deferred contract revenue                                               1,485                  1,308
    Other liabilities                                                          83                    107

   Shareholders' equity:
       Common stock, no par value, authorized 35,000 shares;
        9,438 and 9,330 shares issued and outstanding                      18,346                 17,906
       Other comprehensive loss- foreign currency translation                (188)                  (205)
       Accumulated deficit                                                (12,470)                (9,006)
                                                                        ----------            -----------
         Total shareholders' equity                                         5,688                  8,695
                                                                        ----------            -----------
                                                                    $      19,862           $     22,975
                                                                        ----------            -----------
                                                                        ----------            -----------
</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,
                                              -----------------------------     -----------------------------
                                                  1998             1997            1998             1997
                                              -------------     -----------     ------------    -------------
<S>                                           <C>               <C>             <C>             <C>
     Revenue:
        Product licenses                       $     4,316      $    4,511      $    11,196     $     10,732
        Service and other                            2,942           3,335            7,891            9,068
                                                  ---------        --------        ---------       ----------
           Total revenue                             7,258           7,846           19,087           19,800

     Cost of revenue:

        Product licenses                               478             364            1,407            1,344
        Service and other                              450             669              988            2,205
                                                  ---------        --------        ---------       ----------
           Total cost of revenue                       928           1,033            2,395            3,549
                                                  ---------        --------        ---------       ----------

           Gross profit                              6,330           6,813           16,692           16,251

     Operating expenses:
        Research and development                     2,081           1,587            6,773            4,290
        Sales and marketing                          3,383           3,868           10,066           10,172
        General and administrative                     586             727            1,892            2,151
        Amortization of intangibles                     92              92              276              276
        Restructuring charges                            -               -              557                -
                                                  ---------        --------        ---------       ----------
           Total operating expenses                  6,142           6,274           19,564           16,889
                                                  ---------        --------        ---------       ----------

           Operating income (loss)                      188            539           (2,872)           (638)

     Other expense, net                                (15)            (77)            (246)            (83)
                                                  ---------        --------        ---------       ----------
          Income (loss) before income
              taxes                                     173            462           (3,118)           (721)

     Income tax expense (benefit)                      120             115              346            (180)
                                                  ---------        --------        ---------       ----------

           Net income (loss)                   $         53     $      347      $    (3,464)    $      (541)
                                                  ---------        --------        ---------       ----------
                                                  ---------        --------        ---------       ----------

     Basic net income (loss) per share         $      0.01      $     0.04      $     (0.37)    $     (0.06)
                                                  ---------        --------        ---------       ----------
                                                  ---------        --------        ---------       ----------
     Diluted net income (loss)  per share      $      0.01      $     0.04      $     (0.37)    $     (0.06)
                                                  ---------        --------        ---------       ----------
                                                  ---------        --------        ---------       ----------

     Shares used in per share calculations
       Basic                                         9,437           9,193            9,404            9,164
                                                  ---------        --------        ---------       ----------
                                                  ---------        --------        ---------       ----------
       Diluted                                       9,674           9,834            9,404            9,164
                                                  ---------        --------        ---------       ----------
                                                  ---------        --------        ---------       ----------
</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,
                                                                        -----------------------------------
                                                                            1998                 1997
                                                                        --------------       --------------
<S>                                                                     <C>                  <C>
    CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                           $    (3,464)        $        (541)
      Adjustments to reconcile net loss to net cash
        (used in) provided by operating activities:
         Depreciation and amortization                                          3,050                2,843
      Changes in operating assets and liabilities:
        Accounts receivable                                                    (2,427)                (477)
        Prepaid expenses and other assets                                        (449)                (404)
        Accounts payable and accrued expenses                                  (1,014)                (936)
        Unearned revenue                                                         (751)                 877
                                                                            ----------           ----------
              Net cash (used in) provided by operating activities              (5,055)               1,362
                                                                            ----------           ----------

    CASH FLOWS FROM INVESTING ACTIVITIES:
        Maturities of marketable securities                                        --                1,700
       Capital expenditures for furniture, fixtures and equipment                (597)              (1,042)
       Capital expenditures for library costs                                  (1,367)              (1,712)
                                                                            ----------           ----------
              Net cash used in investing activities                            (1,964)              (1,054)
                                                                            ----------           ----------

