<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: September 30, 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                        9,192,801
         (Class)                    (Shares outstanding at October 31, 1997)



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<PAGE>

                                 ANALOGY, INC.
                                  FORM 10-Q
                                    INDEX

PART I - FINANCIAL INFORMATION                                      Page 
                                                                    ----

Item 1.  Financial Statements:

Consolidated Balance Sheets - September 30, 1997
and March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . .   2

Consolidated Statements of Operations - Three Months and Six Months
ended September 30, 1997 and 1996  . . . . . . . . . . . . . . . . .   3

Consolidated Statements of Cash Flows - Six Months
ended September 30, 1997 and 1996  . . . . . . . . . . . . . . . . .   4

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

Item 2.  Management's Discussion and Analysis of Financial 
         Condition and Results of Operations . . . . . . . . . . . .   6


PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K  . . . . . . . . . . . . .  13




                                       1

<PAGE>

                        PART I - FINANCIAL INFORMATION


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

<TABLE>
<CAPTION>


                                                                      September 30,      March 31,
                                                                          1997              1997
                                                                      -------------     -----------
<S>                                                                   <C>               <C>
ASSETS
  Current assets:                                                              
    Cash and cash equivalents                                          $  3,113            $  1,827
    Marketable securities                                                    --               1,697
    Accounts receivable                                                   8,138               9,161
    Prepaid expenses                                                      1,060                 886
    Other assets, net                                                       554                 455
                                                                      ---------           ---------
           Total current assets                                          12,865              14,026
  
    Furniture, fixtures and equipment, net of accumulated 
        depreciation and amortization of $6,872 and $5,833                4,109               4,280
    Library costs, net                                                    3,248               2,729
    Other assets, net                                                       919               1,095
                                                                      ---------           ---------
                                                                      $  21,141           $  22,130
                                                                      ---------           ---------
                                                                      ---------           ---------

  LIABILITIES AND SHAREHOLDERS' EQUITY
    Current liabilities:
     Accounts payable                                                    $  845            $  1,301
     Current portion of capital leases                                      334                 566
     Accrued salaries and benefits                                        2,001               2,095
     Accrued expenses                                                        --                 181
     Unearned revenue                                                     5,634               5,812
                                                                      ---------           ---------
        Total current liabilities                                         8,814               9,955
  
   Non-current portion of capital leases                                    544                 499
   Other liabilities                                                        347                 359
  
  Shareholders' equity:
      Common stock, no par value, authorized 35,000 shares;
        9,192 and 9,118 shares issued and outstanding                    17,355              17,124
      Foreign currency translation                                         (174)               (155)
      Accumulated deficit                                                (5,745)             (5,652)
                                                                      ---------           ---------
        Total shareholders' equity                                       11,436              11,317
                                                                      ---------           ---------
                                                                      $  21,141           $  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             Six months ended 
                                                         September 30,                 September 30,
                                                   ------------------------      ------------------------
                                                       1997          1996           1997           1996
                                                   ----------     ---------      ----------     ---------
<S>                                                <C>            <C>            <C>            <C>
  Revenue:
     Product licenses                              $  3,870       $  2,882       $  7,395       $  5,553
     Service and other                                3,272          2,377          5,733          4,422
                                                    -------        -------        -------        -------
        Total revenue                                 7,142          5,259         13,128          9,975

 Cost of revenue:
     Product licenses                                   429            374            980            751
     Service and other                                  952            525          1,536          1,011
                                                    -------        -------        -------        -------
        Total cost of revenue                         1,381            899          2,516          1,762
                                                    -------        -------        -------        -------

        Gross profit                                  5,761          4,360         10,612          8,213

  Operating expenses:
     Research and development                         1,192          1,278          2,703          2,640
     Sales and marketing                              3,267          3,015          6,416          5,752
     General and administrative                         756            682          1,424          1,357
     Amortization of intangibles                         92             --            184             --
                                                    -------        -------        -------        -------
        Total operating expenses                      5,307          4,975         10,727          9,749
                                                    -------        -------        -------        -------

        Operating income (loss)                         454           (615)          (115)        (1,536)

