<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 SEPTEMBER 30, 1996

[ ] 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 October
25, 1996 was 11,823,981.
<PAGE>
 
                           ASPECT DEVELOPMENT, INC.

                                   FORM 10-Q

                                     INDEX
 
PART 1.    FINANCIAL INFORMATION                                         PAGE
<TABLE>
<CAPTION>
<S>        <C>                                                           <C>
        
Item 1.    Financial Statements
        
           Condensed Consolidated Balance Sheets
           At September 30, 1996 and December 31, 1995                      3
        
           Condensed Consolidated Statements of Income
           For the three months and nine months ended
           September 30, 1996 and September 30, 1995                        4
        
           Condensed Consolidated Statements of Cash Flows
           For the nine months ended
           September 30, 1996 and September 30, 1995                        5
        
           Notes to Condensed Consolidated Financial Statements             6
        
Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                        8
        
PART 2.    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
        
Signatures                                                                 18
        
Exhibits
        
           11 - Computation of Net Income Per Share for the three 
           months and nine months ended September 30, 1996 and 
           September 30, 1995                                              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)
<TABLE>
<CAPTION>
                                                            Sept. 30,           Dec. 31,
                                                              1996              1995 (1)
                                                           ---------            --------
                                                          (unaudited)
<S>                                                        <C>                  <C> 
                                          ASSETS
Current assets:
  Cash and cash equivalents                                   $2,513              $3,159
  Short-term investments                                      42,898                  --
  Accounts receivable                                          5,782               4,382
  Other current assets                                           903                 694
                                                          ----------          ----------
      Total current assets                                    52,096               8,235
Property and equipment, net                                    2,763               1,397
Other assets, net                                                370                 347
                                                          ----------          ----------
      Total assets                                          $ 55,229              $9,979
                                                          ==========          ==========

                         LIABILITIES AND STOCKHOLDERS' EQUITY      
Current liabilities:                                       
  Accounts payable                                           $   503                $224
  Deferred revenue                                             4,495               4,338
  Capital lease obligations                                      526                 531
  Third-party royalties and fees                                 761                 817
  Other current liabilities                                    2,204               1,301
                                                             -------            --------
                                                           
      Total current liabilities                                8,489               7,211
Capital lease obligations                                        466                 634
Stockholders' equity:                                      
  Convertible preferred stock, $0.001 par value;           
    3,805,118 shares authorized, no shares issued and      
    outstanding at September 30, 1996 and 3,687,117        
    shares issued and outstanding at December 31, 1995            --               4,916
  Common stock, $0.001 par value per share; 20,000,000     
    shares authorized, 11,809,261 issued and outstanding   
    at September 30, 1996 and 5,385,312 shares issued      
    and outstanding at December 31, 1995                      48,381                 653
  Notes receivable from stockholders                            (320)               (320)
  Deferred compensation                                         (485)               (241)
  Accumulated deficit                                         (1,302)             (2,874)
                                                           ---------            --------
       Total stockholders' equity                             46,274               2,134
                                                           ---------            --------
       Total liabilities and stockholders' equity            $55,229              $9,979 
                                                           =========            ========
</TABLE>
 
(1) Derived from audited financial statements as of December 31, 1995.