    CASH FLOWS FROM FINANCING ACTIVITIES:
       Principal payments on capital lease obligations                           (431)                (352)
       Proceeds from exercise of stock options and warrants                       441                  243
                                                                            ----------           ----------
              Net cash provided by (used in) financing activities                  10                 (109)
                                                                            ----------           ----------

    Effect of exchange rate changes on cash and cash equivalents                  105                  (25)
                                                                            ----------           ----------


              Net (decrease) increase in cash and cash equivalents             (6,904)                 174

       Cash and cash equivalents at beginning of period                         8,130                1,827
                                                                            ----------           ----------
       Cash and cash equivalents at end of period                        $      1,226        $       2,001
                                                                            ----------           ----------
                                                                            ----------           ----------


    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Cash paid for:
        Interest                                                         $        176        $         103
        Income taxes                                                              348                  125
    SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
       Acquisition of equipment under capital lease obligations          $         78        $         319
       Recording of deferred and unearned contract revenue                      2,560                   --
</TABLE>


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

                                       4
<PAGE>

                         ANALOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited financial information included herein for the three and nine 
months ended December 31, 1998 and 1997 was prepared in conformity with 
generally accepted accounting principles. The financial information as of 
March 31, 1998 is derived from the Analogy, Inc. (the "Company") consolidated 
financial statements included in the Company's Annual Report on Form 10-K for 
the year ended March 31, 1998. 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 year ended March 31, 1998, as included in the Company's 
Annual Report on Form 10-K for the year ended March 31, 1998.

Operating results for the three and nine months ended December 31, 1998 are 
not necessarily indicative of the results that may be expected for the entire 
fiscal year ending March 31, 1999, or any portion thereof.

2.  RECLASSIFICATIONS

At September 30, 1998, the Company recorded deferred contract revenue 
primarily related to a long term contract received during the second quarter 
of fiscal year 1999, and reclassified certain similar prior period amounts to 
conform with the second quarter presentation. Certain other prior period 
amounts have been reclassified to conform with the current period 
presentation.

3.  COMPREHENSIVE INCOME (LOSS)

On April 1, 1998, the Company adopted 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. Adoption of SFAS 130 did not impact the Company's 
consolidated financial position, results of operations or cash flows for the 
three and nine months ended December 31, 1998 and 1997. The reconciliation of 
net income (loss) to comprehensive income (loss) is as follows (in thousands):

<TABLE>
<CAPTION>
                                                 Three Months Ended December 31,
                                               --------------------------------------
                                                          1998              1997
                                                        ---------         ---------
<S>                                                <C>                <C>           
Net income                                         $          53      $        347
Foreign currency translation adjustments                     (16)              (49)
                                                        ---------         ---------
Comprehensive income                               $          37      $        298
                                                        ---------         ---------
                                                        ---------         ---------

                                                  Nine Months Ended December 31,
                                               --------------------------------------
                                                          1998              1997
                                                        ---------         ---------
Net loss                                           $      (3,464)     $       (541)
Foreign currency translation adjustments                      17               (68)
                                                        ---------         ---------
Comprehensive loss                                 $      (3,447)     $       (609)
                                                        ---------         ---------
                                                        ---------         ---------
</TABLE>

                                       5
<PAGE>

4. NET (LOSS) INCOME PER SHARE

The Company has adopted Financial Accounting Standards Board Statement of 
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). 
Basic net loss per common share is computed by dividing net loss by the 
weighted average number of shares of common stock outstanding for the period. 
Diluted net loss per common share for all periods presented is the same as 
basic net loss per share since all potential dilutive securities are excluded 
because they are antidilutive. 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 potential common shares related 
to stock options and warrants outstanding during the period. Potential common 
shares of 237,000 and 641,000 were used in the calculation of diluted 
earnings per share for the quarters ended December 31, 1998 and 1997, 
respectively.

The dilutive effect of stock options outstanding for the purchase of 
1,728,000 shares for the nine months ended December 31, 1998, and 1,491,000 
shares for the nine months ended December 31, 1997; and warrants outstanding 
for the purchase of 200,000 shares for the nine months ended December 31, 
1998, and 410,000 shares for nine months ended December 31, 1997, 
respectively, were not included in loss per share calculations, because to do 
so would have been antidilutive.

