<PAGE>   1

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-Q
                            ------------------------

(MARK ONE)

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

                  FOR THE QUARTERLY PERIOD ENDED MAY 31, 1999

                                       OR

[ ]   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 000-22565
                            ------------------------

                             ASPEC TECHNOLOGY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      77-0298386
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)
     830 E. ARQUES AVENUE, SUNNYVALE, CA                           94086
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 774-2199
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $0.001 PAR VALUE
                            ------------------------

     Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]  No [ ]

     The number of shares of the Registrant's Common Stock outstanding as of May
31, 1999 was 24,486,886.

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<PAGE>   2

                             ASPEC TECHNOLOGY, INC.

                                   FORM 10-Q

                       FOR THE QUARTER ENDED MAY 31, 1999

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>         <C>                                                           <C>
PART I.     FINANCIAL INFORMATION
Item 1.     Consolidated Financial Statements
            (a) Condensed Consolidated Statements of Income for the
            three and six months ended May 31, 1999 and 1998............    3
            (b) Condensed Consolidated Balance Sheets at May 31, 1999
                and November 30, 1998...................................    4
            (c) Condensed Consolidated Statements of Cash Flows for the
            six months ended May 31, 1999 and 1998......................    5
            (d) Notes to Condensed Consolidated Financial Statements....    6
            Management's Discussion and Analysis of Financial Condition
Item 2.     and Results of Operations...................................    9

PART II.    OTHER INFORMATION
Item 1.     Legal Proceedings...........................................   20
Item 6.     Exhibits and Reports on Form 8-K............................   21

SIGNATURES..............................................................   21
</TABLE>

                                        2
<PAGE>   3

                         PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                             ASPEC TECHNOLOGY, INC.

                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                        QUARTER ENDED        SIX MONTHS ENDED
                                                           MAY 31,                MAY 31,
                                                      ------------------    -------------------
                                                       1999       1998        1999       1998
                                                      -------    -------    --------    -------
<S>                                                   <C>        <C>        <C>         <C>
Revenue.............................................  $ 1,568    $ 5,283    $  4,463    $10,457
Cost of revenue.....................................    2,629      3,505       6,847      6,214
                                                      -------    -------    --------    -------
Gross profit........................................   (1,061)     1,778      (2,384)     4,243
                                                      -------    -------    --------    -------
Operating expenses:
  Research and development..........................    2,351        533       3,503        964
  Sales and marketing...............................      927      1,461       2,288      2,727
  General and administrative........................    1,387        720       2,592      1,593
  Amortization -- goodwill..........................      167        700         334        700
                                                      -------    -------    --------    -------
          Total operating expenses..................    4,832      3,414       8,717      5,984
                                                      -------    -------    --------    -------
Loss from operations................................   (5,893)    (1,636)    (11,101)    (1,741)
Interest income, net................................      373        318         921        340
Equity losses from joint venture....................     (415)        --        (415)        --
                                                      -------    -------    --------    -------
Loss before income taxes............................   (5,935)    (1,318)    (10,595)    (1,401)
Benefit from income taxes...........................       --       (235)         --       (267)
                                                      -------    -------    --------    -------
Net loss............................................   (5,935)    (1,083)    (10,595)    (1,134)
Accretion of redeemable preferred stock.............       --      4,116          --      4,328
                                                      -------    -------    --------    -------
Loss attributable to common stockholders............  $(5,935)   $(5,199)   $(10,595)   $(5,462)
                                                      =======    =======    ========    =======
Basic loss per share................................  $ (0.21)   $ (0.22)   $  (0.38)   $ (0.24)
                                                      =======    =======    ========    =======
Shares used in basic per share calculation..........   28,066     23,835      28,061     22,561
                                                      =======    =======    ========    =======
Diluted loss per share..............................  $ (0.21)   $ (0.22)   $  (0.38)   $ (0.24)
                                                      =======    =======    ========    =======
Shares used in diluted per share calculation........   28,066     23,835      28,061     22,561
                                                      =======    =======    ========    =======
</TABLE>

     See accompanying notes to condensed consolidated financial statements.
                                        3
<PAGE>   4

                             ASPEC TECHNOLOGY, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                MAY 31,      NOVEMBER 30,
                                                                 1999            1998
                                                              -----------    ------------
                                                              (UNAUDITED)        (1)
<S>                                                           <C>            <C>
Current assets:
  Cash and equivalents......................................   $ 31,938        $ 42,480
  Accounts receivable (net of allowances of $1,237 and
     $1,271)
     Billed.................................................      3,545           5,165
     Unbilled...............................................      1,088           2,231
  Income taxes receivable...................................        733             679
  Prepaid expenses..........................................        549             882
  Inventory.................................................        169             167
  Deferred income taxes.....................................      2,100           2,100
                                                               --------        --------
          Total current assets..............................     40,122          53,704
Property and equipment -- net...............................     10,436          12,297
Investments.................................................      2,705             840
Other assets................................................      3,244           3,622
                                                               --------        --------
          TOTAL.............................................   $ 56,507        $ 70,463
                                                               ========        ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
  Accounts payable..........................................   $  2,224        $  3,326
  Accrued liabilities.......................................      1,869           3,104
  Customer advances.........................................      3,418           4,206
                                                               --------        --------
          Total current liabilities.........................      7,511          10,636
Deferred liabilities -- rent................................         52              52
Other liabilities -- long term..............................      1,000           1,000
                                                               --------        --------
          Total liabilities.................................      8,563          11,688
Stockholders' equity (deficiency):
  Common stock..............................................     86,273          86,198
  Treasury stock............................................       (324)             --
  Stockholders' notes receivable............................       (181)           (184)
  Deferred stock compensation...............................        (11)            (70)
  Retained earnings (deficit)...............................    (37,764)        (27,169)
  Cumulative translation adjustment.........................        (49)             --
                                                               --------        --------
          Total stockholders' equity (deficiency)...........     47,944          58,775
                                                               --------        --------
          TOTAL.............................................   $ 56,507        $ 70,463
                                                               ========        ========
</TABLE>

---------------
(1) The balance sheet at November 30, 1998 has been derived from the
    consolidated audited financial statements at that date.

     See accompanying notes to condensed consolidated financial statements.
                                        4
<PAGE>   5

