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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
                                 ANNUAL REPORT
                    PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 1998
 
                        Commission File Number 0-20749
 
                           Aspect Development, Inc.
            (Exact name of registrant as specified in its charter)
 
<TABLE>
 <S>                              <C>
            Delaware                                25-1622857
 (State or other jurisdiction of                 (I.R.S. Employer
 incorporation or organization)                Identification No.)
</TABLE>
 
                 1300 Charleston Road, Mountain View CA 94043
             (Address of principal executive offices and zip code)
 
                                (650) 428-2700
             (Registrant's telephone number, including area code)
 
       Securities registered pursuant to Section 12(b) of the Act: None
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                   Common Stock, $0.001 par value per share
                               (Title of Class)
 
   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     No  X
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
 
   The aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on the closing sale price of the Common Stock as
reported on the NASDAQ National Market on March 23, 1999) was approximately
$594,989,317. The number of outstanding shares of the Registrant's Common
Stock as of the close of business on March 23, 1999 was 31,093,407.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
   The Registrant's definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders is incorporated by reference in Part III of the Form 10-K to the
extent stated herein.
 
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                            ASPECT DEVELOPMENT, INC.
 
                                   FORM 10-K
 
                  For the Fiscal Year Ended December 31, 1998
 
                               Table of Contents
 
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                                    PART I
 Item 1.  Business......................................................     3
 Item 2.  Properties....................................................    14
 Item 3.  Legal Proceedings.............................................    15
 Item 4.  Submission of Matters to a Vote of Security Holders...........    15
                                    PART II
 Item 5.  Market for Registrant's Common Equity and Related Stockholder
          Matters.......................................................    15
 Item 6.  Selected Consolidated Financial Data..........................    16
 Item 7.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations.....................................    22
 Item 7A. Quantitative & Qualitative Disclosures About Market Risk......    33
 Item 8.  Financial Statements and Supplementary Data...................    34
 Item 9.  Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure......................................    56
                                   PART III
 Item 10. Directors and Executive Officers of the Company...............    56
 Item 11. Executive Compensation........................................    56
 Item 12. Security Ownership of Certain Beneficial Owners and
          Management....................................................    56
 Item 13. Certain Relationships and Related Transactions................    56
                                    PART IV
 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
          K.............................................................    57
 Signatures..............................................................   59
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                                    PART I
 
   This report contains forward-looking statements. These statements relate to
future events or Aspect's future financial performance. In some case, forward-
looking statements can be identified by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms and other
comparable technology. These statements reflect only management's current
expectations. Actual evens or results may differ materially from any forward-
looking statements. Factors that should cause or contribute to such
differences are discussed below and under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Risk Factors." Aspect does not undertake any obligations to update any
forward-looking statements contained in this report to reflect any future
events or developments.
 
ITEM 1. BUSINESS.
 
   Aspect Development, Inc. ("Aspect" or the "Company") develops, markets and
supports enterprise solutions combining client/server software and content
databases that enable manufacturers to improve product development and
business processes through component and supplier management ("CSM"). CSM
solutions enable rapid search, comparison and selection of optimal components
and suppliers, promote the reuse of design and manufacturing knowledge,
support the consolidation of the inbound supply chain and facilitate
automation of the related design and procurement processes. Aspect's CSM
solutions technology-enable "in-bound supply chain management," providing the
information bridge between suppliers, sourcing and design, as well as
suppliers, sourcing and plant operations. Aspect solutions complement the role
of enterprise resource planning ("ERP") systems in planning, manufacturing and
order entry and the role of product data management ("PDM") systems in design
release and configuration management.
 
   The Aspect CSM solutions offer manufacturers high return, low risk, and
rapid deployment. CSM enables companies to streamline their inbound supply
chain through three related CSM solutions for procurement, engineering and
plant management. Aspect's CSM facilitates savings by providing decision
support technology for strategic sourcing, speeds time to market by enabling
strategic product development, and saves plant management costs. Aspect CSM
solutions create a unified repository of all component/commodity and supplier
data, coupled with powerful decision support, desktop access to industry-wide
information about parts and suppliers, rapid deployment and workflow/process
automation. Aspect's CSM solutions are licensed to global enterprises in many
industry manufacturing markets including electronics and high technology,
aerospace and defense, automotive, industrial process and consumer package
goods. Aspect's solutions all depend on a unique triad of technology, content
and services to deliver high value to customers.
 
Customers
 
   Aspect's customers include more than 150 of the 200 largest manufacturing
companies in the world spanning multiple industries such as electronics/high
technology, aerospace and defense, automotive, industrial equipment, process
and consumer packaged goods (CPG). The Company's revenues in any period are
substantially dependent upon a relatively small number of large sales, ranging
from $1 million to $10 million. The Company expects that this trend will
continue for the foreseeable future.
 
Aspect Product Elements
 
   Core Explore Technology. Providing the base for all Aspect solutions--CSM
for Strategic Sourcing Management, CSM for Strategic Product Development, and
CSM for Strategic Plant Management is the company's core client-server
technology, called Explore.
 
   Explore Server. The Explore Server provides a variety of features for
component and supplier management, including a parametric search engine, a
cascade search engine, a forms editor for workflow/process
 
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automation and a class and object editor. The Explore Server enables the
storage and management of parametric data, metadata, text, images, graphics
and CAD files. Objects such as components, suppliers or reusable design
elements can be organized into one or more classes, which can be organized
into one or more hierarchies for ease of classification and search. Objects
can also be characterized by their form, fit, function and technical
parameters, their business or other parameters and by their catalogs,
specifications or CAD drawings/models. Relationships and cross-references
between classes or objects can also be defined. The Explore Server is a
portable object-oriented application written in C++ that is supported on
various UNIX server platforms (Sun, IBM and HP) and on Microsoft NT servers,
and operates in conjunction with the embedded Oracle Relational Database
Management System ("RDBMS").
 
  . Parametric Search Engine. The parametric search engine enables the
    browsing of class hierarchies and searching for components, items or
    other objects by specifying simple or complex parametric criteria, such
    as speed, temperature, material, packaging, technology, cost or
    availability. Results of these parametric searches can be displayed in a
    spreadsheet-like comparison window and compared side-by-side, and
    differences can be highlighted to accelerate selection. Datasheets,
    notes, CAD files or other information related to the selected objects can
    be immediately retrieved and viewed.
 
  . Cascade Search Engine. The cascade search engine enables simultaneous ad-
    hoc parametric searching across a combination of component, supplier,
    design reuse or other class hierarchies. Relationships between a class of
    components, such as memory devices, and its manufacturers, distributors,
    CAD design libraries and preferred parts and suppliers lists can be
    viewed graphically to assist in the rapid setup of the search criteria.
    This functionality is particularly important for analytical searches,
    which involve complex combinations of technical and business parameters.
    For example, a user may search for certain memory devices with an access
    time of 50 nanoseconds, lead time of less than two weeks, and cost of
    less than two dollars from preferred suppliers that are ISO 9000
    certified and for which reusable CAD libraries are already available.
    This type of complex search across multiple classes is significantly more
    difficult to manage without the cascade search capability.
 
  . Forms Editor for Workflow/Process Automation. The Explore Server provides
    the ability to automate manual, paper-based processes with an automated
    forms generation and management capability. For example, new part
    requests and approvals can be created and managed in the system as
    objects, just like component or supplier information. Customer-defined
    routings, signoffs and approvals can be accomplished electronically.
 
  . Class and Object Editor. This editor enables the easy addition and
    modification of classes, objects and parameters, as well as the
    relationships between them, using the graphical user interface ("GUI").
    It also enables the use of a spreadsheet-like edit window to make
    simultaneous changes to a large number of objects.
 
   Explore Client and Features. Explore Client software is supported on a
variety of PC and UNIX platforms, as well as commercially available Web
browsers. The client software presents the services and features of the
Explore Server software through such familiar GUI features as folders, icons
and toolbars and supports Windows and other graphical environments. Class
hierarchies and relationships can be viewed in a graphical browser. Using
point-and-click methods, users can rapidly locate the desired class of
information for subsequent searching, initiate parametric or cascade searches,
compare results using spreadsheet windows, organize component information into
user-specified lists, and view related data or documents. The Explore client
software GUI configures itself directly from the data model stored in the
Explore Server. Therefore, if the model changes, the GUI reconfigures itself
automatically without any custom programming.
 
  . Dashboard. In order to make searching easier for novices and to automate
    repetitive searches, Aspect introduced Explore Dashboard. With the push
    of a button, users can call up a list of preferred parts for the
    corporation, for a division, even for a project, view a list of
    functionally equivalent parts, or upgrades or downgrades according to a
    wide range of specifications. Procurement professionals can generate
    graphs showing commitment levels to suppliers, reports monitoring
    supplier performance according to agreed-upon delivery logistics and
    timeframes, quality, and other performance metrics. In
 
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    performing these CSM operations, Dashboard draws on the full power of the
    classification browser, parametric search engine, results display, search
    configurations and patterns, permissions, and report generation
    capabilities of Explore.
 
  . Explore List Manager. Explore List Manager allows users to collect and
    analyze a group of components. For example, users can analyze a group of
    components by cost, availability, and other business criteria. Designers
    can easily construct a preliminary bill of materials ("BOMs"). Explore
    List Manager also facilitates the ability to import parts information
    (such as product structure and BOMs) from external sources to enrich that
    information with VIP and VIS information, to view the combined
    information as a group, and to analyze the collective grouping for usage
    within designs.
 
  . ACE. Explore's Alternate Component Expert ("ACE") opens new opportunities
    for consolidation, volume buying, component obsolescence management, and
    cost cutting through elimination of redundant part numbers. ACE quickly
    and easily searches both legacy data and VIP reference databases.
    Searches for equivalent parts with ACE, based on dozens of parameters,
    are more accurate and efficient than searches based on part numbers only.
    If an equivalent component cannot be found, users can then turn to
    performance upgrades where a part may actually cost less due to volume
    discounts of consolidated purchases or downgrades. For example, defense
    contractors may retool products for commercial markets, whose performance
    requirements are less stringent, creating the opportunity to lower
    product cost. ACE is a complete software and data solution, and includes
    the underlying rules for equivalents, upgrades and downgrades, based on
    best practices.
 
   Explore Options. In addition to the basic functionality available with
Explore, customers can choose to enhance their CSM solution with the following
options:
 
  . Replication. The Explore Replication Server is designed for corporations
    seeking to integrate their global enterprise with preferred component and
    supplier information. Aspect's robust database replication solution links
    remote, network-optimized divisions to allow different divisions to
    maintain control of certain information yet effectively share it. This
    ability to ensure that corporate preferences for components and suppliers
    are visible enterprise-wide significantly aids in the development of
    strategic component and supplier programs. Replications to multiple
    servers can be made that include Explore database objects, attachments
    and notes.
 
  . SAP and Baan Integration. All of Aspect's applications integrate directly
    into SAP's environment and that of Baan Company N. V. ("Baan"). Aspect is
    a SAP and Baan certified partner, which ensures that Aspect software will
    maintain integration integrity with each partner's products throughout
    release cycles, and that customers will be supported by each partner's
    support organization.
 
  . Explore Interfaces. The Explore interfaces integrate the Explore software
    with tools from leading electronic and mechanical design automation
    vendors, allowing designers to work in the environment in which they are
    most comfortable while at the same time providing access to the Explore
    Server to select components, obtain information about components used in
    the current design, find alternatives, or reuse CAD libraries. The
    Explore interfaces also integrate the Explore software with leading PDM
    vendors, allowing users to select components, find alternatives, and
    obtain information about components and where they are used in various
    versions of products and configurations stored in the PDM system. To
    date, the Company has released interfaces to electronic design automation
    tools of Mentor Graphics Corporation ("Mentor Graphics"), Cadence Design
    Systems, Inc. ("Cadence") and Parametric Technology Corporation
    ("Parametric Technology").
 
  . Explore Integration Toolkit. A range of enterprise integration tools is
    provided to enable integration with existing enterprise systems. An API
    is available to allow real-time, programmatic interfaces between Explore
    and other systems. Batch data import-export utilities are also available
    to enable the uploading and downloading of data and data models to and
    from Explore. This toolkit can be used for developing or extending data
    models or integrating them with other systems. Certain of these tools can
    be used to create new data models for new applications, add special
    functions, create or modify class
 
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    hierarchies and create one-to-one, one-to-many or many-to-many
    relationships using high-level object-oriented methods.
 
  . Explore Rapid Application Development ("RAD"). RAD is a software toolkit
    targeted at the application development programmer rather than the
    Explore client end user. RAD is used to develop Softmodels (datamodel) to
    customize Explore, integration to legacy systems, or unique applications,
    such as a bill of materials analysis, layered on Explore.
 
Server Platforms and Interfaces
 
   Aspect's CSM solutions operate in an open client/server environment
allowing customers to use various UNIX servers from Sun Microsystems, Inc.
("Sun"), International Business Machines (IBM), Hewlett-Packard (HP) and
Digital Equipment Corporation, as well as servers based on Microsoft NT.
Customers working in either an Intranet or Internet environment can gain
access to Aspect's CSM data and decision support tools from all major client
platforms, including traditional Windows and UNIX native clients as well as
from Web browsers.
 
   The Aspect CSM solutions also include standard interfaces and tools that
facilitate CSM integration with ECAD, MCAD, ERP, PDM and other enterprise
systems, including legacy systems. Aspect's products are designed to provide
an out-of-the-box solution for rapid enterprise-wide deployment and are
scalable from a divisional solution to an enterprise deployment of hundreds or
thousands of users in a heterogeneous information technology environment. In
order to provide a complete solution, Aspect offers a complete suite of
content databases, as well as consulting services to accelerate CSM data
migration and implementation.
 
Aspect Content Databases
 
   The Company's family of reference databases provides regularly updated
information for components, commodity suppliers, and indirect goods. In 1998,
the Company's content subscriptions grew by 23%, illustrating that the content
business is a key ingredient of the company's unique business model and value
proposition.
 
   VIP Reference Databases. Aspect's VIP (Very Important Parts) database
contains over 5 million electronic, electro-mechanical and mechanical
components available from almost 1000 manufacturers. The VIP component
reference databases include an index of search and select parameters that
enables rapid component search, comparison and selection based on form, fit
and function and other technical characteristics, as well as electronic
versions of databooks and datasheets. VIP component reference databases
provide broad, industry-wide coverage of component manufacturers, enabling
users to rapidly access standardized component information at their desktops
instead of searching manually through many different and often inconsistent
paper databooks or web sites, or receiving information from one manufacturer
at a time. The VIP component reference databases are organized by major device
group, including integrated circuits and discrete semiconductors, passive
components, and electromechanical components. The Company updates its VIP
component reference databases daily and delivers these updates to its
customers weekly and quarterly via the web or on computer tape. VIP component
reference databases are integrated with the Company's Explore client/server
software and internal content to enable a comprehensive CSM solution for
enterprise data management.
 
   VIP reference databases utilize the Company's Standard Classification
Scheme (analogous to a table of contents) and VIP data dictionary, which
defines the classification structure in which the part classes reside and the
standard definitions of the search parameters, including names, descriptions,
units of measure, allowable values and other criteria.
 
   The VIP family of VIP component reference databases includes the following
individual databases:
 
  . VIP IC and Discrete Semiconductors Reference Database, includes memory,
    programmable logic, digital logic, microprocessor, analog, interface,
    telecom/datacom, consumer, transistor, diode, transformer and trigger
    devices, as well as opto-electronic devices and accessories and
    RF/Microwave components and modules.
 
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  . VIP Passives Reference Database: includes capacitor, resistor, inductor
    and transformer components.
 
  . VIP Electro-Mechanical Reference Database: includes connectors, relays,
    and switches.
 
  . VIP Military Specifications Database: includes military characteristics
    and specifications for military-rated integrated circuit and discrete
    semiconductor components, as well as electronic specification drawings
    for passives, electromechanical and mechanical devices.
 
   LCM Databases. Aspect's LCM (Life Cycle Management) product is a reference
database that provides a repository of component life cycle information
identifying existing obsolete and active components as well as daily
notification and alerts for recently obsoleted components. The database also
includes prediction information on components by estimating the number of
years to end of life. The database can be established to track customer-
specific components with alerts for pending obsolescence of affected parts.
 
   VIS Databases. Aspect's VIS (Very Important Supplier) databases include
supplier information on millions of suppliers. The database is built using
multiple data sources. The Supplier Reference databases provide such
information as contact information, company lineage (headquarter, domestic
ultimate, global ultimate), demographics, supplier risk information and
commodity identification for products and services each supplier provides.
 
   MRO Reference Databases. Aspect has two Maintenance and Repair Operations
("MRO") Reference databases, including MRO-Operations, and MRO-Business
Essentials. The Company's MRO-Ops Reference database contains information on
products from over 5,000 suppliers of operational management items, such as
pipes, valves, fittings, solvents, cleansers, repair items and hardware. The
Company is sourcing data for MRO-Ops from a variety of suppliers and
publishers. MRO-Business Essentials contains standardized, organized
information for over 95% of all commercially available office products.
Manufacturer part numbers are cross-referenced to the part numbers used by the
major suppliers of office products. MRO-Business Essentials provides
standardized information on major commercial computer and office products and
supplies, and is cross-referenced to part numbers used by the major suppliers.
Information about office products in MRO-Business Essentials spans all
standard office products and major office products distributors. MRO-Business
Essentials also contains information on computer equipment, peripherals, and
related supplies.
 
   Preferred Catalogs. Tailored reference databases for commercial off-the-
shelf parts can be implemented in the form of a preferred catalog for
customers, where a unique catalog is created reflecting the parts, commodities
and suppliers that are preferred by each customer. The resulting catalogs are
used by engineering for product development, by procurement for commodity
management, and by manufacturing/operations to support such functions as
requisitioning and plant maintenance. In cases where customers have unique or
proprietary parts or specific suppliers to be cataloged, Aspect uses its
expertise in collecting, cleansing, migrating, enriching and publishing a
variation of Preferred Catalog called a Design Encyclopedia to contain the
required custom parts, designs, assemblies or equipment spares information.
 
Aspect Services
 
   The Company provides CSM Professional Consulting and Content Services for
CSM customers. Aspect is the world leader in CSM content services, which
typically includes such tasks as legacy data migration, cleansing, and
standardization and enrichment of existing customer component and supplier
data, as well the development of electronic catalogs. Aspect's Business
Process Services assist the customer in implementing CSM best practices for
preferred parts management, inbound supply chain consolidation, design reuse
and strategic sourcing, strategic product development and strategic plant
management.
 
