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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________

COMMISSION FILE NUMBER: 0-27752

ANALOGY, INC.
(Exact name of registrant as specified in its charter)

OREGON 93-0892014
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

9205 SW GEMINI DRIVE
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 9,252,535
(Class) (Shares outstanding at January 30,1998)

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ANALOGY, INC.
FORM 10-Q/A
INDEX

THIS REPORT ON FORM 10-Q/A CONSTITUTES AMENDMENT NO. 1 TO THE REGISTRANT'S
REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997, AND AMENDS, IN ITS
ENTIRETY, PART I, ITEMS 1 AND 2, AND PART II, ITEM 6 OF SUCH REPORT AS
ORIGINALLY FILED FEBRUARY 12, 1998. SEE NOTE 2 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS FOR A DISCUSSION OF THE BASIS FOR SUCH AMENDMENTS.

PART I - FINANCIAL INFORMATION PAGE

Item 1. Financial Statements:

Consolidated Balance Sheets - December 31, 1997
and March 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Consolidated Statements of Operations - Three Months and Nine Months
Ended December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . .3

Consolidated Statements of Cash Flows - Nine Months
Ended December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . .4

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

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . .8

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . .14

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

December 31, March 31,
1997 1997
------------ ------------

(As Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 2,001 $ 1,827
Marketable securities -- 1,697
Accounts receivable 9,510 9,161
Prepaid expenses 1,249 886
Other assets, net 483 455
------------ ------------
Total current assets 13,243 14,026

Furniture, fixtures and equipment, net of accumulated
depreciation and amortization of $7,499 and $5,833 3,960 4,280
Library costs, net 3,549 2,729
Other assets, net 826 1,095
------------ ------------
$ 21,578 $ 22,130
------------ ------------
------------ ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 771 $ 1,482
Current portion of capital leases 310 566
Accrued salaries and benefits 2,109 2,095
Unearned revenue 6,598 5,812
------------ ------------
Total current liabilities 9,788 9,955

Non-current portion of capital leases 722 499
Other liabilities 117 359

Shareholders' equity:
Common stock, no par value, authorized 35,000 shares;
9,194 and 9,118 shares issued and outstanding 17,367 17,124
Foreign currency translation (223) (155)
Accumulated deficit (6,193) (5,652)
------------ ------------
Total shareholders' equity 10,951 11,317
------------ ------------
$ 21,578 $ 22,130
------------ ------------
------------ ------------

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

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

Three months ended Nine months ended
December 31, December 31,
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(As Restated)

Revenue:
Product licenses $ 4,511 $ 4,434 $ 10,732 $ 9,987
Service and other 3,335 2,382 9,068 6,804
-------- -------- -------- --------
Total revenue 7,846 6,816 19,800 16,791

Cost of revenue:

Product licenses 364 409 1,344 1,160
Service and other 669 629 2,205 1,640
-------- -------- -------- --------
Total cost of revenue 1,033 1,038 3,549 2,800
-------- -------- -------- --------

Gross profit 6,813 5,778 16,251 13,991

Operating expenses:
Research and development 1,587 1,493 4,290 4,133
Sales and marketing 3,868 3,286 10,172 9,038
General and administrative 727 584 2,151 1,941
Amortization of intangibles 92 45 276 45
Acquired in-process research
and development -- 1,896 -- 1,896
-------- -------- -------- --------
Total operating expenses 6,274 7,304 16,889 17,053
-------- -------- -------- --------

Operating income (loss) 539 (1,526) (638) (3,062)

Other expense, net (77) (38) (83) (29)
-------- -------- -------- --------
Income (loss) before income
taxes 462 (1,564) (721) (3,091)

Income tax expense 115 111 (180) 225
-------- -------- -------- --------

Net income (loss) $ 347 $ (1,675) $ (541) $ (3,316)
-------- -------- -------- --------
-------- -------- -------- --------

Basic and diluted net income (loss)
per share $ 0.04 $ (0.19) $ (0.06) $ (0.39)
-------- -------- -------- --------
-------- -------- -------- --------