                             ASPEC TECHNOLOGY, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                    MAY 31,
                                                              -------------------
                                                                1999       1998
                                                              --------    -------
<S>                                                           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...........................................  $(10,595)   $(1,134)
Adjustments from operating activities:
  Write-off of purchased technology.........................        --        700
  Depreciation and amortization.............................     3,641      1,219
  Equity losses from joint venture..........................       415         --
  Cumulative translation adjustment.........................        49         --
  Deferred income taxes.....................................        --     (1,720)
  Stock compensation expense................................        59         37
  Changes in assets and liabilities
  Accounts receivable:
     Billed.................................................    (1,620)      (818)
     Unbilled...............................................    (1,143)    (2,562)
     Income taxes receivable................................        54         --
     Prepaid expenses and other assets......................      (519)      (514)
     Inventory..............................................         2        (13)
     Accounts payable.......................................     1,102      1,360
     Accrued liabilities....................................     1,235        350
     Income taxes payable...................................        --        534
     Customer advances......................................       788      1,353
                                                              --------    -------
     NET CASH USED FOR OPERATING ACTIVITIES.................    (6,532)    (1,208)
                                                              --------    -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment.......................    (1,435)    (2,105)
  Cash acquired, net of cash spent in purchase of SIS
     Microelectronics.......................................        --         26
  Other assets..............................................        --       (258)
  Investment in joint venture corporation...................    (2,329)        --
                                                              --------    -------
     NET CASH USED FOR INVESTING ACTIVITIES.................    (3,764)    (2,337)
                                                              --------    -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Sale of common stock......................................        75     72,226
  Redemption of redeemable preferred stock..................        --    (18,495)
  Repayment of borrowings...................................        --       (314)
  Repurchase of common stock................................      (324)       (12)
  Collection of stockholder notes receivable................         3        101
                                                              --------    -------
     NET CASH PROVIDED BY FINANCING ACTIVITIES..............      (246)    53,506
                                                              --------    -------
Net increase (decrease) in cash and equivalents.............   (10,542)    49,961
Cash and equivalents, beginning of period...................    42,480      2,524
                                                              --------    -------
CASH AND EQUIVALENTS, END OF PERIOD.........................  $ 31,938    $52,485
                                                              ========    =======
Supplemental disclosure of cash flow information:
  Cash paid for income taxes................................  $     --    $   919
                                                              ========    =======
  Accretion of redeemable preferred stock...................  $     --    $ 4,328
                                                              ========    =======
</TABLE>

     See accompanying notes to condensed consolidated financial statements.
                                        5
<PAGE>   6

                             ASPEC TECHNOLOGY, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

 1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and in accordance with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended May 31,
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ending November 30, 1999 or for any other period. The unaudited
condensed consolidated interim financial statements contained herein should be
read in conjunction with the audited financial statements and footnotes for the
year ended November 30, 1998 included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission on February 16, 1999.

 2. EARNINGS PER SHARE (EPS) DISCLOSURES

     The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128). All earnings per share (EPS) data for
prior periods have been restated to conform with SFAS 128.

     SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS
is computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding (excluding shares subject to
repurchase rights) for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Such securities are not included in
loss periods as they would be antidilutive.

     A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                       QUARTER ENDED        SIX MONTHS ENDED
                                                          MAY 31,                MAY 31,
                                                     ------------------    -------------------
                                                      1999       1998        1999       1998
                                                     -------    -------    --------    -------
                                                                    (UNAUDITED)
<S>                                                  <C>        <C>        <C>         <C>
Net loss attributable to common stockholders.......  $(5,935)   $(5,199)   $(10,595)   $(5,462)
                                                     -------    -------    --------    -------
Denominator-basic EPS common stock outstanding.....   28,066     23,835      28,061     22,561
                                                     -------    -------    --------    -------
Basic loss per share...............................  $ (0.21)   $ (0.22)   $  (0.38)   $ (0.24)
                                                     -------    -------    --------    -------
Denominator-Diluted EPS:
  Denominator-Basic EPS............................   28,066     23,835      28,061     22,561
  Effect of dilutive securities:
     Weighted average common shares subject to
       repurchase rights...........................       --         --          --         --
     Weighted average common share equivalents
       related to stock purchase rights and
       options.....................................       --         --          --         --
                                                     -------    -------    --------    -------
                                                      28,066     23,835      28,061     22,561
                                                     -------    -------    --------    -------
Diluted loss per share.............................  $ (0.21)   $ (0.22)   $  (0.38)   $ (0.24)
                                                     -------    -------    --------    -------
</TABLE>

     Stock options to purchase 2,773,150 shares of common stock were outstanding
at May 31, 1999, but were not included in the computation of diluted earnings
per share because they were antidilutive.

                                        6
<PAGE>   7
                             ASPEC TECHNOLOGY, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

 3. NEW ACCOUNTING STANDARDS

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from nonowner sources.
Aspec implemented FAS 130 during the first quarter of fiscal 1999 and has
restated its prior periods to comply with the standard. There is no difference
between the Company's net loss and its total comprehensive income for the three
and six month periods ended May 31, 1998 and 1999.

     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of this statement will not impact the Company's financial position,
results of operations or cash flows. SFAS No. 131 is effective for the Company's
1999 fiscal year that commenced December 1, 1998 with interim reporting required
in the second fiscal year.

 4. INVESTMENT

     The Company entered into a Joint Venture Agreement with certain Korean
investors dated December 18,1998, to establish a joint venture corporation in
South Korea named SLIM Technology Co., Ltd., for the purpose of developing and
providing design implementation technology for the design of ASIC and semi-
custom integrated circuits and providing design services for ASICs. In the first
quarter of fiscal 1999, the Company invested $2.3 million in this joint venture
representing a 40% interest in SLIM Technology Co., Ltd. The Company has
recorded its share of losses in the joint venture using the equity method of
accounting.

 5. CONTINGENCIES

SUPERIOR COURT FOR THE STATE OF CALIFORNIA

     On July 1, 1998, a class action lawsuit, Howard Jonas, et al. v. Aspec
Technology, Inc., et al., No. CV-775037 ("the Jonas Complaint"), was filed in
the Superior Court for the State of California, County of Santa Clara. The Jonas
Complaint alleged that Aspec and certain of its officers, directors, and the
underwriters of the Company's initial public offering, violated California
Corporations Code Sections 25400 and 25500, and California Business and
Professions Code Sections 17200 and 17500 by making false and misleading
statements about Aspec's financial condition. The action was purportedly brought
on behalf of all persons who purchased Aspec stock during the period from April
28, 1998 and June 25, 1998. On July 2, 1998, July 27, 1998, and August 17, 1998,
three additional complaints were filed in state court against Aspec and certain
of its officers, directors, entitled respectively, William Neuman, et al. v.
Aspec Technology, Inc., et al., No. CV-775089 ("the Neuman Complaint"); Martin
L. Klotz, on behalf of the Martin Klotz Defined Benefit Profit Sharing Plan, et
al. v. Aspec Technology, Inc., et al., No. CV-775591 ("the Klotz Complaint");
Glen O. Ressler and Thelma M. Ressler, et al,. v. Aspec Technology, Inc., et
al., No. CV-776065 ("the Ressler Complaint"). In addition to alleging the same
violations of the Corporations Code as the other three complaints, the Klotz
complaint also alleged violations of Sections 11, 12, and 15 of the Securities
Exchange Act of 1933, and a class period of April 28, 1998 through June 30,
1998. The complaints sought unspecified damages.

     On January 29, 1999, the plaintiffs consolidated the pending class action
cases and filed a Consolidated Amended Complaint, styled Howard Jonas, et al. v.
Aspec Technology, Inc., et al., No. CV-775037. The Consolidated Amended
Complaint, purportedly brought on behalf of all persons who purchased Aspec's
stock between April 27, 1998 and June 30, 1998, alleges that Aspec and certain
of its officers and directors, as well as its underwriters, violated Sections
25400 and 25500 of the California Corporations Code, as well as Sections 11 and
15 of the Securities Act of 1933 (except as to the underwriters). On June 7,
1999, Aspec and

                                        7
<PAGE>   8
                             ASPEC TECHNOLOGY, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

certain of the individual defendants filed a demurrer to the Consolidated
Complaint. The demurrer is presently pending in the Superior Court.

