<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q
                                        
/X/    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
                                        
/_/    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

               For the transition period from _______ to _______


                         Commission File Number 0-20749

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

                         DELAWARE                    25-1622857
           (State or other jurisdiction of       (I.R.S. Employer
            incorporation or organization)        Identification No.)

                              1300 CHARLESTON ROAD
                        MOUNTAIN VIEW, CALIFORNIA 94043
          (Address of principal executive offices, including zip code)

                                 (650) 428-2700
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                          Yes    X                No
                                ---                     ---
The number of shares outstanding of the registrant's common stock as of July 31,
1998 was 15,046,671.
<PAGE>
 
                            ASPECT DEVELOPMENT, INC.

                                   FORM 10-Q

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
 
PART I.      FINANCIAL INFORMATION                                        PAGE
<S>          <C>                                                         <C>
 
Item 1.      Condensed Consolidated Financial Statements
 
             Condensed Consolidated Balance Sheets
             as of June 30, 1998 and December 31, 1997                      3
 
             Condensed Consolidated Statements of Operations
             for the three months and six months ended
             June 30, 1998 and June 30, 1997                                4
 
             Condensed Consolidated Statements of Cash Flows
             for the six months ended June 30, 1998 and June 30, 1997       5
 
             Notes to Condensed Consolidated Financial Statements           6
 
Item 2.      Management's Discussion and Analysis of Financial
             Condition and Results of Operations                           11
 
Item 3.      Quantitative and Qualitative Disclosures About Market Risk    19
 
PART II.     OTHER INFORMATION
 
Item 1.      Legal Proceedings                                             20
 
Item 4.      Submission of Matters to a Vote of Security Holders           20
 
Item 6.      Exhibits and Reports on Form 8-K                              21
 
Signature                                                                  22
</TABLE>

                                       2
<PAGE>
 
PART 1.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                           ASPECT DEVELOPMENT, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE> 
<CAPTION> 
                                                          ASSETS
                                                                                            June 30,           December 31,
                                                                                              1998              1997 (1)
                                                                                         --------------     --------------
<S>                                                                                    <C>                <C> 
Current assets:                                                                          (Unaudited)
      Cash and cash equivalents                                                         $         7,060     $       14,550
      Short-term investments                                                                     54,449             40,506
      Accounts receivable, net of allowance for doubtful                                         
          accounts of $421 and $295, respectively                                                16,247             13,366
      Prepaid expenses and other current assets                                                   3,688              3,234
                                                                                         --------------     --------------
              Total current assets                                                               81,444             71,656
Property and equipment, net                                                                       9,146              8,771
Other assets, net                                                                                 1,309              1,293
                                                                                         --------------     --------------
              Total assets                                                               $       91,899     $       81,720
                                                                                         ==============     ==============

                                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
      Accounts payable                                                                   $        2,064     $        2,009
      Accrued bonuses and commissions                                                             3,543              2,077
      Accrued merger costs                                                                          573              2,883
      Income taxes payable                                                                        2,828              1,608
      Other accrued liabilities                                                                   5,101              3,076
      Deferred revenue                                                                            8,578             11,136
      Current portion of obligations under capital  leases                                          163                346
                                                                                         --------------     --------------
              Total current liabilities                                                          22,850             23,135

Noncurrent portion of obligations under capital leases                                               --                 11

Stockholders' equity:
      Preferred stock, $0.001 par value per share;
         2,000 shares authorized, issuable in series,  no shares issued
         or outstanding                                                                              --                 --
      Common stock, $0.001 par value per share;
         100,000 shares authorized, 15,021 and 14,433 issued and
         outstanding at June 30, 1998 and December 31, 1997, respectively                        86,696             81,627
      Notes receivable from stockholders                                                           (210)              (320)
      Deferred compensation                                                                        (293)              (376)
      Accumulated translation adjustment                                                           (713)              (302)
      Accumulated deficit                                                                       (16,431)           (22,055)
                                                                                         --------------     --------------
              Total stockholders' equity                                                         69,049             58,574
                                                                                         --------------     --------------

              Total liabilities and stockholders' equity                                 $       91,899     $       81,720
                                                                                         ==============     ==============
</TABLE> 

(1)  Derived from audited financial statements as of December 31, 1997.

