ASPECT MEDICAL SYSTEMS INC, S-1/A, 1998-07-23

ASPECT MEDICAL SYSTEMS INC
S-1/A, 1998-07-23
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

Previous: U S PHYSICAL THERAPY INC /NV, PRES14A, 1998-07-23

Next: PIONEER SHORT TERM INCOME TRUST, NSAR-A, 1998-07-23

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1998

REGISTRATION NO. 333-57739
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

AMENDMENT NO. 2

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

ASPECT MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
DELAWARE 3845 04-2985553
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

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

TWO VISION DRIVE
NATICK, MASSACHUSETTS 01760
(508) 653-0603
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

NASSIB G. CHAMOUN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ASPECT MEDICAL SYSTEMS, INC.
TWO VISION DRIVE
NATICK, MASSACHUSETTS 01760
(508) 653-0603
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
SUSAN W. MURLEY, ESQ. LESLIE E. DAVIS, ESQ.
HALE AND DORR LLP TESTA, HURWITZ & THIBEAULT, LLP
60 STATE STREET HIGH STREET TOWER
BOSTON, MASSACHUSETTS 02109 125 HIGH STREET
TELEPHONE: (617) 526-6000 BOSTON, MASSACHUSETTS 02110
TELECOPY: (617) 526-5000 TELEPHONE: (617) 248-7000
TELECOPY: (617) 248-7100
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION

JULY 23, 1998

3,100,000 Shares

[ASPECT LOGO]

Common Stock
------------------

All the 3,100,000 shares of Common Stock offered hereby will be sold by
Aspect Medical Systems, Inc. ("Aspect" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is presently estimated that the initial public offering price will be between
$12.00 and $14.00 per share. See "Underwriting" for the factors to be considered
in determining the initial public offering price. Application has been made for
the quotation of the Common Stock on the Nasdaq National Market under the symbol
"ASPM."
------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- ---------------------------------------------------------------------------------------------------------------
Per Share........................ $ $ $
- ---------------------------------------------------------------------------------------------------------------
Total(2)......................... $ $ $
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Before deducting expenses estimated at $850,000, payable by the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
465,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent the option is exercised, the Underwriters will offer
the additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made through the
facilities of the Depository Trust Company in New York, New York, on or about
, 1998 against payment therefor in immediately available funds.

BT Alex. Brown

Merrill Lynch & Co.

Piper Jaffray Inc.

THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3

[Company Logo]

Aspect has developed the only FDA-cleared, commercially available product
for use as a direct measure of the effects of anesthetics on the brain. The BIS
index is a numerical index derived from the combination of several processed EEG
variables that correlate with loss of consciousness and changes in levels of
sedation. The BIS System, which incorporates the BIS index, is comprised of the
Company's BIS monitors and single-use, disposable BIS Sensors.

[Photograph depicting the Company's A-2000 BIS monitor]

The A-2000 BIS Monitor is a compact, portable monitor designed to
accommodate the space limitations and positioning requirements of surgical
settings. The A-2000 displays the BIS index and supporting information on a high
contrast electro-luminescent display and includes Aspect's proprietary Digital
Signal Converter.

[Photograph depicting the Company's A-2000 BIS Monitor product with BIS Sensor
affixed to model's forehead]

The BIS Sensor provides a reliable and simple means of acquiring the EEG
signal needed to generate the BIS index. The BIS Sensor is a single-piece,
single-use disposable product for use with the A-2000, the A-1050 monitor and
the BIS Module Kit.

[Photograph depicting the Company's BIS Sensor, BIS Module Kit and Digital
Signal Converter products]

In 1996, Aspect introduced the BIS Module Kit, which requires the use of
the BIS Sensor in order to calculate the BIS index. The BIS Module Kit is
designed to facilitate the integration of the Company's BIS index into
monitoring products marketed by third parties that enter into OEM arrangements
with the Company.

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SYNDICATE SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------

BIS, Bispectral Index, A-1050, A-2000 and Zipprep are trademarks of Aspect
Medical Systems, Inc. Aspect is a registered trademark licensed on a
non-exclusive basis to the Company. All other trademarks or trade names referred
to in this Prospectus are the property of their respective owners.
2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."

THE COMPANY

Aspect develops, manufactures and markets anesthesia monitoring systems
that enable anesthesia providers to assess levels of consciousness and
administer the appropriate amount of anesthetics during surgery. The BIS System
incorporates the Company's proprietary disposable BIS Sensors and the Company's
BIS monitors. The Company's latest generation monitor, the A-2000 BIS Monitor,
was cleared for marketing by the United States Food and Drug Administration (the
"FDA") in February 1998. The BIS System is based on Aspect's patented core
technology, the Bispectral Index (the "BIS index"), which is the only
FDA-cleared, commercially available, direct measure of the effects of
anesthetics on the brain. The BIS System was developed over a ten-year period
and is the subject of eight issued and five pending United States patents.
Aspect markets the BIS System through a direct sales organization in the United
States. As of July 4, 1998, more than 880 BIS monitors have been sold to
approximately 140 sites in the United States, and the Company estimates that
over 150,000 patients have been monitored using the BIS index during surgery.
Marketing approval of the Company's BIS System has been received in Europe and
is pending in Japan.

Each year, more than 29 million patients in the United States and more than
35 million patients in Europe and Japan receive anesthesia for surgical
procedures. In the United States, the Company estimates that approximately 70%
of patients receive general anesthesia or deep sedation monitored by an
anesthesia provider. Historically, anesthesia providers have had no direct means
of assessing levels of consciousness during surgery and have generally relied on
recommended drug dosages and indirect indicators of consciousness, including
blood pressure and heart rate. Changes in these indirect measures, however, are
not reliable indicators of changes in a patient's levels of consciousness. Using
existing monitoring devices, anesthesia providers are sometimes unable to detect
surgical awareness, or the unintentional regaining of consciousness during
surgery. The Company believes the desire to prevent surgical awareness, as well
as the difficulty of accounting for variability in patient tolerances to
anesthetic drugs, leads anesthesia providers to administer more anesthetic than
is required by many of their patients. Overmedication results in increased drug
costs, prolonged and unpredictable wake-ups from anesthesia and prolonged
recovery in the Post Anesthesia Care Unit (the "PACU"). These factors, in turn,
lead to inefficiencies in operating room (the "OR") and PACU scheduling and
increased personnel costs.

Aspect's BIS index is designed to allow anesthesia providers to measure
directly the effects of anesthetics on the brain in order to assess levels of
consciousness and to administer the appropriate amount of anesthetics for
surgical procedures, while avoiding unintentional overmedication or
undermedication. The BIS index ranges from 100, indicating the patient is awake,
to zero, indicating an absence of electrical brain activity. The Company has
demonstrated in a 302-patient prospective, randomized, controlled utility trial
that BIS monitoring provides more controlled and cost-effective dosing of
anesthetic drugs, faster and more predictable recovery from anesthesia and
improved quality of recovery.

Aspect's objective is to become a major multinational anesthesia monitoring
company by establishing BIS monitoring as the standard of practice in anesthesia
and sedation monitoring in the OR, in the intensive care unit and for procedures
requiring sedation outside the OR. Key elements of the Company's strategy to
accomplish its objective include: (i) a direct sales force for rapid
commercialization, (ii) clinical specialists to educate and to promote the use
of Aspect's BIS System, (iii) OEM relationships to broaden distribution
channels, (iv) technological leadership and (v) new product development.

The Company was organized in Delaware in 1987. The Company's principal
executive offices are located at Two Vision Drive, Natick, Massachusetts 01760,
and its telephone number is (508) 653-0603.

3
<PAGE> 5

THE OFFERING

Common Stock offered by the Company........... 3,100,000 shares

Common Stock to be outstanding after the
offering...................................... 14,166,974 shares(1)

Use of proceeds............................... To fund sales and marketing,
research and development, the
sales-type lease program,
possible acquisitions and
working capital and other
corporate purposes

Proposed Nasdaq National Market symbol........ ASPM

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------ --------------------
JUNE 28, JULY 4,
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue................ $ 155 $ 852 $ 1,067 $ 1,389 $ 3,068 $ 1,076 $ 4,420
Loss from operations... (3,885) (4,491) (5,607) (5,477) (10,308) (4,655) (6,814)
Net loss............... (3,657) (4,260) (5,546) (5,396) (9,886) (4,447) (6,517)
Pro forma basic and
diluted net loss per
share(2)............ $ (1.28) $ (0.65)
Weighted average shares
used to compute pro
forma net loss per
share(2)............ 7,707 9,951
</TABLE>

<TABLE>
<CAPTION>
JULY 4, 1998
-------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $10,131 $46,760
Working capital........................................... 7,143 43,772
Total assets.............................................. 16,125 52,754
Long-term debt............................................ 682 682
Total stockholders' equity................................ 9,299 45,928
</TABLE>

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

(1) Based on the number of shares of Common Stock outstanding on July 23, 1998.
Excludes an aggregate of 1,730,755 shares of Common Stock reserved for
issuance pursuant to exercise of currently outstanding options at a weighted
average exercise price of $4.28 per share. See "Management -- Executive
Compensation" and Note 9 of Notes to Financial Statements.

(2) See Note 10 of Notes to Financial Statements.
(3) Adjusted to give effect to the estimated net proceeds based upon an assumed
public offering price of $13.00 per share.

Unless otherwise indicated, all information contained in this Prospectus
(i) reflects the conversion of all outstanding shares of the Company's Series
A-1, Series B-1, Series C and Series D Convertible Preferred Stock (the
"Convertible Preferred Stock") into an aggregate of 9,313,509 shares of Common
Stock at the closing of this offering and (ii) assumes no exercise of the
Underwriters' over-allotment option. The Company follows a system of fiscal
months as opposed to calendar months. Under this system, the first eleven months
of each fiscal year end on a Saturday and the last month of the fiscal year
always ends on December 31. All references to the six months ended June 28, 1997
relate to the period from January 1, 1997 to June 28, 1997, and all references
to the six months ended July 4, 1998 relate to the period from January 1, 1998
to July 4, 1998.
4
<PAGE> 6

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.

UNCERTAINTY OF MARKET ACCEPTANCE OF TECHNOLOGY AND PRODUCTS

Commercial introduction of the Company's BIS monitors, BIS Sensors and
related products (collectively, the "BIS System") commenced in late 1996, and to
date sales of BIS Systems have been limited. The commercial success of the BIS
System will depend on its acceptance by hospitals and anesthesia providers as an
accurate, reliable and cost-effective method of monitoring the effects of
anesthetics on the brain in order to assess levels of consciousness. There can
be no assurance that anesthesia providers will modify their current practice
methods and support the BIS System as a complement to current anesthesia
monitoring. In addition, market acceptance of the BIS System will depend in part
on the Company demonstrating that the cost of a BIS System would be offset by a
reduction in costs associated with administering anesthesia, including the costs
of drugs and post-operative recovery time. Even if the Company is successful in
marketing and selling BIS monitors, there can be no assurance that customers
will continue to use such monitors or that the Company will be successful in
generating sales of BIS Sensors. Failure of the Company's BIS System to provide
an accurate and reliable measure of the effects of anesthetics on the brain in
order to assess levels of consciousness, whether because of misuse, malfunction
or otherwise, could have a material adverse effect on market acceptance of BIS
Systems. Four cases of surgical awareness, or the unintentional regaining of
consciousness during surgery, during BIS monitoring have been reported to the
Company. In each case, high Bispectral Index ("BIS index") values were noted,
indicating that the BIS index correctly identified the potential risk of
awareness in these patients. However, cases of surgical awareness undetected by
BIS monitoring may occur, and the resulting adverse publicity could result in
the failure of anesthesia providers and hospitals to adopt BIS Systems, which
would have a material adverse effect on the business, financial condition and
results of operations of the Company. In addition, market acceptance of the
Company's BIS System could be adversely affected by events outside its control,
including the introduction of superior competitive products or the failure of
competitive products to perform in accordance with customers' expectations.

HISTORY OF LOSSES; UNCERTAINTY OF PROFITABILITY

The Company has incurred losses since inception. The Company incurred net
losses of $5.5 million, $5.4 million, $9.9 million and $6.5 million during 1995,
1996, 1997 and the six months ended July 4, 1998, respectively. The Company
expects to continue to incur operating losses in future periods, and there can
be no assurance that the Company will ever achieve or sustain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

LIMITED MARKETING AND SALES EXPERIENCE; INTERNATIONAL SALES

The Company has only limited sales and marketing experience in the United
States and no direct sales experience outside the United States. No assurance
can be given that the Company's direct sales force and clinical specialist group
will be successful in promoting BIS Systems. The sales effort is typically
lengthy, in part because the Company generally must educate potential customers
about the clinical benefits and cost effectiveness of BIS Systems. There can be
no assurance that the Company's education or other sales strategies are properly
developed or that they will be successfully implemented. The Company is also
evaluating other domestic marketing and sales channels, including contract sales
organizations, distributors and marketing partners. The Company's failure to
develop and implement successfully its sales and marketing strategy would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Sales, Marketing and Customers."

5
<PAGE> 7

Revenue from international sales accounted for 47%, 49%, 39% and 14% of the
Company's revenue during 1995, 1996, 1997 and the six months ended July 4, 1998,
respectively. Effective July 1, 1998, the Company's agreement with a third party
to distribute the Company's monitors internationally (except in Japan)
terminated pursuant to the terms of the agreement. Sales to this third party
represented substantially all of the Company's revenue from international sales
during the three-year period ended December 31, 1997 and the six months ended
July 4, 1998. The Company is evaluating international sales channels, including
direct sales, contract sales organizations, distributors and marketing partners.
While the Company recently entered into a three-year distribution agreement with
a third party to distribute BIS monitors in Japan, the Company anticipates that
international sales will decrease in absolute dollars and as a percentage of
total revenue at least through 1998. There can be no assurance that the Company
will develop and implement successfully a sales and marketing strategy
internationally and any failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operations.

RELIANCE ON SINGLE PRODUCT FAMILY

The BIS System is the Company's only product. To date, the BIS System has
not achieved widespread market acceptance and sales have been limited. The
failure of the Company to gain widespread market acceptance of BIS Systems would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, sales of BIS Sensors are dependent upon
continued use by customers of the BIS monitors. There can be no assurance that
customers will continue to use BIS monitors or purchase BIS Sensors. Moreover,
there can be no assurance the Company will further enhance its products for use
outside of the operating room (the "OR"), including in the intensive care unit
("ICU"), for conscious sedation or for other applications. The Company's failure
to develop its products for use outside of the OR would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "-- Uncertainty of Market Acceptance of Technology and Products" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

LIMITED MANUFACTURING EXPERIENCE; MANUFACTURING EXPANSION

Aspect relies on third-party manufacturers to assemble and manufacture the
components of its BIS monitors. The Company performs final assembly and testing
of the BIS monitors. The Company has historically outsourced the manufacturing
of its BIS Sensor, but in the first quarter of 1998, the Company began
manufacturing a portion of the BIS Sensors in its own manufacturing facility.
The failure of the Company or any contract manufacturer to produce enough
components or products on time, cost-effectively and in compliance with
applicable licensing or regulatory requirements, such as the Good Manufacturing
Practices ("GMPs") of the United States Food & Drug Administration (the "FDA"),
including the FDA's Quality Systems Regulations, would have a material adverse
effect on the Company's business, results of operations and financial condition.
Any termination or modification of any manufacturing arrangement with a
third-party could result in a business interruption for the Company. The Company
may require additional manufacturing capacity within the next two years. There
can be no assurance that the Company will be successful in expanding its
manufacturing facility or relocating its facility to meet demand in a timely
manner or within budget. The Company has only one manufacturing facility and any
loss of, damage to or interruption of production at its facility could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."

DEPENDENCE ON SINGLE OR LIMITED SOURCE SUPPLIERS

The Company currently obtains certain key components of its BIS Systems,
including certain components used in the BIS Sensors, from single or limited
sources. The Company purchases components pursuant to purchase orders rather
than long-term supply agreements. The Company

6
<PAGE> 8

has experienced shortages and delays in obtaining certain components of its BIS
Systems in the past. There can be no assurance that the Company will not
experience similar delays or shortages in the future. The disruption or
termination of the supply of components or a significant increase in the costs
of these components from these sources could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, if the Company is required to change the manufacturer of a key
component of the BIS System, the Company may be required to verify that the new
manufacturer maintains facilities and procedures that comply with all applicable
regulations and guidelines. The delays associated with verification could delay
the manufacture and sale of the Company's BIS Systems and any delay could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."

TECHNOLOGICAL RISKS

The medical industry is characterized by rapid product development and
technological advances. There can be no assurance that new monitoring products,
alternative techniques for evaluating the effects of anesthesia, significant
changes in the methods of delivering anesthesia or new anesthetic agents will
not be developed that will render the Company's current or planned products
obsolete or inferior. New products or technologies used on patients or in the OR
during surgery, or electrical or mechanical interference from new or existing
products or technologies, could also adversely affect the performance of the BIS
index. The effect of technological changes on the Company's business cannot be
predicted and could have a material adverse effect on the Company's business,
financial condition and results of operations.

Additional studies, sponsored in part by the Company, are ongoing to assess
the performance of the BIS index in the presence of certain anesthetics, such as
ketamine, and patient populations, such as children, not included in the
clinical development of the BIS algorithms. There can be no assurance that the
BIS technology will be effective in monitoring these or other anesthetic agents
and patient populations or when other anesthetic techniques are used.
Furthermore, there can be no assurance that the Company will be successful in
developing any product enhancements or extensions or new products, including
products for use in the ICU, for conscious sedation or for other applications.
The failure of the Company to develop product enhancements or extensions or new
products could have a material adverse effect on the Company's business,
financial condition and results of operations.

DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL

The Company's success is substantially dependent on the ability, experience
and performance of its senior management and other key personnel. The Company
needs to hire, train, retain and motivate additional personnel, particularly
sales representatives and clinical specialists who are responsible for customer
education and training and post-installation customer support. The Company
continues to experience difficulty in recruiting and retaining qualified
personnel because the pool of experienced persons is small and the Company
competes for such personnel with other companies, many of which have greater
resources than the Company. The failure of the Company to hire and retain
required personnel, including sales representatives and clinical specialists,
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Sales, Marketing and
Customers," "Business -- Employees" and "Management."

COMPETITION

Although products incorporating the BIS index are currently the only
devices cleared by the FDA to measure the effects of anesthetics on the brain,
the Company expects to face substantial competition. The Company believes that
competition will initially come from companies, including patient monitoring
companies, currently marketing conventional EEG monitors utilizing standard
7
<PAGE> 9

signal-processing techniques such as the Spectral Edge Frequency and Median
Frequency or from companies that market EEG monitors utilizing novel
signal-processing technologies, including at least two companies that are
currently conducting clinical trials on products under development.
Additionally, a number of academic researchers worldwide are studying the
potential use of other techniques to measure the effects of anesthetics,
including the use of auditory evoked potentials, heart rate variability,
pupillary reflexes and skin blood flow measurement techniques. Competitors that
develop a product that is substantially equivalent to an FDA-cleared product
developed by the Company may use the Company's product as a predicate device to
obtain more quickly FDA clearance under the 510(k) process. Accordingly, there
can be no assurance that competitors will not develop and market products that
compete with any of the Company's products in less time than it took the Company
to develop its products. Further, the Company may face substantial competition
from companies developing sensor products that compete with the Company's
proprietary BIS Sensors for use with the Company's BIS monitors. Competitors in
some jurisdictions outside the United States may enter the market without delays
caused by regulatory barriers that exist in the United States. Many of the
Company's potential competitors have substantially greater financial, marketing,
technical, manufacturing and distribution resources than those of the Company
and the Company expects to compete in areas in which the Company has limited
experience, including manufacturing, marketing and sales and customer service
and support. Competition from other companies may also force the Company to
reduce the price of its products. There can be no assurance that the Company
will be able to compete successfully or that competition, including the
development and commercialization of new products and technology, will not have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition."

DEPENDENCE ON PATENTS, TRADEMARKS, LICENSES AND PROPRIETARY RIGHTS

Aspect believes that its success depends, in part, on obtaining patent
protection for its products, defending patents once obtained, preserving its
trade secrets and operating without infringing upon patents and proprietary
rights held by third parties, both in the United States and in foreign
countries. There can be no assurance that the Company has or will develop or
obtain additional rights to products or processes that are patentable, that
patents will issue from any of the pending patent applications filed by the
Company or that claims allowed will be sufficient to protect the Company's
technology or technology that is licensed to the Company. In addition, no
assurances can be given that any patents issued to or licensed by the Company
will not be challenged, invalidated, infringed or circumvented or that the
rights granted thereunder will provide competitive advantages for the Company's
business or products. The Company may be subject to further risks as it expands
its operations in countries where intellectual property laws are not well
developed or are difficult to enforce. Legal protections of the Company's
proprietary rights may be ineffective in those countries. In such event, the
business, results of operations and financial condition of the Company could be
materially adversely affected.

There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. The Company has in
the past been involved in patent litigation and future litigation may be
necessary to protect patents, trade secrets, copyrights or "know-how" owned by
or licensed to the Company or to defend the Company against claimed infringement
of the rights of others and to determine the scope and validity of the
proprietary rights of the Company and others. The validity and breadth of claims
covered in medical technology patents involve complex legal and factual
questions for which important legal principles are unresolved. Any intellectual
property litigation could result in substantial cost to and diversion of effort
by the Company. Adverse determinations in any litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties with unfavorable terms, if at all, and could
prevent the Company from manufacturing, selling or using certain of its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
8
<PAGE> 10

The Company also relies on trade secrets and proprietary technology that it
seeks to protect, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, that others will not independently develop substantially equivalent
proprietary information or that third parties will not otherwise gain access to
the Company's trade secrets.

The Company also relies upon trademarks and trade names for the development
and protection of brand loyalty and associated goodwill in connection with its
products. There can be no assurance that any registered or unregistered
trademarks or trade names owned by or licensed to the Company will not be
challenged, cancelled, infringed, circumvented, or be declared generic or
infringing of other third-party marks or provide any competitive advantage to
the Company. The Company also is a party to a license agreement with a third
party pursuant to which it has obtained the nonexclusive right to make, use
and/or sell products under the name "Aspect." The licensor of the Aspect name
markets products for use in the health care industry. There can be no assurance
that there will not be confusion in the market between the Company and such
licensor or that any such confusion would compromise the competitive advantage,
if any, the Company derives from its name. See "Business -- Patents and
Proprietary Rights."

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company's results of operations have varied significantly from quarter
to quarter. Quarterly operating results will depend upon several factors, many
of which are not in the Company's control, including commercial acceptance of
the Company's products, both in the United States and internationally, timing
and cancellation of customer orders, cost of product upgrades, continued use by
customers of BIS monitors and, accordingly, sales of BIS Sensors, the
introduction of new products by the Company or competitors, the mix between
pilot production of new products and full scale manufacturing of existing
products, the timing and amount of expenses, the timing and results of clinical
trials, the timing of regulatory approvals and variations in foreign exchange
rates. The Company does not have a significant backlog of customer orders, so
revenues in any quarter depend on orders received in that quarter. The Company's
expenses are relatively fixed and difficult to adjust in response to fluctuating
revenues. In addition, depending on the timing of new product introductions,
competitive factors, warranty claims and product returns, the Company may need
to reserve amounts in excess of those currently reserved for product
obsolescence, excess inventory, warranty claims and product returns. There can
be no assurance that such reserves will be adequate to cover all costs
associated with such items. In addition, quarterly results of operations may be
affected by foreign government controls, export license requirements, political
and economic instability, trade restrictions, changes in tariffs, employee
strikes or disruptions arising under foreign labor laws, standards or
guidelines, or difficulties in staffing and managing international operations.
As a result of these and other factors, the Company expects to continue to
experience significant fluctuations in quarterly operating results, and there
can be no assurance that the Company will be able to achieve or maintain
profitability in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

GOVERNMENT REGULATION

The Company's products and operations are subject to extensive regulation
by numerous governmental authorities. In particular, the Company must obtain
specific clearance from the FDA before it can market new products or certain
modified products in the United States. The FDA administers the Federal Food,
Drug, and Cosmetic Act (the "FDC Act"). The Company has made certain
enhancements to its currently marketed products which it believes do not
necessitate the filing of a new 510(k) notification. However, there can be no
assurance that the FDA would agree with the Company's determination that these
modifications do not require a 510(k) notification. If the FDA requires the
Company to file a new 510(k) notification for any past or future modification to

9
<PAGE> 11

a cleared device, the Company may be prohibited from marketing the device as
modified until it obtains clearance from the FDA. There can be no assurance that
the Company will obtain 510(k) clearance on a timely basis, if at all, for any
device modification. Furthermore, there can be no assurance that the Company's
future products, if any, will receive 510(k) clearance.

FDA regulations also require companies to adhere to GMPs, which include
production design controls, testing, quality control, storage and documentation
procedures. Compliance with device GMP regulations is difficult, costly and
uncertain. The FDA may at any time inspect the Company's facilities to determine
whether adequate compliance has been achieved. There can be no assurance that
adequate compliance will be achieved or that the FDA will not withdraw marketing
clearance or require product recall or permit marketing if there is inadequate
compliance. In addition, when any change or modification is made to a device or
its intended use, the manufacturer may be required to reassess compliance with
device GMP regulations, which may cause interruptions or delays in the marketing
and sale of the Company's products. Any such interruptions or delays could have
a material adverse effect on the Company's business, financial condition and
results of operations.

Failure to comply with applicable federal, state or foreign laws or
regulations could subject the Company to enforcement actions, including, but not
limited to, product seizures, recalls, withdrawal of clearances or approvals and
civil and criminal penalties against the Company or its responsible officials,
any one or more of which could have a material adverse effect on the Company's
business, results of operations and financial condition. Federal, state and
foreign laws and regulations regarding the manufacture and sale of medical
devices are subject to future changes, as are administrative interpretations of
regulatory agencies. No assurance can be given that such changes will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF AVAILABILITY OF ADDITIONAL FINANCING

The Company believes that the anticipated net proceeds from this offering
together with interest thereon and the Company's existing capital resources will
be sufficient to fund its operations at least through 1999. However, the
Company's future liquidity and capital requirements will depend upon numerous
factors, including the resources required to further develop its marketing and
sales organization domestically and internationally, expand manufacturing
capacity, finance the Company's sales-type lease program, and meet market demand
for the Company's products. The Company's capital requirements will also depend
upon the progress of the Company's research and development programs, including
clinical trials, the receipt of and the time required to obtain regulatory
clearances and approvals, the resources the Company devotes to developing,
manufacturing and marketing its products, and the resources, if any, the Company
may devote to the expansion of its business, including through the possible
acquisition of businesses, technologies or other intellectual property rights.
There can be no assurance that the Company will not require additional financing
or will not in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital. Additional
funding may not be available when needed or on terms acceptable to the Company,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."

10
<PAGE> 12

POTENTIAL PRODUCT LIABILITY OR RECALL

The manufacture and sale of the Company's products expose it to product
liability claims and product recalls, including those which may arise from
misuse, malfunction or design flaws. The Company currently maintains product
liability insurance with coverage limits of $1.0 million per occurrence and $2.0
million in the aggregate. The Company also maintains an umbrella policy with
respect to all insurance claims. There can be no assurance that the Company's
existing insurance coverage will cover the costs of any product liability claims
made against the Company or that the Company will be able to obtain insurance in
the future at satisfactory rates or in adequate amounts. Product liability
claims or product recalls, regardless of their ultimate outcome, could result in
costly litigation and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Insurance."

LIMITATIONS ON THIRD-PARTY REIMBURSEMENT

The Company expects that anesthesia providers will not be reimbursed
separately for patient monitoring activities utilizing the Company's BIS
monitor. For hospitals and independent ambulatory surgical centers ("ASCs"),
when reimbursement is based on charges or costs, BIS monitoring may reduce
reimbursements for surgical procedures, because charges or costs may decline as
a result of BIS monitoring. Any reduction in the reimbursement by third-party
payors to hospitals and other users as a result of using the BIS System could
limit market acceptance of the BIS System and have a material adverse effect on
the Company's business, financial condition and results of operations.

POTENTIAL ADVERSE EFFECTS OF YEAR 2000 PROBLEM

The Company has conducted a software review to identify functions that need
corrections to be "Year 2000" compliant. The Year 2000 problem is the result of
computer programs being written to recognize two digits rather than four to
define the applicable year causing computer programs to interpret a date using
"00" as the year 1900 rather than the year 2000, which could result in product
failures or miscalculations. The Company is undertaking certain corrective
actions in an effort to ensure that software incorporated into its products will
continue to function properly in the year 2000, and the Company expects to
implement this software revision within the next year. The Company is also
undertaking corrective actions designed to ensure that software used to manage
its business will continue to function properly in the year 2000. While the
Company believes that software incorporated into its products and software used
to manage its business will be Year 2000 compliant, the Company may experience
disruptions in its business operations as a result of use by customers and
suppliers of software that is not Year 2000 compliant. However, there can be no
assurance that Year 2000 problems will not be encountered or that the costs
incurred to resolve such problems will not be material.

NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or continue after this offering. The initial public
offering price will be determined by negotiations among the Company and the
representatives of the Underwriters, and may not be indicative of the market
price for the Common Stock after this offering. From time to time after this
offering, there may be significant volatility in the market price of the Common
Stock. Quarterly operating results of the Company, deviations in results of
operations from estimates of securities analysts, changes in general conditions
in the economy or the medical equipment industry or other developments affecting
the Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of these companies. Any fluctuations in the
11
<PAGE> 13

equity markets that occur following completion of this offering may adversely
affect the market price of the Common Stock. See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE

Sales of substantial amounts of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon completion of this offering, the Company will have outstanding
14,166,974 shares of Common Stock, assuming no exercise of outstanding options.
On the date of this Prospectus, in addition to the 3,100,000 shares offered
hereby, approximately 29,519 shares of Common Stock, which are not subject to
180-day lock-up agreements (the "Lock-up Agreements") with the representatives
of the Underwriters, will be eligible for immediate sale in the public market
pursuant to Rule 144(k) under the Securities Act of 1933, as amended (the
"Securities Act"). Approximately 48,945 additional shares of Common Stock which
are not subject to the Lock-up Agreements will be eligible for sale in the
public market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning on the 91st day after the date of this Prospectus. Upon expiration of
the Lock-up Agreements 180 days after the date of this Prospectus, approximately
11,618,000 shares of Common Stock (including approximately 551,000 shares of
Common Stock which may be acquired upon the exercise of outstanding options)
will be available for sale in the public market, subject to the provisions of
Rule 144 under the Securities Act. BT Alex. Brown Incorporated may release any
or all shares subject to Lock-up Agreements at any time or from time to time
without notice. Approximately 180 days after the date of this Prospectus, the
Company intends to register an aggregate of approximately 4,000,000 shares of
Common Stock subject to present or future options under its Amended and Restated
1991 Stock Option Plan, 1998 Stock Incentive Plan, 1998 Employee Stock Purchase
Plan and 1998 Director Stock Option Plan, as amended. Holders of approximately
10,981,000 shares of Common Stock have agreed, pursuant to the Lock-up
Agreements, not to offer to sell, contract to sell, transfer, engage in any
hedging transaction with respect to or otherwise dispose of such shares for 180
days after the date of this Prospectus. The Company is unable to predict the
effect that sales made under Rule 144, or otherwise, may have on the then
prevailing market price of the Common Stock. The holders of approximately
9,400,000 shares of Common Stock are entitled to certain incidental and demand
registration rights with respect to such shares. By exercising their
registration rights, such holders could cause a large number of shares to be
registered and sold in the public market at any given time. Sales pursuant to
Rule 144 or other exemptions from registration, or pursuant to registration
rights, may have an adverse effect on the market price for the Common Stock and
could impair the Company's ability to raise capital through offerings of its
equity securities. See "Management -- Executive Compensation -- Stock Plans,"
"Shares Eligible for Future Sale" and "Underwriting."

CONTROL BY DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS

Upon completion of this offering, the Company's directors, executive
officers and principal stockholders, together with their affiliates, will
beneficially own approximately 48% of the Company's outstanding Common Stock. As
a result, these stockholders, if acting together, would have the ability to
influence or determine the outcome of corporate actions requiring stockholder
approval, including the election of directors and the approval of certain
mergers and other significant corporate transactions, such as a sale of
substantially all of the Company's assets, irrespective of how other
stockholders of the Company may vote. This concentration of ownership may have
the effect of delaying or preventing a change in control of the Company, which
could adversely affect the market price of the Company's Common Stock. See
"Management" and "Principal Stockholders."

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation (the
"Restated Certificate") and Bylaws, as they are each proposed to be amended and
restated concurrently with the closing of

12
<PAGE> 14

the offering, the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law statute and the automatic acceleration of the vesting of
stock options and restricted stock under certain circumstances upon a change of
control, could have the effect of delaying, deterring or preventing changes of
control or management of the Company, which could adversely affect the market
price of the Company's Common Stock. See "Description of Capital Stock."

IMMEDIATE AND SUBSTANTIAL DILUTION

The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $9.76 per share (after giving effect to
estimated underwriting discounts and commissions and offering expenses). See
"Dilution." In the event the Company offers additional Common Stock in the
future, including shares that may be issued upon exercise of stock options,
purchasers of Common Stock in this offering may experience further dilution in
the net tangible book value per share of the Common Stock of the Company.

13
<PAGE> 15

USE OF PROCEEDS

The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be $36,629,000 ($42,250,850 if the Underwriters'
over-allotment option is exercised in full) after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company and assuming an initial public offering price of $13.00 per share.

The Company expects to use the net proceeds from this offering to fund
sales and marketing, research and development efforts, the sales-type lease
program and working capital and other corporate purposes. A portion of the
proceeds of this offering may be used to acquire businesses, technologies and
other intellectual property rights and products that complement the Company's
business, although the Company has no agreements or understandings with respect
to any such potential transactions. Pending use of the net proceeds, the Company
intends to invest the net proceeds from this offering in short-term, investment
grade, interest-bearing instruments.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and, therefore, does not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion. The Company's credit
agreement restricts the Company from declaring and paying any cash dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 18 of Notes to Financial
Statements.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
July 4, 1998, and (ii) as adjusted to give effect to the conversion of all
outstanding shares of the Company's Convertible Preferred Stock into an
aggregate of 9,313,509 shares of Common Stock; the filing of the Company's
Restated Certificate to increase the number of authorized shares of Common Stock
and authorize 5,000,000 shares of authorized but undesignated preferred stock;
and to reflect the issuance and sale of 3,100,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $13.00 per share, after
deducting the estimated underwriting discounts and commissions and offering
expenses payable by the Company. The capitalization information set forth in the
table below is qualified by the Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JULY 4, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 682 $ 682
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value; no shares authorized,
issued or outstanding (actual); 5,000,000 shares
authorized, no shares issued or outstanding (as
adjusted).............................................. -- --
Convertible Preferred Stock, $.01 par value; 18,843,224
shares authorized (actual); 9,313,509 issued and
outstanding (actual); (liquidation
preference -- $41,425,301 (actual)); no shares
authorized, issued or outstanding (as adjusted);
(liquidation preference -- $0 (as adjusted))........... 50,300 --
Common Stock, $.01 par value; 14,500,000 shares authorized
(actual); 1,752,965 shares issued and outstanding
(actual); 40,000,000 shares authorized (as adjusted);
14,166,474 shares issued and outstanding (as
adjusted)(1)........................................... 17 141
Additional paid-in-capital................................ 1,370 88,175
Notes receivable from employees and directors............. (306) (306)
Deferred compensation..................................... (825) (825)
Unrealized gain on marketable securities.................. 3 3
Accumulated deficit....................................... (41,260) (41,260)
-------- --------
Total stockholders' equity............................. 9,299 45,928
-------- --------
Total capitalization.............................. $ 9,981 $ 46,610
======== ========
</TABLE>

- ---------------
(1) Excludes an aggregate of 1,312,369 shares of Common Stock reserved for
issuance pursuant to exercise of options outstanding as of July 4, 1998 at a
weighted average exercise price of $2.07 per share. See "Management --
Executive Compensation" and Note 9 of Notes to Financial Statements.

15
<PAGE> 17

DILUTION

The pro forma net tangible book value of the Company as of July 4, 1998 was
approximately $9.3 million or $0.84 per share of Common Stock. Pro forma net
tangible book value per share is determined by dividing the Company's tangible
net worth (tangible assets less liabilities) by the number of shares of Common
Stock outstanding, after giving effect to the conversion of the Company's
Convertible Preferred Stock into Common Stock upon the completion of this
offering. After giving effect to the sale of the shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $13.00 per
share and after deducting the estimated underwriting discounts and commissions
and offering expenses payable by the Company, the pro forma net tangible book
value of the Company as of July 4, 1998 would have been $3.24 per share. This
represents an immediate increase in such pro forma net tangible book value of
$2.40 per share to existing stockholders and an immediate dilution of $9.76 per
share to new investors purchasing shares in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively. The following table illustrates the per share
dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share as of July 4,
1998................................................... 0.84
Increase per share attributable to new investors.......... 2.40
----
Pro forma net tangible book value per share after this
offering.................................................. 3.24
------
Dilution in net tangible book value per share to new
investors................................................. $ 9.76
======
</TABLE>

The following table summarizes, on a pro forma basis as of July 4, 1998
(after giving effect to the conversion of the Company's Convertible Preferred
Stock upon the completion of this offering), the total number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average consideration paid per share by the existing stockholders and by the new
investors based upon an assumed initial public offering price of $13.00 per
share (before deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 11,066,474 78.12% $51,191,269 55.95% $ 4.63
New investors............ 3,100,000 21.88 40,300,000 44.05 $13.00
---------- ------ ----------- ------
Total.......... 14,166,474 100.00% $91,491,269 100.00%
========== ====== =========== ======
</TABLE>

The above information excludes an aggregate of 1,312,369 shares of Common
Stock issuable upon the exercise of options outstanding as of July 4, 1998 with
a weighted average price of $2.07 per share. To the extent that such options are
exercised there will be further dilution to new investors.

16
<PAGE> 18

SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected financial information set forth below for the years ended
December 31, 1995, 1996 and 1997, and as of December 31, 1996 and 1997, are
derived from the Company's audited financial statements, which appear elsewhere
in this Prospectus and which have been audited, with respect to the years ended
December 31, 1996 and 1997 and as of December 31, 1996 and 1997, by Arthur
Andersen LLP, independent accountants, and with respect to the year ended
December 31, 1995, by PricewaterhouseCoopers LLP, independent accountants. The
selected financial information set forth below as of December 31, 1993, 1994 and
1995 and for the years ended December 31, 1993 and 1994 are derived from audited
financial statements, which are not included in this Prospectus. The selected
financial information for the six months ended June 28, 1997 and July 4, 1998
and as of July 4, 1998 are derived from the unaudited financial statements which
appear elsewhere in this Prospectus. In the opinion of management, the unaudited
financial statements have been prepared on a basis consistent with the Company's
audited Financial Statements which appear elsewhere in this Prospectus and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the financial position and results of
operations for these unaudited periods. The operating results for the six months
ended July 4, 1998 are not necessarily indicative of the results to be expected
for the full year ending December 31, 1998. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto, appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------------------------------------- ------------------
JUNE 28, JULY 4,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- ------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue....................... $ 155 $ 852 $ 1,067 $ 1,389 $ 3,068 $ 1,076 $ 4,420
Costs and expenses:
Costs of revenue............ 80 525 704 1,096 3,602 1,381 2,662
Research and development.... 2,371 2,311 2,870 2,338 2,603 1,435 1,942
Sales and marketing......... 663 1,291 1,285 1,561 4,813 1,721 4,670
General and
administrative............ 926 1,216 1,815 1,871 2,358 1,194 1,960
-------- -------- -------- ------- -------- ------- -------
Total costs and
expenses................ 4,040 5,343 6,674 6,866 13,376 5,731 11,234
Loss from operations.......... (3,885) (4,491) (5,607) (5,477) (10,308) (4,655) (6,814)
Interest income............... 233 286 146 144 500 246 313
Interest expense.............. (5) (55) (85) (63) (78) (38) (16)
-------- -------- -------- ------- -------- ------- -------
Net loss...................... $ (3,657) $ (4,260) $ (5,546) $(5,396) $ (9,886) $(4,447) $(6,517)
======== ======== ======== ======= ======== ======= =======
Net loss per share(1):
Basic and diluted........... $(721.36) $(822.34) $(281.65) $(57.76) $ (16.23) $(10.88) $ (6.34)
======== ======== ======== ======= ======== ======= =======
Pro forma basic and
diluted................... $ (1.28) $ (0.65)
======== =======
Shares used in computing net
loss per share(1):
Basic and diluted........... 5 5 20 93 609 409 1,027
Pro forma basic and
diluted................... 7,707 9,951
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------ JULY 4,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.................................. $8,134 $4,258 $3,329 $2,231 $4,981 $10,131
Working capital............................... 8,215 4,273 3,054 1,029 3,052 7,143
Total assets.................................. 8,948 5,719 4,552 3,973 7,603 16,125
Long-term debt................................ -- 423 333 270 118 682
Total stockholders' equity.................... 8,736 4,460 3,028 1,066 4,067 9,299
</TABLE>

- ---------------
(1) See Note 10 of Notes to Financial Statements.

17
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus which could cause actual results to differ
materially from those indicated by such forward-looking statements, including
the matters set forth under the caption "Risk Factors."

OVERVIEW

A-2000, the Company's other monitor products are the A-1000 monitor and the
A-1050 monitor. After the introduction of the A-2000 monitor, the Company ceased
active marketing of the A-1050 monitor domestically. In addition to the
Company's disposable BIS Sensor, the Company offers the Zipprep EEG electrode.

The Company follows a system of fiscal months as opposed to calendar
months. Under this system, the first eleven months of each fiscal year end on a
Saturday and the last month of the fiscal year always ends on December 31. All
references to the six months ended June 28, 1997 relate to the period from
January 1, 1997 to June 28, 1997, and all references to the six months ended
July 4, 1998 relate to the period from January 1, 1998 to July 4, 1998.

The Company offers customers the option either to purchase the BIS monitors
outright or to acquire the BIS monitors pursuant to a sales-type lease agreement
whereby the customer contractually commits to purchase a minimum number of BIS
Sensors per BIS monitor per year. Under this agreement, customers purchase BIS
Sensors and the BIS monitor for the purchase price of the BIS Sensors plus an
additional charge per BIS Sensor to pay for the purchase price of the BIS
monitor and related financing costs over the term of the agreement. The customer
is granted an option to purchase the BIS monitor at the end of the term of the
agreement, which is typically three to five years. Revenue related to BIS
monitors sold pursuant to sales-type leases is recognized at the time of
shipment of the BIS monitors. Sales-type leases accounted for approximately 0%,
11% and 10% of revenue in 1995, 1996 and 1997, respectively, and for
approximately 12% and 30% of revenue in the six months ended June 28, 1997 and
the six months ended July 4, 1998, respectively.

In 1995, 1996 and 1997, revenue from the sale of monitors and related
accessories represented approximately 94%, 87% and 80%, respectively, of the
Company's revenue, and revenue from the sale of disposables represented
approximately 6%, 13% and 20%, respectively, of the Company's revenue. In the
six months ended June 28, 1997 and the six months ended July 4, 1998, revenue
from the sale of monitors and related accessories represented approximately 79%
and 73%, respectively, of the Company's revenue, and revenue from the sale of
disposables represented approximately 21% and 27%, respectively, of the
Company's revenue. The Company expects that revenue from the sale of disposables
will continue to increase as a percentage of total revenue.

In 1995, 1996 and 1997, revenue from domestic sales was approximately
$564,000, $699,000 and $1.9 million, respectively, which represented
approximately 53%, 51% and 61%, respectively, of the Company's revenue, and
revenue from international sales was approximately $503,000, $689,000 and $1.2
million, respectively, which represented approximately 47%, 49% and 39%,
respectively, of

18
<PAGE> 20

the Company's revenue. In the six months ended June 28, 1997 and the six months
ended July 4, 1998, revenue from domestic sales was approximately $640,000 and
$3.8 million, respectively, which represented approximately 60% and 86%,
respectively, of the Company's revenue, and revenue from international sales was
approximately $436,000 and $626,000, respectively, which represented
approximately 40% and 14%, respectively, of the Company's revenue. Effective
July 1, 1998, the Company's agreement with a third party to distribute the
Company's monitors internationally (except in Japan) terminated pursuant to the
terms of the agreement. Sales to this third party represented substantially all
of the Company's revenue from international sales during the three years ended
December 31, 1997 and the six months ended July 4, 1998. The Company is
evaluating international sales channels, including direct sales, contract sales
organizations, distributors and marketing partners. While the Company recently
entered into a three-year distribution agreement with a third party to
distribute BIS monitors in Japan, the Company anticipates that international
sales will decrease in absolute dollars and as a percentage of total revenue at
least through 1998.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, information
expressed as a percentage of revenue. Such information has been derived from the
Statements of Operations included elsewhere in this Prospectus. The Company's
past operating results are not necessarily indicative of future operating
results.

<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------- -------------------
JUNE 28, JULY 4,
1995 1996 1997 1997 1998
----- ----- ----- -------- -------
<S> <C> <C> <C> <C> <C>
Revenue....................................... 100% 100% 100% 100% 100%
Costs and expenses:
Costs of revenue............................ 66 79 117 128 60
Research and development.................... 269 168 85 133 44
Sales and marketing......................... 120 112 157 160 106
General and administrative.................. 170 135 77 111 44
---- ---- ---- ---- ----
Total costs and expenses............ 625 494 436 532 254
Loss from operations.......................... (525) (394) (336) (432) (154)
Interest income............................... 13 10 16 23 7
Interest expense.............................. (8) (5) (2) (4) (1)
---- ---- ---- ---- ----
Net loss...................................... (520)% (389)% (322)% (413)% (148)%
==== ==== ==== ==== ====
</TABLE>

Six Months Ended July 4, 1998 Compared to Six Months Ended June 28, 1997

The Company's revenue increased to $4.4 million in the six months ended
July 4, 1998 from $1.1 million in the six months ended June 28, 1997. Revenue
from the sale of monitors and related accessories increased to $3.2 million in
the six months ended July 4, 1998 from $846,000 in the six months ended June 28,
1997, and revenue from the sale of disposables increased to $1.2 million in the
six months ended July 4, 1998 from $230,000 in the six months ended June 28,
1997. The growth in sales of monitors and related accessories was primarily
related to an increase in the number of units sold as a result of the domestic
introduction of the A-2000 monitor and the growth of the direct sales force. The
increase in sales of disposables was primarily related to growth in the
installed base of monitors.

The Company's gross profit was 40% of revenue in the six months ended July
4, 1998 as compared to a gross loss (revenue less costs of revenue) of 28% of
revenue in the six months ended June 28, 1997. The gross loss in the six months
ended June 28, 1997 resulted primarily from under-absorbed overhead costs and
provisions for excess and obsolete inventory. The increase in gross profit in
the six months ended July 4, 1998 as compared to the six months ended June 28,
1997 was primarily due to lower per-unit monitor costs and improved
manufacturing efficiencies.

Research and development expenses increased to $1.9 million in the six
months ended July 4, 1998 from $1.4 million in the six months ended June 28,
1997, but decreased as a percentage of
19
<PAGE> 21

revenue. The absolute dollar increase was primarily attributable to continued
product development efforts related to the A-2000 monitor, development of
products for use outside the OR, an increase in expenses related to clinical
studies and an increase in research and development personnel.

Sales and marketing expenses increased to $4.7 million in the six months
ended July 4, 1998 from $1.7 million in the six months ended June 28, 1997, but
decreased as a percentage of revenue. The increase in absolute dollars was due
to an increase in sales and marketing personnel and an increase in advertising
and market development expenses associated with a promotion program for the BIS
monitor initiated by the Company in 1998.

General and administrative expenses increased to $2.0 million in the six
months ended July 4, 1998 from $1.2 million in the six months ended June 28,
1997, but decreased as a percentage of revenue. The absolute dollar increase was
primarily attributable to an increase in general and administrative personnel to
support the Company's growth.

Interest income increased to $313,000 in the six months ended July 4, 1998
from $246,000 in the six months ended June 28, 1997. The increase in interest
income was due to a higher average outstanding cash and investments balance
resulting from sales of the Company's Convertible Preferred Stock in February
1997 and February 1998. Interest expense decreased to $16,000 in the six months
ended July 4, 1998 from $38,000 in the six months ended June 28, 1997 as a
result of lower average outstanding capital lease obligations in the six months
ended July 4, 1998.

The Company's net loss increased to $6.5 million in the six months ended
July 4, 1998 from $4.4 million in the six months ended June 28, 1997 as a result
of the factors discussed above.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

The Company's revenue increased to $3.1 million in 1997 from $1.4 million
in 1996. Revenue from the sale of monitors and related accessories increased to
$2.5 million in 1997 from $1.2 million in 1996 and revenue from the sale of
disposables increased to $606,000 in 1997 from $181,000 in 1996. The increase in
revenue from the sale of monitors and related accessories was primarily
attributable to the commercial introduction of the A-1050 monitor in 1996 and
the increase in the growth of the direct sales force in 1997. The increase in
revenue from the sale of disposables was primarily attributable to the
commercial introduction of the BIS Sensor in 1997 and growth in the installed
base of monitors. In 1996, the Zipprep electrode was the Company's only
disposable product.

In 1997, the Company had a gross loss of 17% of revenue as compared to a
gross profit of 21% of revenue in 1996. The gross loss in 1997 and the decrease
in gross profit as compared to 1996 resulted primarily from under-absorbed
overhead costs and provisions for excess and obsolete inventory.

Research and development expenses increased to $2.6 million in 1997 from
$2.3 million in 1996, but decreased as a percentage of revenue in 1997 as
compared to 1996. The absolute dollar increase in 1997 was primarily due to the
new product development efforts related to the A-2000 monitor and the BIS Module
Kit.

Sales and marketing expenses increased to $4.8 million in 1997 from $1.6
million in 1996. This increase was primarily due to an increase in sales and
marketing personnel, including the establishment of the clinical specialist
group, and the related costs of compensation, benefits and travel expenses.

General and administrative expenses increased to $2.4 million in 1997 from
$1.9 million in 1996, but decreased as a percentage of revenue in 1997 as
compared to 1996. The absolute dollar increase was primarily attributable to an
increase in general and administrative personnel to support the Company's
growth.

20
<PAGE> 22

Interest income increased to $500,000 in 1997 from $144,000 in 1996 due to
an increase in the average outstanding cash and investments balance resulting
from the sale of the Company's Convertible Preferred Stock in February 1997.
Interest expense increased to $78,000 in 1997 from $63,000 in 1996 as a result
of higher average outstanding capital lease obligations in 1997.

The Company's net loss increased to $9.9 million in 1997 from $5.4 million
in 1996 as a result of the factors discussed above.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

The Company's revenue increased to $1.4 million in 1996 from $1.1 million
in 1995. Revenue from the sale of monitors and related accessories increased to
$1.2 million in 1996 from $1.0 million in 1995, and revenue from the sale of
disposables increased to $181,000 in 1996 from $67,000 in 1995. The increase in
revenue from the sale of monitors and related accessories was primarily
attributable to the commercial introduction of the A-1050 monitor in 1996. The
increase in revenue from the sale of disposables was primarily attributable to
growth in the installed base of monitors.

The Company's gross profit was 21% of revenue in 1996 as compared to 34% of
revenue in 1995. The decrease from 1995 to 1996 was primarily attributable to a
lower average selling price on the A-1050 monitor introduced in 1996 compared to
the A-1000 monitor.

Research and development expenses decreased to $2.3 million in 1996 from
$2.9 million in 1995. This decrease resulted from a reduction in research and
development personnel in the second half of 1995.

Sales and marketing expenses increased to $1.6 million in 1996 from $1.3
million in 1995, but decreased as a percentage of revenue. The absolute dollar
increase was primarily due to an increase in advertising and marketing expenses
related to the introduction of the A-1050 monitor.

General and administrative expenses increased to $1.9 million in 1996 from
$1.8 million in 1995, but decreased as a percentage of revenue in 1996 as
compared to 1995. The absolute dollar increase was primarily attributable to an
increase in general and administrative personnel to support the Company's
growth.

Interest income remained relatively constant between 1995 and 1996.
Interest expense decreased from $85,000 in 1995 to $63,000 in 1996. The lower
interest expense in 1996 was primarily due to lower average outstanding capital
lease obligations.

The Company's net loss decreased to $5.4 million in 1996 from $5.5 million
in 1995 as a result of the factors discussed above.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited selected operating results for
each of the six fiscal quarters in the period ended July 4, 1998. The Company
believes that the following selected quarterly information includes all
adjustments (consisting only of normal, recurring adjustments) that the Company
considers necessary to present this information fairly. This financial
information should be read in conjunction with the Company's Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. These
operating results are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------
MARCH 29, JUNE 28, SEPTEMBER 27, DECEMBER 31, APRIL 4, JULY 4,
1997 1997 1997 1997 1998 1998
--------- -------- ------------- ------------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue.................... $ 415 $ 661 $ 845 $ 1,147 $ 1,733 $ 2,687
Net loss................... (2,166) (2,281) (2,409) (3,030) (2,817) (3,700)
</TABLE>

21
<PAGE> 23

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed operations primarily from the
sale of its Convertible Preferred Stock. Through July 4, 1998, the Company had
raised approximately $50.3 million from equity financings and had received $1.2
million in equipment lease financing. At July 4, 1998, the Company had
approximately $165,000 committed to the purchase of equipment related to the
automation of the BIS Sensor production line.

Working capital at July 4, 1998 was approximately $7.1 million compared to
approximately $3.1 million and approximately $1.0 million at December 31, 1997
and 1996, respectively. The increase in working capital from December 31, 1997
to July 4, 1998 was primarily due to the sale of the Company's Convertible
Preferred Stock in February 1998, and increases in accounts receivable,
investment in sales-type leases and inventory, offset by increases in accounts
payable, accrued liabilities and deferred revenue. The increase in working
capital from 1996 to 1997 was primarily due to the sale of the Company's
Convertible Preferred Stock in February 1997, and an increase in accounts
receivable, offset by a decrease in inventory and increases in accounts payable
and accrued liabilities.

The Company used approximately $6.1 million of cash for operations in the
six months ended July 4, 1998. Cash used for operations during this period was
primarily driven by operating losses, increases in accounts receivable,
investment in sales-type leases and inventory, offset by increases in accounts
payable, accrued liabilities and deferred revenue. The Company used
approximately $17.5 million for operations during the three years ended December
31, 1997. Cash used for operations during this period was also primarily driven
by operating losses, increases in accounts receivable and investment in
sales-type leases, offset by increases in accounts payable, accrued liabilities
and deferred revenue.

The Company used approximately $3.4 million of cash for investing
activities in the six months ended July 4, 1998. The Company invested
approximately $2.2 million, net, in marketable securities and approximately $1.1
million in manufacturing equipment, leasehold improvements and new information
systems. The Company used approximately $3.0 million for investing activities
during the three years ended December 31, 1997. The Company invested
approximately $1.2 million, net, in marketable securities and approximately $1.8
million in manufacturing equipment, leasehold improvements and new information
systems.

The Company received approximately $12.4 million of cash from financing
activities in the six months ended July 4, 1998 primarily as a result of the
sale by the Company of its Convertible Preferred Stock in February 1998. The
Company received approximately $20.1 million of cash from financing activities
during the three years ended December 31, 1997. Cash provided by financing
activities during this period was primarily the result of the sale by the
Company of its Convertible Preferred Stock in each of the three years.

In June 1998, the Company entered into a loan agreement with a commercial
bank. Under the terms of this loan agreement, the Company may borrow up to $5.0
million for working capital and equipment. The amount available to the Company
under the working capital portion of the loan agreement is based upon a
percentage of the Company's outstanding accounts receivable. The outstanding
principal under the working capital portion of the loan agreement is due and
payable in December 1999. The principal amount outstanding under the equipment
portion of the loan agreement is due in 36 equal monthly installments commencing
January 1999. The loan agreement contains certain restrictive covenants that
require the Company to maintain minimum liquidity or debt service coverage
ratios. The agreement also restricts the Company from declaring and paying cash
dividends. At July 4, 1998, approximately $776,000 was outstanding under the
equipment portion of the loan agreement, and there were no borrowings under the
working capital portion of the loan agreement.

22
<PAGE> 24

The Company believes that the financial resources available to it,
including its current working capital and loan agreement, together with the net
proceeds of this offering, will be sufficient to finance its planned operations
and capital expenditures at least through 1999. However, the Company's future
liquidity and capital requirements will depend upon numerous factors, including
the resources required to further develop its marketing and sales organization
domestically and internationally, to expand manufacturing capacity, to finance
the Company's sales-type lease program and to meet market demand for the
Company's products.

23
<PAGE> 25

BUSINESS

THE COMPANY

Aspect develops, manufactures and markets anesthesia monitoring systems
that enable anesthesia providers to assess levels of consciousness and
administer the appropriate amount of anesthetics during surgery. The BIS System
incorporates the Company's proprietary disposable BIS Sensors and the Company's
BIS monitors. The Company's latest generation monitor, the A-2000 BIS Monitor,
was cleared for marketing by the FDA in February 1998. The BIS System is based
on Aspect's patented core technology, the BIS index, which is the only
FDA-cleared, commercially available direct measure of the effects of anesthetics
on the brain. The BIS System was developed over a ten-year period and is the
subject of eight issued and five pending United States patents. Aspect markets
the BIS System through a direct sales organization in the United States. As of
July 4, 1998, more than 880 BIS monitors have been sold to approximately 140
sites in the United States, and the Company believes that over 150,000 patients
have been monitored using the BIS index during surgery. Marketing approval of
the Company's products has been received in Europe and is pending in Japan.