     In addition, the plaintiffs have moved to certify a plaintiff class, and
for summary judgment against the Company, solely on the Section 11 claims. The
Company has not yet responded and those motions are presently pending.

     Certain of the Company's current and former officers, directors and
shareholder entities were also named as defendants in a derivative lawsuit,
Linda Willinger, IRA, et al. v. Conrad Dell'Oca et al., No. CV-778007, which was
filed on November 12, 1998, in the Superior Court of Santa Clara County. The
derivative action alleges facts similar to those in the class action and also
alleges that certain of the directors caused the Company to conduct the initial
public offering in order to redeem certain preferred stock. Aspec filed a
demurrer to that Complaint on June 8, 1999. That demurrer is also presently
pending in the Superior Court.

UNITED STATES DISTRICT COURT

     On October 16, 1998, plaintiffs agreed to voluntarily dismiss Kassover, et
al. v. Aspec Technology, Inc., et al, No. C 98-2604VRW, which was filed on June
30, 1998 in the United States District Court for the Northern District of
California against Aspec and certain of its officers and directors. The
Complaint alleged that defendants violated Sections 11, 12, and 15 of the
Securities Exchange Act of 1934 by failing to disclose certain facts about
Aspec's financial condition between April 28, 1998 and June 30, 1998. On October
20, 1998, the Court dismissed the purported class action without prejudice.

NASDAQ INQUIRY

     On September 4, 1998, the Company received an informal request for
information from the NASDAQ Listing Investigations Staff. NASDAQ requested
information concerning the Company's financial accounting and internal controls.
The Company has provided information in response to the informal inquiry. NASD
held a de-listing inquiry on December 17, 1998 at which the Company appeared
through counsel and provided information. As of February 25, 1999, the NASD
determined that the Company would remain listed on the NASDAQ.

SEC INQUIRY

     In January 1999, the Company received an informal inquiry from the
Securities and Exchange Commission ("SEC"). The Company is continuing to provide
information in response to the SEC's requests.

                                        8
<PAGE>   9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are based on current expectations and include various risks and uncertainties
that could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties are set forth below and
under "Other Factors Affecting Future Operating Results."

COMPANY OVERVIEW

     Aspec was founded in December 1991 to develop, market and support
semiconductor intellectual property ("SIP") to enable customers to develop
complex ICs. Through fiscal 1992, the Company was principally engaged in the
development of its first products and the establishment of customer
relationships. The Company recognized its initial revenue in fiscal 1993 as SIP
products were completed for customers designing gate array-based ASICs. In
fiscal 1993, 1994 and 1995, a substantial portion of the Company's revenue was
derived from the license of SIP products to vertically integrated semiconductor
manufacturers that were seeking to enter the merchant ASIC market. During these
years, the Company also expanded its development efforts. By fiscal 1996, the
Company had enhanced its SIP products for gate array-based ICs and had developed
SIP products for standard cell-based ICs supporting a number of foundry
processes. These developments allowed the Company to expand its customer base to
include other integrated semiconductor companies, fabless semiconductor
companies, electronics systems manufacturers and distributors that sell to such
entities.

     Since the second half of fiscal 1998, the Company has had significantly
reduced revenues primarily due to the shift in industry pricing practice by a
major competitor from up-front license fees to a royalty based model. This
change is expected to continue to have a material adverse impact on the
Company's revenue in future quarters. Although the Company has taken actions to
reduce costs, the substantially reduced revenue levels have resulted in
significant operating losses for the past several quarters. These losses will
continue unless the Company is able to increase revenues or significantly reduce
its costs.

     The majority of the Company's revenue comes from license fees for the
Company's SIP products. A license is required for each foundry used by the
customer as well as for each process technology employed. The Company also
realizes revenue from service and maintenance fees. Typically a customer
licenses a bundle of products which is accompanied by documentation and
training. The license of the Company's products typically involves a lengthy
sales cycle of up to 12 months because the license generally involves a
significant commitment of capital by the customer and because Aspec's SIP is
either replacing a customer's proprietary SIP or introducing entirely new SIP.
These SIP products are licensed to customers on a per design basis, a per site
basis or an enterprise basis. Late in the third quarter of fiscal 1998, one of
the Company's major competitors announced an agreement with a major foundry
whereby the foundry acquired cell libraries for a minimal up-front fee coupled
with a future royalty. This change in industry pricing practice has had and is
expected to continue to have a material adverse effect on the Company's revenue
and operating results.

     A significant portion of the Company's revenue is recognized on a
percentage of completion method based upon actual costs incurred. The completion
period typically ranges from three months to a year. Accordingly, revenue in any
quarter is dependent on progress towards completion of projects by the Company.
The Company has in the past experienced delays in the progress of certain
projects, and there can be no assurance that such delays will not occur with
respect to future projects. Any delay or failure to achieve such progress could
result in a delay in the ability to bill for or collect payment for work
previously performed, damage to customer relationships and the Company's
reputation, diversion of engineering resources or a delay in the market
acceptance of the Company's products, any of which could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, these contracts may generally be canceled without cause, and if a
customer cancels or delays performance under any such contracts, the Company's
business, operating results and financial condition could be materially
adversely affected.

                                        9
<PAGE>   10

     Engineering efforts devoted to developing products for which revenue is
recognized on a percentage of completion basis are recorded as cost of revenue.
Engineering efforts devoted to developing the Company's core technology and
products not requiring adaptation are recorded as research and development
expense. As a result of its engineering efforts, the Company has developed a
substantial base of technology, which the Company is able to reuse in other
product offerings. The Company expects to continue to devote significant
resources to its various engineering efforts.

     A significant portion of the Company's revenue is derived from customers
outside the United States, and the Company anticipates that international
revenue will continue to account for a significant portion of its total revenue.
Revenue from customers outside the United States, substantially all of whom are
located in Asia, accounted for 54%, 53%, and 65% of revenue in fiscal 1996, 1997
and 1998, respectively, and 51% and 29% of revenue for the first six months of
fiscal 1998 and 1999, respectively. International revenue decreased in the first
six months of fiscal 1999 due to soft demand for the Company's products in
Korea. There can be no assurance when or if such conditions will improve. The
Company has also experienced a lengthening of the payment period for accounts
receivables from certain Asian-based customers. At May 31, 1999, approximately
79% of the Company's accounts receivable (including unbilled receivables) were
from Asian-based customers. Although the Company currently believes, based in
part on continuing discussions with these customers, that its existing
accounting reserves are adequate given the estimated exposure related to all of
its accounts receivable, there can be no assurance that such accounting reserves
will prove to be adequate nor that present or future dislocations in Asian
countries or elsewhere or other factors will not have a material adverse effect
on the Company's ability to collect its accounts receivable or on its business,
operating results and financial condition.

     In March 1998, the Company entered into an agreement to acquire SIS
Microelectronics in exchange for the issuance of an aggregate of 400,000 shares
of Common Stock. The acquisition was completed in April 1998, was accounted for
using the purchase method and resulted in a charge to in-process research and
development of $0.7 million in the Company's fiscal quarter ended May 31, 1998.
The Company recorded $3.3 million of goodwill as part of this acquisition which
will be amortized evenly over a five-year period.