    See accompanying notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>
 
<TABLE> 
<CAPTION> 
                                               ASPECT DEVELOPMENT, INC.
                                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                     (UNAUDITED)


                                                 Three months ended                     Six months ended
                                                      June 30,                              June 30,
                                         ------------------------------------  ------------------------------------

                                              1998               1997 (1)           1998              1997 (1)
                                         --------------     ---------------      -------------      --------------
<S>                                     <C>                <C>                <C>                 <C> 
Revenues
     License                             $       11,408     $         6,600    $        21,617     $        10,632
     Subscription and maintenance                 4,552               3,216              8,571               6,120
     Service and other                            4,447               1,863              7,894               3,273
                                         --------------     ---------------      -------------      --------------
         Total revenues                          20,407              11,679             38,082              20,025
                                         --------------     ---------------      -------------      --------------
Cost of revenues
     License                                        255                 100                322                 274
     Subscription and maintenance                   991                 641              1,676               1,110
     Service and other                            1,733               1,138              3,443               2,131
                                         --------------     ---------------      -------------      --------------
          Total cost of revenues                  2,979               1,879              5,441               3,515
                                         --------------     ---------------      -------------      --------------
Gross profit                                     17,428               9,800             32,641              16,510

Operating expenses
     Research and development                     3,881               2,669              7,454               4,984
     Sales and marketing                          8,131               6,212             15,685              11,345
     General and administrative                   1,827               1,302              3,479               2,327
                                         --------------     ---------------      -------------      --------------
         Total operating expenses                13,839              10,183             26,618              18,656
                                         --------------     ---------------      -------------      --------------
Operating income (loss)                           3,589               (383)              6,023              (2,146)
Interest and other income, net                      685                568               1,190               1,303
                                         --------------     ---------------      -------------      --------------
Income (loss) before income taxes                 4,274                185               7,213                (843)
Provision for income taxes                          939                514               1,589                 969
                                         --------------     ---------------      -------------      --------------
Net income (loss)                        $        3,335     $          (329)     $       5,624      $       (1,812) 
                                         ==============     ===============      =============      ============== 
Net income (loss) per share-basic        $         0.22     $         (0.02)     $        0.38      $        (0.13)
                                         ==============     ===============      =============      ============== 
Net income (loss) per share-diluted      $         0.20     $         (0.02)     $        0.34      $        (0.13)
                                         ==============     ===============      =============      ============== 
Shares used in computing per
share amounts-basic                              14,928              13,638             14,743              13,518
                                         ==============     ===============      =============      ============== 
Shares used in computing per
share amounts-diluted                            16,582              13,638             16,426              13,518
                                         ==============     ===============      =============      ============== 
</TABLE> 
      (1) Amounts reflect the combination of the Company with CADIS, Inc. in a
      pooling of interests transaction which was consummated in the fourth
      quarter of fiscal 1997.


    See accompanying notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                    ASPECT DEVELOPMENT, INC.
                                        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                         (IN THOUSANDS)
                                                          (UNAUDITED)
                                                                                                   Six months ended June 30,
                                                                                                  1998                  1997 (1)
                                                                                                -------                  -------
<S>                                                                                 <C>                     <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                                               $ 5,624                  $(1,812)
Adjustments to reconcile net income (loss)  to net cash from operating
activities:
     Depreciation and amortization                                                                2,251                      844
     Changes in assets and liabilities:
         Accounts receivable                                                                     (2,881)                      (4)
         Prepaid expenses and other current assets                                                 (605)                    (884)
         Accounts payable                                                                            55                    1,306
         Accrued bonuses and commissions                                                          1,467                      256
         Accrued merger costs                                                                    (2,310)                      --
         Income taxes payable                                                                     1,220                    1,394
         Other accrued liabilities                                                                2,025                     (429)
         Deferred revenue                                                                        (2,559)                   1,473
         Other, net                                                                                (411)                     308
                                                                                                -------                  -------
Net cash provided by operating activities                                                         3,876                    2,452

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment                                                              (2,626)                  (3,148)
Purchases of short-term investments                                                             (60,249)                 (27,106)
Proceeds from maturities of short-term investments                                               46,306                   24,819
Decrease / (increase) in employee note receivable                                                   151                     (212)
Increase in other assets                                                                            (16)                  (1,541)
                                                                                                -------                  -------
Net cash used in investing activities                                                           (16,434)                  (7,188)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations                                                    (194)                    (177)
Decrease in stockholders note receivable                                                            110                       --
Proceeds from issuance of common stock                                                            5,152                    1,578
                                                                                                -------                  -------
Net cash provided by financing activities                                                         5,068                    1,401

Net decrease in cash and cash equivalents                                                        (7,490)                  (3,335)
Cash and cash equivalents at beginning of period                                                 14,550                   16,683
                                                                                                -------                  -------
Cash and cash equivalents at end of period                                                      $ 7,060                  $13,348
                                                                                                =======                  =======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest                                                        $    11                  $    33
                                                                                                =======                  =======
Income taxes paid                                                                               $    16                  $    15
                                                                                                =======                  =======
</TABLE> 
(1)  Amounts reflect the combination of the Company with CADIS, Inc. in a
     pooling of interests transaction which was consummated in the fourth
     quarter of fiscal 1997.


