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

                                  FORM 10-QSB

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

                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997

/ /    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)

                                (415) 428-2700
             (Registrant's telephone number, including area code)


Indicate by check /X/ 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.

               (1)      Yes           /X/               No
                                     -----                  -----
               (2)      Yes           /X/               No
                                     -----                  -----

The number of shares outstanding of the registrant's common stock as of April
30, 1997 was 12,481,985.
<PAGE>
 
                            ASPECT DEVELOPMENT, INC.

                                    FORM 10-Q

                                      INDEX
<TABLE> 
<CAPTION> 

                                                                                     PAGE
<S>                                                                                 <C> 
PART I.  FINANCIAL INFORMATION                                                     
Item 1.           Financial Statements

                  Condensed Consolidated Balance Sheets
                  At March 31, 1997 and December 31, 1996                               3

                  Condensed Consolidated Statements of Income
                  For the three months ended
                  March 31, 1997 and March 31, 1996                                     4

                  Condensed Consolidated Statements of Cash Flows
                  For the three months ended
                  March 31, 1997 and March 31, 1996                                     5

                  Notes to Condensed Consolidated Financial Statements                  6

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

PART II. OTHER INFORMATION

Item 1.           Legal Proceedings                                                     17

Item 2.           Changes in Securities                                                 17

Item 3.           Defaults Upon Senior Securities                                       17

Item 4.           Submission of Matters to a Vote of Securities Holders                 17

Item 5.           Other Information                                                     17

Item 6.           Exhibits and Reports on Form 8-K                                      17

Signature                                                                               18

Exhibits:

                  11 - Computation of Net Income Per Share
                  for the three months ended
                  March 31, 1997 and March 31, 1996                                     19
</TABLE> 

                                       2
<PAGE>
 
PART 1.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

                                     ASSETS
<TABLE> 
<CAPTION> 
                                                                                        March 31,         December 31,
                                                                                          1997              1996 (1)
                                                                                     -------------      ---------------
                                                                                      (Unaudited)
<S>                                                                                  <C>                <C> 
Current assets:                                                                       
      Cash and cash equivalents                                                      $       6,711      $         9,632
      Short-term investments                                                                44,039               38,186
      Accounts receivable, net                                                               5,999                6,570
      Other current assets                                                                     966                  964
                                                                                     -------------      ---------------
              Total current assets                                                          57,715               55,352
Property and equipment, net                                                                  4,107                3,278
Other assets, net                                                                            1,107                  370
                                                                                     -------------      ---------------
              Total assets                                                           $      62,929      $        59,000
                                                                                     =============      ===============

                             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Accounts payable                                                               $         484      $           766
      Deferred revenue                                                                       7,435                5,049
      Capital lease obligations                                                                446                  482
      Third-party royalties and fees                                                           771                  972
      Other current liabilities                                                              2,491                2,598
                                                                                     -------------      ---------------
              Total current liabilities                                                     11,627                9,867
Capital lease obligations                                                                      274                  379
Stockholders' equity:
      Convertible preferred stock, $0.001 par value; 3,805,118 shares
         authorized, issuable in series, no shares issued
         and outstanding at March 31, 1997 and December 31, 1996                                --                   --
      Common stock, $0.001 par value per share; 20,000,000 shares
         authorized, 12,469,682 issued and outstanding
          at March 31, 1997 and 12,133,575 shares issued
         and outstanding at December 31, 1996                                               50,835               49,405
      Notes receivable from stockholders                                                      (320)                (320)
      Deferred compensation                                                                   (500)                (544)
      Accumulated translation adjustment                                                       (46)                  78
      Retained Earnings                                                                      1,059                  135
                                                                                     -------------      ---------------
              Total stockholders' equity                                                    51,028               48,754
                                                                                     -------------      ---------------

              Total liabilities and stockholders' equity                             $      62,929      $        59,000
                                                                                     =============      ===============
</TABLE> 
  
 (1)  Derived from audited financial statements as of December 31, 1996.

    See accompanying notes to Condensed Consolidated Financial Statements.