  Other income (expense), net                           (31)            (1)            (6)             9
                                                    -------        -------        -------        -------
        Income (loss) before income
           taxes                                        423           (616)          (121)        (1,527)
                                                    -------        -------        -------        -------
  Income tax expense (benefit)                          106            316            (28)           114
                                                    -------        -------        -------        -------
        Net income (loss)                            $  317        $  (932)        $  (93)     $  (1,641)
                                                    -------        -------        -------        -------
                                                    -------        -------        -------        -------
  Net income (loss) per share                       $  0.03       $  (0.11)      $  (0.01)      $  (0.20)
                                                    -------        -------        -------        -------
                                                    -------        -------        -------        -------
  Shares used in per share calculations               9,808          8,356          9,149          8,334
                                                    -------        -------        -------        -------
                                                    -------        -------        -------        -------

</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>

                                                                      Six months ended September 30,
                                                                      ------------------------------
                                                                          1997               1996
                                                                      -----------         ----------
<S>                                                                   <C>                 <C>
   CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                          $    (93)          $  (1,641)
     Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
        Depreciation and amortization                                     1,845               1,225
     Changes in operating assets and liabilities:
       Accounts receivable                                                  946                (134)
       Prepaid expenses and other assets                                   (216)                (85)
       Accounts payable and accrued expenses                               (803)               (697)
       Unearned revenue                                                    (112)                (44)
                                                                       --------            --------
             Net cash provided by (used in) operating activities          1,567              (1,376)
                                                                       --------            --------
 
   CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchase of marketable securities                                     --              (5,910)
       Maturities of marketable securities                                1,700               1,000
      Capital expenditures for furniture, fixtures and equipment           (819)             (1,156)
      Capital expenditures for library costs                             (1,131)               (559)
                                                                       --------            --------
             Net cash used in investing activities                         (250)             (6,625)
                                                                       --------            --------
   
   CASH FLOWS FROM FINANCING ACTIVITIES:
      Payments on subordinated debt                                          --                (829)
      Principal payments on capital lease obligations                      (250)               (353)
      Common stock offering costs                                            --                 (75)
      Proceeds from exercise of stock options and warrants                  231                  72
                                                                       --------            --------
             Net cash used in financing activities                          (19)             (1,185)
                                                                       --------            --------

   Effect of exchange rate changes on cash and cash equivalents             (12)                 (7)
                                                                       --------            --------
   
             Net increase (decrease) in cash and cash equivalents         1,286              (9,193)
   
      Cash and cash equivalents at beginning of period                    1,827              10,208
                                                                       --------            --------
      Cash and cash equivalents at end of period                       $  3,113            $  1,015
                                                                       --------            --------
                                                                       --------            --------
   
   SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid for:
       Interest                                                           $  68              $  116
       Income taxes                                                         158                 138
   SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
      Acquisition of equipment under capital lease obligations            $  63              $  257


</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 six months ended 
September 30, 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 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 year ended March 31, 1997, as included in the Company's Annual Report 
on Form 10-K for the year ended March 31, 1997.

Operating results for the six months ended September 30, 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.  EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board (FASB) issued 
Statement of Financial Accounting Standards No. 128, "Earnings per Share" 
(SFAS 128), which changes the standards for computing and presenting earnings 
per share (EPS) and supersedes Accounting Principles Board Opinion No. 15, 
"Earnings per Share." SFAS 128 replaces the presentation of primary EPS with 
a presentation of basic EPS, requires dual presentation of basic and diluted 
EPS on the face of the income statement for all entities with complex capital 
structures and requires a reconciliation of the numerator and denominator of 
the basic EPS computation to the numerator and denominator of the diluted EPS 
computation. SFAS 128 is effective for financial statements issued for 
periods ending after December 15, 1997, including interim periods and 
requires restatement of all prior-period EPS data presented. 

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 128 or SFAS 130.

                                       5

<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 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 and 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. 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. Substantially all 
of the Company's product licensing revenue in each quarter results from 
orders booked in that 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. Seasonal factors, particularly

                                       6

<PAGE>

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. Additionally, a 
significant portion of the Company's revenue in a quarter typically is earned 
in the last few weeks of that quarter. 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. 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. No assurance can 
be given that the aerospace and defense industries 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. 