    See accompanying notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
 
                            ASPECT DEVELOPMENT, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        
1.  Description of Business and Basis of Presentation

  The Company develops, markets and supports enterprise client/server 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 unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments which
in the opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented.  These financial statements should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
as included in the Company's Form 10-KSB for the fiscal year ended December 31,
1997, filed with the Securities and Exchange Commission on March 31, 1998.  The
consolidated results of operations for the period ended June 30, 1998 are not
necessarily indicative of the results to be expected for any subsequent interim
or annual period.

  The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries.  All significant intercompany
accounts and transactions have been eliminated.  Investments in joint ventures
in which the Company has a 50% or less ownership interest are accounted for by
the equity method.  Under such method, the Company's share of net earnings (or
losses) is included in interest and other income, net in the consolidated
statements of operations.

  Assets and liabilities of the Company and its wholly owned foreign
subsidiaries are translated from the local currency to United States dollars at
period-end exchange rates.  Income and expense items are translated on a
quarterly basis at the average rates of exchange prevailing during the quarter.
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.

2.  Business Combination

  On November 25, 1997, the Company acquired all of the outstanding shares of
CADIS, Inc. ("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 transaction and the accompanying
consolidated financial statements have been restated for prior periods to
include the operating results of CADIS. In connection with the transaction, the
Company incurred approximately $4.3 million in merger related expenses in the
year ended December 31, 1997, including $0.9 million in 

                                       6
<PAGE>
 
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. As of June 30, 1998, approximately $573,000 of the merger costs remain
unpaid and are expected to be paid prior to December 31, 1998.

  There were no materially significant intercompany transactions between the
Company and CADIS prior to the merger and there were no significant accounting
reclassifications required to conform the financial reporting of the two
companies.

3.  Stock Split

     On July 20, 1998, the Board of Directors declared a two-for-one stock split
in the form of a stock dividend, payable August 14, 1998. The financial
statements included herein have not been adjusted to give effect to the stock
split.

4.  Cash Equivalents and Short-Term Investments

     The Company considers all highly liquid investments purchased with a
maturity of three months or less at date of acquisition to be cash equivalents.
Short-term investments generally mature within two years of purchase.  Gross
realized and unrealized gains and losses are not material.

     The Company's short-term investments consisted of various issuances of
commercial paper and are accounted for as available-for-sale securities at June
30, 1998.  The securities are carried at amortized cost which approximates fair
value, and therefore, there are no unrealized gains or losses recorded to
stockholders' equity.

5.  Revenue Recognition

     On January 1, 1998, the Company adopted Statement of Position No. 97-2,
"Software Revenue Recognition" (SOP 97-2) which superceded Statement of Position
91-1, "Software Revenue Recognition" (SOP 91-1).  Arrangements with effective
dates prior to January 1, 1998 have been and will be accounted for under 
SOP 91-1.  Amendments after January 1, 1998 to arrangements with an original
effective date prior to January 1, 1998 will be accounted for under SOP 97-2.
The implementation of SOP 97-2 did not have a material adverse effect on the
Company's business or revenue accounting practices or on the Company's reported
revenues and earnings for the six months ended June 30, 1998. In March 1998, the
American Institute of Certified Public Accountants issued Statement of Position
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2" (SOP 98-4).
SOP 98-4 is effective March 31, 1998 and defers for one year the implementation
of the provisions of SOP 97-2 that defines what constitutes "vendor specific
objective evidence" with regard to software revenue recognition.

     Licenses are comprised of perpetual license fees, which are recognized as
revenue upon persuasive evidence of an arrangement, shipment of the product has
occurred, if no significant vendor obligations remain, the fee is fixed or
determinable, 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 

                                       7
<PAGE>
 
of installation. Product returns and sales allowances (which were not
significant through June 30, 1998) are estimated and provided for at the time of
sale.

     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 one year.

     Service and other revenues are comprised of service, consulting and
development fees.  Service revenues from training and consulting are recognized
upon completion of the work to be performed.  Development fees are recognized as
revenue in accordance with the terms of the agreements, generally when related
costs have been incurred.  The Company retains complete ownership of all
technology developed under these agreements.

     Two customers accounted for 19% and 16% of revenues for the three months
ended June 30, 1998 and three customers accounted for 15%, 15% and 12% of
revenues for the three months ended June 30, 1997. One customer accounted for
over 10% of revenues for the six months ended June 30, 1998 and no customer
accounted for over 10% of revenues for the six months ended June 30, 1997.

