ASPEC TECHNOLOGY INC, 10-K405/A, 1999-04-07

ASPEC TECHNOLOGY INC
10-K405/A, 1999-04-07
PREPACKAGED SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998

[ ] 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)

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<S> <C>
DELAWARE 77-0298386
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
830 E. ARQUES AVENUE, SUNNYVALE, CA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 774-2199

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

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<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK PAR VALUE $0.001 PER SHARE NASDAQ NATIONAL MARKET
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

NONE
(TITLE OF CLASS)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of such stock on November 30, 1998,
as reported by the Nasdaq National Market, was approximately $35.5 million.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant's Common Stock on
November 30, 1998 was 28,399,070.

AMENDED FILING OF FORM 10-K TO INCLUDE
CERTAIN ADDITIONAL INFORMATION

This amendment is being filed for the sole purpose of including certain
additional information required by Part III of this Form 10-K. All other
information in the originally filed Form 10-K was presented as of the February
16, 1999 filing date, or earlier as indicated, and has not been updated in this
amended filing.

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TABLE OF CONTENTS

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PART I

Item 1. Business.................................................... 3
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 10

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Consolidated Financial Data........................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 40

PART III

Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 47
Item 13. Certain Relationships and Related Transactions.............. 48

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 48

SIGNATURES............................................................. 50
</TABLE>

When used in this Report, the words "expects," "anticipates," "believes,"
"estimates" and similar expressions are intended to identify 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.
Such forward-looking statements, which include statements concerning the timing
of new product introductions; the functionality and availability of products
under development; demand for or pricing of the Company's products; and the
percentage of export sales and sales to key customers; are subject to risks and
uncertainties, including those set forth in Item 7 of Part II hereof entitled
"Other Factors Affecting Future Operating Results" and elsewhere in this Report,
that could cause actual results to differ materially from those projected in the
forward-looking statements. These forward-looking statements speak only as of
the date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's expectations
with regard thereto or to reflect any change in events, conditions or
circumstances on which any such forward-looking statement is based, in whole or
in part.

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PART I

ITEM 1. BUSINESS

INTRODUCTION

Aspec is a leading provider of merchant semiconductor intellectual property
("SIP") solutions for high-performance, complex integrated circuit ("IC")
designs, including system-on-a-chip ICs. Aspec's SIP consists of cell libraries,
design tools, design methodologies and related engineering services which, when
used in conjunction with electronic design automation ("EDA") tools, simplify
the process of designing complex ICs. The Company believes that its SIP provides
designers with quick access to cell libraries at a lower cost than internally
developed solutions. Aspec's SIP includes its AdverPro design verification tool
which manages the IC design process, enabling EDA tools to exchange data while
providing an accurate timing function and helping to ensure compliance with
proper design procedures. Aspec's QuickPort design tool enables an IC designer
to more rapidly and economically port a design from one foundry to another to
secure alternate sourcing and to enable design reuse for next-generation process
technologies. Aspec's SIP currently supports a range of advanced, deep submicron
process technologies at leading semiconductor foundries, including Chartered
Semiconductor, Hyundai Electronics, IBM, LG Semicon, Samsung Electronics, Sanyo
Electric, Taiwan Semiconductor Manufacturing Corp. and United Microelectronics
Corporation.

PRODUCTS AND SERVICES

Aspec offers a suite of products on a per design basis, a per site basis or
an enterprise basis to its customers. Typically a customer licenses a bundle of
products which is accompanied by documentation and training. These products are
also licensed separately. Aspec's products include SIP libraries which consist
of logic functions based on gate array/embedded array or standard cell
architectures, I/Os and memories. The Company also offers SIP design tools to
ensure that various commercially available EDA tools work together to accurately
produce the IC design in silicon and to enable the portability of designs. The
Company's SIP design tools include memory compilers which allow customers to
automatically generate memory libraries. The Company also offers various design
and consulting services to its licensees on a per project basis. The Company's
products, which run on UNIX workstations and Windows NT-based PCs, currently
support over 25 industry standard EDA tools, including those produced by Avant!,
Cadence Design Systems, Mentor Graphics and Synopsys (including Viewlogic).
Aspec's SIP supports many of the world's leading merchant semiconductor
foundries, including Chartered Semiconductor, Hyundai Electronics, IBM, LG
Semicon, Samsung Electronics, Sanyo Electric, Taiwan Semiconductor Manufacturing
Corp. and United Microelectronics Corporation. Aspec's SIP products are
generally licensed on a per process technology basis and are available to
support submicron processes from 0.8u to 0.25u, depending on the foundry.

A description of the Company's principal products and services is provided
below:

SIP LIBRARIES

HDA Libraries. High Density Array ("HDA") is Aspec's proprietary, patented
gate array/embedded array architecture for silicon processes from 0.8u to 0.25u
and smaller. In addition, various HDA circuit design features enable designers
to complete the layout of the design faster than other gate array architectures.
With an HDA license, the customer obtains access to silicon process optimized
libraries for commonly used logic functions, such as Boolean logic.

HDC Libraries. High Density Cell ("HDC") is Aspec's proprietary standard
cell architecture for silicon processes from 0.6u to 0.5u. Compared to other
proprietary or commercially available standard cell libraries, Aspec's HDC
requires less interconnection (routing) overhead. With an HDC license, the
customer obtains access to silicon process optimized libraries for commonly used
logic functions.

SSC Libraries. Super Standard Cell ("SSC") is Aspec's proprietary standard
cell architecture for deep submicron processes for 0.35u, 0.25u and smaller.
When using the same process technology, SSC libraries will usually be 15%
smaller than Aspec's HDC libraries. In addition, ICs implemented in SSC
libraries will

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consume less power and yield higher performance, due to library features that
are designed to take advantage of silicon processes from 0.35u and smaller. With
an SSC license, the customer obtains access to silicon process optimized
libraries for commonly used logic functions.

I/O Circuit Libraries. Aspec offers a set of silicon process optimized
circuit libraries for commonly used I/O functions for silicon processes from
0.8u to 0.25u. These I/O libraries enable Aspec customers to provide
interconnection to other ICs in the system. As these interconnections have
become more application specific, Aspec has developed specialized I/O libraries
for these interfaces.

Memory Libraries. Aspec provides a range of static random access memory
("SRAM") libraries and read only memory ("ROM") libraries for process
technologies that range from 0.8u to 0.25u. These products include high density,
high speed and low power memories available in a variety of configurations to
meet the customer's specifications.

SIP DESIGN TOOLS

AdverPro. Aspec's AdverPro design tool is designed to manage the design
process, provide an accurate timing function across EDA tools and help ensure
compliance with proper design procedures.

QuickPort. Aspec's QuickPort design tool is designed to enable an IC
company to port economically and timely a design developed in Aspec's SIP from
one silicon process to another. QuickPort also enables the transfer of circuit
designs from one IC to another by providing for the reuse of designs developed
in Aspec's SIP.

Memory Compilers. Aspec offers various memory compilers for each of its
process specific libraries which allow customers to automate the process of
creating a variety of SRAM and ROM memory blocks. These memory compilers enable
customers to create memories that are optimized for each silicon process.

SIP SERVICES

Complex IC Design Services. Aspec maintains a design center to test the
functionality of its design tools and to assist customers that lack experience
in completing full-circuit designs. With its acquisition of SIS
Microelectronics, Aspec is expanding its capability to offer collaborative
engineering services.

EDA DESIGN KITS

In the IC development process, the designer uses many EDA tools. Each of
these EDA tools requires that the HDA/HDC/SSC libraries, I/O libraries and
memory blocks be described in a way that is understood by the EDA tools.
Collectively, these different representations are called EDA Design Kits.
Aspec's EDA Design Kits support leading EDA tools. EDA Design Kits are typically
licensed with cell and I/O libraries.

CUSTOMERS

Aspec's principal customers include ASIC and foundry companies, EDA
companies, electronic system companies and IC companies. The Company has been
dependent on a relatively small number of customers for a substantial portion of
its annual revenue. In fiscal 1996, Yamaha accounted for 10% of the Company's
revenue, and the Company's six largest customers accounted for 47% of the
Company's 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
Company's 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 Company's revenue. The Company anticipates that the majority of its
revenue will be derived from a relatively small number of customers through at
least fiscal 1999 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 purchase additional software licenses 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

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condition. See "Other Factors Affecting Future Operating Results -- Customer
Concentration; Dependence on Customers in Asia."

SALES, MARKETING AND CUSTOMER SUPPORT

The Company's current and potential customers are principally located in
North America, Japan, Korea, and Taiwan. The Company markets its products
primarily through its direct sales force. The Company employs highly skilled
engineers and technical sales persons capable of serving the sophisticated needs
of its customers. In addition to its direct sales and marketing efforts, the
Company participates in industry trade shows and seminars to promote the
adoption of its products. In parts of Asia and Europe, the Company markets its
products primarily through a limited number of independent distributors that
license and service the Company's products in these markets. The Company also
supports these distributors with technical, sales and management personnel.

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. 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 November 30, 1998, approximately 73% 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." The Company licenses its SIP products to customers under
nonexclusive agreements that do not transfer title and that restrict use of the
products to specified purposes. The Company offers customers the option of
licensing its products enterprise-wide or for use at a particular site or on
designated computers at specific sites. License fees are dependent on the type
of license, product mix and number of copies of each product subject to the
license.

The Company provides customers with technical support as well as training
and consulting services. The Company believes that a high level of customer
service and support is important to the adoption and successful utilization of
its products. The Company's customers typically pay an additional fee for
maintenance agreements that entitle them to technical support and periodic
product upgrades. The Company also offers additional training and consulting
services on a fee basis. To address technical issues, the Company has
established a technical support group comprised of field and headquarters
applications engineers who understand the design methodologies of the Company's
customers. Through its technical support group, the Company provides customers
with software updates, documentation updates and assistance with problem
identification and resolution.

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RESEARCH AND DEVELOPMENT

The Company believes that its future competitive position will depend in
large part on its ability to quickly and cost effectively develop new products,
maintain and enhance its current product line, maintain technological
competitiveness and meet an expanding range of customer requirements. During
fiscal 1996, 1997 and 1998, research and development expenses were $0.9 million,
$1.2 million and $2.6 million, respectively. In addition to research and
development expenses, engineering efforts devoted to developing products for
which revenue is recognized on a percentage of completion basis are recognized
as cost of revenue. 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. To date, all SIP
product development costs have been expensed as incurred. The Company's research
and development efforts are focused on continued development of proprietary cell
architecture, enhancements to existing software design tools and support of
additional design flows.

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.
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. See "Other Factors Affecting Future
Operating Results -- Dependence Upon Continuous Product Development; Risk of
Product Delays."

COMPETITION

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. 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. The Company also experiences 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 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

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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.

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 November 30, 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 twelve 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 licensed or 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.

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EMPLOYEES

As of November 30, 1998, the Company had 162 employees, including 105 in
operations, 21 in research and development, 21 in sales and marketing and 15 in
finance and administration. None of the Company's employees is represented by a
collective bargaining agreement, nor has the Company experienced any work
stoppage. The Company considers its relations with its employees to be good.