5. RESTRUCTURING

Results of operations for the first quarter of fiscal year 1999 included a 
$557,000 charge for costs associated with a restructuring plan undertaken to 
improve profitability. The restructuring plan consisted of a work force 
reduction primarily in the marketing and research and development functions 
of the Company. All of the restructuring charges were paid in the first 
quarter of fiscal year 1999.


                                       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 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 sales to resellers is generally recognized upon 
shipment to the reseller. In the case of certain long-term contracts, revenue 
is recognized on a subscription basis over the life of the contract. 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 generally 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 provided funding to the Company for research and development. 
The DARPA contract contains cost sharing provisions. The final models under 
the U.S. Air Force contract were delivered in the fourth quarter of fiscal 
year 1998, therefore, no further revenues will be received in fiscal year 
1999 from this source. In addition, revenues from the NIST grant concluded at 
the end of the first quarter of fiscal year 1999 and revenues from the DARPA 
contract are expected to be minimal in fiscal year 1999, as this award nears 
expiration. There can be no assurance that revenues from the U.S. Air Force, 
DARPA or NIST will be replaced.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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 involve risks and uncertainties 
that could cause actual results to differ materially from the forward-looking 
statements, including, without limitation, the receipt and timing of orders 
for the Company's products, changes in capital spending plans by key 
customers, the lengthy sales cycles for the Company's products, the effect of 
the Asian economic situation, the impact of expense reductions on the 
Company, increased adoption of behavioral modeling design methodologies for 
mixed-signal and mixed-technology systems design, the Company's ongoing 
ability to introduce new products and expand its markets, seasonal 
fluctuations in the Company's order patterns and competitive initiatives, 
unanticipated costs related to the Year 2000 issue, and other risks listed 
from time to time in the Company's periodic reports filed with the Securities 
and Exchange Commission, including without limitation the Company's Report on 
Form 10-K for the year ended March 31, 1998, or otherwise disclosed by the 
Company.

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 


                                       7
<PAGE>

business risks that could have adverse effects on the Company's results of 
operations, including those discussed below, and those discussed elsewhere in 
this Report.

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, including decreases in revenues in European 
markets in the second 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.

The Company has historically derived a significant portion of its revenue 
from the aerospace and defense industries, which have been characterized by 
significant technological changes, high cyclicality and the potential for 
significant downturns in business activity resulting from changes in economic 
conditions or governmental resources and spending policies. The Company also 
has historically derived a significant portion of its revenue from the 
automotive industry. The automotive industry is characterized by high 
cyclicality, technological change, fluctuations in manufacturing capacity, 
labor issues, and pricing and gross margin pressures. This industry has from 
time to time experienced significant economic downturns characterized by 
decreased product demand, production over-capacity, price erosion, work 
slowdowns and layoffs. No assurance can be given that the industries served 
by the Company will experience economic growth, will not experience a 
downturn or that any downturn will not be severe, or that such conditions 
would not have a material adverse effect on the Company's business, financial 
condition and results of operations.

The Company's operating results have depended, and will continue to depend, 
upon designers of mixed-signal and mixed-technology systems adopting methods 
of design analysis and simulation which use behavioral modeling techniques. 
The design analysis and simulation industry is characterized by rapid 
technological change, frequent new product introductions and evolving 
industry standards. The introduction of products embodying new technologies 
and the emergence of new industry standards can render existing products 
obsolete and unmarketable. The Company's future success will depend upon its 
ability to enhance its current products and to develop or acquire new 
products that keep pace with technological developments and emerging industry 
standards and address the increasingly sophisticated needs of its customers.


                                       8
<PAGE>

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 (dollars in thousands):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------

