<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 August 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)

                  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 [X] NO [ ]

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


<PAGE>   2


                             ASPEC TECHNOLOGY, INC.

                                    FORM 10-Q

                      FOR THE QUARTER ENDED AUGUST 31, 1999

                                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 nine months ended August
                  31, 1999 and 1998.......................................................................    3

             b)   Condensed Consolidated Balance Sheets at August 31, 1999 and November 30, 1998..........    4

             c)   Condensed  Consolidated  Statements  of Cash Flows for the nine months  ended August 31,
                  1999 and 1998...........................................................................    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...........................................................................    18

Item 6.      Exhibits and Reports on Form 8-K............................................................    19


SIGNATURES...............................................................................................    19
</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          NINE MONTHS ENDED
                                                     AUGUST 31,              AUGUST 31,
                                                1999          1998       1999         1998
<S>                                            <C>         <C>        <C>         <C>
Revenue                                        $  1,525    $  8,659   $  5,989    $ 19,116
Cost of revenue                                   3,419       4,473     10,266      10,687
                                               --------    --------   --------    --------
Gross profit                                     (1,894)      4,186     (4,277)      8,429
                                               --------    --------   --------    --------
Operating expenses:
       Research and development                   1,303         966      4,805       1,930
       Sales and marketing                        1,069       1,729      3,357       4,456
       General and administrative                   817       1,090      3,410       2,683
       Amortization - goodwill                      167         167        502         167
       Write-off of purchased technology           --          --         --           700
                                               --------    --------   --------    --------
             Total operating expenses             3,356       3,952     12,074       9,936
                                               --------    --------   --------    --------
Loss from operations                             (5,250)        234    (16,351)     (1,507)
Interest income, net                                349         690      1,270       1,030
Equity losses from joint venture                   (170)       --         (585)       --
                                               --------    --------   --------    --------
Loss before income taxes                         (5,071)        924    (15,666)       (477)
Benefit from income taxes                          --           349       --            82
                                               --------    --------   --------    --------
Net loss                                         (5,071)        575    (15,666)       (559)
Accretion of redeemable preferred stock            --          --         --         4,328
                                               --------    --------   --------    --------
Loss attributable to common stockholders       $ (5,071)   $    575   $(15,666)   $ (4,887)
                                               ========    ========   ========    ========
Basic loss per share                           $  (0.18)   $   0.02   $  (0.56)   $  (0.20)
                                               ========    ========   ========    ========
Shares used in basic per share calculation       27,680      27,917     27,945      24,347
                                               ========    ========   ========    ========
Diluted loss per share                         $  (0.18)   $   0.02   $  (0.56)   $  (0.20)
                                               ========    ========   ========    ========
Shares used in diluted per share calculation     27,680      28,726     27,945      24,347
                                               ========    ========   ========    ========
</TABLE>





     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>   4


                             ASPEC TECHNOLOGY, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)


                                     ASSETS
<TABLE>
<CAPTION>
                                               AUG. 31,     NOV. 30
                                                 1999         1998
                                              (UNAUDITED)      (1)
<S>                                           <C>          <C>
Current assets:
   Cash and equivalents                        $30,482    $ 42,480
   Accounts receivable (net of
    allowances of $862 and $1,271)
      Billed                                     3,198       5,165
      Unbilled                                     357       2,231
   Income taxes receivable                        --           679
   Prepaid  expenses                               565         882
   Inventory                                        99         167
   Deferred income taxes                         2,100       2,100
                                               -------     -------
      Total current assets                      36,801      53,704
Property and equipment - net                     9,444      12,297
Investments                                      2,538         840
Other assets                                     3,010       3,622
                                               -------     -------
TOTAL                                          $51,793    $ 70,463
                                               =======     =======
</TABLE>

            LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
<S>                                           <C>         <C>
Current liabilities:
   Accounts payable                           $  3,740    $  3,326
   Accrued liabilities                           2,067       3,104
   Customer advances                             3,346       4,206
   Income taxes payable                            272        --
                                              --------    --------
      Total current liabilities                  9,425      10,636

Deferred liabilities - rent                         52          52
Other liabilities - long term                     --         1,000
                                              --------    --------
      Total liabilities                          9,477      11,688