     In December 1998, the Company entered into a Joint Venture Agreement with
certain Korean investors to establish a joint venture corporation in South Korea
named SLIM Technology Co., Ltd, for the purpose of developing and providing
design implementation technology for the design of ASIC and semi-custom
integrated circuits and providing design services for ASICs. In the first
quarter of fiscal 1999, the Company invested $2.3 million in this joint venture
representing a 40% interest in SLIM Technology Co., Ltd. The Company has
recorded its share of losses in the joint venture using the equity method of
accounting.

                                       10
<PAGE>   11

RESULTS OF OPERATIONS

     The following table sets forth for the periods indicated selected
statements of operations data as a percentage of revenue:

<TABLE>
<CAPTION>
                                                   QUARTER ENDED       SIX MONTHS ENDED
                                                      MAY 31,              MAY 31,
                                                   --------------      ----------------
                                                   1999      1998      1999       1998
                                                   ----      ----      -----      -----
<S>                                                <C>       <C>       <C>        <C>
Revenue..........................................   100%     100%       100%       100%
Cost of revenue..................................   168       66        153         59
                                                   ----      ---       ----        ---
Gross profit.....................................   (68)      34        (53)        41
Operating expenses:
  Research and development.......................   150       10         79          9
  Sales and marketing............................    59       28         51         26
  General and administrative.....................    88       14         58         15
  Amortization -- goodwill.......................    11       13          7          7
                                                   ----      ---       ----        ---
          Total operating expenses...............   308       65        195         57
                                                   ----      ---       ----        ---
Loss from operations.............................  (376)     (31)      (248)       (16)
Interest income, net.............................    24        6         20          3
Equity losses from joint venture.................   (27)      --         (9)        --
                                                   ----      ---       ----        ---
Loss before income taxes.........................  (379)     (25)      (237)       (13)
Benefit from income taxes........................     0       (4)         0         (2)
                                                   ----      ---       ----        ---
Net loss.........................................  (379)     (21)      (237)       (11)
Accretion of redeemable preferred stock..........    --       78         --         41
                                                   ----      ---       ----        ---
Loss attributable to common stockholders.........  (379)%    (99)%     (237)%      (52)%
                                                   ====      ===       ====        ===
</TABLE>

     Revenue. Revenue decreased by 70% from $5.3 million in the quarter ended
May 31, 1998 to $1.6 million in the quarter ended May 31, 1999. Revenue
decreased by 57% from $10.5 million in the six-month period ended May 31, 1998
to $4.5 million in the six-month period ended May 31, 1999. The decline in
revenue in the first six months of fiscal 1999 compared with the same period in
fiscal 1998 was primarily attributable to the shift in industry pricing practice
by a major competitor from up-front license fees to a royalty based model that
began in the second half of fiscal 1998. This change is expected to continue to
have a material adverse impact on the Company's revenue in future quarters.

     International revenue accounted for 29% of revenue in the six-month period
ended May 31, 1999 compared to 51% of revenue in the six-month period ended May
31, 1998. International revenue accounted for 26% of revenue during the quarter
ended May 31, 1999 compared to 48% of revenue during the quarter ended May 31,
1998. International revenue decreased in the first six months of fiscal 1999 due
to soft demand for the Company's products in Korea. There can be no assurance
when or if such conditions will improve.

     Cost of revenue. Cost of revenue primarily represents the costs of
personnel and other operating expenses incurred in the development and
production of SIP products to customer specifications. Cost of revenue decreased
by 25% from $3.5 million in the quarter ended May 31, 1998 to $2.6 million in
the quarter ended May 31, 1999. Cost of revenue increased by 10% from $6.2
million in the six-month period ended May 31, 1998 to $6.8 million in the
six-month period ended May 31, 1999. Cost of revenue as a percentage of revenue
was 66% and 168% for the quarters ended May 31, 1998 and 1999, respectively, and
59% and 153% for the six-month periods ended May 31, 1998 and 1999,
respectively. The absolute dollar decrease in cost of revenue in the second
quarter of fiscal 1999 compared with the same period in fiscal 1998 was due to
decreased number of engineering personnel due to layoffs since October 1998
which were effected to reduce costs. The absolute dollar increase in cost of
revenue in the first six months of fiscal 1999 compared with the same period in
fiscal 1998 was due to (i) hiring of additional engineering personnel and
related expenses associated with customer funded development programs, (ii)
costs associated with the Company's chip design service group, (iii) costs of
the additional personnel who joined the Company as a result of the acquisition
of

                                       11
<PAGE>   12

SIS Microelectronics, and (iv) costs of using outside programmers. Cost of
revenue as a percentage of revenue increased over the periods primarily due to
substantially reduced revenue and higher costs in the first six months of fiscal
1999. The Company does not expect cost of revenue to increase in absolute
dollars in the remaining quarters of fiscal 1999.

     Research and development. Research and development expenses represent the
cost of engineering personnel and other operating expenses incurred in the
development and enhancement of the Company's core technology and products not
requiring significant adaptation. Research and development expenses increased by
341% from $0.5 million in the quarter ended May 31, 1998 to $2.4 million in the
quarter ended May 31, 1999. Research and development expenses increased by 263%
from $1.0 million in the six-month period ended May 31, 1998 to $3.5 million in
the six-month period ended May 31, 1999. Research and development expense as a
percentage of revenue was 10% and 150% for the quarters ended May 31, 1998 and
1999, respectively, and 9% and 79% for the six-month periods ended May 31, 1998
and 1999, respectively. The absolute dollar increases in research and
development expenses in the second quarter and first six months of fiscal 1999
compared with the same periods in fiscal 1998 were due to increases in
engineering personnel, including additional SIS Microelectronics personnel, and
related expenses. Research and development expenses increased as a percentage of
revenue due to higher expenses and significantly reduced revenue in the second
quarter and first six months of fiscal 1999.

     Sales and marketing. Sales and marketing expenses consist of salaries,
commissions paid to internal sales and marketing personnel and sales
representatives, promotional costs and related operating expenses. Sales and
marketing expenses decreased by 37% from $1.5 million in the quarter ended May
31, 1998 to $0.9 million in the quarter ended May 31, 1999. Sales and marketing
expenses decreased by 16% from $2.7 million in the six-month period ended May
31, 1998 to $2.3 million in the six-month period ended May 31, 1999. Sales and
marketing expense increased as a percentage of revenue from 28% to 59% for the
quarters ended May 31, 1998 and 1999, respectively, primarily due to lower
revenues in the second quarter of fiscal 1999. The Company does not expect sales
and marketing expense to increase in absolute dollars in the remaining quarters
of fiscal 1999.

     General and administrative. General and administrative expenses increased
by 93% from $0.7 million in the quarter ended May 31, 1998 to $1.4 million in
the quarter ended May 31, 1999. General and administrative expenses increased by
63% from $1.6 million in the six-month period ended May 31, 1998 to $2.6 million
in the six-month period ended May 31, 1999. This increase resulted primarily
from addition of new management and administrative personnel, increased
administrative costs, and an increase of $0.3 million to the bad debt reserve in
the quarter ended May 31, 1999. Also, beginning in the second quarter of fiscal
1998, the Company began amortizing the goodwill associated with the SIS
acquisition over a five-year period. General and administrative expenses
increased as a percentage of revenue from 14% to 88% for the quarter ended May
31, 1998 and 1999, respectively, primarily due to lower revenues in the second
quarter of fiscal 1999. The Company does not expect general and administrative
expense to increase in absolute dollars in the remaining quarters of fiscal
1999.