                                       7

<PAGE>

RESULTS OF OPERATIONS

The following table sets 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:                 September 30,            September 30, 
                                                      1997                      1996
                                                -----------------        ----------------
    <S>                                         <C>                      <C>
    Revenue:  
      Product licenses                          $  3,870    54.2 %       $  2,882    54.8 %
      Service and other                            3,272    45.8            2,377    45.2
                                                  ------  ------           ------  ------
          Total revenue                            7,142   100.0            5,259   100.0
    Cost of revenue:    
       Product licenses                              429     6.0              374     7.1
       Service and other                             952    13.3              525    10.0
                                                  ------  ------           ------  ------
          Total cost of revenue                    1,381    19.3              899    17.1
                                                  ------  ------           ------  ------
    Gross profit                                   5,761    80.7            4,360    82.9
    Operating expenses: 
       Research and development                    1,192    16.7            1,278    24.3
       Sales and marketing                         3,267    45.7            3,015    57.3
       General and administrative                    756    10.6              682    13.0
       Amortization of intangibles                    92     1.3               --      --
                                                  ------  ------           ------  ------
          Total operating expenses                 5,307    74.3            4,975    94.6
                                                  ------  ------           ------  ------
    Operating income (loss)                          454     6.4             (615)  (11.7)
    Other expense, net                               (31)   (0.5)              (1)     --
                                                  ------  ------           ------  ------
    Income (loss) before income taxes                423     5.9             (616)  (11.7)
    Income tax expense                               106     1.5              316     6.0
                                                  ------  ------           ------  ------
    Net income (loss)                            $   317     4.4 %       $   (932)  (17.7) %
                                                  ------  ------           ------  ------
                                                  ------  ------           ------  ------
   --------------------------------------------------------------------------------------

</TABLE>


                                       8
<PAGE>

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

                                                  Six months               Six months
                                                    ended                     ended
    STATEMENT OF OPERATIONS DATA:                 September 30,            September 30,
                                                     1997                      1996
                                                -----------------        ----------------
    <S>                                         <C>                      <C>
    Revenue:  
      Product licenses                          $  7,395     56.3 %      $  5,553    55.7 %
      Service and other                            5,733     43.7           4,422    44.3
                                                  ------   ------          ------  ------
          Total revenue                           13,128    100.0           9,975   100.0
    Cost of revenue:    
       Product licenses                              980      7.5             751     7.5
       Service and other                           1,536     11.7           1,011    10.2
                                                  ------   ------          ------  ------
          Total cost of revenue                    2,516     19.2           1,762    17.7
                                                  ------   ------          ------  ------
    Gross profit                                  10,612     80.8           8,213    82.3
    Operating expenses: 
       Research and development                    2,703     20.6           2,640    26.5
       Sales and marketing                         6,416     48.9           5,752    57.6
       General and administrative                  1,424     10.8           1,357    13.6
       Amortization of intangibles                   184      1.4              --      --
                                                  ------   ------          ------  ------
          Total operating expenses                10,727     81.7           9,749    97.7
                                                  ------   ------          ------  ------
    Operating loss                                  (115)    (0.9)         (1,536)  (15.4)
    Other (expense) income, net                       (6)      --               9     0.1
                                                  ------   ------          ------  ------
    Loss before income taxes                        (121)    (0.9)         (1,527)  (15.3)
    Income tax (benefit) expense                     (28)    (0.2)            114     1.2
                                                  ------   ------          ------  ------
    Net loss                                     $   (93)    (0.7) %     $ (1,641)  (16.5) %
                                                  ------   ------          ------  ------
                                                  ------   ------          ------  ------
   --------------------------------------------------------------------------------------
</TABLE>

SECOND QUARTER AND FIRST SIX MONTHS OF FISCAL YEARS 1998 AND 1997 

REVENUE

Total revenue increased 35.8% to $7.1 million in the second quarter of fiscal 
year 1998 from $5.3 million in the second quarter of fiscal year 1997, and 
increased 31.6% to $13.1 million in the first six months of fiscal year 1998 
from $10.0 in the first six months of fiscal year 1997. No one customer 
accounted for 10% or more of total revenue in the second quarter or first six 
months of fiscal years 1998 and 1997.

Product license revenue increased 34.3% to $3.9 million in the second quarter 
of fiscal year 1998 from $2.9 million in the second quarter of fiscal year 
1997, and increased 33.2% to $7.4 million in the first six months of fiscal 
year 1998 from $5.6 million in the first six 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 and continued broadening of the Company's customer base. 