Aspect Product Solutions--Combining Technology, Content and Services
 
   Explore core technology, content, and services are combined to create three
strategic decision support solutions designed for procurement, product
development, and plant management. The three product solutions
 
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are CSM for strategic sourcing, CSM for strategic product development, and CSM
for strategic plant management. Aspect derives a significant portion of its
revenue from these products and services. See "Risk Factors."
 
   CSM for Strategic Sourcing, provides rapid analysis and reporting to enable
strategic sourcing programs for discrete components and commodities, as well
as indirect commodities such as plant maintenance, equipment spares, MRO goods
and office products. It combines the proven capabilities of Explore--high-
performance parametric classification, search, and comparison engine--with
component and supplier reference catalogs and open, scalable data mart
technology to provide a rapidly deployable, technology-enabling framework that
helps manage spending, rationalize suppliers and materials, and enforce
sourcing strategies enterprise-wide. Aspect's Strategic Sourcing modules
include:
 
  Strategic Sourcing Management Datamart
  The CSM datamart is an open, star-schema architecture based on a pre-
  configured, best practices business model with integrated supplier and
  material reference content. The design supports ad-hoc, multi-dimensional
  analysis by supplier and part level parametric attribute or by any
  combination of four basic information "dimensions": commodity/component,
  supplier, division, and time. The sourcing datamart utilizes the many-to-
  many cross-reference capabilities within Explore to provide true
  enterprise-wide visibility even if there are different part, supplier, and
  commodity identification codes across the business.
 
  Best Practices Business Model
  Aspect CSM for Strategic Sourcing Management provides a pre-configured best
  practices business model that assembles disparate data elements into
  meaningful business intelligence. This model is designed to specifically
  support the key strategic sourcing practices of commodity management,
  supplier rationalization, material consolidation, and design/source for
  supply. The business model can be tailored to specific or evolving
  requirements without software modification.
 
  Supplier Performance Management System
  Aspect's Strategic Sourcing Management provides centralized and aggregated
  visibility to over 30 objective and subjective supplier performance
  metrics. In addition, the Aspect solution retains a separate area where
  internal supplier information can be retained along with "enterprise
  enabled" parameters, such as certification date, Kanban enabled, EDI
  enabled, Year 2000 enabled, Preferred, strategic worldwide, as examples.
 
  Graphical Navigator and Dashboard User Interface
  The Aspect Navigator(TM) uses the intuitive Microsoft Windows "nested
  folder" usage metaphor to provides point-and-click, ad-hoc query of the
  information in the data mart, and automatically configures itself to any
  changes made in the object-relational business model. In addition, the
  Dashboard(TM) provides configurable "push buttons" to generate pre-defined
  processes or queries.
 
  Strategic Decision Support Reporting and Analysis
  CSM for Strategic Sourcing provides decision support and analyses programs
  including historic and forecast spending by commodity and division, current
  and potential supply allocation, duplicate parts, and top suppliers.
 
  The Aspect Consolidator
  Designed to enable easy system administration, the Consolidator(TM) manages
  the load/update of transaction data from multiple disparate legacy systems
  into the strategic sourcing datamart through a JAVA-based graphical user
  interface. The Consolidator allows users to schedule processing of data
  "shipments" and then monitor execution of the resulting job stream through
  a constant state monitor that reports selected job attributes and performs
  electronic notification at pre-defined events. For example, the
  Consolidator can electronically notify system administrators via email of
  the job number, user, and time when processing has begun, completed, or
  generated an error condition.
 
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  E-Supply Direct Connect
  Aspect's Direct Connect is the powerful mechanism that enables direct
  sharing of data between the customer and strategic suppliers. Information
  exchanged via Direct Connect can include such information as component
  price changes, inventory updates, BOM exchanges, new delivery schedules,
  etc.
 
   CSM for Strategic Product Development, or SPD, enables engineering to
maximize design efficiency by setting up preferred parts and design programs.
CSM for Product Development combines software, content and services to guide
designers to preferred components and designs, dynamically assesses individual
part "preferredness," and evaluates design intent against operational cost and
other factors. The SPD solution includes the following product modules:
 
  CSM Catalog ManagementTM
  Aspect's CSM Catalog Management module provides an enterprise-wide master
  catalog for parts and suppliers. Aspect Content Services creates the
  catalog by cleansing and enriching customer data, cross-referencing it to
  Aspect's reference content, and organizing data with Aspect's Standard
  Classification Scheme (SCS), which provides an easy-to-navigate
  classification tree and dozens of searchable form-fit-function parameters.
  Parts are cross-referenced to an unlimited number of internal part
  numbering schemes enabling designers to easily locate and analyze
  alternates, upgrades, and downgrades.
 
  Design EncyclopediaTM for Company-Specific Assemblies and Designs
  Users enhance basic CSM Catalog Management with the Aspect Design
  Encyclopedia. The Design Encyclopedia extends Aspect's Standard
  Classification Scheme to include custom classes and search parameters for
  company-specific assemblies and designs. Design Encyclopedias are authored
  and maintained through advanced data migration tools and industry-specific
  domain consultants. These designs and assemblies can then be shared
  enterprise-wide, leveraging them for new product development and re-use.
 
  Strategic Design Management for Analysis of Preliminary Parts Lists
  Aspect's Strategic Design Management module provides designers with a
  powerful desktop tool for creating preliminary parts lists and analyzing
  new designs against a variety of design metrics, including component cost,
  availability, inventory, or technical attributes. By performing these
  analyses early in the design cycle, costly design choices can be spotted
  early and corrected before design freeze.
 
  Preferred Component ManagementTM
  Aspect's Preferred Component Management module dynamically manages and
  promotes preferred part and supplier programs across the enterprise.
  Aspect's Preference Generator(TM) makes it easy to capture design intent
  for a wide variety of "preference factors" at the beginning of a new design
  program. Preferred Component Management then dynamically creates and
  manages preferred part lists as part attributes change over time. Typical
  preference factors include cost, supplier rating, lead-time, quality,
  engineering change order (ECO) activity, and local availability.
 
  Life Cycle ManagementTM to track Component Obsolescence
  Aspect's Life-Cycle Management module enables engineers to review designs
  at a bill-of-material (BOM) and platform level, predict obsolescence
  issues, and then make fully informed trade-off decisions, evaluating the
  cost of last time buys against the cost of new system or sub-system
  redesigns. The module includes a full catalog of both obsolete and
  predicative life-cycle management factors for most critical electronic
  components. The module includes a dynamic monitoring and notification
  management function that triggers alerts well before the situation becomes
  critical.
 
   CSM for Strategic Plant Management, or SPM, is Aspect's decision support
solution for plant operations and maintenance, providing strategic management
of equipment spares, maintenance and repair items, as well as
 
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indirect MRO commodities, office supplies, computer products and services. SPM
provides plant maintenance professionals with a complete, current and cross-
referenced catalog of all MRO items and suppliers organized in a standard
classification scheme for ease of search, comparison and selection. It was
designed to provide the economic and process efficiencies of enterprise-wide
MRO management without sacrificing local flexibility by creating a central
repository of all MRO items and suppliers used in the enterprise, yet allowing
individual user and site-specific views of the data.
 
   CSM for Plant Management customer catalogs contain:
 
  . Customer-configurable data model, business rules, and workflows
 
  . Comprehensive analysis and reporting
 
  . Intuitive "walk-up" graphical user interface
 
  . Integrated catalog for stocked and non-stocked items
 
  . Immediate access to key documents such as Material Safety Data Sheets,
    drawings, and best-practice maintenance procedures
 
  . Powerful "notes' facility to share and leverage repair knowledge across
    the enterprise
 
  . Multiple user views including customized views per plant
 
   With the CSM for Strategic Plant Management solution, customers can
automate and sustain best practices and improved processes to suit their
operations and their ERP implementation. It has been designed to work
seamlessly with SAP R/3, with additional ERP and procurement systems supported
through API integration. Features include:
 
  . Preferred item and supplier management at the enterprise, business unit
    and plant levels
 
  . Spare parts management of stock and non-stock items to minimize inventory
 
  . Maintenance decision support for planned and unplanned repairs
 
  . Access from familiar SAP screens, workflow requests, and item masters
 
  . Seamless integration and sharing of SAP R/3 Plant Maintenance data
    combined with external supplier data
 
Customer Service and Support
 
   The Company's customer service and support organization provides customers
with technical support, training, consulting and implementation services. All
of the Company's current customers have software maintenance agreements with
the Company that provide for one or more of the following services:
 
   Customer Education and Training. The Company offers training courses
designed to meet the needs of end users, data modeling, knowledge, and
integration experts and system administrators. The Company also trains
customer personnel who in turn train end users in large global enterprise
deployments. Training classes are provided at the Company's offices in
Mountain View, California; Boston, Massachusetts; London, England; Tokyo,
Japan; and Bangalore, India. The Company provides on-site training services
upon request by customers at a higher cost. Fees for education and training
services are in addition to and separate from the fees for software and
content products and are typically charged either per student per class, or on
a per diem basis.
 
 
                                      10
<PAGE>
 
   Software Maintenance and Support. The Company offers telephone, e-mail and
facsimile customer support through its central technical support staff at the
Company's headquarters and regional support centers in North America, Europe,
and Asia. The Company also provides customers with product documentation,
release notes, and on-line help that describe features in new products, known
problems and workarounds, and application notes. Software product license fees
do not cover maintenance. Each customer is entitled to receive certain
software updates, maintenance releases and technical support for an annual fee
based on a percentage of the price of the products under license to such
customers. The annual subscription service fee for the Company's content
products covers all data updates and maintenance on an ongoing basis for the
term of the subscription.
 
Sales and Marketing
 
   The Company markets and sells its products and services primarily through a
direct sales force based in Mountain View, California and in field sales
offices in North American metropolitan areas of Atlanta, Boston, Cincinnati,
Cleveland, Chicago, Dallas, Denver, Houston, Los Angeles, New York and
Toronto, and abroad in London, Paris, Munich, Tokyo and Bangalore. As of
December 31, 1998 the Company's sales and marketing organization consisted of
214 employees. To support its sales force, the Company conducts a number of
marketing programs, which include public relations, advertising, CSM industry
conference event, telemarketing, seminars, direct mail, trade shows and
customer advisory board meetings. The Company's sales team includes persons
performing strategic account management, applications, and consulting and
business development roles. The Company also has worldwide strategic reselling
agreements with SAP and Baan, a joint marketing and systems integrator
agreement with Nihon Unisys, Ltd. (NUL) in Japan, and a sales representative
agreement in South Korea with Advanced Technology of Engineering Systems Co.,
Ltd. ("ATE").
 
   The Company's near-term strategy is to continue its focus its sales and
marketing efforts to a highly targeted "Aspect 500" list of the top 500
worldwide discrete manufacturers and top 500 manufacturers in the process,
chemical, pharmaceutical and related industries, and to explore additional
sales opportunities among its current customer base. The Company's field sales
force conducts multiple presentations and demonstrations of the Company's CSM
strategic decision support solutions for sourcing (SSM), product development
(SPD) and MRO operations (SPM) to management and users at the customer site as
a part of the direct sales effort. Sales cycles generally range from six to
twelve months or longer. The direct sales force is responsible for joint sales
efforts and management of multiple channels. The 1998 sales breakdown between
locations was (in thousands): U.S. $75,232 or 87.1%, UK $8,413 or 9.7% and
Asia $2,720 or 3.2 % for a total of $86,365.
 
   International sales accounted for 12.9%, 17.0%, and 20.3% of the Company's
total revenues in 1998, 1997, and 1996 respectively. In addition, although the
Company records revenues based on the billing location, certain domestic
billings include licenses that may be deployed by customers or resold through
indirect channels into international locations. The Company believes that in
order to increase sales opportunities and profitability, it will be required
to expand its international sales. The decreasing international percentages of
total revenue for 1996 through 1998 are attributable to faster comparative
growth of new sales and expansion sales in North America. The Company intends
to continue to expand its direct and indirect sales and marketing activities
worldwide, which will require significant management attention and financial
resources.
 
   The Company has committed, and continues to commit, significant time and
financial resources to developing international sales and support channels.
There are a number of risks inherent in the Company's international business
activities, including unexpected changes in regulatory requirements, tariffs
and other trade barriers, costs and risks of localizing products for foreign
countries, longer accounts receivable payment cycles, potentially adverse tax
consequences, currency fluctuations, repatriation of earnings and the burdens
of complying with a wide variety of foreign laws. In addition, revenues of the
Company earned in various countries where the Company does business may be
subject to taxation by more than one jurisdiction, thereby adversely affecting
the Company's earnings. There can be no assurance that such factors will not
have an adverse effect on the revenues from the Company's future international
sales and, consequently, the Company's business, financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Risk Factors."
 
                                      11
<PAGE>
 
   The Company generally ships its products within a short period of time
after execution of a license. As a result, the Company typically does not have
a material backlog of unfilled license orders at any given time, and the
Company does not consider backlog to be a meaningful indicator of future
performance.
 
Strategic Alliance Partners
 
   The Company believes that in order to provide comprehensive CSM solutions,
it will be necessary to develop, maintain and enhance close alliances with
vendors of hardware, software, databases, data and professional services. In
addition to the strategic reselling agreements with SAP and Baan, the Company
has established marketing, integration and strategic alliances with a number
of major vendors, including IBM, HP, Cadence, EDTN, Arrow Electronics, Dun &
Bradstreet, SDRC/Metaphase Technology, Inc., Oracle, Parametric Technology,
Sherpa Corporation, Siemens Business Systems, Sun, Viewlogic and a
relationship with two of the consulting groups of the Big 5 accounting firms,
Ernst & Young and PricewaterhouseCoopers. The Company's alliances with
hardware vendors have enabled it to integrate its solution with several
industry standard hardware platforms. The Company has formed an Enterprise
Partners Program with vendors of complementary products and meets regularly
with its Enterprise Partners to enhance integration between their
complementary products and the Company's products. The Company believes these
alliances may enhance the Company's ability to deliver a CSM solution that
supports customers' existing enterprise data management architecture and that
is tailored to the specific requirements of their industry. Although the
Company seeks to maintain close alliances with these companies, if the Company
is unable to develop and retain effective, long-term alliances with these
third parties, the Company's competitive position could be materially
adversely affected.
 
Research and Development
 
   The Company has committed, and expects to continue to commit in the future,
substantial resources to product development. Research and development efforts
are directed at increasing product functionality and solution modules,
improving product performance and expanding the capabilities of the products
to interoperate with third party software. The Company originally introduced
its CIS software in 1992 and introduced commercial availability of the next
generation Explore client/server software and its VIP content databases in
1995. The Company has regularly released new products and enhancements to
existing products. Although the Company expects that certain of its new
products will be developed internally, the Company may, based on timing and
cost considerations, acquire technology and products from third parties.
 
   The Company supplements its product development efforts by reviewing
customer feedback on existing products and working with customers and
potential customers to anticipate future functionality requirements. To assist
this effort, the Company hosts a customer advisory board made up of
representatives from many of its key customers, which meets periodically to
provide feedback to the Company's current and future product plans.
 
   The Company's future success will depend in part upon its ability to
enhance its current products and to develop and introduce new products on a
timely basis that keep pace with technological developments, emerging industry
standards and the increasingly sophisticated needs of its customers. There can
be no assurance that the Company will be successful in developing or marketing
product enhancements or new products that respond to technological change or
evolving industry standards, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products or that its new products or product enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements, the Company's business,
financial condition and results of operations could be materially adversely
affected.
 
   In addition, applications software and content products as complex as those
offered by the Company frequently contain undetected errors or failures when
first introduced or when new versions are released. The Company has in the
past discovered software and data errors in certain of its products and
enhancements, both
 
                                      12
<PAGE>
 
before and after initial shipments, and has experienced delays or lost
revenues during the period required to correct these errors. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not occur in products, data or releases after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, financial condition and results of operations.
 
   As of December 31, 1998, the Company's research and development
organization consisted of 390 full time employees, 285 of whom are employed by
the Company's facility at Bangalore, India. During 1998, 1997 and 1996,
research and development expenses were approximately $15.9 million, $11.2
million, and $8.8 million, respectively.
 
Competition
 
   The market for the Company's products is competitive, subject to rapid
change and significantly affected by new product introductions and other
market activities of industry participants. The Company's products are
targeted at the emerging market for open, client/server software, content
databases and services solutions, and many of the Company's competitors offer
software or content to address this market. Among the Company's principal
competitors is Information Handling Systems, Inc. ("IHS"), which has recently
acquired International Computex Inc., a consulting company that has begun
selling low-end CSM systems. Further, the Company currently faces indirect
competition from third-party professional service organizations and internal
information systems and computer-aided design departments of potential
customers that develop custom internal software.
 
   In the future, because there are relatively low barriers to entry in the
software industry, the Company could experience additional competition from
other established or emerging companies as the client/server application
software market continues to develop and expand. In particular, RDBMS vendors,
ERP vendors, PDM vendors, CAD vendors or professional service providers may
enter the Company's market with competitive products. As the Company expands
into Internet-based or other forms of product delivery, it may encounter
additional competition from its existing competitors and other established or
emerging companies. While Aspect believes that it has significant market
advantage with its combination of software, content and services, with the
compilation of content a significant barrier to entry, there can be no
guarantee of ultimate success. Many of these potential competitors have well-
established relationships with the Company's current and potential customers,
have extensive knowledge of client/server technology, better name recognition
and significantly greater financial, technical, sales, marketing and other
resources and are capable of offering single vendor solutions which span
multiple industries. It is also possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. The
Company also expects that competition will increase as a result of software
industry consolidations. The Company's competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements,
or to devote greater resources to the development, promotion and sale of their
products.
 
   Increased competition may result in price reductions, reduced gross margins
and loss of market share, any of which could materially adversely affect the
Company's business, financial condition or results of operations. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures will not
materially adversely affect its business, financial condition or results of
operations.
 
   The Company believes that, to compete effectively, it must continue to
provide comprehensive software and integrated content products, openness,
scalability, ability to integrate with third party products, functionality,
adaptability, ease of use, product reputation, quality, performance, price,
customer service and support, effectiveness of sales and marketing efforts and
company reputation. Although the Company believes that it currently competes
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors, especially those with greater financial, marketing, service,
support, technical and other resources than the Company.
 
