<PAGE>   1
                                 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, 1998

                                       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)

             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)

       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 [ ] NO [X]*

         The number of shares of the Registrant's Common Stock outstanding as of
May 31, 1998 was 28,441,554.

* The Registrant became subject to the filing requirements of the Exchange Act
on April 27, 1998 in connection with the initial public offering of its Common
Stock.



<PAGE>   2

                             ASPEC TECHNOLOGY, INC.

                                    FORM 10-Q

                       FOR THE QUARTER ENDED MAY 31, 1998

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                            Page
<S>         <C>                                                                                             <C>
PART I.      FINANCIAL INFORMATION

Item 1.      Condensed Consolidated Financial Statements

             a)       Condensed Consolidated Statements of Income for the three and six months ended
                      May 31, 1998 and 1997 ................................................................  3

             b)       Condensed Consolidated Balance Sheets at May 31, 1998 and November 30, 1997 ..........  4

             c)       Condensed Consolidated Statements of Cash Flows for the six months ended
                      May 31, 1998 and 1997 ................................................................  5

             d)       Notes to Condensed Consolidated Financial Statements .................................  6

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations .........  9


PART II.     OTHER INFORMATION

Item 1.      Legal Proceedings ............................................................................. 24

Item 2.      Change in Securities and Use of Proceeds ...................................................... 25

Item 6.      Exhibits and Reports on Form 8-K .............................................................. 25


SIGNATURES ................................................................................................. 26
</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,
                                                 --------      --------      --------      --------
                                                  1998           1997          1998          1997
                                                 --------      --------      --------      --------
<S>                                              <C>           <C>           <C>           <C>     
Revenue                                          $  8,034      $  5,042      $ 14,959      $ 10,720
Cost of revenue                                     3,729         2,078         6,438         3,728
                                                 ----------------------      ----------------------

Gross profit                                        4,305         2,964         8,521         6,992
                                                 ----------------------      ----------------------
Operating expenses:
       Research and development                       533           288           964           586
       Sales and marketing                          1,461         1,836         2,727         3,350
       General and administrative                     644           534         1,517           930
       Write-off of purchased technology            3,742            --         3,742            --
                                                 ----------------------      ----------------------
             Total operating expenses               6,380         2,658         8,950         4,866
                                                 ----------------------      ----------------------

Income (loss) from operations                      (2,075)          306          (429)        2,126
Interest income, net                                  318            39           340           128
                                                 ----------------------      ----------------------

Income (loss) before income taxes                  (1,757)          345           (89)        2,254
Provision for income taxes                            770           138         1,437           902
                                                 ----------------------      ----------------------

Net income (loss)                                  (2,527)          207        (1,526)        1,352
Accretion of redeemable preferred stock             4,116           204         4,328           406
                                                 ----------------------      ----------------------
Income (loss) attributable to common
     stockholders                                $ (6,643)     $      3      $ (5,854)     $    946
                                                 ======================      ======================
Basic earnings (loss) per share                  $  (0.28)     $   0.00      $  (0.26)     $   0.04
                                                 ======================      ======================
Shares used in basic per share calculation         23,822        21,433        22,555        21,376
                                                 ======================      ======================
Diluted earnings (loss) per share                $  (0.28)     $   0.00      $  (0.26)     $   0.04
                                                 ======================      ======================
Shares used in diluted per share calculation       23,822        22,676        22,555        22,825
                                                 ======================      ======================
</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,       NOV. 30,
                                                                  1998          1997
                                                                --------      --------
                                                               (UNAUDITED)       (1)
<S>                                                             <C>           <C>     
Current assets:
   Cash and equivalents                                         $ 52,485      $  2,524
   Accounts receivable (net of allowances of $700 and $300)
      Billed                                                       8,085         6,996
      Unbilled                                                     3,510           948
   Prepaid  expenses                                               1,039           507
   Inventory                                                         112            --
   Deferred income taxes                                           1,778         1,778
                                                                ----------------------
      Total current assets                                        67,009        12,753
Property and equipment - net                                       5,180         4,105
Other assets                                                       1,459           243
                                                                ----------------------

TOTAL                                                           $ 73,648      $ 17,101
                                                                ======================

                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
   Accounts payable                                             $  2,346      $    801
   Accrued liabilities                                             3,090         2,379
   Income taxes payable                                              855           321
   Customer advances                                               1,904         4,747
                                                                ----------------------
      Total current liabilities                                    8,195         8,248