                                                   THREE MONTHS                     THREE MONTHS
                                                       ENDED                           ENDED
  STATEMENT OF OPERATIONS DATA:                  DECEMBER 31, 1998                  DECEMBER 31,
                                                                                        1997
                                                --------------------            ---------------------
<S>                                          <C>           <C>               <C>             <C>
  Revenue:
    Product licenses                         $    4,316        59.5  %       $     4,511        57.5  %
    Service and other                             2,942        40.5                3,335        42.5
                                                --------    --------            ---------    --------
        Total revenue                             7,258       100.0                7,846       100.0
  Cost of revenue:
     Product licenses                               478         6.6                  364         4.7
     Service and other                              450         6.2                  669         8.5
                                                --------    --------            ---------    --------
        Total cost of revenue                       928        12.8                1,033        13.2
                                                --------    --------            ---------    --------
  Gross profit                                    6,330        87.2                6,813        86.8
  Operating expenses:
     Research and development                     2,081        28.7                1,587        20.2
     Sales and marketing                          3,383        46.6                3,868        49.3
     General and administrative                     586         8.1                  727         9.3
     Amortization of intangibles                     92         1.2                   92         1.2
                                                --------    --------            ---------    --------
        Total operating expenses                  6,142        84.6                6,274        80.0
                                                --------    --------            ---------    --------
  Operating income                                  188         2.6                  539         6.8
  Other expense, net                                (15)       (0.2)                 (77)       (0.9)
                                                --------    --------            ---------    --------
  Income before income taxes                        173         2.4                  462         5.9
  Income tax expense                                120         1.7                  115         1.5
                                                --------    --------            ---------    --------
                                                --------    --------            ---------    --------
  Net income                                 $       53         0.7  %       $       347         4.4  %
                                                --------    --------            ---------    --------

-----------------------------------------------------------------------------------------------------
</TABLE>

                                       9
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                                    NINE MONTHS                     NINE MONTHS
                                                       ENDED                           ENDED
  STATEMENT OF OPERATIONS DATA:                  DECEMBER 31, 1998               DECEMBER 31, 1997
                                                --------------------            ---------------------
<S>                                          <C>            <C>              <C>              <C>
  Revenue:
    Product licenses                         $   11,196        58.7  %       $     10,732       54.2  %
    Service and other                             7,891        41.3                 9,068       45.8
                                                --------    --------            ----------    -------
        Total revenue                            19,087       100.0                19,800      100.0
  Cost of revenue:
     Product licenses                             1,407         7.4                 1,344        6.8
     Service and other                              988         5.2                 2,205       11.1
                                                --------    --------            ----------    -------
        Total cost of revenue                     2,395        12.6                 3,549       17.9
                                                --------    --------            ----------    -------
  Gross profit                                   16,692        87.4                16,251       82.1
  Operating expenses:
     Research and development                     6,773        35.5                 4,290       21.7
     Sales and marketing                         10,066        52.7                10,172       51.4
     General and administrative                   1,892         9.9                 2,151       10.8
     Amortization of intangibles                    276         1.4                   276        1.4
     Restructuring charges                          557         2.9                    --         --
                                                --------    --------            ----------    -------
        Total operating expenses                 19,564       102.4                16,889       85.3
                                                --------    --------            ----------    -------
  Operating loss                                 (2,872)      (15.0)                 (638)      (3.2)
  Other expense, net                               (246)       (1.3)                  (83)      (0.4)
                                                --------    --------            ----------    -------
  Loss before income taxes                       (3,118)      (16.3)                 (721)      (3.6)
  Income tax expense (benefit)                      346         1.8                  (180)      (0.9)
                                                --------    --------            ----------    -------
  Net loss                                   $   (3,464)      (18.1) %       $       (541)      (2.7) %
                                                --------    --------            ----------    -------
                                                --------    --------            ----------    -------

-----------------------------------------------------------------------------------------------------
</TABLE>

THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL YEARS 1999 AND 1998

REVENUE

Total revenue decreased 7.5% to $7.3 million in the third quarter of fiscal year
1999 from $7.8 million in the third quarter of fiscal year 1998, and decreased
3.6% to $19.1 million in the first nine months of fiscal year 1999 from $19.8 in
the first nine months of fiscal year 1998. No one customer accounted for 10% or
more of total revenue in the third quarter or first nine months of fiscal years
1999 or 1998.

Product license revenue decreased 4.3% to $4.3 million in the third quarter of
fiscal year 1999 from $4.5 million in the third quarter of fiscal year 1998, and
increased 4.3% to $11.2 million in the first nine months of fiscal year 1999
from $10.7 million in the first nine months of fiscal year 1998. Throughout
fiscal year 1999, the Company has experienced increased demand for its products
from customers in the U.S. and Europe, offset by reduced demand from customers
in Asia.

Service and other revenue decreased 11.8% to $2.9 million in the third quarter
of fiscal year 1999 from $3.3 million in the third quarter of fiscal year 1998,
and decreased 13.0% to $7.9 million in the first nine months of fiscal year 1999
from $9.1 million in the first nine months of fiscal year 1998. The decreases
were due primarily to decreased revenues under the NIST grant and U.S.
government contracts, offset by increasing demand for the Company's maintenance,
consulting and other services resulting from growth in the Company's installed
base. The final models under the U.S. Air Force contract were delivered in the
fourth quarter of fiscal year 1998, therefore, no further revenues will be
received in fiscal year 1999 from this source. 