6.  Comprehensive Income

     As of January 1, 1998, the Company adopted Statement No. 130, "Reporting
Comprehensive Income" (SFAS 130). Statement No. 130 establishes new rules for
the reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income or
stockholders' equity. Statement No. 130 requires unrealized gains or losses on
the Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income.

During the three months ended June 30, 1998 and 1997, total comprehensive income
(loss) amounted to $3.0 million and $(314,000), respectively. During the six
months ended June 30, 1998 and 1997, total comprehensive income (loss) amounted
to $5.2 million and $(1.9) million, respectively. The components of
comprehensive income, net of related tax, for the three months ended June 30,
1998 and 1997, and for the six months ended June 30, 1998 and 1997 are as
follows:
 
<TABLE>
<CAPTION>
                                                 Three months ended                       Six months ended
                                                       June 30,                               June 30,
                                            --------------------------------      -----------------------------------
                                               1998                1997             1998                    1997
                                            ------------       -------------      ----------             ------------
 
                 (In thousands)
<S>                                              <C>                <C>                <C>                    <C>
            Net income (loss)                     $3,335               $(329)          5,624                   (1,812)
            Foreign currency translation           
            adjustment                              (293)                 15            (411)                    (115)
                                            ------------       -------------      ----------             ------------
            Comprehensive income (loss)           $3,042               $(314)         $5,213                  $(1,927)
                                            ============       =============      ==========             ============
</TABLE>

The components of accumulated comprehensive income (loss), net of related tax,
at June 30, 1998 and December 31, 1997 are as follows:

                                       8
<PAGE>
 
<TABLE>
<CAPTION>
 
                (In thousands)                      1998      1997
                                                   -------  --------
<S>                                                <C>      <C>
 
        Foreign currency translation adjustment      (713)     (302)
                                                    -----   -------
        Accumulated comprehensive income (loss)     $(713)  $  (302)
                                                    =====   =======
</TABLE>
7.  Net Income Per Share

     Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share."  As required by SFAS No. 128, the earnings per share for the three
months and six months ended June 30, 1997 have been restated.

     Under the new requirements for calculating EPS, the dilutive effect of
stock options and convertible securities is excluded from a new EPS measure,
basic EPS. 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).

                 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 Three months ended                      Six months ended
                                                                      June 30,                                June 30,
                                                         ----------------------------------       -------------------------------
 
                                                            1998                  1997                1998                1997
                                                         ----------          --------------       ------------          ----------
<S>                                                      <C>                   <C>                  <C>                 <C>
       Basic:
       Total weighted average common and
        common equivalent shares outstanding                 14,928                  13,638             14,743             13,518
       Net income (loss)                                    $ 3,335                 $  (329)           $ 5,624            $(1,812)
       Net income (loss) per share                          $  0.22                 $ (0.02)           $  0.38            $ (0.13)
 
       Diluted:
       Weighted average common stock outstanding             14,928                  13,638             14,743             13,518
       Common stock equivalents (treasury stock method)       1,654                     ---              1,683                ---
                                                            -------                 -------            -------             ------- 
       Total weighted average common and common
        equivalent shares outstanding                        16,582                  13,638             16,426              13,518
       Net income (loss)                                    $ 3,335                 $  (329)           $ 5,624             $(1,812)
       Net income (loss) per share                          $  0.20                 $ (0.02)           $  0.34             $ (0.13)
</TABLE>

8.    Foreign Exchange Hedging

        The Company has established a hedging program to manage its exposure to
foreign currency rate changes on customer receivables. The Company does not use
derivative financial instruments for speculative or trading purposes. The
Company had no hedging contracts open at June 30, 1998. If considered
appropriate, the Company will enter into hedging contracts in the future.

9.  EDTN Joint Venture

        The Company entered into a joint venture agreement with CMP Media, Inc.
("CMP") dated April 4, 1997.  The joint venture was established for the creation
of the Electronic 

                                       9
<PAGE>
 
Design Technology Network ("EDTN"). EDTN is an Internet supersite using push
technology to provide electronic designers with up-to-date information on
components and suppliers, and related news, reviews, product demonstrations and
company announcements. EDTN revenues are generated primarily from advertising
sponsorships. The equity ownership of this joint venture is split 50% to CMP and
50% to the Company. Included within interest and other income, net for the three
months and six months ended June 30, 1998, are charges of $138,000 and $297,000,
respectively representing the Company's share of losses in this joint venture.