Service and other revenue increased 37.7% to $3.3 million in the second 
quarter of fiscal year 1998 from $2.4 million in the second quarter of fiscal 
year 1997, and increased 29.6% to $5.7 million in the first six months of 
fiscal year 1998 from $4.4 million in the first six months of fiscal year 
1997. The increases were due primarily to increased demand for the Company's 
maintenance and other services, growth in the Company's installed base; and 
revenues from NIST under a $2.0 million grant awarded in fiscal year 1996, 
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. 

                                       9

<PAGE>

Revenues recognized under these contracts were as follows (dollars in 
thousands):

                            Three months ended          Six months ended
                               September 30,              September 30, 
                            1997          1996          1997        1996
                            ----          ----          ----        ----
NIST                        $241          $173          $450        $414
U.S. Air Force               458           374           619         631
DARPA                        378           120           515         120

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 six 
months of fiscal years 1998 and 1997. Total revenues from U.S. 
government-related sources, including the previously mentioned specific 
awards, accounted for approximately 20.3% of total revenues in the first six 
months of fiscal year 1998, and approximately 17.2% of total revenues in the 
first six months of fiscal year 1997. Revenues received under the DARPA 
contract in the second quarter of fiscal year 1998 included a one time 
adjustment to the cost sharing provisions which resulted in an increase in 
revenue of $250,000. 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 a material adverse effect on the Company's business, 
financial condition and results of operations. 

International revenue was $5.4 million (41% of total revenue) in the first 
six months of fiscal year 1998 compared to $4.3 million (43% of total 
revenue) in the first six 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 the second quarter of fiscal year 1998. The 
Company sells its products and services through its wholly-owned subsidiaries 
in Europe and through distributors in Asia.

COST OF REVENUE

Total cost of revenue increased 53.6% to $1.4 million in the second quarter 
of fiscal year 1998 from $899,000 in the second quarter of fiscal year 1997, 
and increased 42.8% to $2.5 million in the first six months of fiscal year 
1998 from $1.8 million in the first six 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 11.1% of product license revenue in the second quarter 
of fiscal year 1998 from 13.0% in the second quarter of fiscal year 1997, and 
decreased slightly to 13.3% of product license revenue in the first six 
months of fiscal year 1998 from 13.5% in the first six months of fiscal year 
1998. 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 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. As a percentage of service and other revenue, 
cost of service and other revenue increased to 29.1% of service and other 
revenue in the second quarter of fiscal year 1998 from 22.1% in the second 
quarter of fiscal year 1997, and increased to 26.8% of service and other 
revenue in the first six months of fiscal year 1988 from 22.9% of service and 
other revenue in the first six months of fiscal year 1997. The increases were 
due primarily to allocation of 

                                      10

<PAGE>

expense from research and development to cost of service and other revenue, 
for work performed under government contracts during the second quarter of 
fiscal year 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 decreased 6.7% to $1.2 million in the second quarter of fiscal year 
1998 from $1.3 million in the second quarter of fiscal year 1997, and 
increased  2.4% to $2.7 million in the first six months of fiscal year 1998, 
from $2.6 million in the first six months of fiscal year 1997. As a 
percentage of total revenue, research and development costs decreased to 
16.7% in the second quarter of fiscal year 1998 from 24.3% in the second 
quarter of fiscal year 1997, and decreased to 20.6% in the first six months 
of fiscal year 1998 from 26.5% in the first six months of fiscal year 1998. 
The decreases were primarily due to allocation of expense from research and 
development to cost of service and other revenue for work performed under 
government contracts during the second quarter of fiscal year 1998, and due 
to increased revenue in the second quarter and first six months of fiscal 
year 1998.