                                       10
<PAGE>

In addition, revenues from the NIST grant concluded at the end of the first 
quarter of fiscal year 1999 and revenues from the DARPA contract are expected 
to be minimal in fiscal year 1999, as this award nears expiration. There can 
be no assurance that revenues from the U.S. Air Force, DARPA or NIST will be 
replaced. Revenues recognized under these contracts, in the aggregate, were 
not significant as a percentage of total revenue in the three months and nine 
months ended December 31, 1998, and were approximately $1.0 million and $2.6 
million in the three months and nine months ended December 31, 1997, 
respectively.

Total revenues from U.S. government-related sources, including the previously 
mentioned specific awards, were not significant as a percentage of total 
revenues in the first nine months of fiscal year 1999, and were approximately 
13% of total revenues in the first nine months of fiscal year 1998.

The Company sells its products and services through its wholly-owned 
subsidiaries in Europe and through distributors in Asia. International 
revenue was $10.1 million (53% of total revenue) in the first nine months of 
fiscal year 1999 compared to $8.1 million (41% of total revenue) in the first 
nine months of fiscal year 1998. Throughout fiscal year 1999 the Company has 
experienced reduced demand from customers in Asia and is continuing to 
monitor the Asian financial situation and the impact on its customers.

COST OF REVENUE

Total cost of revenue decreased 10.2% to $928,000 in the third quarter of 
fiscal year 1999 from $1.0 million in the third quarter of fiscal year 1998, 
and decreased 32.5% to $2.4 million in the first nine months of fiscal year 
1999 from $3.5 million in the first nine months of fiscal year 1998.

Cost of product license revenue consists primarily of documentation expense, 
media manufacturing costs, supplies, shipping expense, 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 increased to 11.1% of product license revenue in the third quarter of 
fiscal year 1999 from 8.1% in the third quarter of fiscal year 1998, and 
increased slightly to 12.6% of product license revenue in the first nine 
months of fiscal year 1999 from 12.5% in the first nine months of fiscal year 
1998. Costs such as documentation expense and supplies are expensed as 
incurred, and development costs associated with creating the library of 
component and template models are capitalized and amortized over the 
estimated product life. These costs and amortization expenses 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), 
certain contract model development costs associated with the U.S. Air Force 
and DARPA contracts and the NIST grant (primarily in the fiscal year 1998 
periods), and the direct cost of providing services such as training and 
consulting. As a percentage of service and other revenue, cost of service and 
other revenue decreased to 15.3% of service and other revenue in the third 
quarter of fiscal year 1999 from 20.1% in the third quarter of fiscal year 
1998, and decreased to 12.5% of service and other revenue in the first nine 
months of fiscal year 1999 from 24.3% of service and other revenue in the 
first nine months of fiscal year 1998. The decreases were primarily 
attributable to decreased activity under the NIST grant, and the U.S. Air 
Force and DARPA contracts, which had higher costs associated with them than 
the Company's other services. The decrease in costs associated with the 
government grant and contracts in the third quarter of fiscal year 1999 was 
partially offset by increased outside services necessary in connection with 
consulting revenue. The final models under the U.S. Air Force contract were 
delivered in the fourth quarter of fiscal year 1998, therefore, no further 
costs will be incurred in fiscal year 1999 in connection with this contract. 
In addition, the NIST grant concluded at the end of the first quarter of 
fiscal year 1999 and costs incurred under the DARPA contract are expected to 
be minimal in fiscal year 1999 as this award nears expiration.