MARKET OPPORTUNITY

The three basic objectives of general anesthesia are to render the patient
unconscious, to prevent response to painful stimuli and to ensure the patient
will not move during the surgical procedure. A combination of drugs is typically
used to accomplish these goals, including drugs to induce unconsciousness,
analgesics to provide pain relief and muscle relaxants to immobilize the
patient. Historically, anesthesia providers have had no direct means of
assessing a patient's level of consciousness during surgery and have generally
relied on recommended drug dosages and on indirect indicators of consciousness,
including blood pressure and heart rate. Changes in these indirect measures,
however, are not reliable indicators of changes in a patient's level of
consciousness. Although anesthesia providers can adjust recommended anesthetic
dosages based on individual patient characteristics, these adjustments cannot
always account for variability in patient responses to anesthesia or changes in
anesthetic requirements during the course of surgery.

Each year, approximately 29 million patients in the United States and more
than 35 million patients in Europe and Japan receive anesthesia for surgical
procedures. In the United States, the Company estimates that approximately 70%
of patients receive general anesthesia or deep sedation monitored by an
anesthesia provider. In the United States, there are approximately 34,000 ORs in
hospitals and 5,000 in independent ASCs. The Company believes that the aggregate
number of ORs in Europe and Japan exceeds the number of ORs in the United
States.

Third-party payors and managed care organizations are increasingly
scrutinizing the high cost of surgical care. As a result, hospitals are
implementing programs to control surgical costs, including the cost of
anesthetic drugs and anesthesia recovery, while seeking to improve quality of
care and safety. Programs to accelerate the anesthesia recovery process include
reducing the amount of time patients remain in the OR following the completion
of surgery, reducing the amount of time patients are required to remain in the
Post Anesthesia Care Unit ("PACU") after surgery, and allowing a higher
percentage of patients to bypass the PACU following ambulatory surgery and
proceed immediately to less costly step-down recovery areas.

The Company believes that providing an effective tool for monitoring a
patient's level of consciousness during surgery will contribute to improving the
quality, safety and efficiency of anesthesia care. Using existing monitoring
devices, anesthesia providers are sometimes unable to identify surgical
awareness, or the unintentional regaining of consciousness during surgery,
because anesthetized patients who have received muscle relaxants are unable to
communicate and because changes in vital signs are not reliable indicators of
changes in levels of consciousness. It is estimated that, in the United States,
surgical awareness occurs in approximately 0.2% of surgeries requiring general
anesthesia, or approximately 35,000 procedures per year.

24
<PAGE> 26

Because of variations in the amount of anesthetic drugs administered for
any given surgery, variations in patient tolerances to anesthetic drugs and the
desire to prevent surgical awareness, the Company believes that anesthesia
providers tend to administer more anesthetic than is required by many of their
patients. Overmedication contributes to the high cost of surgical care as a
result of increased drug costs, prolonged and unpredictable wake-ups from
anesthesia and prolonged post-anesthesia recovery in the PACU. These factors, in
turn, lead to inefficiencies in OR and PACU scheduling and increased personnel
costs.

In addition to the OR, anesthesia is administered to sedate patients in
ICUs and for diagnostic and therapeutic procedures outside the OR. Many patients
admitted to the ICU receive sedation during their stay. There are approximately
80,000 beds in hospitals in the United States for critical care patients and
over 22 million patient days per year are spent in the ICU. The assessment of a
patient's level of sedation in the ICU is subjective, relies on indirect
measures, and is usually carried out by several different individuals in a
24-hour period, many of whom are not trained in anesthesia. The Company believes
that this may result in overmedication that may extend the patient's length of
stay in the ICU.

Advances in pharmacology and the development of less-invasive diagnostic
and therapeutic procedures have enabled physicians to perform more procedures
outside the OR under conscious sedation rather than general anesthesia. Aspect
estimates that in the United States there are more than 24,000 rooms in
hospitals, ASCs and doctors' offices where these procedures are performed.
During conscious-sedation procedures, a trained anesthesia provider may or may
not be present depending on the institution's policies and the attending
physician's judgment. One of the risks of conscious sedation is that
overmedication may cause a patient to lose consciousness and fall into a state
of general anesthesia resulting in the loss of protective reflexes, including
the ability to breath without mechanical assistance.

THE ASPECT SOLUTION: PATIENT MONITORING WITH THE BIS INDEX

The Company has developed the only FDA-cleared, commercially available
product for use as a direct measure of anesthetic effect on the brain. Aspect's
clinically validated BIS index assists the anesthesia provider in assessing
levels of consciousness and administering appropriate amounts of anesthesia
required for the surgical procedure while avoiding unintentional overmedication
or undermedication. Company-sponsored clinical trials have shown that
administering appropriate levels of anesthetics results in less drug use, and
therefore, lower drug costs, faster wake-up from anesthesia, less patient time
in the OR and the PACU following surgery and improvement in the quality of
recovery. Other studies have shown that when appropriate levels of anesthesia
are administered, patients are more likely to meet criteria for bypassing the
PACU following ambulatory surgery and proceeding immediately to the less costly
step-down recovery area. The Company also believes that the BIS index can be
used to assess the risk of surgical awareness.

The BIS index is a numerical index derived from the combination of several
processed EEG variables that correlate with loss of consciousness and changes in
levels of sedation. The BIS System, which incorporates the BIS index, is
comprised of the Company's BIS monitor and single-use, disposable BIS Sensors.
The FDA cleared for marketing the BIS index for use as a direct measure of
anesthetic effect on the brain in October 1996 and cleared the A-2000 BIS
Monitor in February 1998.

The following are examples of the benefits of BIS monitoring demonstrated
by the Company in a 302-patient prospective, randomized, controlled clinical
utility trial:

- More controlled and cost-effective dosing of anesthetic drugs: Patients
monitored with the BIS index during surgery received 23% less anesthetic
than patients who were not BIS monitored. Based upon the current average
cost of the anesthetic drugs used in this utility trial, the Company
believes that the use of the BIS index could result in drug cost savings
of up to $18.00 per case.

25
<PAGE> 27

- Faster and more predictable recovery from anesthesia: Patients receiving
BIS monitoring during surgery emerged from unconsciousness 35% to 40%
faster than patients who did not receive BIS monitoring. In addition,
only 5% of BIS-monitored patients required more than 15 minutes to emerge
from anesthesia compared with 16% of patients who did not receive BIS
monitoring. Moreover, patients who received BIS monitoring were eligible
for discharge from the PACU 16% faster than patients who did not receive
BIS monitoring.

- Improved quality of recovery: Patients received better clinical
assessments of their recovery by PACU nurses when the BIS index was used.
In addition, 43% of patients monitored with the BIS index were alert and
oriented when admitted to the PACU, as compared to 23% of patients not
monitored with the BIS index during surgery.

The Company believes that the BIS index also provides an effective
indication of the risk of surgical awareness. The Company demonstrated the
correlation of BIS index values with the loss of and return to consciousness in
two clinical efficacy studies, one involving approximately 100 volunteers and
one involving 40 patients. The Company estimates that, as of July 4, 1998, more
than 150,000 patients have been monitored with the BIS index during surgery.
Four cases of surgical awareness during BIS monitoring have been reported to the
Company. In each case, high BIS index values were noted, indicating that the BIS
index correctly identified the potential risk of awareness in these patients.
The Company has not undertaken the clinical studies necessary to confirm that
BIS monitoring reduces the incidence of surgical awareness because the Company
estimates that surgical awareness typically occurs in only one patient per 500
and, therefore, the required studies are not practicable.

STRATEGY

The BIS index is the only FDA-cleared and commercially available measure of
the effects of anesthetics on the brain. Aspect's objective is to become a major
multinational anesthesia monitoring company by establishing BIS monitoring as
the standard of practice in anesthesia and sedation monitoring. Key elements of
the Company's strategy to accomplish its objective include the following:

Direct Sales Force for Rapid Commercialization. Aspect intends to
capitalize on its first-to-the-market position by pursuing a rapid
commercialization strategy that emphasizes use of a direct sales force. The
Company believes that a direct sales force is best able to convey to anesthesia
providers and administrators the clinical benefits and potential cost savings
achievable with BIS monitoring. Flexible sales options allow hospitals to either
purchase BIS monitors outright or acquire BIS monitors by committing to purchase
a minimum number of BIS Sensors per monitor per year. As of July 4, 1998, the
Company has sold more than 880 BIS monitors to approximately 140 sites in the
United States and the Company believes that over 150,000 patients have been
monitored with the BIS Sensor.

Clinical Specialists to Educate and to Promote the Use of Aspect's BIS
System. Aspect intends to establish a ratio of 1.5 clinical specialists for
each of the Company's sales representatives. The principal responsibilities of
these clinical specialists are to provide education, training and support for
the Company's installed base and to promote appropriate use of BIS Systems.
These activities are designed to increase the use of BIS Sensors in the OR. The
Company expects that clinical specialists will also play a key role in expanding
the use of BIS monitoring to markets outside the OR, including the ICU and
conscious-sedation markets.

OEM Relationships to Broaden Distribution Channels. The Company believes
that original equipment manufacturer ("OEM") relationships will accelerate
market penetration of the BIS technology. OEM relationships will result in
integration of the BIS index into third-party patient-monitoring systems. The
Company currently is a party to two OEM agreements and expects to enter into
additional OEM relationships with patient-monitoring or medical device companies
over the

26
<PAGE> 28

next several years to expand the channels for distribution of the BIS System,
particularly in international markets.

Technological Leadership. Aspect's priority is to improve current
applications of BIS technology and to develop further its signal-processing
technology. In addition, the Company intends to continue to sponsor and support
research of leading clinicians to further document the clinical utility of the
BIS index. The Company intends to protect its intellectual property and
technology leadership position through product innovation, patents and other
proprietary means.

New Product Development. The Company is continuing to focus both on
product extensions, such as the application of the BIS index for the ICU and
conscious-sedation markets, and on new product development, such as the
application of bispectral analysis to the electrocardiogram (the "ECG"). Each of
these initiatives builds on the Company's core expertise and innovations in
signal-processing technology. Continued innovation and commercialization of new
proprietary products is an essential element in the Company's long-term growth
strategy and the source of potential competitive advantages.

PRODUCTS

The following chart summarizes Aspect's product offerings, all of which
have received 510(k) clearance from the FDA:

<TABLE>
<CAPTION>
INITIAL
COMMERCIAL
PRODUCT SHIPMENT DESCRIPTION
------- ------------ -----------
<S> <C> <C>
A-2000 BIS Monitor March 1998 Small, lightweight third-generation BIS
monitor for the OR
BIS Sensor 1997 Single-piece, single-use disposable
product for use with A-2000, A-1050 and
BIS Module Kit
BIS Module Kit(1) -- Components of BIS monitoring technology to
be integrated into OEM monitors
A-1050 EEG Monitor with BIS 1996 Second-generation monitor with BIS index
and simplified user interface
A-1000 EEG Monitor 1993 Aspect's first commercial EEG monitor with
BIS index
Zipprep EEG Electrode 1995 EEG electrode with Aspect's Zipprep
technology used with A-1000 monitor
</TABLE>

- ---------------
(1) The Company has commenced commercial shipment of the BIS Module Kit. The
Company does not believe any OEM has commenced commercial shipment of its
BIS Module product. Each OEM will be required to obtain FDA clearance of its
BIS Module product.

A-2000 BIS Monitor

Aspect began commercial distribution of the A-2000 BIS Monitor ("A-2000"),
the Company's third-generation monitoring product, in March 1998. The A-2000 is
a compact, portable monitor designed to accommodate the space limitations and
positioning requirements of surgical settings. The A-2000 displays the BIS index
and supporting information on a high-contrast electro-luminescent display and
includes Aspect's proprietary Digital Signal Converter. The Digital Signal
Converter is a palm-sized module that performs the analog-to-digital conversion
of the EEG and provides the interface between the monitor and the BIS Sensor,
which adheres to the patient's forehead. The A-2000 is compact (7 inches by 6.8
inches by 4 inches) and lightweight (3.1 pounds). The hardware architecture of
the A-2000 employs a 50 megaflops floating-point processor to perform the BIS
index computation and a 25 MIPS RISC processor to perform the user-interface
functions. The list price for the A-2000 is $8,900.

27
<PAGE> 29

BIS Sensor

The BIS Sensor is a single-piece, single-use disposable product for use
with the A-2000, the A-1050 and the BIS Module Kit. Aspect's BIS monitors and
BIS Module Kits require the use of the BIS Sensor to generate the BIS index. The
BIS Sensor provides a reliable and simple means of acquiring the high-resolution
EEG signal needed to generate the BIS index. The one-piece design allows quick
and accurate placement on the patient's forehead. The BIS Sensor connects to the
monitor by a single-point proprietary connector. The Company commenced
commercial shipment of the BIS Sensor in January 1997. The list price for the
BIS Sensor is $15.00.

Aspect's Zipprep self-prepping technology is a key feature of the BIS
Sensor because it minimizes patient set-up time and enables consistent, accurate
readings of the EEG signal. Prior to Aspect's development of the Zipprep
technology, to obtain an EEG signal the user prepared a patient's skin by
rubbing an abrasive cream over the area 10 to 20 times in order to remove the
top layer of skin. The Zipprep technology contains a non-conductive polymer disk
with multiple, small, flexible tines that are embedded in a standard electrode
hydrogel. As a function of their design, the Zipprep tines come in contact with
and part the outer layer of dead cells on the skin. This allows the electrode's
hydrogel to quickly penetrate the skin and establish an effective electrical
contact to the patient.

BIS Module Kit

The BIS Module Kit consists of two pieces, the Company's proprietary
Digital Signal Converter and a small circuit board that resides in the OEM
equipment. The Digital Signal Converter acquires the EEG signal from the BIS
Sensor, performs the analog-to-digital conversion, and transmits the digitized
EEG signal to the circuit board. The circuit board then processes the EEG signal
and outputs the BIS index to the OEM system.

The Company expects that all OEM licensees of the BIS index technology will
use the common architecture of the BIS Module Kit, which will facilitate
integration of the BIS index into the OEM's system and will simplify any future
software updates of the BIS index technology.

TECHNOLOGY

Aspect's BIS System was developed over a ten-year period and combines the
computational power of bispectral analysis with proprietary signal-processing
algorithms. The BIS index is a numerical index derived from the combination of
several processed EEG variables that correlate with loss of consciousness and
changes in levels of sedation. The EEG, the electrical signal generated in the
cortex of the brain, changes in response to anesthetic drugs. In general, the
EEG changes from a low-amplitude, high-frequency signal while a person is awake
to a large-amplitude, low-frequency signal while a person is deeply
anesthetized. Mathematical algorithms based on this observation, such as the
Spectral Edge Frequency and Median Frequency, attempt to track the effects of
anesthetics on the brain. However, these processed EEG parameters have not been
widely adopted because studies have indicated that they generally do not provide
sufficient clinically useful information to assess levels of consciousness with
commonly used anesthetic agents and doses.

In developing the BIS index, the Company sought to improve these early EEG
analyses in two ways. First, by using bispectral analysis, a mathematical tool
that examines non-linear signals such as the EEG, new information is extracted
from the EEG signal. The second improvement involves the development of
proprietary processing algorithms that extract information from bispectral
analysis, power spectral analysis and time domain analysis. Bispectral analysis
was originally used in the early

28
<PAGE> 30

1960s by geophysicists to study ocean wave motion, atmospheric pressure changes
and seismic activity. Bispectral analysis can now be utilized for other
applications with the advent of high-speed, low-cost digital signal processors.
This technology is based on the non-linear expansion of Fourier analysis, which
provides the means to analyze the frequency, amplitude and phase relationships
within a signal. As a result, a distinctive "fingerprint" of the underlying
process that generates the signal can be obtained. Bispectral analysis extracts
this unique fingerprint and represents it as a three-dimensional mathematical
model of the signal's structure.

The Company created the BIS index to describe changes in the EEG that
relate to the effects of anesthetics on the brain in order to assess levels of
consciousness. Over a number of years, a large database of high-fidelity EEG
recordings and clinical assessments were collected by the Company and third
parties from patients and volunteers receiving a wide variety of anesthetic
agents. The clinical assessments used to define levels of consciousness included
a sedation-rating scale, picture or word recall memory tests, and response to
stimuli. Using statistical methods, Aspect identified features within the EEG
that correlated with sedation and loss of consciousness. The Company used
proprietary multivariate statistical methods to combine these features to
generate an interpretive numerical index, which the Company refers to as the BIS
index. The BIS index ranges from 100, indicating that the patent is awake, to
zero, indicating an absence of electrical brain activity.

CLINICAL DEVELOPMENT

The Company's clinical and regulatory affairs research group (i)
establishes collaborative relationships with leading clinical researchers; (ii)
encourages publications related to the BIS index in the scientific literature;
(iii) is responsible for clinical research with the goal of extending the
application of BIS monitoring to other settings and clinical uses; and (iv)
collects data for new product development. The Company has a clinical database
of over 5,000 cases for use in algorithm development and product validation
based on trials conducted or sponsored by the Company or undertaken by third
parties.

In 1996, the FDA cleared for marketing the Company's BIS index as a measure
of anesthetic effect on the brain. The regulatory process involved studies
conducted by the Company on over 900 subjects. These studies characterized the
relationships between the BIS index value and various clinical endpoints,
including movement response to incision, response to verbal command as a measure
of consciousness in volunteers and patients, memory function, drug utilization
and speed of patient recovery following surgery.

The Company evaluated the use of BIS monitoring as a measure of sedation,
consciousness and memory function in two clinical trials. In a multicenter study
involving approximately 100 volunteers, the Company demonstrated that the BIS
index correlated with the level of responsiveness and tracked the loss of
consciousness. In a second trial involving 40 patients, the BIS index reliably
correlated with the return to consciousness after a single injection of either
propofol or thiopental, two anesthetics often used to induce unconsciousness.
Several studies conducted by third parties, some of which were partially funded
by the Company, have generally confirmed these results.

The Company's multicenter, prospective, randomized, controlled clinical
utility trial of 302 patients demonstrated the outcome benefits of BIS
monitoring. This trial compared clinical outcomes of a group of BIS-monitored
patients to a similar group of patients who were monitored under standard
clinical practice without BIS monitoring. The principal efficacy endpoints were
the amounts of anesthetic given and the speed of recovery following surgery.
BIS-monitored patients received 23% less propofol, woke up earlier in the
operating room, were more likely (43% versus 23%) to arrive at the PACU fully
alert and oriented, were judged by PACU nurses to have had better recovery and
met criteria for discharge from the PACU sooner.

Following FDA clearance of the BIS index, there have been five additional
prospective, randomized, clinical studies of BIS monitoring. The studies, one of
which was conducted by the Company, evaluated the effectiveness of BIS
monitoring in conjunction with various commonly used
29
<PAGE> 31

anesthetic agents on a total of nearly 300 patients. Each of the five studies
indicated that BIS monitoring led to a statistically significant reduction,
ranging from 15% to 38%, in the amount of anesthetic used per patient.

One of the third-party studies, which was partially funded by the Company,
evaluated whether patients monitored with the BIS index were more likely to
bypass the PACU and proceed directly to the step-down recovery unit following
surgery. In this 60-patient study, approximately 90% of the BIS-monitored
patients were considered eligible to bypass the PACU as compared to 63% of
patients who were not BIS monitored.

In 1997, the Company's outcome study of 1,552 patients documented the
clinical impact and cost-effectiveness of routine BIS monitoring in all
operating rooms of Grady Hospital, a high-acuity, urban hospital located in
Atlanta, Georgia and affiliated with Emory University. Patients received a wide
variety of anesthetic agents typically used in general practice. Comprehensive
data were collected on all patients who received general anesthesia for at least
one hour. Results demonstrated that maintaining BIS index values within a
recommended target range during anesthetic maintenance was associated with
improved outcomes in terms of drug utilization, OR and PACU recovery and
associated costs.

There are more than 175 scientific articles and abstracts reporting the
results of BIS index performance in studies conducted by the Company and third
parties. In addition, Aspect currently maintains collaborations with over 50
clinical research sites.

SALES, MARKETING AND CUSTOMERS

The Company markets its BIS Systems in the United States through a direct
sales force. As of July 4, 1998, the Company's domestic sales force was
comprised of 15 sales professionals and 16 clinical specialists. Aspect has
developed a financial model for use by sales representatives to assist
administrators in evaluating the economic impact of BIS monitoring at their
hospital. Aspect believes that its clinical specialists play a key role in the
ongoing process of developing support for the BIS technology both before and
after the sale of BIS Systems. The principal responsibilities of clinical
specialists are clinical training and education at the time the equipment is
installed. Clinical specialists also make follow-up visits at each customer site
at regularly scheduled intervals. These visits allow clinical specialists to
monitor customer satisfaction and provide continuing feedback to the Company's
marketing and research and development staffs. The Company also believes that
these visits may help to establish BIS monitoring as the standard of practice in
anesthesia monitoring and to extend BIS monitoring into other settings in the
hospital, such as the ICU and conscious-sedation procedure rooms. Clinical
specialists generally have nursing backgrounds and have experience in
anesthesia, perioperative care or critical care. The Company currently plans to
hire several additional sales representatives and clinical specialists prior to
the end of 1998. The Company intends to establish a ratio of 1.5 clinical
specialists for each of the Company's sales representatives.

The Company offers customers the option either to purchase the BIS monitors
outright or to acquire the BIS monitors pursuant to a sales-type lease agreement
whereby the customer contractually commits to purchase a minimum number of BIS
Sensors per BIS monitor per year. Under this agreement, customers purchase the
BIS Sensors and the BIS monitor for the purchase price of the BIS Sensors plus
an additional charge per BIS Sensor to pay for the purchase price of the BIS
monitor and related financing costs over the term of the agreement. The customer
is granted an option to purchase the BIS monitor at the end of the term of the
agreement, which is typically three to five years. The Company believes that the
sale-type lease arrangement in some cases reduces the time required for
customers to adopt the BIS System because it provides them with an option to
utilize their operating budget to fund the purchase.

The Company's customers include anesthesia providers, hospitals, ASCs and
individual practitioners in office-based practice. The key customers that the
Company has targeted initially include
30
<PAGE> 32

the larger hospitals and ASCs, at or near capacity, with a high ratio of
outpatient surgical procedures to total surgical procedures. Through July 4,
1998, approximately 140 sites in the United States have acquired the BIS System.

The Company conducts several activities for the different constituencies
that may be involved in the decision-making process. For clinical audiences, the
Company exhibits at tradeshows, sponsors speakers at professional meetings and
develops articles for publication in conjunction with industry experts. To
educate consumers and hospital administrators, the Company is conducting a
public-relations campaign to highlight the benefits of BIS monitoring for
hospitals and patients. In addition, the Company works with hospitals to
publicize their adoption of BIS monitoring in an effort to assist them in
communicating their commitment to improving the quality and efficiency of
patient care. The Company believes that such publicity in the local media allows
hospitals to compete more effectively in their service areas and has allowed
Aspect to expand its business in those markets.

Revenue from international sales was approximately $503,000, $689,000, $1.2
million and $626,000, which represented 47%, 49%, 39% and 14%, respectively, of
the Company's revenue during 1995, 1996, 1997 and the six months ended July 4,
1998, respectively. Effective July 1, 1998, the Company's agreement with a third
party to distribute the Company's monitors internationally (except in Japan)
terminated pursuant to the terms of the agreement. Sales to this distributor
represented substantially all of the Company's revenue from international sales
during the three years ended December 31, 1997 and the six months ended July 4,
1998. The Company is evaluating international sales channels, including direct
sales, contract sales organizations, distributors and marketing partners. The
Company anticipates that international sales will decrease in absolute dollars
and as a percentage of total revenue at least through 1998. All international
sales are denominated in United States dollars. See "Risk Factors -- Limited
Marketing and Sales Experience; International Sales."

The Company received ISO 9001 certification in June 1998. As a result of
ISO 9001 certification and full compliance with the essential requirements of
the European Union Medical Device Directives, Aspect's products are cleared for
marketing throughout the European community and in other countries which may
recognize appropriate CE marketing.

In January 1998, the Company entered into a three-year distribution
agreement with Nihon Kohden pursuant to which the Company granted to Nihon
Kohden Corporation ("Nihon Kohden") exclusive rights to distribute the Company's
BIS monitors in Japan. The Company's BIS Sensors have received marketing
approval from the Japanese Ministry of Health and Welfare. Marketing approval of
the Company's A-1050 monitor is currently pending in Japan.

The Company has hired a president of its newly-developed International
Division and is evaluating several options for international distribution of its
products, including the development of a field organization that includes sales
representatives and clinical specialists in selected countries and international
regions. The Company is also evaluating entering into distribution agreements
with dealers, distributors and anesthesia monitoring companies outside the
United States.

RESEARCH AND DEVELOPMENT

The Company's research and development efforts focus primarily on
continuing to improve the function and features of the BIS System and enhancing
the Company's technical leadership in signal-processing technology for use in
patient care. The Company intends to leverage the BIS technology for the
development of new monitoring products and proprietary disposables for new
applications.

During the fiscal years ended December 31, 1995, 1996 and 1997, and the six
months ended July 4, 1998, the Company expended $2.9 million, $2.4 million, $2.6
million and $1.9 million,

31
<PAGE> 33

respectively, in its research and development efforts, including clinical and
regulatory expenses. The Company expects research and development expenses to
increase in the future as it seeks to enhance its existing products and develop
additional products. As of July 4, 1998, the Company employed 16 persons in its
research and development group and eight persons in its clinical and regulatory
group. For a further discussion of the Company's clinical and regulatory group,
see "-- Clinical Development."

The Company conducts research and development in five areas: algorithm
research, product development, disposable-product development, pre-production
quality assurance and clinical engineering. Algorithm research involves
developing signal-processing techniques to analyze the EEG and other
biopotentials. Product-development activities include developing the hardware
and software, including signal-processing software employed in the Company's BIS
Systems, and coordinating with external resources, particularly with respect to
mechanical engineering and industrial design. Disposable-product research and
development combines expertise in materials science, disposable-products design,
electrode technology and design for manufacturing to develop the Company's
disposable products, including the BIS Sensor products. Pre-production quality-
assurance activities include testing the Company's products to ensure that they
meet FDA guidelines, other applicable regulatory and international quality
standards and internal verification and validation protocols.

The Company is currently seeking to improve the BIS index technology for
ICU applications. Sedative agents are frequently used on ICU patients to reduce
anxiety, to enhance patient compliance to various interventional treatments and
to improve patient comfort. The current methods of assessing levels of sedation
in the ICU rely on a variety of indirect, often subjective, assessments
performed by observing physical signs and patient responsiveness to voice or
touch. These assessments are typically carried out by a number of different
health care providers in a 24-hour period, many of whom are not trained in
anesthesia. Patients in the ICU often have a critical illness or injury that
affects one or more organ systems simultaneously resulting in high degrees of
variability in patient responses to drug doses. Another complicating problem in
assessing a patient's level of sedation in the ICU is the effect of muscle
relaxants. These drugs may render the assessment extremely difficult because the
patient's ability to respond to the observer is eliminated due to drug-induced
paralysis. There are reports of patients who do not receive adequate levels of
sedation when these agents are used. In these cases, patients are paralyzed and
subjected to painful and traumatic therapies while the clinician is unaware of
the patient's discomfort. The Company is currently evaluating monitoring
products intended to measure the effects of sedation in the ICU setting.

The Company is also enhancing the BIS index for use in procedures requiring
sedation that are performed outside the OR. In these procedures, the level of
conscious sedation required ranges from light to deep sedation. The types of
procedures where conscious sedation is used include diagnostic endoscopy for
upper gastrointestinal exams, colonoscopy, bronchoscopy, and cystoscopy;
diagnostic and therapeutic radiological procedures, oral surgery, plastic
surgery, interventional cardiac procedures, and some emergency-room procedures.
During these procedures, a trained anesthetist may not be present depending upon
the local institution's policies and the attending physician's judgment. One of
the risks of conscious sedation is that overmedication may cause a patient to
lose consciousness and fall into a state of general anesthesia resulting in the
loss of protective reflexes, including the ability to breath without mechanical
assistance.

The Company is exploring the development of a BIS Sensor with improved
signal-processing systems for detection and filtration of noise in settings
outside the OR and other BIS Sensors which offer advantages in cases where
patients may require extended BIS monitoring, such as in the ICU.

The Company is also conducting preliminary research on the application of
its BIS index technology to ECG signals to diagnose cardiovascular disease. The
Company believes that bispectral analysis may provide a means for extracting and
quantifying subtle physiological information contained in the ECG and thus has
the potential to enhance the diagnostic accuracy of many ECG

32
<PAGE> 34

applications, including the early diagnosis and assessment of coronary artery
disease, a more rapid assessment of acute myocardial infarctions and advanced
perioperative ischemia monitoring for patients at risk for heart attacks during
or after surgery.

Additional studies, sponsored in part by the Company, are ongoing to assess
the performance of the BIS index in the presence of certain anesthetics, such as
ketamine, and patient populations, such as children, not included in the
clinical development of the BIS algorithms. There can be no assurance that the
BIS technology will be effective in monitoring these or other anesthetic agents
and patient populations or when other anesthetic techniques are used.
Furthermore, there can be no assurance that the Company will be successful in
developing any product enhancements or extensions or new products, including
products for use in the ICU, for conscious sedation or for other applications.
The failure of the Company to develop product enhancements or extensions or new
products on a timely basis or at all could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Technological Risks."