Stockholders' equity (deficiency):
   Common stock                                 86,299      86,198
   Treasury stock                                 (927)       --
   Stockholders' notes receivable                 (175)       (184)
   Deferred stock compensation                    --           (70)
   Retained earnings (deficit)                 (42,835)    (27,169)
   Cumulative translation adjustment               (46)       --
                                              --------    --------
    Total stockholders' equity (deficiency)     42,316      58,775
                                              --------    --------
TOTAL                                         $ 51,793    $ 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>
                                                                 NINE MONTHS ENDED
                                                                    AUGUST 31,
                                                                 1999        1998
<S>                                                            <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                              $(15,666)   $  (559)
Adjustments from operating activities:
  Write-off of purchased technology                                --          700
  Depreciation and amortization                                   5,409      2,376
  Equity losses from joint venture                                  585       --
  Cumulative translation adjustment                                --         --
  Deferred income taxes                                            --         (796)
  Stock compensation expense                                         96         57
  Changes in assets and liabilities
    Accounts receivable:
      Billed                                                       1,967    (1,204)
      Unbilled                                                     1,874    (3,021)
    Income taxes receivable                                          679      --
    Prepaid expenses and other assets                                427      (885)
    Inventory                                                         68       (13)
    Accounts payable                                                (586)    2,986
    Accrued liabilities                                           (1,037)      (67)
    Income taxes payable                                             272        40
    Customer advances                                               (860)     (296)
                                                                --------   --------
    NET CASH USED FOR OPERATING ACTIVITIES                        (6,772)     (682)
                                                                --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                             (2,054)   (9,372)
  Cash  acquired,  net of  cash  spent  in  purchase  of SIS       --           26
Microelectronics

  Purchase of Non-Marketable Equity                                --         (916)
  Investment in joint venture corporation                         (2,329)     --
                                                                --------   --------
    NET CASH USED FOR INVESTING ACTIVITIES                        (4,383)  (10,262)
                                                                --------   --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Sale of common stock                                                75    72,217
  Redemption of redeemable preferred stock                          --     (18,495)
  Repayment of borrowings                                           --        (314)
  Repurchase of common stock                                        (927)       (8)
  Collection of stockholder notes receivable                           9       101
                                                                --------   --------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                       (843)   53,501
                                                                --------   --------

Net increase (decrease) in cash and equivalents                  (11,998)   42,557
Cash and equivalents, beginning of period                         42,480     2,524
                                                                --------   --------
CASH AND EQUIVALENTS, END OF PERIOD                             $ 30,482   $45,081
                                                                ========   ========

Supplemental disclosure of cash flow information:
  Cash paid for income taxes                                    $   --     $ 1,101
                                                                ========   ========
  Accretion of redeemable preferred stock                       $   --     $ 4,328
                                                                ========   ========
  Long term payable for acquisition of equipment                $   --     $ 1,000
                                                                ========   ========
</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 nine months ended August
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         Nine Months Ended
                                                                           August 31,             August 31,
                                                                       ---------   --------   ---------   ---------
                                                                          1999       1998        1999        1998
                                                                       ---------   --------   ---------   ---------
                                                                                      (Unaudited)

<S>                                                                    <C>         <C>        <C>         <C>
Net loss attributable to common stockholders                           $ (5,071)   $    575   $(15,666)   $ (4,887)
                                                                       ---------   --------   ---------   ---------
Denominator-basic EPS common stock outstanding                           27,680      27,917     27,945      24,347
                                                                       ---------   --------   ---------   ---------
Basic loss per share                                                   $  (0.18)   $   0.02   $  (0.56)   $  (0.20)
                                                                       ---------   --------   ---------   ---------
Denominator-Diluted EPS:
     Denominator-Basic EPS                                               27,680      27,917     27,945      24,347
     Effect of dilutive securities:
         Weighted average common shares subject to repurchase rights       --           527       --          --
         Weighted average common share equivalents related
             to stock purchase rights and options                          --           282       --          --
                                                                       ---------   --------   ---------   ---------
                                                                         27,680      28,726     27,945      24,347
                                                                       ---------   --------   ---------   ---------
Diluted loss per share                                                 $  (0.18)   $   0.02   $  (0.56)   $  (0.20)
                                                                       ---------   --------   ---------   ---------
</TABLE>


                                       6
<PAGE>   7

        Stock options to purchase 1,725,650 shares of common stock were
outstanding at August 31, 1999, but were not included in the computation of
diluted earnings per share because they were antidilutive.