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

<TABLE>
<CAPTION>
                                                               Three months ended
                                                                    March 31,
                                                   ----------------------------------------
                                                           1997                  1996
                                                   ------------------    ------------------
<S>                                                <C>                   <C>
Revenues:
      Licenses                                     $            3,849    $            2,351
      Subscription and maintenance                              2,686                 1,938
      Service and other                                         1,141                   312
                                                   ------------------    ------------------
               Total revenues                                   7,676                 4,601
Cost of revenues:
      Licenses                                                    174                    99
      Subscription and maintenance                                445                   270
      Service and other                                           515                   206
                                                   ------------------    ------------------
               Total cost of revenues                           1,134                   575
                                                   ------------------    ------------------
Gross profit                                                    6,542                 4,026
Operating expenses:
      Research and development                                  1,873                 1,548
      Sales and marketing                                       3,089                 1,688
      General and administrative                                  817                   587
                                                   ------------------    ------------------
               Total operating expenses                         5,779                 3,823
                                                   ------------------    ------------------
Operating income                                                  763                   203
Interest/other income, net                                        616                     6
                                                   ------------------    ------------------
Income before income taxes                                      1,379                   209
Provision for income taxes                                        455                    21
                                                   ------------------    ------------------
Net income                                         $              924    $              188
                                                   ==================    ==================

Net income per share                               $             0.07    $             0.02
                                                   ==================    ==================

Shares used in per share computations                          13,948                10,852
                                                   ==================    ==================
</TABLE>


    See accompanying notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>
 
                            ASPECT DEVELOPMENT, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (IN THOUSANDS; UNAUDITED)
<TABLE> 
<CAPTION> 

                                                                                       Three months ended March 31,
                                                                                      1997                     1996
                                                                               -------------------      ------------------
<S>                                                                            <C>                      <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                     $               924      $              188
Adjustments to reconcile net income to net cash from operating activities
     Depreciation and amortization                                                             430                     240
     Changes in assets and liabilities:
         Accounts receivable                                                                   571                  (1,397)
         Prepaid expenses and other current assets                                             (16)                   (314)
         Accounts payable                                                                     (282)                    205
         Deferred revenue                                                                    2,386                     636
         Third-party royalties & fees                                                         (201)                      -
         Other current liabilities                                                            (107)                     86
         Other, net                                                                           (124)                      -
                                                                               -------------------      ------------------
Net cash provided by (used for) operating activities                                         3,581                    (356)

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures                                                                        (1,215)                   (146)
Purchase of short-term investments                                                         (18,396)                      -
Proceeds from maturities of short-term investments                                          12,543                       -
Decrease in employee notes receivable                                                           14                     150
Increase in other assets                                                                      (737)                    (32)
                                                                               -------------------      ------------------
Net cash provided by (used for) investing activities                                        (7,791)                    (28)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations                                               (141)                   (191)
Proceeds from issuance of common stock                                                       1,430                       6
                                                                               -------------------      ------------------
Net cash provided by (used for) financing activities                                         1,289                    (185)

Net increase (decrease) in cash and cash equivalents                                        (2,921)                   (569)
Cash and cash equivalents at beginning of period                                             9,632                   3,159
                                                                               -------------------      ------------------
Cash and cash equivalents at end of period                                     $             6,711      $            2,590
                                                                               ===================      ==================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest                                       $                18      $               35
                                                                               ===================      ==================

Income taxes paid                                                              $                 0      $               25
                                                                               ===================      ==================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Equipment acquired under capital lease obligations                             $                 0      $              380
                                                                               ===================      ==================
</TABLE> 

    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 as included in the
Company's Form 10-KSB, for the fiscal year ended December 31, 1996, filed with
the Securities and Exchange Commission on March 19, 1997. The consolidated
results of operations for the period ending March 31, 1997 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.

         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. The Company has begun a hedging program to hedge
certain foreign currency accounts receivable.

2.       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, 1997. The securities are carried at
amortized cost which approximates fair value, and therefore, there are no
unrealized gains or losses recorded to stockholders' equity.

                                       6
<PAGE>
 
                                                             March 31, 1997
                                                             --------------
                                                             (in thousands)

       Commercial Paper                                         $29,846
       Obligations of U.S. Government agencies                   14,193
                                                                -------
                                                                $44,039
                                                                =======


3.       Revenue Recognition

         Licenses are comprised of perpetual license fees, which are recognized
as revenue after execution of a license agreement or receipt of a definitive
purchase order, and shipment of the product if no significant vendor obligations
remain 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, 1997) 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,
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.