Weighted average shares outstanding:
-------- -------- -------- --------
-------- -------- -------- --------
Basic 9,193 8,596 9,164 8,422
-------- -------- -------- --------
-------- -------- -------- --------
Diluted 9,834 8,596 9,164 8,422
-------- -------- -------- --------
-------- -------- -------- --------

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

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

Nine months ended December 31,
---------------------------------
1997 1996
------------- -------------
(As Restated)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (541) $ (3,316)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,843 2,097
Acquired in-process research and development - 1,896
Changes in operating assets and liabilities:
Accounts receivable (477) (784)
Prepaid expenses and other assets (404) (735)
Accounts payable and accrued expenses (936) (89)
Unearned revenue 877 (232)
--------- ---------
Net cash provided by (used in) operating activities 1,362 (1,163)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities - (5,910)
Sales of marketable securities - 3,017
Maturities of marketable securities 1,700 1,200
Capital expenditures for furniture, fixtures and equipment (1,042) (1,741)
Capital expenditures for library costs (1,712) (900)
Net cash acquired in acquisition - 260
--------- ---------
Net cash used in investing activities (1,054) (4,074)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on subordinated debt - (829)
Principal payments on capital leases (352) (510)
Common stock offering costs - (82)
Proceeds from exercise of common stock options 243 84
--------- ---------
Net cash used in financing activities (109) (1,337)

Effect of exchange rate changes on cash and cash equivalents (25) 14
--------- ---------
Net increase (decrease) in cash and cash equivalents 174 (6,560)
Cash and cash equivalents at beginning of period 1,827 10,208
--------- ---------
Cash and cash equivalents at end of period $ 2,001 $ 3,648
--------- ---------
--------- ---------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 103 $ 151
Income taxes 125 62

SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Acquisition of equipment under capital lease obligations $ 319 $ 693
Acquisition of Symmetry Design Systems:
Assets acquired and liabilities assumed, net of cash acquired $ - $ (2,421)
Issuance of common stock - 2,681
--------- ---------
Net cash acquired in acquisition $ - $ 260

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

ANALOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

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

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

2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR PRIOR PERIODS

In April 1998, the Company determined that revenue from products sold to a
reseller previously recognized in the first and second quarters of fiscal 1998
of $774,000 and $400,000, respectively, should more appropriately be recognized
as revenue at the time the product is sold to the ultimate end user rather than
to recognize the revenue when it is sold to the reseller. Accordingly, the
results of operations for the first and second quarters of fiscal year 1998 have
been restated. The effect of this restatement was as follows:

Nine Months Ended
(In thousands, except per share amounts) September 30, 1997
--------------------------
As reported Restated

Total revenues $ 20,974 $ 19,800
Net income (loss) $ 254 $ (541)
Diluted income (loss) per share $ 0.03 $ (0.06)

Accumulated deficit at Dec. 31, 1997 $ (5,398) $ (6,193)

3. 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.

4. NET INCOME (LOSS) PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128). This
Statement supersedes APB Opinion No. 15 and specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. The Company was
required to adopt the provisions of SFAS 128 for the quarter ended December 31,
1997. As it relates to the Company, the

principal differences between the provisions of SFAS 128 and previous
authoritative pronouncements are the exclusion of common stock equivalents in
the determination of Basic Earnings Per Share and the market price at which
common stock equivalents are calculated in the determination of Diluted Earnings
Per Share.

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

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

Three Months Ended
------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
----------------- -----------------
Income Per Share Income Per Share
Basic earnings per share (Loss) Shares Amount (Loss) Shares Amount
------ ------ ------ ------ ------ ------

Income (loss) available to
shareholders $347 9,193 $0.04 $(1,675) 8,596 $(0.19)
-------- ----------
-------- ----------
Effect of dilutive securities
Stock options and warrants -- 641 -- --
-------- -------- ----------- --------
Diluted earnings per share
Income (loss) available to
shareholders $347 9,834 $0.04 $(1,675) 8,596 $(0.19)
-------- -------- -------- ----------- -------- ----------
-------- -------- -------- ----------- -------- ----------