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 significant difference
between the Company's net loss and its total comprehensive loss for the three
and nine month periods ended August 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.

      In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.

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


                                       7
<PAGE>   8

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. On June 9, 1999, the plaintiffs
filed a motion for summary adjudication of their claims against Aspec under
Section 11 of the Securities Act. The plaintiffs also moved to certify a
plaintiff class.

On August 26, 1999, the court heard argument on the defendants' demurrer. The
court sustained the demurrer in part and overruled it in part. Specifically, the
court held that the plaintiffs had not pleaded their claims under California
Corporations Code Section 25400 with sufficient particularity and granted
plaintiffs leave to amend this claim. The court overruled the defendants'
demurrer to the Section 11 claim. Plaintiffs' amended complaint is due on
October 18, 1999.

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, 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 on behalf of certain of the officer and director defendants and nominal
defendant, Aspec. Thereafter, the plaintiffs requested the defendants' assent to
the dismissal of their complaint and the filing of an amended complaint.
Plaintiffs served their First Amended Shareholders' Derivative Complaint on
September 2, 1999. Defendants' response to the amended complaint is due on
October 28, 1999.

On June 21, 1999, a lawsuit entitled Cadabra Design Technology, Inc. v. Aspec
Technology, Inc., No. CV-782691, was filed in the Superior Court, County of
Santa Clara. Plaintiff's complaint seeks damages in the amount of $594,000 for
an alleged breach of a commercial software licensing agreement entered into by
Cadabra Design Technology, Inc. and the Company on or about August 18, 1998. On
August 6, 1999, the Company answered the complaint - denying liability and
asserting various affirmative defenses - and filed a cross-complaint seeking
damages according to proof and equitable relief for breach of contract,
conversion, and negligent misrepresentation on the part of Cadabra Design
Technology, Inc. Cadabra Design Technology, Inc. answered the cross-complaint on
October 8, 1999. The parties have also stipulated to a continuance of the case
management conference, on November 23, 1999.

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.

6. SUBSEQUENT EVENTS

   In September 1999, the Company completed its purchase of two electronic
design automation ("EDA") software companies--Verilux Design Technology, Inc.
("Verilux") and Chip&Chip, Inc. ("Chip&Chip"). The Company acquired 100 percent
of Verilux in exchange for the issuance of 2,127,400 shares of Company Common
Stock and $872,600 in cash. The Company acquired 100 percent of Chip&Chip in
exchange for the issuance of 2,000,000 shares of Company Common Stock and
$800,000 in cash.


                                       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.

   A significant portion of the Company's revenue comes from license fees for
the Company's SIP products and licenses. 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 cell libraries can be acquired by customers 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.

   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.


                                       9
<PAGE>   10

   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 57% and 30% of revenue for the first nine 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 August 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
is being 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.

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     NINE MONTHS ENDED
                                               AUGUST 31,         AUGUST 31,
                                            ---------------    ----------------
                                             1999     1998      1999      1998
                                            ------    -----    ------     -----
<S>                                         <C>       <C>      <C>        <C>
Revenue                                      100%      100%     100%      100%
Cost of revenue                              224        52      171        56
                                            ------    -----    ------     -----
Gross profit                                (124)       48      (71)       44
Operating expenses:
       Research and development               85        11       80        10
       Sales and marketing                    70        19       56        23
       General and administrative             54        13       57        15
       Amortization - goodwill                11         2        9         1
       Write-off of purchased technology      --        --       --         3
                                            ------    -----    ------     -----
             Total operating expenses        220        45      202        52
                                            ------    -----    ------     -----
Loss from operations                        (344)        3     (273)       (8)
Interest income, net                          22         8       21         5
Equity losses from joint venture             (11)       --      (10)       --
                                            ------    -----    ------     -----
Loss before income taxes                    (333)       11     (262)       (3)
Benefit from income taxes                      0         4       --        --
                                            ------    -----    ------     -----
Net loss                                    (333)        7     (262)       (3)
Accretion of redeemable preferred stock       --        --       --       (23)
                                            ------    -----    ------     -----
Loss attributable to common stockholders    (333%)       7%    (262%)     (26%)
                                            ======    =====    ======     =====
</TABLE>