 
                                      13
<PAGE>
 
Proprietary Rights and Licensing
 
   The Company's success is heavily dependent upon proprietary technology. The
Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions with its
employees, consultants and business partners and in its license agreements to
protect its proprietary rights. The Company currently owns three patents for
object technology use for parametric searching, concurrency and
internationalization in an object data model. The Company seeks to protect its
software, published data, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's product or to obtain and use
information that the Company regards as proprietary. While the Company is not
aware that any of its products infringes the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products.
 
   In addition, the Company relies on certain software and data that it
licenses from third parties, including software and data that are used in the
Company's products to perform certain functions. There can be no assurance
that such firms will remain in business, that they will continue to support
their products or that their products will otherwise continue to be available
to the Company on commercially reasonable terms. The Company believes that
substantially all of the software it licenses is available from vendors other
than the Company's current vendors and could be replaced with equivalent
software in a timely manner. However, it is possible that the loss of or
inability to maintain any of these software licenses could result in delays or
cancellations in product shipments until equivalent software can be identified
and licensed or developed and integrated with the Company's products. Any such
delay or cancellation could materially adversely affect the Company's
business, financial condition or results of operations.
 
   The Company's products are generally provided to customers in object code
format only. From time to time, in limited circumstances, the Company has
licensed source code format subject to customary protections such as use
restrictions and confidentiality agreements. In addition, certain customers
have entered into source code escrow arrangements with the Company, pursuant
to which the Company's source code could be released to the customer upon the
occurrence of certain events, such as certain material breaches of the
agreement. In the event of any such release of source code from escrow, the
customer's license is generally limited to use of the source code to maintain,
support and configure the Company's software products.
 
Employees
 
   As of December 31, 1998, the Company employed 659 persons, of whom 285 were
based in the United States and 374 were based in India and other foreign
countries. Of the total, 214 were engaged in sales and marketing, 390 in
product development and technical support, and 55 in finance and
administration. None of the Company's employees is represented by a labor
union with respect to his or her employment by the Company. The Company has
experienced no organized work stoppages and believes its relationships with
its employees are good. The Company believes that its future success will also
depend to a significant extent upon its ability to attract, train and retain
highly skilled technical, management, sales, marketing and consulting
personnel. Competition for such personnel in the computer software industry in
both the United States and India is intense. The Company has from time to time
experienced difficulty in locating candidates with appropriate qualifications.
There can be no assurance that the Company will be successful in attracting or
retaining such personnel and the failure to attract or retain such personnel
could have a material adverse effect on the Company's business or results of
operations.
 
ITEM 2. PROPERTIES.
 
   The Company's principal administrative, sales, marketing, support and
software research and development facility is located in approximately 37,000
square feet of space in Mountain View, California. This facility is leased to
the Company through May 2001. The Company also leases facilities of
approximately 25,000 square
 
                                      14
<PAGE>
 
feet of space in Nashua, New Hampshire and approximately 53,000 square feet of
space in three locations in Bangalore, India. The Nashua facility is leased to
the Company through August 2002. The Bangalore facilities are occupied under
leases, which expire in 1999 through 2007. In addition, the Company maintains
sales and support offices in the metropolitan areas of Atlanta, Boston,
Boulder, Chicago, Cleveland, Dallas, Detroit, Los Angeles, Toronto, London,
Munich, Milan, Paris, and Tokyo. The Company believes that its current
facilities are adequate for its needs through the end of 1998, and that,
should it be needed, suitable additional or alternative space will be
available in the future on commercially reasonable terms.
 
ITEM 3. LEGAL PROCEEDINGS.
 
   In the ordinary course of business, the Company may be involved in legal
proceedings. As of the date hereof, to the Company's knowledge there are no
material proceedings in which the Company is involved or litigation pending
against the Company.
 
   In late November 1998 the FTC dropped its civil investigation of potential
antitrust issues with respect to the Company's acquisition of Cadis, Inc.
While the FTC reserved the right to re-open the case, the Commission staff
formally ended its investigation and notified the Company of its conclusion
that no action was warranted in the matter.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
   No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
Market Price of Common Stock and Dividend Policy
 
   The Company's common stock has been traded on the NASDAQ National Market
since the Company's initial public offering in May 1996. According to the
Company's transfer agent, the Company had approximately 179 stockholders of
record as of February 28, 1999. Because many of such shares are held by
brokers and other institutions on behalf of stockholders, the Company is
unable to estimate the total number of stockholders represented by these
record holders. The following table sets forth the low and high sale price as
of the close of market of the Stock in each of the fiscal quarters during 1997
and 1998.
 
<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ -----
     <S>                                                           <C>    <C>
     Year ended December 31, 1997
       First quarter.............................................. $16.00 $9.75
       Second quarter.............................................  14.50  8.75
       Third quarter..............................................  20.91 12.50
       Fourth quarter.............................................  26.00 19.56
     Year ended December 31, 1998
       First quarter.............................................. $27.44 21.13
       Second quarter.............................................  38.06 26.56
       Third quarter..............................................  42.56 28.56
       Fourth quarter.............................................  44.31 17.75
</TABLE>
 
   The stock prices have been adjusted to reflect the two for one stock split
declared in August 1998.
 
   The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid dividends and does not anticipate
declaring dividends on its Common Stock in the foreseeable future.
 
                                      15
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA.
 
   The following selected consolidated financial data and separate
unconsolidated Company financial data is qualified by reference to and should
be read in conjunction with the consolidated financial statements and related
notes thereto and the section captioned "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Annual Report on Form 10-K.
 
   The information in the tables below, representing Consolidated Statement of
Operations Data and Consolidated Balance Sheet Data has been restated to
include the financial position of Cadis, Inc. ("Cadis") at the respective year
end dates and results of its operations for each of the five years in the
period ended December 31, 1998.
 
                   Consolidated Statement of Operations Data
                   (in thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                    -------------------------------------------
                                     1998     1997     1996     1995     1994
                                    -------  -------  -------  -------  -------
<S>                                 <C>      <C>      <C>      <C>      <C>
Revenues:
  Licenses........................  $51,132  $26,892  $16,043  $ 8,123  $ 3,998
  Subscription and maintenance....   17,509   13,594    9,392    5,141    2,974
  Service and other...............   17,724    9,443    5,023    2,299    2,327
                                    -------  -------  -------  -------  -------
    Total revenues................   86,365   49,929   30,458   15,563    9,299
                                    -------  -------  -------  -------  -------
Cost of revenues:
  Cost of license revenues........    1,419      346      612      298      197
  Cost of subscription and
   maintenance revenues...........    3,737    2,676    1,206    1,142      735
  Cost of service and other
   revenues.......................    6,400    5,027    2,689    1,291    1,634
                                    -------  -------  -------  -------  -------
    Total cost of revenues........   11,556    8,049    4,507    2,731    2,566
                                    -------  -------  -------  -------  -------
Gross profit......................   74,809   41,880   25,951   12,832    6,733
                                    -------  -------  -------  -------  -------
Operating expenses:
  Research and development........   15,882   11,213    8,762    6,031    4,012
  Sales and marketing.............   33,246   26,730   13,540    7,128    3,982
  General and administrative......    7,909    5,304    4,030    2,253    1,629
  Costs incurred in merger........      --     4,312      --       --       --
                                    -------  -------  -------  -------  -------
    Total operating expenses......   57,037   47,559   26,332   15,412    9,623
                                    -------  -------  -------  -------  -------
Net loss before interest and
 taxes............................   17,772   (5,679)    (381)  (2,580)  (2,890)
Interest and other income.........    3,526    3,066    1,805      268      112
Interest and other expense........     (751)    (665)    (209)     (83)     (46)
                                    -------  -------  -------  -------  -------
Net income (loss) before taxes....   20,547   (3,278)   1,215   (2,395)  (2,824)
Taxes.............................    4,522    1,593      330      150      144
                                    -------  -------  -------  -------  -------
Net income (loss).................  $16,025  $(4,871) $   885  $(2,545) $(2,968)
                                    =======  =======  =======  =======  =======
Net income (loss) per share--
 basic............................  $  0.54  $ (0.18) $  0.04  $ (0.14)
                                    =======  =======  =======  =======
Net income (loss) per share--
 diluted..........................  $  0.48  $ (0.18) $  0.03  $ (0.14)
                                    =======  =======  =======  =======
Number of shares used in computing
 per share amounts--basic.........   29,931   27,634   24,010   18,050
Number of shares used in computing
 per share amounts--diluted.......   33,150   27,634   27,510   18,050
</TABLE>
 
                                      16
<PAGE>
 
                        Consolidated Balance Sheet Data
 
                                 (in thousands)
 
<TABLE>
<CAPTION>
                                                 As of December 31,
                                       ---------------------------------------
                                         1998    1997    1996    1995    1994
                                       -------- ------- ------- ------- ------
<S>                                    <C>      <C>     <C>     <C>     <C>
Cash and short-term investments....... $ 81,473 $55,056 $57,831 $ 6,095 $3,999
                                       ======== ======= ======= ======= ======
Working capital....................... $ 79,438 $48,521 $56,440 $ 3,927 $2,344
                                       ======== ======= ======= ======= ======
Total assets.......................... $114,782 $81,720 $73,273 $14,159 $7,696
                                       ======== ======= ======= ======= ======
Long-term obligations, less current
 portion.............................. $    --  $    11 $ 2,365 $ 2,620 $2,297
                                       ======== ======= ======= ======= ======
Stockholders' equity (deficit)........ $ 88,840 $58,574 $58,746 $ 3,855 $1,331
                                       ======== ======= ======= ======= ======
</TABLE>
 
                                       17
<PAGE>
 
                            Aspect Development, Inc.
 
                    Statement of Historical Operations Data
 
                   (excluding the operating results of Cadis)
 
                                 (in thousands)
 
   Beginning in 1998, financial results were combined consistent with the
pooling of interests and were not recorded separately.
 
<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                             ---------------------------------
                                              1997     1996     1995    1994
                                             -------  -------  ------  -------
<S>                                          <C>      <C>      <C>     <C>
Revenues:
  Licenses.................................. $24,238  $12,263  $7,143  $ 3,478
  Subscription and maintenance..............  12,596    8,943   4,964    2,962
  Service and other.........................   7,532    3,029   1,586    2,044
                                             -------  -------  ------  -------
    Total revenues..........................  44,366   24,235  13,693    8,484
                                             -------  -------  ------  -------
Cost of revenues:
  Cost of license revenues..................     346      612     298      197
  Cost of subscription and maintenance
   revenues.................................   2,503    1,116     938      735
  Cost of service and other revenues........   3,055    1,679     612    1,333
                                             -------  -------  ------  -------
    Total cost of revenues..................   5,904    3,407   1,848    2,265
                                             -------  -------  ------  -------
Gross profit................................  38,462   20,828  11,845    6,219
                                             -------  -------  ------  -------
Operating expenses:
  Research and development..................   8,697    7,052   4,859    3,096
  Sales and marketing.......................  18,922    8,819   4,490    3,047
  General and administrative................   4,379    2,975   1,660    1,084
  Costs incurred in merger..................   1,712      --      --       --
                                             -------  -------  ------  -------
    Total operating expenses................  33,710   18,846  11,009    7,227
                                             -------  -------  ------  -------
Net income (loss) before interest and
 taxes......................................   4,752    1,982     836   (1,008)
Interest and other income...................   2,740    1,566      78       78
Interest and other expense..................    (665)    (209)    (83)     (46)
                                             -------  -------  ------  -------
Net income (loss) before taxes..............   6,827    3,339     831     (976)
Taxes.......................................   1,593      330     150      144
                                             -------  -------  ------  -------
Net income (loss)........................... $ 5,234  $ 3,009  $  681  $(1,120)
                                             =======  =======  ======  =======
</TABLE>
 
                                       18
<PAGE>
 
                            Aspect Development, Inc.
 
                               Balance Sheet Data
 
                (excluding the assets and liabilities of Cadis)
 
                                 (in thousands)
 
   Beginning in 1998, financial results were combined consistent with the
pooling of interests and were not recorded separately.
 
<TABLE>
<CAPTION>
                                                       As of December 31,
                                                  -----------------------------
                                                   1997    1996    1995   1994
                                                  ------- ------- ------ ------
<S>                                               <C>     <C>     <C>    <C>
Cash and short-term investments.................. $52,675 $47,818 $3,159 $2,437
                                                  ======= ======= ====== ======
Working capital.................................. $47,872 $45,485 $1,024 $  854
                                                  ======= ======= ====== ======
Total assets..................................... $75,456 $59,000 $9,979 $5,439
                                                  ======= ======= ====== ======
Long-term obligations, less current portion...... $    11 $   379 $  634 $  311
                                                  ======= ======= ====== ======
Stockholders' equity............................. $56,861 $48,754 $2,134 $1,374
                                                  ======= ======= ====== ======
</TABLE>
 
                                       19
<PAGE>
 
                                  CADIS, Inc.
 
                          Statement of Operations Data
 
                                 (in thousands)
 
   Beginning in 1998, financial results were combined consistent with the
pooling of interests and were not recorded separately.
 
<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                           -----------------------------------
                                             1997     1996     1995     1994
                                           --------  -------  -------  -------
<S>                                        <C>       <C>      <C>      <C>
Revenues:
  Licenses................................ $  2,654  $ 3,780  $   980  $   520
  Subscription and maintenance............      998      449      177       12
  Service and other.......................    1,911    1,994      713      283
                                           --------  -------  -------  -------
    Total revenues........................    5,563    6,223    1,870      815
                                           --------  -------  -------  -------
Cost of revenues:
  Cost of license revenues................      --       --       --       --
  Cost of subscription and maintenance
   revenues...............................      173       90      204      --
  Cost of service and other revenues......    1,972    1,010      679      301
                                           --------  -------  -------  -------
    Total cost of revenues................    2,145    1,100      883      301
                                           --------  -------  -------  -------
Gross profit..............................    3,418    5,123      987      514
                                           --------  -------  -------  -------
Operating expenses:
  Research and development................    2,516    1,710    1,172      916
  Sales and marketing.....................    7,808    4,711    2,638      935
  General and administrative..............      925    1,055      593      545
  Costs incurred in merger................    2,600      --       --       --
                                           --------  -------  -------  -------
    Total operating expenses..............   13,849    7,476    4,403    2,396
                                           --------  -------  -------  -------
Net loss before interest and taxes........  (10,431)  (2,353)  (3,416)  (1,882)
Interest and other income.................      326      239      190       34
                                           --------  -------  -------  -------
Net loss.................................. $(10,105) $(2,114) $(3,226) $(1,848)
                                           ========  =======  =======  =======
</TABLE>
 
                                       20
<PAGE>
 
                                  CADIS, Inc.
 
                               Balance Sheet Data
 
                                 (in thousands)
 
   Beginning in 1998, financial results were combined consistent with the
pooling of interests and were not recorded separately.
 
<TABLE>
<CAPTION>
                                                       As of December 31,
                                                  ----------------------------
                                                   1997   1996    1995   1994
                                                  ------ ------- ------ ------
<S>                                               <C>    <C>     <C>    <C>
Cash and short-term investments.................. $2,381 $10,013 $2,936 $1,562
                                                  ====== ======= ====== ======
Working capital.................................. $  649 $10,955 $2,903 $1,490
                                                  ====== ======= ====== ======
Total assets..................................... $6,264 $14,273 $4,180 $2,257
                                                  ====== ======= ====== ======
Long-term obligations, less current portion...... $  --  $ 1,986 $1,986 $1,986
                                                  ====== ======= ====== ======
Stockholders' equity (deficit)................... $1,893 $ 9,992 $1,721 $  (43)
                                                  ====== ======= ====== ======
</TABLE>
 
                                       21
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
     RESULTS OF OPERATIONS
 
Overview
 
   The Company develops, markets and supports enterprise client/server
software and reference content products that enable manufacturers to improve
product development and business processes through component and supplier
management. The Company was incorporated in 1990 and was in the development
stage, engaging primarily in research and development, until 1992. In 1992,
the Company commenced shipment of its first generation component and supplier
management software product, CIS 1.0. The Company's second generation CSM
software product, Explore, first became generally commercially available in
the second quarter of 1995. In 1993, the Company began development of
component reference content products, and its first internally developed
reference content products, VIP, became generally commercially available in
the second quarter of 1995.
 
   In November 1997, the Company acquired Cadis Inc., a developer of CSM
solutions. In the acquisition, the Company issued approximately 1.4 million
shares of its Common Stock in exchange for all of the outstanding capital
stock and options of Cadis. The acquisition was accounted for as a pooling of
interests, and, except where specified, the financial statements of the
Company and the information herein have been restated to include the results
of Cadis for all periods. The acquisition of Cadis augmented the Company's
portfolio of CSM products with the addition of Krakatoa, a Web-based catalog
publishing software product.
 
   Excluding the effects of the acquisition of Cadis, the Company's revenues
have increased from $8.5 million in 1994 to $44.4 million in 1997 as a result
of greater market acceptance of the Company's CIS products and the
introduction of the Explore and VIP products. Taking the Cadis acquisition
into account, the Company's revenues have grown from $9.3 million to $49.9
million over the same period. Excluding the effects of the Cadis acquisition,
the Company realized an operating loss in 1994 but achieved limited
profitability in 1995 and increased profitability in 1996 and 1997. The loss
in 1994 and the limited profitability in 1995 primarily reflected the
Company's substantial investment in research and development to build its
software and reference content products and in sales and marketing to expand
its marketing presence, while the increased profitability in 1996 and 1997
reflected increased market acceptance of the Company's products, which caused
revenues to increase at a greater rate than operating expenses. Taking the
Cadis acquisition into account, the Company recorded a small profit in 1996,
and loss in 1997. The differences between these results on a consolidated
basis and Aspect's results on a stand-alone basis primarily reflect the fact
that, during 1996 and 1997, Cadis was an early-stage company whose primary
focus was on developing its initial commercial products and entering the CSM
market, and therefore incurred substantial software development and marketing
expenses that were only partially offset by licensing revenues. The
consolidated loss incurred in 1997 also reflected costs and expenses
associated with the Company's acquisition of Cadis. See Note 2 of Notes to
Consolidated Financial Statements.
 