10.  Legal Matters

     In connection with its investigation of certain potential antitrust issues
arising out of the CADIS acquisition, the Federal Trade Commission (the "FTC")
has issued a civil investigative demand and a subpoena requesting certain
information and documentation with respect to the Company's business. Although
no premerger notification was required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 for the CADIS acquisition because of the size of the
parties, the FTC's demand is similar in scope to that of a request for
information by the FTC that may follow such a premerger notification. While the
Company intends to cooperate with the FTC's investigation, it does not believe
that the CADIS acquisition was in violation of federal antitrust laws. The
Company does not believe that the outcome of the FTC's investigation will have a
material adverse effect on the Company's business or results of operations,
although there can be no assurance of such outcome.

                                       10
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     The discussion in this Report contains forward-looking statements that
involve risks and uncertainties.  The Company's actual results could differ
materially from those discussed herein.  Factors that could cause or contribute
to such differences include, but are not limited to, those discussed under the
caption "Factors That May Affect Future Results" as well as those discussed
below and elsewhere in this Report, and the risks discussed in the "Business
Factors" section included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997, filed with the Securities and Exchange
Commission on March 31, 1998.

RESULTS OF OPERATIONS

     In November 1997, the Company acquired CADIS, 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 Common Stock and options of
CADIS.  The acquisition was accounted for as a pooling of interests transaction,
and, except where specified, the financial statements of the Company and the
information herein includes the results of CADIS for all periods.

REVENUES

     The Company's revenues are divided into three categories: 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 data 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, its VIP family of component reference databases and the CAPS reference
data product.  Service and other revenues are comprised principally of fees for
consulting, development and training services performed by the Company. License
revenues are recognized upon persuasive evidence of an arrangement, shipment of
the product has occurred, if no significant vendor obligations remain, the fee
is fixed or determinable, and collection of the resulting receivables is deemed
probable.  Product returns and sales allowances (which were not significant
through June 30, 1998) are estimated and provided for at the time of sale.  When
delivery involves significant 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. U.S. and international sales accounted for
approximately 83% and 17% of the Company's total revenues for the three months
ended June 30, 1998, respectively, compared to 80% and 20% for the three months
ended June 30, 1997, respectively. U.S. and international sales accounted for
approximately 82% and 18% of the Company's total revenues for the six months
ended June 30, 1998, respectively, compared to 79% and 21% for the six months
ended June 30, 1997, respectively.

                                       11
<PAGE>
 
     License Revenue.  License revenue increased from $6,600,000 for the three
months ended June 30, 1997 to $11,408,000 for the three months ended June 30,
1998 and increased from $10,632,000 for the six months ended June 30, 1997 to
$21,617,000 for the six months ended June 30, 1998.  These increases were due
primarily to sales to three significant customers and continuing acceptance of
the Company's Explore and VIP products.

     Subscription and Maintenance Revenue.  Subscription and maintenance revenue
increased from $3,216,000 for the three months ended June 30, 1997 to $4,552,000
for the three months ended June 30, 1998 and increased from $6,120,000 for the
six months ended June 30, 1997 to $8,571,000 for the six months ended June 30,
1998.  This increase was due primarily to renewals of subscription and
maintenance agreements from the increased installed base of customers.

     Service and Other Revenue.  Service and other revenue increased from
$1,863,000 for the three months ended June 30, 1997 to $4,447,000 for the three
months ended June 30,1998 and increased from $3,273,000 for the six months ended
June 30, 1997 to $7,894,000 for the six months ended June 30, 1998.  This
increase was due primarily to an increase in the number and size of consulting
contracts in 1998.  The Company is increasing its focus on consulting services
due to their leverage in increasing future license revenues.

COST OF REVENUES

     Cost of Licenses.  Cost of licenses consists primarily of license fees and
royalties paid to third-party vendors and shipping expenses.  Cost of licenses
increased from $100,000 for the three months ended June 30, 1997 to $255,000 for
the three months ended June 30, 1998, representing 1.5% and 2.2% of license
revenues for the three months ended June 30, 1997 and 1998, respectively. Cost
of licenses increased from $274,000 for the six months ended June 30, 1997 to
$322,000 for the six months ended June 30, 1998, representing 2.6% and 1.5% of
license revenues for the six months ended June 30, 1997 and 1998, respectively.
These increases in absolute dollars and as a percentage of revenues for the
three months ended June 30, 1998 were due primarily to an increase in the number
of customers requiring the Company to provide for their database software
licenses.