   Revenue. Revenue decreased by 82% from $8.7 million in the quarter ended
August 31, 1998 to $1.5 million in the quarter ended August 31, 1999. Revenue
decreased by 69% from $19.1 million in the nine-month period ended August 31,
1998 to $6.0 million in the nine-month period ended August 31, 1999. The decline
in revenue in the first nine 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


                                       10
<PAGE>   11

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 30% of revenue in the nine-month period
ended August 31, 1999 compared to 57% of revenue in the nine-month period ended
August 31, 1998. International revenue accounted for 28% of revenue during the
quarter ended August 31, 1999 compared to 58% of revenue during the quarter
ended August 31, 1998. International revenue decreased in the first nine 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 24% from $4.5
million in the quarter ended August 31, 1998 to $3.4 million in the quarter
ended August 31, 1999. Cost of revenue decreased by 4% from $10.7 million in the
nine-month period ended August 31, 1998 to $10.3 million in the nine-month
period ended August 31, 1999. Cost of revenue as a percentage of revenue was 52%
and 224% for the quarters ended August 31, 1998 and 1999, respectively, and 56%
and 171% for the nine-month periods ended August 31, 1998 and 1999,
respectively. The absolute dollar decrease in cost of revenue in the third
quarter of fiscal 1999 compared with the same period in fiscal 1998 was due to
decreased number of engineering personnel due to layoffs which were effected to
reduce costs. Cost of revenue as a percentage of revenue increased over the
periods primarily due to substantially reduced revenue and higher costs in the
first nine months of fiscal 1999. The Company does not expect cost of revenue to
increase in absolute dollars in the remaining quarter 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
35% from $1.0 million in the quarter ended August 31, 1998 to $1.3 million in
the quarter ended August 31, 1999. Research and development expenses increased
by 149% from $1.9 million in the nine-month period ended August 31, 1998 to $4.8
million in the nine-month period ended August 31, 1999. Research and development
expense as a percentage of revenue was 11% and 85% for the quarters ended August
31, 1998 and 1999, respectively, and 10% and 81% for the nine-month periods
ended August 31, 1998 and 1999, respectively. The absolute dollar increases in
research and development expenses in the third quarter and first nine months of
fiscal 1999 compared with the same periods in fiscal 1998 were due to increases
in engineering personnel, including additional SIS Microelectronics personnel,
developing new technology, and related expenses. Research and development
expenses increased as a percentage of revenue due to higher expenses and
significantly reduced revenue in the third quarter and first nine 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 38% from $1.7 million in the quarter ended
August 31, 1998 to $1.1 million in the quarter ended August 31, 1999. Sales and
marketing expenses decreased by 25% from $4.5 million in the nine-month period
ended August 31, 1998 to $3.4 million in the nine-month period ended August 31,
1999. The absolute dollar decrease in sales and marketing expenses in the third
quarter and first nine months of fiscal 1999 compared with the same periods in
fiscal 1998 was due to decreased headcount and less advertising/public
relations spending. Sales and marketing expense increased as a percentage of
revenue from 19% to 70% for the quarters ended August 31, 1998 and 1999,
respectively, primarily due to lower revenues in the third quarter of fiscal
1999. The Company does not expect sales and marketing expense to increase in
absolute dollars in the remaining quarter of fiscal 1999.

   General and administrative. General and administrative expenses decreased by
35% from $1.3 million in the quarter ended August 31, 1998 to $0.8 million in
the quarter ended August 31, 1999. This decrease is primarily due to decreased
headcount and less bad debt reserve. General and administrative expenses
increased by 20% from $2.9 million in the nine-month period ended August 31,
1998 to $3.4 million in the nine-month period ended August 31, 1999. This
increase resulted primarily from increased administrative costs, accrued
severance for terminated employees, and an increase to the bad debt reserve in
the second quarter of fiscal 1999. General and administrative expenses increased
as a percentage of revenue from 15% to 54% for the quarters ended August 31,
1998 and 1999, respectively, primarily due to lower revenues in the third
quarter of fiscal 1999. The Company does not expect general and administrative
expense to increase in absolute dollars in the remaining quarter 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.


                                       11
<PAGE>   12


   Interest income, net. Interest income, net decreased by 49% from $0.7 million
in the quarter ended August 31, 1998 to $0.3 million in the quarter ended August
31, 1999. This decrease is due to lower cash levels in fiscal 1999 as compared
to fiscal 1998. Interest income increased by 23% from $1.0 million in the
nine-month period ended August 31, 1998 to $1.3 million in the nine-month period
ended August 31, 1999. The absolute dollar increases in interest income in the
first nine 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.

