<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 MARCH 31, 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 May 1,
1998 was 14,915,857.
<PAGE>
 
                            ASPECT DEVELOPMENT, INC.
                                        
                                   FORM 10-Q
                                        
                               TABLE OF CONTENTS
 
PART I.      FINANCIAL INFORMATION                                 PAGE
 
Item 1.      Condensed Consolidated Financial Statements
 
             Condensed Consolidated Balance Sheets
             as of March 31, 1998 and December 31, 1997               3
 
             Condensed Consolidated Statements of Operations
             for the three months ended
             March 31, 1998 and March 31, 1997                        4
 
             Condensed Consolidated Statements of Cash Flows
             for the three months ended
             March 31, 1998 and March 31, 1997                        5
 
             Notes to Condensed Consolidated Financial Statements     6
 
Item 2.      Management's Discussion and Analysis of Financial
             Condition and Results of Operations                     11
 
PART II.     OTHER INFORMATION
 
Item 1.      Legal Proceedings                                       19
 
Item 2.      Exhibits and Reports on Form 8-K                        19
 
Signature                                                            20

                                       2
<PAGE>
 
PART 1.   FINANCIAL INFORMATION

ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                           ASPECT DEVELOPMENT, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
              (IN THOUSANDS, EXCEPT PAR VALUE PER SHARE AMOUNTS)
<TABLE> 
<CAPTION> 
 
                                   ASSETS
                                                                                    March 31,              December 31,
                                                                                      1998                   1997 (1)
                                                                              --------------------       ---------------
                                                                                   (Unaudited)
<S>                                                                           <C>                        <C> 
Current assets:                                                                   
     Cash and cash equivalents                                                $            5,756        $      14,550
     Short-term investments                                                               51,332               40,506
     Accounts receivable, net of allowance for doubtful                                     
        accounts of $217 and $295, respectively                                           14,090               13,366
     Employee receivables                                                                     --                  151
     Prepaid expenses and other current assets                                             3,002                3,083
                                                                              --------------------       ---------------
        Total current assets                                                              74,180               71,656
Property and equipment, net                                                                8,888                8,771
Other assets, net                                                                          1,406                1,293
                                                                              --------------------       ---------------
        Total assets                                                          $           84,474         $     81,720
                                                                              ====================       ===============
                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                         $            2,018         $      2,009
     Accrued bonuses and commissions                                                       1,893                2,077
     Accrued merger costs                                                                  1,178                2,883
     Income taxes payable                                                                  1,944                1,608
     Other accrued liabilities                                                             4,037                2,488
     Deferred revenue                                                                      9,277               11,136
     Current portion of obligations under capital leases                                     255                  346
     Third-party royalties and fees                                                          678                  588
                                                                              --------------------       ---------------
        Total current liabilities                                                         21,280               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;
        20,000 shares authorized, 14,800 and
        14,433 issued and outstanding
        at March 31, 1998 and 
        December 31, 1997, respectively                                                   84,034               81,627
     Notes receivable from stockholders                                                     (320)                (320)
     Deferred compensation                                                                  (334)                (376)
     Accumulated translation adjustment                                                     (420)                (302)
     Accumulated deficit                                                                 (19,766)             (22,055)
                                                                              --------------------       ---------------
        Total stockholders' equity                                                        63,194               58,574
                                                                              --------------------       --------------- 
 
        Total liabilities and                      
        stockholders' equity                                                  $           84,474         $     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 
                                                                                           March 31,
                                                                           -----------------------------------------
                                                                                   1998               1997 (1)
                                                                              ------------         ------------
<S>                                                                      <C>                     <C> 
Revenues
     License                                                            $           10,210       $        4,032
     Subscription and maintenance                                                    4,019                2,904
     Service and other                                                               3,447                1,410
                                                                              ------------         ------------
         Total revenues                                                             17,676                8,346
Cost of revenues
     License                                                                            67                  174
     Subscription and maintenance                                                      684                  469
     Service and other                                                               1,711                  993
                                                                              ------------         ------------
         Total cost of revenues                                                      2,462                1,636
                                                                              ------------         ------------
Gross profit                                                                        15,214                6,710
Operating expenses
     Research and development                                                        3,572                2,315
     Sales and marketing                                                             7,556                5,133
     General and administrative                                                      1,651                1,025
                                                                              ------------         ------------
         Total operating expenses                                                   12,779                8,473
                                                                              ------------         ------------
Operating income (loss)                                                              2,435               (1,763)
Interest and other income, net                                                         504                  735
                                                                              ------------         ------------
Income (loss) before income taxes                                                    2,939               (1,028)
Provision for income taxes                                                             650                  455
                                                                              ------------         ------------
Net income (loss)                                                       $            2,289       $       (1,483)
                                                                              ============         ============
 