   Licenses of the Company's software and reference content products have
historically accounted for the substantial majority of the Company's revenues,
and the Company anticipates that this will continue for the foreseeable
future. Accordingly, any decline in the demand for or market acceptance of the
Company's software or reference content products would have a material adverse
effect on the Company's business, financial condition and results of
operations. Although the Company has experienced significant revenue growth in
recent periods, there can be no assurance that the Company will sustain such
growth in revenues or that the Company will sustain profitability in the
future on a quarterly or an annual basis. A significant portion of the
Company's revenues has historically been derived from relatively large sales
to a limited number of customers, and the Company expects that this trend will
continue for the foreseeable future. The license of the Company's software and
data products generally requires the Company to engage in a sales cycle of six
to twelve month or longer and to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's
products. For these reasons, sales cycles are subject to a number of
significant delays over which the Company has little or no control.
Accordingly, any delay in the sale of a larger license or a number of smaller
 
                                      22
<PAGE>
 
licenses would have a material adverse effect on the Company's business,
financial condition and results of operations and would cause the Company's
operating results to vary significantly from quarter to quarter.
 
   The Company's revenues consist of: license revenues, subscription and
maintenance revenues and service and other revenues. License revenues are
comprised principally of perpetual license fees for the Company's
client/server software and reference content products. Subscription and
maintenance revenues are comprised principally of annual subscription and
maintenance fees for the Company's products, including its Explore
client/server software and its VIP family of component reference databases.
Service and other revenues are comprised principally of fees for consulting,
development and training services performed by the Company. The Company
recognizes revenues in accordance with American Institute of Certified Public
Accountants (the "AICPA") Statement of Position ("SOP") 97-2 on Software
Revenue Recognition. License revenues are recognized after execution of a
license agreement, or receipt of a definitive purchase order, and shipment of
the product if no significant vendor obligations remain and collection of the
resulting receivables is deemed probable. For arrangements involving multiple
products and services, the entire arrangement is allocated between the
elements based on each element's relative value. Product returns and sales
allowances (which were not significant through December 31, 1998) are
estimated and provided for at the time of sale. When delivery involves
significant installation obligations at multiple sites, revenues are
recognized on a per-site basis upon completion of installation. Revenues from
subscription and maintenance agreements are deferred and recognized on a
straight-line basis over the life of the related agreement, which is typically
twelve months. Service revenues from training and consulting are recognized
upon completion of the work to be performed. Development revenues are
recognized in accordance with the terms of the agreements, generally when
related costs have been incurred.
 
Recent Accounting Pronouncements
 
   In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which requires companies to
record derivative financial instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS
No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. This Statement will not have a material impact on the
financial condition or results of the operations of the Company.
 
   In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
"Software Revenue Recognition,"' which defers for one year the application of
provisions in SOP 97-2 which limit what is considered vendor-specific
objective evidence of the fair value of the various elements in a multiple
element arrangement. All other provisions of SOP 97-2 remain in effect. This
SOP was effective as of March 31, 1998. In December 1998, the AICPA issued SOP
98-9, "Modification of SOP 97-2, "Software Revenue Recognition,' With Respect
to Certain Transactions," which amends paragraphs 11 and 12 of SOP 97-2,
Software Revenue Recognition, to require recognition of revenue using the
"residual value method" under certain conditions. Effective December 15, 1998,
SOP 98-9 amends SOP 98-4, "Deferral of the Effective Date of a Provision of
SOP 97-2, "Software Revenue Recognition,"' to extend the deferral of the
application of certain passages of SOP 97-2 provided by SOP 98-4 through
fiscal years beginning on or before March 15, 1999. All other provisions of
this SOP are effective for transactions entered into in fiscal years beginning
after March 15, 1999. The Company does not anticipate that these statements
will have a material adverse impact on its statement of operations.
 
 
                                      23
<PAGE>
 
Significant Segment Information
 
   The Company derived approximately 9.7%, 14.9% and 19.5% of its revenues
from its European operations in 1998, 1997 and 1996, respectively. The Company
generated income before interest and taxes of 36.3%, 47.2% and 80.5% on those
revenues in each of the years listed. The Company generated 23.5% of operating
income from its North American operations in 1998, while incurring losses on
substantially larger revenue in 1997 and 1996 (See Note 8 of the Notes to
Consolidated Financial Statements). This apparent disparity is due to the fact
that in those years most of the Company's research and development, sales and
marketing and general and administrative costs were allocated to the Company's
operations in North America. In addition, the 1997 North American results
include expenses of approximately $4.3 million associated with the acquisition
of Cadis. Management expects this concentration of research and development
costs and other infrastructure expenses in North America to become less
significant in the future as more operational functions are organized and
developed in the countries in which the Company sells its products and as the
Company continues to expand its sales efforts in foreign markets.
 
                                      24
<PAGE>
 
Results of Operations
 
   The following tables set forth certain operating data, expressed as a
percentage of net revenue, for each of the years ended December 31, 1998, 1997
and 1996 for the Company on a consolidated basis, for the Company excluding the
operating results of Cadis and for Cadis on a stand-alone basis.
 
<TABLE>
<CAPTION>
                                                              1998   1997    1996
Statement of Operations Data                                  -----  -----   -----
<S>                                                           <C>    <C>     <C>
Revenues:
  Licenses...................................................  59.2%  53.9%   52.7%
  Subscription and maintenance...............................  20.3   27.2    30.8
  Service and other..........................................  20.5   18.9    16.5
                                                              -----  -----   -----
    Total revenues........................................... 100.0  100.0   100.0
                                                              -----  -----   -----
Cost of revenues:
  Cost of licenses...........................................   1.7    0.7     2.0
  Cost of subscription and maintenance.......................   4.3    5.3     4.0
  Cost of service and other..................................   7.4   10.1     8.8
                                                              -----  -----   -----
    Total cost of revenues...................................  13.4   16.1    14.8
                                                              -----  -----   -----
    Gross margin.............................................  86.6   83.9    85.2
                                                              -----  -----   -----
Operating expenses:
  Research and development...................................  18.4   22.5    28.8
  Sales and marketing........................................  38.5   53.6    44.5
  General and administrative.................................   9.1   10.6    13.2
  Merger costs...............................................   --     8.6     --
                                                              -----  -----   -----
    Total operating expenses.................................  66.0   95.3    86.5
                                                              -----  -----   -----
Operating Income (loss)......................................  20.6  (11.4)   (1.3)
Interest and other income....................................   4.0    6.1     5.9
Interest and other expense...................................  (0.9)  (1.3)   (0.6)
                                                              -----  -----   -----
Income (loss) before income taxes............................  23.8   (6.6)    4.0
Provision for income taxes...................................   5.2    3.2     1.1
                                                              -----  -----   -----
Net income (loss)............................................  18.6%  (9.8)%   2.9%
                                                              =====  =====   =====
</TABLE>
 
<TABLE>
<CAPTION>
                                                                      1997   1996
Aspect Statements of Operations (excluding Cadis)                     -----  -----
<S>                                                                   <C>    <C>
Revenues:
  Licenses...........................................................  54.6%  50.6%
  Subscription and maintenance.......................................  28.4   36.9
  Service and other..................................................  17.0   12.5
                                                                      -----  -----
    Total revenues................................................... 100.0  100.0
                                                                      -----  -----
Cost of revenues:
  Cost of licenses...................................................   0.8    2.5
  Cost of subscription and maintenance...............................   5.6    4.6
  Cost of service and other..........................................   6.9    6.9
                                                                      -----  -----
    Total cost of revenues...........................................  13.3   14.0
                                                                      -----  -----
Gross margin.........................................................  86.7   86.0
                                                                      -----  -----
Operating expenses:
  Research and development...........................................  19.6   29.1
  Sales and marketing................................................  42.6   36.4
  General and administrative.........................................   9.9   12.3
  Merger costs.......................................................   3.9    --
                                                                      -----  -----
    Total operating expenses.........................................  76.0   77.8
                                                                      -----  -----
Operating income.....................................................  10.7    8.2
Interest and other income............................................   6.2    6.5
Interest and other expense...........................................  (1.5)  (0.9)
                                                                      -----  -----
Income before income taxes...........................................  15.4   13.8
Provision for income taxes...........................................   3.6    1.4
                                                                      -----  -----
Net income...........................................................  11.8%  12.4%
                                                                      =====  =====
</TABLE>
 
                                       25
<PAGE>
 
<TABLE>
<CAPTION>
                                                                 1997    1996
Cadis Statements of Operations (stand-alone basis)              ------   -----
<S>                                                             <C>      <C>
Revenues:
  Licenses.....................................................   47.7%   60.7%
  Subscription and maintenance.................................   17.9     7.2
  Service and other............................................   34.4    32.1
                                                                ------   -----
    Total revenues.............................................  100.0   100.0
                                                                ------   -----
Cost of revenues:
  Cost of licenses.............................................    --      --
  Cost of subscription and maintenance.........................    3.1     1.5
  Cost of service and other....................................   35.5    16.2
                                                                ------   -----
    Total cost of revenues.....................................   38.6    17.7
                                                                ------   -----
Gross margin...................................................   61.4    82.3
                                                                ------   -----
Operating expenses:
Research and development.......................................   45.2    27.5
Sales and marketing............................................  140.4    75.8
General and administrative.....................................   16.6    17.0
Merger costs...................................................   46.7     --
                                                                ------   -----
    Total operating expenses...................................  248.9   120.3
                                                                ------   -----
Operating loss................................................. (187.5)  (38.0)
Interest and other income......................................    5.9     3.9
                                                                ------   -----
Net loss....................................................... (181.6)% (34.1)%
                                                                ======   =====
</TABLE>
 
Revenues
 
   Licenses. Revenues from licenses increased to $51.0 million in 1998 from
$26.9 million in 1997 and $16.0 million in 1996. These increases were due
primarily to the growing market acceptance of the Company's products and an
increased emphasis on marketing the Company's products. Also contributing to
the revenue increases were higher average selling prices of the Explore
client/server software and VIP component reference databases compared to the
CIS products.
 
   Subscription and maintenance. Subscription and maintenance revenues were
$17.5 million, $13.6 million, and $9.4 million in 1998, 1997 and 1996,
respectively. The increase in subscription and maintenance fee revenues during
these years was principally the result of the increased acceptance of the
Company's VIP component reference databases and the increased base of
customers entering into maintenance contracts.
 
   Service and other. Service and other revenues were $17.7 million in 1998,
up from $9.4 million in 1997 and $5.0 million in 1996. This growth in revenue
was primarily due to the increased number and size of consulting contracts and
management's continuing recognition of the need to offer superior service
support to the Company's customers in order to enhance the market's acceptance
of the Company's products.
 
   International sales were $11.1 million, $8.5 million and $6.2 million in
1998, 1997 and 1996, respectively, representing 12.9%, 17.0% and 20.3% of
total revenues, respectively, in each year. The increased volume of
international sales from 1996 to 1998 in absolute dollars is primarily
attributable to an increase in the Company's international marketing efforts.
The decreasing international percentages of total revenue are attributable to
faster comparative growth of new sales and expansion sales in North America.
The Company intends to continue to expand its international operations and to
enter additional international markets. The Company currently maintains sales
offices in the United Kingdom, France, Germany, Japan, Canada, and India and
has sales representative agreements with Advanced Technology of Engineering
Systems Co., Ltd. ("ATE") in South Korea, a joint marketing/systems integrator
agreement with Nihon Unisys, Ltd. ("NUL") in Japan, marketing
 
                                      26
<PAGE>
 
relationships with Ernst & Young LLP and PricewaterhouseCoopers LLP, and
worldwide strategic reselling agreements with SAP and Baan. In addition,
although the Company records revenues based on the billing location, certain
domestic billings include licenses that may be deployed by customers or resold
by indirect channel partners into international locations. International sales
are denominated and collected in both U.S. and foreign currency. Accordingly,
a portion of the Company's international revenues are subject to foreign
currency fluctuation risks. In those jurisdictions in which the Company's
sales are denominated in foreign currency, fluctuations in such currencies
could adversely affect the profitability of sales made in such jurisdictions
and, therefore, materially adversely affect the Company's business, financial
condition and results of operations. Further, an increase in the value of the
U.S. dollar relative to foreign currencies could make the Company's products
more expensive and, therefore, potentially less competitive in those markets
in which the Company's sales are denominated in U.S. dollars. To a limited
extent, the Company has engaged in some insignificant foreign currency hedging
activities to offset the potential risks mentioned above. This hedging
activity has not had a material effect on the financial statements and no
hedging contracts remained open at December 31, 1998. If considered
appropriate, the Company will enter into hedging contracts in the future.
 
   Adoption of the Euro Presents Uncertainties. In January 1999, the new
"Euro" currency was introduced in certain European countries that are part of
the European Monetary Union ("EMU"). During 2002, all EMU countries are
expected to be operating with the Euro as their single currency. A significant
amount of uncertainty exists as to the effect the Euro will have on the
market-place generally and, additionally, all of the final rules and
regulations have not yet been defined and finalized by the European Commission
with regard to the Euro currency. We are currently assessing the effect the
introduction of the Euro will have on our internal accounting systems and the
sales of our products. Aspect is not aware of any material operational issues
or costs associated with preparing our internal systems for the Euro. However,
Aspect utilizes third party vendor equipment and software products that may or
may not be EMU compliant. Although Aspect is currently taking steps to address
the impact, if any, of EMU compliance for such third party products, the
failure of any critical components to operate properly post-Euro may have an
adverse effect on the business or results of operations of our Company or
require us to incur expenses to remedy such problems.
 
Cost of revenues
 
   Cost of licenses. Cost of licenses consists primarily of license fees and
royalties paid to third-party vendors, primarily Oracle, and shipping
expenses. Cost of licenses was $1.4 million, $346,000 and $612,000 in 1998,
1997 and 1996, respectively, representing 2.8%, 1.3% and 3.8%, respectively,
of the related license revenues for each of those years. The decrease between
1996 and 1997 is primarily due to the fact that more customers already owned
Oracle or other relational database software and the Company was not obligated
to obtain the product for them. The increase as a percentage of revenues from
1997 to 1998 was primarily due to the addition of additional third-party
vendors' products licensed in conjunction with Aspect's products. Because all
development costs incurred in the research and development of products and
enhancements to existing software products have been expensed as incurred,
cost of licenses includes no amortization of capitalized software development
costs. See Note 1 of Notes to Consolidated Financial Statements.
 
   Cost of subscription and maintenance revenues. Cost of subscription and
maintenance revenues consist primarily of license fees and royalties paid to
third-party vendors and personnel-related costs incurred in providing
centralized telephone support and related technical support to customers. Cost
of subscription and maintenance revenues was $3.7 million, $2.7 million and
$1.2 million, in 1998, 1997 and 1996, representing 21.3%, 19.7% and 12.8%,
respectively, of related subscription and maintenance revenues for each year.
The increase between 1996 and 1998 is primarily due to the Company's high
level of interest in continued customer support and the resulting increase in
facilities and employees assigned to that effort.
 
   Cost of service and other revenues. Cost of service and other revenues
consist primarily of personnel-related costs incurred in providing process
consulting services, data services and training to customers. Cost of service
and other revenues was $6.4 million, $5.0 million and $2.7 million,
respectively, in 1998, 1997 and 1996, representing 36.1%, 53.2% and 53.5%,
respectively, of related revenue for each year. The increase in absolute
 
                                      27
<PAGE>
 
dollars in each of the years presented is due to an increase in the number and
size of consulting contracts. The overall decrease in terms of percentages of
revenue is due to the increasing profit margin associated with each individual
contract due to management's continuing effort to more efficiently manage
individual projects and an increasing percentage of the fulfillment of these
contracts from the lower cost of labor in India.
 
Gross profit
 
   Gross profit was $74.8 million, $41.9 million and $26.0 million in 1998,
1997 and 1996, respectively, representing 86.6%, 83.9% and 85.2%,
respectively, of total revenues for each year. The increase in absolute
dollars and as a percentage of total revenues from 1997 to 1998 was primarily
the result of an increased level of revenues and the allocation of costs over
a larger customer base. The Company currently expects that gross profits may
decrease as a percentage of total revenues in the future as services and other
revenues, which generally have lower gross margins than the Company's license
revenues, increase as a percentage of total revenues, as well as due to an
increase in royalties due for data in its subscription products sourced
through other third party companies.
 
Operating Expenses
 
   Research and development. Research and development expenses consist
primarily of engineering personnel costs. Research and development expenses
for 1998, 1997 and 1996 were approximately $15.9 million, $11.2 million and
$8.8 million, respectively. These expenses as a percentage of total revenues
were 18.4%, 22.5% and 28.8%, respectively, during the three years. The
increases in research and development expenses in absolute dollars since 1996
were primarily attributable to increased staffing and associated support for
technical staff and the use of consultants and outside service providers
required to develop and enhance the Company's products. The reduction as a
percentage of revenue is due to revenues increasing at a higher rate than
research and development expenses. The Company believes that a significant
level of research and development expenses will be required to be competitive
in the future. Accordingly, the Company expects that the absolute dollar
amounts of research and development expenses may increase in the future, but
may decline as a percentage of total revenues in the event that revenues
increase.
 
   Sales and marketing. Sales and marketing expenses include salaries,
commissions, advertising, travel, trade show, public relations and other
selling and marketing related expenses. Sales and marketing expenses for 1998,
1997 and 1996 were approximately $33.2 million, $26.7 million and $13.5
million, respectively, representing 38.5%, 53.5%, and 44.5% of total revenues,
respectively. The increases in sales and marketing expenses in absolute
dollars were primarily due to the addition of sales and marketing personnel
and increased marketing activities, including trade shows and promotional
expenses and substantial growth in international sales and marketing channels.
The Company believes that such expenses will increase in dollar amounts and
may increase as a percentage of total revenues in the future as the Company
expands its sales and marketing staff and enters new markets, worldwide.
 
   General and administrative. General and administrative expenses include
personnel costs for administration, finance, human resources and general
management, along with legal and accounting expenses and other professional
services. General and administrative expenses increased from $4.0 million in
1996 to $5.3 million in 1997 and $7.9 million in 1998. These expenses
represented 13.2%, 10.6% and 9.1% of total revenues, respectively during those
three years. The increases in dollar amounts were primarily the result of
increased staffing and associated expenses necessary to manage and support the
Company's growth. The Company believes that its general and administrative
expenses will increase in dollar amounts in the future as the Company expands
its staffing and as the Company experiences higher costs associated with being
a public company, but may decrease as a percentage of total revenues in the
event that revenues increase.
 