MANUFACTURING

The Company assembles all of its BIS monitors in a 7,000 square foot
manufacturing facility located within its Natick, Massachusetts headquarters.
The Company has historically outsourced the manufacturing of its BIS Sensors. In
the first quarter of 1998, the Company transitioned a portion of its production
of BIS Sensors to its manufacturing facility. The Company currently outsources
to third parties the production of some of its BIS Sensors and all of its
Zipprep electrodes. The Company is currently building a custom-designed,
semi-automated production line for the high-volume manufacture of its BIS
Sensors that it expects to be operational by late 1998. The Company may require
additional manufacturing capacity within the next two years. The Company will
seek to obtain additional manufacturing facilities as needed. While the Company
believes that additional space on reasonable commercial terms will be available
to meet its future manufacturing needs, there can be no assurance that the
Company will be successful in expanding its manufacturing facility or relocating
its facility to meet demand in a timely manner or within budget.

The Company's production process for its BIS monitors consists of final
assembly, integration and testing of standard and custom components. The
Company's production process for its BIS Sensors consists of several
manufacturing and assembly processes using custom components. Qualified
sub-contractors, who have met the Company's supplier certification process and
are placed on an approved vendors list, produce certain custom components.

The Company maintains a quality-assurance program covering its
manufacturing operations. Suppliers of purchased components are required to meet
stated specifications. The Company certifies suppliers prior to use by
conducting audits and product inspections. The Company engages in ongoing
evaluations of the performance of its suppliers by evaluating the results of
inspections and tests as well as the timeliness of product deliveries. The
Company employs numerous quality-assurance procedures during its in-house
manufacturing processes to ensure finished products meet specification.
Quality-assurance procedures include operator training, process validation,
equipment calibration, inspection and testing. All manufacturing procedures and
processes are formally approved and updated using established revision-control
procedures. Documentation of in-process and final-testing results is maintained
in device history records for every unit. The Company maintains an ongoing
post-sale performance-monitoring program.

Although most of the standard components utilized by the Company in
manufacturing its products are available from more than one vendor, certain key
components of the Company's BIS Systems, including certain components used in
the BIS Sensor, are currently provided to the Company by single or limited
sources. A significant unplanned event at a supplier, including shortages of raw
materials or components, could have a material adverse effect on the Company's
operations. In addition, any termination or modification of any manufacturing
arrangement with a third party could result in a business interruption for the
Company. The Company has only one

33
<PAGE> 35

manufacturing facility, and any loss of, damage to, or interruption of
production at its facility could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Limited Manufacturing Experience; Manufacturing Expansion."

COMPETITION

The medical device market is highly competitive and characterized by rapid
product development and technological advances. The future success of the
Company will depend in part upon its ability to anticipate and keep pace with
advancing technology and competitive innovations. However, there can be no
assurance that the Company will be successful in identifying, developing and
marketing new products or enhancing its existing products. In addition, there
can be no assurance that new monitoring products or alternative techniques for
evaluating the effects of anesthesia or other significant changes in the methods
of delivering anesthesia will not be developed that will render the Company's
current or planned products obsolete or inferior. Rapid technological
development by competitors may result in the Company's products becoming
obsolete before the Company recovers a significant portion of the research,
development and commercialization expenses incurred with respect to such
products.

Although the BIS monitor is currently the only device to be cleared by the
FDA for use in the United States as a direct measure of anesthetic effect on the
brain, the Company expects to face significant competition in the future. The
Company believes that competition will initially come from companies, including
patient monitoring companies, currently marketing conventional EEG monitors
utilizing standard signal-processing techniques such as the Spectral Edge
Frequency and Median Frequency, or companies that market EEG monitors utilizing
novel signal-processing technologies, including at least two companies that are
currently conducting clinical trials on products under development.
Additionally, a number of academic researchers worldwide are studying the
potential use of other techniques to measure the effects of anesthesia,
including the use of auditory evoked potentials, heart rate variability,
pupillary reflexes and skin blood flow measurement techniques. In addition, the
Company may face substantial competition from companies developing sensor
products that are competitive with the Company's proprietary BIS Sensors for use
with the Company's BIS monitors. Competitors in some jurisdictions outside the
United States may enter the market without the delay caused by regulatory
barriers that exist in the United States. Many potential competitors have
substantially greater financial, marketing, technical, manufacturing and
distribution resources than those of the Company. In addition, the Company will
compete on the basis of a number of factors in areas in which the Company has
limited experience, including manufacturing efficiencies, marketing and sales
capabilities and customer service. There can be no assurance that the Company
will be able to compete successfully against competitors or that competition,
including the development and commercialization of new products and technology,
will not have a material adverse effect on the Company's business, financial
condition or results of operations. See "Risk Factors -- Competition."

PATENTS AND PROPRIETARY RIGHTS

The Company's policy is to prosecute and enforce its patents and
proprietary technology. The Company intends to continue to file United States
and foreign patent applications to protect technology, inventions and
improvements that are considered important to the development of its business.
The Company also relies upon trade secrets, know how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position. As of July 4, 1998, the Company held eight United States patents and
several foreign patents and had filed five additional United States patent
applications and numerous patent applications in certain major industrial
countries, including Canada, the major European market countries, Australia and
Japan.

The Company has established a substantial proprietary position with respect
to its core signal-processing technology, bispectral analysis, and its
application to biological signals. A series of four issued United States patents
covers the application of bispectral and higher order analysis to EEG
34
<PAGE> 36

signals, along with various statistical-modeling techniques. Two United States
patent applications cover innovative methods of ensuring the reliability of the
computed values; of these, one has been allowed but has not yet issued and the
other is pending. The Company also holds two issued United States patents
covering the application of its core technology to ECG applications. The Company
holds one United States patent and three United States patent applications
covering its proprietary electrode and sensor technology. The issued patent
covers the Company's Zipprep self-prepping disposable electrode technology, a
patent application covers the Company's proprietary sensor interconnection
technology, and two other patent applications cover the Company's proprietary
disposable BIS Sensor technology. The Company owns a United States patent that
covers signal acquisition technology for the Company's Digital Signal Converter
and has been granted a perpetual, royalty-free, non-exclusive license to a
second United States patent covering this technology by a third party.

The Company believes that its competitive position and success has depended
on, in part, and will continue to depend on the ability of the Company to obtain
patent protection for its products, to defend patents once obtained, to preserve
its trade secrets and to operate without infringing upon patents and proprietary
rights held by third parties, both in the United States and in foreign
countries. There can be no assurance that the Company has or will develop or
obtain additional rights to products or processes that are patentable, that
patents will issue from any of the pending patent applications filed by the
Company or that claims allowed will be sufficient to protect the Company's
technology or technology that is licensed to the Company. In addition, no
assurances can be given that any patents issued to the Company will not be
challenged, invalidated, infringed or circumvented or that the rights granted
thereunder will provide competitive advantages for the Company's business or
products. Protection of patent rights outside the United States could be more
costly and result in a greater diversion of effort and resources of management
than protection of patent rights inside the United States. In such event, the
business, results of operations and financial condition of the Company could be
materially adversely affected.

There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. The Company has in
the past been involved in patent litigation and future litigation may be
necessary to protect patents, trade secrets, copyrights or "know-how" owned by
the Company or to defend the Company against claimed infringement of the rights
of others and to determine the scope and validity of the proprietary rights of
the Company and others. The validity and breadth of claims covered in medical
technology patents involve complex legal and factual questions for which
important legal principles are unresolved. Any such litigation could result in
substantial cost to and diversion of effort by the Company. Adverse
determinations in any such litigation could subject the Company to significant
liabilities to third parties, could require the Company to seek licenses from
third parties with unfavorable terms, if at all, and could prevent the Company
from manufacturing, selling or using certain of its products, any of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.

The Company also relies on copyrights, trade secrets and proprietary
technology that it seeks to protect, in part, through confidentiality agreements
with employees, consultants and other parties. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, that others will not independently develop
substantially equivalent proprietary information or that third parties will not
otherwise gain access to the Company's trade secrets.

The Company also relies upon trademarks and trade names for the development
and protection of brand loyalty and associated goodwill in connection with its
products. The Company's policy is to protect its trademarks, trade names and
associated goodwill by, among other methods, filing United States and foreign
trademark applications relating to its products and business. The Company owns
numerous United States and foreign trademark registrations and applications. The
Company's registered and unregistered trademark rights relate to the majority of
the Company's products. There can be no assurance that any registered or
unregistered trademarks or trade names owned by or
35
<PAGE> 37

licensed to the Company or licensed to the Company will not be challenged,
cancelled, infringed, circumvented, be declared generic or infringing of other
third-party marks or provide any competitive advantage to the Company. The
Company also is a party to a license agreement with a third party pursuant to
which it has obtained the nonexclusive right to make, use and/or sell products
under the name "Aspect." The licensor of the Aspect name markets monitors for
use in the healthcare industry. There can be no assurance that there will not be
confusion in the market between the Company and such licensor. In addition,
there can be no assurance that other companies in the medical device industry
will not emerge with the same or a similar name and thereby create confusion in
the market or that any such confusion would compromise the competitive
advantage, if any, the Company derives from its name.

GOVERNMENT REGULATION

The manufacture and sale of medical diagnostic devices intended for
commercial distribution and use are subject to extensive government regulation
in the United States and in other countries. The Company's existing products are
regulated in the United States as medical devices by the FDA under the Federal
Food, Drug, and Cosmetic Act ("FDC Act"). Pursuant to the FDC Act, the FDA
regulates the research, testing, manufacturing, safety, labeling, storage,
record keeping, advertising, distribution and production of medical devices.
Noncompliance with applicable regulations can result in failure of the
government to grant clearance for devices, withdrawal of prior clearances or
approvals, total or partial suspension of production, fines, injunctions, civil
penalties, recall or seizure of products and criminal prosecution.

Generally, before the Company can introduce a new product in the United
States, the Company must obtain FDA clearance of a premarket notification under
Section 510(k) of the FDA Act ("510(k)") or approval of a PMA application under
Section 515 of the FDC Act. To date, the Company has received 510(k) clearance
from the FDA with respect to the following products: A-1000 (December 1992);
Zipprep EEG Electrodes (June 1994); A-1050 (January 1996); BIS Sensor (October
1996); BIS Clinical Utility Indication (October 1996) and A-2000 (February
1998). While the Company has been successful to date in obtaining regulatory
approval of its products through the 510(k) notification process, there can be
no assurance that any of the Company's future products will meet the
requirements for 510(k) clearance. If the FDA concludes that any product does
not meet such requirements, then a PMA would be required and the process for
obtaining regulatory approval would be significantly delayed.

Once 510(k) clearance has been received, any products manufactured or
distributed by the Company are subject to extensive and continuing regulation by
the FDA, including compliance with GMP regulations, recordkeeping requirements,
reporting of adverse experience with the use of the device, post-market
surveillance, and other actions deemed necessary by the FDA. A new 510(k)
notification is also required when a medical device manufacturer makes a change
or modification to a legally marketed device that could significantly affect the
safety or effectiveness of the device, or where there is a major change or
modification in the intended use of the device. When any change or modification
is made to a device or its intended use, the manufacturer must make the initial
determination whether the change or modification is of a kind that would
necessitate the filing of a new 510(k) notification. The FDA's regulations
provide only limited guidance for making this determination. The Company has
made certain enhancements to its currently marketed products which it believes
do not necessitate the filing of a new 510(k) notification. There can be no
assurance that the FDA would agree with the Company's determinations that these
modifications do not require 510(k) notification. If the FDA requires the
Company to file a new 510(k) notification for any past or future modification to
a cleared device, the Company may be prohibited from marketing the device as
modified until it obtains clearance from the FDA. There can be no assurances
that the Company will obtain 510(k) clearance on a timely basis, if at all, for
any device modification.

36
<PAGE> 38

The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company to demonstrate and maintain compliance with
GMPs, including Quality Systems Regulations, as specified by the FDA. This
regulation requires, among other things, that (i) the product development and
manufacturing process be controlled by the use of written procedures and (ii)
the ability to produce devices which meet the manufacturer's specifications be
validated by extensive and detailed testing of every aspect of the process. The
regulation also requires investigation of any deficiencies in the manufacturing
process or in the products produced and detailed record keeping. The GMP
regulations are applicable to manufacturers that produce components specifically
for use in a medical device, and require design controls and maintenance of
service records.

The FDA monitors compliance with GMP by conducting periodic inspections of
manufacturing facilities. If violations of applicable regulations are noted
during FDA inspections of the Company's manufacturing facilities, the continued
marketing of the Company's products may be adversely affected.

The GMP regulations are subject to change and depend heavily on
administrative interpretations. There can be no assurance that future changes in
regulations or interpretations made by the FDA or other regulatory bodies, with
possible retroactive effect, will not adversely affect the Company. In August
1996, the FDA conducted a routine inspection of the Company's manufacturing
facility to ensure compliance with GMP regulations. The FDA noted no adverse
observations during this inspection. The Company believes that it has continued
to maintain manufacturing facilities and procedures that are fully compliant
with all applicable government quality systems regulations and guidelines.
However, adverse findings during future FDA facility inspections could have
material adverse effects on the Company's business, financial condition, and
result of operations.

Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Failure to comply with foreign regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.

In June 1998, the Company obtained ISO 9001/EN46001 international quality
systems registration, a certification showing that the Company's procedures and
manufacturing facilities comply with standards for quality assurance and
manufacturing process control. The ISO 9001 certification, along with the
EN46001, the European Medical Device Directive ("MDD") certification, signifies
compliance with the requirements enabling the Company to affix the CE Mark to
its current products. The CE Mark denotes conformity with European standards for
safety and allows certified devices to be placed on the market in all European
Union countries. After June 1998, medical devices may not be sold in European
Union countries unless they display the CE Mark. However, there can be no
assurance that the Company will be able to maintain regulatory approvals or
clearances for its products in foreign countries. See "Risk
Factors -- Government Regulation."

The Company has established a dedicated regulatory and quality assurance
group to maintain regulatory compliance and manage all quality-assurance
activities for the Company. This group is responsible for all regulatory
submissions and communications, scheduling and performing company-wide audits,
coordinating product update procedures and corrective actions, and maintaining
document control activities. Other quality-related responsibilities include
complaint handling, adhering to appropriate procedures and applicable
requirements related to the FDA's quality systems regulations, and coordinating
appropriate documentation for FDA and ISO 9001/EN 46001 review and audits.

37
<PAGE> 39

THIRD-PARTY REIMBURSEMENT

Third-party payors such as Medicare, Medicaid, private health insurance
carriers, managed care organizations, health care administration authorities in
foreign countries and other organizations may affect the pricing or demand for
the Company's products by regulating the maximum amount of reimbursement
provided for by such payors to the anesthesia providers, hospitals, ASCs or
physician's offices where surgical procedures are performed.

The Company does not expect that anesthesia providers will be separately
reimbursed for patient monitoring activities utilizing the Company's BIS
monitor. When providers, such as hospitals or ASCs, are reimbursed a fixed fee
calculated on a per case, per stay, or per capita basis, which is typical for
inpatient hospital procedures and procedures performed in ASCs, the cost of BIS
monitoring will not be recovered by these providers unless the incremental costs
of BIS monitoring are offset by savings in other costs, such as the costs of
anesthetic drugs or costs of the OR or PACU. There can be no assurance that BIS
monitoring will result in sufficient savings to offset these costs. When
reimbursement is based on charges or costs, BIS monitoring may have the effect
of reducing reimbursement because the charges or costs for surgical procedures,
including OR and PACU charges and costs, may decline as a result of BIS
monitoring. Failure by hospitals and other users of the BIS Systems to obtain
sufficient reimbursement from third-party payors, or any reduction in the
reimbursement by third-party payors to hospitals and other users as a result of
using the BIS System, could limit market acceptance of the BIS System and have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors -- Limitations on Third-Party
Reimbursement."

EMPLOYEES

As of July 4, 1998, the Company had 103 full-time employees. Approximately
16 persons were engaged in research and development activities, 21 persons were
engaged in manufacturing and engineering, eight persons were engaged in clinical
and regulatory affairs, 41 persons were engaged in sales and marketing and
clinical support and 17 persons were engaged in general and administrative
functions. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers relations with its employees to be good.

SCIENTIFIC ADVISORS

The Company utilizes a number of scientists and physicians to advise it on
scientific and medical matters, including experts in EEG monitoring,
pharmacology and anesthesia management. These individuals advise the Company
concerning its research and development programs, the design and implementation
of the Company's clinical research program, the Company's publication
strategies, the identification of market opportunities from the clinical
perspective and specific scientific and technical issues.

FACILITIES

The Company currently leases approximately 23,000 square feet of
development, production, and administrative space in Natick, Massachusetts
pursuant to a lease which expires on October 31, 2000. The Company believes its
current facilities will be sufficient to meet the Company's needs through the
first half of 1999 and that additional space will be available at a reasonable
cost to meet the Company's space needs thereafter.

INSURANCE

The business of the Company entails the risk of product liability and
product recall claims and any such claims could have an adverse impact on the
Company. The Company has taken and will continue to take what it believes are
appropriate precautions, including maintaining general liability and commercial
liability insurance policies which include adequate coverage for product
liability
38
<PAGE> 40

and product recall claims. The Company evaluates its insurance requirements on
an ongoing basis to enable it to maintain adequate levels of coverage. However,
there can be no assurance that product liability or product recall claims will
not exceed such insurance coverage limits or that such insurance will be
available on commercially reasonable terms or at all.

LITIGATION

The Company is not a party to any material threatened or pending legal
proceedings.

39
<PAGE> 41

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, their respective ages
and their positions with the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Nassib G. Chamoun...................... 36 Chief Executive Officer, President and Director
J. Breckenridge Eagle.................. 48 Chairman of the Board of Directors
J. Neal Armstrong...................... 60 Vice President, Chief Financial Officer and
Secretary
Jeffrey L. Barrett..................... 35 Vice President of Manufacturing and Operations
Boudewijn L.P.M. Bollen................ 51 President - International
Philip H. Devlin....................... 41 Vice President of Research and Development
Steven H. Kane......................... 45 Vice President of Sales and Field Operations
Paul J. Manberg, Ph.D. ................ 44 Vice President of Clinical, Regulatory and Quality
Assurance
Jean M. Nelson......................... 39 Vice President of Marketing
Stephen E. Coit(1)..................... 50 Director
Edwin M. Kania, Jr. (2)................ 41 Director
Lester John Lloyd(2)................... 62 Director
Terrance McGuire....................... 42 Director
Donald R. Stanski, M.D.(1)............. 48 Director
</TABLE>

- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Mr. Chamoun is a founder of the Company and has served as a director of the
Company since 1987. Mr. Chamoun has served as President of the Company since
1996 and Chief Executive Officer since 1995. Mr. Chamoun served as Chairman of
the Board of Directors from 1987 to 1996 and as Chief Scientific Officer from
1991 to 1995. Mr. Chamoun also served as President and Chief Executive Officer
prior to 1995 at various times since founding the Company in 1987. From 1984 to
1987, Mr. Chamoun was a fellow in cardiovascular physiology at the Lown
Cardiovascular Laboratory of the Harvard School of Public Health. Mr. Chamoun
earned a bachelors degree in Electrical Engineering from Northeastern University
and a masters degree in Computer Engineering from Boston University.

Mr. Eagle has served as a director of the Company from 1988 to 1991 and
from 1996 to the present. Mr. Eagle has served as Chairman of the Board of
Directors since November 1996. He served as President and Chief Operating
Officer of the Company in 1996 and served as a consultant to the Company in
1995. From 1989 to 1995, he served as President of ECS, Inc., a medical practice
management company, which he founded in 1989. From 1981 to 1988, he served as
Chief Financial Officer, Vice President and General Manager of The Health Data
Institute, Inc., a health care services company, which he co-founded. Mr. Eagle
earned a bachelors degree in Psychology and a masters degree in Public Health
from Yale University and received a masters degree in Business Administration
from Harvard Business School.

Mr. Armstrong has served as Vice President and Chief Financial Officer of
the Company since 1996. From 1990 to 1996, he served as Vice President of
Finance, Chief Financial Officer and a director of Haemonetics, Inc., a
manufacturer of blood processing systems ("Haemonetics"). From 1985 to 1990, he
served as Vice President of Finance and Administration, Treasurer and Chief
Financial Officer at BTU International, a manufacturer of thermal processing
systems. He previously served for 14 years in senior operating and financial
positions at Texas Instruments, Inc., an

40
<PAGE> 42

electronics company. Mr. Armstrong holds a bachelors degree in Business
Administration from the University of Texas and is a certified public
accountant.

Mr. Barrett has served as Vice President of Manufacturing and Operations of
the Company since 1997. From 1996 to 1997, he served as Vice President of
Manufacturing at Aksys, Ltd., a developer of dialysis equipment. From 1989 to
1996, Mr. Barrett served in a variety of manufacturing and operating positions
at Haemonetics, serving most recently as its Vice President of Operations. Mr.
Barrett received a bachelors degree in Economics and Industrial Engineering from
Rutgers University and a masters degree in Business Administration from Boston
University.

Mr. Bollen has served as President - International of the Company since
June 1998. From 1986 to June 1998, Mr. Bollen held several positions at Nellcor
Puritan Bennett, Inc., a medical device company, including Executive Vice
President for Worldwide Sales, Service and Distribution, Vice President of
European Sales and Marketing, and Vice President and Managing Director for
Europe. From 1981 to 1986, Mr. Bollen served as Vice President of Marketing and
Sales in Europe for Bentley Laboratories, Inc., a manufacturer of specialized
monitoring and medical equipment. Mr. Bollen holds the equivalent of a bachelors
degree in Hotel Business Management from the Hotel Business School in
Maastricht, Holland.

Mr. Devlin has served as Vice President of Research and Development of the
Company since 1994 and served as Director of Product Development of the Company
from 1990 to 1994. From 1984 to 1985 and 1986 to 1990, he served as Software
Engineer and Manager of Software Engineering at Lifeline Systems, Inc., a
medical products and communications company. From 1980 to 1984, he served as
Chief Biomedical Engineer at Beth Israel Hospital in Boston, Massachusetts and
from 1985 to 1986, he served as Technical Marketing Engineer in the Medical
Product Group of Hewlett-Packard Company, a manufacturer of computers and
medical devices. Mr. Devlin holds a bachelors and masters degree in Electrical
Engineering from Northeastern University.

Mr. Kane has served as Vice President of Sales and Field Operations of the
Company since 1997. From 1990 to 1997, he was employed by Pyxis Corp., a medical
technology company, serving as Area Vice President, Sales and Operations,
Northeast United States, from 1992 to 1997. From 1983 to 1990, he was employed
by IVAC Corporation, a manufacturer of infusion therapy and vital signs
monitoring technology owned by Eli Lilly and Company, serving as Regional
Manager, Northeastern United States, from 1988 to 1990.

Dr. Manberg has served as Vice President of Clinical, Regulatory and
Quality Assurance of the Company since 1991. From 1984 to 1990, he served in a
variety of clinical research positions at Serono Laboratories, a pharmaceutical
company, most recently as Vice President, Research and Development. From 1979 to
1984, he served as a Clinical Research Scientist at Burroughs-Wellcome Company,
a pharmaceutical company, and served as an Adjunct Research Scientist at the
University of North Carolina. Dr. Manberg received a bachelors degree in
Biological Sciences from the State University of New York at Binghamton and a
doctorate in Pharmacology from the University of North Carolina at Chapel Hill.

Ms. Nelson has served as Vice President of Marketing of the Company since
1995 and served as Director of Marketing from 1992 to 1995. From 1988 to 1992,
she was employed by Nellcor, Inc., a medical device company, serving from 1990
to 1992 as Manager of Advanced Technologies, from 1989 to 1990 as Multi-Function
Monitor Group Manager and from 1988 to 1989 as New Products Manager. From 1984
to 1988, Ms. Nelson served as a consultant with Bain and Company, Inc., a
strategic management consulting firm. Ms. Nelson earned a bachelors degree in
Metallurgy and Materials Engineering from Lehigh University and a masters degree
in Business Administration from the University of Chicago Graduate School of
Business.

Mr. Coit has served as a director of the Company since 1987. He has been a
self-employed artist since 1997. From 1995 to 1997, Mr. Coit served as a general
partner of Charles River Ventures, a venture capital firm. From 1984 to 1994,
Mr. Coit served as a general partner of Merrill, Pickard,

41
<PAGE> 43

Anderson & Eyre, a venture capital firm. Since 1989, Mr. Coit has also served as
a director of International Data Group, a provider of media research and
conferences to the information technology industry.

Mr. Kania has served as a director of the Company since 1995. Mr. Kania is
a founding general partner of OneLiberty Ventures, a venture capital firm.
Previously, he was a general partner at a predecessor firm, Morgan Holland
Ventures, which he joined in 1985. Mr. Kania is also a director of Anesta
Corporation.

Mr. Lloyd has served as a director of the Company from 1991 to April 1995
and from November 1995 to the present. He served as President and Chairman of
Aradigm, Inc., a medical device company, from 1992 to 1997. From 1995 to the
present, Mr. Lloyd has also served as Chairman of the Board of Alere Medical,
Inc., a chronic disease monitoring company. Mr. Lloyd is also a director of
Molecular Dynamics, Inc.

Mr. McGuire has served as a director of the Company since 1997. He has been
a general partner of Polaris Venture Partners, a venture capital firm, since
1996. From 1992 to the present, Mr. McGuire has served as general partner of
Burr, Egan, Deleage & Co., a venture capital firm, and from 1988 to the present,
he has served as general partner of Beta Partners, a venture capital firm. Mr.
McGuire is also a director of Ascent Pediatrics, Inc., Cubist Pharmaceuticals,
Inc. and Integ Incorporated.

Dr. Stanski has served as a director of the Company since 1996. Dr. Stanski
has been a professor of anesthesia and medicine (Clinical Pharmacology) at
Stanford University since 1979 and is an anesthesiologist/clinical
pharmacologist. He served as Chair of the Department of Anesthesia at Stanford
University from 1992 to 1997. Dr. Stanski received his medical degree from the
University of Calgary, Canada, and his anesthesiology training at the
Massachusetts General Hospital.

Pursuant to a Third Amended and Restated Voting Agreement dated February
13, 1998 among the Company and certain stockholders of the Company, certain
stockholders have the right to nominate persons as their representatives on the
Company's Board of Directors. Each of the current directors has been nominated
to serve as a director pursuant to this agreement. This agreement will terminate
concurrently with the closing of this offering.

The Company's Restated Certificate, to be filed concurrently with the
closing of this offering, provides that the Board of Directors of the Company
will be divided into three classes, each of whose members will serve for a
staggered three-year term. The Board will consist of three Class I Directors
(Messrs. McGuire and Coit and Dr. Stanski), two Class II Directors (Messrs.
Eagle and Kania) and two Class III Directors (Messrs. Chamoun and Lloyd). At
each annual meeting of stockholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are then
expiring. The terms of the Class I Directors, Class II Directors and Class III
Directors expire upon the election and qualification of successor directors at
the annual meeting of stockholders held during the calendar years 1999, 2000 and
2001, respectively.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has a Compensation Committee comprised of Mr. Coit
and Dr. Stanski, which makes recommendations concerning salaries and incentive
compensation for employees of and consultants to the Company and administers and
grants stock options pursuant to the Company's stock option plans. The Board of
Directors has an Audit Committee comprised of Messrs. Lloyd and Kania, which
reviews the results and scope of the annual audit, other services provided by
the Company's independent public accountants and other matters relating to
internal control systems.

DIRECTOR COMPENSATION

All of the directors are reimbursed for expenses incurred in connection
with their attendance at Board of Directors and committee meetings. In addition,
non-employee directors of the Company are eligible to receive stock options
under the Company's 1998 Director Stock Option Plan.

42
<PAGE> 44

1998 Director Stock Option Plan. The Company's 1998 Director Stock Option
Plan, as amended (the "Director Plan"), was adopted by the Board of Directors
and stockholders of the Company in February 1998. Under the terms of the
Director Plan, directors of the Company who are not employees of the Company or
any subsidiary of the Company ("Outside Directors") are eligible to receive
nonstatutory options to purchase shares of Common Stock. A total of 100,000
shares of Common Stock may be issued upon exercise of options granted under the
Director Plan.

Pursuant to the Director Plan, on April 14, 1998 (the "Initial Grant
Date"), each Outside Director (other than Mr. Lloyd and Dr. Stanski) received an
option to purchase 10,000 shares of Common Stock, and each person who first
becomes an Outside Director after the Initial Grant Date will be granted an
option to purchase 10,000 shares of Common Stock on the date of his or her
initial election to the Board (the "Initial Options"). In addition, each Outside
Director shall be granted an additional option to purchase 5,000 shares of
Common Stock (the "Additional Options") on the date of each Annual Meeting of
Stockholders, commencing with the 1999 Annual Meeting of Stockholders. Each
Outside Director will be eligible to receive Additional Options if he or she is
serving as a director immediately prior to the Annual Meeting of Stockholders
and continues to serve immediately following such Annual Meeting of
Stockholders, and, if the grant date of such Additional Option is at least six
months after the Outside Director receives an Initial Option. In July 1998, the
Director Plan was amended, subject to stockholder approval, to provide that
options held by Outside Directors would vest and become fully exercisable upon a
Change of Control Event or Acquisition Event of the Company (each as defined in
the Director Plan).