Net income (loss) per share-basic                                       $             0.16       $        (0.11)
                                                                              ============         ============
Net income (loss) per share-diluted                                     $             0.14       $        (0.11)
                                                                              ============         ============
 
Shares used in computing per share
     amounts-basic                                                                  14,557               13,397
                                                                              ============         ============
Shares used in computing per share
     amounts-diluted                                                                16,269               13,397
                                                                              ============         ============
</TABLE>
(1)  Amounts have been restated to 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)
 
                                                                                  Three months ended March 31,
                                                                                 1998                    1997 (1)
                                                                              ----------               ------------ 
<S>                                                                           <C>                     <C>     
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                             $    2,289               $     (1,483)
Adjustments to reconcile net income (loss)  to net cash from operating 
 activities:
     Depreciation and amortization                                                 1,090                        387
     Changes in assets and liabilities:
       Accounts receivable                                                          (724)                     1,291
       Prepaid expenses and other current assets                                      81                       (174)
       Accounts payable                                                                9                       (207)
       Accrued bonuses and commissions                                              (184)                       257
       Accrued merger costs                                                       (1,705)                        --
       Income taxes payable                                                          336                        455
       Other accrued liabilities                                                   1,549                     (1,101)
       Deferred revenue                                                           (1,859)                     2,676
       Third-party royalties and fees                                                 90                       (201)
       Other, net                                                                   (118)                      (130)
                                                                              ----------               ------------ 
Net cash provided by operating activities                                            854                      1,770   
                                                                                                                      
CASH FLOWS FROM INVESTING ACTIVITIES                                                                                  
Purchases of property and equipment                                               (1,207)                    (1,286)  
Purchases of short-term investments                                              (29,376)                   (18,396)  
Proceeds from maturities of short-term investments                                18,550                     15,505   
Decrease in employee note receivable                                                 151                         49   
Increase in other assets                                                            (113)                      (737)  
                                                                              ----------               ------------   
Net cash used in investing activities                                            (11,995)                    (4,865)  
                                                                                                                      
CASH FLOWS FROM FINANCING ACTIVITIES                                                                                  
Principal payments on capital lease obligations                                     (102)                      (141)  
Proceeds from issuance of common stock                                             2,449                      1,484   
                                                                              ----------               ------------   
Net cash provided by financing activities                                          2,347                      1,343   
                                                                                                                      
Net decrease in cash and cash equivalents                                         (8,794)                    (1,752)  
                                                                              ----------               ------------ 
Cash and cash equivalents at beginning of period                                  14,550                     16,683   
                                                                              ----------               ------------ 
Cash and cash equivalents at end of period                                    $    5,756               $     14,931   
                                                                              ==========               ============   
                                                                                                                      
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                                      
Cash paid during the period for interest                                      $        7               $         18   
                                                                              ==========               ============   
</TABLE>

(1) Amounts have been restated to 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 ending March 31, 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% 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 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 

                                       6
<PAGE>
 
for facilities consolidation expense. Of the merger expenses, a total of
approximately $2.9 million was accrued at December 31, 1997. As of March 31,
1998, approximately $1.2 million of the merger costs remain unpaid and are
expected to be paid prior to June 30, 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.  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 following is a summary of the estimated fair value of available-for-sale
securities at March 31, 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.

                                                        March 31, 1998
                                                        --------------
                                                        (in thousands)

            Commercial Paper                                 $46,632
            Obligations of U.S. Government agencies            4,700
                                                            --------
                                                             $51,332
                                                              ======

4.  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 three months ended March 31, 1998.