         No customer accounted for over 10% of revenues for the three months
ended March 31, 1997 and two customers accounted for 17% and 14% of revenues
during the three months ended March 31, 1996.

4.       Net Income Per Share

         Net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consists of shares issuable upon the exercise
of stock options (using the treasury stock method). Pursuant to the Securities
and Exchange Commission Staff Accounting Bulletins and staff policy, such
computations prior to the Company's Initial Public Offering ("IPO") include all
common and common equivalent shares issued within 12 months of the filing date
of the Company's IPO as if they were outstanding for all periods presented using
the treasury stock method.

         In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in 

                                       7
<PAGE>
 
primary earnings per share for the first quarter ended March 31, 1997 and March
31, 1996 of $0.00 and $0.01 per share, respectively. The impact of Statement 128
on the calculation of fully diluted earnings per share for these quarters is not
expected to be material.


5.       Line of Credit

         At March 31, 1997, the Company had available a $2 million bank line of
credit agreement, secured by certain assets of the Company. The Company may
utilize up to $2 million of this line for spot and future foreign exchange
contracts. The line expires in April 1997. Borrowings bear interest at the
bank's prime rate plus 0.5%. The Company had entered into two forward exchange
contracts under the foreign exchange provisions of the line of credit as of
March 31, 1997. There were no other borrowings outstanding under the lines as of
March 31, 1997. The bank line of credit was not renewed in April 1997. The
Company is securing a bank foreign currency guidance line for up to $5 million
in forward exchange contracts.

6.       Income Taxes

         The Company's provision for income taxes for the three months ended
March 31, 1997 is based upon the Company's estimate of the effective tax rate
for 1997. The Company's effective tax rate for the three month period ended
March 31, 1997 was 33%. The Company's accrued income taxes was reduced by a tax
benefit from employee stock option transactions which will be credited directly
to stockholders' equity when realized.

7.       Initial Public Offering

         In May 1996, the Company completed its initial public offering and
issued 2,322,500 new shares of its common stock to the public at $20.00 per
share. The Company received approximately $42.3 million in cash, net of
underwriting discounts, commissions and other offering costs. Simultaneously
with completion of the offering, 3,687,117 outstanding shares of preferred stock
were automatically converted into common stock on a one-to-one basis.

                                       8
<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, 1996, filed with the Securities and Exchange Commission on March
19, 1997.

RESULTS OF OPERATIONS

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. The
Company recognizes revenues in accordance with the American Institute of
Certified Public Accountants Statement of Position 91-1 on Software Revenue
Recognition. License revenues are recognized after execution of a license
agreement, or receipt of a definitive purchase order, and shipment of the
product if no significant vendor obligations remain and collection of the
resulting receivables is deemed probable. Product returns and sales allowances
(which were not significant through March 31, 1997) 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.

         Licenses.  
         --------
         Revenues from licenses increased from $2,351,000 for the three months
ended March 31, 1996 to $3,849,000 for the three months ended March 31, 1997
due primarily to continuing increased acceptance of the Company's Explore and
VIP products.

         Subscription and Maintenance Revenue.  
         ------------------------------------
         Subscription and maintenance revenue increased from $1,938,000 for
the three months ended March 31, 1996 to $2,686,000 for the three months ended
March 31, 1997 due primarily to renewals of maintenance agreements from the
increased installed base of customers and to the introduction of on-line
subscriptions.

         Service and Other Revenue.  
         -------------------------
         Service and other revenue increased from $312,000 for the three
months ended March 31, 1996 to $1,141,000 for the three months ended March 31,
1997 due
                                       9
<PAGE>
 
primarily to an increase in the number and size of consulting contracts in 1997.
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 increased from $99,000 for the three months ended March 31, 1996 to
$174,000 for the three months ended March 31, 1997 due primarily to the higher
revenue base. Cost of licenses as a percent of license revenues in the
quarters ended in 1997 and 1996 were 4.5% and 4.2%, respectively.