EXECUTIVE OFFICERS

The executive officers of the Company and their ages as of November 30,
1998 are as follows:

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NAME AGE POSITION
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Conrad J. Dell'Oca(1)..................... 57 Chairman of the Board
R. Michael O'Malley....................... 52 Chief Financial Officer and Acting Chief Operating
Officer
Douglas E. Klint(1)....................... 48 Acting President and Acting Chief Executive Officer,
Vice President, Legal Counsel
Jai P. Shin............................... 57 Executive Vice President and Director
Yen C. Chang.............................. 47 Senior Vice President, Engineering
Walter G. Kortschak(2)(3)................. 39 Director
Jeffrey D. Saper(3)....................... 50 Director and Secretary
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(1) Member of the Option Committee

(2) Member of the Compensation Committee

(3) Member of the Audit Committee

BACKGROUND OF EXECUTIVE OFFICERS

Conrad Dell'Oca has served as Chairman of the Board since February 1997. He
also served as Chief Executive Officer and President from February 1992 to
January 1999. From May 1981 to 1991, Mr. Dell'Oca was Vice President, Research
and Development of LSI Logic Corporation ("LSI Logic"), a semiconductor
manufacturer. Mr. Dell'Oca received a B.A.Sc. and M.A.Sc. in Engineering Physics
and a Ph.D. in Electrical Engineering from the University of British Columbia.

R. Michael O'Malley has served as Acting Chief Operating Officer and Chief
Financial Officer of the Company since January 1999. Mr. O'Malley was a
consultant to the Company from November 1998 to January 1999. From December 1993
to May 1998, Mr. O'Malley served as Vice President, Finance at TelCom
Semiconductor, Inc., a semiconductor manufacturing firm. Mr. O'Malley also
served as Chief Operating Officer at TelCom from November 1996 to May 1998. From
May 1991 to January 1993, Mr. O'Malley served as Executive Vice President and
Chief Financial Officer of Concurrent Logic, Inc., a semiconductor manufacturer.
From June 1988 to August 1989, Mr. O'Malley served as Vice President, Finance
for New DEST Corporation, a manufacturer of hardware and software for the
personal computer marketplace. Mr. O'Malley received a B.S. degree in Business
Administration from the University of Virginia and an M.B.A. from Stanford
University. Mr. O'Malley also serves as a director of VXI Electronics, a private
power supply manufacturer.

Douglas E. Klint has served as Acting President and Acting Chief Executive
Officer of the Company since January 1999. Mr. Klint has also served as Vice
President, Secretary and General Counsel of the Company since August 1998. From
December 1994 to August 1998, Mr. Klint served as Vice President, Secretary and
General Counsel of Gate Field Corporation, which developed and sold field
programmable gate arrays. From December 1984 to December 1994, Mr. Klint served
as Vice President, Secretary and General Counsel of Zycad Corporation which
developed and sold EDA hardware and software. Mr. Klint received a B.A. degree
in Economics and Business Administration from Gustavus Adolphus College in
Minnesota and a J.D. degree from the William Mitchell College of Law.

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Jai P. Shin has served as Executive Vice President of the Company since
November 1996 and as a director of the Company since January 1992. From January
1992 to November 1996, Mr. Shin served as Vice President, Business Development
and Chief Financial Officer of the Company. From January 1986 to December 1989,
Mr. Shin served as President of LSI Logic, Korea. Mr. Shin received his B.A. and
M.A. degree in Economics from San Jose State University.

Yen C. Chang has served as Senior Vice President, Engineering of the
Company since March 1998. From September 1997 to March 1998, he served as Vice
President, Engineering of the Company. Mr. Chang served as the Company's Vice
President, Engineering Asia from January 1997 to September 1997. From September
1995 to December 1996, Mr. Chang served as Vice President, Engineering of the
Company. From January 1992 to September 1997, Mr. Chang served as Director,
Engineering of the Company. From June 1982 to January 1992, Mr. Chang served as
Department Head, Megafunction Development for LSI Logic. Mr. Chang received B.S.
and M.S. degrees in Electrical Engineering from Oregon State University.

Walter G. Kortschak has been a director of the Company since May 1996. Mr.
Kortschak is a General Partner of Summit Partners, L.P., where he has been
employed since June 1989. Summit Partners and its affiliates manage a number of
venture capital funds, including Summit Ventures IV, L.P. and Summit Investors
III, L.P., which are principal stockholders of the Company. Mr. Kortschak also
serves as a director of Diamond Multimedia Systems, Inc., HMT Technology
Corporation, Simulation Sciences, Inc., and SteriGenics International, Inc.

Jeffrey D. Saper has been Secretary and a director of the Company since May
1996. Mr. Saper has been a member of Wilson Sonsini Goodrich & Rosati, P.C.,
legal counsel to the Company, since 1980. Mr. Saper is also a director of
Diamond Multimedia Systems, Inc. and Proxim, Inc.

Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of the
Company.

ITEM 2. PROPERTIES

The Company occupies approximately 29,000 square feet of office space in
Sunnyvale, California, pursuant to a lease which expires in November 2001. As a
result of its acquisition of SIS Microelectronics, the Company also occupies
approximately 9,600 square feet of office space in Longmont, Colorado under a
lease which expires in February 2002. The Company also maintains sales offices
in Phoenix, Arizona, Boca Raton, Florida, Boston, Massachusetts, San Diego,
California and Tokyo, Japan. The Company believes that its existing facilities
are adequate for its current needs.

ITEM 3. 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

9
<PAGE> 10

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 (except as to the underwriters) of the Securities Act of 1933. The parties
have agreed that the defendants will have forty-five days to respond to the
Consolidated Amended Complaint.

Certain of the Company's current and former officers, directors and
shareholder entities were also named as defendants in a derivative lawsuit,
Linda Willinger, IRA, et al. v. Conrad Dell'Oca et al., No. CV-778007, which was
filed on November 12, 1998, in the Superior Court of Santa Clara County. The
derivative complaint is based on factual allegations substantially similar to
those alleged in the class action lawsuits.

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. The Company is awaiting the NASD's
response.

SEC INQUIRY

In January 1999, the Company received an informal inquiry from the
Enforcement Division of the Securities and Exchange Commission ("SEC"). The
Company has provided information in response to the SEC's inquiry.

INDEMNIFICATION OBLIGATIONS; PARTIAL IMPACT OF LITIGATION

Certain provisions of the Company's Certificate of Incorporation and
indemnification agreements between the Company and its officers require the
Company to advance to such officers ongoing legal expenses of defending the
above lawsuits and may require the Company to indemnify them against judgments
rendered on certain claims. The Company expects to incur significant legal
expenses on its behalf and on behalf of such officers in connection with this
litigation. In addition, defending this litigation has resulted, and will likely
continue to result, in the diversion of management's attention from the day to
day operations of the Company's business. There can be no assurance that this
stockholder litigation will be resolved in the Company's favor. An adverse
result, settlement or prolonged litigation would have a material adverse effect
on the Company's business, financial condition or results of operation. The
Company is currently unable to estimate the range of potential loss associated
with these legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of securities holders during the
fourth quarter of fiscal 1998.

10
<PAGE> 11

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

MARKET FOR COMMON STOCK

The Company's Common Stock has been quoted on the Nasdaq National Market
since the Company's initial public offering in April 1998. Prior to such date,
there was no public market for the Common Stock. The following table sets forth,
for the fiscal quarters indicated, the high and low sale prices per share for
the Common Stock as reported on the Nasdaq National Market. These prices are
over-the-counter market quotations which reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. The Company's Common Stock is currently quoted under the symbol
"ASPCE."

<TABLE>
<CAPTION>
FISCAL YEAR ENDING NOVEMBER 30, 1998 HIGH LOW
------------------------------------ ------- -------
<S> <C> <C>
Fourth quarter (from September 1, 1998 to November 30,
1998)..................................................... $ 4.25 $ 1.50
Third quarter (from June 1, 1998 to August 31, 1998)........ 11.625 2.125
Second quarter (from April 28, 1998 to May 31, 1998)........ 15.50 12.25
</TABLE>

HOLDERS OF RECORD

As of November 30, 1998, there were approximately 850 beneficial holders of
the Company's Common Stock.

DIVIDENDS

The Company has never declared or paid cash dividends. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends on its capital stock in the foreseeable
future. See Note 10 of Notes to Consolidated Financial Statements.

RECENT SALES OF UNREGISTERED SECURITIES

On April 13, 1998, in connection with the the Company's acquisition of SIS
Microelectronics, Inc., the Company issued an aggregate of 400,000 shares of its
Common Stock to the SIS Microelectronics, Inc. shareholders. The shares were
issued pursuant to Section 4(2) and Regulation D promulgated under the
Securities Act of 1933, as amended.

11
<PAGE> 12

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
--------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue..................................... $ 4,659 $ 6,640 $ 14,999 $ 20,278 $ 23,090
Cost of revenue............................. 1,553 2,307 4,702 8,763 16,688
------- ------- -------- -------- --------
Gross profit................................ 3,106 4,333 10,297 11,515 6,402
------- ------- -------- -------- --------
Operating expenses:
Research and development................. 289 445 921 1,190 2,640
Sales and marketing...................... 624 1,387 3,526 6,537 5,952
General and administrative............... 827 1,093 1,994 2,363 4,576
Write-off of purchased technology........ -- -- -- -- 700
Amortization -- Goodwill................. -- -- -- -- 418
------- ------- -------- -------- --------
Total operating expenses............ 1,740 2,925 6,441 10,090 14,286
------- ------- -------- -------- --------
Income (loss) from operations............... 1,366 1,408 3,856 1,425 (7,884)
Interest income, net........................ 17 56 310 173 1,614
------- ------- -------- -------- --------
Income (loss) before income taxes........... 1,383 1,464 4,166 1,598 (6,270)
Provision for income taxes.................. 553 585 1,708 639 264
------- ------- -------- -------- --------
Net income (loss)........................... 830 879 2,458 959 (6,534)
Accretion of redeemable preferred stock..... -- -- 392 823 4,328
------- ------- -------- -------- --------
Income (loss) attributable to common
stockholders............................. $ 830 $ 879 $ 2,066 $ 136 $(10,862)
======= ======= ======== ======== ========
Diluted earnings (loss) per share(1)........ $ 0.04 $ 0.04 $ 0.09 $ 0.01 $ (0.43)
======= ======= ======== ======== ========
Diluted average shares outstanding.......... 19,407 20,172 22,397 22,585 25,258
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
--------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................. $ 420 $ 944 $ 3,544 $ 3,077 $ 43,068
Total assets................................ 2,353 5,046 15,866 14,905 70,463
Redeemable Preferred Stock.................. -- -- 13,345 14,168 --
Redeemable Common Stock..................... -- -- 7,116 7,116 --
Total stockholders' equity (deficiency)..... 904 1,798 (14,223) (13,859) 58,775
</TABLE>

- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing earnings per share.

12
<PAGE> 13

ITEM 7.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."

As a result of the restatement of the Company's financial statements for
the first and second quarters of fiscal 1998 and the fiscal years 1996 and 1997,
certain information contained in this item has been changed from that which was
reported previously in the Company's Registration Statement on Form S-1 (see
Note 16 of Notes to Condensed Consolidated Financial Statements). Readers should
carefully review the "Revenues" and "Other Factors Affecting Future Operating
Results" sections included herein to reflect current events.