Deferred income taxes                                                267            --
                                                                ----------------------
      Total liabilities                                            8,462         8,248

Series A redeemable preferred stock                                   --        14,168
Redeemable common stock                                               --         7,116

Stockholders' equity (deficiency):
   Common stock                                                   86,237         2,914
   Stockholders' notes receivable                                   (200)         (301)
   Deferred stock compensation                                      (118)         (165)
   Retained earnings (deficit)                                   (20,733)      (14,879)
                                                                ----------------------
      Total stockholders' equity (deficiency)                     65,186       (12,431)
                                                                ----------------------
TOTAL                                                           $ 73,648      $ 17,101
                                                                ======================
</TABLE>

(1)   Derived from audited consolidated financial statements

     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,    
                                                                                            --------------------  
                                                                                                1998        1997
<S>                                                                                          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                           $  (1,526)    $ 1,352
Adjustments from operating activities: 
  Write-off of purchased technology                                                             3,742          --
  Depreciation and amortization                                                                 1,143         666
  Deferred income taxes                                                                           (16)         --
  Stock compensation expense                                                                       37          73
  Changes in assets and liabilities 
    Accounts receivable:
      Billed                                                                                     (818)     (2,689)
      Unbilled                                                                                 (2,562)       (694)
    Prepaid expenses                                                                             (514)        (87)
    Inventory                                                                                     (13)         --
    Accounts payable                                                                            1,360         458
    Accrued liabilities                                                                           268         329
    Income taxes payable                                                                          534      (1,687)
    Customer advances                                                                          (2,843)        210
                                                                                             --------     -------
    NET CASH PROVIDED (USED FOR) BY OPERATING ACTIVITIES                                       (1,208)     (2,069)
                                                                                             --------     -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                                          (2,105)     (2,052)
  Cash acquired, net of cash payments for purchase of SIS Microelectronics                         26          --
  Other assets                                                                                   (258)        (51)
                                                                                             --------     -------
    NET CASH PROVIDED (USED FOR) BY INVESTING ACTIVITIES                                       (2,337)     (2,103)
                                                                                             --------     -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Sale of common stock                                                                         72,226          --
  Redemption of redeemable preferred stock                                                    (18,495)         --
  Repayment of borrowings                                                                        (314)         --
  Repurchase of common stock                                                                      (12)         --
  Collection of stockholder notes receivable                                                      101          92
                                                                                             --------     -------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                                                  53,506          92
                                                                                             --------     -------
Net increase (decrease) in cash and equivalents                                                49,961      (4,080)
Cash and equivalents, beginning of period                                                       2,524       6,341
                                                                                             --------     -------
CASH AND EQUIVALENTS, END OF PERIOD                                                          $ 52,485     $ 2,261
                                                                                             ========     =======
 
Supplemental disclosure of cash flow information:
  Cash paid for income taxes                                                                 $    919     $ 2,588
                                                                                             ========     =======

  Accretion of redeemable preferred stock                                                    $  4,328     $   406
                                                                                             ========     =======

The Company purchased all of the capital stock of SIS Microelectronics for Aspec
stock of $4,000,000 plus transaction costs of $148,000. In conjunction with the
acquisition, assets acquired and liabilities assumed were as follows:

  Fair value of assets acquired, including purchased technology                              $  1,348
  Liabilities assumed                                                                             942
                                                                                             --------
    Net assets acquired                                                                           406
    Purchased technology (expensed)                                                             3,742
                                                                                             --------
      Purchase price                                                                         $  4,148
                                                                                             ========
</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
ASPEC TECHNOLOGY, INC. ("Aspec" or 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.
The year-end balance sheet has been derived from audited financial statements
and does not include all disclosures required by GAAP. Operating results for the
three and six-month periods ended May 31, 1998 are not necessarily indicative of
the results that may be expected for the fiscal year ending November 30, 1998 or
for any other period. The unaudited condensed consolidated financial statements
contained herein should be read in conjunction with the audited financial
statements and footnotes for the year ended November 30, 1997 included in the
Company's Registration Statement on Form S-1 (Reg. No. 333-22913) together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations.