     The $0.7 million written off to purchased technology in the second quarter
of fiscal 1998 related to the acquisition of SIS Microelectronics. The Company
recorded $3.3 million of goodwill as part of this acquisition which is being
amortized evenly over a five-year period.

     Interest income, net. Interest income, net increased by 17% from $0.3
million in the quarter ended May 31, 1998 to $0.4 million in the quarter ended
May 31, 1999. Interest income increased by 171% from $0.3 million in the
six-month period ended May 31, 1998 to $0.9 million in the six-month period
ended May 31, 1999. The absolute dollar increases in interest income in the
first six months of fiscal 1999 compared with the same period in fiscal 1998,
were due to interest income earned on the proceeds from the Company's initial
public offering which was completed in May 1998.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has funded its operations primarily from license revenue and
the net proceeds of $71.9 million from its initial public offering of Common
Stock in May 1998.
                                       12
<PAGE>   13

     The Company's operating activities utilized net cash of $1.2 million in the
six-month period ended May 31, 1998 and utilized net cash of $6.5 million in the
six-month period ended May 31, 1999. Net cash used for operating activities in
the first six months of fiscal 1999 was mainly due to a net loss of $10.6
million.

     Net cash used in investing activities was $2.3 million and $3.8 million in
the six-month periods ended May 31, 1998 and 1999, respectively. Investing
activities for the first six months of fiscal 1999 consisted primarily of the
investment in the joint venture and net purchases of property and equipment.

     The Company's financing activities provided net cash of $53.5 million in
the six-month period ended May 31, 1998, and utilized net cash of $0.2 million
in the six-month period ended May 31, 1999.

     At May 31, 1999, the Company had cash and equivalents of $31.9 million. As
of May 31, 1999, the Company had a retained deficit of $37.8 million and working
capital of $32.6 million. The Company anticipates approximately $2.0 million of
capital expenditures over the next 12 months.

     The Company intends to continue to invest in the development of new
products and enhancements to its existing products. The Company's future
liquidity and capital requirements will depend upon numerous factors, including
the costs incurred in connection with the defense, settlement or payment of any
damages with respect to the class action lawsuits pending against the Company
and related parties, the costs and timing of the Company's product development
efforts and the success of these development efforts, the costs and timing of
the Company's sales and marketing activities, the extent to which the Company's
existing and new products gain market acceptance, competing technological and
market developments, the costs involved in maintaining and enforcing patent
claims and other intellectual property rights, the level and timing of license
revenue, available borrowings under line of credit arrangements and other
factors. The Company believes that its current cash and investment balances
together with any cash generated from operations will be sufficient to meet the
Company's operating and capital requirements for the next 12 months.

OTHER FACTORS AFFECTING FUTURE OPERATING RESULTS

     Restatement of Financial Statements. As previously announced, the Company's
restatement of its consolidated financial statements for fiscal years 1996 and
1997 and the first and second quarters of fiscal 1998 reflects reductions in
reported earned revenue for those years and resulted in a loss from operations
for the first and second quarters of fiscal 1998. The Company also experienced a
significant operating loss for the fourth quarter of fiscal 1998 and the first
and second quarters of fiscal 1999. The Company's public announcement of the
pending restatement of its financial statements, the delay in reporting its
third quarter results for fiscal 1998 while the restatement was being compiled
and the related uncertainty regarding the Company's business have adversely
affected the Company's financial condition and the price of the Company's common
stock. These factors and other matters described herein have had, and will
continue to have, a material adverse effect on the Company's business, including
its financial condition and results of operations.

     Fluctuations in Future Operating Results; Dependence Upon Timely Project
Completion. The Company's operating results have fluctuated in the past and are
expected to fluctuate significantly on a quarterly and annual basis in the
future as a result of a number of factors including the size and timing of
customer orders; the Company's ability to achieve progress on percentage of
completion contracts; the continuation of the shift in industry pricing practice
from up-front license fees to a royalty based model; the length of the Company's
sales cycle; the timing of new product announcements and introductions by the
Company and its competitors; the Company's ability to successfully develop,
introduce and market new products and product enhancements; market acceptance of
the Company's products; the cancellation or delay of orders from major
customers; the level of changes to customer requirements due to process specific
changes requested by customers or changes in design rules or process
technologies at semiconductor foundries, the Company's ability to retain its
existing personnel; and general economic conditions. These and other factors
could have a material adverse effect on the Company's business, operating
results and financial condition.

     A significant portion of the Company's revenue is recognized on a
percentage of completion method based upon actual costs incurred. The completion
period typically ranges from three months to a year. Accordingly, revenue in any
quarter is dependent on progress towards completion of the project by the

                                       13
<PAGE>   14

Company. The Company has in the past experienced delays in the progress of
certain projects and there can be no assurance that such delays will not occur
with respect to future projects. Any delay or failure to achieve such progress
could result in a delay in the ability to bill for or collect payment for work
previously performed, damage to customer relationships and the Company's
reputation, diversion of engineering resources or a delay in the market
acceptance of the Company's products, any of which could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, these contracts may generally be canceled without cause, and if a
customer cancels or delays performance under any such contracts, the Company's
business, operating results and financial condition could be materially
adversely affected. A customer's license of the Company's products may involve a
significant commitment of capital with the attendant delays frequently
associated with authorization procedures for capital expenditures within
customer organizations. The Company's operating expenses will be based in part
on the Company's expectations of future revenue from product licenses.
Accordingly, if the Company does not realize its expected revenues, its
business, operating results and financial condition would be materially
adversely affected.

     Dependence on Emergence of Merchant SIP Market. The market for merchant SIP
is new and emerging. The Company's ability to achieve revenue growth and
profitability in the future will depend on the continued development of this
market and, to a large extent, on the level of demand for complex ICs, including
system-on-a-chip designs. There can be no assurance that the merchant SIP market
will develop or grow at a rate sufficient to support the Company's business. If
this market fails to grow or develops slower than expected, the Company's
business, operating results and financial condition would be materially
adversely affected. To date, the Company's SIP products have been licensed only
by a limited number of customers. Many of the Company's existing and potential
customers currently rely on SIP developed internally or offered by other
vendors. The Company's future growth will be dependent on the adoption of, and
increased reliance on, merchant SIP by both existing and potential customers.
Moreover, if the Company's products do not achieve broad market acceptance, the
Company's business, operating results and financial condition would be
materially adversely affected. In this regard, late in the third quarter of
fiscal 1998, one of the Company's major competitors announced an agreement with
a major foundry whereby the foundry acquired cell libraries for a minimal
up-front fee coupled with a future royalty. This change in industry pricing
practice has had and is expected to continue to have a material adverse effect
on the Company's revenue and operating results.