         Cost of Subscription and Maintenance Revenues. 
         ---------------------------------------------
         Cost of subscription and maintenance revenues consists primarily of
license fees and royalties paid to third-party vendors, primarily Information
Handling Systems for the CAPS reference data product, and personnel-related
costs incurred in providing centralized telephone support and related
technical support to customers. Cost of subscription and maintenance revenues
increased from $270,000 for the three months ended March 31, 1996 to $445,000
for the three months ended March 31, 1997. Cost of subscription and
maintenance revenues as a percent of subscription and maintenance revenues, in
the quarters ended in 1997 and 1996 were 16.6%, and 13.9%, respectively. The
increased percentage in 1997 is 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
$206,000 for the three months ended March 31, 1996 to $515,000 for the three
months ended March 31, 1997. Cost of service and other revenues as a percent
of service and other revenues were 45.1% and 66.0%, respectively, in the
quarters ended in 1997 and 1996. The decrease in cost of service and other
revenues as a percent of service and other revenues was due primarily to
increased growth in service revenue and the increased efficiency of the
consulting workforce.

OPERATING EXPENSES
------------------

         Research and Development.  
         ------------------------
         Research and development expenses consist primarily of engineering
personnel costs. Research and development expenses increased from $1,548,000
for the three months ended March 31, 1996 to $1,873,000 for the three months
ended March 31, 1997. Research and development expenses as a percent of total
revenues were 24.4% and 33.6%, respectively, in the quarters ended in 1997 and
1996. The decrease in cost of research and development as a percent of total
revenues was due principally to the Company's growth in total revenues
partially offset by increased development and support staffing.

         Sales and Marketing.  
         -------------------
         Sales and marketing expenses include salaries, commissions,
advertising, travel, trade show, public relations and other selling and
marketing-related expenses. Sales and marketing expenses increased from
$1,688,000 for the three months ended March 31, 1996 to $3,089,000 for the
three months ended March 31, 1997. Sales and marketing expenses as a percent
of total revenues were 40.2% and 36.7%, respectively, in the quarters ended in
1997 and 1996. The increase in sales and marketing expenses both in absolute
dollars and as a percentage of

                                       10
<PAGE>
 
revenues was due primarily to the addition of sales marketing and consulting
personnel and increased marketing activities, including trade shows, promotional
expenses and increased geographic coverage. The Company expects sales and
marketing expenses to increase in absolute dollars while remaining approximately
level as a percent of revenues as the Company releases and promotes new
products; however, there can be no assurance that increased sales and marketing
spending will result in increased revenues.

         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 $587,000 for the three months ended
March 31, 1996 to $817,000 for the three months ended March 31, 1997. General
and administrative expenses as a percent of total revenues were 10.6% and
12.8%, respectively, in the quarters ended in 1997 and 1996. 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
revenue was due to the Company's growth in total revenues.

INTEREST/OTHER INCOME AND EXPENSE
---------------------------------

         Interest and other income and expense represents interest income earned
on the Company's cash, cash equivalents and short-term investments, and other
items. Interest and other income and expense increased from $6,000 for the three
months ended March 31, 1996 to $616,000 for the three months ended March 31,
1997 primarily due to higher cash balances resulting from the infusion of cash
from the initial public offering.

PROVISION FOR INCOME TAXES
--------------------------

         The Company's effective income tax rate for the three month period
ended March 31, 1997 was 33% compared to 10% for the comparable period in the
prior year. The increase in the effective income tax rate was primarily related
to increased net income before taxes which resulted in higher federal income
taxes, and to the full utilization of net operating loss carryforwards and
utilization of a substantial portion of credit carryforwards in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

         In May 1996, the Company completed its initial public offering, and its
common stock began trading on the NASDAQ National Market System under the symbol
ASDV. Through the offering, the Company sold 2,322,500 new shares of its common
stock which generated approximately $42.3 million of cash, net of underwriting
discounts, commissions and other offering costs.

         As of March 31, 1997, the Company had approximately $50.8 million in
cash, cash equivalents and short-term investments. Net cash provided by
operating activities was $3,537,000 for the three months ended March 31, 1997,
and was primarily due to net income of $924,000, an increase in deferred revenue
of $2,386,000, and a decrease in accounts receivable of $571,000, offset by a
decrease in accounts payable of $282,000, decrease in accrued liabilities of
$107,000 and a decrease in third-party royalties & fees of $201,000.