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
excludes dilution and 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):






                                       6
<PAGE>   7


<TABLE>
<CAPTION>
                                                                    Quarter Ended            Six Months Ended
                                                                       May 31,                    May 31,
                                                                 1998          1997         1998          1997
                                                               --------      --------     --------      --------
                                                                                 (Unaudited)

<S>                                                            <C>           <C>          <C>           <C>     
Net income (loss) attributable to common stockholders          $ (6,643)     $      3     $ (5,854)     $    946
                                                               -------------------------------------------------

Denominator-basic EPS common stock outstanding                   23,822        21,433       22,555        21,376
                                                               -------------------------------------------------

Basic earnings (loss) per share                                $  (0.28)     $   0.00     $  (0.26)     $   0.04
                                                               -------------------------------------------------

Denominator-Diluted EPS:
     Denominator-Basic EPS                                       23,822        21,433       22,555        21,376
     Effect of dilutive securities:
         Weighted average common shares subject to
             repurchase rights                                       --         1,028           --         1,086
         Weighted average common share equivalents related
             to stock purchase rights and options                    --           215           --           363
                                                               -------------------------------------------------
                                                                 23,822        22,676       22,555        22,825
                                                               -------------------------------------------------

Diluted earnings (loss) per share                              $  (0.28)     $   0.00     $  (0.26)     $   0.04
                                                               -------------------------------------------------
</TABLE>


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;
and 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 these statements
will not impact the Company's financial position, results of operations or cash
flows. Both statements are effective for fiscal years beginning after December
15, 1997, with earlier application permitted.

4.       BUSINESS COMBINATIONS

         In April 1998, the Company completed its purchase of SIS
Microelectronics, Inc. ("SIS Microelectronics"), an engineering design services
company located in Longmont, Colorado in exchange for the issuance of an
aggregate 400,000 shares of Common Stock. As part of this transaction, the
Company expensed approximately $3.7 million of in-process research and
development in the second quarter of fiscal 1998.




                                       7
<PAGE>   8


5.       STOCKHOLDERS' EQUITY

      On May 1, 1998, the Company completed the public offering of 6,000,000
shares of Common Stock through a Registration Statement declared effective by
the Securities and Exchange Commission on April 27, 1998.

      In May and June 1996, the Company issued an aggregate of 130,378 shares of
its Series A Redeemable Preferred Stock. The aggregate liquidation and
redemption value of the Series A Redeemable Preferred Stock was approximately
$18.5 million at May 6, 1998. In connection with the redemption of all
outstanding shares of such Series A Redeemable Preferred Stock from the proceeds
of the Company's initial public offering in May 1998, as required by the terms
of such shares, the difference between the book value and the redemption value
of approximately $4.1 million was recorded as accretion for Preferred Stock when
determining income attributable to common stockholders and earnings per share.
This $4.1 million of accretion was recorded in the second quarter of fiscal 1998
when the offering was completed and, together with the charge to in-process
research and development related to the acquisition of SIS Microelectronics,
resulted in a loss attributable to common stockholders and a loss per share in
the quarter.

      During May and June 1996, the Company sold an aggregate of 4,778,804
shares of redeemable common stock to the preferred stock investors for net
proceeds of approximately $7,116,000. Under a stockholder rights agreement,
these investors had a put option, exercisable at any time after the seventh
anniversary of the agreement, to require the Company to repurchase for cash all
of the common shares held by such investors at a price determined based upon the
then market value of the Company divided by the number of common shares
outstanding. This right terminated upon the IPO. The holders of these shares
have certain registration rights.




                                       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.

         Revenue consists primarily of 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. The price for a
typical bundle of products ranges from approximately $200,000 on a per design
basis to over $2.0 million on an enterprise basis.

         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





                                       9

<PAGE>   10

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.

         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 54.1%, 66.2% and 48.2% of revenue
in fiscal 1995, 1996 and 1997, respectively and 47.6% and 58.5% of revenue for
the first six months of fiscal 1997 and 1998, respectively. Although the Company
does not believe that it experienced any material adverse impact in revenue as a
result of the financial dislocations that occurred in certain Asian countries
during 1997 and 1998, it has experienced a lengthening of the payment period for
accounts receivables from certain Asian-based customers. At May 31, 1998,
approximately 67.3% 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. See "Other Factors
Affecting Future Operating Results -- Risks Associated With International
Operations."

         In May and June 1996, the Company issued an aggregate of 130,378 shares
of its Series A




                                       10
<PAGE>   11
Redeemable Preferred Stock. The aggregate liquidation and redemption value of
the Series A Redeemable Preferred Stock was approximately $18.5 million at May
6, 1998. In connection with the redemption of all outstanding shares of such
Series A Redeemable Preferred Stock from the proceeds of the Company's initial
public offering in May 1998, as required by the terms of such shares, the
difference between the book value and the redemption value of approximately $4.1
million was recorded as accretion for Preferred Stock when determining income
attributable to common stockholders and earnings per share. This $4.1 million of
accretion was recorded in the second quarter of fiscal 1998 when the offering
was completed and, together with the charge to in-process research and
development related to the acquisition of SIS Microelectronics, resulted in a
loss attributable to common stockholders and a loss per share in the quarter.
See Notes 4 and 5 of Notes to Condensed Consolidated Financial Statements.