     Retention of Key Personnel. The Company's business depends in significant
part on the continued service of the Company's executive officers and other
senior management and key employees, including certain technical, managerial and
marketing personnel. A number of key members of the Company's management have
left the Company to pursue other opportunities. The Company's future success
will depend on its ability to identify, attract, hire and retain skilled
employees and to hire replacements for employees that leave the Company. In this
regard, the Company is actively recruiting a President/Chief Executive Officer
and several additional engineering personnel. The Company's failure to hire a
suitable President/Chief Executive Officer or to expand its engineering
organization in a timely manner could have a material adverse effect on the
Company's business, operating results and financial condition.

     Risks Associated with SIS Microelectronics Acquisition; Other Potential
Acquisitions. As part of the Company's strategy to expand its engineering design
services capability, in April 1998, the Company acquired SIS Microelectronics in
exchange for the issuance of an aggregate of 400,000 shares of Common Stock. The
acquisition was accounted for using the purchase method and resulted in a charge
to in-process research and development of $0.7 million in the Company's fiscal
quarter ended May 31, 1998. The remaining $3.3 million of the purchase price was
charged to goodwill and will be amortized over a five-year period. The Company
has no prior experience with acquisitions and there can be no assurance that the
Company will be able to retain the key employees of SIS Microelectronics or
successfully integrate the operations of SIS Microelectronics.

     From time to time, the Company expects to evaluate other potential
acquisitions to build its SIP expertise. There can be no assurance that the
Company will be able to identify attractive acquisition candidates, that it will
be able to successfully complete any such acquisition or that it will be able to
integrate any acquired company with its other operations. In connection with the
acquisition of SIS Microelectronics or potential acquisitions of other
companies, the failure to successfully and efficiently integrate new employees
and operations of the acquired company with the Company's existing employees and
operations or to
                                       14
<PAGE>   15

successfully manage an acquired company located in a different geographical
location could materially adversely effect the Company's business, operating
results and financial condition.

     Risks Associated with Engineering Services Business. One of the Company's
strategies is to increase its revenue from collaborative engineering services.
The engineering services business is subject to a number of risks, including
potential competition from numerous other engineering service companies and the
ability to attract and retain qualified engineering personnel. There can be no
assurance that the Company can successfully expand its collaborative engineering
services, and the failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition.

     Dependence Upon Continuous Product Development; Risk of Product Delays. The
Company's customers operate in the semiconductor industry, which is subject to
rapid technological change, frequent introductions of new products, short
product life cycles, changes in customer demands and requirements and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards can render existing products obsolete
and unmarketable. Accordingly, the Company's future success will depend on its
ability to continue to enhance its existing products and to develop and
introduce new products that satisfy increasingly sophisticated customer
requirements and that keep pace with product introductions by EDA tool
companies, emerging process technologies and other technological developments in
the semiconductor industry. Any failure by the Company to anticipate or respond
adequately to changes in technology or customer requirements, or any significant
delays in product development or introduction, would have a material adverse
effect on the Company's business, operating results and financial condition. In
this regard, the Company's gross margin was materially adversely effected in the
first and second quarters of fiscal 1999 and in fiscal 1998, in part due to
process technology changes implemented by the semiconductor foundries for which
the Company had developed process-related performance data which required
recalculation and/or recharacterization. There can be no assurance that the
Company will be successful in its product development efforts, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and sale of new or enhanced products or that such new
or enhanced products will achieve market acceptance. The Company has in the past
experienced delays in the release dates of certain of its products. If release
dates of any new significant products or product enhancements are delayed, the
Company's business, operating results and financial condition would be
materially adversely affected. The Company could also be exposed to litigation
or claims from its customers in the event it does not satisfy its delivery
commitments. There can be no assurance that any such claim will not have a
material adverse effect on the Company's business, operating results and
financial condition.

     Customer Concentration; Dependence on Customers in Asia. The Company has
been dependent on a relatively small number of customers for a substantial
portion of its annual revenue. In fiscal 1997, Tritech accounted for 10% of the
Company's revenue, and the Company's seven largest customers accounted for 48%
of the revenue. In fiscal 1998, Asahi Glass accounted for 13% of the Company's
revenue, and five of the Company's largest customers accounted for 43% of the
revenue. In the quarter ended May 31, 1999, one customer accounted for 26% of
the Company's revenue, and five of the Company's largest customers accounted for
33% of the remaining revenue. The Company anticipates that the majority of its
revenue will be derived from a relatively small number of customers. None of the
Company's customers has a written agreement with the Company that obligates it
to license additional products or to renew its maintenance agreement, and there
can be no assurance that any customer will license additional SIP products or
renew its maintenance agreement. The loss of one or more of the Company's major
customers, or reduced orders by one or more of such customers, could materially
adversely affect the Company's business, operating results and financial
condition.

     Risks Associated with International Operations. A significant portion of
the Company's revenue is derived from customers outside the United States, and
the Company anticipates that international revenue will continue to account for
a significant portion of its total revenue. Revenue from customers outside the
United States, substantially all of whom are located in Asia, accounted for 54%,
53% and 65% of revenue in fiscal 1996, 1997, 1998, respectively, and 29% of
revenue for the first six months of fiscal 1999. International revenue decreased
in the first six months of fiscal 1999 due to soft demand for the Company's
products in Korea. There can be no assurance when or if such conditions will
improve. The Company has also experienced
                                       15
<PAGE>   16

a lengthening of the payment period for accounts receivables from certain
Asian-based customers. At May 31, 1999, approximately 79% of the Company's
accounts receivable (including unbilled receivables) were from Asian-based
customers. Although the Company currently believes, based in part on continuing
discussions with these customers, that its existing accounting reserves are
adequate given the estimated exposure related to all of its accounts receivable,
there can be no assurance that such accounting reserves will prove to be
adequate nor that present or future dislocations in Asian countries or elsewhere
or other factors will not have a material adverse effect on the Company's
ability to collect its accounts receivable or on its business, operating results
and financial condition.

     The Company's international business involves a number of risks, including
the impact of possible recessionary environments in foreign economies, political
and economic instability, exchange rate fluctuations, longer receivables
collection periods and greater difficulty in accounts receivable collection from
distributors and customers, difficulty in managing distributors or sales
representatives, unexpected changes in regulatory requirements, reduced or
limited protection for intellectual property rights, export license
requirements, tariffs and other trade barriers and potentially adverse tax
consequences. Although the Company prices its products and services in United
States dollars, currency exchange fluctuations could have a material adverse
effect on the Company's business to the extent that the Company's pricing is not
competitive with products priced in local currencies. The Company does not
currently hedge against foreign currency fluctuations.

     Export Control Matters. In May 1997, the Company was advised by the U.S.
Department of Commerce, Bureau of Export Administration (the "DOC") and the
United States Attorney's Office for the Northern District of California that an
investigation had been initiated with respect to the possible violation of U.S.
export laws by the Company and certain of its employees. In August 1997, the
Company was orally informed that the investigation had been closed, and no
action has been brought against the Company or, to the Company's knowledge, its
employees or former employees. The investigation and related diversion of
management time and attention and legal and other costs and expenses had a
material adverse impact on the Company's business and results of operations in
the second and third quarters of fiscal 1997. Although the Company engaged
special counsel with expertise in export matters and has taken steps to help
ensure compliance with export laws, there can be no assurance that the Company
will not be subject to the same or a similar investigation in the future.