   Merger costs. During 1997, the costs associated with the acquisition of
Cadis were approximately $4.3 million, including $0.9 million in consulting
fees to financial advisors, $0.7 million for legal and other professional
fees, $0.7 million for personnel severance and outplacement expenses and $0.6
million for facilities
 
                                      28
<PAGE>
 
consolidation expense. Of the merger expenses, a total of approximately $2.9
million was accrued at December 31, 1997. This amount has been paid during
1998 resulting in no accruals at December 31, 1998. The Company may incur
similar expenses should management determine that further acquisitions are
strategically important to the Company's future growth.
 
Interest and other income
 
   The Company's net interest and other income for 1998, 1997 and 1996 were
$3.5 million, $3.1 million and $1.8 million, respectively. Interest income
consists primarily of interest accrued on the Company's cash generated from
financing and operating activities. The increase in interest and other income
during these years was primarily due to higher cash and investment balances
resulting from improved cash flows from operations and the resulting
investment in short-term securities of the funds.
 
Interest and other expense
 
   Interest and other expense was $751,000, $665,000 and $209,000 in 1998,
1997 and 1996 respectively. The increase in other expense in 1998 and in 1997
was due primarily to $489,000 and $612,000 respective charges to record the
Company's proportionate share of the loss in a joint venture.
 
Provision for income taxes
 
   The Company's provision for income taxes was $4.5 million in 1998, $1.6
million in 1997, and $330,000 in 1996. The increase in the provision in 1998
is primarily due to increased income generated by the Company (excluding the
acquisition of Cadis) and the Company's limitation in use of Cadis net
operating loss carryforwards or its losses generated in 1998. As of December
31, 1998, the Company had federal net operating loss carryforwards of
approximately $25 million. The Company also had federal research and
development tax credit carryforwards of approximately $2.5 million. The
federal net operating loss and credit carryforwards will expire in 2007
through 2018, if not utilized sooner. Utilization of the net operating losses
and credits will be subject to a substantial annual limitation for losses
previously incurred by Cadis and obtained by the Company in the acquisition
and merger (as described in Note 2 to the Consolidated Financial Statements)
due to the ownership change limitations provided by the Internal Revenue Code
of 1986 and similar state provisions. Net operating losses and credits related
to Aspect may also be subject to a substantial limitation due to ownership
change limitations provided by the Internal Revenue Code and similar state
provisions. Based upon current values, however, the annual limitations are not
expected to result in the expiration of net operating losses and credits
before utilization. See Note 6 of Notes to Consolidated Financial Statements.
 
Liquidity and Capital Resources
 
   In May 1996, the Company completed its initial public offering, and its
common stock began trading on the NASDAQ National Market under the symbol
ASDV. Through the offering, the Company sold 2,322,500 new shares of its
common stock which generated approximately $42.3 million of cash, net of
underwriting discounts, commissions and other offering costs.
 
   In 1998 and 1997, the Company's investing activities consisted primarily of
purchases of property and equipment. During these years, the Company used $4.8
million and $3.5 million respectively, of cash to purchase property and
equipment, primarily for personal computers and for furniture and other office
equipment. The Company acquired Cadis in 1997 (as discussed in Note 2 to the
Consolidated Financial Statements). The Company expects that the rate of
purchases of property and equipment will increase as the Company's employee
base grows. As of December 31, 1998, the Company's principal commitments
consisted primarily of operating leases for office facilities. See Note 3 of
Notes to Consolidated Financial Statements.
 
 
                                      29
<PAGE>
 
   To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. The
Company expects that, in the future, cash in excess of current requirements
will be invested in investment grade, interest-bearing securities.
 
   At December 31, 1998, the Company had a total of $81.5 million in cash and
short-term investments. This was composed of $7.9 million in cash and cash
equivalents and $73.6 million in short-term investments. The Company had $79.4
million of working capital.
 
   The Company believes that its current cash balances and short term
investments are sufficient to support the Company's operations and planned
growth over the next year. Although operating activities may provide cash in
certain periods, to the extent that the Company experiences growth in the
future, the Company anticipates that its operating and investing activities
may use cash. Consequently, any such growth may require the Company to obtain
additional equity or debt financing. In addition, although there are no
present understandings, commitments or agreements with respect to any
acquisition of other businesses, products or technologies, the Company from
time to time evaluates potential acquisitions of businesses, products and
technologies and may in the future require additional equity or debt financing
to consummate such potential acquisitions.
 
   The Company will continue to invest in its sales and marketing
infrastructure. In addition, the Company will commit substantial cash
resources to research and development activities.
 
Impact of the Year 2000
 
   Many older computer software programs use two digits in their date fields,
identifying years by the last two digits only. Such programs may interpret the
year 2000 as 1900 instead, causing such systems to fail or create erroneous
results after 1999.
 
   The Company has a Year 2000 (Y2K) internal task force to determine the
impact, if any, of the Year 2000 issues related to the Company's products,
third party databases embedded in the Company's products, internal computer
and information systems, office equipment, customers' internal management
systems, and third party suppliers. The Company intends to retain a consultant
to evaluate internal systems compliance with Y2K. The amount budgeted for this
expense is $98,000. The Company has tested its products and has determined
that all of the Company's supported products are Y2K compliant, with the
exception of certain older versions of software for which upgrades are
available. The Company is in the process of obtaining questionnaires or
certificates of compliance from significant third-party vendors as to their
Y2K compliance. If any of these vendors are determined to be non-compliant,
the internal task force will develop plans to correct problems once they are
identified.
 
   The costs to address the Year 2000 compliance issues to date have been
minimal and have been financed through operating cash flow. The Company has
not determined the total estimated cost of the Year 2000 compliance program.
The estimate of costs will be determined as the Company continues its
assessments and additional information is known. These costs will not include
internal resource costs or the costs of software and systems that are being
replaced or upgraded in the normal course of business. There can be no
assurance that these costs will not be greater than expected, or that
corrective action will be successful or completed in the requisite timeframe.
See "Risk Factors." The Company will continue to expend appropriate resources
to address this issue on a timely basis.
 
   The Company believes that Year 2000 issues may affect the purchasing
patterns of customers and potential customers in a variety of ways. Many
companies are expending significant resources to correct, patch or replace
their current software systems to achieve Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products such
as those offered by the Company. Any of the foregoing could result in a
material adverse effect on the Company's business, operating results and
financial condition.
 
   The Company believes that it will be substantially complete with its Y2K
compliance work prior to December 31, 1999. Contingency plans will be
developed if it appears the Company, its key customers or its key suppliers
will not be Year 2000 compliant, and such noncompliance is expected to have a
material adverse impact on the Company's operations.
 
                                      30
<PAGE>
 
Risk Factors
 
   The Company's revenues and results of operations could be materially
adversely affected by many factors, some of which are outside the control of
the Company, including, among others, the relatively long sales and
implementation cycles for the Company's products; the size and timing of
individual license transactions; seasonality of revenues; changes in the
Company's operating expenses; changes in the mix of products and services
sold; timing of introduction or enhancement of products by the Company or its
competitors; market acceptance of new products; technological changes in
software or database technology; personnel changes and difficulties in
attracting and retaining qualified sales, marketing, technical and consulting
personnel; changes in customers' budgeting cycles; foreign currency exchange
rates; quality control of products sold; and economic conditions generally and
in specific industry segments.
 
   The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer buying patterns and the
Company's expense patterns. In recent years, the Company has generally had
stronger demand for its products during the quarter ending December 31 and has
incurred higher personnel costs in the quarter ending March 31. The Company
believes that these patterns will continue for the foreseeable future.
 
   Licenses of the Company's client/server software and reference data
products have historically accounted for the substantial majority of the
Company's revenues, and the Company anticipates that this trend will continue
for the foreseeable future. The Company generally ships its products within a
short period of time after execution of a license. As a result, the Company
typically does not have a material backlog of unfilled license orders, and
revenues in any quarter are substantially dependent on license revenues
recognized in that quarter. The Company's expense levels are based, in part,
on its expectations as to future revenues and to a large extent are fixed in
the short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenues, and any
significant shortfall of demand in relation to the Company's expectations or
any material delay of customer orders would have an almost immediate material
adverse effect on the Company's business, financial condition or results of
operations. As a result, it is likely that in some future period the Company's
results of operations could fail to meet the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail or are perceived to prevail generally or with respect to the Company's
business, the price of the Company's Common Stock would likely drop
significantly.
 
   The licensing of the Company's client/server software and reference data
products generally requires the Company to engage in a sales cycle lasting six
to twelve months or longer, during which the Company typically provides a
significant level of education to prospective customers regarding the use and
benefits of the Company's products. In addition, the implementation of the
Company's standard products typically involves a significant commitment of
resources by its customers over an extended period of time and is commonly
associated with reengineering of product development and business processes.
For these reasons, sales and customer implementation cycles are subject to
delays over which the Company may have little or no control. Accordingly, any
delay in the sale or customer implementation of a larger license or a number
of smaller licenses would have a material adverse effect on the Company's
business, financial condition or results of operations and cause the Company's
operating results to vary significantly from quarter to quarter.
 
   The Company currently derives substantially all of its revenues from the
licensing of its Explore client/server software and VIP family of reference
databases and fees from related services. These products and services are
expected to continue to account for substantially all of the Company's
revenues for the foreseeable future. While the Company believes that to date
its customers have not experienced significant problems with such products, if
the Company's customers were to do so in the future or if they were
dissatisfied with product functionality or performance, the Company's
business, financial condition or results of operations could be materially
adversely affected.
 
                                      31
<PAGE>
 
   There can be no assurance that the Company's products will achieve broader
market acceptance or that the Company will be successful in marketing its
products or enhancements thereto. In the event that the Company's current or
future competitors release new products that have more advanced features,
offer better performance or are more price competitive than the Company's
products, demand for the Company's products would decline. A decline in demand
for, or market acceptance of, the Explore client/server software or the VIP
family of reference databases as a result of competition, technological
change, evolution of the Internet or other factors would have a material
adverse effect on the Company's business, financial condition or results of
operations.
 
   The Company's business has grown rapidly in recent periods. In addition,
the Company has experienced significant growth in the number of its employees,
the scope of its operating and financial systems and the geographic area of
its operations, which has placed a significant strain on the Company's
management. The Company's future results of operations will depend in part on
the ability of its officers and other key employees to continue to implement
and expand its operational, customer support and financial control systems and
to expand, train and manage its employee base. In addition, the Company
believes that its future success will also depend to a significant extent upon
its ability to attract, train and retain highly skilled technical, management,
sales, marketing and consulting personnel. Competition for such personnel is
intense, and the Company expects that such competition will continue for the
foreseeable future. The Company has from time to time experienced difficulty
in locating candidates with appropriate qualifications. There can be no
assurance that the Company will be successful in attracting or retaining such
personnel, and the failure to attract or retain such personnel could have a
material adverse effect on the Company's business, financial condition or
results of operations.
 
   Historically, a relatively small number of customers have accounted for a
significant percentage of the Company's total revenues, and the Company
expects that it will continue to experience significant customer concentration
for the foreseeable future. There can be no assurance that such customers or
any other customers will in the future continue to license or purchase
products or services from the Company at levels that equal or exceed those of
prior periods, or at all.
 
   The Company believes that, in order to provide competitive CSM solutions,
it will be necessary to develop, maintain and enhance close associations with
other enterprise data management vendors such as database, hardware, data,
ERP, PDM, CAD and professional service companies. The Company has established
marketing, selling and consulting relationships with many such vendors, but
there can be no assurance that the Company will be able to maintain its
existing relationships or enter into new relationships with such vendors.
 
   Although the Company believes that all of its products will record, store,
process, calculate and present calendar dates falling on or after (and if
applicable, spans of time including) January 1, 2000, and will calculate any
information dependent on or relating to such dates in the same manner, and
with the same functionality, data integrity and performance, as such products
record, store, process, calculate and present calendar dates on or before
December 31, 1999, or calculate any information dependent on or relating to
such dates (collectively, "Year 2000 Compliant"), Year 2000 Compliant issues
may arise with respect to customers' internal management systems or third
party suppliers that may result in unforeseen costs or delays to the Company
and therefore may have a material adverse effect on the Company or the
Company's products.
 
   The Company has operations in Bangalore, India with 339 employees as of
December 31, 1998. The Company is dependent to a significant extent upon the
ability of its Indian operations to successfully maintain and upgrade its
reference data products. The Company believes that the success of its Indian
operations will depend in large part upon its ability to attract, train and
retain highly skilled technical and management personnel in India. Competition
for such personnel in India is intense, and there can be no assurance that the
Company will be successful in attracting a sufficient number of qualified
personnel. The Company is directly affected by the political and economic
conditions to which India is subject. In addition, many of the Company's
expenses in India are paid in Indian currency, thereby subjecting the Company
to the risk of foreign currency fluctuations. Any difficulties in coordinating
or managing the Indian operations due to cultural, geographic, communication
or other reasons could have a material adverse effect on the Company's
business, financial condition or results of operations.
 
 
 
                                      32
<PAGE>
 
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
   Foreign Exchange. The company's revenue originating outside the U.S. in
1998, 1997 and 1996 was 12.9%, 17.0% and 20.3% of total revenues,
respectively. Revenues generated from the European region in 1998, 1997 and
1996 were 9.7%, 14.9% and 19.5% of the total revenue, respectively.
International sales are made mostly from the Company's foreign sales
subsidiaries in the local countries and are typically denominated in U.S.
dollars. These subsidiaries incur most of their expenses in the local
currency.
 
   The company's international business is subject to risks typical of an
international business, including, but not limited to: different economic
conditions, changes in political climate, differing tax structures, other
regulations and restriction, and foreign exchange rate volatility.
Accordingly, the Company's future results could be materially adversely
impacted by changes in these or other factors. The effect of foreign exchange
rate fluctuations on the Company in 1998, 1997 and 1996 was not material.
 
   Interest Rates. The Company invests its cash in a variety of financial
instruments, including bank time deposits, taxable and taxadvantaged variable
rate and fixed rate obligations of corporations, municipalities, and local,
state and national governmental entities and agencies. Cash balances in
foreign currencies overseas are operating balances and are invested in short-
term time deposits of the local operating bank.
 
   Interest income on the Company's investments is carried in "Interest and
other income." The Company accounts for its investments in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". All of the cash equivalents and short-term investments are
treated as available-for-sale under SFAS No. 115.
 
   Investment in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Due in part of these factors, the Company's future
investment income may fall short of expectations due to changes in interest
rates or the Company may suffer losses in principal if forced to sell
securities which have seen a decline in market value due to changes in
interest rates. The Company's investment securities are held for purposes
other than trading. The weighted-average interest rate on investment
securities at December 31, 1998 was 5.3%.
 
                                      33
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
   The following Financial Statements are filed as part of this Report.
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Arthur Andersen LLP, Independent Public Accountants.............  35
Report of Ernst & Young LLP, Independent Auditors.........................  36
Report of Arthur Andersen LLP, Independent Public Accountants.............  37
Consolidated Balance Sheets as of December 31, 1998 and 1997..............  38
Consolidated Statements of Operations for each of the three fiscal years
 in the period ended December 31, 1998....................................  39
Consolidated Statements of Stockholders' Equity for each of the three
 fiscal years
 in the period ended December 31, 1998....................................  40
Consolidated Statements of Cash Flows for each of the three fiscal years
 in the period ended December 31, 1998....................................  41
Notes to the Consolidated Financial Statements............................  42
</TABLE>
 
                                       34
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Stockholders of
   Aspect Development, Inc.:
 
   We have audited the accompanying balance sheet of Aspect Development, Inc.,
(a Delaware corporation) as of December 31, 1998, and the related statements
of income, stockholders' equity and comprehensive income and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Aspect
Development, Inc., as of December 31, 1997 and 1996 were audited by other
auditors whose report dated January 26, 1998, except with respect to paragraph
3 of Note 4, as to which the date is August 15, 1998, expressed an unqualified
opinion on those statements.
 
   We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aspect Development, Inc.,
as of December 31, 1998, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
 
                                          ARTHUR ANDERSEN LLP
 
San Jose, California
January 26, 1999
 
                                      35
<PAGE>
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
   Aspect Development, Inc.
 
   We have audited the accompanying consolidated balance sheet of Aspect
Development, Inc. as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. In
November 1997, the Company merged with Cadis, Inc. in a transaction that was
accounted for as a pooling of interests. We did not audit the financial
statements of Cadis, Inc., which statements reflected total assets of $6.3
million as of December 31, 1997, and net losses of $10.8 million and $2.1
million, for the years ended December 31, 1997 and 1996, respectively. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to data included for Cadis, Inc.,
is based solely on the report of the other auditors.
 
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
 
   In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Aspect Development, Inc. at
December 31, 1997, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended December 31, 1997, after
giving retroactive effect to the business combination with Cadis, Inc., as
described in the notes to the consolidated financial statements, in conformity
with generally accepted accounting principles.
 