  Licenses are comprised of perpetual license fees, which are recognized as
revenue upon persuasive evidence of an arrangement, shipment of the product if
no significant vendor obligations remain has occurred, 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 of installation.
Product returns and sales allowances (which were not significant through March
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.

                                       7
<PAGE>
 
  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.

  One customer accounted for 31% of revenues for the three months ended March
31, 1998, and no customer accounted for over 10% of revenues for the three
months ended March 31, 1997.

5.  Comprehensive Income

     As of January 1, 1998, the Company adopted Statement No. 130, "Reporting
Comprehensive Income" (SFAS 130). Statement 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
shareholders' equity. Statement 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 shareholders'
equity to be included in other comprehensive income.

During the three months ended March 31, 1998 and 1997, total comprehensive
income (loss) amounted to $2.4 million and $(1.4) million, respectively. The
components of comprehensive income, net of related tax, for the three months
ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
 
                                               Three months ended March 31,
          (In thousands)                            1998      1997
                                                   -------  --------
        <S>                                        <C>      <C>
        Net income (loss)                          $2,289   $(1,486)
        Unrealized gain (loss) on securities           --        --
        Foreign currency translation adjustment      (118)     (130)
                                                   ------   -------
        Comprehensive income (loss)                $2,171   $(1,616)
                                                   ======   =======
</TABLE>

The components of accumulated comprehensive income (loss), net of related tax,
at March 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
 
          (In thousands)                            1998      1997
                                                   -------  --------
<S>                                                <C>      <C>
        Unrealized gain (loss) on securities      $   --   $    --
        Foreign currency translation adjustment      (420)     (302)
                                                    -----   -------
        Accumulated comprehensive income (loss)   $  (420) $   (302)
                                                    =====   =======
</TABLE>
6.  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 ended March 31, 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).

                                       8
<PAGE>
 
                 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
                    (in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                              Three months ended March 31,
                                                                                1998                1997
                                                                            -------------       -------------
<S>                                                                         <C>                 <C>         
Basic:
Total weighted average common and common equivalent
   shares outstanding                                                              14,557             13,397
Net income (loss)                                                         $         2,289     $       (1,483)   
Net income (loss) per share                                               $          0.16     $        (0.11)   
 
Diluted:
Weighted average Common stock outstanding                                          14,557             13,397
Common stock equivalents (treasury stock method)                                    1,712                 --
                                                                          ---------------     --------------
Total weighted average common and common equivalent
   shares outstanding                                                              16,269             13,397
Net income (loss)                                                         $         2,289     $       (1,483)   
Net income (loss) per share                                               $          0.14     $        (0.11)   
</TABLE>
                                                                                
7.    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 has no hedging contracts open at March 31, 1998. If considered
appropriate, the Company will enter into hedging contracts in the future.

8.  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 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 ended March 31, 1998, are charges of $159,000
representing the Company's share of losses in this joint venture.

9.  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 

                                       9
<PAGE>
 
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 that.

                                       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 in "Factors
That May Affect Future Results" as well as those discussed in this section and
elsewhere in this Report, and the risks discussed in the "Business Factors"
section 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.

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, 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.

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 if no significant vendor obligations remain has occurred, 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 March 31, 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 75% and 25% of the Company's total revenue for the three months
ended March 31, 1998, respectively, compared to 77% and 23% for the three months
ended March 31, 1997, respectively.

     License Revenue.  License revenue increased from $4,032,000 for the three
months ended March 31, 1997 to $10,210,000 for the three months ended March 31,
1998.  This increase was due primarily to the sale to one significant customer
and continuing acceptance of the Company's Explore and VIP products.