The exercise price per share of Initial Options granted on the Initial
Grant Date was $2.80. The exercise price of Initial Options granted after the
Initial Grant Date and of any Additional Options will be the closing price per
share of Common Stock on the date of grant. Initial Options are exercisable as
to one-half of the shares as of the date of grant and as to one-sixth ( 1/6th)
of the shares on the first, second and third anniversaries of the date of grant,
provided that the optionee continues to serve as a director. Additional Options
are exercisable in three equal annual installments on each of the first, second
and third anniversaries of the date of grant, provided that the optionee
continues to serve as a director. Options granted under the Director Plan
terminate on the earlier of (i) ten years from the date of grant or (ii) sixty
days after the optionee ceases to serve as a director (180 days after the
optionee ceases to serve as a director if due to death or disability).

EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation for
the year ended December 31, 1997 by its Chief Executive Officer and President
and its four other most highly compensated executive officers in 1997 who were
serving as executive officers on December 31, 1997 (the Chief Executive Officer
and such other executive officers are hereinafter referred to as the "Named
Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------
NAME AND ------------------- NUMBER OF SECURITIES
PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS(1)
------------------ -------- ------- ----------------------
<S> <C> <C> <C>
Nassib G. Chamoun............................ $170,000 $40,000 200,000
Chief Executive Officer and President
J. Breckenridge Eagle........................ $157,500 $27,565 --
Chairman of the Board of Directors
J. Neal Armstrong............................ $153,750 $26,910 70,000
Vice President, Chief Financial Officer and
Secretary
Steven H. Kane(2)............................ $127,153 $58,648 180,000
Vice President of Sales and Field
Operations
Paul J. Manberg.............................. $137,500 $24,065 50,000
Vice President of Clinical, Regulatory and
Quality Assurance
</TABLE>

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

(1) Represents the number of shares covered by options to purchase shares of the
Company's Common Stock granted during the year ended December 31, 1997.

(2) Mr. Kane commenced employment with the Company on April 1, 1997 and received
a salary for only nine months of the year ended December 31, 1997. His
current annual base salary is $165,000.

43
<PAGE> 45

Option Grants During 1997

The following table sets forth grants of stock options to each of the Named
Executive Officers during the year ended December 31, 1997.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
----------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL EXERCISE RATES OF STOCK PRICE
SECURITIES OPTIONS OR BASE APPRECIATION FOR
UNDERLYING GRANTED PRICE OPTION TERM(2)
OPTIONS TO EMPLOYEES IN PER EXPIRATION ---------------------------
NAME GRANTED(1) FISCAL YEAR SHARE DATE 5% 10%
---- ---------- ---------------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Nassib G. Chamoun........ 200,000 19.2% $0.80 11/4/07 $100,623 $254,999
J. Breckenridge Eagle.... -- -- -- -- -- --
J. Neal Armstrong........ 70,000 6.7% $0.80 9/8/07 $ 35,218 $ 89,250
Steven H. Kane........... 180,000 17.3% $0.38 4/14/07 $ 42,450 $107,578
Paul J. Manberg.......... 50,000 4.8% $0.80 9/8/07 $ 25,156 $ 63,750
</TABLE>

- ---------------
(1) The dates of exercisability of the options are determined in accordance with
their respective vesting schedules. These options vest in 48 equal monthly
installments, provided that unvested stock options outstanding at December
31, 2000 shall become fully exercisable on such date.

(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of the Common Stock on the date of option grant over the
term of the options. These numbers are calculated based on rules promulgated
by the Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the timing of such
exercise and the future performance of the Common Stock. There can be no
assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the individuals.

Option Exercises and Year-End Option Values

The following table sets forth certain information regarding the aggregate
number of shares of Common Stock acquired upon option exercises by the Named
Executive Officers and the value realized upon such exercises during the year
ended December 31, 1997 and the number and value of unexercised options held by
each of the Named Executive Officers on December 31, 1997.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nassib G. Chamoun....... 378,964 $227,378 -- 200,000 --
J. Breckenridge Eagle... 189,482 $113,689 2,625 -- $1,575 --
J. Neal Armstrong....... 120,000 $ 72,000 -- 70,000 --
Steven H. Kane.......... 180,000 $ 76,500 -- -- --
Paul J. Manberg......... 81,207 $ 48,724 -- 50,000 --
</TABLE>

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

(1) Represents shares acquired upon exercise of stock options that are subject
to repurchase by the Company. See Note 9 to Notes to Financial Statements.

(2) Represents the difference between the exercise price and the fair market
value of the Common Stock at fiscal year end ($0.80) as determined by the
Board of Directors of the Company.

44
<PAGE> 46

Stock Plans

Amended and Restated 1991 Stock Option Plan. The Company's Amended and
Restated 1991 Stock Option Plan (the "1991 Plan") was initially adopted by the
Board of Directors and approved by the stockholders of the Company in April
1991. As of July 4, 1998, 3,460,000 shares were authorized for issuance upon
exercise of outstanding options under the 1991 Plan and options to purchase an
aggregate of 1,272,369 shares of Common Stock at a weighted average exercise
price of $2.04 per share were outstanding under the 1991 Plan. On July 9, 1998,
the Board of Directors decreased the number of shares authorized for issuance
upon exercise of outstanding options under the 1991 Plan to 3,360,000.

The 1991 Plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonstatutory stock options, restricted stock and other stock-based
awards (collectively, "Awards").

Officers, employees, directors, consultants and advisors of the Company are
eligible to receive Awards under the 1991 Plan. Under present law, however,
incentive stock options may only be granted to employees. The maximum number of
shares with respect to which an Award may be granted to any participant under
the 1991 Plan may not exceed 200,000 shares per calendar year.

Optionees receive the right to purchase a specified number of shares of
Common Stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. Options may be
granted at an exercise price which may be less than, equal to or greater than
the fair market value of the Common Stock on the date of grant. Under present
law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Code may not be
granted at an exercise price less than the fair market value of the Common Stock
on the date of grant (or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of the voting
power of the Company). The 1991 Plan permits the Board of Directors to determine
the manner of payment of the exercise price of options, including through
payment by cash, check or in connection with a "cashless exercise" through a
broker, by surrender to the Company of shares of Common Stock, by delivery to
the Company of a promissory note, or by any combination of the permitted forms
of payment.

The 1991 Plan is administered by the Board of Directors. The Board of
Directors has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the 1991 Plan and to interpret the
provisions thereof. Pursuant to the terms of the 1991 Plan, the Board of
Directors may delegate authority under the 1991 Plan to one or more committees
of the Board of Directors and, subject to certain limitations, to one or more
executive officers of the Company. The Board of Directors has authorized the
Compensation Committee to administer the 1991 Plan, including the granting of
options to executive officers. Subject to any applicable limitations contained
in the 1991 Plan, the Board of Directors, the Compensation Committee or any
other committee or executive officer to whom the Board of Directors delegates
authority, as the case may be, selects the recipients of Awards and determines
(i) the number of shares of Common Stock covered by options and the dates upon
which such options become exercisable, (ii) the exercise price of options, (iii)
the duration of options, and (iv) the number of shares of Common Stock subject
to any restricted stock or other stock-based Awards and the terms and conditions
of such Awards, including the conditions for repurchase, issue price and
repurchase price.

No Award may be granted under the 1991 Plan after April 1, 2001, but the
vesting and effectiveness of Awards previously granted may extend beyond that
date. The Board of Directors may at any time amend, suspend or terminate the
1991 Plan, except that no Award granted after an amendment of the 1991 Plan and
designated as subject to Section 162(m) of the Code by the Board of Directors
will become exercisable, realizable or vested (to the extent such amendment was
required to grant such Award) unless and until such amendment is approved by the
Company's stockholders.

45
<PAGE> 47

1998 Stock Incentive Plan. The Company's 1998 Stock Incentive Plan (the
"Incentive Plan") was adopted by the Board of Directors on July 9, 1998, subject
to stockholder approval. The Incentive Plan is intended to replace the 1991
Plan. Up to 2,100,000 shares of Common Stock (subject to adjustment in the event
of stock splits and other similar events) may be issued pursuant to awards
granted under the Incentive Plan.

The Incentive Plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Code, nonstatutory stock options,
restricted stock awards and other stock-based awards (collectively, "Awards").

Officers, employees, directors, consultants and advisors of the Company and
its subsidiaries are eligible to receive Awards under the Incentive Plan. Under
present law, however, incentive stock options may only be granted to employees.
The maximum number of shares with respect to which an Award may be granted to
any participant under the Incentive Plan may not exceed 250,000 shares per
calendar year.

Optionees receive the right to purchase a specified number of shares of
Common Stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. Options may be
granted at an exercise price which may be less than, equal to or greater than
the fair market value of the Common Stock on the date of grant. Under present
law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Code may not be
granted at an exercise price less than the fair market value of the Common Stock
on the date of grant (or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of the voting
power of the Company). The Incentive Plan permits the Board of Directors to
determine the manner of payment of the exercise price of options, including
through payment by cash, check or in connection with a "cashless exercise"
through a broker, by surrender to the Company of shares of Common Stock, by
delivery to the Company of a promissory note, or by any combination of the
permitted forms of payment.

The Incentive Plan is administered by the Board of Directors. The Board of
Directors has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the Incentive Plan and to interpret the
provisions thereof. Pursuant to the terms of the Incentive Plan, the Board of
Directors may delegate authority under the Incentive Plan to one or more
committees of the Board of Directors and, subject to certain limitations, to one
or more executive officers of the Company. The Board of Directors has authorized
the Compensation Committee to administer the Incentive Plan, including the
granting of options to executive officers. Subject to any applicable limitations
contained in the Incentive Plan, the Board of Directors, the Compensation
Committee or any other committee or executive officer to whom the Board of
Directors delegates authority, as the case may be, selects the recipients of
Awards and determines (i) the number of shares of Common Stock covered by
options and the dates upon which such options become exercisable, (ii) the
exercise price of options, (iii) the duration of options, and (iv) the number of
shares of Common Stock subject to any restricted stock or other stock-based
Awards and the terms and conditions of such Awards, including the conditions for
repurchase, issue price and repurchase price.

The Incentive Plan provides that, unless otherwise specified, in the event
of a merger, liquidation or other Acquisition Event (as defined in the Incentive
Plan), the Board of Directors is authorized to (i) cause all options to be
assumed by the acquiring Company; (ii) in the case of a cash acquisition, cause
all options to be accelerated and the acquiring company to pay cash to the
option holders equal to their spread; and (iii) in the case of stock options and
restricted stock that do not become fully exercisable upon an Acquisition Event,
(a) cause such options to be accelerated in full; and/or (b) cause all
restricted stock awards to become free of all restrictions.

No Award may be granted under the Incentive Plan after June 2008, but the
vesting and effectiveness of Awards previously granted may extend beyond that
date. The Board of Directors may at any time amend, suspend or terminate the
Incentive Plan, except that no Award granted after an
46
<PAGE> 48

amendment of the Incentive Plan and designated as subject to Section 162(m) of
the Code by the Board of Directors shall become exercisable, realizable or
vested (to the extent such amendment was required to grant such Award) unless
and until such amendment is approved by the Company's stockholders.

1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors,
subject to stockholder approval, on July 9, 1998. The Purchase Plan authorizes
the issuance of up to a total of 150,000 shares of Common Stock to participating
employees.

All employees of the Company, including directors of the Company who are
employees, and all employees of any participating subsidiaries, whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year are eligible to participate in the Purchase Plan. Employees who
would immediately after the grant own 5% or more of the total combined voting
power or value of the stock of the Company or any subsidiary are not eligible to
participate in the Purchase Plan.

On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock as
follows: the employee may authorize an amount (a whole percentage from 1% to 10%
of such employee's base pay) to be deducted by the Company from such employee's
base pay during the Offering Period. Each Offering Period is six months. On the
last day of the Offering Period, the employee is deemed to have exercised the
option, at the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the Purchase Plan, the option price is an amount
equal to 85% of the closing price per share of the Common Stock on either the
first day or the last day of the Offering Period, whichever is lower. In no
event may an employee purchase in any one Offering Period a number of shares
which exceeds the number of shares determined by dividing $12,500 by the average
market price of a share of Common Stock on the commencement date of the Offering
Period. Employees are required to hold shares of Common Stock purchased under
the Purchase Plan for a period of one year after the end of an Offering Period.

If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's rights
under the Purchase Plan terminate upon voluntary withdrawal from the Purchase
Plan at any time, or when such employee ceases employment for any reason, except
that upon termination of employment because of death, the employee's beneficiary
has certain rights to elect to exercise the option to purchase the shares which
the accumulated payroll deductions in the participant's account would purchase
at the date of death.

Because participation in the Purchase Plan is voluntary, the Company cannot
now determine the number of shares of Common Stock to be purchased by any
particular current executive officer, by all current executive officers as a
group or by non-executive employees as a group.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The current members of the Compensation Committee of the Board of Directors
are Mr. Coit and Dr. Stanski. No executive officer of the Company has served as
a director or member of the compensation committee (or other committee serving
an equivalent function) of any other entity, any of whose executive officers
served as a director of or member of the Compensation Committee of the Board of
Directors.

47
<PAGE> 49

CERTAIN TRANSACTIONS

In October 1995, certain investors, including One Liberty Fund III, L.P.
("Liberty III"), Charles River Partnership VII, Limited Partnership ("CRL VII"),
New Enterprise Associates IV, Limited Partnership ("NEA") and Catalyst Ventures,
Limited Partnership ("Catalyst"), made bridge loans to the Company in the
aggregate amount of $500,000 in exchange for promissory notes (the "October 1995
Notes"). In November 1995 and June 1996, the Company sold an aggregate of
3,800,428 shares of its Series B-1 Convertible Preferred Stock to a group of
existing and new investors, including Messrs. J. Breckenridge Eagle, the
Chairman of the Board of Directors, and J. Neal Armstrong, Vice President, Chief
Financial Officer and Secretary of the Company, Liberty III, CRL VII, NEA and
Catalyst, at a purchase price of $2.00 per share for an aggregate purchase price
of approximately $7.6 million. The purchase price was paid, in part, by the
cancellation and conversion of the October 1995 Notes. Mr. Kania, a director of
the Company, is a general partner of One Liberty Partners III, L.P., which is
the general partner of Liberty III. Mr. Coit, a director of the Company, served
as a general partner of CRL VII at the time that CRL VII purchased these
securities from the Company.

In February 1997, August 1997 and October 1997, the Company sold an
aggregate of 3,439,949 shares of its Series C Convertible Preferred Stock to a
group of existing and new investors, including Messrs. Eagle and Armstrong,
Jeffrey L. Barrett, Vice President of Manufacturing of the Company, and Stephen
H. Kane, Vice President of Sales and Field Operations of the Company, Liberty
III, CRL VII, NEA, Orchid & Co., nominee for T. Rowe Price Threshold Fund III,
L.P. ("T. Rowe Price"), Merrill, Pickard, Anderson & Eyre IV Limited Partnership
("MPAE"), Polaris Venture Partners, L.P. ("Polaris V.P.") and Polaris Venture
Partners Founders' Fund, L.P. ("Polaris F.F."), at a purchase price of $3.75 per
share for an aggregate purchase price of approximately $12.9 million. Mr.
Jordan, who served as a director of the Company until June 1998, is a Vice
President of T. Rowe Price Associates, Inc., the general partner of T. Rowe
Price. Mr. McGuire, a director of the Company, is a member of Polaris Venture
Management Co., LLC, which is a general partner of Polaris V.P. and Polaris F.F.

In February 1998, the Company issued and sold an aggregate of 1,666,234
shares of its Series D Convertible Preferred Stock to a group of existing and
new investors, including Messrs. Armstrong, Kane, Coit and Lester John Lloyd, a
director of the Company, CRL VII, Liberty III, T. Rowe Price, Polaris V.P.,
Polaris F.F. and MPAE, at a purchase price of $7.00 per share for an aggregate
purchase price of approximately $11.7 million.

In February 1997, the Company entered into a Pledge Agreement with Mr.
Nassib Chamoun, the Company's Chief Executive Officer and President, pursuant to
which the Company loaned to Mr. Chamoun, on a full recourse basis, $68,214,
representing 90% of the aggregate exercise price of certain options exercised by
Mr. Chamoun. Mr. Chamoun pledged 341,068 of the 378,964 shares of restricted
Common Stock issued upon exercise of such options as collateral for the loan.
The loan bears interest at 8% per annum. As of July 4, 1998, $60,635 of the
principal amount of the loan plus accrued interest was outstanding. In the event
that Mr. Chamoun ceases to be employed by the Company, the Company will have the
right, for 90 days after such termination of employment, to purchase from Mr.
Chamoun, for a repurchase price equal to the original exercise price ($0.20 per
share), up to the number of shares which have not yet vested. As of July 4,
1998, 82,103 shares of Common Stock were subject to repurchase by the Company.

In May 1997, the Company loaned $80,000 to Mr. Chamoun. The loan is
represented by two promissory notes and is secured by a security interest in
certain securities of the Company owned by Mr. Chamoun. The loan bears interest
at 6.42% per annum. As of July 4, 1998, $70,000 of the principal amount of the
loan plus accrued interest was outstanding.

In May 1997, the Company entered into a Pledge Agreement with Mr. Kane,
pursuant to which the Company loaned Mr. Kane, on a full recourse basis,
$60,750, representing 90% of the aggregate exercise price of certain options
exercised by Mr. Kane. Mr. Kane pledged the 180,000 shares of restricted Common
Stock issued upon exercise of such options as collateral for the loan. The loan

48
<PAGE> 50

bears interest at 8% per annum. As of July 4, 1998, $54,000 of the principal
amount of the loan plus accrued interest was outstanding. In the event that Mr.
Kane ceases to be employed by the Company, the Company will have the right, for
90 days after such termination of employment, to purchase from Mr. Kane, for a
repurchase price equal to the original exercise price ($0.375 per share), up to
the number of shares which have not yet vested. As of July 4, 1998, 127,500
shares of Common Stock were subject to repurchase by the Company.

In September 1997, the Company loaned $27,000 to Mr. Barrett. The loan is
evidenced by a promissory note and bears interest at 8% per annum. As of July 4,
1998, the entire principal amount of the loan plus accrued interest was
outstanding. Pursuant to the terms of the promissory note, in the event that Mr.
Barrett is employed by the Company on each of September 24, 1998, 1999, 2000 and
2001, respectively, the Company will forgive the payment by Mr. Barrett of
$8,152 on each of such dates and such amounts will be considered and treated as
compensation to Mr. Barrett by the Company.

In April 1998, the Company entered into a Pledge Agreement with Mr.
Barrett, pursuant to which the Company loaned to Mr. Barrett, on a full recourse
basis, $63,000, representing 90% of the aggregate exercise price of certain
options exercised by Mr. Barrett. Mr. Barrett pledged the 87,500 shares of
restricted Common Stock issued upon exercise of such options as collateral for
the loan. The loan bears interest at 8% per annum. As of July 4, 1998, the
entire principal amount of the loan plus accrued interest was outstanding. In
the event that Mr. Barrett ceases to be employed by the Company, the Company
will have the right, for 90 days after such termination of employment, to
purchase from Mr. Barrett, for a repurchase price equal to the original exercise
price ($0.80 per share), up to the number of shares which have not yet vested.
As of July 4, 1998, 69,271 shares of Common Stock were subject to repurchase by
the Company.

In July 1998, stock options granted under the Company's 1991 Plan during
late 1997 and early 1998 to certain officers, directors and employees of the
Company were amended to provide that any of such outstanding stock options that
are unvested at December 31, 2000 would become fully vested on such date. As a
result of such amendments, options to purchase an aggregate of 84,817 shares of
Common Stock held by officers and directors will become exercisable on December
31, 2000.

The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.

49
<PAGE> 51

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 4, 1998, and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered hereby, by
(i) each person (or group of affiliated persons) who is known to the Company to
own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's directors and Named Executive Officers, and (iii) all
directors and executive officers of the Company as a group:

<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OWNED(1)(2)
SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
BENEFICIAL OWNERS OWNED(1) OFFERING OFFERING
- ----------------- ------------ ---------- ---------
<S> <C> <C> <C>
5% STOCKHOLDERS
Charles River Partnership VII, Limited Partnership...... 1,580,953 14.3% 11.2%
1000 Winter Street, Suite 3300
Waltham, MA 02154
One Liberty Fund III, L.P.(3)........................... 1,528,096 13.8% 10.8%
OneLiberty Ventures
One Liberty Square
Boston, MA 02109
Polaris Venture Partners, L.P.(4)....................... 1,007,143 9.1% 7.1%
Bay Colony Corporate Center
1000 Winter Street, Suite 3350
Waltham, MA 02154
New Enterprise Associates IV, Limited Partnership(5).... 654,493 5.9% 4.6%
1119 St. Paul Street
Baltimore, MD 21202
Orchid & Co., Nominee for T. Rowe Price
Threshold Fund III, L.P............................... 618,382 5.6% 4.4%
T. Rowe Price Assoc. Inc.
100 East Pratt
Baltimore, MD 21202
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Nassib G. Chamoun(6).................................... 392,156 3.5% 2.8%
J. Breckenridge Eagle(7)................................ 210,447 1.9% 1.5%
Lester John Lloyd(8).................................... 50,239 * *
Stephen E. Coit(9)...................................... 8,572 * *
Edwin M. Kania, Jr.(10)................................. 1,533,096 13.9% 10.8%
Donald R. Stanski(11)................................... 40,125 * *
Terrance McGuire(12).................................... 1,012,143 9.1% 7.1%
J. Neal Armstrong(13)................................... 178,989 1.6% 1.3%
Steven H. Kane(14)...................................... 212,322 1.9% 1.5%
Paul J. Manberg(15)..................................... 92,219 * *
All current executive officers and directors as a group
(14 persons)(16)...................................... 3,998,791 35.8% 28.0%
</TABLE>

- ---------------
* Indicates less than 1%

(1) Reflects the conversion, simultaneously with the closing of this offering,
of all outstanding shares of preferred stock of the Company into an
aggregate of 9,313,509 shares of Common Stock. The number of shares of
Common Stock deemed outstanding after this offering includes the 3,100,000
shares of Common Stock of the Company being offered for sale in this

50
<PAGE> 52

offering. The persons and entities named in the table have sole voting and
investment power with respect to the shares beneficially owned by them,
except as noted below. Share numbers include shares of Common Stock
issuable pursuant to outstanding options that may be exercised within the
60-day period following July 4, 1998.

(2) Assumes no exercise of the Underwriters' over-allotment option.

(3) Mr. Kania, a director of the Company, is a General Partner of One Liberty
Partners III, L.P., a General Partner of Liberty III. Mr. Kania disclaims
beneficial ownership of the shares held by Liberty III, except to the
extent of his pecuniary interest therein.

(4) Includes 54,829 shares held by Polaris F.F. North Star Ventures directly or
indirectly provides investment advisory services to various venture capital
funds, including Polaris V.P. and Polaris F.F. The general partner of these
funds exercises sole voting and investment power with respect to the shares
held by such funds. The principals of North Star Ventures, including Mr.
McGuire, a director of the Company, are members of Polaris Venture
Management Co., L.L.C. (the General Partner of both Polaris V.P. and
Polaris F.F.). As a member of the general partner, Mr. McGuire may be
deemed to share voting and investment power for the shares held by the
funds. Mr. McGuire disclaims beneficial ownership of all such shares held
by all of the aforementioned funds except to the extent of his
proportionate pecuniary interests therein.

(5) Includes 154,203 shares held by Catalyst. New Enterprise Associates IV,
Limited Partnership is a General Partner of Catalyst and may be deemed to
share voting and investment power with respect to the shares held by
Catalyst.

(6) Includes an aggregate of 16,666 shares of Common Stock subject to options
which are exercisable within 60 days after July 4, 1998. Also includes
50,000 shares of Common Stock held by The Nassib G. Chamoun 1998
Irrevocable Trust, of which Mr. Chamoun disclaims beneficial ownership, and
82,103 shares of Common Stock subject to repurchase by the Company under
certain circumstances. Does not include 251,667 shares which will not
become exercisable within 60 days of July 4, 1998.

(7) Includes 35,000 shares of Common Stock held by Jeanne Warren Eagle as
Trustee for the Trust for John Warren Eagle, of which Mr. Eagle disclaims
beneficial ownership, and 56,056 shares of Common Stock subject to
repurchase by the Company under certain circumstances. Does not include
74,500 shares which will not become exercisable within 60 days of July 4,
1998.

(8) Includes an aggregate of 2,917 shares of Common Stock subject to options
which are exercisable within 60 days after July 4 1998 and 7,986 shares of
Common Stock subject to repurchase by the Company under certain
circumstances. Does not include 7,083 shares which will not become
exercisable within 60 days of July 4, 1998.

(9) Includes 5,000 shares of Common Stock subject to options which are
exercisable within 60 days after July 4, 1998. Does not include 5,000
shares which will not become exercisable within 60 days of July 4, 1998.

(10) Includes 1,528,096 shares held by Liberty III. See Note 3 above. Also
includes 5,000 shares of Common Stock subject to options which are
exercisable within 60 days after July 4, 1998. Does not include 5,000
shares which will not become exercisable within 60 days of July 4, 1998.

(11) Includes an aggregate of 20,125 shares of Common Stock subject to options
which are exercisable within 60 days after July 4, 1998. Does not include
24,875 shares which will not become exercisable within 60 days of July 4,
1998.

(12) Includes 952,314 shares held by Polaris V.P. and 54,829 shares held by
Polaris F.F. See Note 4 above. Also includes 5,000 shares of Common Stock
subject to options which are exercisable within 60 days after July 4, 1998.
Does not include 5,000 shares which will not become exercisable within 60
days of July 4, 1998.

(13) Includes an aggregate of 5,834 shares of Common Stock subject to options
which are exercisable within 60 days after July 4, 1998 and 60,000 shares
of Common Stock subject to

51
<PAGE> 53

repurchase by the Company under certain circumstances. Does not include
87,083 shares which will not become exercisable within 60 days of July 4,
1998.

(14) Includes an aggregate of 2,083 shares of Common Stock subject to options
which are exercisable within 60 days after July 4, 1998 and 127,500 shares
of Common Stock subject to repurchase by the Company under certain
circumstances. Does not include 26,667 shares which will not become
exercisable within 60 days of July 4, 1998.

(15) Includes an aggregate of 14,583 shares of Common Stock subject to options
which are exercisable within 60 days after July 4, 1998. Also includes
3,571 shares of Common Stock held by Paul Manberg, as Custodian under the
Uniform Transfer to Minors Act, for Shawn Joseph Manberg, 3,571 shares of
Common Stock held by Paul Manberg, as Custodian under the Uniform Transfer
to Minors Act, for Kate Michelle Manberg and 19,186 shares of Common Stock
subject to repurchase by the Company under certain circumstances. Does not
include 62,917 shares which will not become exercisable within 60 days of
July 4, 1998.

(16) Includes an aggregate of 84,082 shares of Common Stock subject to options
which are exercisable within 60 days after July 4, 1998 and 456,722 shares
of Common Stock subject to repurchase by the Company under certain
circumstances. Does not include 800,730 shares which will not become
exercisable within 60 days of July 4, 1998.

52
<PAGE> 54

DESCRIPTION OF CAPITAL STOCK

As of July 4, 1998, there were outstanding an aggregate of 11,066,474
shares of Common Stock, assuming the conversion of all of the Company's
Convertible Preferred Stock, held of record by 145 stockholders.

Upon closing of this offering, the authorized capital stock of the Company
will consist of 40,000,000 shares of Common Stock and 5,000,000 shares of
undesignated preferred stock, $.01 par value per share (the "Preferred Stock").
Immediately after the sale of the 3,100,000 shares of Common Stock offered
hereby, there will be 14,166,974 shares of Common Stock outstanding and no
shares of Preferred Stock outstanding.

The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, (i) the provisions of the Company's Restated Certificate and
amended By-Laws (to be filed and effected, respectively, on or before the
closing of this offering) and (ii) the provisions of applicable law.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of Common Stock are entitled to receive dividends if, as and when declared by
the Board of Directors out of funds legally available therefor. See "Dividend
Policy." Upon the liquidation, dissolution or winding up of the Company, holders
of Common Stock are entitled to share ratably in the assets of the Company
available for distribution to its stockholders, subject to the preferential
rights of any then outstanding shares of Preferred Stock. No shares of Preferred
Stock will be outstanding immediately following the closing of this offering.
The Common Stock outstanding upon the effective date of the Registration
Statement, and the shares offered by the Company hereby, upon issuance and sale,
will be fully paid and nonassessable.