                                          Ernst & Young LLP
 
Palo Alto, California
January 26, 1998,
except with respect to paragraph 3 of Note 4,
as to which the date is August 15, 1998
 
                                      36
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Cadis, Inc.;
 
   We have audited the consolidated balance sheets of Cadis, Inc. (a Delaware
corporation) and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, mandatorily redeemable convertible
preferred stock, junior mandatorily redeemable preferred stock and
stockholders' equity (deficit) and cash flows for each of the two years in the
period ended December 31, 1997, not presented separately herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
   In our opinion, the financial statements referred to above, not presented
separately herein, present fairly, in all material respects, the consolidated
financial position of Cadis Inc. and subsidiary as of December 31, 1997, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
 
                                          ARTHUR ANDERSEN LLP
 
Denver, Colorado
January 20, 1998
 
                                      37
<PAGE>
 
                          Consolidated Balance Sheets
 
               (in thousands, except par value per share amounts)
<TABLE>
<CAPTION>
                                                               December 31,
                                                             -----------------
                                                               1998     1997
                                                             --------  -------
<S>                                                          <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents................................. $  7,877  $14,550
  Short-term investments....................................   73,596   40,506
  Accounts receivable, net of allowance for doubtful
   accounts of $421 and $295 in 1998 and 1997,
   respectively.............................................   19,509   13,366
  Prepaid expenses and other current assets.................    4,397    3,234
                                                             --------  -------
    Total current assets....................................  105,379   71,656
Property and equipment, net.................................    9,121    8,771
Other assets, net...........................................      282    1,293
                                                             --------  -------
                                                             $114,782  $81,720
                                                             ========  =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.......................................... $  2,483  $ 2,009
  Accrued bonuses and commissions...........................    5,233    2,077
  Accrued merger costs......................................      --     2,883
  Income taxes payable......................................    2,946    1,608
  Other accrued liabilities.................................    5,766    3,076
  Deferred revenue..........................................    9,497   11,136
  Capital lease obligations--current portion................       17      346
                                                             --------  -------
    Total current liabilities...............................   25,942   23,135
Capital lease obligations...................................      --        11
Stockholders' equity:
  Preferred stock, $0.001 par value per share; 2,000
   authorized none issued or outstanding....................      --       --
  Common stock, $0.001 par value per share and additional
   paid in capital;
   100,000 authorized, 30,752 and 28,866 issued and
   outstanding in 1998
   and 1997, respectively...................................   95,068   81,627
  Notes receivable from stockholders........................      --      (320)
  Deferred compensation.....................................     (210)    (376)
  Accumulated translation adjustment........................       12     (302)
  Accumulated deficit.......................................   (6,031) (22,055)
                                                             --------  -------
    Total stockholders' equity..............................   88,840   58,574
                                                             --------  -------
                                                             $114,782  $81,720
                                                             ========  =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       38
<PAGE>
 
                     Consolidated Statements of Operations
 
                    (in thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                                    -------------------------
                                                     1998     1997     1996
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
Revenues
  License.......................................... $51,132  $26,892  $16,043
  Subscription and maintenance.....................  17,509   13,594    9,392
  Service and other................................  17,724    9,443    5,023
                                                    -------  -------  -------
    Total revenues.................................  86,365   49,929   30,458
                                                    -------  -------  -------
Cost of revenues
  Cost of license revenues.........................   1,419      346      612
  Cost of subscription and maintenance revenues....   3,737    2,676    1,206
  Cost of service and other revenues...............   6,400    5,027    2,689
                                                    -------  -------  -------
    Total cost of revenues.........................  11,556    8,049    4,507
                                                    -------  -------  -------
Gross profit.......................................  74,809   41,880   25,951
                                                    -------  -------  -------
Operating expenses:
  Research and development.........................  15,882   11,213    8,762
  Sales and marketing..............................  33,246   26,730   13,540
  General and administrative.......................   7,909    5,304    4,030
  Merger costs.....................................     --     4,312      --
                                                    -------  -------  -------
    Total operating expenses.......................  57,037   47,559   26,332
                                                    -------  -------  -------
Operating income (loss)............................  17,772   (5,679)    (381)
Interest and other income..........................   3,526    3,066    1,805
Interest and other expense.........................    (751)    (665)    (209)
                                                    -------  -------  -------
Income (loss) before income taxes..................  20,547   (3,278)   1,215
Provision for income taxes.........................   4,522    1,593      330
                                                    -------  -------  -------
Net income (loss).................................. $16,025  $(4,871) $   885
                                                    =======  =======  =======
Net income (loss) per share--basic................. $  0.54  $ (0.18) $   .04
                                                    =======  =======  =======
Net income (loss) per share--diluted............... $  0.48  $ (0.18) $   .03
                                                    =======  =======  =======
Number of shares used in computing per share
 amounts--basic....................................  29,931   27,634   24,010
Number of shares used in computing per share
 amounts--diluted..................................  33,150   27,634   27,510
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       39
<PAGE>
 
                 Consolidated Statement of Stockholders' Equity
 
                                 (in thousands)
 
<TABLE>
<CAPTION>
                     Convertible
                      Preferred                       Notes                  Accumulated
                        Stock        Common Stock   Receivable               Translation   Retained       Total
                    --------------  --------------     From       Deferred   Adjustments   Earnings   Stockholders' Comprehensive
                    Shares  Amount  Shares Amount  Stockholders Compensation   Deficit)  (Accumulated    Equity        Income
                    ------  ------  ------ ------- ------------ ------------ ----------- ------------ ------------- -------------
 <S>                <C>     <C>     <C>    <C>     <C>          <C>          <C>         <C>          <C>           <C>
 Balance at
  December 31,
  1995...........    7,374  $4,916  12,554 $17,573    $(320)       $(241)       $ (4)      $(18,069)     $ 3,855
 Comprehensive
  income
 Net income......      --      --      --      --       --           --          --             885          885       $   885
 Foreign currency
  translation
  adjustments....      --      --      --      --       --           --           69            --            69            69
                                                                                                                       -------
 Comprehensive
  Income.........                                                                                                          954
                                                                                                                       =======
 Conversion of
  preferred
  stock..........   (7,374) (4,916)  7,374   4,916      --           --          --             --           --
 Issuance of
  common stock
  upon exercise
  of options.....      --      --    1,282     263      --           --          --             --           263
 Deferred
  compensation
  related to
  grant of stock
  options........      --      --      --      441      --          (441)        --             --           --
 Amortization of
  deferred
  compensation...      --      --      --      --       --           138         --             --           138
 Tax benefit from
  stock options..      --      --      --      250      --           --          --             --           250
 Issuance of
  common stock
  through Initial
  Public Offering
  net of issuance
  costs of $938..      --      --    4,646  42,261      --           --          --             --        42,261
 Issuance of
  common stock
  for cash, net
  of issuance
  cost of $663...      --      --      798  10,298      --           --          --             --        10,298
 Issuance of
  common stock
  upon exercise
  of warrants....      --      --      190      30      --           --          --             --            30
 Option granted
  for dispute
  settlement.....      --      --      --       90      --           --          --             --            90
 Issuance of
  common stock
  upon exercise
  of options
  settlement
  (see note 4)...      --      --      150     607      --           --          --             --           607
                    ------  ------  ------ -------    -----        -----        ----       --------      -------
 Balance at
  December 31,
  1996...........      --      --   26,994  76,729     (320)        (544)         65        (17,184)      58,746
 Comprehensive
  income
 Net loss........                                                                            (4,871)      (4,871)       (4,871)
 Foreign currency
  translation
  adjustments....                                                               (367)                       (367)         (367)
                                                                                                                       -------
 Comprehensive
  Income.........                                                                                                       (5,238)
                                                                                                                       =======
 Issuance of
  common stock
  upon exercise
  of options.....      --      --    1,346   1,027      --           --          --             --         1,027
 Amortization of
  deferred
  compensation...      --      --      --      --       --           168         --             --           168
 Issuance of
  common stock
  under Employee
  Stock Purchase
  Plan...........      --      --      364   1,307      --           --          --             --         1,307
 Issuance of
  common stock
  for Redeemable
  Preferred
  Stock..........      --      --       84   1,986      --           --          --             --         1,986
 Issuance of
  common stock
  for software...      --      --       27     375      --           --          --             --           375
 Issuance of
  common stock
  upon exercise
  of options
  settlement
  (see note 4)...      --      --       50     203      --           --          --             --           203
                    ------  ------  ------ -------    -----        -----        ----       --------      -------
 Balance at
  December 31,
  1997...........      --      --   28,866  81,627     (320)        (376)       (302)       (22,055)      58,574
 Comprehensive
  income
 Net income......      --      --      --      --       --           --          --          16,025       16,025        16,025
 Foreign currency
  translation
  adjustments....      --      --      --      --       --           --          314            --           314           314
                                                                                                                       -------
 Comprehensive
  Income.........                                                                                                      $16,339
                                                                                                                       =======
 Issuance of
  common stock
  upon exercise
  of options.....      --      --    1,573   8,706      --           --          --             --         8,706
 Issuance of
  common stock
  under Employee
  Stock Purchase
  Plan...........      --      --      313   1,770      --           --          --             --         1,770
 Amortization of
  deferred
  compensation...      --      --      --      --       --           166         --             --           166
 Repayment of
  notes
  receivable.....      --      --      --      --       320          --          --             --           320
 Income tax
  benefit from
  stock option
  transactions...      --      --      --    2,965      --           --          --             --         2,965
                    ------  ------  ------ -------    -----        -----        ----       --------      -------
 Balance at
  December 31,
  1998...........      --   $  --   30,752 $95,068    $ --         $(210)       $ 12       $ (6,031)     $88,840
                    ======  ======  ====== =======    =====        =====        ====       ========      =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       40
<PAGE>
 
                     Consolidated Statements of Cash Flows
 
                Increase (Decrease) in Cash and cash equivalents
                                 (in thousands)
<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                                   --------------------------
                                                     1998     1997     1996
                                                   --------  -------  -------
<S>                                                <C>       <C>      <C>
Cash flows from operating activities:
  Net income (loss)............................... $ 16,025  $(4,871) $   885
Adjustments to reconcile net income (loss) to net
 cash from operating activities:
  Depreciation and amortization...................    5,079    3,096    1,792
  (Gain) loss on disposals of assets..............       30       61       (9)
  Loss in joint ventures..........................      489      612      --
  Compensation related to options granted in
   settlement of dispute..........................      --       --        90
  Changes in items affecting operations:
    Accounts receivable...........................   (6,143)  (3,873)  (4,801)
    Prepaid expenses and other current assets.....     (119)  (1,870)    (526)
    Accounts payable..............................      449    1,058      599
    Accrued bonuses and commissions...............    3,156    1,167      910
    Accrued merger costs..........................   (2,883)   2,883      --
    Income taxes payable..........................    1,338    1,563       45
    Other accrued liabilities.....................    2,904      (42)   1,111
    Deferred revenue..............................   (1,639)   4,480    2,106
                                                   --------  -------  -------
Net Cash provided by (used in) operating activi-
 ties.............................................   18,686    4,264    2,202
                                                   --------  -------  -------
Cash flows from investing activities
  Purchases of property and equipment.............   (4,831)  (7,429)  (3,453)
  Proceeds from sales of property and equipment...      --        15       25
  Proceeds from sales of short-term investments...  117,376   56,662   30,949
  Purchases of short-term investments............. (150,466) (56,020) (70,289)
  Decrease (increase) in employee note
   receivable.....................................   (1,258)     (86)     157
  Increase in other assets........................       86   (1,160)      61
                                                   --------  -------  -------
Net cash used in investing activities.............  (39,093)  (8,018) (42,550)
                                                   --------  -------  -------
Cash flows from financing activities
  Principal payments on capital lease
   obligations....................................     (340)    (553)    (705)
  Proceeds from initial public offering, net of
   offering costs.................................      --       --    42,261
  Repayment of notes receivable...................      320      --       --
  Proceeds from additional issuance of common
   stock, net of offering costs...................   13,441    2,548   11,197
                                                   --------  -------  -------
Net cash provided by financing activities.........   13,421    1,995   52,753
                                                   --------  -------  -------
Net increase (decrease) in cash and cash equiva-
 lents............................................   (6,986)  (1,759)  12,405
Effect of exchange rates on cash..................      313     (374)      (9)
Cash and cash equivalents at the beginning of the
 period...........................................   14,550   16,683    4,287
                                                   --------  -------  -------
Cash and cash equivalents at the end of the
 period........................................... $  7,877  $14,550  $16,683
                                                   ========  =======  =======
Supplemental disclosure of cash flow information
  Cash paid during the period for interest........ $     16  $    44  $   116
                                                   ========  =======  =======
  Income taxes paid............................... $     40  $   143  $    67
                                                   ========  =======  =======
Supplemental schedule of non cash financing
 activities
  Equipment acquired under capital lease
   obligations.................................... $    --   $    49  $   401
                                                   ========  =======  =======
  Conversion of preferred stock to common stock... $    --   $ 1,986  $ 4,916
                                                   ========  =======  =======
  Issuance of common stock for software........... $    --   $   375  $   --
                                                   ========  =======  =======
  Tax benefit from stock options.................. $  2,965  $   --   $   250
                                                   ========  =======  =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       41
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Organization and Summary of Significant Accounting Policies
 
 Description of Business and Principles of Consolidation
 
   Aspect Development, Inc. (the "Company") develops, markets and supports
enterprise client/server software and reference data products that enable
manufacturers to improve product development and business processes through
component and supplier management. The Company sells licensed software and
reference data products to customers and provides software and data services
for customers both within and outside the United States.
 
   The consolidated financial statements comprise the accounts of the Company
and its wholly-owned subsidiaries after elimination of all significant
intercompany balances and transactions. On November 25, 1997, the Company
acquired Cadis, Inc. in a merger transaction accounted for as a pooling of
interests (see Note 2).
 
 Foreign Exchange
 
   Assets and liabilities of the Company and its wholly-owned foreign
subsidiaries are translated from the local currency to the United States
dollar at month-end exchange rates. Income and expense items are translated on
a monthly basis at the average rates of exchange prevailing during the month.
The adjustment resulting from translating the financial statements of the
Company and its foreign subsidiaries is reflected as an accumulated
translation adjustment in stockholders' equity. Foreign currency transaction
gains and losses are included in results of operations and were immaterial for
all periods presented. The Company has not entered into any material hedging
contracts in the three years ended December 31, 1998.
 
 Use of Estimates
 
   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, and such differences may be material to the financial statements.
 
 Revenue Recognition
 
   Licenses are comprised of perpetual license fees, which are recognized as
revenue after execution of a license agreement or receipt of a definitive
purchase order and shipment of the product, if vendor specific objective
evidence exists to allocate the fee from the arrangement between delivered and
undelivered elements, and collection of the resulting receivables is deemed
probable. Where delivery involves significant installation obligations at
multiple sites, revenues are recognized on a per-site basis upon completion of
installation. Product returns and allowances (which were not significant
through December 31, 1998) are estimated and provided for at the time of sale.
 
   Revenue from subscription and maintenance agreements is deferred and
recognized on a straight-line basis over the life of the related agreement,
which is typically one year.
 
   Service and other revenues are comprised of data services, process
consulting, and training fees. Revenues from these items are recognized upon
completion of the work to be performed.
 
 Comprehensive Income
 
   As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income and its components. The adoption of this Statement had no impact on the
Company's net income or stockholders' equity. SFAS No. 130 requires all
changes in equity that result from transactions and other economic events of
the period other than transactions with owners, for example, unrealized gains
or losses on the Company's available-for-sale securities and foreign currency
translation adjustments, to be included in other comprehensive income.
 
                                      42
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Segment Reporting
 
   Effective December 31, 1998 the Company adopted the provisions of SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way that public business enterprises
report information in annual statements and interim financial reports
regarding operating segments, products and services, geographic areas and
major customers. SFAS No. 131 has had minimal effect on the Company since the
segments as viewed by the Company's management were already reported on the
face of the Statements of Operations. Segment results are reported for
Licenses, Subscriptions and Maintenance, and Services and other.
 
 Per Share Amounts
 
   Effective December 31, 1997, the Company adopted the provisions of SFAS No.
128, "Earnings per Share." As required by SFAS No. 128, all prior periods
presented have been restated to conform to the requirements of the statement.
 
                                      43
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent
shares consist of stock options and warrants (using "the treasury stock"
method). Common equivalent shares are excluded from the dilutive computation
when their effect is anti-dilutive. Diluted EPS is computed using the weighted
average number of common shares outstanding after the issuance of common stock
upon exercise of stock options (using "the treasury stock" method) and the
issuance of common stock upon the conversion of convertible preferred stock
(using the if-converted method) when their effect is dilutive. The following
table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share amounts).
 
<TABLE>
<CAPTION>
                                                        Years ended December
                                                                31,
                                                       -----------------------
                                                        1998    1997     1996
                                                       ------- -------  ------
<S>                                                    <C>     <C>      <C>
Basic:
Weighted average common shares outstanding............  29,931  27,634  21,060
Convertible preferred stock...........................     --      --    2,950
                                                       ------- -------  ------
Total weighted average common and common equivalent
 shares outstanding...................................  29,931  27,634  24,010
Net income/(loss)..................................... $16,025 $(4,871) $  885
Basic income/(loss) per share......................... $  0.54 $ (0.18) $ 0.04
Diluted:
Weighted average common shares outstanding............  29,931  27,634  21,060
Common stock equivalents (treasury stock method)......   3,219     --    3,500
Convertible preferred stock...........................     --      --    2,950
                                                       ------- -------  ------
Total weighted average common and common equivalent
 shares outstanding...................................  33,150  27,634  27,510
Net income/(loss)..................................... $16,025 $(4,871) $  885
Diluted income/(loss) per share....................... $  0.48 $ (0.18) $ 0.03
</TABLE>
 
 Concentration of Credit Risk and Significant Customers
 
   Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash investments and trade
receivables. The Company has a cash investment policy that limits investments
to investment grade securities. The Company's revenues consist primarily of
license and subscription fees for its applications software and reference data
products from large manufacturers in the United States, Europe and Asia. The
Company has historically sold primarily to large financially stable
institutions and has not obtained collateral. The Company has not incurred
significant credit losses during any of the periods presented. Increases in
the Company's allowance for bad debts (expense) in 1998, 1997 and 1996 were
approximately $126,000, $52,000 and $281,000, respectively. No outstanding
customer receivables were written off and deducted from the allowance account
in 1998 whereas in each of 1997 and 1996 years the write off amounts were
approximately $7,000 and $112,000, respectively.
 
   During the years ended December 31, 1998 and 1996, no one customer
accounted for more than 10% of revenues. During the year ended December 31,
1997 one customer accounted for 11% of revenues.
 
 Product Concentration
 
   The Company currently derives substantially all of its revenues from the
licensing of its Explore client/server software, the VIP family of reference
databases, the Krakatoa Web Catalog Publisher, and fees from
 
                                      44
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
related services. These products and services are expected to continue to
account for substantially all of the Company's revenues for the foreseeable
future. While the Company believes that to date its customers have not
experienced significant problems with such products, if the Company's
customers were to do so in the future or if they were dissatisfied with
product functionality or performance, the Company's business, financial
condition or results of operations could be materially adversely affected.
 
 Cash, Cash Equivalents and Short-Term Investments
 
   The Company considers all highly liquid investments with minimum yield
risks and original maturities of less than 90 days to be cash equivalents. The
Company's investment policy is to protect the value of its investment
portfolio and to minimize principal risk by earning returns based on current
interest rates.
 
   At December 31, 1998, all of the Company's cash equivalents and short term
investments were designated as "available-for-sale" and, in accordance with
SFAS No. 115 are presented at fair value in the financial statements. As of
December 31, 1998, the carrying value of the Company's short-term investments
approximated the current fair value. Therefore no adjustment has been recorded
as a separate component of equity as of December 31, 1998. Realized gains and
losses to date have not been material. The cost of securities sold is based on
specific identification.
 