                                       11
<PAGE>

RESEARCH AND DEVELOPMENT

Research and development expense includes all costs associated with 
development of new products and technology research. Costs classified in this 
category primarily include such items as salaries, fringe benefits and an 
allocation of facilities and systems support costs including depreciation of 
capital equipment used in research and development. Research and development 
expenses increased 31.1% to $2.1 million in the third quarter of fiscal year 
1999 from $1.6 million in the third quarter of fiscal year 1998, and 
increased 57.9% to $6.8 million in the first nine months of fiscal year 1999, 
from $4.3 million in the first nine months of fiscal year 1998. As discussed 
under "Revenue" and "Cost of Revenue" above, the final models under the U.S. 
Air Force contract were delivered in the fourth quarter of fiscal year 1998, 
the NIST grant concluded at the end of the first quarter of fiscal year 1999 
and the DARPA contract expires in fiscal 1999. Accordingly, payroll and 
overhead related to research and development personnel performing work under 
these contracts was matched with related revenues and recorded as cost of 
service and other revenue in fiscal year 1998, whereas similar costs in the 
first nine months of fiscal year 1999 were recorded as research and 
development expense, which increased research and development expense in 
fiscal 1999. This increase was partially offset by the work force reduction 
which occurred in the first quarter of fiscal 1999, pursuant to the Company's 
restructuring plan. As a percentage of total revenue, research and 
development costs increased to 28.7% in the third quarter of fiscal year 1999 
from 20.2% in the third quarter of fiscal year 1998, and increased to 35.5% 
in the first nine months of fiscal year 1999 from 21.7% in the first nine 
months of fiscal year 1998.

SALES AND MARKETING

Sales and marketing expense consists primarily of salaries, commissions, 
travel and costs of promotional activities. Sales and marketing expense 
decreased 12.5% to $3.4 million in the third quarter of fiscal year 1999 from 
$3.9 million in the third quarter of fiscal year 1998, and decreased 1.0% to 
$10.1 million in the first nine months of fiscal year 1999 from $10.2 million 
in the first nine months of fiscal year 1998. Sales and marketing expenses 
decreased in the third quarter and first nine months of fiscal year 1999 
primarily as a result of the work force reduction which occurred in the first 
quarter of fiscal 1999, pursuant to the Company's restructuring plan. The 
decrease in the first nine months of fiscal year 1999 was offset by costs 
associated with the Company's corporate image marketing campaign, which 
occurred primarily in the fourth quarter of fiscal year 1998 and the first 
quarter of fiscal year 1999. As a percentage of total revenue, sales and 
marketing expenses decreased to 46.6% in the third quarter of fiscal year 
1999 from 49.3% in the third quarter of fiscal year 1998, and increased to 
52.7% in the first nine months of fiscal year 1999 from 51.4% in the first 
nine months of fiscal year 1998.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include costs associated with the 
Company's executive staff, legal, accounting, corporate systems, facilities 
and human resources departments. General and administrative expenses 
decreased 19.4% to $586,000 in the third quarter of fiscal year 1999 compared 
to $727,000 in the third quarter of fiscal year 1998, and decreased 12.0% to 
$1.9 million in the first nine months of fiscal year 1999 compared to $2.2 
million in the first nine months of fiscal year 1998. The decreases primarily 
resulted from work force reductions implemented during the first quarter of 
fiscal year 1999. As a percentage of total revenue, general and 
administrative expenses decreased to 8.1% in the third quarter of fiscal year 
1999 from 9.3% in the third quarter of fiscal year 1998, and decreased to 
9.9% in the first nine months of fiscal year 1999 from 10.8% in the first 
nine months of fiscal year 1998.

RESTRUCTURING CHARGES

Results of operations for the first quarter of fiscal year 1999 included a 
$557,000 charge for costs associated with a restructuring plan undertaken to 
improve profitability. The restructuring plan consisted of a work force 
reduction primarily in the marketing and research and development functions 
of the Company. All of the restructuring charges were paid in the first 
quarter of fiscal year 1999.


                                       12
<PAGE>

OTHER EXPENSE, NET

Other expense, net primarily consists of interest expense associated with 
capital leases, the effects of foreign currency transaction gains and losses, 
and interest income on cash, cash equivalents and marketable securities. 
Other expense, net was $15,000 and $77,000 in the third quarters of fiscal 
years 1999 and 1998, respectively. Other expense, net was $246,000 and 
$83,000 in the first nine months of fiscal years 1999 and 1998, respectively. 
The increase in the first nine months of fiscal year 1999 was primarily 
attributable to amortization of finance charges in the first quarter of 
fiscal year 1999, related to the sale of approximately $4.0 million of 
accounts receivable to a financial institution in the fourth quarter of 
fiscal year 1998, reduced interest income resulting from lower levels of cash 
and cash equivalents held during the periods and the effect of foreign 
currency transaction gains and losses. The decrease in the third quarter of 
fiscal year 1999 primarily related to the effect of foreign currency 
transaction gains and losses.