         As part of the Company's strategy to expand its engineering design
services capability, 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. SIS Microelectronics is an engineering design
services company located in Longmont, Colorado, has 17 employees and recorded
revenues of approximately $1.7 million for its fiscal year ended December 31,
1997. 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 $3.7 million in the Company's fiscal quarter ended May 31, 1998. 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. The charge from
the SIS Microelectronics acquisition, in addition to the $4.1 million of
accretion of the Series A Redeemable Preferred Stock, resulted in a loss
attributable to common stockholders and a loss per share in the second quarter
of fiscal 1998. See "Other Factors Affecting Future Operating Results -- Risks
Associated With SIS Microelectronics Acquisition; Other Potential Acquisitions."








                                       11
<PAGE>   12

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
                                                      1998       1997       1998      1997
                                                       ---        ---        ---        --- 
<S>                                                   <C>        <C>        <C>        <C> 
Revenue                                                100%       100%       100%       100%
Cost of revenue                                         46         41         43         35 
                                                       --------------        -------------- 
Gross profit                                            54         59         57         65 
Operating expenses:
       Research and development                          7          6          7          5 
       Sales and marketing                              18         36         18         31 
       General and administrative                        8         11         10          9 
       Write-off of purchased technology                47          -         25          - 
                                                       --------------        -------------- 
             Total operating expenses                   80         53         60         45 
                                                       --------------        -------------- 
Income (loss) from operations                          (26)         6         (3)        20
Interest income, net                                     4          1          2          1 
                                                       --------------        -------------- 
Income (loss) before income taxes                      (22)         7         (1)        21 
Provision for income taxes                              10          3          9          8 
                                                       --------------        -------------- 
Net income (loss)                                      (32)         4        (10)        13 
Accretion of redeemable preferred stock                 51          4         29          4 
                                                       --------------        -------------- 
Income (loss) attributable to common stockholders      (83%)        -%       (39%)        9%
                                                       ==============        ============== 
</TABLE>

         Revenues. Revenue increased by 59% from $5.0 million in the quarter
ended May 31, 1997 to $8.0 million in the quarter ended May 31, 1998. Revenue
increased by 40% from $10.7 million in the six-month period ended May 31, 1997
to $15.0 million in the six-month period ended May 31, 1998. The growth in
revenue in the second quarter and first half of fiscal 1998 compared with the
same periods in fiscal 1997 was primarily attributable to the Company's
continued expansion of its sales of standard cell-based products to a broader
customer base.

         International revenue accounted for 58.5% of revenue in the six-month
period ended May 31, 1998 compared to 47.6% of revenue in the six-month period
ended May 31, 1997. International revenue accounted for 57.7% of revenue during
the quarter ended May 31, 1998 compared to 51.2% of revenue during the quarter
ended May 31, 1997. 

         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





                                       12
<PAGE>   13
specifications. Cost of revenue increased by 79% from $2.1 million in the
quarter ended May 31, 1997 to $3.7 million in the quarter ended May 31, 1998.
Cost of revenue increased by 73% from $3.7 million in the six-month period ended
May 31, 1997 to $6.4 million in the six-month period ended May 31, 1998. Cost of
revenue as a percentage of revenue was 41% and 46% for the quarters ended May
31, 1997 and 1998, respectively, and 35% and 43% for the six-month periods ended
May 31, 1997 and 1998, respectively. The absolute dollar increases in cost of
revenue and the increases in cost of revenue as a percentage of revenue in the
second quarter and first half of fiscal 1998 compared with the same periods in
fiscal 1997 were due to (i) hiring of additional engineering personnel and
related expenses associated with customer funded development programs, (ii)
start-up 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 SIS Microelectronics and (iv) costs of rework resulting from
process technology changes implemented by semiconductor foundries for which the
Company had developed process-related performance data which required
recalculation and/or recharacterization. Due primarily to these four factors,
the Company's gross margin was adversely effected in the quarter ended May 31,
1998. The Company expects cost of revenue as a percentage of revenue to
fluctuate in future periods depending on the mix between development program
revenues and revenues from previously developed products.