   At December 31, 1998 and 1997, the Company's debt securities consisted of
$1.0 million and $8.4 million of US Government Agency obligations,
respectively, and $72.6 million and $36.2 million of domestic corporate debt
issues, respectively, all of which mature within one year. At December 31,
1997, $4.1 million of debt securities were included in cash equivalents.
 
 Property and Equipment
 
   Office and computer equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the respective assets
(generally two to five years). Equipment under capital lease obligations is
recorded at cost and amortized on a straight-line basis over the shorter of
its estimated life or the term of the lease (generally three years). Property
and equipment as of December 31, 1998 and 1997, consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                                 1998     1997
                                                                -------  ------
<S>                                                             <C>      <C>
Computer equipment............................................. $10,323  $8,478
Computer software..............................................   2,101   1,159
Leased computer equipment & software...........................   2,172   2,101
Office equipment and furniture.................................   3,384   2,176
Leasehold improvements.........................................   1,992     533
                                                                -------  ------
                                                                 19,972  14,447
Less accumulated depreciation.................................. (10,851) (5,676)
                                                                -------  ------
Property and equipment, net.................................... $ 9,121  $8,771
                                                                =======  ======
</TABLE>
 Research and Development
 
   Research and development expenditures are generally charged to operations
as incurred. SFAS No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," requires the capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred
by the Company between completion of the working model and the point at which
the product is ready for general release have been insignificant. Accordingly
through December 31, 1998, all research and development costs have been
expensed.
 
                                      45
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Reclassification
 
   Certain prior year amounts have been reclassified to conform to the current
year presentation.
 
 Recent Accounting Pronouncements
 
   In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which requires companies to
record derivative financial instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS
No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. This Statement will not have a material impact on the
financial condition or results of the operations of the Company.
 
   In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
"Software Revenue Recognition,"' which defers for one year the application of
provisions in SOP 97-2 which limit what is considered vendor-specific
objective evidence of the fair value of the various elements in a multiple
element arrangement. All other provisions of SOP 97-2 remain in effect. This
SOP was effective as of March 31, 1998. In December 1998, the AICPA issued SOP
98-9, "Modification of SOP 97-2, "Software Revenue Recognition,' With Respect
to Certain Transactions," which amends paragraphs 11 and 12 of SOP 97-2,
Software Revenue Recognition, to require recognition of revenue using the
"residual value method" under certain conditions. Effective December 15, 1998,
SOP 98-9 amends SOP 98-4, "Deferral of the Effective Date of a Provision of
SOP 97-2, "Software Revenue Recognition,"' to extend the deferral of the
application of certain passages of SOP 97-2 provided by SOP 98-4 through
fiscal years beginning on or before March 15, 1999. All other provisions of
this SOP are effective for transactions entered into in fiscal years beginning
after March 15, 1999. The Company does not anticipate that these statements
will have a material adverse impact on its statement of operations.
 
2.Business Combination
 
   On November 25, 1997, the Company acquired all of the outstanding shares of
Cadis, a privately held Delaware corporation which develops, markets, and
supports component and supplier management software, by issuing approximately
1,411,000 shares of the Company's common stock. The acquisition was accounted
for as a pooling-of-interests and the accompanying consolidated financial
statements of Aspect for prior periods have been restated to include the
operating results of Cadis. In connection with the transaction, the Company
incurred approximately $4.3 million in merger related expenses, including $0.9
million in consulting fees to financial advisors, $0.7 million for legal and
other professional fees, $0.7 million for personnel severance and outplacement
expenses and $0.6 million for facilities consolidation expense. Of the merger
expenses, a total of approximately $2.9 million was accrued at December 31,
1997, which was paid during 1998 resulting in no related accruals at December
31, 1998.
 
   There were no materially significant intercompany transactions between the
Company and Cadis prior to the merger and there were no significant
adjustments required to conform the financial reporting of the two companies.
 
                                      46
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The following information shows revenue and net income of the separate
companies during the periods preceding the combination (in thousands):
 
<TABLE>
<CAPTION>
                                                      Unaudited Ten
                                                      Months Ended   Year Ended
                                                       October 31,  December 31,
                                                          1997          1996
                                                      ------------- ------------
<S>                                                   <C>           <C>
Revenue:
  Aspect.............................................    $36,170      $24,235
  Cadis..............................................      4,564        6,223
                                                         -------      -------
                                                         $40,734      $30,458
                                                         =======      =======
Net income (loss):
  Aspect.............................................    $ 6,614      $ 3,009
  Cadis..............................................     (6,725)      (2,124)
                                                         -------      -------
                                                         $  (111)     $   885
                                                         =======      =======
</TABLE>
 
3. Lease Obligations
 
   The Company leases fourteen office facilities under noncancelable operating
leases, which expire at various dates through September 2007. The Company also
rents certain property and equipment under operating leases. Rental expense
for all operating leases was $2,439,069, $2,377,942 and $933,193 for 1998,
1997 and 1996, respectively.
 
   Future minimum lease payments under operating and capital lease obligations
which have initial or remaining non cancelable lease terms in excess of one
year as of December 31, 1998 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               Operating Capital
                                                                Leases   Leases
                                                               --------- -------
<S>                                                            <C>       <C>
Year ending December 31,
  1999........................................................  $ 2,252    $17
  2000........................................................    2,252    --
  2001........................................................    1,339    --
  2002........................................................      909    --
  2003........................................................      600    --
Thereafter....................................................    3,072    --
                                                                -------    ---
Total minimum lease payments..................................  $10,425    $17
                                                                =======    ===
</TABLE>
 
4. Stockholders' Equity
 
   Cadis was authorized to issue a total of 1,985,705 shares of Junior
Mandatorily Redeemable Preferred stock ("Junior Preferred"), all of which had
been issued as of December 31, 1996. The holders of Junior Preferred were
entitled to liquidation preferences of $1.00 per share and were not entitled
to dividends. The Junior Preferred was mandatroily redeemable at $1.00 per
share on each of July 31, 2000, 2001 and 2002. In 1997, all of the outstanding
Junior Preferred of Cadis was converted to common stock of the Company at the
time of the acquisition of Cadis.
 
                                      47
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Convertible Preferred Stock and Common Stock
 
   Each aggregate share of Series A, B, and C preferred stock outstanding was
automatically converted into one share of common stock upon the initial public
offering of the Company's common stock on May 24, 1996 (a total of 7,374,234
shares). In 1996, the Company's Certificate of Incorporation was amended to
authorize the issuance of 2,000,000 shares of undesignated preferred stock and
20,000,000 shares of common stock. The Board did not authorize any additional
shares in 1997. In 1998, the Company's Certificate of Incorporation was
amended to increase the number of shares of the Company's Common Stock
authorized for issuance by 80,000,000 shares, to a total of 100,000,000. The
Board did not authorize any additional preferred stock in 1998.
 
Stock Split
 
   In 1998, the Company effected a two for one stock split by declaring a
dividend payable in shares of the Common Stock of the Company, of one
additional share for each share outstanding. All share and per share numbers
in the accompanying financial statements have been adjusted to reflect the
stock split.
 
Shareholder Rights Plan
 
   On September 1, 1998 the Board of Directors approved the adoption of a
Share Purchase Rights Plan (the "Rights Plan"). Terms of the Rights Plan
provide for a dividend distribution of one preferred share purchase right (a
"Right") for each outstanding share of common stock, par value $.001 per share
(the "Common Shares"), of the Company. The dividend is payable on October 22,
1998 (the "Record Date") to the stockholders of record on that date. Each
Right entitles the registered holder to purchase from the Company one one-
hundredth of a share of Series A Junior Participating Preferred Stock, par
value $.001 per share (the "Preferred Shares"), at a price of $187.50 per one
one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment. Each one one-hundredth of a share of Preferred Shares has
designations and powers, preferences and rights, and the qualifications,
limitations and restrictions which make its value approximately equal to the
value of a Common Share.
 
   Rights will not be distributed upon the earlier of (i) the date of a public
announcement that a person, entity or group of affiliated or associated
persons have acquired beneficial ownership of 15% or more of the outstanding
Common Shares (an "Acquiring Person") or (ii) 10 business days (or such later
date as may be determined by action of the Board of Directors prior to such
time as any person or entity becomes an Acquiring Person) following the
commencement of, or announcement of an intention to commence, a tender offer
or exchange offer the consummation of which would result in any person or
entity becoming an Acquiring Person. The Rights will expire on October 7, 2008
unless the Rights are earlier redeemed or exchanged by the Company.
 
Common Stock Subject to Repurchase
 
   The Company has previously issued shares of common stock, which are subject
to the Company's right to repurchase at the original issuance price upon the
occurrence of certain events, as defined in the agreement relating to the
sales of such stock. At December 31, 1996, 1997, and 1998, approximately
702,084, 277,084 and 14,475 shares, respectively, were subject to repurchase.
In the event that a stockholder negotiates to sell all or part of the stock to
a third party, the Company has a right of first refusal to repurchase that
stock at the negotiated price.
 
Stock Options
 
   Amended and Restated 1992 Stock Option Plan. In 1996, the Company adopted
its Amended and Restated 1992 Stock Option Plan (the "Plan"), which authorizes
the board of directors to grant incentive and nonstatutory
 
                                      48
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
stock to purchase up to 7,860,000 shares of common stock to employees,
officers, directors and consultants of the Company. The 1992 Plan allows for
the grant of incentive stock options to employees and the grant of
nonstatutory stock options to all eligible participants. In 1998, the Company
amended the 1992 Plan to increase the number of shares of common stock
reserved for issuance thereunder to 10,060,000.
 
   The exercise price shall be at least 100% and 85% of the fair market value
of the common stock on the date of the grant for incentive stock options and
nonstatutory stock options, respectively, except for options granted to a
person owning greater than 10% of the total voting power of the Company, for
which the exercise price of the options must not be less than 110% of the fair
market value at the time of grant. Options generally become exercisable upon
grant subject to repurchase rights in favor of the Company until vested. At
December 31, 1996, December 31, 1997 and December 1998, a total of 95,744,
22,940 and 14,475 shares of common stock, respectively, previously exercised
under the plan were subject to repurchase. Shares generally vest over a period
of four years, with 1/8 of the shares subject to option vesting at the end of
the six months after commencement of employment, and the remainder vesting
ratably over the next 42 months. Options may be granted with different vesting
terms. Options are exercisable for a term of ten years after the date of grant
except those options granted to a person owning greater than 10% of the total
vesting power of stock of the Company, which are exercisable for a term of
five years after the date of grant. The options are not transferable.
 
   In the event of a sale or merger of the Company, the board may arrange with
the acquiring corporation for such corporation either to assume the Company's
rights and obligations under the outstanding options or to substitute new
options for the acquiring corporation's stock for such outstanding options.
Options that are neither assumed nor substituted by the acquiring corporation,
nor exercised as of the date of the sale or merger, terminate and cease to be
outstanding as of the date of the transaction.
 
   On November 25, 1997, in connection with the merger of the Company and
Cadis described in Note 2, the Company substituted options covering 235,684
shares of common stock for options granted under the Cadis option plan and
assumed the rights and obligations of Cadis with respect to the outstanding
options. The options are generally exercisable only when vested, and have
similar vesting terms as options granted under the 1992 Plan.
 
   1996 Outside Directors Stock Option Plan. In 1996, the Company adopted its
1996 Outside Directors Stock Option Plan (the "Directors Plan") and reserved
for issuance a total of 200,000 shares of common stock. The Directors Plan
provides for the automatic grant of nonstatutory stock options to directors of
the Company who are not employees of the Company or any parent or subsidiary
corporation of the Company ("Outside Directors"). Under the Directors Plan,
each Outside Director who had not previously been granted an option under a
stock option plan of the Company was granted automatically on the effective
date of the IPO an option to purchase 10,000 shares of common stock. Each new
Outside Director elected after the date of the IPO is granted automatically on
the date of election an option to purchase 30,000 shares of common stock. Such
options will become vested in three annual installments on the anniversary of
the date of grant. In addition, each Outside Director previously granted an
option under the Directors Plan is granted automatically on the date of each
annual meeting of the stockholders after 1996 an option to purchase 10,000
shares of common stock. Each such subsequent option will become vested in full
on the third anniversary of the date of grant. The exercise price of each
option granted under the Directors Plan is equal to the fair market value of
the common stock on the date of grant, and the term of each option is ten
years. Options granted under the Directors plan are nontransferable.
 
   1997 Nonstatutory Stock Option Plan. In 1997, the Company adopted its 1997
Nonstatutory Stock Option Plan (the "1997 Plan"), which authorizes the board
of directors to grant nonstatutory stock options to purchase up to 2,400,000
shares of common stock to eligible participants. The option exercise price
shall be at least 85% of the fair market value of the Company's common stock
on the date of grant of the option. The options are not transferable. The
shares issued under the 1997 Plan are subject to the Company's right to
repurchase all shares
 
                                      49
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
not vested to the employee under the 1997 Plan at the participant's original
cost. Shares vest ratably over a 48-month period.
 
   Information with respect to activity under the plans is as follows (in
thousands except per share and exercise price amounts):
 
<TABLE>
<CAPTION>
                                                 Outstanding Options
                                           -------------------------------
                         Options Available                    Price Per    Weighted Average
                             for Grant     Number of Shares     Share       Exercise Price
                         ----------------- ---------------- -------------- ----------------
<S>                      <C>               <C>              <C>            <C>
Balance at December 31,
 1995...................         298             3,814      $ 0.03-$ 1.84       $ 0.23
  Additional Shares
   Authorized...........       3,400               --                  --          --
  Options Granted.......      (2,110)            2,110      $ 0.35-$13.38       $ 5.29
  Exercised.............         --             (1,282)     $ 0.03-$ 4.05       $ 0.21
  Canceled..............         216              (216)     $ 0.10-$ 4.05       $ 0.74
                              ------            ------      --------------      ------
Balance at December 31,
 1996...................       1,804             4,426      $ 0.03-$13.38       $ 2.64
  Additional Shares
   Authorized...........       2,400               --                  --          --
  Options Granted.......      (3,342)            3,342      $ 1.50-$22.41       $14.39
  Exercised.............         --             (1,346)     $ 0.03-$16.88       $ 0.88
  Canceled..............         342              (342)     $ 0.10-$21.67       $ 9.54
                              ------            ------      --------------      ------
Balance at December 31,
 1997...................       1,206             6,080      $ 0.03-$22.41       $ 9.18
  Additional Shares
   Authorized...........       2,200               --                  --          --
  Options Granted.......      (2,500)            2,500      $17.75-$38.25       $27.06
  Exercised.............         --             (1,573)     $ 0.03-$31.875      $ 5.48
  Canceled..............         599              (599)     $ 0.05-$38.25       $16.47
                              ------            ------      --------------      ------
Balance at December 31,
 1998...................       1,523             6,408      $ 0.03-$38.25       $16.40
                              ======            ======      ==============      ======
</TABLE>
 
   At December 31, 1998, 1,865,552 options were vested (1,475,956 at December
31, 1997 and 1,663,585 shares at December 31, 1996).
 
   The Company has recorded for financial statement purposes deferred
compensation expense of $0.7 million for the difference between the exercise
price and the deemed fair value of the common stock with respect to certain
options granted in 1995 and 1996. This amount is being amortized over the
vesting period of the individual options, which is generally four years.
Compensation expense recognized in fiscal 1998, 1997 and 1996 total
approximately $166,000, $168,000 and $138,000, respectively. At December 31,
1998, deferred compensation totaled $210,000.
 
   1996 Employee Stock Purchase Plan. In 1996, the Company adopted its 1996
Employee Stock Purchase Plan (the "Purchase Plan"). A total of 1,000,000
shares of common stock have been reserved for issuance under the Purchase
Plan, and 362,893 were issued in the year ended December 31, 1997 and 312,939
in the year ended December 31, 1998. The Purchase Plan permits eligible
employees to purchase common stock at a discount, but only through payroll
deductions, during concurrent 24-month offering periods. Each offering period
is divided into four consecutive six-month purchase periods. The price at
which stock is sold under the Purchase Plan is equal to 85% of the fair market
value of the common stock on the first day of the offering period or the last
day of the purchase period, whichever is lower.
 
Option Issued as Settlement
 
   During 1996, the board of directors approved the issuance of an option to a
third party to purchase up to 200,000 shares of common stock at a price of
$4.05 per share to obtain the release of all claims arising from a
 
                                      50
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
dispute with such party. The Company recorded an expense of $90,000 in
connection with this grant. A total of 150,000 of these options were exercised
in 1996 for proceeds of $607,000 and the remaining 50,000 options were
exercised in January 1997 for proceeds of $203,000.
 
Stock-Based Compensation
 
   The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation" requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
 
   Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of SFAS
No. 123. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions for 1998, 1997 and 1996, respectively: risk-free interest
rates of 5.26%, 6.00% and 5.64%; a dividend yield of 0.0%; volatility factors
of the expected market price of the Company's common stock of 0.84, 0.70 and
0.75; and a weighted-average expected life of the option of 0.2, 2.5 and 2.0
years beyond each respective vesting period. The weighted average fair value
of options granted during 1998, 1997 and 1996 was $17.55, $13.97 and $4.56,
respectively.
 
   The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
 
   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):
 
<TABLE>
<CAPTION>
                                                          1998    1997    1996
                                                         ------ --------  -----
<S>                                                      <C>    <C>       <C>
Pro forma net income/(loss)............................. $4,366 $(13,157) $ 222
Pro forma earnings per share
  Basic................................................. $ 0.15 $  (0.48) $0.01
  Diluted............................................... $ 0.13 $  (0.48) $0.01
</TABLE>
 
                                      51
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The following table summarizes information regarding stock options
outstanding at December 31, 1998.
 