PREFERRED STOCK

Upon closing of this offering, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the relative rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders. The Company believes that the power to issue
Preferred Stock will provide flexibility in connection with possible corporate
transactions. The issuance of Preferred Stock could adversely affect the voting
power of the holders of Common Stock and restrict their rights to receive
payment upon liquidation and could have the effect of delaying, deferring or
preventing a change-in-control of the Company. See "-- Delaware Law and Certain
Charter and By-Law Provisions." The Company has no present plans to issue any
shares of Preferred Stock.

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder' for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.

53
<PAGE> 55

The Restated Certificate, which will become effective concurrently with the
closing of this offering, provides for the division of the Board of Directors
into three classes as nearly equal in size as possible with staggered three-year
terms. See "Management." The Restated Certificate also provides that, after the
closing of this offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The Restated
Certificate further provides that special meetings of the stockholders may only
be called by the Chairman of the Board, the Chief Executive Officer or the Board
of Directors. Under the Company's Bylaws, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
certain requirements regarding advance notice to the Company. The foregoing
provisions could have the effect of delaying until the next stockholders'
meeting stockholder actions which are favored by the holders of a majority of
the outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Common
Stock, because such person or entity, even if it acquired a majority of the
outstanding voting securities of the Company, would be able to take action as a
stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders' meeting, and not by written consent.

The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or bylaws, as the case may
be, requires a greater percentage. The Restated Certificate and the Bylaws
require the affirmative vote of the holders of at least 75% of the shares of
capital stock of the Company issued and outstanding and entitled to vote to
amend or repeal any of the provisions described in the prior two paragraphs.

The Restated Certificate contains certain provisions permitted under the
General Corporation Law of Delaware relating to the liability of directors. The
provisions eliminate a director's liability for monetary damages for a breach of
fiduciary duty, except in certain circumstances involving wrongful acts, such as
the breach of a director's duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. Further, the Restated
Certificate contains provisions to indemnify the Company's directors and
officers to the fullest extent permitted by the General Corporation Law of
Delaware. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors.

54
<PAGE> 56

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the securities
of the Company. Upon completion of this offering, based upon the number of
shares outstanding at July 4, 1998, there will be 14,166,474 shares of Common
Stock of the Company outstanding (assuming no exercise of the Underwriters'
over-allotment option or outstanding options of the Company). Of these shares,
the 3,100,000 shares sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" of the Company, as that term is defined in Rule
144 ("Rule 144") under the Securities Act ("Affiliates"), may generally only be
sold in compliance with the limitations of Rule 144 described below.

SALES OF RESTRICTED SECURITIES

The remaining 11,066,474 outstanding shares of Common Stock are owned by
existing stockholders and are deemed "Restricted Shares" under Rule 144. These
shares may not be resold, except pursuant to an effective registration statement
or an applicable exemption from registration. Of these remaining shares,
approximately 79,000 shares of Common Stock will be eligible for sale under
Rules 144 and 701 on the ninety-first day after the effectiveness of this
offering. Stockholders of the Company, holding in the aggregate approximately
10,981,000 shares of Common Stock, have agreed to enter into the Lock-up
Agreements. At the end of the 180-day period, approximately 11,618,000 shares of
Common Stock (including approximately 551,000 shares of Common Stock which may
be acquired upon the exercise of outstanding options) will be eligible for sale
under Rules 144 and 701.

In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year from the later of the date such
Restricted Shares were acquired from the Company and (if applicable) the date
they were acquired from an Affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
in the public market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner and
notice of sale and the availability of public information concerning the
Company. All sales of shares of the Company's Common Stock, including Restricted
Shares, held by Affiliates of the Company must be sold under Rule 144, subject
to the foregoing volume limitations and other restrictions. In addition, under
Rule 144(k), if a period of at least two years has elapsed between the later of
the date restricted securities were acquired from the Company or (if applicable)
the date they were acquired from an Affiliate of the Company, a stockholder who
is not an Affiliate of the Company at the time of sale and has not been an
Affiliate with the Company for at least three months prior to the sale is
entitled to sell the shares immediately without compliance with the foregoing
requirements under Rule 144.

The Company's directors and executive officers and certain of its
stockholders have agreed that they will not, without the prior written consent
of the representatives of the Underwriters, offer to sell, sell, contract to
sell, grant any option to sell or otherwise dispose of or require the Company to
file with the Commission a registration statement under the Securities Act to
register any shares of Common Stock or securities convertible or exchangeable
for shares of Common Stock or warrants or other rights to acquire shares of
Common Stock during the 180-day period following the effective date of the
Registration Statement of which this Prospectus is a part.

OPTIONS

The Company plans to file registration statements under the Securities Act
to register an aggregate of approximately 4,000,000 shares of Common Stock
issuable under the 1991 Plan, the Incentive Plan, the Purchase Plan and the
Director Plan following the 180th day after the date of the Registration
Statement of which this Prospectus is a part. Upon registration, such shares
will be

55
<PAGE> 57

eligible for immediate resale upon exercise, subject, in the case of Affiliates,
to the volume, manner of sale and notice requirements of Rule 144.

REGISTRATION RIGHTS

Pursuant to the Third Amended and Restated Registration Rights Agreement
(the "Registration Rights Agreement"), dated as of February 13, 1998, among the
Company and certain persons and entities (the "Rightsholders"), the
Rightsholders will be entitled, following the offering, to certain rights with
respect to the registration under the Securities Act of a total of approximately
9,400,000 shares of Common Stock (the "Registrable Stock"). The Registration
Rights Agreement generally provides that, in the event the Company proposes to
register (the "Registration") any of its securities under the Securities Act,
the Rightsholders shall be entitled to include Registrable Stock in such
Registration, subject to the right of the managing underwriter of any
underwritten offering to limit for marketing reasons the number of shares of
Registrable Stock included in such "piggyback" registration period.

The Rightsholders may, at any time after one year following the date of the
closing of this offering and upon the request of holders of not less than 35% of
the Registrable Stock then outstanding, require the Company to prepare and file
a registration statement under the Securities Act with respect to their shares
of Registrable Stock. The Company need effect only three such demand
registrations. In addition, at any time after the Company becomes eligible to
file a registration statement on Form S-3 (or any successor form), Rightsholders
may request the Company to effect a registration on Form S-3 of Registrable
Stock having an aggregate offering price of at least $250,000.

EFFECT OF SALES OF SHARES

Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market sales
of shares of Common Stock or the availability of shares for sale will have on
the market price of the Common Stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of the Common Stock in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities.

56
<PAGE> 58

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") through their Representatives, BT
Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Piper Jaffray Inc. have severally agreed to purchase from the Company the
following respective numbers of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
BT Alex. Brown Incorporated.................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Piper Jaffray Inc...........................................
---------
Total............................................. 3,100,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.

The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Representatives of the Underwriters.

The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 465,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 3,100,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,100,000 shares are being offered.

The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities under the Securities Act.

The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.

In connection with this offering, the Underwriters and certain other
persons participating in this offering may purchase and sell the Common Stock in
the open market in accordance with Regulation M under the Securities Exchange
Act of 1934, as amended. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in the offering. The

57
<PAGE> 59

Underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the securities sold
in the offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock, and as a result, such price may be higher than
the price that might otherwise prevail in the open market. The Underwriters and
such other persons are not required to engage in these activities, and may end
any of these activities at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined by negotiations among the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations will be prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies which the Company and the Representatives of the
Underwriters believe to be comparable to the Company, estimates of the business
potential of the Company, the present state of the Company's development and
other factors deemed relevant. Application has been made for quotation of the
Common Stock on the Nasdaq National Market under the symbol "ASPM."

LEGAL MATTERS

The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston, Massachusetts,
and for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. An investment partnership comprised of certain partners of Hale
and Dorr LLP owns an aggregate of 9,107 shares of Common Stock of the Company.

EXPERTS

The audited financial statements as of December 31, 1996 and 1997 and for
the years then ended have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.

The Company's financial statements for the year ended December 31, 1995
included in this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS

In December 1996, the Company decided to retain Arthur Andersen LLP as its
independent public accountants and dismissed Price Waterhouse LLP, the Company's
former independent public accountants. The reports of Price Waterhouse LLP on
the Company's financial statements for the years ended December 31, 1995 and
1994 did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the two years ended December 31, 1995 and 1994 and through the date of
the change in accountants, there were no disagreements with Price Waterhouse LLP
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of Price Waterhouse LLP, would have caused them to make reference
to the subject matter of the disagreement in connection with their report on the
financial statements for such years. Prior to retaining Arthur Andersen LLP, the
Company had not consulted with Arthur Andersen LLP regarding accounting
principles.

58
<PAGE> 60

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all amendments,
exhibits, schedules and supplements thereto) on Form S-1 under the Securities
Act with respect to the shares of Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission, to
which Registration Statement reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, the Company is required to file electronic versions to these
documents with the Commission through the Commission's Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.

The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements. The Company also intends
to make available to its stockholders, within 45 days after the end of each
fiscal quarter, reports for the first three quarters of each fiscal year
containing interim unaudited financial information.

59
<PAGE> 61

ASPECT MEDICAL SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Report of Price Waterhouse LLP, Independent Accountants..... F-3
Balance Sheets as of December 31, 1996 and 1997, July 4,
1998 (Unaudited) and Pro Forma July 4, 1998 (Unaudited)... F-4
Statements of Operations for the Years Ended December 31,
1995, 1996, and 1997 and for the Six Months Ended June 28,
1997 (Unaudited) and July 4, 1998 (Unaudited)............. F-5
Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and for the Six Months
Ended July 4, 1998 (Unaudited)............................ F-6
Statements of Cash Flows for the Years Ended December 31,
1995, 1996, and 1997 and for the Six Months Ended June 28,
1997 (Unaudited) and July 4, 1998 (Unaudited)............. F-7
Notes to Financial Statements............................... F-8
</TABLE>

F-1
<PAGE> 62

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Aspect Medical Systems, Inc.:

We have audited the accompanying balance sheets of Aspect Medical Systems,
Inc. (a Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aspect Medical Systems, Inc.
as of December 31, 1996 and 1997, and the results of its operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles.

/s/ Arthur Andersen LLP

Boston, Massachusetts
March 27, 1998

F-2
<PAGE> 63

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Aspect Medical Systems, Inc.

In our opinion, the accompanying statements of operations, of stockholders'
equity and of cash flows present fairly, in all material respects, the results
of operations and cash flows of Aspect Medical Systems, Inc. for the year ended
December 31, 1995, 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit 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 audit provides a reasonable basis for the opinion expressed
above. We have not audited the financial statements of the Company for any
period subsequent to December 31, 1995.

/s/ PRICE WATERHOUSE LLP

Boston, Massachusetts
July 3, 1996

F-3
<PAGE> 64

ASPECT MEDICAL SYSTEMS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, JULY 4, JULY 4, 1998
1996 1997 1998 (NOTE 2)
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 1,353,920 $ 368,507 $ 3,300,024 $ 3,300,024
Marketable securities.......................... 876,741 4,612,462 6,830,863 6,830,863
Accounts receivable, net of allowance of
$50,000, $62,400 and $102,310 at December 31,
1996, 1997 and July 4, 1998, respectively.... 152,440 719,172 1,306,003 1,306,003
Investment in sales-type leases................ 44,676 136,392 531,556 531,556
Inventory...................................... 1,099,837 387,479 951,129 951,129
Other current assets........................... 137,619 245,962 367,861 367,861
------------ ------------ ------------ ------------
Total current assets.................... 3,665,233 6,469,974 13,287,436 13,287,436
Property and equipment, net...................... 208,984 923,559 1,896,835 1,896,835
Investment in sales-type leases.................. 98,864 209,074 902,213 902,213
Other long-term assets........................... -- -- 38,956 38,956
------------ ------------ ------------ ------------
Total assets............................ $ 3,973,081 $ 7,602,607 $ 16,125,440 $ 16,125,440
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 18).... $ 429,871 $ 154,906 $ 291,945 $ 291,945
Accounts payable............................... 659,277 1,119,055 1,222,842 1,222,842
Accrued liabilities............................ 724,331 1,500,591 2,933,754 2,933,754
Deferred revenue............................... 823,000 643,000 1,695,830 1,695,830
------------ ------------ ------------ ------------
Total current liabilities............... 2,636,479 3,417,552 6,144,371 6,144,371
------------ ------------ ------------ ------------
Long-term debt (Note 18)......................... 270,273 117,680 681,926 681,926
------------ ------------ ------------ ------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred Stock, $.01 par value; (pro forma --
5,000,000 shares authorized, no shares issued
or outstanding).............................. -- -- -- --
Convertible Preferred Stock, $.01 par value;
18,843,224 shares authorized, 4,207,326,
7,647,275 and 9,313,509 shares issued and
outstanding at December 31, 1996 and 1997 and
July 4, 1998, respectively (liquidation
preference -- $41,425,301 at July 4, 1998)
(pro forma -- no shares authorized, issued or
outstanding)................................. 25,891,270 38,726,070 50,299,886 --
Common Stock, $.01 par value; 14,500,000 shares
authorized, 93,424, 1,548,027 and 1,752,965
shares issued and outstanding at December 31,
1996 and 1997, and July 4, 1998, respectively
(pro forma -- 40,000,000 shares authorized,
11,066,474 shares issued and outstanding).... 934 15,480 17,530 110,665
Additional paid-in capital..................... 31,096 338,970 1,369,598 51,576,349
Notes receivable from employees and
directors.................................... -- (273,579) (306,182) (306,182)
Deferred compensation.......................... -- -- (825,350) (825,350)
Unrealized gain (loss) on marketable
securities................................... (162) 3,098 3,393 3,393
Accumulated deficit............................ (24,856,809) (34,742,664) (41,259,732) (41,259,732)
------------ ------------ ------------ ------------
Total stockholders' equity.............. 1,066,329 4,067,375 9,299,143 9,299,143
------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity................................ $ 3,973,081 $ 7,602,607 $ 16,125,440 $ 16,125,440
============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 65

ASPECT MEDICAL SYSTEMS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------------------- -------------------------
JUNE 28, JULY 4,
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 1,067,207 $ 1,388,788 $ 3,067,573 $ 1,075,807 $ 4,420,165
Costs and expenses:
Costs of revenue....................... 704,386 1,095,872 3,601,569 1,380,972 2,662,249
Research and development............... 2,870,231 2,338,239 2,603,117 1,434,419 1,941,915
Sales and marketing.................... 1,284,880 1,560,635 4,813,505 1,721,239 4,669,543
General and administrative............. 1,814,850 1,871,071 2,357,695 1,193,788 1,960,271
----------- ----------- ------------ ----------- -----------
Total costs and expenses........ 6,674,347 6,865,817 13,375,886 5,730,418 11,233,978
----------- ----------- ------------ ----------- -----------
Loss from operations..................... (5,607,140) (5,477,029) (10,308,313) (4,654,611) (6,813,813)
Interest income.......................... 145,636 143,675 500,485 246,057 312,857
Interest expense......................... (84,405) (63,084) (78,027) (38,853) (16,112)
----------- ----------- ------------ ----------- -----------
Net loss................................. $(5,545,909) $(5,396,438) $ (9,885,855) $(4,447,407) $(6,517,068)
=========== =========== ============ =========== ===========
Net loss per share:
Basic and diluted...................... $(281.65) $(57.76) $(16.23) $(10.88) $(6.34)
=========== =========== ============ =========== ===========
Pro forma basic and diluted............ $(1.28) $(0.65)
============ ===========
Shares used in computing net loss per
share:
Basic and diluted...................... 19,691 93,424 609,026 408,956 1,027,166
Pro forma basic and diluted............ 7,707,188 9,951,283
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 66

ASPECT MEDICAL SYSTEMS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NOTES
CONVERTIBLE PREFERRED ------------------- RECEIVABLE
STOCK ADDITIONAL FROM
----------------------- PAR PAID-IN EMPLOYEES DEFERRED
SHARES AMOUNT SHARES VALUE CAPITAL AND DIRECTORS COMPENSATION
--------- ----------- --------- ------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994....... 49,137 $18,384,462 5,306 $ 53 $ 11,205 $ -- $ --
Issuance of common stock........ -- -- 87,952 879 16,691 -- --
Issuance of Series B-1
convertible preferred stock,
net of issuance costs of
approximately $80,000......... 2,075,042 4,069,909 -- -- -- -- --
Issuance of anti-dilution
shares........................ 357,761 -- -- -- -- -- --
Issuance of common stock upon
exercise of common stock
options....................... -- -- 166 2 3,200 -- --
Change in unrealized gain (loss)
on marketable securities...... -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- --
--------- ----------- --------- ------- ---------- --------- ---------
Balance, December 31, 1995....... 2,481,940 22,454,371 93,424 934 31,096 -- --
Issuance of Series B-1
convertible preferred stock,
net of issuance costs of
approximately $14,000......... 1,725,386 3,436,899 -- -- -- -- --
Change in unrealized gain (loss)
on marketable securities...... -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- --
--------- ----------- --------- ------- ---------- --------- ---------
Balance, December 31, 1996....... 4,207,326 25,891,270 93,424 934 31,096 -- --
Issuance of Series C convertible
preferred stock, net of
issuance costs of
approximately $61,000......... 3,439,949 12,834,800 -- -- -- -- --
Issuance of common stock upon
exercise of common stock
options....................... -- -- 1,454,603 14,546 307,874 (273,579) --
Change in unrealized gain (loss)
on marketable securities...... -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- --
--------- ----------- --------- ------- ---------- --------- ---------
Balance, December 31, 1997....... 7,647,275 38,726,070 1,548,027 15,480 338,970 (273,579) --
Issuance of Series D convertible
preferred stock, net of
issuance costs of
approximately $73,000
(unaudited)................... 1,666,234 11,573,816 -- -- -- -- --
Issuance of common stock upon
exercise of common stock
options(unaudited)............ -- -- 204,938 2,050 140,973 (63,000) --
Payments on notes receivable
from employees and directors
(unaudited)................... -- -- -- -- -- 30,397 --
Deferred compensation related to
stock options (unaudited)..... -- -- -- -- 889,655 -- (889,655)
Amortization of deferred
compensation related to stock
options (unaudited)........... -- -- -- -- -- -- 64,305
Change in unrealized gain (loss)
on marketable
securities(unaudited)......... -- -- -- -- -- -- --
Net loss(unaudited)............. -- -- -- -- -- -- --
--------- ----------- --------- ------- ---------- --------- ---------
Balance, July 4, 1998
(unaudited)..................... 9,313,509 $50,299,886 1,752,965 $17,530 $1,369,598 $(306,182) $(825,350)
========= =========== ========= ======= ========== ========= =========

UNREALIZED
GAIN (LOSS) ON TOTAL
MARKETABLE ACCUMULATED STOCKHOLDERS'
SECURITIES DEFICIT EQUITY
-------------- ------------ -------------
<S> <C> <C> <C>
Balance, December 31, 1994....... $(21,561) $(13,914,462) $ 4,459,697
Issuance of common stock........ -- -- 17,570
Issuance of Series B-1
convertible preferred stock,
net of issuance costs of
approximately $80,000......... -- -- 4,069,909
Issuance of anti-dilution
shares........................ -- -- --
Issuance of common stock upon
exercise of common stock
options....................... -- -- 3,202
Change in unrealized gain (loss)
on marketable securities...... 23,905 -- 23,905
Net loss........................ -- (5,545,909) (5,545,909)
-------- ------------ -----------
Balance, December 31, 1995....... 2,344 (19,460,371) 3,028,374
Issuance of Series B-1
convertible preferred stock,
net of issuance costs of
approximately $14,000......... -- -- 3,436,899
Change in unrealized gain (loss)
on marketable securities...... (2,506) -- (2,506)
Net loss........................ -- (5,396,438) (5,396,438)
-------- ------------ -----------
Balance, December 31, 1996....... (162) (24,856,809) 1,066,329
Issuance of Series C convertible
preferred stock, net of
issuance costs of
approximately $61,000......... -- -- 12,834,800
Issuance of common stock upon
exercise of common stock
options....................... -- -- 48,841
Change in unrealized gain (loss)
on marketable securities...... 3,260 -- 3,260
Net loss........................ -- (9,885,855) (9,885,855)
-------- ------------ -----------
Balance, December 31, 1997....... 3,098 (34,742,664) 4,067,375
Issuance of Series D convertible
preferred stock, net of
issuance costs of
approximately $73,000
(unaudited)................... -- -- 11,573,816
Issuance of common stock upon
exercise of common stock
options(unaudited)............ -- -- 80,023
Payments on notes receivable
from employees and directors
(unaudited)................... -- -- 30,397
Deferred compensation related to
stock options (unaudited)..... -- -- --
Amortization of deferred
compensation related to stock
options (unaudited)........... -- -- 64,305
Change in unrealized gain (loss)
on marketable
securities(unaudited)......... 295 -- 295
Net loss(unaudited)............. -- (6,517,068) (6,517,068)
-------- ------------ -----------
Balance, July 4, 1998
(unaudited)..................... $ 3,393 $(41,259,732) $ 9,299,143
======== ============ ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 67

ASPECT MEDICAL SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------------------------- ---------------------------
JUNE 28, JULY 4,
1995 1996 1997 1997 1998
----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(5,545,909) $(5,396,438) $(9,885,855) $ (4,447,407) $ (6,517,068)
Adjustments to reconcile net loss to net
cash used for operating activities --
Depreciation and amortization......... 575,373 189,378 192,571 95,313 160,474
Provision for doubtful accounts....... -- 43,000 14,333 -- 40,000
Amortization of deferred
compensation........................ -- -- -- -- 64,305
Changes in assets and liabilities --
Increase in accounts receivable..... (188,004) (92,990) (437,525) (67,513) (626,831)
(Increase) decrease in inventory.... (214) 61,193 763,483 (64,045) (563,650)
Decrease (increase) in other current
assets............................ 121,764 (60,628) (108,343) (163,322) (121,899)
Increase in investment in sales-type
leases............................ -- -- (345,466) (88,306) (1,088,303)
Increase in other long-term
assets............................ -- -- -- -- (38,956)
(Decrease) increase in accounts
payable........................... (100,281) 493,575 459,778 (180,447) 103,787
Increase (decrease) in accrued
liabilities....................... 454,407 (4,385) 776,260 633,878 1,433,163
(Decrease) increase in deferred
revenue........................... (121,717) 814,717 (180,000) 136,249 1,052,830
----------- ----------- ----------- ------------ ------------
Net cash used for operating
activities...................... (4,804,581) (3,952,578) (8,750,764) (4,145,600) (6,102,148)
----------- ----------- ----------- ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment... (272,270) (622,384) (958,271) (121,318) (1,133,750)
Purchases of marketable securities...... (347,820) (23,953,144) (65,379,625) (39,186,351) (38,316,566)
Proceeds from sales of marketable
securities............................ 2,800,052 24,045,377 61,647,164 33,021,116 36,098,460
----------- ----------- ----------- ------------ ------------
Net cash provided by (used for)
investing activities............ 2,179,962 (530,151) (4,690,732) (6,286,553) (3,351,856)
----------- ----------- ----------- ------------ ------------
Cash flows from financing activities:
Principal payments on capital lease
obligations........................... (206,646) (287,616) (427,558) (194,265) (74,546)
Proceeds from sale leaseback of property
and equipment......................... 238,996 330,291 -- -- --
Proceeds from equipment loan............ -- -- -- -- 775,831
Proceeds received from issuance of
convertible notes..................... 500,000 -- -- -- --
Proceeds from issuance of convertible
preferred stock, net of stock issuance
costs................................. 3,569,909 3,436,899 12,834,800 12,684,800 11,573,816
Proceeds from issuance of common
stock................................. 20,772 -- 48,841 48,061 80,023
Payments received on notes receivable
from employees and directors.......... -- -- -- -- 30,397
----------- ----------- ----------- ------------ ------------
Net cash provided by financing
activities...................... 4,123,031 3,479,574 12,456,083 12,538,596 12,385,521
----------- ----------- ----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................. 1,498,412 (1,003,155) (985,413) 2,106,443 2,931,517
Cash and cash equivalents, beginning of
period.................................. 858,663 2,357,075 1,353,920 1,353,920 368,507
----------- ----------- ----------- ------------ ------------
Cash and cash equivalents, end of
period.................................. $ 2,357,075 $ 1,353,920 $ 368,507 $ 3,460,363 $ 3,300,024
=========== =========== =========== ============ ============
Supplemental disclosure of cash flow
information:
Interest paid........................... $ 209,404 $ 59,000 $ 78,000 $ 39,000 $ 16,000
=========== =========== =========== ============ ============
Supplemental disclosure of noncash
financing activities:
Capital lease obligations totaling
$239,000 and $367,000, including sale
leaseback transactions, were incurred
during 1995 and 1996, respectively.
Convertible notes totaling $500,000 were
converted into 250,000 shares of
Series B-1 convertible preferred stock
in 1995.
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 68

ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(1) DESCRIPTION OF OPERATIONS

Aspect Medical Systems, Inc. (the "Company") develops, manufactures and
markets anesthesia monitoring systems that enable anesthesia providers to assess
levels of consciousness and administer the appropriate amount of anesthetics
during surgery. The BIS System incorporates the Company's proprietary disposable
BIS Sensors and the Company's BIS monitors. The Company's latest generation BIS
monitor, the A-2000 BIS Monitor, was cleared for marketing by the United States
Food and Drug Administration (the "FDA") in February 1998. The BIS System is
based on Aspect's patented core technology, the Bispectral Index (the "BIS
index"), which is the only FDA cleared, commercially available direct measure of
the effects of anesthetics on the brain.

The Company incurred net losses of $5,545,909, $5,396,438 and $9,885,855
for the years ended December 31, 1995, 1996 and 1997, respectively, and at July
4, 1998 had an accumulated deficit of $41,259,732. Principal risks that may
affect the business, results of operations and financial condition of the
Company include market acceptance of the Company's technology and products,
limited sales and marketing experience, the reliance on a single product family,
manufacturing risks, the dependence on single source or limited suppliers,
technological risks and other risks.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies used by the Company in the
preparation of its financial statements are as follows:

Interim Financial Statements

The accompanying balance sheet as of July 4, 1998, statements of operations
and cash flows for the six months ended June 28, 1997 and July 4, 1998 and the
statement of stockholders' equity for the six months ended July 4, 1998 are
unaudited but, in the opinion of management, include all adjustments (consisting
of normal, recurring adjustments) necessary for a fair presentation for results
of these interim periods. The results of operations for the six months ended
July 4, 1998 are not necessarily indicative of results to be expected for the
entire year or for any other interim period.

Unaudited Pro Forma Presentation

Under the terms of the Company's agreements with the holders of the
convertible preferred stock, all of such preferred stock will be converted
automatically into shares of common stock upon the closing of the Company's
initial public offering. The unaudited pro forma balance sheet information at
July 4, 1998 reflects the conversion of all series of preferred stock into
9,313,509 shares of common stock as if the conversion occurred on July 4, 1998.

Cash, Cash Equivalents and Marketable Securities

The Company invests its excess cash in money market accounts, U.S. Treasury
bills, high grade commercial paper, and debt obligations of various government
agencies. The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
F-8
<PAGE> 69
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115, the
Company has classified all of its investments as available-for-sale at December
31, 1996 and 1997, respectively. The securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity.

Revenue Recognition

Revenue from equipment sales, disposable product sales and sales-type
leases are recognized at the time of shipment. Payments received prior to
shipment are recorded as deferred revenue. The Company has entered into certain
licensing and distribution agreements for which payments received in advance are
recorded as deferred revenue. Revenue is recognized as earned per the terms of
the respective agreements. The Company provides for the cost of warranty at the
time of product shipment.

Inventory

Inventory is valued at the lower of cost or estimated market, cost being
determined on a first-in, first-out basis.

Property and Equipment

Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related equipment.
Equipment held under capital leases is stated at the lower of the fair market
value of the equipment or the present value of the minimum lease payments at the
inception of the lease and is amortized on a straight-line basis over the
shorter of the lives of the related assets or the term of the leases.
Maintenance and repair expenditures are charged to expense as incurred.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences, utilizing
currently enacted tax rates, of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Deferred tax assets are
recognized, net of any valuation allowance, for the estimated future tax effects
of deductible temporary differences and tax operating loss and credit
carryforwards.

Concentration of Credit Risk, Significant Customer and Single or Limited
Source Suppliers

Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable, investment in
sales-type lease receivables and investments. To minimize the risk with respect
to accounts receivable and investment in sales-type lease receivables, the
Company maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. The Company maintains
cash, cash equivalents and investments with various financial institutions. The
Company performs periodic evaluations of the relative credit quality of
investments and Company policy is designed to limit exposure to any one
institution or type of investment. The primary objective of the Company's
investment strategy is the safety of the principal invested.

F-9
<PAGE> 70
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

At December 31, 1996 and 1997 and July 4, 1998, accounts receivable from
one of the Company's international distributors accounted for approximately 8%,
19% and 23%, respectively, of the total amounts due to the Company. For the
years ended December 31, 1995, 1996 and 1997, sales to this customer accounted
for approximately 47%, 49% and 35%, respectively, of the Company's total
revenue. For the six months ended July 4, 1998, sales to this customer accounted
for approximately 17% of total revenue. Effective July 1, 1998, this customer no
longer distributes the Company's monitors.