     Cost of Subscription and Maintenance Revenues.  Cost of subscription and
maintenance revenues consists primarily of personnel-related costs incurred in
providing centralized telephone support and related technical support to
customers and license fees and royalties paid to third-party vendors, primarily
Information Handling Systems for the CAPS reference data product.  Cost of
subscription and maintenance revenues increased from $641,000 for the three
months ended June 30, 1997 to $991,000 for the three months ended June 30, 1998,
representing 20.0% and 21.8% of subscription and maintenance revenues for the
three months ended June 30, 1997 and 1998, respectively. Cost of subscription
and maintenance revenues increased from $1,110,000 for the six months ended June
30, 1997 to $1,676,000 for the six months ended June 30, 1998, representing
18.1% and 19.6% of subscription and maintenance revenues for the six months
ended June 30, 1997 and 1998, respectively. The increase in absolute dollars and

                                       12
<PAGE>
 
as a percentage of related revenues in 1998 was due to an increase in the
customer support infrastructure required to provide an increased level of
support to customers.

     Cost of Service and Other Revenues.  Cost of service and other revenues
consist primarily of personnel-related costs incurred in providing consulting
services, development services and training to customers.  Cost of service and
other revenues increased from $1,138,000 for the three months ended June 30,
1997 to $1,733,000 for the three months ended June 30, 1998, representing 61.1%
and 39.0% of service and other revenues for the three months ended June 30, 1997
and 1998, respectively. Cost of service and other revenues increased from
$2,131,000 for the six months ended June 30, 1997 to $3,443,000 for the six
months ended June 30, 1998, representing 65.1% and 43.6% of service and other
revenues for the six months ended June 30, 1997 and 1998, respectively. The
increase in absolute dollars is due primarily to an increase in the number and
size of consulting contracts. The overall decrease in percentages of related
revenues is due primarily to the increasing profit margin associated with each
individual contract due to increased management efficiencies and an increasing
percentage of the fulfillment of these contracts from the lower cost of labor in
India.

OPERATING EXPENSES

     Research and Development.  Research and development expenses consist
primarily of engineering personnel costs.  Research and development expenses
increased from $2,669,000 for the three months ended June 30, 1997 to $3,881,000
for the three months ended June 30, 1998, representing 22.9% and 19.0% of total
revenues for the three months ended June 30, 1997 and 1998, respectively.
Research and development expenses increased from $4,984,000 for the six months
ended June 30, 1997 to $7,454,000 for the six months ended June 30, 1998,
representing 24.9% and 19.6% of total revenues for the six months ended June 30,
1997 and 1998, respectively. The decrease in research and development expenses
as a percent of total revenues was due principally to the Company's growth in
total revenues, partially offset by increased development staffing.  The dollar
increase in research and development expenses was due to this increased
development staffing.  The Company expects research and development expenses to
increase in absolute dollars while remaining approximately level or decreasing
as a percent of total revenues.

     Sales and Marketing.  Sales and marketing expenses include salaries,
commissions, advertising, travel, trade shows, public relations and other
selling and marketing-related expenses. Sales and marketing expenses increased
from $6,212,000 for the three months ended June 30, 1997 to $8,131,000 for the
three months ended June 30, 1998, representing 53.2% and 39.8% of total revenues
for the three months ended June 30, 1997 and 1998, respectively. Sales and
marketing expenses increased from $11,345,000 for the six months ended June 30,
1997 to $15,685,000 for the six months ended June 30, 1998, representing 56.7%
and 41.2% of total revenues for the six months ended June 30, 1997 and 1998,
respectively. The dollar increase in sales and marketing expenses was 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 decrease in such
expenses as a percent of total revenues was due to significant increases in
total revenues during the periods.  The Company believes that such expenses will
continue to increase in 

                                       13
<PAGE>
 
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 $1,302,000 for the
three months ended June 30, 1997 to $1,827,000 for the three months ended June
30, 1998, representing 11.1% and 9.0% of total revenues for the three months
ended June 30, 1997 and 1998, respectively. General and administrative expenses
increased from $2,327,000 for the six months ended June 30, 1997 to $3,479,000
for the six months ended June 30, 1998, representing 11.6% and 9.1% of total
revenues for the six months ended June 30, 1997 and 1998, respectively. The
dollar increase of general and administrative expenses was primarily the result
of increased staffing and associated expenses necessary to manage and support
the Company's growth.  The decrease in such expenses as a percent of total
revenues was due to the increase in total revenues.  The Company expects general
and administrative expenses to increase in absolute dollars while remaining
approximately level or decreasing as a percent of total revenues.