<TABLE>
<CAPTION>
                         Options Outstanding         Options Exercisable
                 ----------------------------------- --------------------
                                 Weighted
                     Shares       Average   Weighted             Weighted
                 Outstanding at  Remaining  Average              Average
   Range of       December 31,  Contractual Exercise   Number    Exercise
Exercise Prices       1998         Life      Price   Exercisable  Price
---------------  -------------- ----------- -------- ----------- --------
<S>              <C>            <C>         <C>      <C>         <C>
$  0.1-$ 1.00        579,519       6.31      $ 0.31     579,519   $ 0.31
  1.50-  9.87        923,408       7.34        4.27     904,595     4.28
 10.25- 15.50      1,581,453       8.48       11.20   1,581,453    11.20
 16.87- 21.84      1,532,589       9.03       20.16   1,532,589    20.16
 22.25- 30.62      1,508,479       9.54       28.35   1,508,479    28.35
$31.59-$38.25        282,111       9.59       33.79     283,611    33.81
                   ---------       ----      ------   ---------   ------
                   6,407,559       8.55      $16.39   6,390,246   $16.39
                   =========       ====      ======   =========   ======
</TABLE>
 
5. Notes Receivable from Stockholders
 
   In 1994, the Company issued 550,000 shares of common stock to an officer at
a purchase price of $0.20 per share in exchange for a full-recourse promissory
note bearing interest at 6.31% per year. Interest was payable annually, and
the principal was due in 2003. The promissory note, including interest accrued
to date, was paid in full in 1998.
 
   In 1995, the Company issued 300,000 shares of common stock to an officer,
at a purchase price of $0.70 per share in exchange for a full-recourse
promissory note bearing interest at 6.31% per year. Interest is payable
annually, and the principal is due in 2004. The promissory note, including
interest accrued to date, was paid in full in 1998.
 
6. Income Taxes
 
   The provision for taxes consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                Years ended
                                                                December 31,
                                                             ------------------
                                                              1998   1997  1996
                                                             ------ ------ ----
   <S>                                                       <C>    <C>    <C>
   Current:
     Federal................................................ $    0 $1,027 $353
     State..................................................    100    466   53
     Foreign................................................    479    100   33
                                                             ------ ------ ----
                                                                579  1,593  439
   Deferred:
     Federal................................................  2,387     -- (109)
     State..................................................  1,556     --   --
                                                             ------ ------ ----
                                                              3,943     --   --
                                                             ------ ------ ----
                                                             $4,522 $1,593 $330
                                                             ====== ====== ====
</TABLE>
 
                                      52
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The Company's effective income tax provision differs from the Federal
statutory rate of 35% due to the following (in thousands):
 
<TABLE>
<CAPTION>
                                                       Years ended December
                                                               31,
                                                       ----------------------
                                                        1998    1997    1996
                                                       ------  -------  -----
<S>                                                    <C>     <C>      <C>
Expected tax provision (benefit) at federal statutory
 rate................................................. $6,668  $(1,114) $ 413
State taxes (net of federal benefit)..................  1,656      308     35
Net operating losses not currently usable............. (3,120)   2,598    722
Non-deductible acquisition costs......................     --      519    --
Foreign taxes.........................................    479      100    --
Research credits......................................   (750)    (350)   --
Foreign tax credits...................................   (411)     --     --
Other.................................................    --       239     49
Prior year net operating losses not benefited.........    --      (707)  (889)
                                                       ------  -------  -----
Provision for income taxes............................ $4,522  $ 1,593  $ 330
                                                       ======  =======  =====
Effective tax rate                                      22.01%    N.M.  27.16%
</TABLE>
 
   As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $24.8 million, of which approximately $20.2
million relate to Cadis pre-acquisition net operating losses. The Company also
had federal research and development tax credit carryforwards of approximately
$2.45 million. The federal net operating loss and credit carryforwards will
expire between 2007 and 2018 if not utilized.
 
   Due to a change in ownership in 1991, the utilization of approximately
$10.0 million of Cadis net operating loss carryforwards incurred prior to that
date are limited in accordance with the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. In
addition, due to the change in ownership which resulted from Aspect
Development, Inc.'s acquisition of Cadis, there is an overall annual
limitation of approximately $3.5 million with respect to the entire $23.7
million of Cadis's pre-acquisition net operating losses. The Company's net
operating losses and credits may also be subject to an annual limitation due
to the ownership change provisions should the Company itself experience an
ownership change. Significant components of the Company's deferred tax assets
are as follows:
 
<TABLE>
<CAPTION>
                                                          December 31,
                                                    ---------------------------
                                                      1998      1997     1996
                                                    --------  --------  -------
<S>                                                 <C>       <C>       <C>
Deferred tax assets:
  Net operating loss carryforwards................. $ 11,319  $ 13,000  $ 7,000
  Research credit carryforwards....................    2,450     1,700    1,100
  Foreign tax credits..............................      811       400      300
  Other timing differences.........................    2,000     2,000      800
                                                    --------  --------  -------
Total deferred tax assets..........................   16,580    17,100    9,200
Valuation allowance................................  (15,000)  (17,100)  (9,200)
                                                    --------  --------  -------
Net deferred tax assets............................ $  1,580  $    --   $   --
                                                    ========  ========  =======
</TABLE>
 
   The valuation allowance decreased by $2.1million during the year ended
December 31, 1998. Approximately $8.7 million of the remaining valuation
allowance relates to net operating losses and other tax attributes acquired in
the Cadis acquisition (see Note 2) which have not been benefited.
Approximately $6.3 million of the remaining valuation allowance relates to
benefits of stock option deductions which, if recognized, will be allocated
directly to stockholders' equity.
 
                                      53
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
7. Joint Venture
 
   The Company entered into a Limited Liability Company ("LLC") Agreement with
CMP Media Inc. ("CMP") dated April 4, 1997. The LLC, EDTN, was established to
provide news, promotional materials, literature, product data, reference
material, application information tutorials, seminars, product and software
demonstrations and other services through the Internet and corporate intranets
to the electronic engineering community in North America. As of December 31,
1998, the ownership of the LLC was shared equally between the Company and CMP,
each contributing $1.0 million to establish the LLC. In fiscal 1998 and 1997,
the Company's share of losses in the joint venture amounted to $0.6 million
and $0.5 million respectively. This amount is included in Interest and other
expense.
 
8. Industry Segment and Geographic Information
 
   During 1998 the Company adopted SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information". The Company develops, markets and
supports enterprise client/server software and reference data products that
enable manufacturers to improve product development and business processes
through component and supplier management.
 
   The Company is organized based upon the nature of the products and services
it offers. Under this organizational structure, the Company operates in three
fundamental business segments: licenses, subscription and maintenance, and
service. The information in the following tables is derived directly from the
Company's internal financial reporting used for corporate management purposes.
The Company evaluates its segments' performance based on several factors,
including revenue, gross profit, and net income before taxes. Unallocated
costs include corporate and other costs not allocated to business segments for
management reporting purposes.
 
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    -------------------------
                                                     1998     1997     1996
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
Net revenues from unaffiliated customers (in
 thousands):
  Licenses......................................... $51,132  $26,892  $16,043
  Subscriptions and maintenance....................  17,509   13,594    9,392
  Service..........................................  17,724    9,443    5,023
                                                    -------  -------  -------
    Total revenue.................................. $86,365  $49,929  $30,458
                                                    =======  =======  =======
<CAPTION>
                                                    Year Ended December 31,
                                                    -------------------------
                                                     1998     1997     1996
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
Income (loss) before income taxes (in thousands):
  Licenses......................................... $49,713  $26,546  $15,431
  Subscriptions and maintenance....................  13,772   10,918    8,186
  Service..........................................  11,324    4,416    2,334
                                                    -------  -------  -------
    Gross Profit................................... $74,809  $41,880  $25,951
                                                    =======  =======  =======
  Unallocated expense.............................. $57,037  $47,559  $26,332
  Interest and other income........................   3,526    3,066    1,805
  Interest and other expense.......................    (751)    (665)    (209)
                                                    -------  -------  -------
    Income (loss) before income taxes.............. $20,547  $(3,278) $ 1,215
                                                    =======  =======  =======
</TABLE>
 
                                      54
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The Company's foreign operations consist of sales, marketing, and support
activities in subsidiaries and distributors throughout the world and
development and support activities in India. The Company's export sales were
as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    --------------------------
                                                      1998     1997     1996
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Net revenues from unaffiliated customers:
  Europe........................................... $    202  $   976  $ 2,398
  Asia.............................................    2,344    1,046      229
                                                    --------  -------  -------
    Total export sales............................. $  2,546  $ 2,022  $ 2,627
                                                    ========  =======  =======
 
   Net revenue and operating income generated by the Company and its
corresponding identifiable assets classified by major geographic area were as
follows (in thousands):
 
<CAPTION>
                                                    Year Ended December 31,
                                                    --------------------------
                                                      1998     1997     1996
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Net revenues from unaffiliated customers:
  North America.................................... $ 75,232  $41,431  $24,282
  Europe...........................................    8,413    7,452    5,947
  Other international operations...................    2,720    1,046      229
                                                    --------  -------  -------
    Total net revenues............................. $ 86,365  $49,929  $30,458
                                                    ========  =======  =======
Income (loss) from operations:
  North America.................................... $ 17,661  $(9,328) $(4,520)
  Europe...........................................    3,051    3,520    4,789
  Other international operations...................   (2,940)     129     (650)
                                                    --------  -------  -------
    Income (loss) before interest and taxes........ $ 17,772  $(5,679) $  (381)
                                                    ========  =======  =======
Identifiable assets:
  North America.................................... $109,938  $74,144
  Europe...........................................    2,891    5,340
  Other international operations...................    1,953    2,236
                                                    --------  -------
    Total identifiable assets...................... $114,782  $81,720
                                                    ========  =======
</TABLE>
 
9. 401(k) Plan
 
   Under the Company's 401(k) Plan, an employee may defer and invest up to 20%
of his or her compensation, subject to an annual limitation. As of December
31, 1998, the Company had not elected to make any matching contributions under
the Plan.
 
                                      55
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.
 
   On November 12, 1998, the Company filed a Report on Form 8-K reporting that
Ernst & Young LLP had resigned as the Company's independent auditors. The
Company announced that a marketing relationship had been established whereby
Ernst & young LLP would market the Company's products. In connection with the
audits of the Company's financial statements for each of the two fiscal years
ended December 31, 1997 and in subsequent interim period, there were no
disagreements with Ernst &Young LLP on any matters of accounting principles or
practice, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Ernst & Young LLP would have
caused Ernst & Young LLP to make reference to the matter in their report. The
reports of Ernst & Young LLP for the past two years did not contain an adverse
opinion or a disclaimer of opinion and these reports were not qualified or
modified as to uncertainty, audit scope or accounting principles. Effective
November 13, 1998, the Company engaged Arthur Andersen LLP to audit the
Company's consolidated financial statements for the fiscal year ending
December 31, 1998.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
   Information required by this item, insofar as it relates to directors and
executive officers, will be contained under the captions "Election of
Directors and Executive Officers" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the definitive Proxy Statement with
respect to the Company's 1999 Annual meeting of Stockholders (the "1999 Proxy
Statement"), and is hereby incorporated by reference thereto.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
   Information required by this item will be contained in the Proxy Statement
under the caption "Executive Compensation," and is hereby incorporated by
reference thereto.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
   Information required by this item will be contained in the 1999 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners
and Management," and is hereby incorporated by reference thereto.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
   Information required by this item will be contained in the Proxy Statement
under the caption "Certain Transactions," and is hereby incorporated by
reference thereto.
 
                                      56
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 
    (a) The following documents are filed as part of this Report:
 
    1. Financial Statements and Financial Statement Schedules -- See Index
       to Consolidated Financial Statements at Item 8 on Page 34 of this
       Report.
 
    2. Exhibits. The following exhibits are filed as part of, or
       incorporated by reference into, this Report.
 
 
<TABLE>
<CAPTION>
 Exhibit
  Number                               Exhibit Title
 -------   --------------------------------------------------------------------
 <C>       <S>
   3.1(1)  Restated Certificate of Incorporation.
   3.2(1)  Form of Restated Certificate of Incorporation to be filed with the
           Delaware Secretary of State following the closing of this offering.
   3.3(4)  Certificate of Designation for Series A Junior Participating
           Preferred Stock
   3.4(1)  By-Laws.
   4.1(1)  Restated Rights Agreement dated December 3, 1993.
 *10.1(1)  Amended and Restated 1992 Stock Option Plan and forms of agreements
           thereunder.
 *10.2(1)  1996 Employee Stock Purchase Plan.
 *10.3(1)  1996 Outside Directors Stock Option Plan and forms of agreement
           thereunder.
  10.4(1)  Sublease Agreement between the Company and Insignia Solutions, Inc.
           dated December 9, 1995.
  10.5(1)  Agreement of Lease between the Company and Mareld Company, Inc.
           dated June 2, 1994.
  10.6(1)  Agreement of Lease between Aspect Development India and M.S.
           Janardhan Corporation dated September 18, 1995.
  10.7(1)  Agreement of Lease between Aspect-DCM Pvt. Ltd. and the co-owners of
           Leo Shopping Complex, dated February 10, 1994.
  10.8(1)  Master Lease Agreement between the Company and Comdisco, Inc. dated
           July 2, 1992.
  10.9(1)  Business Loan Agreement between the Company and Silicon Valley Bank
           dated November 14, 1995.
  10.10(2) Agreement and Plan of Reorganization dated November 18, 1997 among
           Aspect Development, Inc., Hawaii Acquisition Corporation and Cadis,
           Inc.
  10.11(3) Amendment to Agreement and Plan of Reorganization dated November 21,
           1997 among Aspect Development, Inc., Hawaii Acquisition Corporation
           and Cadis, Inc.
  21.1     List of Subsidiaries.
  23.1     Consent of Arthur Andersen LLP, Independent Public Accountants.
  23.2     Consent of Ernst & Young LLP, Independent Auditors.
  23.3     Consent of Arthur Andersen LLP, Independent Public Accountants.
  24.1     Power of Attorney. (See page 59)
  27.1     Financial Data Schedule.
  99.1(4)  Rights Agreement dated as of October 7, 1998 among the Company and
           U.S. Stock Transfer Corporation.
</TABLE>
--------
 * Constitutes a management contract or compensatory plan required to be filed
   pursuant to Item 13(a) of Form 10-K.
(1) Incorporated by reference to identically numbered exhibit to Registrant's
    Registration Statement on Form SB-2 (file no. 333-3840-LA) filed on April
    19, 1996.
 
                                      57
<PAGE>
 
(2) Incorporated by reference to Registrant's Current Report on Form 8-K filed
    December 10, 1997.
(3) Incorporated by reference to Registrant's Current Report on Form 8-K filed
    December 10, 1997.
(4) Incorporated by reference to Registrant's Current Report on Form 8-K filed
    on October 7, 1998.
 
    (b) Reports on Form 8-K during the quarter ended December 31, 1998:
 
       On November 12, 1998, the Company filed a Report on Form 8-K
    reporting that Ernst & Young LLP had resigned as the Company's
    independent auditors. The Company announced that a marketing
    relationship had been established whereby Ernst & Young LLP would
    market the Company's products. In connection with the audits of the
    Company's financial statements for each of the two fiscal years ended
    December 31, 1997 and in the subsequent interim period, there were no
    disagreements with Ernst & Young LLP on any matters of accounting
    principles or practice, financial statement disclosure, or auditing
    scope and procedures which, if not resolved to the satisfaction of
    Ernst & Young LLP would have caused Ernst & Young LLP to make reference
    to the matter in their report. The reports of Ernst & Young LLP for the
    past two years did not contain an adverse opinion or a disclaimer of
    opinion and these reports were not qualified or modified as to
    uncertainty, audit scope, or accounting principles. Effective November
    13, 1998, the Company engaged Arthur Andersen LLP to audit the
    Company's consolidated financial statements for the fiscal year ending
    December 31, 1998.
 
       On September 1, 1998 the Board of Directors approved the adoption of
    a Share Purchase Rights Plan (the "Rights Plan"). Terms of the Rights
    Plan provide for a dividend distribution of one preferred share
    purchase right (a "Right") for each outstanding share of common stock,
    par value $.001 per share (the "Common Shares"), of the Company. The
    dividend is payable on October 22, 1998 (the "Record Date") to the
    stockholders of record on that date. Each Right entitles the registered
    holder to purchase from the Company one one-hundredth of a share of
    Series A Junior Participating Preferred Stock, par value $.001 per
    share (the "Preferred Shares"), at a price of $187.50 per one one-
    hundredth of a Preferred Share (the "Purchase Price"), subject to
    adjustment. Each one one-hundredth of a share of Preferred Shares has
    designations and powers, preferences and rights, and the
    qualifications, limitations and restrictions which make its value
    approximately equal to the value of a Common Share.
 
       Rights will not be distributed upon the earlier of (i) the date of a
    public announcement that a person, entity or group of affiliated or
    associated persons have acquired beneficial ownership of 15% or more of
    the outstanding Common Shares (an "Acquiring Person") or (ii) 10
    business days (or such later date as may be determined by action of the
    Board of Directors prior to such time as any person or entity becomes
    an Acquiring Person) following the commencement of, or announcement of
    an intention to commence, a tender offer or exchange offer the
    consummation of which would result in any person or entity becoming an
    Acquiring Person. The Rights will expire on October 7, 2008 unless the
    Rights are earlier redeemed or exchanged by the Company.
 
                                      58
<PAGE>
 
                                  SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) 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 on this 30th day
of March 1999.
 
                                          Aspect Development, Inc.
 
                                                    /s/ Romesh Wadhwani
                                          By___________________________________
                                              Romesh Wadhwani Chief Executive
                                              Officer and Director (Principal
                                                    Executive Officer)
 
 
                               POWER OF ATTORNEY
 
   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints jointly and severally, Romesh
Wadhwani and David S. Dury and each one of them, his attorneys-in-fact, each
with the power of substitution, for him in any way and all capacities, to sign
any and all amendments to this Annual Report (Form 10-K) and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.
 
   Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
 
             Signatures                        Title                 Date
 
         /s/ Romesh Wadhwani           Chairman of the          March 30, 1999
-------------------------------------   Board of Directors
           Romesh Wadhwani              and ChiefExecutive
                                        Officer (Principal
                                        Executive Officer)
 
          /s/ Joseph Prang             President, Chief         March 30, 1999
-------------------------------------   Operating Officer
            Joseph Prang                and Director
 
          /s/ David S. Dury            Vice President and       March 30, 1999
-------------------------------------   Chief Financial
            David S. Dury               Officer(Principal
                                        Financial and
                                        Accounting Officer)
 
         /s/ Mark A. Stevens           Director                 March 30, 1999
-------------------------------------
           Mark A. Stevens
 
          /s/ Dennis Sisco             Director                 March 30, 1999
-------------------------------------
            Dennis Sisco
 
          /s/ Steven Goldby            Director                 March 30, 1999
-------------------------------------
            Steven Goldby
 
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