     Dependence Upon Semiconductor and Electronics Industries. The Company is
dependent upon the semiconductor and electronics industries. Each of these
industries is characterized by rapid technological change, short product life
cycles, fluctuations in manufacturing capacity and pricing and gross margin
pressures. Each of these industries is highly cyclical and has periodically
experienced significant downturns, often in connection with or in anticipation
of decline in general economic conditions during which the number of new IC
design projects often decreases. Revenue from new licenses of the Company's
products is influenced by the level of design efforts by its customers, and
factors negatively affecting any of these industries could have a material
adverse effect on the Company's business, operating results and financial
condition. In this regard, the shift in industry practice from payment of
up-front license fees to a royalty based model had and will continue to have a
material adverse impact on the Company's revenue in future periods. The
Company's business, operating results and financial condition may also fluctuate
in the future from period to period as a consequence of general economic
conditions in the semiconductor or electronics industry.

     Competition. Although the market for merchant SIP is new and emerging and
the Company has few direct competitors, the Company expects that the market for
its products will become increasingly competitive in the future. The Company's
current competitors include Artisan Components, Inc., Compass Design Automation
(a division of Avant!), Mentor Graphics, Cadence, Nurologic, Silicon Architects
(a division of Synopsys), and Duet Technology, Inc. The Company also experiences
significant indirect competition from the engineering departments of potential
customers that maintain and develop internally developed SIP. Certain of the
Company's other potential customers rely on proprietary SIP developed and
maintained by ASIC vendors. In addition, certain semiconductor foundries
currently offer or may in the future offer one or more elements of a SIP
solution including cell libraries acquired from the Company's competitors. The
Company's potential competitors also include a number of large vertically
integrated semiconductor companies and numerous EDA software companies that may
develop SIP products that compete with those of the
                                       16
<PAGE>   17

Company. To the extent the Company expands its capability to offer design
services, it could also experience competition from numerous small design
engineering firms and from large public companies that also offer such services.
Increased competition has resulted in a shift from up-front license fees to a
royalty based model and in price reductions and reduced operating margins which
have materially adversely affect the Company's business, operating results and
financial condition. Many of the Company's potential competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
can the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures will not materially adversely affect the Company's business, operating
results and financial condition. The Company believes the principal elements of
competition in its market are the range of EDA tools and process technologies
supported, technological leadership, product functionality, the level of
technical support provided, software reliability and price. The Company believes
that it competes favorably with respect to each of these factors.

     Limited Protection of Proprietary Rights. The Company's success is
dependent on its ability to protect its proprietary technology. The Company
relies upon a combination of copyright, patent, trade secret and trademark laws
to protect its proprietary technology. The Company enters into confidentiality
agreements with its employees, distributors and customers and limits access to
and distribution of the source code to its software and other proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. Any such
misappropriation of the Company's technology or development of competitive
technologies could have a material adverse effect on the Company's business,
operating results and financial condition. Despite the Company's efforts to
protect its proprietary rights, there can be no assurance that the Company will
be able to protect its proprietary rights against unauthorized third-party
copying or use, and attempts may be made to copy or reverse engineer aspects of
the Company's products or to obtain and use information that the Company regards
as proprietary. Policing the unauthorized use of the Company's products is
difficult and the Company could incur substantial costs in protecting and
enforcing its intellectual property rights. Litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition.

     As of May 31, 1999, the Company held six U.S. patents and one foreign
patent which expire from 2013 to 2015 and had two U.S. patent applications
pending. The Company also has eleven patent applications pending in various
foreign jurisdictions. The Company expects to continue to file patent
applications where appropriate to protect its proprietary technologies; however,
the Company believes that its continued success depends primarily on factors
such as the technological skills and innovation of its personnel rather than on
its patents. The Company has registered the trademarks Aspec Technology, ABOND,
HDEA, I/O GEN, and Mastergen and has one trademark application pending in the
United States. The process of seeking patent and trademark protection can be
expensive and time consuming. There can be no assurance that patents or
trademarks will issue from pending or future applications or that, if issued,
such patents or trademarks will not be challenged, invalidated or circumvented,
or that rights granted thereunder will provide meaningful protection or other
commercial advantage to the Company. Moreover, there can be no assurance that
any patent or trademark rights will be upheld in the future or that the Company
will be able to preserve any of its other intellectual property rights. In
addition, the laws of certain countries in which the Company's products are
distributed do not protect the Company's products and intellectual property
rights to the same extent as the laws of the United States. Accordingly,
effective trademark, copyright and patent protection may be unavailable in
certain foreign countries.

     As is common in the technology industry, the Company may from time to time
receive notices from third parties claiming infringement by the Company's
products of third-party proprietary rights. While the Company is not currently
subject to any such claim, the Company believes that its products could
increasingly

                                       17
<PAGE>   18

be subject to such claims as the market for its products grows and as more
competitors enter the market. Any such claim, with or without merit, could
result in significant litigation costs and require the Company to enter into
royalty and licensing agreements, which could have a material adverse effect on
the Company's business, operating results and financial condition. Such royalty
and licensing agreements, if required, may not be available on terms acceptable
by the Company or at all.

     Potential for Product Defects. Complex products such as those offered by
the Company may contain undetected errors, defects or "bugs." There can be no
assurance that, despite significant testing by the Company and by current and
potential customers, errors will not be found in products or enhancements to
existing products after commencement of commercial shipments. The Company does
not presently maintain insurance with respect to potential damages due to errors
or defects in its products. Although the Company has not experienced material
adverse effects resulting from any such errors or defects to date, there can be
no assurance that errors or defects will not be discovered in the future,
potentially causing delays in product introduction and shipments or requiring
design modifications that could materially adversely affect the Company's
business, operating results and financial condition.

     Year 2000 Readiness Disclosure. Many currently installed computer systems
and software products are coded to accept only two digit entries in the date
code field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than a year, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements.

     The Company believes that there are four critical areas that require
planning and execution to insure that Year 2000 issues do not impose a
significant threat to the Company's operating ability. These areas are: (1) the
Company's product offerings, (2) the computer hardware and software systems
which the Company purchases from outside suppliers and uses to produce its
software product offerings, (3) the operating systems used by the Company's
customers to run our product offerings, and (4) the Company's internal
operations and facilities.

     (1) In terms of the effect of Year 2000 issues on the Company's product
         offerings, the software and library products, which comprise almost all
         of the Company's revenue, do not have specific date dependence.
         Therefore, the date code field is not used by the Company's products
         while operating in the customer's environment. This means that there
         should be no effect when the date changes to the year 2000 because it
         will be transparent to our products. Testing has been completed on our
         products to insure that the date change will have no effect.

     (2) All of Aspec's software development, whether done internally, or, in
         some instances, by outside subcontractors, is performed on workstations
         manufactured by Sun Microsystems. The Company is in the process of
         upgrading all workstations to the operating system specified by Sun
         Microsystems as Year 2000 compliant; currently this is 80% done. The
         Company expects to complete this upgrade by September 1999 at a cost of
         approximately $300,000. If this upgrade cannot be completed in time,
         the Company would be forced to purchase new workstations. Costs to do
         this could run as high as $0.75 million.