INTEREST AND  OTHER INCOME, NET

     Interest and other income, net represents interest income earned on the
Company's cash, cash equivalents and short-term investments, the Company's share
of losses of the EDTN joint venture and other items.  Interest and other income,
net increased from $568,000 for the three months ended June 30, 1997 to $685,000
for the three months ended June 30, 1998, representing 4.9% and 3.4% of total
revenues for the three months ended June 30, 1997 and 1998, respectively.
Interest and other income, net decreased from $1,303,000 for the six months
ended June 30, 1997 to $1,190,000 for the six months ended June 30, 1998,
representing 6.5% and 3.1% of total revenues for the six months ended June 30,
1997 and 1998, respectively. The increase from the three months ended June 30,
1997 to the comparable quarter in 1998 was primarily due to a higher level of
investment in short-term securities offset by losses in the EDTN joint venture.
The decrease from the six months ended June 30, 1997 to the comparable six-month
period in 1998 was primarily due to a larger amount of losses in the EDTN joint
venture for the six months ended June 30, 1998.

PROVISION FOR INCOME TAXES

     The Company has provided income taxes at an effective tax rate of 22% for
the three and six months ended June 30, 1998. The rate reflects the utilization
of certain prior year CADIS net operating losses not previously benefited. The
income tax provisions for the prior year comparable periods were computed
without benefiting CADIS losses, resulting in extraordinary high effective tax
rates. The Company's provision for income taxes and effective tax rate may vary
in future periods based upon a variety of factors, including the geographic mix
of income.

LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 1998, the Company had approximately $61.5 million in cash,
cash equivalents and short-term investments.  Net cash provided by operating
activities was 

                                       14
<PAGE>
 
$3,876,000 for the six months ended June 30, 1998, primarily due to net income
of $5,624,000, an increase in accrued bonuses and commissions of $1,467,000 and
an increase in accrued liabilities of $1,742,000, offset by an increase in
accounts receivable of $2,881,000, a decrease in deferred revenue of $2,559,000,
and a decrease in accrued merger costs of $2,310,000.

     As of June 30, 1998, the Company's principal commitments consisted of
obligations under operating and capital leases.  As of June 30, 1998, the
Company had $163,000 in outstanding borrowings under capital leases which are
payable through 1999.

     The Company believes that its current cash balances and the cash flows
generated from operations, if any, will be sufficient to meet its working
capital and capital expenditure requirements for at least the next 12 months.
In addition, 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. There can be
no assurance such financing will be available on favorable terms. In addition, 
issuances of additional equity securities could be dilutive to the Company's 
stockholders.

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 after 1999.

The Company has assembled an 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, but has not yet performed the testing and analysis necessary to
permit identification and correction of problems that could result in date-
related failures. The internal task force will develop plans to correct problems
once they are identified. Efforts will be made to modify or replace any non-
compliant software, systems and equipment throughout year 1999. There can be no
assurance that the Company will be able to do so successfully and in the
requisite time frame. The Company will continue to expend appropriate resources
to address this issue on a timely basis. No determination has yet been made as
to the cost of this compliance program but such expenditures could be
significant. The Company has not yet begun its assessment of the impact on it,
if any, of its customers' and suppliers' Year 2000 issues. Unresolved Year 2000
issues with respect to the Company's products, internal systems, suppliers or
customers could result in unforeseen costs or delays, which could have a
materially adverse impact on the Company's operations and earnings.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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, 

                                       15
<PAGE>
 
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 31st and has incurred higher
personnel costs in the quarter ending March 31st. 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. 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

                                       16
<PAGE>
 
condition or results of operations could be materially adversely affected. 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.

The Company acquired CADIS in November 1997. See Note 2 of Notes to Condensed
Consolidated Financial Statements. The successful integration of CADIS will
require substantial additional attention from management. The majority of the
costs associated with the acquisition have already been incurred, but the
anticipated benefits of the acquisition will not be achieved unless the CADIS
operations are successfully combined with the Company's. The diversion of the
attention of management from the day-to-day operations of the Company, or
difficulties encountered in the transition and integration process, could have a
material adverse effect on the business, financial condition and results of
operations of the Company.

In connection with the acquisition of CADIS, the Company terminated current or
potential contractual relationships between CADIS and certain customers of
CADIS. Although the Company believes that this action was not in breach of
contractual obligations of CADIS or any rights of other parties that may have
existed at the time, there can be no assurance that any of these customers will
not bring an action against CADIS or the Company claiming contract or tort
damages arising out of the Company's termination of these relationships, or
that, in the event any such action is brought, the Company will be successful in
defending it.

In connection with its investigation of certain potential antitrust issues
arising out of the CADIS acquisition, the Federal Trade Commission (the "FTC")
has issued a civil investigative demand and a subpoena requesting certain
information and documentation 

                                       17
<PAGE>
 
with respect to the Company's business. Although no premerger notification was
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 for the
CADIS acquisition because of the size of the parties, the FTC's demand is
similar in scope to that of a request for information by the FTC that may follow
such a premerger notification. While the Company intends to cooperate with the
FTC's investigation, it does not believe that the CADIS acquisition was in
violation of federal antitrust laws. The Company does not believe that the
outcome of the FTC's investigation will have a material adverse effect on the
Company's business or results of operations, although there can be no assurance
of such outcome.