                                       11
<PAGE>
 
         At March 31, 1997, the Company had available a $2 million bank line of
credit agreement, secured by certain assets of the Company. The Company may
utilize up to $2 million of this line for spot and future foreign exchange
contracts. The line expires in April 1997. Borrowings bear interest at the
bank's prime rate plus 0.5%. The Company had entered into two forward exchange
contracts under the foreign exchange provisions of the line of credit as of
March 31, 1997. There were no other borrowings outstanding under the lines as of
March 31, 1997. The bank line of credit was not renewed in April 1997. The
Company is securing a bank foreign currency guidance line for up to $5 million
in forward exchange contracts.

         As of March 31, 1997, the Company's principal commitments consisted of
obligations under operating and capital leases. As of March 31, 1997, the
Company had $720,000 in outstanding borrowings under capital leases which are
payable through 1999.

         The Company believes that its current cash balances, its credit
facility 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, although there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies, the Company from time to time
evaluates potential acquisitions of businesses, products and technologies and
may in the future require additional equity or debt financings to consummate
such potential acquisitions.

                                       12
<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, 1996, filed with the Securities
and Exchange Commission on March 19, 1997.

FLUCTUATIONS IN OPERATING RESULTS
---------------------------------

         The Company's revenues and results of operations have varied on a
quarterly and an annual basis in the past and are expected to vary significantly
in the future. The Company's revenues and results of operations are difficult to
forecast and 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.

         License 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

                                       13
<PAGE>
 
LENGTHY SALES AND IMPLEMENTATION CYCLES
---------------------------------------

         The license 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 a number
of significant delays over which the Company may have little or no control.
Accordingly, any delay in the sale or customer implementation of a larger
license or a number of smaller licenses would have a material adverse effect on
the Company's business, financial condition or results of operations and cause
the Company's operating results to vary significantly from quarter to quarter.

RELIANCE ON ACCEPTANCE OF CSM SOLUTION
--------------------------------------

         Substantially all of the Company's revenues are derived from fees for
licensed products and for services which enable component and supplier
management ("CSM") by manufacturers. The Company's future financial performance
will depend to a large extent on the growth in the number of organizations
adopting client/server software and reference data solutions for CSM and
engaging outside vendors to provide and maintain such solutions. The Company's
future growth, if any, will also depend upon the extent to which such
organizations choose to implement CSM solutions in general, and the Company's
CSM solutions in particular, across their enterprises and on their continued
reliance on the Company's subscription, maintenance and support offerings.
Because the CSM market is new and evolving, it is difficult to assess or predict
with any assurance its size or growth rate, if any. There can be no assurance
that the market for CSM products and services will develop, or that the
Company's CSM products or services will achieve market acceptance. If the CSM
market fails to develop, develops more slowly than expected or attracts new
competitors, or if the Company's products do not achieve broader market
acceptance, the Company's business, financial condition or results of operations
could be materially adversely affected.

DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS
------------------------------------------

         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. The Company first made its Explore client/server
software and VIP reference databases generally commercially available in the
second quarter of 1995, and has issued regular updates since then. As a result,
the Company has only a limited number of fully implemented, operational product
installations at customer sites. There can be no assurance that such products
will not require modifications to satisfy performance requirements of existing
or potential customers or to fix previously undetected errors. 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 

                                       14
<PAGE>
 
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.

MANAGEMENT OF EXPANDING OPERATIONS
----------------------------------

         The Company's business has grown rapidly in recent periods, with
revenues increasing from $8.5 million in 1994, to $13.7 million in 1995, to
$24.2 million in 1996 and to $7.7 million in the first three months of 1997. 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 order to successfully manage its
future growth, if any, the Company will be required to hire additional general
and administrative personnel and to augment its existing financial and
management systems or to implement new such systems. There can be no assurance
that the existing and new management will be able to augment or to implement
such systems efficiently or on a timely basis, and the failure to do so could
have a material adverse effect on the Company's business, financial condition or
results of operations. There can be no assurance that the Company will be able
to manage any future expansion, if any, successfully; and any inability to do so
would have a material adverse effect on the Company's business, financial
condition or results of operations. 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.