INCOME TAX EXPENSE (BENEFIT)

The Company provided for foreign income and withholding taxes of $346,000 and 
$225,000 in the first nine months of fiscal years 1999 and 1998, 
respectively. In the first nine months of fiscal year 1998, the Company also 
recorded a benefit from the utilization of net operating loss carryforwards 
of $405,000. The Company's effective tax rate is 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

Net cash used in operating activities was $5.1 million in the first nine 
months of fiscal year 1999. This primarily resulted from a net loss for the 
period, decreases in accounts payable and accrued expenses as a result of the 
timing of payments, a decrease in unearned revenue due to revenue recognized 
during the period, and an increase in accounts receivable, offset by 
adjustments for depreciation and amortization. Accounts receivable increased 
compared to the balance at March 31, 1998 which was net of a March 1998 sale 
of approximately $4.0 million of accounts receivable to a financial 
institution. Deferred contract revenue, unearned contract revenue and other 
assets increased due to the recording of unearned and deferred revenue during 
the second quarter of fiscal year 1999, primarily related to a long term 
contract received during that quarter. (See Note 2 of Notes to Consolidated 
Financial Statements.)

Net cash used in investing activities was $1.9 million in the first nine 
months of fiscal year 1999, which primarily included expenditures associated 
with the investment in the Company's component and template model libraries 
and capital expenditures for the upgrade of corporate information systems.

Net cash provided by financing activities was $10,000 in the first nine 
months of fiscal year 1999, which included proceeds from the exercise of 
stock options and warrants offset by principal payments on capital lease 
obligations.

The Company has an operating line of credit with a bank which allows the Company
to receive advances of up to $5.0 million based on 80% of eligible domestic
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 0.5%. The line of credit facility requires the Company to
maintain certain financial and other covenants including minimum net worth,
results of operations and ratio of current assets to current liabilities. The
Company was in compliance with all covenants at December 31, 1998. At December
31, 1998, the Company had no amounts outstanding under the operating line and
available borrowing capacity of approximately $1.9 million. At February 11,
1999, the Company had borrowings outstanding under the operating line of
approximately $400,000, additional borrowing capacity of approximately $1.5
million (based on borrowing capacity as calculated at December 31, 1998) and
cash and cash equivalents of approximately $1.9 million. The line of credit
matures on March 4, 1999. The 


                                       13
<PAGE>

Company believes it will be able to successfully negotiate a renewal of this 
line of credit in the fourth quarter of fiscal year 1999. If the Company 
cannot successfully negotiate a renewal of the line of credit, the Company 
may explore other financing alternatives, including factoring of accounts 
receivable and equity financing.

The Company believes its existing cash and cash equivalents, combined with 
amounts available under its operating 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 through the end of 
the current fiscal year. Beyond the end of the current fiscal year, depending 
on a variety of factors which cannot be predicted with certainty, including 
the Company's results of operations, receipt and timing of orders for the 
Company's products, changes in capital spending plans by key customers, the 
impact of expense reductions on the Company, the Company's ongoing ability to 
introduce new products and expand its markets, seasonal fluctuations in the 
Company's order patterns and unanticipated costs related to the Year 2000 
issue, the Company may need to raise additional funds. Such additional 
funding, if through factoring of accounts receivable or debt, could be more 
costly than the Company's current line of credit or, if equity, could be 
materially dilutive to existing shareholders. There can be no assurance that 
additional financing would be available and, if available, that the terms 
would be acceptable to the Company or that such financing could be obtained 
in a timely manner. If adequate funds are not available as required, the 
Company's ability to continue its research and product development efforts, 
as well as the Company's financial condition and results of operations will 
be adversely affected.

YEAR 2000 ISSUE

The Company is assessing its computer software programs and operating systems 
used in its internal operations including development and accounting systems, 
to determine their readiness for the Year 2000. The inability of computer 
software programs and operating systems to accurately recognize, interpret 
and process date data designating the Year 2000 and beyond could cause 
systems to yield inaccurate results or encounter operating problems, 
including disruption of the business operations these systems control. The 
Company is approximately 90% complete with its internal assessment and 
expects to complete the internal assessment by March 31, 1999.