   The Company's operating activities utilized net cash of $0.7 million in the
nine-month period ended August 31, 1998 and utilized net cash of $6.8 million
in the nine-month period ended August 31, 1999. Net cash used for operating
activities in the first nine months of fiscal 1999 was mainly due to a net loss
of $15.7 million.

   Net cash used in investing activities was $10.3 million and $4.4 million in
the nine-month periods ended August 31, 1998 and 1999, respectively. Investing
activities for the first nine months of fiscal 1999 consisted primarily of the
investment in the joint venture and purchases of property and equipment.

   The Company's financing activities provided net cash of $53.5 million in the
nine-month period ended August 31, 1998, and utilized net cash of $0.8 million
in the nine-month period ended August 31, 1999.

   At August 31, 1999, the Company had cash and equivalents of $30.5 million. As
of August 31, 1999, the Company had a retained deficit of $42.8 million and
working capital of $27.4 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
three 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


                                       12
<PAGE>   13

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
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 is being 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.


                                       13
<PAGE>   14

   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 materially adversely effected in the
first three 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 August 31, 1999, two customers accounted for 47% of the
Company's revenue, and five of the Company's largest customers accounted for 24%
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 30% of
revenue for the first nine months of fiscal 1999. International revenue
decreased in the first nine 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
August 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


                                       14
<PAGE>   15

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 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


                                       15
<PAGE>   16

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 August 31, 1999, the Company held six U.S. patents and two foreign
patents which expire from 2013 to 2015 and had one U.S. patent application
pending and one under appeal. The Company also has ten 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 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.


                                       16
<PAGE>   17

   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 the latest version of 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 90% done. The Company expects to
    complete this upgrade by October 1999 at a cost of approximately $100,000.
    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 $0.25
    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.

   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
expects that these contingency plans will be place by end of October 1999. The
Company estimates that the remaining costs to meet the internal Year 2000 plan
should be between $50,000 to $100,000. 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."


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                           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. On June 9, 1999, the plaintiffs filed a motion for summary
adjudication of their claims against Aspec under Section 11 of the Securities
Act. The plaintiffs also moved to certify a plaintiff class.

On August 26, 1999, the court heard argument on the defendants' demurrer. The
court sustained the demurrer in part and overruled it in part. Specifically, the
court held that the plaintiffs had not pleaded their claims under California
Corporations Code Section 25400 with sufficient particularity and granted
plaintiffs leave to amend this claim. The court overruled the defendants'
demurrer to the Section 11 claim. Plaintiffs' amended complaint is due on
October 18, 1999.

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, 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 on behalf of certain of the officer and director defendants and nominal
defendant, Aspec. Thereafter, the plaintiffs requested the defendants' assent to
the dismissal of their complaint and the filing of an amended complaint.
Plaintiffs served their First Amended Shareholders' Derivative Complaint on
September 2, 1999. Defendants' response to the amended complaint is due on
October 28, 1999.

On June 21, 1999, a lawsuit entitled Cadabra Design Technology, Inc. v. Aspec
Technology, Inc., No. CV-782691, was filed in the Superior Court, County of
Santa Clara. Plaintiff's complaint seeks damages in the amount of $594,000 for
an alleged breach of a commercial software licensing agreement entered into by
Cadabra Design Technology, Inc. and the Company on or about August 18, 1998. On
August 6, 1999, the Company answered the complaint - denying liability and
asserting various affirmative defenses - and filed a cross-complaint seeking
damages according to proof and equitable relief for breach of contract,
conversion, and negligent misrepresentation on the part of Cadabra Design
Technology, Inc. Cadabra Design Technology, Inc. answered the Company's
cross-complaint on October 8, 1999. The parties have also stipulated to a
continuance of the case management conference, on November 23, 1999.

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


                                       18
<PAGE>   19

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.

Item 6. Exhibits and Reports on Form 8-K

    (a) Exhibits

        27.1 Financial Data Schedule

    (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.

Date:    October 15, 1999     By: /s/              Douglas E. Klint
                                  --------------------------------------------
                                  Douglas E. Klint
                                  Acting President / Chief Executive Officer


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<PAGE>   20


                                INDEX TO EXHIBITS

   EXHIBITS

   27.1 Financial Data Schedule



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