         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
85% from $0.3 million in the quarter ended May 31, 1997 to $0.5 million in the
quarter ended May 31, 1998. Research and development expense increased by 65%
from $0.6 million in the six-month period ended May 31, 1997 to $1.0 million in
the six-month period ended May 31, 1998. Research and development expense as a
percentage of revenue was 6% and 7% for the quarters ended May 31, 1997 and
1998, respectively, and 5% and 7% for the six-month periods ended May 31, 1997
and 1998, respectively. The absolute dollar increases in research and
development expenses in the second quarter and first half of fiscal 1998
compared with the same periods in fiscal 1997 were due to increases in
engineering personnel and related expenses. The Company expects research and
development expense to increase in absolute dollars in future periods as the
Company expands its engineering efforts. The expected increase in the Company's
research and development expense could have a material adverse effect on the
Company's business, operating results and financial condition if the Company's
revenue does not also increase.

         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 20% from $1.8 million in the quarter ended May
31, 1997 to $1.5 million in the quarter ended May 31, 1998. Sales and marketing
expenses decreased by 19% from $3.4 million in the six-month period ended May
31, 1997 to $2.7 million in the six-month period ended May 31, 1998. Sales and
marketing expenses as a percentage of revenue was 36% and 18% for the quarters
ended May 31, 1997 and 1998, respectively, and 31% and 18% for the six-month
periods ended May 31, 1997 and 1998, respectively. The absolute dollar decreases
in sales and marketing expenses in the second quarter and first half of fiscal
1998 compared with the same periods in fiscal 1997, were due to higher Asian
representative sales commissions in the second quarter and first half of fiscal
1997 that did not occur in the fiscal 1998 periods and due to reduced personnel
costs as certain field application engineers were transferred into engineering.
The Company expects sales and





                                       13
<PAGE>   14

marketing expense to increase in absolute dollars in future periods as the
Company expands its sales and marketing efforts. The expected increase in the
Company's sales and marketing expense could have a material adverse effect on
the Company's business, operating results and financial condition if the
Company's revenue does not also increase.

         General and administrative. General and administrative expenses
increased by 21% from $0.5 million in the quarter ended May 31, 1997 to $0.6
million in the quarter ended May 31, 1998. General and administrative expenses
increased by 63% from $0.9 million in the six-month period ended May 31, 1997 to
$1.5 million in the six-month period ended May 31, 1998. These increases
resulted primarily from addition of new management and administrative personnel
and increased administrative costs to support the Company's growth. General and
administrative expenses as a percentage of revenue was 11% and 8% for the
quarters ended May 31, 1997 and 1998, respectively. As a percentage of revenue,
general and administrative expenses decreased over these three-month periods as
the growth in revenue more than offset the growth in general and administrative
expenses. General and administrative expenses as a percentage of revenue was 9%
and 10% for the six-month periods ended May 31, 1997 and 1998, respectively. The
increase in general and administrative expense as a percentage of revenue in the
first half of fiscal 1998 was primarily attributable to a $0.4 million increase
in the Company's bad debt reserve recorded in the first quarter of fiscal 1998.
The Company expects general and administrative expense to increase in absolute
dollars in future periods as the Company expands its operations. The expected
increase in the Company's general and administrative expense could have a
material adverse effect on the Company's business, operating results and
financial condition if the Company's revenue does not also increase.

         The $3.7 million written off to purchased technology in the second
quarter of fiscal 1998 related to the acquisition of SIS Microelectronics (see
Note 4 to the Condensed Consolidated Financial Statements).

         Interest income, net. Interest income, net increased by 717% from
$39,000 in the quarter ended May 31, 1997 to $0.3 million in the quarter ended
May 31, 1998. Interest income increased 166% from $0.1 million in the six-month
period ended May 31, 1997 to $0.3 million in the six-month period ended May 31,
1998. Interest income as a percentage of revenue was 1% and 4% for the quarters
ended May 31, 1997 and 1998, respectively, and 1% and 2% for the six-month
periods ended May 31, 1997 and 1998, respectively. The absolute dollar increases
in interest income in the second quarter and first half of fiscal 1998 compared
with the same periods in fiscal 1997, were due to interest income earned on the
proceeds from the Company's initial public offering which was completed in May
1998.