COMPANY OVERVIEW

Aspec was founded in December 1991 to develop, market and support 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. Late in the third
quarter of fiscal 1998, one of the Company's major competitors announced an
agreement with a major foundry whereby the foundry acquired cell libraries for a
minimal up-front fee coupled with a future royalty. This change in industry
pricing practice has had and is expected to continue to have a material adverse
effect on the Company's revenue and operating results.

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

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

13
<PAGE> 14

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.

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. See Note 10 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, had 17 employees and had 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 $0.7
million in the Company's fiscal quarter ended May 31, 1998. The Company recorded
$3.3 million of goodwill as part of this acquisition which will be amortized
evenly over a five-year period.

14
<PAGE> 15

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue..................................................... 100% 100% 100%
Cost of revenue............................................. 72 43 31
--- --- ---
Gross profit................................................ 28 57 69
Operating expenses:
Research and development.................................. 11 6 6
Sales and marketing....................................... 26 32 24
General and administrative................................ 20 12 13
Write-off of purchased technology......................... 3 -- --
Amortization of goodwill.................................. 2 -- --
--- --- ---
Total operating expenses.......................... 62 50 43
--- --- ---
Income (loss) from operations............................... (34) 7 26
Interest income, net........................................ 7 1 2
--- --- ---
Income (loss) before income taxes........................... (27) 8 28
Provision for income taxes.................................. 1 3 11
--- --- ---
Net income (loss)........................................... (28) 5 17
Accretion of redeemable preferred stock..................... 19 4 3
--- --- ---
Income (loss) attributable to common stockholders........... (47%) 1% 14%
=== === ===
</TABLE>

YEARS ENDED NOVEMBER 30, 1997 AND 1998

Revenues. Revenue increased by 14% from $20.3 million in fiscal 1997 to
$23.1 million in fiscal 1998. The growth in revenue in fiscal 1998 compared with
fiscal 1997 was primarily attributable to the Company's termination of a
relationship with a foreign distributor which resulted in $2.9 million of
revenues being recognized in the third quarter of fiscal 1998; such revenue is
not expected to recur. In addition, the shift in industry pricing practice by a
major competitor from up-front license fees to a royalty based model that began
in the second half of fiscal 1998 will have a material adverse impact on the
Company's revenue in future quarters.

International revenue accounted for 65% of revenue in fiscal 1998 compared
to 53% of revenue in fiscal 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 specifications. Cost of revenue increased
by 90% from $8.8 million in fiscal 1997 to $16.7 million in fiscal 1998. Cost of
revenue as a percentage of revenue was 43% and 72% in fiscal 1997 and fiscal
1998, respectively. The absolute dollar increases in cost of revenue and the
increases in cost of revenue as a percentage of revenue in fiscal 1998, compared
with 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 using outside programmers,
and (v) costs of rework under maintenance 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, such rework was provided as part of customer maintenance
contracts. Due primarily to these five factors, the Company's gross margin
percentage was adversely effected in fiscal 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.

15
<PAGE> 16

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
122% from $1.2 million in fiscal 1997 to $2.6 million in fiscal 1998. Research
and development expense as a percentage of revenue was 6% and 11% in fiscal 1997
and fiscal 1998, respectively. The absolute dollar increases in research and
development expenses and the increases in research and development costs as a
percentage of revenue in fiscal 1998, compared with fiscal 1997, were due to
increases in engineering personnel, including additional SIS Microelectronics
personnel, and related expenses. The Company does not expect research and
development expense to increase in absolute dollars in 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 9% from $6.5 million in fiscal 1997 to $6.0
million in fiscal 1998. Sales and marketing expense as a percentage of revenue
was 32% and 26% in fiscal 1997 and fiscal 1998, respectively. The absolute
dollar decreases in sales and marketing expenses in fiscal 1998, compared with
fiscal 1997, were due to (i) higher Asian representative sales commissions in
fiscal 1997 that did not recur in fiscal 1998, (ii) reduced personnel costs as
certain field application engineers were transferred into engineering, and (iii)
decreased advertising and sales promotions. The Company does not expect sales
and marketing expense to increase in absolute dollars in fiscal 1999.

General and administrative. General and administrative expenses increased
by 94% from $2.4 million in fiscal 1997 to $4.6 million in fiscal 1998. General
and administrative expenses as a percentage of revenue was 12% and 20% in fiscal
1997 and fiscal 1998, respectively. The absolute dollar increases in general and
administrative expenses and the increases in general and administrative expenses
as a percentage of revenue in fiscal 1998, compared with fiscal 1997, were due
to (i) addition of new management and administrative personnel and increased
administrative costs, and (ii) a $1.0 million increase in the Company's bad debt
reserve. The Company does not expect general and administrative expense to
increase in absolute dollars in fiscal 1999.

The $0.7 million written off to purchased technology in fiscal 1998 related
to the acquisition of SIS Microelectronics (see Note 5 to the Condensed
Consolidated Financial Statements). The Company recorded $3.3 million of
goodwill as part of this acquisition which will be amortized evenly over a
five-year period.

Interest income, net. Net interest income increased by 833% from $0.2
million in fiscal 1997 to $1.6 million in fiscal 1998. Net interest income as a
percentage of revenue was 1% and 7% in fiscal 1997 and 1998, respectively. The
absolute dollar increases in interest income in fiscal 1998, compared with
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 $0.6 million
and $0.3 million in the fiscal years 1997 and 1998, respectively. Excluding the
impact of the one-time non-deductible write-off of purchased technology and the
increase in valuation allowance recorded against deferred tax assets, the
effective tax rate was 38% for fiscal 1998, compared with 40% in fiscal 1997.
The difference between the Company's effective tax rate and the U.S. federal
statutory income tax rate is primarily due the tax effect of purchased
technology that is non-deductible for tax purposes, the valuation allowance
recorded against deferred assets and state taxes net of federal benefit. At
November 30, 1998, the Company had a net deferred tax asset of approximately
$4.7 million. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets, other than to the extent of taxes
available from carryback of current losses, such that a valuation allowance of
$2.6 million has been provided against the net deferred tax asset.

YEARS ENDED NOVEMBER 30, 1996 AND 1997

Revenues. Revenue increased by 35% from $15.0 million in fiscal 1996 to
$20.3 million in fiscal 1997. The growth in revenue in fiscal 1997 compared with
fiscal 1996 was primarily attributable to the Company's expansion of its sales
of standard cell-based products to a broader customer base.

16
<PAGE> 17

International revenue accounted for 53% of revenue in fiscal 1997 compared
to 54% of revenue in fiscal 1996.

Cost of revenue. Cost of revenue increased by 86% from $4.7 million in
fiscal 1996 to $8.8 million in fiscal 1997. Cost of revenue as a percentage of
revenue was 31% and 43% in fiscal 1996 and fiscal 1997, respectively. The
absolute dollar increases in cost of revenue and the increases in cost of
revenue as a percentage of revenue in fiscal 1997, compared with fiscal 1996,
were due to hiring of additional engineering personnel and related expenses
associated with customer funded development programs and in anticipation of
future revenue growth.

Research and development. Research and development expenses increased by
29% from $0.9 million in fiscal 1996 to $1.2 million in fiscal 1997. Research
and development expense as a percentage of revenue was 6% in both fiscal years
1997 and 1998. The absolute dollar increase in research and development expenses
in fiscal 1997, compared with fiscal 1996, were due to increases in engineering
personnel and related costs. Because a significant portion of the Company's
development programs are customer funded, only the residual unfunded development
activities of the Company are reported as research and development expense. In
addition to its research and development efforts, the Company has significant
engineering efforts devoted to developing products on which revenue is
recognized on a percentage of completion basis which are recognized as cost of
revenue.

Sales and marketing. Sales and marketing expenses increased by 85% from
$3.5 million in fiscal 1996 to $6.5 million in fiscal 1997. Sales and marketing
expense as a percentage of revenue was 24% and 32% in fiscal 1996 and fiscal
1997, respectively. The absolute dollar increases in sales and marketing
expenses and the increases in sales and marketing expenses as a percentage of
revenue in fiscal 1997, compared with fiscal 1996, were due to the Company
establishing a North America direct sales force and relationships with
distributors and sales representatives in North America and Asia.

General and administrative. General and administrative expenses increased
by 19% from $2.0 million in fiscal 1996 to $2.4 million in fiscal 1997. General
and administrative expenses as a percentage of revenue was 13% and 12% in fiscal
1996 and fiscal 1997, respectively. The absolute dollar increases in general and
administrative expenses in fiscal 1997, compared with fiscal 1996, were due to
increased personnel and other administrative costs.

Interest income, net. Net interest income decreased by 56% from $0.3
million in fiscal 1996 to $0.2 million in fiscal 1997. Net interest income as a
percentage of revenue was 2% and 1% in fiscal 1996 and 1997, respectively. The
absolute dollar decrease in interest income in fiscal 1997, compared with fiscal
1996, was due to the Company using funds to repurchase common stock.

Provision for income taxes. The provision for income taxes was $1.7 million
and $0.6 million in the fiscal years 1996 and 1997, respectively. The effective
tax rate remained constant at 40% in both fiscal years 1996 and 1997.

LIQUIDITY AND CAPITAL RESOURCES

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

The Company's operating activities provided net cash of $4.6 million in
fiscal 1996 and utilized net cash of $0.7 million and $2.1 million in fiscal
1997 and 1998, respectively. Net cash provided in fiscal 1996 for operating
activities was mainly due to net income and increases in customer advances. Net
cash used in fiscal 1997 for operating activities was mainly due to changes in
income tax related assets and liabilities, and net cash used in fiscal 1998 was
mainly due to net loss and increases in accounts receivable.

Net cash used in investing activities was $2.5 million, $3.2 million, and
$11.4 million in fiscal 1996, 1997, and 1998, respectively. Investing activities
consisted primarily of purchases of software licenses and equipment.

17
<PAGE> 18

Net cash provided by financing activities was $1.9 million, $0.1 million,
and $53.5 million in fiscal 1996, 1997, and 1998, respectively. In fiscal 1996,
financing activities consisted primarily of the sale of common and preferred
stock. In fiscal 1998, financing activities consisted primarily of the sale of
the Company's Common Stock in its initial public offering.

At November 30, 1998, the Company had cash and equivalents of $42.5
million. As of November 30, 1998, the Company had a retained deficit of $27.2
million and working capital of $43.1 million. The Company anticipates
approximately $2 million for 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 at least 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 reflected 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. The Company's
public announcement of the pending restatement of its financial statements, the
delay in reporting its third quarter results for fiscal 1998 while the
restatement was being compiled and the related uncertainty regarding the
Company's business have adversely affected the Company's financial condition and
the price of the Company's common stock. These factors and other matters
described herein have had, and will continue to have, a material adverse effect
on the Company's business, including its financial condition and results of
operations.