                                       11
<PAGE>
 
     Subscription and Maintenance Revenue.  Subscription and maintenance revenue
increased from $2,904,000 for the three months ended March 31, 1997 to
$4,019,000 for the three months ended March 31, 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
$1,410,000 for the three months ended March 31, 1997 to $3,447,000 for the three
months ended March 31,1998.  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 its 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, primarily Oracle, and shipping expenses.
Cost of licenses decreased from $174,000 for the three months ended March 31,
1997 to $67,000 for the three months ended March 31, 1998, representing 4.3% and
0.7% of license revenues for the three months ended March 31, 1997 and 1998,
respectively. This decrease in absolute dollars and as a percentage of revenues
in 1998 was due primarily to an increase in the number of customers providing
their own database software.

     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 $469,000 for the three
months ended March 31, 1997 to $684,000 for the three months ended March 31,
1998, representing 16.2% and 17.0% of subscription and maintenance revenues for
the three months ended March 31, 1997 and 1998, respectively.  The increase in
absolute dollars and 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 $993,000 for the three months ended March 31, 1997
to $1,711,000 for the three months ended March 31, 1998, representing 70.4% and
49.6% of service and other revenues for the three months ended March 31, 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
terms of percentages is due primarily to the increasing profit margin associated
with each individual contract due to management's continuing effort to more
efficiently manage them 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 $2,315,000 for 

                                       12
<PAGE>
 
the three months ended March 31, 1997 to $3,572,000 for the three months ended
March 31, 1998, representing 27.7% and 20.2% of total revenues for the three
months ended March 31, 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 increase in research and development expenses in absolute dollars
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 $5,133,000 for the three months ended March 31, 1997 to $7,556,000 for the
three months ended March 31, 1998, representing 61.5% and 42.7% of total
revenues for the three months ended March 31, 1997 and 1998, respectively. The
increase in sales and marketing expenses in absolute dollars 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 cost as a
percent of total revenues was due to the Company's growth in total revenues.
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 $1,025,000 for the
three months ended March 31, 1997 to $1,651,000 for the three months ended March
31, 1998, representing 12.3% and 9.3% of total revenues for the three months
ended March 31, 1997 and 1998, respectively. The increase in absolute dollars 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 cost as a percent of total revenues was due to the
Company's growth 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 decreased from $735,000 for the three months ended March 31, 1997 to
$504,000 for the three months ended March 31, 1998, representing 8.8% and 2.9%
of total revenues for the three months ended March 31, 1997 and 1998,
respectively.  The decrease from 1997 to 1998 was primarily due to the share in
losses of the EDTN joint venture in 1998 and a decrease in net cash provided by
operations offset by a higher level of investment in short-term securities.

PROVISION FOR INCOME TAXES

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<PAGE>
 
     The Company's provision for income taxes increased from $455,000 for the
three months ended March 31, 1997 to $650,000 for the three months ended March
31, 1998. The increase in the provision in 1998 is primarily due to increased
income generated by the Company and the Company's inability to fully utilize net
operating loss carryforwards and credit carryforwards generated in the prior
years. 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 March 31, 1998, the Company had approximately $57.1 million in cash,
cash equivalents and short-term investments.  Net cash provided by operating
activities was $854,000 for the three months ended March 31, 1998, primarily due
to net income of $2,289,000 and an increase in accrued liabilities of
$1,549,000, offset by an increase in accounts receivable of $724,000, a decrease
in deferred revenue of $1,859,000, and a decrease in accrued merger costs of
$1,705,000.

     As of March 31, 1998, the Company's principal commitments consisted of
obligations under operating and capital leases.  As of March 31, 1998, the
Company had $255,000 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 financings to consummate such potential acquisitions.

                                       14
<PAGE>
 
FACTORS THAT MAY AFFECT FUTURE RESULTS

     The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control.  The following
discussion highlights some of these risks.  These risks should be read in
conjunction with the "Business Factors" section 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 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 

                                       15
<PAGE>
 
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
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.

                                       16
<PAGE>
 
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 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 that.

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.  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 

                                       17
<PAGE>
 
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 Compliance"), Year 2000 Compliance 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.

The Company has operations in Bangalore, India with 259 employees as of March
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.

                                       18
<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 that.

Item 2.  Exhibits and Reports on Form 8-K

     (a)  Exhibits

     Exhibit 27.1  Financial Data Schedule (filed electronically)

     (b)  Reports on Form 8-K

     None.

                                       19
<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.



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

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