         Provision for income taxes. The provision for income taxes was $0.1
million and $0.8 million for the quarters ended May 31, 1997 and 1998,
respectively and $0.9 million and $1.4 million in the six-month periods ended
May 31, 1997 and 1998, respectively. Excluding the impact of the one-time
non-deductible write-off of purchased technology, the effective tax rate
decreased to 38.8% and 39.3% in the second quarter and first half of fiscal
1998, respectively, compared with 40% in both the second quarter and the first
half of fiscal 1997. The provision for income taxes differs from the statutory
rate applied to pretax income because the write-off of purchased technology is
not deductible for income tax purposes. State taxes, net of federal benefit, and
the foreign sales corporation benefit also impacted the provision for income
taxes.




                                       14
<PAGE>   15
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.

         The Company's operating activities utilized net cash of $2.1 million in
the six-month period ended May 31, 1997 and utilized net cash of $1.2 million in
the six-month period ended May 31, 1998. Net cash used for operating activities
in both periods was mainly due to increases in accounts receivable.

         Net cash used in investing activities was $2.1 million and $2.3 million
in the six-month periods ended May 31, 1997 and 1998, respectively. Investing
activities consisted primarily of net purchases of property and equipment.

         Net cash provided by financing activities was $92,000 and $53.5 million
in the six-month periods ended May 31, 1997 and 1998, respectively. In the six
month period ended May 31, 1998, financing activities consisted primarily of the
sale of the Company's Common Stock in its initial public offering.

         At May 31, 1998, the Company had cash and equivalents of $52.5 million.
As of May 31, 1998, the Company had retained deficit of $20.7 million and
working capital of $58.8 million. The Company anticipates approximately $10.0
million for capital expenditures over the next 12 months.

         The Company intends to continue to invest heavily 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 and timing of expansion of product development efforts and the success
of these development efforts, the costs and timing of expansion of 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 at least the next 12 months.


Other Factors Affecting Future Operating Results

         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 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





                                       15
<PAGE>   16

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 hire
additional 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. In addition, it is likely that in some future
quarter the Company's operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely decline, perhaps substantially.

         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
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 generally
involves a significant commitment of capital with the attendant delays
frequently associated with authorization procedures for substantial capital
expenditures within customer organizations. The Company plans to increase its
operating expenses in order to enhance certain of its existing products and to
develop additional cell libraries for emerging design processes. The Company
also plans to increase its sales and marketing expenses in an attempt to broaden
its customer base. These 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 could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         Dependence on Emergence of Merchant SIP Market. The market for merchant
SIP is new and emerging. The Company's ability to achieve sustained 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 continue to 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.




                                       16
<PAGE>   17
         Management of Growth; Significant Anticipated Hiring Needs. The
Company's business has grown significantly with revenue increasing from $6.6
million in fiscal 1995 to $15.3 million in fiscal 1996 to $22.4 million in
fiscal 1997. Revenue for the first six months of fiscal 1998 was $15.0 million.
The growth of the Company's business and expansion of its customer base has
placed, and is expected to continue to place, a significant strain on the
Company's management and operations. A number of key members of the Company's
management, including its Chief Operating Officer and Chief Financial Officer
and its Vice Presidents of Marketing, Business Development and Design Services,
joined the Company after January 1998, and certain other executive officers have
joined the Company during the year. The Company's future success will depend on
its ability to integrate its new officers and 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 several additional
engineering personnel. The Company's failure to continue to expand its
engineering organization in a timely manner could result in delays in the
progress on percentage of completion contracts and the Company's research and
development efforts, either of which could have a material adverse effect on the
Company's business, operating results and financial condition.

         The Company's expansion has also resulted in substantial growth in the
number of its employees and the burden placed upon its financial, accounting and
operating systems, resulting in increased responsibility for both existing and
new management personnel. In this regard, the number of employees at the Company
increased from 46 at the end of fiscal 1995 to 121 at November 30, 1997 and 163
at May 31, 1998. The Company is in the process of hiring additional accounting
and financial personnel and in establishing and upgrading its financial and
accounting systems and procedures to support its growth. Because experienced
accounting and financial personnel are in great demand, there can be no
assurance that the Company will be able to identify, attract and retain such
personnel. The Company's future operating results will depend on the ability of
its management and other key employees to implement and improve its systems for
operations, financial control and information management, and to recruit, train
and manage its overall employee base. In particular, the Company's ability to
effectively manage and support any future growth will be substantially dependent
on its ability to improve its financial and management controls, reporting and
order entry systems and other procedures on a timely basis. The Company also
expects to increase its customer support operations to the extent the installed
base of the Company's products continues to grow and to recruit additional
personnel to expand its design services capabilities. There can be no assurance
that the Company will be able to manage or continue to manage its recent or any
future growth successfully or to implement and maintain adequate financial and
management controls and procedures, and any inability to do so would 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 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. SIS Microelectronics is an engineering design
services company located in Longmont, Colorado, has 17 employees and recorded
revenues of approximately $1.7 million for its fiscal year ended December 31,
1997. 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 $3.7 million in the