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

18
<PAGE> 19

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 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. 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 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 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. SIS
Microelectronics is an engineering design services company located in Longmont,
Colorado. The acquisition was accounted for using the purchase method and
resulted in a charge to in-process research and development of $0.7 million in
the Company's fiscal quarter ended May 31, 1998. The remaining $3.3 million of
the purchase price was charged to goodwill and will be amortized over a
five-year period. 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

19
<PAGE> 20

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 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 1996, Yamaha accounted for 10% of the
Company's revenue, and the Company's six largest customers accounted for 47% of
the Company's revenue. In fiscal 1997, Tritech accounted for 10% of revenue, and
the Company's seven largest customers accounted for 48% of the Company's
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.
The Company anticipates that the majority of its revenue will be derived from a
relatively small number of customers 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. In the third quarter of fiscal 1998, the Company recognized
approximately $2.9 million of revenue from a distributor agreement that was
terminated during the quarter. The Company does not expect any future revenue
from this customer. The nonrecurring nature of this revenue will have a material
adverse impact on the Company's future revenue.

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. 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

20
<PAGE> 21

certain Asian-based customers. At November 30, 1998, approximately 73% 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.

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 will 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.

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

21
<PAGE> 22

certain technical, managerial and marketing personnel. In this regard, a number
of key members of the Company's management have left the Company to pursue other
opportunities. 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 a year, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements.

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

(1) In terms of the effect of Year 2000 issues on the Company's
product offerings, the software and library products, which comprise almost
all of the Company's revenue, do not have specific date dependence.
Therefore, the date code field is not used by the Company's products while
operating in the customer's environment. This means that there should be no
effect when the date changes to the year 2000 because it will be
transparent to our products. We are in the process of testing our products
to insure that the date change will have no effect. This testing should be
completed by the middle of 1999.

(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. The Company expects to complete this
upgrade by June 1999 at a cost of approximately $300,000. If this upgrade
cannot be completed in time, the Company would be forced to purchase new
workstations. Costs to do this could run as high as $1.5 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. It has
identified the appropriate personnel to complete the evaluations and
expects to have these reviews completed by April 1999.

The Company estimates that the remaining costs to meet the internal Year 2000
plan should be between $100,000 to $300,000. These costs will be expensed as
incurred as normal operating expenditures. We do not expect the costs relating
to Year 2000 remediation to have a material effect on our results of operations.
In the event that there is a major problem with our software and hardware
development systems, the Company could incur substantial delays in completing
its contractual commitment to customers which would have a materially

22
<PAGE> 23

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 I -- Item 3 -- Legal Proceedings."

23
<PAGE> 24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Accountants........................... 25

Financial Statements:
Consolidated Balance Sheets
As of November 30, 1998, and November 30, 1997......... 26
Consolidated Statements of Income
For Fiscal Years Ended November 30, 1998, November 30,
1997 and November 30, 1996............................ 27
Consolidated Statements of Stockholders' Equity
(Deficiency)
For Fiscal Year Ended November 30, 1998, November 30,
1997 and November 30, 1996............................ 28
Consolidated Statements of Cash Flows
For Fiscal Years Ended November 30, 1998, November 30,
1997 and November 30, 1996............................ 29

Notes to Consolidated Financial Statements.................. 30
</TABLE>

24
<PAGE> 25

REPORT OF INDEPENDENT ACCOUNTANTS

January 18, 1999

To the Board of Directors and Stockholders of Aspec Technology, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity (deficiency) and
cash flows present fairly, in all material respects, the consolidated financial
position of Aspec Technology, Inc. and subsidiaries as of November 30, 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended November 30, 1998, 1997 and 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provides a reasonable basis for the opinion expressed
above.

As discussed in Note 16 to the consolidated financial statements, the
Company has restated its 1997 and 1996 financial statements (previously audited
by other independent accountants).

PRICEWATERHOUSECOOPERS LLP

25
<PAGE> 26

ASPEC TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 42,480 $ 2,524
Accounts receivable: (net of allowances of $1,271 in 1998
and $300 in 1997)
Billed................................................. 5,165 3,943
Unbilled............................................... 2,231 853
Income taxes receivable................................... 679 --
Prepaid expenses.......................................... 882 507
Inventory................................................. 167 --
Deferred income taxes..................................... 2,100 2,730
-------- --------
Total current assets.............................. 53,704 10,557
Property and equipment -- net............................... 12,297 4,105
Other assets................................................ 4,462 243
-------- --------
TOTAL ASSETS...................................... $ 70,463 $ 14,905
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 3,326 $ 801
Accrued liabilities....................................... 3,104 2,379
Income taxes payable...................................... -- 321
Customer advances......................................... 4,206 3,979
-------- --------
Total current liabilities......................... 10,636 7,480
Deferred liabilities -- rent................................ 52 --
Other liabilities -- long term.............................. 1,000 --
-------- --------
Total liabilities................................. 11,688 7,480
-------- --------
Commitments and contingencies (Notes 9 and 10)
Series A redeemable preferred stock, $.001 par value:
Shares designated and outstanding:
1998 -- none; 1997 -130 (liquidation value: $18,495)... -- 14,168
Redeemable common stock, $.001 par value;
shares outstanding: 1998 -- none; 1997 -- 4,779........... -- 7,116
Stockholders' equity (deficiency):
Preferred stock, $.001 par value; 5,000 authorized
(excluding Series A redeemable preferred stock); none
outstanding............................................ -- --
Common stock, $.001 par value; 75,000 shares authorized
shares outstanding:
1998 -- 28,399; 1997 -- 17,234......................... 86,198 2,914
Stockholders notes receivable............................. (184) (301)
Deferred stock compensation............................... (70) (165)
Retained deficit.......................................... (27,169) (16,307)
-------- --------
Total stockholders' equity (deficiency)........... 58,775 (13,859)
-------- --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY).................................... $ 70,463 $ 14,905
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

26
<PAGE> 27

ASPEC TECHNOLOGY, INC.

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

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenue..................................................... $ 23,090 $20,278 $14,999
Cost of revenue............................................. 16,688 8,763 4,702
-------- ------- -------
Gross profit................................................ 6,402 11,515 10,297
-------- ------- -------
Operating expenses:
Research and development.................................. 2,640 1,190 921
Sales and marketing....................................... 5,952 6,537 3,526
General and administrative................................ 4,576 2,363 1,994
Write-off of purchased technology......................... 700 -- --
Amortization -- Goodwill.................................. 418 -- --
-------- ------- -------
Total operating expenses.......................... 14,286 10,090 6,441
-------- ------- -------
Income (loss) from operations............................... (7,884) 1,425 3,856
Interest income, net........................................ 1,614 173 310
-------- ------- -------
Income (loss) before income taxes........................... (6,270) 1,598 4,166
Provision for income taxes.................................. 264 639 1,708
-------- ------- -------
Net income (loss)........................................... (6,534) 959 2,458
Accretion of redeemable preferred stock..................... 4,328 823 392
-------- ------- -------
Income (loss) attributable to common stockholders........... $(10,862) $ 136 $ 2,066
======== ======= =======
Basic earnings (loss) per share............................. $ (0.43) $ 0.01 $ 0.10
======== ======= =======
Basic average shares outstanding............................ 25,258 21,365 21,064
======== ======= =======
Diluted earnings (loss) per share........................... $ (0.43) $ 0.01 $ 0.09
======== ======= =======
Diluted average shares outstanding.......................... 25,258 22,585 22,397
======== ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

27
<PAGE> 28

ASPEC TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS)

<TABLE>
<CAPTION>
NON REDEEMABLE TOTAL
COMMON STOCK STOCKHOLDER DEFERRED RETAINED STOCKHOLDERS'
---------------- NOTES STOCK EARNINGS EQUITY
SHARES AMOUNT RECEIVABLE COMPENSATION (DEFICIT) (DEFICIENCY)
------ ------- ----------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 1, 1995....... 18,929 $ 114 $ -- $ -- $ 1,684 $ 1,798
Sale of common stock (net of
costs of $260)................. 508 1,900 -- -- -- 1,900
Issuance of common stock under
stock purchase plan............ 3,293 1,346 (648) (582) -- 116
Repurchase of common stock from
founders and employees......... (4,789) (16) -- -- (20,193) (20,209)
Accretion of redeemable preferred
stock.......................... -- -- -- -- (392) (392)
Amortization of deferred stock
compensation................... -- -- -- 106 -- 106
Net income....................... -- -- -- -- 2,458 2,458
------ ------- ----- ----- -------- --------
Balances, November 30, 1996...... 17,941 3,344 (648) (476) (16,443) (14,223)
Issuance of common stock under
stock option plans............. 2 10 -- -- -- 10
Repurchase of common stock from
employees...................... (709) (440) 239 197 -- (4)
Accretion of redeemable preferred
stock.......................... -- -- -- -- (823) (823)
Collection of stockholders notes
receivable..................... -- -- 108 -- -- 108
Amortization of deferred stock
compensation................... -- -- -- 114 114
Net income....................... -- -- -- -- 959 959
------ ------- ----- ----- -------- --------
Balances, November 30, 1997...... 17,234 2,914 (301) (165) (16,307) (13,859)
Issuance of common stock under
stock option plans, net of
repurchases.................... (14) 277 23 17 317
Accretion of redeemable preferred
stock.......................... (212) (212)
Collection of stockholders notes
receivable..................... 94 94
Amortization of deferred stock
compensation................... 78 78
Conversion of redeemable common
stock.......................... 4,779 7,116 7,116
Issuance of common stock, net of
issuance costs................. 6,000 71,891 71,891
Purchase of SIS
Microelectronics............... 400 4,000 4,000
Redemption of preferred stock.... (4,116) (4,116)
Net loss......................... (6,534) (6,534)
------ ------- ----- ----- -------- --------
Balances, November 30, 1998...... 28,399 $86,198 $(184) $ (70) $(27,169) $ 58,775
====== ======= ===== ===== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

28
<PAGE> 29

ASPEC TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (6,534) $ 959 $ 2,458
Adjustments to reconcile net income to net cash
provided by operating activities:
Write-off of purchased technology......................... 700 -- --
Depreciation and amortization............................. 3,980 1,570 737
Provision for doubtful acccounts.......................... 1,150 -- 300
Deferred Income taxes..................................... 842 (2,226) (422)
Stock compensation expense................................ 78 114 106
Changes in assets and liabilities:
Accounts receivable.................................... (3,480) 945 (4,249)
Prepaid expenses and other assets...................... (420) 52 (699)
Inventory.............................................. (68) -- --
Accounts payable....................................... 2,306 (140) 845
Accrued liabilities.................................... 76 442 1,269
Income taxes payable................................... (1,000) (1,729) 964
Customer advances...................................... 227 (721) 3,302
-------- ------- --------
Net cash provided by (used for) operating
activities...................................... (2,143) (734) 4,611
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (10,504) (3,197) (2,463)
Cash spent, net of cash acquired in purchase of
SIS Microelectronics................................... 26 -- --
Purchase of non marketable equity securities.............. (916) -- --
-------- ------- --------
Net cash used for investing activities............ (11,394) (3,197) (2,463)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock...................................... 72,215 10 2,016
Sale of redeemable common stock........................... -- -- 7,116
Sale of redeemable preferred stock........................ -- -- 12,953
Redemption of redeemable preferred stock.................. (18,495) -- --
Repayment of borrowings................................... (314) -- --
Repurchase of common stock................................ (14) (4) (20,209)
Collection of stockholder notes receivable................ 101 108 --
-------- ------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 53,493 114 1,876
-------- ------- --------
Net increase (decrease) in cash and equivalents............. 39,956 (3,817) 4,024
Cash and equivalents, beginning of period................... 2,524 6,341 2,317
-------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 42,480 $ 2,524 $ 6,341
======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes................................ $ 549 $ 4,594 $ 1,166
======== ======= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING
ACTIVITIES:
Accretion of redeemable preferred stock................... $ 4,328 $ 823 $ 392
======== ======= ========
Long term payable for acquisition of equipment............ $ 1,000 $ -- $ --
======== ======= ========
Issuance of common stock for notes receivable............. $ -- $ -- $ 648
======== ======= ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

29
<PAGE> 30

ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Business -- Aspec Technology, Inc. (the "Company") is a leading provider of
merchant semiconductor intellectual property ("SIP") solutions for
high-performance, complex IC designs, including system-on-a-chip ICs.

Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries, SIS
Microelectronics, Inc. and Aspec Technology, Inc. (Barbados). Intercompany
accounts and transactions are eliminated.

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates,
and such differences may be material to the financial statements.

Cash Equivalents -- Cash equivalents consist of short-term highly liquid
debt investments with original maturities of 90 days or less.

Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization is
provided using the straight-line method over the estimated useful lives,
generally three to five years.

Software Development Costs -- Development costs incurred in the research
and development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established, at which time certain development costs required to attain general
production release would be capitalized. To date, the Company's software
development has essentially been completed concurrent with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized.

Concentration of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and equivalents and accounts receivables. Cash equivalents consist primarily of
money market instruments carried at cost, which approximates fair market value.
Management believes the credit risk associated with such instruments is minimal.

Revenue Recognition -- A substantial portion of the Company's license
revenue has been recognized on a percentage of completion basis based upon
actual costs incurred since Aspec's products typically involve levels of
adaptation or completion. License terms typically include a payment upon
execution of the agreement with further payments upon completion of milestones.
Revenue is recognized ratably as the work is performed on the project. Billings
in excess of revenue are recorded as customer advances, while revenue in excess
of billings is recorded as unbilled receivables. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. The time required to adapt a product for a specific customer
application generally ranges from three to twelve months. License revenue for
products not requiring adaptation is recognized upon delivery and when
collection is reasonably assured.

Revenue from support and maintenance contracts is deferred as customer
advances and recognized ratably over the term of the agreement, which is
typically one year. Royalty revenues are earned and recognized in the period
reported by the customer or when cash is received.

Income Taxes -- The Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities.

Stock Compensation -- The Company accounts for stock-based awards granted
to employees based on the intrinsic value method in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees" (see Note 8).

30
<PAGE> 31
ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Earnings Per Share -- During fiscal 1998, the Company 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 common shares less shares subject to
repurchase rights outstanding 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.

Recent Pronouncements -- In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components in the financial statements. It does not require a specific
format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in the financial
statement. SFAS No. 130 is effective for the Company's 1999 fiscal year that
commenced December 1, 1998. The pronouncement will not have a material impact on
the Company.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. SFAS No. 131 is effective for
the Company's 1999 fiscal year that commenced December 1, 1998. The
pronouncement will have no effect on the Company's financial statement
presentation.

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 costs of computer software
developed or obtained for internal use. The pronouncement will not have a
material impact on the Company.

2. BUSINESS RISKS AND CREDIT CONCENTRATIONS

The Company operates in an intensely competitive industry that has been
characterized by rapid technological change, short product life cycles, cyclical
market patterns and heightened foreign and domestic competition. Significant
technological changes in the industry could affect operating results adversely.

The Company markets and sells its technology to a narrow base of customers
which are primarily designers and manufacturers of integrated circuits, and
generally does not require collateral. At November 30, 1998, one customer
accounted for 31% of gross accounts receivables. At November 30, 1997, three
customers accounted for 15%, 15% and 13% of gross accounts receivables. A
significant portion of the Company's revenues are derived from customers in
Asia, a region experiencing economic volatility. The Company has experienced a
lengthening of the payment period for accounts receivables from certain
Asian-based customers. At November 30, 1998, approximately 74% 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.

31
<PAGE> 32
ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consist of (in thousands):

<TABLE>
<CAPTION>
NOVEMBER 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Computer equipment and software............................. $18,242 $ 6,621
Office and other equipment.................................. 1,135 492
------- -------
19,377 7,113
Less accumulated depreciation and amortization.............. (7,080) (3,008)
------- -------
$12,297 $ 4,105
======= =======
</TABLE>

Depreciation and amortization expense was $3.6 million, $1.6 million, and
$0.7 million for the fiscal years 1998, 1997, and 1996, respectively.

4. OTHER ASSETS

Other assets consist of (in thousands):

<TABLE>
<CAPTION>
NOVEMBER 30,
--------------
1998 1997
------ ----
<S> <C> <C>
Goodwill.................................................... $3,226 $ --
Non-marketable equity securities at cost.................... 916 --
Other....................................................... 320 243
------ ----
$4,462 $243
====== ====
</TABLE>

5. ACQUISITION

The Company purchased all of the capital stock of SIS Microelectronics for
400,000 shares Aspec stock at $10 each, for a total value of $4,000,000.
Transaction costs were $148,000.

In conjunction with the acquisition, which was accounted for as a purchase,
assets acquired and liabilities assumed were as follows:

<TABLE>
<S> <C>
Fair Value of assets acquired, including purchased
technology................................................ $4,390
Liabilities assumed......................................... 942
------
Net assets acquired......................................... 3,448
------
Purchased technology, expenses.............................. 700
------
Purchase price.............................................. $4,148
======
</TABLE>

The balance sheet, statements of income, stockholders' equity (deficiency)
and cash flows were consolidated as from April 13, 1998. Aspec recorded $3.3
million of goodwill which is being amortized over five years.

The unaudited pro forma combined condensed results of operations of the
Company and SIS Microelectronics for the years ended November 30, 1998 and 1997,
assuming the acquisition had taken place on December 1 of each year, after
giving effect to certain pro forma adjustments, is as follows:

<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Revenue..................................................... $ 23,842 $21,932
Income (loss) attributable to common stockholders........... $(11,311) $ (179)
Basic and diluted loss per share............................ $ (0.45) $ (0.01)
</TABLE>

32
<PAGE> 33
ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. ACCRUED LIABILITIES

Accrued liabilities consist of (in thousands):

<TABLE>
<CAPTION>
NOVEMBER 30,
----------------
1998 1997
------ ------
<S> <C> <C>
Accrued compensation and related benefits................... $1,455 $1,089
Accrued commissions to outside sales representatives........ 275 651
Other....................................................... 1,374 639
------ ------
$3,104 $2,379
====== ======
</TABLE>

7. VALUATION AND QUALIFYING ACCOUNTS:

Valuation and qualifying accounts consist of Allowance for Doubtful
Accounts (in thousands):

<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------------
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period.................... $ 300,000 $300,000 $ 0
Addition charged to costs and expenses............ 1,150,000 -- 300,000
Deductions........................................ 179,000 -- --
---------- -------- --------
Balance at end of period.......................... $1,271,000 $300,000 $300,000
========== ======== ========
</TABLE>

8. LINE OF CREDIT

In March 1998, the Company increased its bank line of credit from
$1,000,000 to $4,000,000. Borrowings under this line are due on demand, are
collateralized by substantially all of the Company's assets and bear interest at
the bank's prime rate (7.75% at November 30, 1998) plus 0.5%. As of November 30,
1998, there were no borrowings outstanding under the line. The Company must
maintain compliance with certain current and net worth ratio covenants under
this agreement. As of November 30, 1998, the Company was in compliance with
these covenants.

9. LEASE COMMITMENTS

The Company leases its primary operating facility under a noncancelable
operating lease agreement which expires in November 2001. Rent expense incurred
under operating leases was approximately $585,000, $465,000, and $186,000 for
the years ended November 30, 1998, 1997, and 1996, respectively.

Future minimum lease commitments under operating leases as of November 30,
1998 are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING
NOVEMBER 30,
- ------------------------------------------------------------
<S> <C>
1999..................................................... $ 522
2000..................................................... 501
2001..................................................... 519
2002..................................................... 21
------
Total minimum lease payments................................ $1,563
======
</TABLE>

33
<PAGE> 34
ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. REDEEMABLE STOCK

Redeemable Preferred Stock -- During fiscal 1996, the Board of Directors
authorized and designated 130,385 shares of Series A redeemable preferred stock.
In May and June 1996, the Company sold an aggregate of 130,378 shares of Series
A redeemable preferred stock at $100 per share, resulting in net proceeds of
approximately $12,953,000. The significant terms of the Series A redeemable
preferred stock are as follows:

- In the event of liquidation, dissolution or winding up of the Company,
the redeemable preferred stockholders shall receive, per share, the
greater of (1) the initial issue price ($100) plus all accrued but unpaid
dividends or (2) $141.86, prior to any distribution to be made to holders
of the Company's common stock.

- Dividends shall accrue on a daily basis at the rate of 6% per annum on
the sum of the liquidation value plus all accrued but unpaid dividends.

- The redeemable preferred shares have no voting rights except that:

- The Series A preferred stockholders, voting as a class, shall be
entitled to elect two directors as long as the holders of record on June
30, 1996 continue to hold 50% or more of the Series A preferred shares
(or to elect one director if the holders of record on June 30, 1996
continue to hold 25% to 50% of the Series A preferred shares).

- So long as any Series A preferred shares remain outstanding, the
corporation shall not, without a vote of 55% of the outstanding Series A
preferred shares, issue securities with equity features senior to Series
A preferred stock, liquidate, change the Series A preferred rights or
merge or consolidate with another entity which results in the Company's
common stockholders immediately prior to the transaction owning less
than 66.7% of the common stock after the transaction.

- The redeemable preferred shares are not convertible into common stock.

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.

The aggregate liquidation and redemption value of the Company's then
outstanding 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 the redeemable preferred shares were redeemed.

Redeemable Common Stock -- 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 have 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, whereupon the
redeemable common stock converted to nonredeemable common stock.

34
<PAGE> 35
ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. STOCKHOLDERS' EQUITY (DEFICIENCY)

Stock Split -- During 1997, the Company effected a two for one split of the
outstanding shares of common stock. All shares and per share data in the
accompanying financial statements have been retroactively adjusted to reflect
the stock split.

Repurchase of Common Stock -- During August 1996, the Company repurchased
an aggregate of 4,778,786 shares of common stock held by certain founders of the
Company at $4.227 per share for an aggregate purchase price of approximately
$20,200,000.

Employee Stock Plans -- Under the Company's 1992 Employee Stock Purchase
Plan (the 1992 Plan), 4,000,000 shares of the Company's common stock were
reserved and available for issuance to officers, directors, employees and
consultants of the Company. The 1992 Plan provides that the purchase or exercise
price of the stock covered by the Plan shall be no less than the fair value of
the Company's common stock at the date of the grant, as determined by the Board
of Directors. The Board of Directors also has the authority to set exercise
dates (generally no longer than ten years from the date of grant), payment terms
and other provisions for each grant. Stock purchase rights and options granted
under the plan generally vest as to 25% of the shares on the first anniversary
of the date of grant and thereafter vest ratably over three years. The Company
has the option to repurchase exercised shares that have not vested at the
original purchase price upon termination of employment. As of November 30, 1996,
there were no stock purchase rights outstanding under the 1992 Plan and in
December 1996, the Company's Board of Directors determined not to grant or issue
any additional shares under the 1992 Plan.