    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                Nine months ended
                                                   September 30,                    September 30,
                                               ------------------------------------------------------
                                                1996            1995            1996           1995
                                               -------        -------          -------        -------
<S>                                            <C>            <C>              <C>            <C> 
Revenues:
       Licenses                                $ 2,949        $ 1,603          $ 8,414        $ 4,943
       Subscription and maintenance              2,127          1,389            6,313          3,350
       Service and other                         1,346            366            2,083          1,080
                                               -------        -------          -------        -------
             Total revenues                      6,422          3,358           16,810          9,373
Cost of revenues:                                                                             
       Licenses                                    181             54              427            268
       Subscription and maintenance                323            225              851            696
       Service and other                           482            100            1,080            447
                                               -------        -------          -------        -------
             Total cost of revenues                986            379            2,358          1,411
                                               -------        -------          -------        -------
Gross profit                                     5,436          2,979           14,452          7,962
Operating expenses:                                                                           
       Research and development                  1,769          1,348            5,111          3,549
       Sales and marketing                       2,240          1,034            6,096          2,886
       General and administrative                  892            440            2,227          1,153
                                               -------       --------          -------        -------
             Total operating expenses            4,901          2,822           13,434          7,588
                                               -------       --------          -------        -------
Operating income                                   535            157            1,018            374
Interest/other income(expense)                     605             (3)             735              1
                                               -------        -------          -------        -------
Income before income taxes                       1,140            154            1,753            375
Provision for income taxes                         120              7              181             17
                                               -------        -------          -------        -------
Net income                                     $ 1,020        $   147          $ 1,572        $   358
                                               =======        =======          =======        =======
Net income per share                           $  0.07        $  0.01          $  0.13        $  0.03
                                               =======        =======          =======        =======
Shares used in per share computations           13,761         11,001           12,340         10,870
                                               =======        =======          =======        =======
</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>
                                                       Nine months ended September 30,
                                                            1996            1995
                                                       --------------   -------------
<S>                                                    <C>              <C> 
CASH FLOWS FROM OPERATING ACTIVITIES                 
Net Income                                                    $ 1,572         $   358
Adjustments to reconcile net income to net cash      
   from operating activities                         
      Depreciation and amortization                               939             294
      Noncash legal dispute settlement charge                      90               -
      Changes in assets and liabilities:             
         Accounts receivable                                   (1,400)         (1,996)
         Prepaid expenses and other current assets               (209)           (113)
         Accounts payable                                         279            (104)
         Accrued liabilities                                      903             402
         Deferred revenue                                         157             360
         Third party royalties & fees                             (56)             76
                                                              -------         -------
Net cash provided by (used for) operating activities            2,275            (723)
                                                     
CASH FLOWS FROM INVESTING ACTIVITIES                 
Capital expenditures                                           (1,825)           (156)
Purchases of short term investments                           (46,898)              -
Proceeds from maturities of short term investments              4,000               -
Increase in other assets                                          (23)           (210)
                                                              -------         -------
Net cash used for investing activities                        (44,746)           (366)
                                                     
CASH FLOWS FROM FINANCING ACTIVITIES                 
Proceeds from Initial Public Offering                          42,286               -
Principal payments on capital lease obligations                  (553)           (332)
Proceeds from issuance of common stock                             92              58
                                                              -------         -------
Net cash provided by (used for) financing activities           41,825            (274)

Net decrease in cash and cash equivalents                        (646)         (1,363)
Cash and cash equivalents at beginning of period                3,159           2,437
                                                              -------         -------
Cash and cash equivalents at end of period                    $ 2,513         $ 1,074
                                                              =======         =======
                                                     
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION     
Cash paid during the period for interest                      $   188         $    56
                                                              =======         =======

Income taxes paid                                             $    71         $     3
                                                              =======         =======
                                                     
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Equipment acquired under capital lease obligations            $   380         $   577
                                                              =======         =======
Issuance of common stock for note receivable                  $     -         $   210
                                                              =======         =======
</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
was incorporated in 1990 and was in the development stage and engaged primarily
in research and development until 1992. 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 Registration Statement on Form SB-2 as declared effective by the
Securities and Exchange Commission on May 23, 1996 (Reg. No. 333-3840-LA). The
consolidated results of operations for the period ending September 30, 1996 are
not necessarily indicative of the results to be expected for any subsequent
interim or annual period. The December 31, 1995 condensed consolidated balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.

     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.

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 September 30, 1996. The securities are carried at amortized
cost which approximates fair value, and therefore, there are no unrealized gains
or losses recorded to stockholders' equity.