Nine Months Ended
------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
----------------- -----------------
(As Restated)
Income Per Share Income Per Share
Basic earnings per share (Loss) Shares Amount (Loss) Shares Amount
------ ------ ------ ------ ------ ------

Loss available to
shareholders $(541) 9,164 $(0.06) $(3,316) 8,422 $(0.39)
-------- ----------
-------- ----------
Effect of dilutive securities
Stock options and warrants -- -- -- --
-------- -------- ----------- --------
Diluted earnings per share
Loss available to
shareholders $(541) 9,164 $(0.06) $(3,316) 8,422 $(0.39)
-------- -------- -------- ----------- -------- ----------
-------- -------- -------- ----------- -------- ----------

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

5. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

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

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

GENERAL

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

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

FORWARD LOOKING STATEMENTS

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

The Company's quarterly operating results have in the past and may in the future
vary significantly depending on factors such as the receipt and timing of
significant orders, increased competition, the timing of new product
announcements, changes in pricing policies by the Company or its competitors,
lengthy sales cycles, lack of market acceptance or delays in the introduction of
new or enhanced versions of the Company's products, seasonal factors, the mix of
direct and indirect sales and general economic conditions, and the potential
effect of the Asian financial crisis. In particular, the Company's quarterly
operating results have in

the past fluctuated as a result of the large percentage of orders that are not
received by the Company until near the end of the quarter. The Company's expense
levels are based, in part, on its expectations as to future revenue. If revenue
levels are below expectations, results of operations may be disproportionately
affected because only a small portion of the Company's expenses varies with its
revenue. As a result, the Company may not learn of, or be able to confirm,
revenue or earnings shortfalls until late in the quarter or following the end of
the quarter. Seasonal factors, particularly decreases in revenues in European
markets in the second fiscal quarter resulting from European holidays in July
and August, and cyclical economic patterns in the aerospace, defense, automotive
or other end-user industries also contribute to quarter-to-quarter fluctuations.
Any shortfall in revenue or earnings from expected levels or other failure to
meet expectations of the financial markets regarding results of operations could
have an immediate and significant adverse effect on the trading price of the
Company's Common Stock in any given period.

RESULTS OF OPERATIONS

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

THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
STATEMENT OF OPERATIONS DATA: 1997 1996
------------------- -------------------

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

NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
STATEMENT OF OPERATIONS DATA: 1997 1996
------------------- -------------------
(AS RESTATED)

Revenue:
Product licenses $ 10,732 54.2 % $ 9,987 59.5 %
Service and other 9,068 45.8 6,804 40.5
--------- ------- --------- -------
Total revenue 19,800 100.0 16,791 100.0
Cost of revenue:
Product licenses 1,344 6.8 1,160 6.9
Service and other 2,205 11.1 1,640 9.8
--------- ------- --------- -------
Total cost of revenue 3,549 17.9 2,800 16.7
--------- ------- --------- -------
Gross profit 16,251 82.1 13,991 83.3
Operating expenses:
Research and development 4,290 21.7 4,133 24.6
Sales and marketing 10,172 51.4 9,038 53.8
General and administrative 2,151 10.8 1,941 11.5
Amortization of intangibles 276 1.4 45 0.3
Acquired in-process research
and development -- -- 1,896 11.3
--------- ------- --------- -------
Total operating expenses 16,889 85.3 17,053 101.5
--------- ------- --------- -------
Operating income (loss) (638) (3.2) (3,062) (18.2)
Other expense, net (83) (0.4) (29) (0.2)
--------- ------- --------- -------
Income (loss) before income taxes (721) (3.6) (3,091) (18.4)
Income tax expense (180) (0.9) 225 1.3
--------- ------- --------- -------
Net income (loss) $ (541) (2.7) % $ (3,316) (19.7) %
--------- ------- --------- -------
--------- ------- --------- -------