                                       17
<PAGE>   18

Company's fiscal quarter ended May 31, 1998. 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. The charge from the SIS Microelectronics
acquisition, in addition to the $4.1 million of accretion of the Series A
Redeemable Preferred Stock, resulted in a loss attributable to common
stockholders and a loss per share in the second quarter of fiscal 1998.

         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 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 adversely effected in the quarter
ended May 31, 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





                                       18
<PAGE>   19

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 1995, Samsung Electronics, National
Semiconductor and Yamaha accounted for 18.2%, 17.3% and 15.1%, respectively, of
the Company's revenue. In fiscal 1996, Asahi Glass accounted for 10.5% of the
Company's revenue, and the Company's six largest customers accounted for 51.8%
of the Company's revenue. In fiscal 1997, although no customer accounted for 10%
or more of revenue, seven customers located in Asia accounted for 37.1% of
revenue and seven domestic customers accounted for 30.5% of revenue. The Company
anticipates that the majority of its revenue will be derived from a relatively
small number of customers through at least fiscal 1998 and that sales to
customers in Asia will continue to account for a significant portion of the
Company's revenue. 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
54.1%, 66.2% and 48.2% of revenue in fiscal 1995, 1996, 1997, respectively and
58.5% and 57.7% of revenue for the first six months and second quarter of fiscal
1998, respectively. Although the Company does not believe that it experienced
any material adverse impact in revenue as a result of the financial dislocations
that occurred in certain Asian countries during 1997 and 1998, it has
experienced a lengthening of the payment period for accounts receivables from
certain Asian-based customers. At May 31, 1998, approximately 67.3% 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





                                       19
<PAGE>   20

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. The Company's business, operating results and financial condition may
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., Cascade Design
Automation (a subsidiary of Oki Semiconductor Ltd.), Compass Design Automation
(a division of Avant!), Mentor Graphics and Silicon Architects (a division of
Synopsys). Duet Technology, Inc., a design services company, recently acquired
Cascade Design Automation. 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. 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 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 could eventually result in price
reductions or reduced operating margins which could materially adversely affect
the Company's business, operating results and financial condition. Many of the
Company's potential competitors have





                                       20
<PAGE>   21

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, 1998, the Company held six U.S. patents which expire from
2013 to 2015 and had two U.S. patent applications pending. The Company also has
12 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 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





                                       21
<PAGE>   22

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 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.

         Dependence on 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. The loss of the services of any of these
individuals or groups of individuals could have a material adverse effect on the
Company's business, operating results and financial condition. None of the
Company's executive officers has an employment agreement with the Company. The
Company believes that its future business results will also depend in
significant part upon its ability to identify, attract, motivate and retain
additional highly skilled technical, managerial and marketing personnel.
Competition for such personnel in the computer software industry is intense. The
Company is currently engaged in a search for several additional engineering
personnel. There can be no assurance the Company will be successful in
identifying, attracting and retaining such personnel, and the failure to do so
could have a material adverse effect on the Company's business, operating
results and financial condition.

         Year 2000 Compliance. 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 two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Although the Company
has conducted an internal review of such matters and believes that its products
and internal systems are Year 2000 compliant, the Company believes that the
purchasing patterns of customers and potential customers may be affected by Year
2000 issues as companies expend significant resources to upgrade their current
software systems for Year 2000 compliance. These expenditures may result





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in reduced funds available to purchase products such as those offered by the
Company, which could have a material adverse effect on the Company's business,
operating results and financial condition.

         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."






                                       23
<PAGE>   24

                           PART II. OTHER INFORMATION

Item 1.           Legal Proceedings

         A number of securities class actions have been filed against the
Company and certain of its officers and directors. One federal complaint was
filed in the United States District Court for the Northern District of
California; other complaints were filed in the Superior Court of Santa Clara
County. The lawsuits concern the Company's financial results for the second
quarter of fiscal 1998 and were filed on behalf of persons who purchased the
Company's stock between April 28,1998 and June 30, 1998. The complaints allege
violations of state and/or federal securities laws arising out of alleged
misstatements and omissions to state material facts about the Company in the
April 27, 1998 Prospectus filed in connection with the Company's initial public
offering of Common Stock. The Company believes that the actions are without
merit and intends to defend against them vigorously. Nevertheless, litigation is
subject to inherent uncertainties, and thus there can be no assurance that these
suits will be resolved favorably to the Company or will not have a material
adverse effect on the Company's financial condition and results of operations.