                                               September 30, 1996
                                               ------------------
                                                 (in thousands)

        Commercial Paper                            $34,398
        Obligations of U.S. Government Agencies       8,500
                                                     --------
                                                     $42,898
                                                     ========

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

                                       6
<PAGE>
 
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 September 30, 1996) 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 typically retains ownership of technology
developed under these agreements.


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 consist of the incremental common shares
issuable upon conversion of the Series A, B, and C convertible preferred stock
(using the if-converted method) and shares issuable upon the exercise of options
(using the treasury stock method). Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins and staff policy, for the period prior to
the Company's Initial Public Offering, such computations include all common and
common equivalent shares issued within 12 months of the filing date of the
Company's Registration Statement on Form SB-2 as if they were outstanding for
all periods presented using the treasury stock method.

5.   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.

6.   Settlement of Dispute

     In May 1996, the Company issued an option to a third party to purchase up
to 100,000 shares of common stock at a price of $8.10 per share to obtain the
release of all claims arising from a dispute with such party. The Company
recorded a charge of $90,000 in connection with this grant. Such amount is
included within Interest/other income(expense) for the nine months ended
September 30, 1996.

                                       7
<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 "Risk Factors" section
included in the Company's Registration Statement on Form SB-2 as declared
effective by the Securities and Exchange Commission on May 23, 1996 (Reg. No.
333-3840-LA).

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 occasionally, for its reference data products if sold
as a perpetual license. 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 September 30,
1996) 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 $1,603,000 for the three months ended
September 30, 1995, to $2,949,000 for the three months ended September 30, 1996,
and increased from $4,943,000 for the nine months ended September 30, 1995, to
$8,414,000 for the nine months ended September 30, 1996. This increase was due
primarily to the increased acceptance of the Company's Explore products.

     Subscription and Maintenance Revenues. 
     -------------------------------------
     Subscription and maintenance revenue increased from $1,389,000 for the
three months ended September 30, 1995, to $2,127,000 for the three months ended
September 30, 1996, and increased from $3,350,000 for the nine months ended
September 30, 1995, to $6,313,000 for the nine months ended September 30, 1996.
This increase was due primarily to the renewals of subscriptions and maintenance
agreements from the installed base of customers and the increased market
acceptance of the Company's Explore and VIP products.

     Service and Other Revenue. 
     -------------------------
     Service and other revenue increased from $366,000 for the three months
ended September 30, 1995, to $1,346,000 for the three months ended September 30,
1996, and increased from $1,080,000 for the nine months ended September 30,
1995, to $2,083,000 for the nine months ended September 30, 1996. This increase
was due primarily to the increased number

                                       8
<PAGE>
 
and size of consulting contracts in 1996 offset by a decrease in development
revenues caused by the conclusion of a development contract in 1995.

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 $54,000 for the three months ended September 30, 1995, to
$181,000 for the three months ended September 30, 1996, and increased from
$268,000 for the nine months ended September 30, 1995, to $427,000 for the nine
months ended September 30, 1996, representing 3.4%, 6.1%, 5.4% and 5.1% of
license revenues for the three months ended September 30, 1995 and 1996 and for
the nine months ended September 30, 1995 and 1996. The cost of licenses as a
percent of license revenues varies due to the mix of products licenses, some of
which require third party royalties.

     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 $225,000 for the three months ended September 30, 1995, to $323,000 for the
three months ended September 30, 1996, and increased from $696,000 for the nine
months ended September 30, 1995, to $851,000 for the nine months ended September
30, 1996, representing 16.2%, 15.2%, 20.8% and 13.5% of subscription and
maintenance revenues for the three months ended September 30, 1995 and 1996 and
for the nine months ended September 30, 1995 and 1996, respectively. While the
absolute dollars increased for each period presented, the cost of subscription
and maintenance revenues decreased as a percentage of related revenues over such
periods primarily as a result of allocating related costs over a larger customer
base.