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

REVENUE

Total revenue increased 15.1% to $7.8 million in the third quarter of fiscal
year 1998 from $6.8 million in the third quarter of fiscal year 1997, and
increased 17.9% to $19.8 million in the first nine months of fiscal year 1998
from $16.8 million in the first nine months of fiscal year 1997. One customer
accounted for 13% of total revenue in the third quarter of fiscal year 1998. No
one customer accounted for 10% or more of total revenue in the first nine months
of fiscal year 1998 and the third quarter or first nine months of fiscal years
1997. SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

Product license revenue increased 1.7% to $4.5 million in the third quarter of
fiscal year 1998 from $4.4 million in the third quarter of fiscal year 1997, and
increased 7.5% to $10.7 million in the first nine months of fiscal year 1998
from $10.0 million in the first nine months of fiscal year 1997. The increases
were primarily attributable to continued customer acceptance of the Company's
new SaberDesigner suite of products for the Windows NT operating system,
increased penetration of products into the mixed-signal integrated circuit
market and continued broadening of the Company's customer base.

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

fiscal year 1998 from $6.8 million in the first nine months of fiscal year 1997.
The increases were due primarily to increased demand for the Company's
maintenance and other services, growth in the Company's installed base; and
revenues from the U.S. Air Force under a $2.0 million modeling contract awarded
during the first quarter of fiscal year 1997 and DARPA under a $1.3 million
contract awarded in September 1996. The final models under the U.S. Air Force
contract are expected to be delivered in the fourth quarter of fiscal year 1998,
therefore, the Company does not expect significant revenues in the fourth
quarter of fiscal year 1998 or beyond from this source. In addition, revenues
from the NIST grant and the DARPA contract are expected to decline significantly
in the fourth quarter of fiscal year 1998 and the first quarter of fiscal year
1999, as these awards near expiration. The Company expects to continue to grow
its maintenance revenues and continues to seek additional modeling contracts to
replace the U.S. Air Force contract. However, there can be no assurance that
revenues from the U.S. Air Force, DARPA or NIST will replaced.

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

Three months ended Nine months ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----

NIST $130 $139 $ 579 $553
U.S. Air Force 625 -- 1,244 631
DARPA 228 118 743 238

In addition to revenues received under the NIST grant, and under the contracts
with the U.S. Air Force and DARPA, the Company received other revenues from the
U.S. government or its subcontractors during the first nine months of fiscal
years 1998 and 1997. Total revenues from U.S. government-related sources,
including the previously mentioned specific awards, accounted for approximately
13.0% of total revenues in the first nine months of fiscal year 1998, and
approximately 18.2% of total revenues in the first nine months of fiscal year
1997. While the cancellation or reduction of projects being undertaken by the
U.S. government requiring products or services of the type provided by the
Company, or the Company's failure to obtain awards of such projects, could have
an adverse effect on the Company's business, financial condition and results of
operations; the Company continues to broaden its customer base which it believes
will lessen the effect of such project cancellations or reductions.

International revenue was $8.1 million (41% of total revenue) in the first nine
months of fiscal year 1998 compared to $7.4 million (44% of total revenue) in
the first nine months of fiscal year 1997. International revenue decreased as a
percentage of total revenue primarily as a result of increased sales in the
United States in fiscal year 1998. The Company sells its products and services
through its wholly-owned subsidiaries in Europe and through distributors in
Asia. The Company is monitoring the Asian financial situation and the potential
impact on its customers, and does not currently anticipate a significant impact
from such crisis on its results of operations for fiscal year 1998.

COST OF REVENUE

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

Cost of product license revenue consists primarily of documentation expense,
media manufacturing costs, supplies, shipping expense and the amortization of
component and template model library costs and royalty payments. The Company
does not capitalize development costs for software products since the time
between the establishment of a working model of the software product and its
commercialization is typically of a short duration. Cost of product license
revenue decreased to 8.1% of product license revenue in the third quarter of
fiscal year 1998 from 9.2% in the third quarter of fiscal year 1997, and
increased to 12.5% of product license

revenue in the first nine months of fiscal year 1998 from 11.6% in the first
nine months of fiscal year 1997. Costs such as documentation expense and
supplies are expensed as incurred, which may not necessarily relate to the
number of product licenses shipped during the period.