In 1996, the Board of Directors adopted the Company's 1996 Stock Option
Plan (the 1996 Plan). Under this plan, 4,500,000 shares have been reserved for
issuance to directors, officers, employees and consultants to the Company at
prices not less than the fair market value for incentive stock options. These
options generally expire five to ten years from the date of grant. Incentive and
nonstatutory options normally vest and become exercisable at an annual rate of
25%.

In 1997, the Board of Directors adopted the Company's 1997 Director Option
Plan (the Director Plan) and reserved 250,000 shares of common stock for grants
of options to each outside director. The Director Plan provides for the
automatic grant to outside directors of an option to purchase 25,000 shares of
common stock at the time the director joins the board and an option to purchase
5,000 shares of common stock upon the outside director's annual reelection to
the Board.

During 1997, the Board of Directors adopted the Company's 1997 Employee
Stock Purchase Plan and, as amended in March 1998, reserved 500,000 shares of
common stock (plus annual increases equal to the lesser of (i) the shares
underlying options granted in the immediately preceding year or (ii) a lesser
amount determined by the Board) for sale to employees thereunder at a price no
less than 85% of the lower of the fair market value at the beginning of the
six-month offering period or the end of such offering.

In July 1998, substantially all outstanding options with a share price in
excess of $5.75 were cancelled and new options were issued with a grant date of
July 6, 1998 and a restart on the vesting period. A total of 1,324,700 options
were cancelled and reissued.

35
<PAGE> 36
ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of activity under the 1996 Plan and the Director Plan is as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER EXERCISE AGGREGATE AVERAGE
FOR GRANT OF SHARES PRICE PRICE EXERCISE PRICE
--------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Options reserved at 1996 Plan
inception....................... 4,500
Options granted................. (554) 554 $2.20 - $ 4.25 $ 2,159 $3.90
Options cancelled............... 13 (13) $2.20 (29) $2.20
------ ------ --------
Balances. November 30, 1996....... 3,959 541 $2.20 - $ 4.25 2,130 $3.94
Options reserved under the
Director Plan................... 250
Options granted................. (1,372) 1,372 $5.00 - $ 8.50 10,400 $7.58
Options canceled................ 462 (462) $2.20 - $ 8.00 (2,684) $5.81
Options exercised............... (2) $5.00 (10) $5.00
------ ------ --------
Balances. November 30, 1997....... 3,299 1,449 $2.20 - $ 8.50 9,836 $6.79
Options granted................. (5,750) 5,750 $2.06 - $13.37 42,427 $7.38
Options canceled................ 4,233 (4,233) $2.20 - $13.37 (34,511) $8.15
Options exercised............... -- (73) $2.20 - $ 8.00 (320) $4.38
------ ------ --------
Balances. November 30, 1998....... 1,782 2,893 $2.06 - $11.00 $ 17,432 $6.03
====== ====== ========
</TABLE>

At November 30, 1998, approximately 1,562,000 shares were available for
future grant under the 1996 Plan. At November 30, 1998, 220,000 shares were
available for future grant under the 1997 Director Option Plan. As of November
30, 1998, approximately 310,000 shares exercised and outstanding under the 1992
Plan that were subject to repurchase by the Company at the original purchase
price.

The weighted average fair value of rights or options granted in fiscal
1996, 1997, and 1998 was $0.56, $2.11, and $5.26, respectively. At November 30,
1996, no options were exercisable. At November 30, 1997, 144,339 options were
exercisable. At November 30, 1998, 353,290 options were exercisable.

In connection with certain issuances of stock rights or options under the
Plans, the Company recorded stock compensation for the difference between the
deemed fair value for accounting purposes and the issuance or exercise price.
Such amounts are amortized to expense over the related vesting periods.

Additional information regarding options outstanding as of November 30,
1998 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.06 - $ 4.25 198,500 7.3 $3.89 106,250 $4.01
$4.26 - $ 6.80 2,250,700 8.3 5.79 -- --
$6.81 - $11.00 444,540 6.3 8.08 247,040 7.67
--------- --- ----- ------- -----
2,893,740 7.9 $6.09 353,290 $6.57
========= === ===== ======= =====
</TABLE>

Additional Stock Plan Information -- Effective for fiscal 1997, the Company
was required to adopt the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). SFAS 123 defines a fair value method of accounting for stock-based
compensation awards to employees. The Company has elected to continue to follow
the provisions of

36
<PAGE> 37
ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Accounting Principals Board No. 25, "Accounting for Stock Issued to Employees,"
and its related interpretations.

SFAS 123 requires that the fair value of stock-based awards to employees be
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
which greatly affect the calculated values. The Company's calculations were made
using the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, five years; no stock volatility; risk free interest
rate, approximately 6.0% in 1996, 6.1% in 1997, and 6.0% in 1998; and no
dividend payments during the expected term. Forfeitures are recognized as they
occur. If the computed fair values of the 1996 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma income
attributable to common stockholders and diluted earnings per share would have
been approximately $2,036,000 ($0.09 per share) in 1996, a loss of ($819,000)
(or ($0.04) per share) in 1997, and a loss of ($13.8 million) (or ($0.55) per
share) in 1998. However, the impact of outstanding non-vested options granted
prior to 1996 has been excluded from the pro forma calculation; accordingly, the
1996, 1997 and 1998 pro forma adjustments are not indicative of future period
pro forma adjustments, when the calculation will apply to all applicable stock
options.

12. INCOME TAXES

The provision for income taxes for the years ended November 30 consists of
(in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Current:
Federal................................................. $(632) $1,884 $1,484
State................................................... -- 401 469
Foreign................................................. 266 580 177
----- ------ ------
Total current............................................. (366) 2,865 2,130
----- ------ ------
Deferred:
Federal................................................. 583 (1,894) (370)
State................................................... 47 (332) (52)
----- ------ ------
Total deferred............................................ 630 (2,226) (422)
----- ------ ------
Total provision for income taxes.......................... $ 264 $ 639 $1,708
===== ====== ======
</TABLE>

The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate to income before taxes as a
result of the following (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------- ---- ------
<S> <C> <C> <C>
Income tax expense........................................ $(2,119) $543 $1,416
State income taxes, net of federal benefit................ (367) 81 250
Increase in valuation allowance........................... 2,601 -- --
Other..................................................... 149 15 42
------- ---- ------
Total provision for income taxes.......................... $ 264 $639 $1,708
======= ==== ======
</TABLE>

37
<PAGE> 38
ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The deferred tax assets valuation allowance at November 30, 1998 is
attributed to U.S. federal and state deferred tax assets which result primarily
from the tax effect of future reversing temporary differences. Management
believes that the realization of deferred tax assets was not assured at November
30, 1998, other than to the extent of taxable income for the carryback period.
Significant components of the Company's deferred tax assets as of November 30,
1998 were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ----
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss...................................... $ 1,075 $ -- $ --
Customer advances included in taxable income............ 1,611 1,930 106
Reserves and accruals not current deductible............ 1,796 664 213
State taxes............................................. 28 136 169
Depreciation and amortization........................... 191 -- 16
Less: valuation allowance............................... (2,601) -- --
------- ------ ----
Net deferred tax assets................................... $ 2,100 $2,730 $504
======= ====== ====
</TABLE>

13. EARNINGS PER SHARE

In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts). For the purposes
of the EPS compilation, net income has been reduced by the amount of the
periodic accretion for redeemable preferred stock (see Note 7).

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Numerator -- Basic and diluted EPS
Net income attributable to common stockholders..... $(10,862) $ 136 $ 2,066
======== ======= =======
Denominator -- Basic EPS
Common stock outstanding........................... 25,258 21,365 21,064
======== ======= =======
Basic earnings per share............................. $ (0.43) $ 0.01 $ 0.10
======== ======= =======
Denominator -- Diluted EPS
Denominator -- Basic EPS........................... 25,258 21,365 21,064
Effect of dilutive securities:
Common shares subject to repurchase rights...... -- 978 854
Stock purchase rights and options............... -- 242 479
-------- ------- -------
$ 25,258 $22,585 $22,397
======== ======= =======
Diluted earnings per share........................... $ (0.43) $ 0.01 $ 0.091
======== ======= =======
</TABLE>

Stock options to purchase 2,893 shares of common stock, at prices ranging from
$2.06 to $11.00 per share were outstanding at November 30, 1998, but were not
included in the computation of diluted earnings per share because they were
antidilutive. 422,708 common shares subject to repurchase rights were similarly
excluded from the computation of diluted earnings per share.

14. MAJOR CUSTOMERS AND INTERNATIONAL SALES

In fiscal 1998, one customer accounted for approximately 13% of revenue.

Export sales to Asia accounted for 57%, 48%, and 50% of total revenue in
fiscal 1998, 1997, and 1996, respectively.

38
<PAGE> 39
ASPEC TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. EMPLOYEE BENEFIT PLAN

The Company has established a 401(k) tax-deferred savings plan. Employees
meeting the eligibility requirements, as defined, may contribute specified
percentages of their salaries. The Company has not contributed to the plan to
date.

16. RESTATEMENT OF FINANCIAL STATEMENTS

The Company, after consultation with its new independent accountants,
PricewaterhouseCoopers LLP, determined to restate its financial results for the
fiscal years ended November 30, 1997 and 1996. The restatement relates
principally to the timing of revenue recognized on certain of the Company's
contracts. Specifically, the revenue adjustments relate to three principal
areas: (i) changes due to revisions in the estimated progress on contracts that
were accounted for on a percentage of completion basis, (ii) the deferral of
previously recognized revenue on a distribution contract and (iii) the
accounting for exchange rights on a specific contract.

As a result of the restatement, the financial statements have been restated
as summarized below (in thousands, except per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1996
---------------------- ----------------------
AS REPORTED RESTATED AS REPORTED RESTATED
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenue..................................... $22,392 $20,278 $15,265 $14,999
Net income.................................. 2,227 959 2,617 2,458
Income attributable to common
stockholders.............................. 1,404 136 2,225 2,066
Diluted earnings per share.................. $ 0.06 $ 0.01 $ 0.10 $ 0.09
</TABLE>

17. 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 which
was later voluntarily dismissed; 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's initial public offering of Common Stock.

18. SUBSEQUENT EVENTS

The Company entered into a Joint Venture Agreement between Aspec
Technology, Inc. and certain Korean investors dated December 18, 1998, for the
purpose of establishing 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
circuit and providing design service for ASIC. The Company invested $2.3 million
in this joint venture representing a 40% interest in SLIM Technology Co., Ltd.

39
<PAGE> 40

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.