     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 $100,000 for the
three months ended September 30, 1995, to $482,000 for the three months ended
September 30, 1996, and increased from $447,000 for the nine months ended
September 30, 1995, to $1,080,000 for the nine months ended September 30, 1996,
representing 27.3%, 35.8%, 41.4% and 51.8% of service and other revenues for the
three months ended September 30, 1995 and 1996 and for the nine months ended
September 30, 1995 and 1996, respectively. The increase in cost of service and
other revenues as a percent of service and other revenues was due primarily to
an increase in the number of consultants being engaged by the Company in advance
of the build up of consulting revenues.

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

     Research and Development. 
     -------------------------
     Research and development expenses consist primarily of engineering
personnel costs. Research and development expenses increased from $1,348,000 for
the three months ended September 30, 1995, to $1,769,000 for the three months
ended September 30, 1996, and increased from $3,549,000 for the nine months
ended September 30, 1995, to $5,111,000 for the nine months ended September 30,
1996, representing 40.1%, 27.5%, 37.9% and 30.4% of total revenues for the three
months ended September 30, 1995 and 1996 and for the nine months ended September
30, 1995 and 1996, respectively. The increase in research and development
expenses in absolute dollars was primarily attributable to increased staffing
and associated support for technical staff throughout 1995 and 1996. The Company
believes that its research and development expenses will increase in absolute
dollars in the future as the Company expands its staffing.

                                       9

<PAGE>
 
     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 $1,034,000 for the three
months ended September 30, 1995, to $2,240,000 for the three months ended
September 30, 1996, and increased from $2,886,000 for the nine months ended
September 30, 1995, to $6,096,000 for the nine months ended September 30, 1996,
representing 30.8%, 34.9%, 30.8% and 36.3% of total revenues for the three
months ended September 30, 1995 and 1996 and for the nine months ended September
30, 1995 and 1996, respectively. The increase in sales and marketing expenses
both in absolute dollars and as a percentage of revenues was due primarily to
the addition of sales and marketing personnel and increased marketing
activities, including trade shows and promotional expenses. The Company expects
sales and marketing expenses to increase in absolute dollars 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 $440,000 for the three months ended
September 30, 1995, to $892,000 for the three months ended September 30, 1996,
and increased from $1,153,000 for the nine months ended September 30, 1995, to
$2,227,000 for the nine months ended September 30, 1996, representing 13.1%,
13.9%, 12.3% and 13.2% of total revenues for the three months ended September
30, 1995 and 1996 and for the nine months ended September 30, 1995 and 1996,
respectively. The increase in general and administrative expenses was primarily
the result of increased staffing and associated expenses necessary to manage and
support the Company's growth. The Company believes that its general and
administrative expenses will increase in absolute dollars in the future as the
Company expands its staffing.

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 a net expense of
$3,000 for the three months ended September 30, 1995, to net income of $605,000
for the three months ended September 30, 1996 and from net income of $1,000 for
the nine months ended September 30, 1995, to $735,000 for the nine months ended
September 30, 1996, primarily due to higher cash balances resulting from the
infusion of cash from the initial public offering, offset in the second quarter
of 1996 by a $90,000 expense related to the settlement of a dispute.

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

     The Company has provided for income taxes at an estimated effective tax
rate of 10% for the nine months ended September 30, 1996. The 10% rate has been
determined based on projected income for the year offset by utilization of
available losses and credits from prior years. The rate for the full year may
vary depending on actual income for the year and the amount of any nondeductible
temporary differences which cannot be benefited.

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.

                                       10
<PAGE>
 
     As of September 30, 1996, the Company had approximately $45.4 million in
cash, cash equivalents and short-term investments. Net cash provided by
operating activities was $2,275,000 for the nine months ended September 30,
1996, and was primarily due to net income of $1,572,000 and increases in
accrued liabilities of $903,000 and accounts payable of $279,000 offset by an
increase in accounts receivable of $1,400,000 and prepaid expenses and other
current assets of $209,000.