To implement its business plans, the Company may make further acquisitions in
the future, which will require significant financial and management resources
both at the time of the transaction and during the process of integrating the
newly-acquired business into the Company's operations.  The Company's operating
results could be adversely affected if it is unable to successfully integrate
such new companies into its operations.  There can be no assurance that any
acquired products, technologies or businesses will contribute at anticipated
levels to the Company's sales or earnings, or that sales and earnings from
combined businesses will not be adversely affected by the integration process.
Certain acquisitions or strategic transactions may be subject to approval by the
other party's board or stockholders, domestic or foreign governmental agencies
or other third parties.  Accordingly, there is a risk that important
acquisitions or transactions could fail to be concluded as planned.  Future
acquisitions by the Company could also result in issuances of equity securities
or the rights associated with the equity securities, which could potentially
dilute earnings per share and cause the market value of the Company's Common
Stock to fall.  In addition, future acquisitions could result in the incurrence
of additional debt, taxes, contingent liabilities, amortization expenses related
to goodwill and other intangible assets and expenses incurred to align the
accounting policies and practices of the acquired companies with those of the
Company.  These factors could adversely affect the Company's future operating
results, financial position and cash flows.  As some of the Company's
competitors have pursued a strategy of growth through acquisition, there is a
risk that future acquisitions could be more expensive due to competition among
bidders for target companies.

Historically, a relatively small number of customers has 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.

The Company has operations in Bangalore, India with 284 employees as of June 30,
1998.  The Company is dependent to a significant extent upon the ability of its
Indian 

                                       18
<PAGE>
 
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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.

                                       19
<PAGE>
 
PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     In April 1998, the Federal Trade Commission (the "FTC") issued a civil
investigative demand and subpoena requesting certain information and
documentation with respect to the Company's business in connection with an
investigation of potential antitrust issues arising out of the Company's
acquisition of CADIS, Inc. Although the CADIS acquisition required no premerger
notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
because of the size of the parties involved in the transaction, the FTC's demand
is similar in scope to that of a request for information by the FTC that may
follow such a premerger notification.

     While the Company intends to cooperate with the FTC's investigation, it
does not believe that its acquisition of CADIS was in violation of federal
antitrust laws. The Company cannot accurately estimate the cost of responding to
and complying with the FTC's subpoena, but believes that such cost may be
material. The Company does not believe that the outcome of the FTC's
investigation will have a material adverse effect on the Company's business or
results of operation, although there can be no assurance of such outcome.

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

     The following are the results of matters which were submitted to a vote of
security holders at the Company's Annual Meeting of Stockholders held on June
16, 1998 in Mountain View, California:

Proposal 1 - Election of Directors
<TABLE>
<CAPTION>
 
                   Number of Votes  Number of Votes  Number of Votes
Name                     For            Against        Abstaining
----                     ---            -------        ----------   
<S>                <C>              <C>              <C>
Romesh Wadhwani         11,842,054         0             5,282
Joseph A. Prang         11,827,476         0            19,860
Steven Goldby           11,842,054         0             5,282
Dennis G. Sisco         11,842,054         0             5,282
Mark A. Stevens         11,842,054         0             5,282
 
</TABLE>

Proposal 2--To approve an amendment to the Company's 1992 Employee Stock Option
Plan to increase the number of shares of Common Stock reserved for issuance
thereunder by 1,100,000 shares. (8,017,548 votes in favor, 2,802,281 votes
opposed, 9,810 votes abstaining and 1,017,697 broker non-votes)

Proposal 3--To approve an amendment to the Company's Restated Certificate of
Incorporation 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 shares.
(9,410,044 votes in favor, 2,428,072 votes opposed, 9,220 votes abstaining)

                                       20
<PAGE>
 
Proposal 4 - To ratify the appointment of Ernst & Young, LLP as independent
auditors for the Company for the fiscal year ending December 31, 1998.
(11,838,129 votes in favor, 4,907 votes opposed, 4,300 votes abstaining)


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

          Exhibit 27.1  Financial Data Schedule (filed electronically)

     (b)  Reports on Form 8-K

          None.

                                       21
<PAGE>
 
                                   SIGNATURE
                                        
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                              Aspect Development, Inc.


August 14, 1998               /s/ David S. Dury
                              ------------------------------------    
                              David S. Dury
                              Vice President and Chief Financial Officer
                              (Principal Financial and Accounting Officer)

                                       22