DISTRIBUTION RISKS
------------------

         An integral part of the Company's strategy is to expand its direct
sales force and to establish marketing, selling and consulting relationships
both domestically and internationally. In addition, the Company intends to
leverage its relationships with hardware and software vendors and systems
integrators to encourage these parties to recommend or distribute the Company's
products. The Company has invested resources and may invest additional resources
to develop these channels. 

                                       15
<PAGE>
 
The ability of the Company to achieve revenue growth in the future will depend
on its success in adding a substantial number of direct sales employees and
establishing marketing, selling and consulting relationships during 1997 and
future periods. There can be no assurance that the Company will be able to
attract sufficient direct sales personnel, hardware and software vendors,
systems integrators or other marketing or selling partners to market the
Company's products effectively. There can be no assurance that the cost of the
Company's investment in direct and indirect sales channels will not exceed the
revenues generated from such investment, if any, or that the Company's sales and
marketing organization will successfully compete against the sales and marketing
organizations of the Company's competitors.

NEED TO DEVELOP, MAINTAIN AND IMPROVE REFERENCE DATA PRODUCTS
-------------------------------------------------------------

         The Company's VIP component reference databases are composed of a large
amount of information supplied by component suppliers which requires frequent
updating and expansion. As a result, the Company must continue to invest
substantial resources in its reference data products. The information regarding
components and suppliers contained in the Company's VIP component reference
databases is not proprietary to the Company and is derived from supplier
databooks. Therefore, other parties may independently create similar reference
data products. The Company first released its VIP component reference databases
in 1995, and accordingly has only limited experience with building, maintaining
and upgrading such products. Furthermore, the Company currently plans to
develop, license or acquire reference data products for additional global
vertical markets, which will impose significant additional burdens on its data
product development efforts. As the information contained in the Company's
reference data products expands or if the demand for frequency of updates
increases, unforeseen problems with entering, updating, managing or delivering
the data may arise. Because the Company's customers rely on the information
contained in the Company's VIP family of component reference databases to design
and procure components for their products, the accuracy, completeness and
currency of the information in those data products is critical. To the extent
that the Company is unable to keep its reference data products accurate,
complete or current, its customers may become dissatisfied with the Company's
products and discontinue their purchase of the Company's products and services.
In the event that the Company's VIP family of component reference databases is
or is perceived to be inaccurate, incomplete or out-of-date, the Company's
business, financial condition or results of operations could be materially
adversely affected.

NEED TO DEVELOP NEW SOFTWARE PRODUCTS AND ENHANCEMENTS
------------------------------------------------------

         The market for the Company's client/server software products is
characterized by rapid technological change, changing customer requirements,
frequent new product introductions and evolving industry standards. The
introduction of products incorporating new technologies and the emergence of new
industry standards could render existing products obsolete or unmarketable. The
life cycles of the Company's client/server software products are difficult to
estimate. The Company's future success will depend in large part upon its
ability to enhance its current client/server software products and to develop
and introduce on a timely basis new products that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. The success of the Company's software
development efforts will depend on various factors, including the integration of
additional software modules under development with existing products. There can
be no assurance that the Company 

                                       16
<PAGE>
 
will be successful in developing and marketing product enhancements or new
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction or marketing of these products, or that
the Company's new products and product enhancements will adequately address the
requirements of the marketplace and achieve market acceptance. If the Company is
unable to develop and introduce new software products or enhancements of
existing products in a timely manner or if the Company experiences delays in the
commencement of commercial shipments of new products and enhancements, the
Company's business, financial condition or results of operations could be
materially adversely affected.

                                       17
<PAGE>
 
PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

         Not Applicable.

Item 2.  Changes in Securities

         Not Applicable.

Item 3.  Defaults Upon Senior Securities

         Not Applicable.

Item 4.  Submission of Matters to a Vote of Security Holders

         Not Applicable.

Item 5   Other Information

         Not applicable.

Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits

         Exhibit 11.1 --  Computation of Net Income Per Share

         Exhibit 27   --  Financial Data Schedule

          (b)     Reports on Form 8-K

                  None.

                                       18
<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 9, 1997                        /s/  David S. Dury
                                   ------------------
                                   David S. Dury
                                   Vice President,
                                   Chief Financial Officer
                                   (Principal Financial and
                                   Accounting Officer)

                                       19