BOARD OF DIRECTORS

The members of the Board of Directors of the Company and their ages as of
April 1, 1999, are as follows:

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Conrad J. Dell'Oca....................... 57 Chairman of the Board
Jai P. Shin.............................. 57 Executive Vice President, Business Development
Walter Kortschak......................... 39 General Partner, Summit Partners
Jeffrey D. Saper......................... 50 Member, Wilson Sonsini Goodrich & Rosati, P.C.
Ronald K. Bell........................... 56 Chief Executive Officer, Equator Technologies, Inc.
</TABLE>

CONRAD J. DELL'OCA has served as a director of the Company since January
1992. He also served as President of the Company from January 1992 to January
1999 and as Chief Executive Officer of the Company since February 1992 to
January 1999. In addition, since February 1997, Mr. Dell'Oca has served as
Chairman of the Board. From May 1981 to 1991, Mr. Dell'Oca was Vice President,
Research and Development of LSI Logic Corporation ("LSI Logic"), a semiconductor
manufacturer. Mr. Dell'Oca received a B.A.Sc. and M.A.Sc. in Engineering Physics
and a Ph.D. in Electrical Engineering from the University of British Columbia.

JAI P. SHIN has served as Executive Vice President of the Company since
November 1996 and as a director of the Company since January 1992. From January
1992 to November 1996, Mr. Shin served as Vice President, Business Development
of the Company, and from January 1992 to November 1996, Mr. Shin served as Chief
Financial Officer of the Company. From January 1986 to December 1989, Mr. Shin
served as President of LSI Logic Korea. Mr. Shin received his B.A. and M.A.
degrees in Economics from San Jose State University.

WALTER KORTSCHAK has been a director of the Company since May 1996. Mr.
Kortschak is a General Partner of Summit Partners, L.P., where he has been
employed since June 1989. Summit Partners and its affiliates manage a number of
venture capital funds, including Summit Ventures IV, L.P. and Summit Investors
III, L.P., which are principal stockholders of the Company. Mr. Kortschak also
serves as a director of Diamond Multimedia Systems, Inc., HMT Technology
Corporation, Simultation Sciences, Inc. and SteriGenics International, Inc.

JEFFREY D. SAPER has been Secretary and a director of the Company since May
1996. Mr. Saper has been a member of Wilson Sonsini Goodrich & Rosati, P.C.,
legal counsel to the Company, since 1980. Mr. Saper is also a director of
Diamond Multimedia Systems, Inc. and Proxim, Inc.

RONALD K. BELL has served as Chief Executive Officer of Equator
Technologies, Inc., a multimedia processor company, since February 1998. From
October 1997 to 1998, Mr. Bell was Vice President, Engineering and Chief
Operations Officer at Equator Technologies, Inc. From November 1995 to 1997, he
was Vice President, Advanced Architecture and Consumer Products Divisions and
General Manager, Consumer Products Division of LSI Logic Corporation, a
semiconductor manufacturer. Mr. Bell received a B.S. in Electrical Engineering
and a M.S. in Computer Science from the University of Utah.

There are no family relationships among any directors or executive officers
of the Company.

40
<PAGE> 41

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely on its review of copies of filings under Section 16(a) of the
Securities Exchange Act of 1934, as amended, received by it, or written
representations from certain reporting persons, the Company believes that during
fiscal 1998, all Section 16 filing requirements were met.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth all compensation received for services
rendered to the Company and the Company's subsidiaries in all capacities during
the last three fiscal years by (i) the Company's Chief Executive Officer and
(ii) the four other executive officers of the Company whose total annual salary
and bonus exceeded $100,000 during fiscal 1998 (collectively, the "Named
Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION(1) COMPENSATION
---------------------------------------------- ------------
FISCAL OTHER ANNUAL AWARDS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION(3) OPTIONS
--------------------------- ------ -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Conrad J. Dell'Oca....................... 1998 $209,000 $120,000 -- --
Former Chief Executive 1997 191,617 120,000 -- --
Officer and President 1996 174,372 50,000 $103,070 --
Jai P. Shin.............................. 1998 191,563 120,000 -- --
Executive Vice President 1997 175,628 120,000 -- --
1996 159,831 50,000 103,070 --
Yen Chang................................ 1998 170,469 120,000 -- --
Senior Vice President, Engineering 1997 156,281 120,000 80,676 --
1996 142,206 50,000 55,500 --
Charles R. Olson(4)...................... 1998 170,226 60,938 -- --
Former Vice President, Sales 1997 76,173 29,500 -- 275,000
Mitchell D. Bohn(5)...................... 1998 170,077 85,000 -- 600,000
Former Chief Financial Officer
</TABLE>

- ---------------
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus for such officer.

(2) Includes bonus awards earned for performance in the fiscal year noted even
though such amounts are payable in subsequent years. Excludes bonus awards
paid in the fiscal year noted but earned in prior years.

(3) Represents incentive payments based on revenue from certain contracts.
Includes incentive payments earned in the fiscal year indicated even if such
bonuses were paid in a subsequent fiscal year.

(4) Mr. Olson joined the Company in July 1997 and left the Company on October
26, 1998.

(5) Mr. Bohn joined the Company in February 1998 and left the Company on
December 14, 1998.

41
<PAGE> 42

OPTION GRANTS IN FISCAL YEAR 1998

The following table sets forth certain information concerning grants of
stock options to each of the Named Executive Officers during the fiscal year
ended November 30, 1998.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
---------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
OPTIONS ANNUAL RATES OF STOCK PRICE
GRANTED TO EXERCISE APPRECIATION FOR OPTION
EMPLOYEES OR BASE TERM(2)
OPTIONS IN FISCAL PRICE PER EXPIRATION -----------------------------
NAME GRANTED YEAR SHARE DATE 5% 10%
---- ------- ---------- --------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Conrad J. Dell'Oca -- -- -- -- -- --
Jai P. Shin -- -- -- -- -- --
Yen Chang -- -- -- -- -- --
Charles R. Olson -- -- -- -- -- --
Mitchell D. Bohn(3) 400,000 7% $2.66 9/22/2008 $669,143 $1,695,742
200,000 3% 1.94 12/01/2008 244,011 618,372
</TABLE>

- ---------------

(1) Each of these options was granted pursuant to the Company's 1996 Stock Plan
(the "Stock Plan") and is subject to the terms of such plan. These options
were granted at an exercise price equal to the fair market value of the
Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant and, as long as the optionee maintains
continuous employment with the Company, vest over a four year period at the
rate of one-fourth of the shares on the first anniversary of the date of
grant and 1/48 of the remaining shares per month thereafter.

(2) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the hypothetical gains or "option spreads" that
would exist for the respective options. These gains are based on assumed
rates of annual compounded stock price appreciation of 5% and 10% from the
date the option was granted over the full option term. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Commission
and do not represent the Company's estimate or projection of future
increases in the price of its Common Stock.

(3) The information in the table reflects Mr. Bohn's participation in the
Company's option exchange program in September 1998.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table sets forth certain information concerning options
exercised by the Named Executive Officers in fiscal 1998, and exercisable and
unexercisable stock options held by each of the Named Executive Officers as of
November 30, 1998.

<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
---------------------------------------------------------
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Conrad J. Dell'Oca -- -- -- -- -- --
Jai P. Shin -- -- -- -- -- --
Yen Chang -- -- -- -- -- --
Charles R. Olson -- -- -- -- -- --
Mitchell D. Bohn(2) -- -- -- 600,000 -- $49,600
</TABLE>

- ---------------
(1) The value of an "in the money" option represents the difference between the
exercise price of such option and the fair market value of the Company's
Common Stock at November 30, 1998 ($2.188 per share) multiplied by the total
number of shares subject to the option.

42
<PAGE> 43

(2) The information in the table reflects Mr. Bohn's participation in the
Company's option exchange program in September 1998.

COMPENSATION OF DIRECTORS

Outside directors receive $10,000 per year for serving on the Board of
Directors, $1,000 for attendance at each Board meeting and $2,000 per year for
serving as a member of the Audit or Compensation Committees. Outside directors
are reimbursed for all reasonable expenses incurred by them in attending Board
and Committee meetings. In addition, each outside director is eligible to
participate in the Company's 1997 Director Stock Option Plan (the "Director
Plan"). Under the Director Plan, each outside director is automatically granted
a nonstatutory option to purchase 25,000 shares of Common Stock upon the date
upon which such person first becomes a outside director. In addition, each
director who has been an outside director for at least six (6) months will
automatically receive a nonstatutory option to purchase 5,000 shares of Common
Stock upon such director's annual reelection to the Board by the stockholders.
Options granted under the Director Plan have a term of ten (10) years unless
terminated sooner upon termination of the optionee's status as a director or
otherwise pursuant to the Director Plan. The exercise price of each option
granted under the Director Plan is equal to the fair market value of the Common
Stock on the date of grant. Options granted under the Director Plan are subject
to cumulative yearly vesting over a four (4) year period commencing at the date
of grant. In fiscal 1998, Mr. Saper was granted an option to purchase 5,000
shares of Common Stock at an exercise price of $8.00 per share pursuant to the
Company's 1996 Stock Option Plan.

TEN YEAR OPTION REPRICINGS

The following table sets forth certain information with respect to the
Company's exchange of outstanding options with its executive officers. For
further information with respect to such option exchanges, see "Report of the
Compensation Committee of the Board of Directors."

<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
MARKET OPTION TERM
SECURITIES PRICE REMAINING
UNDERLYING OF STOCK AT EXERCISE (IN YEARS)
OPTIONS TIME OF PRICE AT TIME AT DATE
NAME DATE REPRICED REPRICING(1) OF REPRICING OF REPRICING
---- -------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Mitchell D. Bohn.............. 09/22/98 400,000 $2.66 $2.94 10
12/11/98 200,000 1.94 2.94 10
</TABLE>

- ---------------
(1) The market price of stock at time of repricing is the new exercise price of
each such option.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors currently consists of
Messrs. Kortschak and Bell. Mr. Y.S. Fu also served on the Compensation
Committee during fiscal 1998 until December 1998. None of such individuals has
been or is an officer or an employee of the Company. No member of the
Compensation Committee or executive officer of the Company has a relationship
that would constitute an interlocking relationship with executive officers or
directors of another entity.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

The members of the Compensation Committee of the Board of Directors are
Messrs. Kortschak and Bell. Mr. Fu was also a member of the Compensation
Committee during fiscal 1998 until December 1998. All such members are outside
directors. The Compensation Committee reviews compensation levels of senior
management and recommends salaries and other compensation paid to senior
management to the Company's Board of Directors for approval.

Compensation Philosophy. The Company's executive pay programs are designed
to attract and retain executives who will contribute to the Company's long-term
success, to reward executives for achieving both short and long-term strategic
Company goals, to link executive and stockholder interests through equity-based

43
<PAGE> 44

plans, and to provide a compensation package that recognizes individual
contributions and Company performance. A meaningful portion of each executive's
total compensation is intended to be variable and to relate to and be contingent
upon Company performance. The Company's compensation philosophy is that cash
compensation must be competitive with other technology companies of comparable
size to help motivate and retain existing staff and provide a strong incentive
to achieve specific Company goals. The Company believes that the use of stock
options as a long-term incentive links the interests of the employees to that of
the stockholders and motivates key employees to remain with the Company to a
degree that is critical to the Company's long-term success.