                                       24
<PAGE>   25
Item 2.       Changes in Securities and Use of Proceeds

         On April 28, 1998, the Company completed the sale of 6,000,000 Common
Shares at a per share price of $13.00 in a firm commitment underwriting public
offering. The offering was effected pursuant to a Registration Statement on Form
S-1 (Registration No. 333-22913), which the United States Securities and
Exchange Commission declared effective on April 27, 1998. Hambrecht and Quist
LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated were the lead
underwriters for the offering.

         Of the $78,000,000 in aggregate proceeds raised by the Company in
connection with the April 1998 offering, (i) $5,460,000 was paid to underwriters
in connection with underwriting discounts, and (ii) approximately $600,000 was
paid by the Company in connection with offering expenses, printing fees, filing
fees, and legal fees. The legal fees included approximately $200,000 in legal
fees to Wilson Sonsini Goodrich & Rosati, Professional Corporation ("WSG&R"),
counsel to the Corporation. Jeffrey D. Saper, a member of WSG&R is Secretary and
a director of the Company. Of the net proceeds of approximately $71.9 million,
the Company used approximately $18.5 million to redeem all outstanding shares of
the Company's Series A Redeemable Preferred Stock as required by the terms of
such shares. The Company paid Summit Ventures IV, L.P. and Summit Investors III,
L.P. an aggregate of approximately $9.2 million in connection with the
redemption of an aggregate of 64,544 shares of Series A Redeemable Preferred
Stock. Walter G. Kortschak, a director of the Company, is a general partner of
Stamps, Woodsum & Co. IV and Summit Investors III, L.P. Stamps, Woodsum & Co. IV
is the general partner of Summit Partners IV, L.P. Summit Partners IV, L.P. is
the general partner of Summit Ventures IV, L.P. The Company paid WK Technology
Fund, WK Technology Fund II and WK Technology Fund III an aggregate of
approximately $9.2 million in connection with the redemption of an aggregate of
64,544 shares of Series A Redeemable Preferred Stock. Y.S. Fu, a director of the
Company, is a partner of WK Technology Fund, WK Technology Fund II and WK
Technology Fund III. The Company paid Jeffrey D. Saper approximately $69,000 in
connection with the redemption of 484 shares of Series A Redeemable Preferred
Stock. The Company paid certain members of WSG&R and investment partnerships of
which such persons are partners approximately $23,000 in connection with the
redemption of 161 shares of Series A Redeemable Preferred Stock. The Company
paid the counsel to the purchasers of Series A Redeemable Preferred Stock 
approximately $91,000 in connection with the redemption of 645 shares of Series 
A Redeemable Preferred Stock. There were no other direct or indirect payments 
to directors or officers of the Company or any other person or entity. Except 
for approximately $1.0 million used for working capital requirements and 
purchases of computer equipment and software, none of the offering proceeds 
have been used for the construction of plant, building or facilities or the 
purchase or installation of machinery or equipment or for purchases of real 
estate or the acquisition of other businesses. The Company is currently 
investing the net offering proceeds for future use as additional working 
capital. Such net proceeds have been invested in short-term, interest bearing,
investment grade securities. A portion of the net proceeds may be used for the 
acquisition of technologies, businesses or products that are complementary to 
those of the Company.

Item 6.       Exhibits and Reports on Form 8-K

       (a)    Exhibits

              27.1        Financial Data Schedule

       (b)    Reports on Form 8-K

                    There were no reports filed on Form 8-K during the quarter
              ended May 31, 1998. However, on June 29, 1998, the Company filed a
              Form 8-K with the Securities and Exchange Commission relating to
              the acquisition of SIS Microelectronics, Inc.



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                                   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.


Date:    July 15, 1998                       By:  /s/   MITCHELL D. BOHN
                                                -----------------------------
                                                Mitchell D. Bohn
                                                Chief Operating Officer
                                                and Financial Officer


                                           
                                           
                                           
                                           








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                                INDEX TO EXHIBITS

EXHIBITS

27.1          Financial Data Schedule