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

RESEARCH AND DEVELOPMENT

Research and development expense includes all costs associated with development
of new products and technology research. The costs classified in this category
primarily include such items as salaries, fringe benefits, depreciation of
capital equipment and an allocation of facilities and systems support costs used
in research and development. Research and development expenses increased 6.3% to
$1.6 million in the third quarter of fiscal year 1998 from $1.5 million in the
third quarter of fiscal year 1997, and increased 3.8% to $4.3 million in the
first nine months of fiscal year 1998, from $4.1 million in the first nine
months of fiscal year 1997. The increases were primarily attributable to
increases in research and development personnel and increased salaries. As a
percentage of total revenue, research and development costs decreased to 20.2%
in the third quarter of fiscal year 1998 from 21.9% in the third quarter of
fiscal year 1997, and decreased to 21.7% in the first nine months of fiscal year
1998 from 24.6% in the first nine months of fiscal year 1998, primarily as a
result of increased revenue in fiscal year 1998.

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

SALES AND MARKETING

Sales and marketing expense consists primarily of salaries, commissions and
travel expenses for sales and marketing personnel, and advertising and public
relations expenses. Sales and marketing expense increased 17.7% to $ 3.9 million
in the third quarter of fiscal year 1998 from $3.3 million in the third quarter
of fiscal year 1997, and increased 12.5% to $10.2 million in the first nine
months of fiscal year 1998 from $9.0 million in the first nine months of fiscal
year 1997. The increases primarily resulted from increases in sales commissions,
personnel, salaries, travel, and the establishment of a new telemarketing
function early in fiscal 1998. As a percentage of total revenue, sales and
marketing expenses increased to 49.3% in the third quarter of fiscal year 1998
from 48.2% in the third quarter of fiscal year 1997, and decreased to 51.4% in
the first nine months of fiscal year 1998 from 53.8% in the first nine months of
fiscal year 1997, due to increased revenue in fiscal year 1998.

GENERAL AND ADMINISTRATIVE

General and administrative expense includes costs associated with the Company's
executive staff, legal, accounting, corporate systems, facilities and human
resources departments. General and administrative expenses increased 24.5% to
$727,000 in the third quarter of fiscal year 1998 compared to $584,000 in the
third quarter of fiscal year 1997, and increased 10.8% to $2.2 million in the
first nine months of fiscal year 1998 compared to $1.9 million in the first nine
months of fiscal year 1997. The increases primarily resulted from increased
depreciation related to the investment in application software and equipment
associated with updating corporate information systems in fiscal year 1997 and
general and administrative expenses of Symmetry Design Systems, Inc., which was
acquired in November 1996. As a percentage of total revenue, general and
administrative expenses increased to 9.3% in the third quarter of fiscal year
1998 from 8.6% in the third quarter of fiscal year , and decreased to 10.9% in
the first nine months of fiscal year 1998 from 11.5% in the first nine months of
fiscal year 1997, primarily due to increased revenue in fiscal year 1998. These
changes were primarily as result of the above explanations, offset by increased
revenue in fiscal year 1998.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

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

OTHER INCOME (EXPENSE), NET

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

INCOME TAX EXPENSE (BENEFIT)

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

Net cash used in financing activities was $109,000 in the first nine months of
fiscal year 1998, which included payments on capital lease obligations, offset
by proceeds from the exercise of stock options.

The Company has an operating line of credit with a bank which allows the Company
to receive advances of up to $3.0 million based on eligible accounts receivable
and is secured by accounts receivable, furniture, fixtures and equipment and
general intangibles. Interest is payable monthly at the bank's prime rate plus
1%. The line of credit facility requires the Company to maintain certain
financial and other covenants and matures on March 9, 1998. No amounts were
outstanding under this facility at December 31, 1997.

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

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

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

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

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.
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27 Financial Data Schedule, as restated

(b) Reports on Form 8-K

A Report on Form 8-K, containing the Company's earnings release for the quarter
and six months ended September 30, 1997, under Item 5, was filed on October 21,
1997.

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: June 1, 1998

ANALOGY, INC.

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

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