In July 1998, the Company's Board of Directors approved an option exchange
program for all employees who were not directors of the Company whereby all such
employees that held options with exercise prices in excess of $5.75 per share
were offered the opportunity to exchange such options for new options at $5.75
per share, which was the fair market value of the Common Stock on the date of
the exchange program. In order to participate in the option exchange program,
employees were required to restart the vesting period for their options such
that the vesting commencement date would be July 6, 1998. The Board undertook
this action in light of the then recent reduction in the trading price of the
Company's Common Stock and in consideration of the importance to the Company of
retaining its employees by offering them appropriate equity incentives. The
Board also considered the highly competitive environment for obtaining and
retaining qualified employees and the overall benefit to the Company's
stockholders from a highly motivated group of employees.

In September 1998, the Company's Board of Directors approved an option
exchange program for all employees of the Company whereby all such employees
that held options with exercise prices in excess of $2.66 per share were offered
the opportunity to exchange such options for new options at $2.66 per share,
which was the fair market value of the Common Stock on the date of the exchange
program. To the extent that any option holder exchanged shares in excess of the
option plan's annual share limit, those excess options would be exchanged for
new options at $1.94 per share, which was the fair market value of the Common
Stock on December 1, 1998. In order to participate in the option exchange
program, employees were required to restart the vesting period for their options
such that the vesting commencement date would be September 22, 1998 and December
1, 1998 for those options in excess of the annual share limit. The Board
undertook this action in light of the then recent reduction in the trading price
of the Company's Common Stock and in consideration of the importance to the
Company of retaining its employees by offering them appropriate equity
incentives. The Board also considered the highly competitive environment for
obtaining and retaining qualified employees and the overall benefit to the
Company's stockholders from a highly motivated group of employees.

Components of Executive Compensation. The two key components of the
Company's senior management compensation program in fiscal 1998 were base salary
and long-term incentives, represented by the Company's stock option program. The
Compensation Committee utilizes an industry recognized independent annual survey
of companies to determine whether the Company's senior management compensation
is within the competitive range. Base salary is set for each senior manager
commensurate with that person's level of responsibility and within the
parameters of companies of comparable size within the semiconductor industry.

It is the policy of the Company, and the members of the Committee believe
that it is consistent with practices of comparable companies in the industry,
that bonus compensation should comprise a meaningful portion of the annual total
compensation of senior management. Messrs Dell'Oca, Shin, Chang, Olson and Bohn
were paid bonuses in 1998 in the amount of $120,00, $120,000, $120,000, $60,938
and $85,000, respectively. All such bonuses were paid based on achievement of
management business objectives.

Stock options are generally granted when a senior manager joins the Company
and additional options may be granted from time-to-time thereafter. The options
granted to each senior manager vest over a four (4) year period. In addition to
the stock option program, senior managers are eligible to participate in the
Company's 1997 Employee Stock Purchase Plan.

Other elements of executive compensation include participation in
Company-wide medical and dental benefits and the ability to defer compensation
pursuant to a 401(k) plan, and a non-qualified deferred compensation program.
The Company does not match annual contributions under the 401(k) plan at this
time.

44
<PAGE> 45

The Compensation Committee has considered the potential impact of Section
162(m) of the Internal Revenue Code of 1986, as amended, and the regulations
thereunder (the "Section"). The Section disallows a tax deduction for any
publicly-held corporation for individual compensation exceeding $1 million in
any taxable year for any of the Named Executive Officers, unless such
compensation is performance-based. Since the cash compensation of each of the
Named Executive Officers is below the $1 million threshold and the Compensation
Committee believes that any options granted under the Company's Stock Plan will
meet the requirements of being performance-based, the Compensation Committee
believes that the Section will not reduce the tax deduction available to the
Company. The Company's policy is to qualify, to the extent reasonable, its
executive officers' compensation for deductibility under applicable tax laws.
However, the Compensation Committee believes that its primary responsibility is
to provide a compensation program that will attract, retain and reward the
executive talent necessary to the Company's success. Consequently, the
Compensation Committee recognizes that the loss of a tax deduction could be
necessary in some circumstances.

Compensation Committee of the Board of
Directors

Ronald K. Bell
Walter Kortschak

45
<PAGE> 46

COMPARISON OF TOTAL CUMULATIVE STOCKHOLDER RETURN

The following graph sets forth the Company's total cumulative stockholder
return compared to the Nasdaq Stock Market and the Nasdaq Electronic Components
Stock Index for the period April 27, 1998 (the date of the Company's initial
public offering) through November 30, 1998. Total stockholder return assumes
$100 invested at the beginning of the period in the Common Stock of the Company,
the stocks represented in the Nasdaq Stock Market and the Nasdaq Electronic
Components Stock Index, respectively. Total return also assumes reinvestment of
dividends; the Company has paid no dividends on its Common Stock.

Historical stock price performance should not be relied upon as indicative
of future stock price performance.

COMPARISON OF 7 MONTH CUMULATIVE TOTAL RETURN*
AMONG ASPEC TECHNOLOGY, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ ELECTRONIC COMPONENTS INDEX

<TABLE>
<CAPTION>
ASPEC TECHNOLOGY, NASDAQ STOCK NASDAQ ELECTRONIC
INC. MARKET (U.S.) COMPONENTS
----------------- ------------- -----------------
<S> <C> <C> <C>
4/28/98 100.00 100.00 100.00
5/98 87.00 96.00 89.00
8/98 17.00 82.00 80.00
11/98 16.00 107.00 121.00
</TABLE>

* INVESTED ON 4/28/98 IN STOCK OR INDEX.
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING NOVEMBER 30.

46
<PAGE> 47

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHARE OWNERSHIP

As of March 19, 1999, the following persons were known by the Company to be
the beneficial owners of more than 5% of the Company's Common Stock:

- ---------------

(1) Includes 2,490,724 shares held by Summit Venture IV, L.P. ("Summit IV") and
110,284 shares held by Summit Investors III, L.P. ("Summit Investors III").
Summit Partners IV, L.P. is the general partner of Summit IV. Stamps,
Woodsum & Co. IV is the general partner of Summit Partners IV, L.P. Mr.
Kortschak, a director of the Company, is a general partner of Stamps,
Woodsum & Co. IV and Summit Investors III. Mr. Kortshak disclaims beneficial
ownership of such shares held by Summit IV and Summit Investors III, except
to the extent of his pecuniary interest therein.

(2) Includes 510,992 shares held by WK Technology Fund, 510,992 shares held by
WK Technology Fund II, 1,343,730 shares held by WK Technology Fund III and
235,294 shares held by WK Technology Fund IV.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth the beneficial ownership of the Company's
Common Stock as of March 19, 1999 (i) by each director of the Company, (ii) by
the Company's Chief Executive Officer and the four other executive officers of
the Company whose total annual salary and bonus exceeded $100,000 during fiscal
1998, and (iii) by all current directors and executive officers as a group:

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------
NAME NUMBER PERCENT
---- --------- -------
<S> <C> <C>
Conrad J. Dell'Oca....................................... 2,625,304 9.2%
Jai P. Shin.............................................. 2,012,126 7.1%
Yen Chang................................................ 2,429,070 8.6%
Walter Kortschak(1)...................................... 2,601,008 9.2%
Jeffrey D. Saper(2)...................................... 176,046 *
Charles R. Olson(3)...................................... -- --
Mitchell D. Bohn(4)...................................... -- --
All directors and executive officers as a group (8
persons)............................................... 9,843,554 34.7%
</TABLE>

- ---------------

* Less than 1%

47
<PAGE> 48

(2) Includes 140,922 shares held by WS Investment Company 96-A, an investment
fund of Wilson Sonsini Goodrich & Rosati, P.C. ("WSG&R"). Mr. Saper
disclaims beneficial ownership of the shares held by WSG&R, except to the
extent of his proportionate partnership interest therein.

(3) Mr. Olson left the Company on October 26, 1998.

(4) Mr. Bohn left the Company on December 14, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) List of documents filed as part of this Report.

1. Financial Statements

The following consolidated financial statements of Aspec Technology, Inc.
are contained in Part II, Item 8 of this Report on Form 10-K:

Report of Independent Accountants

Consolidated Statements of Operations

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Stockholders' Equity (Deficiency)

Notes to Consolidated Financial Statements

2. Financial Statement Schedule

None.

All schedules for which provision is made in the Applicable Accounting
Regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

48
<PAGE> 49

EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1(1) Restated Certificate of Incorporation of Registrant.
3.3(1) Bylaws of Registrant.
4.2(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)* 1996 Stock Plan, as amended, and form of Stock Option
Agreement.
10.3(1)* 1997 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.4(1)* 1997 Director Stock Option Plan and form of Director Option
Agreement.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
27.1(2) Financial Data Schedule.
</TABLE>

- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Report on Form 10-K pursuant to form 14(c) of this
report.

(1) Incorporated by reference to an exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (File No. 333-22913) which
became effective with the Securities and Exchange Commission on April 27,
1998.

(2) Incorporated by reference to the Company's Annual Report on Form 10-K filed
February 16, 1999.

49
<PAGE> 50

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to its
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Santa Clara, State of California, on the 5th day
of April, 1999.

ASPEC TECHNOLOGY, INC.

By: /s/ R. MICHAEL O'MALLEY
------------------------------------
R. Michael O'Malley
Chief Financial Officer and
Acting Chief Operating Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment to Annual Report on Form 10-K has been signed below on April 5, 1999
by the following persons on behalf of the Registrant and in the capacities
indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>

/s/ DOUGLAS E. KLINT* Acting Chief Executive Officer and Acting
- -------------------------------------------- President (Principal Executive Officer)
(Douglas E. Klint)

/s/ R. MICHAEL O'MALLEY Chief Financial Officer and Acting Chief
- -------------------------------------------- Operating Officer (Principal Financial and
(R. Michael O'Malley) Accounting Officer)

/s/ CONRAD J. DELL'OCA* Chairman of the Board
- --------------------------------------------
(Conrad J. Dell'Oca)

/s/ JAI P. SHIN* Director
- --------------------------------------------
(Jai P. Shin)

/s/ WALTER KORTSCHAK* Director
- --------------------------------------------
(Walter Kortschak)

/s/ JEFFREY D. SAPER* Director
- --------------------------------------------
(Jeffrey D. Saper)
</TABLE>

*By: /s/ R. MICHAEL O'MALLEY
---------------------------------
R. Michael O'Malley
Attorney-in-fact

50
<PAGE> 51

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
3.1(1) Restated Certificate of Incorporation of Registrant.
3.3(1) Bylaws of Registrant.
4.2(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)* 1996 Stock Plan, as amended, and form of Stock Option
Agreement.
10.3(1)* 1997 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.4(1)* 1997 Director Stock Option Plan and form of Director Option
Agreement.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
27.1(2) Financial Data Schedule.
</TABLE>

- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Report on Form 10-K pursuant to form 14(c) of this
report.

(2) Incorporated by reference to the Company's Annual Report on Form 10-K filed
February 16, 1999.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statement of
Aspec Technology, Inc. on Form S-8 (File No. 333-61607) of our report dated
January 18, 1999 appearing on page 25 of this Annual Report on Form 10-K/A.

/s/ PricewaterhouseCoopers LLP

San Jose, California
April 5, 1999