SALES AND MARKETING

Sales and marketing expense consists primarily of salaries, commissions and 
travel. Sales and marketing expense increased 8.4% to $3.3 million in the 
second quarter of fiscal year 1998 from $3.0 million in the second quarter of 
fiscal year 1997, and increased 11.5% to $6.4 million in the first six months 
of fiscal year 1998 from $5.8 million in the first six months of fiscal year 
1997. The increases primarily resulted from increases in sales commissions, 
personnel, salaries, related benefits, travel and training. Additionally, in 
the first quarter of fiscal year 1998 the Company established a new 
telemarketing division. As a percentage of total revenue, sales and marketing 
expenses decreased to 45.7% in the second quarter of fiscal year 1998 from 
57.3% in the second quarter of fiscal year 1997, and decreased to 48.9% in 
the first six months of fiscal year 1998 from 57.6% in the first six months 
of fiscal year 1997, due to increased revenue in the second quarter and first 
six months of fiscal year 1998.

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 10.9% to $756,000 in the second quarter of fiscal year 1998 
compared to $682,000 in the second quarter of fiscal year 1997, and increased 
4.9% to $1.42 million in the first six months of fiscal year 1998 compared to 
$1.36 million in the first six months of fiscal year 1997. The increases 
primarily resulted from expenses of Symmetry Design Systems, Inc., which was 
acquired in November 1996. As a percentage of total revenue, general and 
administrative expenses decreased to 10.6% in the second quarter of fiscal 
year 1998 from 13.0% in the second quarter of fiscal year 1997, and decreased 
to 10.8% in the first six months of fiscal year 1998 from 13.6% in the first 
six months of fiscal year 1997, primarily due to increased revenue in the 
second quarter and first six months of fiscal year 1998. 

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 $31,000 and $1,000 in 
the second quarter of fiscal years 1998 and 1997, respectively. Other 
expense, net was $6,000 in the first six months of fiscal year 1998 and other 
income, net was $9,000 in the first six months of fiscal year 1997. These 
changes were primarily attributable to reduced interest income resulting from 
a lower level of cash, cash 

                                      11

<PAGE>

equivalents and marketable securities held during the periods, and the 
effects of foreign currency transaction gains and losses.

INCOME TAX EXPENSE (BENEFIT)

The Company provided for foreign income and withholding taxes of $158,000 and 
$114,00 in the first six months of fiscal years 1998 and 1997, respectively. 
In the first six months of fiscal year 1998 the Company recorded a benefit 
from the utilization of net operating loss carryforwards of $186,000, which 
it believes will be realized in the fiscal year. The Company's effective tax 
rate is sensitive to shifts in income and losses among the various countries 
in which the Company does business.

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.

Net cash provided by operating activities was $1.6 million in the first six 
months of fiscal year 1998. This primarily resulted from a decrease in 
accounts receivable, representing the collection of billings to the U.S. 
government which were outstanding at March 31, 1997, and adjustments for 
depreciation and amortization. These changes were offset by a decrease in 
accounts payable and accrued expenses as a result of timing of purchases and 
payments, and an increase in prepaid expenses and other assets as a result of 
the timing of payment of prepaid insurance and royalties.

Net cash used in investing activities was $250,000 in the first six months of 
fiscal year 1998, which primarily included the maturities of investments in 
marketable securities, offset by 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.

Net cash used in financing activities was $19,000 in the first six months of 
fiscal year 1998, which included payments on capital lease obligations, 
offset by proceeds from the exercise of stock options and warrants.

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 September 30, 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 $42,000 was 
outstanding at September 30, 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 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. 

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<PAGE>

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board (FASB) issued 
Statement of Financial Accounting Standards No. 128, "Earnings per Share" 
(SFAS 128), which changes the standards for computing and presenting earnings 
per share (EPS) and supersedes Accounting Principles Board Opinion No. 15, 
"Earnings per Share." SFAS 128 replaces the presentation of primary EPS with 
a presentation of basic EPS, requires dual presentation of basic and diluted 
EPS on the face of the income statement for all entities with complex capital 
structures and requires a reconciliation of the numerator and denominator of 
the basic EPS computation to the numerator and denominator of the diluted EPS 
computation. SFAS 128 is effective for financial statements issued for both 
interim and annual periods ending after December 15, 1997, and requires 
restatement of all prior-period EPS data presented. 

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 128 or SFAS 130.


                                    
                                    
                       PART II - OTHER INFORMATION
                                    

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The exhibits filed as part of this report are listed below:
    
    Exhibit No.
    -----------
    11     Computation of per share earnings
    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 ended June 30, 1997, under Item 5, was filed on July 22, 1997.


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<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: November 7, 1997           


                                   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)


                                      14