     At September 30, 1996, the Company had available a $2 million bank line of
credit agreement, secured by certain assets of the Company. Borrowings bear
interest at the bank's prime rate plus 0.5%. The Company also had available a
$500,000 capital lease line of credit. There were no borrowings outstanding
under these lines of credit as of September 30, 1996.

     As of September 30, 1996, the Company's principal commitments consisted of
obligations under operating and capital leases. As of September 30, 1996, the
Company had $1.0 million 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.

                                       11
<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 "Risk Factors" section included in the Company's
Registration Statement on Form SB-2 as declared effective by the Securities and
Exchange Commission on May 23, 1996 (Reg. No. 333-3840-LA).

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.

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


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 customer regarding the use and
benefits of the Company's products. In addition, the implementation of the
Company's

                                       12
<PAGE>
 
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 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.

LIMITED HISTORY OF PROFITABILITY
--------------------------------

     The Company was founded in 1990 and commenced shipment of its initial
products in 1992. The Company did not achieve operating profitability on a
quarterly basis until the fourth quarter of 1994. Accordingly, the Company has
only a limited operating history upon which an evaluation of its business and
prospects can be based. Although the Company has experienced significant growth
in revenues during recent periods, there can be no assurance that the Company
will sustain such growth or that the Company will remain profitable in the
future on a quarterly or an annual basis. As of September 30, 1996, the Company
had an accumulated deficit of approximately $1.3 million.


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

     Substantially all of the Company's revenues are derived from fees and
subscriptions 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 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.

                                       13
<PAGE>
 
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 $4.0 million in 1993, to $8.5 million in 1994, to $13.7 million
in 1995 and to $16.8 million in the first nine months of 1996. 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
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.

COMPETITION
-----------

     The market for the Company's products is competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company's products are targeted at the
emerging market for open, client/server software solutions, and the Company's
competitors offer a variety of products and services to address this market.
Among the Company's principal competitors are Cadis, a privately held software
company, and the Information Handling Systems division of IHS Group, Inc.
("IHS"), a privately held software and data publishing company. The Company has
licensed a reference data product from IHS since 1992 which the Company
continues to offer on a limited basis to certain current and potential customers
who typically use it in addition to the Company's VIP reference databases.
Because IHS competes directly with the Company, there can be no assurance that
it will not seek to terminate the Company's license to the IHS reference data
product. The Company anticipates that its revenues from subscription agreements
for the IHS reference data product will not be material in the current period or
future periods and that subscription agreements and renewals for the IHS
reference data product will decrease over time as the Company's reference data
products become more comprehensive. However, if IHS were to terminate such
license, there can be no assurance that the Company would be able to retain all
the customers who license such data. The Company also currently faces indirect
competition from third-party professional service organizations and internal

                                       14
<PAGE>
 
management information systems and computer-aided design departments of
potential customers that develop custom internal software.

     In the future, the Company could experience additional competition from
other established or emerging companies as the client/server application
software market continues to develop and expand. To the extent that the Company
expands into Internet-based or other forms of delivery of data, the Company may
encounter additional competition from its existing competitors and other
established or emerging companies. Potential competitors may have well-
established relationships with the Company's current and potential customers,
have extensive knowledge of the client/server industry, better name recognition
and significantly greater financial, technical, sales, marketing and other
resources and are capable of offering single vendor solutions which span
multiple industries. It is also possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. The Company
also expects that competition may increase as a result of software industry
consolidations. The Company's competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products.

     Increased competition could result in price reductions, reduced gross
margins and/or loss of market share, any of which could materially adversely
affect the Company's business, financial condition or results of operations.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures will not
materially and adversely affect its 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. 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 1996 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 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

                                       15
<PAGE>
 
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 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.

                                       16
<PAGE>
 
PART 2.    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

                                       17
<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.



November 11, 1996                     /s/ David S. Dury
                                      ------------------
                                      David S. Dury
                                      Vice President,
                                      Chief Financial Officer
                                      (Principal Financial and
                                      Accounting Officer)

                                       18