     (3) The customer's operating systems that run Aspec's software and
         libraries may have issues that could hamper their operations. In this
         event, sales to these customers may be reduced until the customer has
         addressed his internal issues. Aspec sales and customer support
         personnel will work on Year 2000 issues to the extent allowed by the
         customer. All of the Company's customers are semiconductor
         manufacturers which tend to use relatively new computing systems that
         are Year 2000 tolerant, which should mitigate the risk in this area.

     (4) The Company is in the process of determining whether there may be
         additional Year 2000 issues with various computer software programs
         purchased from outside vendors for engineering and for accounting. All
         reviews have been completed internally and the Company is in the
         process of doing the necessary upgrades and fixes.

                                       18
<PAGE>   19

     The Company is in the process of developing contingency plans to mitigate
the potential disruptions that may result from the Year 2000 issue. The Company
estimates that the remaining costs to meet the internal Year 2000 plan should be
between $100,000 to $300,000. These costs will be expensed as incurred as normal
operating expenditures. We do not expect the costs relating to Year 2000
remediation to have a material effect on our results of operations. In the event
that there is a major problem with our software and hardware development
systems, the Company could incur substantial delays in completing its
contractual commitment to customers which would have a materially adverse impact
on our future financial results. At this time there is no way to forecast the
cost of the potential impact of this type of problem.

     Volatility of Share Price. Since the Company's initial public offering in
April 1998, the market price of the Company's Common Stock has been highly
volatile and is expected to be significantly affected by factors such as actual
or anticipated fluctuations in the Company's operating results, the Company's
failure to meet or exceed published earnings estimates, changes in earnings
estimates or recommendations by securities analysts, announcements of
technological innovations, new products or new contracts by the Company or its
existing or potential competitors, developments with respect to patents,
copyrights or proprietary rights, conditions and trends in the EDA,
semiconductor or electronics industries, adoption of new accounting standards
affecting the software industry, general market conditions and other factors. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices for
the common stocks of technology companies which have often been unrelated to the
operating performance of such companies. These broad market fluctuations may
materially adversely affect the market price of the Common Stock. In June 1998,
securities class action litigation was filed against the Company and certain of
its executive officers and directors. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect upon the Company's business, operating
results and financial condition. See "Part II -- Item 1 -- Legal Proceedings."

                                       19
<PAGE>   20

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

SUPERIOR COURT FOR THE STATE OF CALIFORNIA

     On July 1, 1998, a class action lawsuit, Howard Jonas, et al. v. Aspec
Technology, Inc., et al., No. CV-775037 ("the Jonas Complaint"), was filed in
the Superior Court for the State of California, County of Santa Clara. The Jonas
Complaint alleged that Aspec and certain of its officers, directors, and the
underwriters of the Company's initial public offering, violated California
Corporations Code Sections 25400 and 25500, and California Business and
Professions Code Sections 17200 and 17500 by making false and misleading
statements about Aspec's financial condition. The action was purportedly brought
on behalf of all persons who purchased Aspec stock during the period from April
28, 1998 and June 25, 1998. On July 2, 1998, July 27, 1998, and August 17, 1998,
three additional complaints were filed in state court against Aspec and certain
of its officers, directors, entitled respectively, William Neuman, et al. v.
Aspec Technology, Inc., et al., No. CV-775089 ("the Neuman Complaint"); Martin
L. Klotz, on behalf of the Martin Klotz Defined Benefit Profit Sharing Plan, et
al. v. Aspec Technology, Inc., et al., No. CV-775591 ("the Klotz Complaint");
Glen O. Ressler and Thelma M. Ressler, et al,. v. Aspec Technology, Inc., et
al., No. CV-776065 ("the Ressler Complaint"). In addition to alleging the same
violations of the Corporations Code as the other three complaints, the Klotz
complaint also alleged violations of Sections 11, 12, and 15 of the Securities
Exchange Act of 1933, and a class period of April 28, 1998 through June 30,
1998. The complaints sought unspecified damages.

     On January 29, 1999, the plaintiffs consolidated the pending class action
cases and filed a Consolidated Amended Complaint, styled Howard Jonas, et al. v.
Aspec Technology, Inc., et al., No. CV-775037. The Consolidated Amended
Complaint, purportedly brought on behalf of all persons who purchased Aspec's
stock between April 27, 1998 and June 30, 1998, alleges that Aspec and certain
of its officers and directors, as well as its underwriters, violated Sections
25400 and 25500 of the California Corporations Code, as well as Sections 11 and
15 of the Securities Act of 1933 (except as to the underwriters). On June 7,
1999, Aspec and certain of the individual defendants filed a demurrer to the
Consolidated Complaint. The demurrer is presently pending in the Superior Court.

     In addition, the plaintiffs have moved to certify a plaintiff class, and
for summary judgment against the Company, solely on the Section 11 claims. The
Company has not yet responded and those motions are presently pending.

     Certain of the Company's current and former officers, directors and
shareholder entities were also named as defendants in a derivative lawsuit,
Linda Willinger, IRA, et al. v. Conrad Dell'Oca et al., No. CV-778007, which was
filed on November 12, 1998, in the Superior Court of Santa Clara County. The
derivative action alleges facts similar to those in the class action and also
alleges that certain of the directors caused the Company to conduct the initial
public offering in order to redeem certain preferred stock. Aspec filed a
demurrer to that Complaint on June 8, 1999. That demurrer is also presently
pending in the Superior Court.

UNITED STATES DISTRICT COURT

     On October 16, 1998, plaintiffs agreed to voluntarily dismiss Kassover, et
al. v. Aspec Technology, Inc., et al, No. C 98-2604VRW, which was filed on June
30, 1998 in the United States District Court for the Northern District of
California against Aspec and certain of its officers and directors. The
Complaint alleged that defendants violated Sections 11, 12, and 15 of the
Securities Exchange Act of 1934 by failing to disclose certain facts about
Aspec's financial condition between April 28, 1998 and June 30, 1998. On October
20, 1998, the Court dismissed the purported class action without prejudice.

NASDAQ INQUIRY

     On September 4, 1998, the Company received an informal request for
information from the NASDAQ Listing Investigations Staff. NASDAQ requested
information concerning the Company's financial accounting

                                       20
<PAGE>   21

and internal controls. The Company has provided information in response to the
informal inquiry. NASD held a de-listing inquiry on December 17, 1998 at which
the Company appeared through counsel and provided information. As of February
25, 1999, the NASD determined that the Company would remain listed on the
NASDAQ.

SEC INQUIRY

     In January 1999, the Company received an informal inquiry from the
Securities and Exchange Commission ("SEC"). The Company is continuing to provide
information in response to the SEC's requests.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) EXHIBITS

<TABLE>
        <C>     <S>
        27.1    Financial Data Schedule
</TABLE>

     (b) REPORTS ON FORM 8-K

     None

                                   SIGNATURES

     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.

                                          ASPEC TECHNOLOGY, INC.

                                          By:    /s/ R. MICHAEL O'MALLEY

                                            ------------------------------------
                                            R. Michael O'Malley
                                            Chief Financial Officer

Date: July 15, 1999

                                       21
<PAGE>   22

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS
--------
<C>         <S>
  27.1      Financial Data Schedule
</TABLE>