The Company intends to contact major suppliers of products and services to 
determine that the products and services provided to the Company are Year 
2000 compliant. As the majority of the Company's major customers are "Fortune 
100" companies, the Company intends to review Year 2000 public disclosures 
made by its major customers to determine whether their operations are Year 
2000 compliant. If the Company's major suppliers of products and services and 
its major customers are not Year 2000 compliant, their noncompliance may 
cause a material disruption to their businesses which could negatively impact 
the Company in many ways, including the inability to collect payments from 
customers and the delay or cessation of deliveries of products or services. 
Additionally, risks associated with parties located outside the U.S. may be 
higher as it is generally believed than non-U.S. businesses may not be 
addressing their Year 2000 issues on as timely a basis as U.S. businesses. 
There can be no assurance that major suppliers of products and services and 
major customers will adequately address their Year 2000 issues. The Company 
expects to complete its assessment of its major suppliers of products and 
services and its major customers by November 30, 1999.

Like all businesses, the Company will be at risk from other external 
infrastructure failures that could arise from Year 2000 failures. It is not 
clear that electrical power, telephone and computer networks, for example, 
will be fully functional in the countries in which the Company does business 
in the year 2000. Investigation and assessment of infrastructures, like 
national power grids, transportation systems, communications systems or major 
institutions such as government or banking systems is beyond the scope and 
resources of the Company. Investors should use their own awareness of 
potential problems regarding infrastructure issues and their potential impact 
on the Company's performance.

The Company has assessed its products to determine their readiness for the Year
2000. The Company's products do not require date-specific calculations and
therefore the Company believes they will be unaffected 


                                       14
<PAGE>

by the Year 2000 transition. The Company believes that its 5.0 product 
version, scheduled for release near the end of fiscal year 1999 (March 31, 
1999) or the beginning of fiscal year 2000 (April 1999), when used in 
combination with compliant operating systems and development environment 
software of third parties, will be Year 2000 compliant. To the extent that a 
user of the Company's products does not have Year 2000 compliant operating 
systems, the Company can give no assurance as to Year 2000 compliance of its 
products used on such operating systems.

The Company has not incurred, and does not expect to incur material 
incremental costs to ensure Year 2000 compliance of its systems or products. 
Certain systems have been targeted for replacement based on Year 2000 and 
other technology considerations. The Company anticipates that affected 
systems will be replaced prior to June 30, 1999. However, related 
expenditures are not anticipated to be material. At this time, the Company 
foresees nominal incremental spending for the Year 2000 issue.

Based on the Company's assessment to date, the Company currently believes 
that Year 2000 issues will not pose significant risks for the Company. 
However, if all Year 2000 issues are not properly identified, or assessment, 
remediation and testing are not effected timely with respect to Year 2000 
problems that are identified, there can be no assurance that the Year 2000 
issue will not have a material adverse impact on the Company's business, 
financial condition or results of operations, or adversely affect the 
Company's relationships with customers, vendors or others.

The Company has not yet developed a contingency plan for dealing with the 
most likely worst-case scenario as such scenario has not yet been clearly 
identified. The Company currently plans to complete such contingency planning 
by November 30, 1999.

The costs of the Company's Year 2000 assessment, remediation and testing 
efforts and the dates on which the Company believes it will complete such 
efforts and the timing and effectiveness of the Company's future product 
releases are forward-looking statements that are based upon management's best 
estimates. Such estimates were derived using numerous assumptions regarding 
future events, including the continued availability of certain resources, 
third party remediation plans and compliance assurances, and other factors. 
There can be no assurance that these estimates will prove to be accurate, and 
actual results could differ materially from those currently anticipated.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative 
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and 
reporting standards requiring that every derivative instrument be recorded in 
the balance sheet as either an asset or liability measured at its fair value. 
SFAS No. 133 also requires that changes in the derivative's fair value be 
recognized currently in results of operations unless specific hedge 
accounting criteria are met. SFAS No. 133 is effective for fiscal years 
beginning after June 15, 1999. The Company does not expect SFAS No. 133 to 
have a material impact on its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 

Not applicable.
                           PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The exhibit filed as part of this report:
       Exhibit 27        Financial Data Schedule

 (b) Reports on Form 8-K:
       No Reports on Form 8-K were filed during the quarter ended 
       December 31, 1998.


                                       15
<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 12, 1999


                                       ANALOGY, INC.

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




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