The Company currently obtains certain key components of its products from
single or limited sources. The Company purchases components pursuant to purchase
orders rather than long-term supply agreements. The Company has experienced
shortages and delays in obtaining certain components of its products in the
past. There can be no assurance that the Company will not experience similar
delays or shortages in the future. The disruption or termination of the supply
of components or a significant increase in the costs of these components from
these sources could have a material adverse effect on the Company's business,
financial condition and results of operations.

Comprehensive Income

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 did
not have a material effect on the Company's financial statements, as the only
element of comprehensive income impacting the Company is the unrealized gain
(loss) on marketable securities.

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.

Fair Value of Financial Instruments

The estimated fair market values of the Company's financial instruments,
which include marketable securities, accounts receivable, investment in
sales-type leases, accounts payable and capital lease obligations, approximate
their carrying values.

F-10
<PAGE> 71
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(3) CASH EQUIVALENTS AND MARKETABLE SECURITIES

Cash and cash equivalents consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JULY 4,
1996 1997 1998
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash......................................... $ 369,566 $131,757 $1,071,652
U.S. Government debt securities.............. 280,036 236,750 481,962
Corporate debt securities.................... 704,318 -- 1,746,410
---------- -------- ----------
$1,353,920 $368,507 $3,300,024
========== ======== ==========
</TABLE>

Available-for-sale securities included in marketable securities at December
31, 1996 and 1997 and July 4, 1998 consist of the following:

<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1996 --
U.S. Government debt securities....... $ 220,929 $ -- $ -- $ 220,929
Corporate debt securities............. 405,974 -- (162) 405,812
Municipal notes....................... 250,000 -- -- 250,000
---------- ------ ----- ----------
$ 876,903 $ -- $(162) $ 876,741
========== ====== ===== ==========
December 31, 1997 --
U.S. Government debt securities....... $ 99,187 $ -- $ -- $ 99,187
Corporate debt securities............. 4,010,177 3,098 -- 4,013,275
Municipal notes....................... 500,000 -- -- 500,000
---------- ------ ----- ----------
$4,609,364 $3,098 $ -- $4,612,462
========== ====== ===== ==========
July 4, 1998 -- (unaudited)
U.S. Government debt securities....... $1,003,374 $1,166 $ -- $1,004,540
Corporate debt securities............. 3,624,427 -- (823) 3,623,604
Municipal notes....................... 2,199,669 3,050 -- 2,202,719
---------- ------ ----- ----------
$6,827,470 $4,216 $(823) $6,830,863
========== ====== ===== ==========
</TABLE>

The amortized cost and estimated fair value of investments in debt
securities at July 4, 1998, by contractual maturity, were as follows:

<TABLE>
<CAPTION>
ESTIMATED
FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Maturing in one year or less................................ $3,629,113 $3,629,983
Maturing in one to two years................................ 3,198,357 3,200,880
---------- ----------
$6,827,470 $6,830,863
========== ==========
</TABLE>

The cost of securities sold is determined based on the specific
identification method for purposes of recording realized gains and losses. Gross
realized gains and losses on the sales of investments have not been material to
the Company's financial statements.

F-11
<PAGE> 72
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(4) INVESTMENT IN SALES-TYPE LEASES

The Company leases equipment to customers under sales-type leases. The
components of the Company's net investment in sales-type leases are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JULY 4,
1996 1997 1998
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Total minimum lease payments receivable...... $186,770 $505,474 $2,449,252
Less -- unearned interest.................. 43,230 160,008 1,015,483
-------- -------- ----------
Net investment in sales-type leases.......... 143,540 345,466 1,433,769
Less -- current portion.................... 44,676 136,392 531,556
-------- -------- ----------
$ 98,864 $209,074 $ 902,213
======== ======== ==========
</TABLE>

Future minimum lease payments due under noncancelable leases as of December
31, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
- -----------
<S> <C>
1998........................................................ $222,565
1999........................................................ 165,443
2000........................................................ 79,455
2001........................................................ 21,554
2002........................................................ 16,457
--------
$505,474
========
</TABLE>

(5) INVENTORY

Inventory consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JULY 4,
1996 1997 1998
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................ $ 363,205 $322,636 $626,049
Work-in-progress............................. 59,928 -- --
Finished goods............................... 676,704 64,843 325,080
---------- -------- --------
$1,099,837 $387,479 $951,129
========== ======== ========
</TABLE>

F-12
<PAGE> 73
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(6) PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE ---------------------- JULY 4,
IN YEARS 1996 1997 1998
-------------------------- --------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer equipment.......... 3 $ 454,414 $ 707,071 $1,211,970
Construction in progress.... -- -- 490,194 369,870
Machinery and equipment..... 3 - 5 -- 152,735 383,549
Furniture and fixtures...... 3 123,039 133,114 375,140
Shorter of the life of the
lease or the estimated
Leasehold improvements...... remaining useful life -- 1,485 270,192
--------- ---------- ----------
577,453 1,484,599 2,610,721
Accumulated depreciation and
amortization.............. (368,469) (561,040) (713,886)
--------- ---------- ----------
$ 208,984 $ 923,559 $1,896,835
========= ========== ==========
</TABLE>

At December 31, 1996, 1997 and April 4, 1998, property and equipment held
under capital leases totaled approximately $521,651. Accumulated amortization of
these assets totaled approximately $365,515 and $458,988 at December 31, 1996
and 1997, respectively, and $484,769 at July 4, 1998.

During 1995 and 1996, the Company entered into sale-leaseback transactions.
The Company received proceeds of approximately $239,000 and $330,000 during 1995
and 1996, respectively, from the sale of these assets. No gain was recorded
during 1995 as the net book value of the assets sold approximated the proceeds
received. A gain of approximately $99,000 relating to the sale-leaseback
transaction was deferred in 1996 and is being amortized over the term of the
respective lease.

(7) INCOME TAXES

Deferred income tax assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net operating loss carryforwards..................... $ 9,009,000 $ 12,254,000
Tax credit carryforwards............................. 1,038,000 1,119,000
Other................................................ 315,000 782,000
------------ ------------
Gross deferred tax assets....................... 10,362,000 14,155,000
Valuation allowance............................. (10,362,000) (14,155,000)
------------ ------------
Net deferred tax asset.......................... $ -- $ --
============ ============
</TABLE>

The Company has provided a full valuation allowance against its gross
deferred tax assets at December 31, 1996 and 1997 because the future
realizability of such asset is uncertain. Should the Company achieve
profitability in the future, various components of the gross deferred tax assets
would be available to offset future income tax liabilities and expenses.

The Company has net operating loss and research and development tax credit
carryforwards for federal income tax purposes of approximately $30,430,000 and
$1,119,000, respectively, at December 31, 1997 that will expire commencing in
the year 2002 through the year 2012 if not utilized.

F-13
<PAGE> 74
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

The net operating loss and research and development tax credit
carryforwards are subject to review by the Internal Revenue Service. Ownership
changes, as defined in the Internal Revenue Code, may limit the amount of these
tax attributes that can be utilized annually to offset future taxable income or
tax liabilities. The amount of the annual limitation is determined based on the
Company's value immediately prior to the ownership change. Subsequent ownership
changes may further affect the limitation in future years.

(8) STOCKHOLDERS' EQUITY

Authorized Capital Stock

As of December 31, 1997, the Company's authorized capital stock consisted
of 10,600,000 shares of common stock, $.01 par value, and 7,707,326 shares of
preferred stock, $.01 par value. Of the 7,707,326 shares of preferred stock,
406,898 shares are designated Series A-1 convertible preferred stock, 3,800,428
shares are designated Series B-1 convertible preferred stock and 3,500,000
shares are designated Series C convertible preferred stock.

In February 1998, the Company restated its Certificate of Incorporation. As
a result, the authorized capital stock increased to 14,500,000 shares of common
stock, $.01 par value, and 18,843,224 shares of preferred stock, $.01 par value.
Of the 18,843,224 shares of preferred stock, 406,898 shares are designated
Series A-1 convertible preferred stock, 3,800,428 shares are designated Series
B-1 convertible preferred stock, 3,500,000 shares are designated Series C
convertible preferred stock, 1,714,286 shares are designated Series D
convertible preferred stock, 406,898 shares are designated Series A-2
convertible preferred stock, 3,800,428 shares are designated Series B-2
convertible preferred stock, 3,500,000 shares are designated Series C-2
convertible preferred stock and 1,714,286 shares are designated Series D-2
convertible preferred stock.

Upon the closing of the Company's initial public offering, the authorized
capital stock of the Company will consist of 40,000,000 shares of common stock
and 5,000,000 shares of preferred stock, the terms of which will not be
designated.

Convertible Preferred Stock

Convertible preferred stock outstanding consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JULY 4,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Series A-1 convertible preferred stock; 406,898
shares issued and outstanding, at issuance
price, net of issuance costs.................... $18,384,462 $18,384,462 $18,384,462
Series B-1 convertible preferred stock; 3,800,428
shares issued and outstanding, at issuance
price, net of issuance costs.................... 7,506,808 7,506,808 7,506,808
Series C convertible preferred stock; 3,439,949
shares issued and outstanding, at issuance
price, net of issuance costs.................... -- 12,834,800 12,834,800
Series D convertible preferred stock; 1,666,234
shares issued and outstanding, at issuance
price, net of issuance costs.................... -- -- 11,573,816
----------- ----------- -----------
$25,891,270 $38,726,070 $50,299,886
=========== =========== ===========
</TABLE>

F-14
<PAGE> 75
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

In November 1995 and June 1996, the Company sold 2,075,042 and 1,725,386
shares, respectively, of Series B-1 convertible preferred stock in a private
placement, for total net proceeds of $7,506,808 including the conversion of
$500,000 of notes payable to certain stockholders that were issued in 1995. As a
result of anti-dilution provisions associated with this transaction and an
associated recapitalization of the Company, certain preferred stockholders
received an additional 357,761 shares of Series A-1 convertible preferred stock.

In 1997, the Company issued 3,439,949 shares of Series C convertible
preferred stock for net proceeds of $12,834,800.

In February 1998, the Company issued 1,666,234 shares of Series D
convertible preferred stock for net proceeds of $11,573,816.

The rights and preferences of the Company's convertible preferred stock are
as follows:

Voting Rights

Except as set forth in the Certificate of Incorporation, the holders of the
preferred stock vote together with the holders of common stock as a single class
on all matters. Each preferred stockholder is entitled to the number of votes
equal to the number of whole shares of common stock into which such
stockholder's shares are convertible.

Conversion

Each preferred share is convertible into common stock at the option of the
stockholder or automatically upon the closing of a public offering of the
Company's common stock at a price per common share equal to or exceeding $12.00,
and that results in gross proceeds to the Company of at least $20,000,000. The
number of shares of common stock into which holders of the preferred stock shall
be entitled upon conversion is one-for-one, subject to adjustment for certain
dilutive events.

Liquidation, Dissolution or Winding Up of the Company

In the event of any liquidation, dissolution or winding up of the Company,
the Series A-1 convertible preferred stockholders will receive $22.76 per share,
the Series B-1 convertible preferred stockholders will receive $2.00 per share,
the Series C convertible preferred stockholders will receive $3.75 per share and
the Series D convertible preferred stockholders will receive $7.00 per share. In
the case where the remaining assets of the Company available for distribution
are insufficient to pay the preferred stockholders the full amount they are
entitled to, the preferred stockholders shall share ratably in any distribution
of the assets. Any amounts available after these distributions are to be
distributed to the holders of common stock.

Dividends

The holders of the preferred stock are entitled to dividends when and if
declared by the Board of Directors.

Common Stock

At July 4, 1998, the Company has reserved approximately 9,313,509 shares of
common stock for issuance upon conversion of the preferred stock and 1,900,459
shares of common stock for issuance under the Company's stock option plans. On
July 9, 1998, the Company reserved an additional

F-15
<PAGE> 76
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

2,150,000 shares of common stock for issuance under the Company's stock option
plans and employee stock purchase plan (see Note 9).

(9) STOCK OPTION PLANS

1991 Restated Stock Option Plan

The Company's 1991 Restated Stock Option Plan (the "1991 Plan") provides
for the granting, at the discretion of the Board of Directors, of options for
the purchase of up to 3,460,000 shares of common stock to employees, directors
and advisors. Option prices are determined by the Board of Directors. On July 9,
1998, the Board of Directors decreased the number of shares authorized for
issuance upon exercise of stock options under the 1991 Plan to 3,360,000.

A summary of plan activity is as follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF OPTION PRICE AVERAGE OPTION
SHARES PER SHARE PRICE PER SHARE
---------- --------------- ---------------
<S> <C> <C> <C>
Outstanding, December 31, 1994................. 14,151 $16.67 - $45.83 $31.02
Granted...................................... 1,106,532 .20 - 45.83 .22
Exercised.................................... (166) 16.67 - 45.83 16.91
Canceled..................................... (14,507) 16.67 - 45.83 34.78
---------- --------------- ------
Outstanding, December 31, 1995................. 1,106,010 .20 - 45.83 .32
Granted...................................... 451,002 .20 .20
Exercised.................................... -- -- --
Canceled..................................... (939) .20 .20
---------- --------------- ------
Outstanding, December 31, 1996................. 1,556,073 .20 - 45.83 .28
Granted...................................... 1,046,532 .20 - .80 .66
Exercised.................................... (1,460,450) .20 - .375 .22
Canceled..................................... (71,529) .20 - .375 .20
---------- --------------- ------
Outstanding, December 31, 1997................. 1,070,626 .20 - 45.83 .74
Granted (unaudited).......................... 416,796 .80 - 11.05 5.00
Exercised (unaudited)........................ (204,938) .20 - .80 .70
Canceled (unaudited)......................... (10,115) .20 - 45.83 .57
---------- --------------- ------
Outstanding, July 4, 1998 (unaudited).......... 1,272,369 $.20 - $45.83 $ 2.04
========== =============== ======
Exercisable, December 31, 1995................. 306,695 $.20 - $45.83 $ .53
Exercisable, December 31, 1996................. 1,347,642 $.20 - $45.83 $ .29
Exercisable, December 31, 1997................. 170,747 $.20 - $45.83 $ .96
Exercisable, July 4, 1998 (unaudited).......... 260,353 $.20 - $45.83 $ .52
</TABLE>

Subsequent to July 4, 1998, the Company granted stock options to purchase
430,098 shares of common stock at an exercise price of $11.05 per share, and
stock options to purchase 500 shares of common stock with an exercise price of
$.80 per share were exercised.

During 1997 and 1998, employees and directors exercised stock options to
purchase an aggregate of 1,407,970 shares and 87,500 shares, respectively, of
restricted common stock. The shares are subject to repurchase by the Company, at
prices ranging from $.20 to $.80 per share. The payment for the restricted
common stock was in the form of cash of $45,735 and full recourse notes of
$336,579 payable to the Company.

F-16
<PAGE> 77
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

In the event that any employee holding shares of restricted Common Stock
ceases to be employed by the Company, the Company has the right to repurchase
such shares for 90 days at a price equal to the original exercise price. The
shares generally vest over two to four years from the initial grant date,
provided that the holder continues to be employed by the Company. As the shares
of restricted Common Stock vest, they cease to be subject to a repurchase right
by the Company. As of July 4, 1998, an aggregate of 537,331 shares remain
subject to repurchase.

Stock options and restricted common stock granted under the 1991 Plan
generally vest over two to four years and provide for acceleration of vesting
upon a change of control of the Company.

A summary of outstanding and exercisable options as of July 4, 1998 is as
follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL NUMBER
PRICE OUTSTANDING LIFE EXERCISABLE
- ------------ ----------- ----------- -----------
<S> <C> <C> <C>
$ 0.20 203,066 7.84 140,461
0.375 113,886 8.87 31,877
0.80 603,682 9.28 77,815
2.80 163,365 9.78 9,980
7.00 125,000 9.95 0
11.05 63,150 9.95 0
16.67 207 2.12 207
45.83 13 2.50 13
- ------------ --------- ---- -------
$0.20-$45.83 1,272,369 9.19 260,353
</TABLE>

In connection with certain stock option grants, the Company recorded
deferred compensation of approximately $834,000, which represents the aggregate
difference between the estimated fair market value of the common stock and the
exercise price of the options. This deferred compensation will be recognized as
compensation expense over the vesting term of the options.

In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options or warrants to be included in the
statement of income or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. The Company has
computed the value of options granted in 1995, 1996 and 1997 using the
Black-Scholes option-pricing model prescribed by SFAS No. 123. The following
table shows the weighted average assumptions used in the applicable periods and
the weighted average fair market value of the options granted in each period.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------
----------------------------------- JUNE 28, JULY 4,
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Risk-free interest rate....... 5.9%-6.2% 6.4%-6.8% 6.5%-6.75% 6.4%-6.8% 5.1%-6.75%
Expected dividend yield....... -- -- -- -- --
Expected life................. 7 years 7 years 7 years 7 years 7 years
Expected volatility........... 60% 60% 60% 60% 60%
Weighted average fair market
value of options granted.... $ .16 $ .15 $ .48 $ .27 $ 4.46
</TABLE>

F-17
<PAGE> 78
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

Had compensation cost for these options been determined consistent with
SFAS No. 123, the Company's net loss and pro forma net loss per common share
would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------
---------------------------------------- JUNE 28, JULY 4,
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss
As reported................ $(5,545,909) $(5,396,438) $ (9,885,855) $(4,447,407) $(6,517,068)
=========== =========== ============ =========== ===========
Pro forma.................. $(5,590,110) $(5,457,382) $(10,073,236) $(4,541,097) $(6,676,033)
=========== =========== ============ =========== ===========
Basic and diluted net loss
per common share
As reported................ $(281.65) $(57.76) $(16.23) $(10.88) $(6.34)
=========== =========== ============ =========== ===========
Pro forma.................. $(283.89) $(58.42) $(16.54) $(11.10) $(6.50)
=========== =========== ============ =========== ===========
Pro forma basic and diluted
net loss per common share
As reported................ $(1.28) $(0.65)
============ ===========
Pro forma.................. $(1.31) $(0.67)
============ ===========
</TABLE>

The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Also, because options
vest over several years and the Company expects to grant options in future
years, the above pro forma results of applying the provisions of SFAS No. 123
are not necessarily representative of the pro forma results in future years.

1998 Stock Incentive Plan

The Company's 1998 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors on July 9, 1998, subject to stockholder approval, and
is intended to replace the 1991 Plan. The Board of Directors has authorized the
Compensation Committee to administer the Incentive Plan, including the granting
of options to executive officers. The Incentive Plan provides for the granting,
at the discretion of the Compensation Committee, of options for the purchase of
up to 2,100,000 shares of common stock (subject to adjustment in the event of
stock splits and other similar events) to employees, directors and advisors.
Option prices are determined by the Compensation Committee, but cannot be less
than 100% of fair market value for incentive stock options (or less than 110% of
the fair market value in the case of incentive stock options granted to
optionees holding more than 10% of the voting power of the Company).

F-18
<PAGE> 79
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

1998 Employee Stock Purchase Plan

On July 9, 1998, the Company's 1998 Employee Stock Purchase Plan ("Purchase
Plan") was adopted by the Board of Directors, subject to stockholder approval.
The Purchase Plan allows eligible employees the right to purchase common stock
at the lower of 85% of the closing price per share of common stock on the first
or last day of the offering period. Each offering period is six months. An
aggregate of 150,000 shares of common stock have been reserved for issuance
pursuant to the Purchase Plan.

1998 Director Stock Option Plan

In February 1998, the Company adopted the 1998 Director Stock Option Plan
("Director Plan"). Under the terms of this plan, directors of the Company who
are not employees of the Company are eligible to receive nonstatutory options to
purchase shares of common stock. A total of 100,000 shares of common stock may
be issued upon exercise of options under this plan. The initial options granted
under the Director Plan are exercisable as to 50% of the option as of the date
of grant and as to one-sixth of the shares on the first, second and third
anniversaries of the date of grant, provided that the optionee continues to
serve as a director and provide for the acceleration of vesting upon a change of
control of the Company. Additional options granted will be exercisable in three
equal annual installments on each of the first, second and third anniversaries
of the date of grant, provided that the optionee continues to serve as a
director. Options granted under the Director Plan terminate on the earlier of
(i) ten years from the date of grant, or (ii) sixty days after the optionee
ceases to serve as a director. In April 1998, options to purchase 40,000 shares
were granted under this plan at an exercise price of $2.80, of which 20,000
shares are exercisable at July 4, 1998. In connection with these grants, the
Company recorded deferred compensation of approximately $56,000 which
represented the difference between the estimated fair market value of the common
stock and the exercise price of the options. This deferred compensation will be
recognized as compensation expense over the vesting term of the options.

(10) NET LOSS PER SHARE

The Company follows Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share. Basic net loss per share represents net loss available
to common stockholders divided by the weighted average number of common shares
outstanding. The Company has excluded all shares of restricted common stock that
are subject to repurchase by the Company from the weighted average number of
common shares outstanding. Diluted net loss per share is the same as basic net
loss per share for the Company, because all stock options and convertible
preferred stock have been excluded from the calculation. Inclusion of stock
issuable pursuant to the exercise of stock options and the conversion of
convertible preferred stock would be antidilutive. The Company evaluated the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 98 ("SAB 98"), and concluded that there are no nominal issuances of common
stock or common stock equivalents which would be required to be shown as
outstanding for all periods as outlined in SAB 98. Pro forma net loss per share
includes the weighted average common shares outstanding and reflects the
automatic conversion of all convertible preferred stock into common stock upon
completion of the Company's initial public offering based on the original
issuance date using the "if-converted" method.

F-19
<PAGE> 80
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

(11) DISTRIBUTION AND LICENSING AGREEMENTS

The Company has entered into various distribution, licensing and royalty
agreements relating to its monitor products with distributors covering the
international market. These agreements have terms ranging from three to ten
years. In connection with these agreements, approximately $823,000 and $643,000
in revenue was deferred as of December 31, 1996 and 1997, respectively, and
approximately $1,520,500 was deferred as of July 4, 1998. The deferred revenue
relates to prepayments for monitoring systems under minimum purchase obligations
and also includes prepaid license and royalty fees. The deferred revenue will be
recognized upon product shipment and as license and royalty fees are earned.
License and royalty fees are related to future technological developments and
will be recognized upon shipment of units incorporating this technology.

(12) 401(K) SAVINGS PLAN

The Company has a 401(k) savings plan in which substantially all employees
can participate. Employer contributions are at the discretion of the Board of
Directors and vest ratably over five years. The Company made no contributions to
the plan during the years ended December 31, 1995, 1996 and 1997.

(13) COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office space under an operating lease and certain
equipment under capital leases. Rent expense was approximately $328,000,
$335,000 and $346,000 in 1995, 1996 and 1997, respectively. Future gross minimum
lease commitments as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
1998................................................. $ 406,298 $169,016
1999................................................. 397,528 135,960
2000................................................. 331,273 --
---------- --------
Total minimum lease payments......................... $1,135,099 304,976
==========
Less -- Amount representing interest................. 32,390
--------
Present value of obligations under capital leases.... 272,586
Less -- Current portion.............................. 154,906
--------
$117,680
========
</TABLE>

Subleases

During 1995, 1996 and 1997, the Company had a sublease agreement whereby a
portion of existing office space was leased to a third party under an operating
lease. Rental income for 1995, 1996 and 1997 approximated $15,000, $129,000 and
$113,000, respectively. This agreement expired in 1997.

(14) OTHER RELATED PARTY TRANSACTIONS

In addition to the transactions discussed in Note 9, during 1997 the
Company loaned a total of $107,000 to certain employees of the Company. The
loans are evidenced by promissory notes

F-20
<PAGE> 81
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

bearing interest with rates ranging from 6.42% to 8% per annum. The outstanding
balance on these notes at December 31, 1997 and July 4, 1998 was approximately
$105,000 and $92,000, respectively.

(15) ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JULY 4,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and payroll-related.................. $ 80,163 $ 375,121 $ 642,460
Other........................................ 644,168 1,125,470 2,291,294
-------- ---------- ----------
$724,331 $1,500,591 $2,933,754
======== ========== ==========
</TABLE>

(16) FINANCIAL INFORMATION BY GEOGRAPHIC AREA

Revenues by geographic destination and as a percentage of total revenues
are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------------- -------------------------------
1995 1996 1997 JUNE 28, 1997 JULY 4, 1998
---------- ---------- ---------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
GEOGRAPHIC AREA BY
DESTINATION
Domestic........... $ 563,857 $ 699,362 $1,881,409 $ 640,104 $3,794,447
International...... 503,350 689,426 1,186,164 435,703 625,718
---------- ---------- ---------- ---------- ----------
$1,067,207 $1,388,788 $3,067,573 $1,075,807 $4,420,165
========== ========== ========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------- --------------------------------
1995 1996 1997 JUNE 28, 1997 JULY 4, 1998
----- ----- ----- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
GEOGRAPHIC AREA BY DESTINATION
Domestic.......................... 53% 51% 61% 60% 86%
International..................... 47 49 39 40 14
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>

(17) VALUATION AND QUALIFYING ACCOUNTS

The following table sets forth activity in the Company's allowance for
doubtful accounts:

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF CHARGES TO END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended --
December 31, 1995...................... $ 8,000 $ -- $1,000 $ 7,000
December 31, 1996...................... 7,000 43,000 -- 50,000
December 31, 1997...................... 50,000 14,333 1,933 62,400
Six months ended July 4, 1998............ 62,400 40,000 90 102,310
</TABLE>

(18) LOAN AGREEMENT

F-21
<PAGE> 82
ASPECT MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)

agreement is based upon a percentage of the Company's outstanding accounts
receivable. The outstanding principal under the working capital portion of the
loan agreement is due and payable in December 1999. Interest on the working
capital portion of the loan agreement is at the prime rate plus .5% until
September 30, 1998 whereby it becomes the prime rate plus .25%.

The principal amount outstanding under the equipment portion of the loan
agreement is due in 36 equal monthly installments commencing in January 1999.
Interest on the equipment loan portion of the loan agreement is at the prime
rate plus 1.0% up to and including the closing date of the Company's initial
public offering. After the closing of the Company's initial public offering, the
interest rate becomes the prime rate.

The loan agreement contains certain restrictive covenants that require the
Company to maintain minimum liquidity or debt service coverage ratios. The
agreement also restricts the Company from declaring and paying cash dividends.

At July 4, 1998, approximately $776,000 was outstanding under the equipment
portion of the loan agreement. There were no outstanding balances under the
working capital portion of the loan agreement at July 4, 1998.

F-22
<PAGE> 83

[INSIDE BACK COVER OF PROSPECTUS]

Each year, approximately 29 million patients in the United States and more
than 35 million patients in Europe and Japan receive anesthesia for surgical
procedures. Aspect's clinically validated BIS index assists the anesthesia
provider in assessing levels of consciousness and administering appropriate
amounts of anesthetics.

[Photograph depicting an anesthesia provider sitting next to a patient
being monitored with the Company's BIS monitor product.]

Benefits of BIS monitoring demonstrated by the Company in a 302-patient
prospective, randomized, controlled clinical utility trial include:

- more controlled and cost-effective dosing of anesthetic drugs

- faster and more predictable recovery from anesthesia

- improved quality of recovery

[Photograph depicting a patient sitting in a chair holding a beverage.]

Other studies have shown that, when appropriate levels of anesthesia are
administered, patients are more likely to meet criteria for bypassing the PACU
following ambulatory surgery and proceeding immediately to the less costly
step-down recovery area.

[Company Logo]
<PAGE> 84

================================================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES, OR AN OFFER TO SELL TO, OR SOLICITATION OF, ANY
PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Financial Information........ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 22
Management............................ 37
Certain Transactions.................. 45
Principal Stockholders................ 47
Description of Capital Stock.......... 50
Shares Eligible for Future Sale....... 52
Underwriting.......................... 54
Legal Matters......................... 55
Experts............................... 55
Change in Independent Public
Accountants......................... 55
Additional Information................ 55
Index to Financial Statements......... F-1
</TABLE>

------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

================================================================================

================================================================================
3,100,000 Shares

[ASPECT MEDICAL SYSTEMS LOGO]
Common Stock

-------------------
PROSPECTUS
-------------------

BT Alex. Brown

Merrill Lynch & Co.

Piper Jaffray Inc.
, 1998

================================================================================
<PAGE> 85

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 15,776
NASD filing fee............................................. 5,848
Nasdaq National Market listing fee.......................... 88,500
Blue Sky fees and expenses.................................. 10,000
Transfer Agent and Registrar fees........................... 5,500
Accounting fees and expenses................................ 250,000
Legal fees and expenses..................................... 300,000
Printing and mailing expenses............................... 130,000
Miscellaneous............................................... 44,376
--------
Total............................................. $850,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article EIGHTH of the Registrant's Restated Certificate of Incorporation
(the "Restated Certificate of Incorporation") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director, except to the extent that the Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.

Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.

Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination

II-1
<PAGE> 86

by the Registrant that the director or officer did not meet the applicable
standard of conduct required for indemnification, or if the Registrant fails to
make an indemnification payment within 60 days after such payment is claimed by
such person, such person is permitted to petition the court to make an
independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of indemnification, the
director or officer must give the Registrant notice of the action for which
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.

Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.

Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.

Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Set forth in chronological order is information regarding shares of Common
Stock and Preferred Stock issued and options granted by the Company since July
1, 1995. Further included is the consideration, if any, received by the Company
for such shares and options and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), or rule of the
Securities and Exchange Commission under which exemption from registration was
claimed.

Certain of the transactions described below involved directors, officers
and 5% Stockholders of the Company. See "Certain Transactions."

The Company's Amended and Restated 1991 Stock Option Plan was adopted by
the Board of Directors and approved by the stockholders of the Company in April
1991, and the Company's 1998 Director Stock Option Plan was adopted by the Board
of Directors and approved by the stockholders of the Company in February 1998.
As of July 4, 1998, options to purchase 1,665,961 of Common Stock had been
exercised for an aggregate consideration of $598,327 and options to purchase
1,312,369 of Common Stock, at a weighted average exercise price of $2.07 per
share, were outstanding under such plans.

In November 1995, the Company issued and sold 104 shares of its Common
Stock to LTI Ventures Leasing Corp. at a purchase price of $2.00 per share in
connection with the execution of a Master Lease Agreement.

On November 2, 1995 and June 28, 1996, the Company issued and sold an
aggregate of 3,800,428 shares of its Series B-1 Convertible Preferred Stock to a
group of investors at a purchase price of $2.00 per share.

II-2
<PAGE> 87

On February 26, 1997, August 8, 1997 and October 7, 1997, the Company
issued and sold an aggregate of 3,439,949 shares of its Series C Convertible
Preferred Stock to a group of investors at a purchase price of $3.75 per share.

On February 13, 1998, the Company issued and sold an aggregate of 1,666,234
shares of its Series D Convertible Preferred Stock to a group of investors at a
purchase price of $7.00 per share.

The securities issued in the foregoing transactions were either (i) offered
and sold in reliance upon exemptions from Securities Act registration set forth
in Sections 3(b) and 4(2) of the Securities Act, or any regulations promulgated
thereunder, relating to sales by an issuer not involving any public offering, or
(ii) in the case of certain options to purchase shares of Common Stock and
shares of Common Stock issued upon the exercise of such options, such offers and
sales were made in reliance upon an exemption from registration under Rule 701
of the Securities Act. No underwriters were involved in the foregoing sales of
securities.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

II-3
<PAGE> 88

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.9** Loan Agreement, dated as of June 22, 1998, between the
Company and Imperial Bank, together with Revolving Loans
Promissory Note, dated June 22, 1998, made in favor of
Imperial Bank by the Company, Equipment Loans Promissory
Note, dated June 22, 1998, made in favor of Imperial Bank by
the Company, Security Agreement, dated as of June 22, 1998,
between the Company and Imperial Bank, Trademark Collateral
Security and Pledge Agreement, dated as of June 22, 1998,
between the Company and Imperial Bank, Patent Collateral
Security and Pledge Agreement, dated as of June 22, 1998,
between the Company and Imperial Bank and Agreement to
Provide Insurance, dated June 22, 1998, between the Company
and Imperial Bank.
10.10** Promissory Note, dated February 18, 1997, as amended on
April 14, 1997, made in favor of the Company by Nassib G.
Chamoun, together with Pledge Agreement, dated as of
February 18, 1997, as amended on April 14, 1997, between
Nassib G. Chamoun and the Company.
10.11** Promissory Note, dated May 1, 1997, made in favor of the
Company by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, between Nassib G.
Chamoun and the Company.
10.12** Promissory Note, dated May 1, 1997, made in favor of the
Company by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, between Nassib G.
Chamoun and the Company.
10.13** Form of Promissory Note made in favor of the Company by
certain directors and executive officers, together with Form
of Pledge Agreement between the Company and certain
directors and executive officers.
10.14** Promissory Note, dated September 24, 1997, made in favor of
the Company by Jeffrey Barrett.
10.15** Promissory Note, dated April 10, 1998, made in favor of the
Company by Jeffrey Barrett, together with Pledge Agreement,
dated as of April 10, 1998, between Jeffrey Barrett and the
Company.
10.16** Series D Convertible Preferred Stock Purchase Agreement
dated February 13, 1998 by and among the Company and the
several purchasers named on Schedule I thereto.
10.17** Third Amended and Restated Right of First Refusal and
Co-Sale Agreement dated February 13, 1998 by and among the
Company and the several parties named on Schedules I and II
thereto.
10.18** Third Amended and Restated Registration Rights Agreement
dated February 13, 1998 by and among the Company and the
parties named on the signature pages thereto.
10.19** Third Amended and Restated Voting Agreement dated February
13, 1998 by and among the Company and the several parties
named on Schedule I thereto.
16 Letter from PricewaterhouseCoopers LLP re: change in
independent public accountants.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Hale and Dorr LLP (included in Exhibit 5).
24** Power of Attorney.
27.1** Financial Data Schedule for fiscal year ended December 31,
1997.
27.2** Financial Data Schedule for the six months ended July 4,
1998.
</TABLE>

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

* To be filed by amendment.

** Previously filed.

+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the Securities and Exchange
Commission.

(b) Financial Statement Schedules

Report of Independent Public Accountants

Schedule II -- Valuation and Qualifying Accounts

II-4
<PAGE> 89

All other schedules have been omitted because they are not required or
because the required information is given in the Company's Financial Statements
or Notes thereto.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions contained in the Amended and Restated Certificate of
Incorporation of the Company and the laws of the State of Delaware, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

The undersigned Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-5
<PAGE> 90

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 2 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Natick, Massachusetts
on this 22nd day of July, 1998.

ASPECT MEDICAL SYSTEMS, INC.

By: /s/ J. NEAL ARMSTRONG
------------------------------------
J. Neal Armstrong
Vice President and Chief Financial
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.

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

/s/ NASSIB G. CHAMOUN* Chief Executive Officer and July 22, 1998
- ------------------------------------------------ President (Principal Executive
Nassib G. Chamoun Officer)

/s/ J. BRECKENRIDGE EAGLE* Chairman of the Board of Directors July 22, 1998
- ------------------------------------------------
J. Breckenridge Eagle

/s/ J. NEAL ARMSTRONG Vice President and Chief Financial July 22, 1998
- ------------------------------------------------ Officer (Principal Financial and
J. Neal Armstrong Accounting Officer)

/s/ STEPHEN E. COIT* Director July 22, 1998
- ------------------------------------------------
Stephen E. Coit

/s/ EDWIN M. KANIA, JR.* Director July 22, 1998
- ------------------------------------------------
Edwin M. Kania, Jr.

/s/ LESTER J. LLOYD* Director July 22, 1998
- ------------------------------------------------
Lester J. Lloyd

/s/ TERRANCE MCGUIRE* Director July 22, 1998
- ------------------------------------------------
Terrance McGuire

/s/ DONALD STANSKI* Director July 22, 1998
- ------------------------------------------------
Donald Stanski

*By: /s/ J. NEAL ARMSTRONG
- ------------------------------------------------
J. Neal Armstrong
Attorney-In-Fact
</TABLE>

II-6
<PAGE> 91

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Aspect Medical Systems, Inc.:

We have audited in accordance with generally accepted auditing standards,
the financial statements of Aspect Medical Systems, Inc. as of December 31, 1996
and 1997 and for the years then ended included in this registration statement
and have issued our report thereon dated March 27, 1998. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the accompanying index is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

/s/ Arthur Andersen LLP

Boston, Massachusetts

March 27, 1998

S-1
<PAGE> 92

ASPECT MEDICAL SYSTEMS, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT

RESERVE FOR EXCESS AND OBSOLETE INVENTORY

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF CHARGES TO END OF
PERIOD EXPENSES WRITE-OFFS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended --
December 31, 1995....................... $ 6,500 $ 16,500 $ -- $ 23,000
December 31, 1996....................... 23,000 119,000 -- 142,000
December 31, 1997....................... 142,000 714,000 (235,000) 621,000
Six months ended July 4, 1998
(unaudited)............................. 621,000 416,000 (232,000) 805,000
</TABLE>

S-2
<PAGE> 93

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1** Form of Underwriting Agreement.
3.1** Third Restated Certificate of Incorporation of the Company.
3.2 Form of Certificate of Amendment to Third Restated
Certificate of Incorporation of the Company (to be filed
with the Secretary of State of the State of Delaware
immediately prior to the effectiveness of this Registration
Statement).
3.3 Form of Restated Certificate of Incorporation of the Company
(to be filed with the Secretary of State of the State of
Delaware upon the closing of the offering to which this
Registration Statement relates).
3.4** By-Laws of the Company, as amended.
3.5** Form of Amended and Restated By-Laws of the Company (to be
effective upon the closing of the offering to which this
Registration Statement relates).
4.1* Specimen certificate for shares of Common Stock, $.01 par
value, of the Company.
5 Opinion of Hale and Dorr LLP.
10.1 1998 Director Stock Option Plan, as amended.
10.2 [Intentionally left blank.]
10.3+** International Distribution Agreement, dated as of January
21, 1998, by and between the Company and Nihon Kohden
Corporation.
10.4+** International License Agreement, dated as of January 21,
1998, by and between the Company and Nihon Kohden
Corporation.
10.5** Trademark License Agreement, dated May 25, 1994, between
Aspect Electronics, Inc. and the Company.
10.6+** License Agreement, dated as of October 31, 1995, between
Siemens Medical Systems, Inc. and the Company.
10.7** Property Lease at 2 Vision Drive between the Company and
Vision Drive, Inc., successor in interest to Natick
Executive Park Trust No. 2, dated September 8, 1994, as
amended, together with Subordination, Non-Disturbance and
Attornment Agreement between the Company and Teachers
Insurance Association of America, dated June 15, 1995.
10.8** Lease Extension Agreement, dated as of August 7, 1997,
between Vision Drive, Inc. and the Company.
10.9** Loan Agreement, dated as of June 22, 1998, between the
Company and Imperial Bank, together with Revolving Loans
Promissory Note, dated June 22, 1998, made in favor of
Imperial Bank by the Company, Equipment Loans Promissory
Note, dated June 22, 1998, made in favor of Imperial Bank by
the Company, Security Agreement, dated as of June 22, 1998,
between the Company and Imperial Bank, Trademark Collateral
Security and Pledge Agreement, dated as of June 22, 1998,
between the Company and Imperial Bank, Patent Collateral
Security and Pledge Agreement, dated as of June 22, 1998,
between the Company and Imperial Bank and Agreement to
Provide Insurance, dated June 22, 1998, between the Company
and Imperial Bank.
10.10** Promissory Note, dated February 18, 1997, as amended on
April 14, 1997, made in favor of the Company by Nassib G.
Chamoun, together with Pledge Agreement, dated as of
February 18, 1997, as amended on April 14, 1997, between
Nassib G. Chamoun and the Company.
10.11** Promissory Note, dated May 1, 1997, made in favor of the
Company by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, between Nassib G.
Chamoun and the Company.
10.12** Promissory Note, dated May 1, 1997, made in favor of the
Company by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, between Nassib G.
Chamoun and the Company.
10.13** Form of Promissory Note made in favor of the Company by
certain directors and executive officers, together with Form
of Pledge Agreement between the Company and certain
directors and executive officers.
10.14** Promissory Note, dated September 24, 1997, made in favor of
the Company by Jeffrey Barrett.
</TABLE>

<PAGE> 94

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.15** Promissory Note, dated April 10, 1998, made in favor of the
Company by Jeffrey Barrett, together with Pledge Agreement,
dated as of April 10, 1998, between Jeffrey Barrett and the
Company.
10.16** Series D Convertible Preferred Stock Purchase Agreement
dated February 13, 1998 by and among the Company and the
several purchasers named on Schedule I thereto.
10.17** Third Amended and Restated Right of First Refusal and
Co-Sale Agreement dated February 13, 1998 by and among the
Company and the several parties named on Schedules I and II
thereto.
10.18** Third Amended and Restated Registration Rights Agreement
dated February 13, 1998 by and among the Company and the
parties named on the signature pages thereto.
10.19** Third Amended and Restated Voting Agreement dated February
13, 1998 by and among the Company and the several parties
named on Schedule I thereto.
16 Letter from PricewaterhouseCoopers LLP re: change in
independent public accountants.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Hale and Dorr LLP (included in Exhibit 5).
24** Power of Attorney.
27.1** Financial Data Schedule for fiscal year ended December 31,
1997.
27.2** Financial Data Schedule for the six months ended July 4,
1998.
</TABLE>

- ---------------
* To be filed by amendment.

** Previously filed.

+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the Securities and Exchange
Commission.

(b) Financial Statement Schedules

Report of Independent Public Accountants

Schedule II -- Valuation and Qualifying Accounts

All other schedules have been omitted because they are not required or
because the required information is given in the Company's Financial Statements
or Notes thereto.

<PAGE> 1

EXHIBIT 3.2

CERTIFICATE OF AMENDMENT
TO THE
THIRD RESTATED
CERTIFICATE OF INCORPORATION
OF
ASPECT MEDICAL SYSTEMS, INC.

Pursuant to Section 242
of the General Corporation Law of
The State of Delaware
---------------------

Aspect Medical Systems, Inc. (the "Corporation"), a corporation duly
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify as follows:

By vote of the Board of Directors of the Corporation, a resolution was
duly adopted pursuant to Sections 141 and 242 of the General Corporation Law of
the State of Delaware, setting forth an amendment to the Third Restated
Certificate of Incorporation of the Corporation and declaring said amendment to
be advisable and directing that it be submitted to and be considered by the
stockholders of the Corporation for approval. The stockholders of the
Corporation duly approved said proposed amendment by written consent in lieu of
a special meeting in accordance with Sections 228 and 242 of the General
Corporation Law of the State of Delaware. The resolution setting forth the
amendment is as follows:

RESOLVED: That Article FOURTH of the Corporation's Third Restated Certificate
of Incorporation, be, and hereby is, amended as follows:

1. by deleting the introductory paragraph in its entirety and
inserting a new introductory paragraph in lieu thereof which
shall read in its entirety as follows:

"FOURTH: The total number of shares that the Corporation
shall have authority to issue is 58,843,224 shares
consisting of 40,000,000 shares of Common Stock, par
value $0.01 per share, and 18,843,224 shares of
preferred stock, par value $.01 per share, of which
406,898 shares have been designated Series A-1
Convertible Preferred Stock (the "Series A-1 Preferred
Stock"), 3,800,428 shares have been designated Series
B-1 Convertible Preferred Stock (the "Series B-1
Preferred Stock"), 3,500,000 shares have been designated
Series C Convertible Preferred Stock (the "Series C
Preferred Stock"), 1,714,286 shares have been designated
Series

<PAGE> 2

D Convertible Preferred Stock (the "Series D Preferred
Stock"), 406,898 shares have been designated Series A-2
Convertible Preferred Stock (the "Series A-2 Preferred
Stock"), 3,800,428 shares have been designated Series
B-2 Convertible Preferred Stock (the "Series B-2
Preferred Stock"), 3,500,000 shares have been designated
Series C-2 Convertible Preferred Stock (the "Series C-2
Preferred Stock") and 1,714,286 shares have been
designated Series D-2 Convertible Preferred Stock (the
"Series D-2 Preferred Stock")."

2. by deleting Section B.5(a) in its entirety and inserting a new
Section B.5(a) in lieu thereof which shall read in its
entirety as follows:

"(a) The Corporation may, at its option, require all
(and not less than all) holders of shares of any series
of Preferred Stock then outstanding to convert their
shares of such series of Preferred Stock into shares of
Common Stock, at the then effective conversion rate
pursuant to Section 4, at any time on or after the
closing (the "Closing") of the sale of shares of the
Corporation's Common Stock in a firm commitment
underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933,
as amended (the "Securities Act"), (i) at a price per
share which equals or exceeds $12.00, which number shall
be appropriately adjusted for stock splits, stock
dividends, combinations, reorganizations,
recapitalizations and other similar events involving a
change in capital structure of the Corporation; and (ii)
resulting in at least $20,000,000 of aggregate gross
proceeds; PROVIDED that, the provisions of subsection
(i) above shall not apply in the event that such Closing
occurs on or before December 31, 1998; and FURTHER
PROVIDED that, in the event an underwritten public
offering does not meet the thresholds provided in this
paragraph (a), a vote of two-thirds (2/3) of the
outstanding shares of Preferred Stock may require all
(and not less than all) holders of shares of any series
of Preferred Stock then outstanding to convert their
shares of such series of Preferred Stock into shares of
Common Stock, at the then effective conversion rate
pursuant to Section 4."

-2-

<PAGE> 3

3. by deleting Section B.5(c) in its entirety and inserting a new
Section B.5(c) in lieu thereof which shall read in its
entirety as follows:

"(c) All certificates evidencing shares of Preferred
Stock which are required to be surrendered for
conversion in accordance with the provisions hereof
shall, for and after the date such certificates are so
required to be surrendered, be deemed to have been
retired and canceled and the shares of Preferred Stock
presented thereby converted into Common Stock for all
purposes, notwithstanding the failure of the holder or
holders thereof to surrender such certificates on or
prior to such date. Upon the closing of the sale of
shares of Common Stock in a firm commitment underwritten
public offering meeting the requirements of Section
5(a), the number of authorized shares of Series A-1
Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series A-2
Preferred Stock, Series B-2 Preferred Stock, Series C-2
Preferred Stock and Series D-2 Preferred Stock shall be
automatically reduced by the number of shares of Series
A-1 Preferred Stock, Series B-1 Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series A-2
Preferred Stock, Series B-2 Preferred Stock, Series C-2
Preferred Stock and Series D-2 Preferred Stock that had
been designated as Series A-1 Preferred Stock, Series
B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series A-2 Preferred Stock, Series B-2
Preferred Stock, Series C-2 Preferred Stock and Series
D-2 Preferred Stock and all provisions included under
Section 5 of this Article FOURTH and all references to
the Series A-1 Preferred Stock, Series B- 1 Preferred
Stock, Series C Preferred Stock, Series D Preferred
Stock, Series A-2 Preferred Stock, Series B-2 Preferred
Stock, Series C-2 Preferred Stock and Series D-2
Preferred Stock in this Third Restated Certificate of
Incorporation shall be deleted and shall be of no
further force or effect."

-3-

<PAGE> 4

IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Certificate of Amendment to the Third Restated
Certificate of Incorporation to be signed by its President and Chief Executive
Officer this _____ day of July, 1998.

ASPECT MEDICAL SYSTEMS, INC.

By:
-------------------------------------
Nassib G. Chamoun
President and Chief Executive Officer

-4-

<PAGE> 1

EXHIBIT 3.3

RESTATED

CERTIFICATE OF INCORPORATION

ASPECT MEDICAL SYSTEMS, INC.

Aspect Medical Systems, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does hereby certify as follows:

1. The Corporation filed its original Certificate of
Incorporation with the Secretary of State of the State of Delaware on October
14, 1987 under the name "Biometrak Corporation."

2. By vote of the Board of Directors of the Corporation, a
resolution was duly adopted, pursuant to Section 245 of the General Corporation
Law of the State of Delaware, setting forth a Restated Certificate of
Incorporation of the Corporation and declaring said Restated Certificate of
Incorporation advisable. The stockholders of the Corporation duly approved said
proposed Restated Certificate of Incorporation in accordance with Sections 228,
242 and 245 of the General Corporation Law of the State of Delaware by written
consent in lieu of a special meeting. The resolution setting forth the Restated
Certificate of Incorporation is as follows:

RESOLVED: That the Third Restated Certificate of Incorporation of the
Corporation, as amended, be, and hereby is, amended and restated in its entirety
so that the same shall read as follows:

FIRST. The name of the Corporation is:

Aspect Medical Systems, Inc.

<PAGE> 2

SECOND. The address of the its registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle 19801. The name of its registered agent at such
address is The Corporation Trust Company.

THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is as follows:

To engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.

FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Forty-Five Million (45,000,000)
shares, consisting of (i) Forty Million (40,000,000) shares of Common Stock,
$.01 par value per share ("Common Stock"), and (ii) Five Million (5,000,000)
shares of Preferred Stock, $.01 par value per share ("Preferred Stock"), which
may be issued from time to time in one or more series as set forth in Part B of
this Article FOURTH.

The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.

A. COMMON STOCK.

1. GENERAL. The voting, dividend and liquidation rights of the
holders of the Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.

2. VOTING. The holders of the Common Stock are entitled to one
vote for each share held at all meetings of stockholders. There shall be no
cumulative voting.

The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.

3. DIVIDENDS. Dividends may be declared and paid on the Common
Stock from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.

-2-

<PAGE> 3

4. LIQUIDATION. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.

B. PREFERRED STOCK.

Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.

Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption privileges
and liquidation preferences, as shall be stated and expressed in such
resolutions, all to the full extent now or hereafter permitted by the General
Corporation Law of Delaware. Without limiting the generality of the foregoing,
the resolutions providing for issuance of any series of Preferred Stock may
provide that such series shall be superior or rank equally or be junior to the
Preferred Stock of any other series to the extent permitted by law. Except as
otherwise provided in this Restated Certificate of Incorporation, no vote of the
holders of the Preferred Stock or Common Stock shall be a prerequisite to the
designation or issuance of any shares of any series of the Preferred Stock
authorized by and complying with the conditions of this Restated Certificate of
Incorporation, the right to have such vote being expressly waived by all present
and future holders of the capital stock of the Corporation.

FIFTH. The Corporation shall have a perpetual existence.

SIXTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided that the Board of Directors is expressly
authorized to adopt, amend or repeal the Bylaws of the Corporation.

SEVENTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable

-3-

<PAGE> 4

jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any promise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.

EIGHTH. Except to the extent that the General Corporation Law of the
State of Delaware prohibits the elimination or limitation of liability of
directors for breaches of fiduciary duty, no director of the Corporation shall
be personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty as a director, notwithstanding any provision of
law imposing such liability. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment.

NINTH. 1. ACTION, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE
RIGHT OF THE CORPORATION. The Corporation shall indemnify each person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement,

-4-

<PAGE> 5

conviction or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Notwithstanding anything to the contrary in this Article, except as set forth in
Section 6 below, the Corporation shall not indemnify an Indemnitee seeking
indemnification in connection with a proceeding (or part thereof) initiated by
the Indemnitee unless the initiation thereof was approved by the Board of
Directors of the Corporation.

2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of Delaware shall determine upon application that, despite the
adjudication of such liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
(including attorneys' fees) which the Court of Chancery of Delaware shall deem
proper.

3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding the other provisions of this Article, to the extent that an
Indemnitee has been successful, on the merits or otherwise, in defense of any
action, suit or proceeding referred to in Sections 1 and 2 of this Article, or
in defense of any claim, issue or matter therein, or on appeal from any such
action, suit or proceeding, he shall be indemnified against all expenses
(including attorneys' fees) actually and reasonably incurred by him or on his
behalf in connection therewith. Without limiting the foregoing, if any action,
suit or proceeding is disposed of, on the merits or otherwise (including a
disposition without prejudice), without (i) the disposition being adverse to the
Indemnitee, (ii) an adjudication that the Indemnitee was liable to the
Corporation, (iii) a plea of guilty or NOLO CONTENDERE by the Indemnitee, (iv)
an adjudication that the Indemnitee did not act in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and (v) with respect to any criminal proceeding,

-5-

<PAGE> 6

an adjudication that the Indemnitee had reasonable cause to believe his conduct
was unlawful, the Indemnitee shall be considered for the purposes hereof to have
been wholly successful with respect thereto.

4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to
his right to be indemnified, the Indemnitee must notify the Corporation in
writing as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Section 4. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.

5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6
below, in the event that the Corporation does not assume the defense pursuant to
Section 4 of this Article of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom shall
be paid by the Corporation in advance of the final disposition of such matter;
PROVIDED, HOWEVER, that the payment of such expenses incurred by an Indemnitee
in advance of the final disposition of such matter shall be made only upon
receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts
so advanced in the event that it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the Corporation as authorized in
this Article. Such undertaking shall be accepted without reference to the
financial ability of the Indemnitee to make such repayment.

-6-

<PAGE> 7

6. PROCEDURE FOR INDEMNIFICATION. In order to obtain
indemnification or advancement of expenses pursuant to Section 1, 2, 3 or 5 of
this Article, the Indemnitee shall submit to the Corporation a written request,
including in such request such documentation and information as is reasonably
available to the Indemnitee and is reasonably necessary to determine whether and
to what extent the Indemnitee is entitled to indemnification or advancement of
expenses. Any such indemnification or advancement of expenses shall be made
promptly, and in any event within 60 days after receipt by the Corporation of
the written request of the Indemnitee, unless with respect to requests under
Section 1, 2 or 5 the Corporation determines, by clear and convincing evidence,
within such 60-day period that the Indemnitee did not meet the applicable
standard of conduct set forth in Section 1 or 2, as the case may be. Such
determination shall be made in each instance by (a) a majority vote of the
directors of the Corporation consisting of persons who are not at that time
parties to the action, suit or proceeding in question ("disinterested
directors"), even though less than a quorum, (b) a majority vote of a committee
of disinterested directors designated by a majority vote of disinterested
directors, whether or not a quorum, (c) a majority vote of a quorum of the
outstanding shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum shall consist of stockholders who are not
at that time parties to the action, suit or proceeding in question, (d)
independent legal counsel (who may be regular legal counsel to the Corporation),
or (e) a court of competent jurisdiction.

7. REMEDIES. The right to indemnification or advances as granted
by this Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise provided by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation. Neither the failure of the Corporation
to have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.

8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of
this Article or of the relevant provisions of the General Corporation Law of
Delaware or any other applicable laws shall affect or diminish in any way the
rights of any Indemnitee to indemnification under the provisions hereof with
respect to any action, suit, proceeding or investigation arising out of or
relating to any actions, transactions

-7-

<PAGE> 8

or facts occurring prior to the final adoption of such amendment, termination or
repeal.

9. OTHER RIGHTS. The indemnification and advancement of expenses
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.

10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under
any provision of this Article to indemnification by the Corporation for some or
a portion of the expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with any action, suit, proceeding or investigation and any
appeal, therefrom but not, however, for the total amount thereof, the
Corporation shall nevertheless indemnify the Indemnitee for the portion of such
expenses (including attorneys' fees), judgments, fines or amounts paid in
settlement to which the Indemnitee is entitled.

11. INSURANCE. The Corporation may purchase and maintain
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the Corporation or another corporation, partnership, joint venture,
trust or other enterprise (including any employee benefit plan) against any
expense, liability or loss incurred by him in any such capacity, or arising out
of his status as such, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the General
Corporation law of Delaware.

12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.

-8-

<PAGE> 9

13. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees) judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.

14. DEFINITIONS. Terms used herein and defined in Section 145(h)
and Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).

15. SUBSEQUENT LEGISLATION. If the General Corporation Law of
Delaware is amended after adoption of this Article to expand further the
indemnification permitted to Indemnitees, then the Corporation shall indemnify
such persons to the fullest extent permitted by the General Corporation Law of
Delaware, as so amended.

TENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed by statute and this Restated Certificate
of Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.

ELEVENTH. This Article is inserted for the management of the business
and for the conduct of the affairs of the Corporation.

1. NUMBER OF DIRECTORS. The number of directors of the
Corporation shall not be less than three. The exact number of directors within
the limitations specified in the preceding sentence shall be fixed from time to
time by, or in the manner provided in, the Corporation's Bylaws.

2. CLASSES OF DIRECTORS. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. No director shall
be elected or appointed to a class if, as a result, one class shall have more
than one director more than any other class. If a fraction is contained in the
quotient arrived at by dividing the designated number of directors by three,
then, if such fraction is one-third, the extra director shall be a member of
Class I, and if such fraction is two-thirds, one of the extra directors shall be
a member of Class I and one of the extra directors shall be a member of Class
II, unless otherwise provided from time to time by resolution adopted by the
Board of Directors.

3. ELECTION OF DIRECTORS. Elections of directors need not be by
written ballot except as and to the extent provided in the Bylaws of the
Corporation.

-9-

<PAGE> 10

4. TERMS OF OFFICE. Each director (other than a director elected
to fill a vacancy in accordance with Section 8) shall serve for a term ending on
the date of the third annual meeting following the annual meeting at which such
director was elected; PROVIDED, that each initial director in Class I shall
serve for a term ending on the date of the annual meeting in 1999; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting in 2000; and each initial director in Class III shall serve for a term
ending on the date of the annual meeting in 2001; and PROVIDED, FURTHER, that
the term of each director shall be subject to the election and qualification of
his successor and to his earlier death, resignation or removal.

5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF
INCREASES OR DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase
or decrease in the authorized number of directors, (i) each director then
serving as such shall nevertheless continue as a director of the class of which
he is a member and (ii) the newly created or eliminated directorships resulting
from such increase or decrease shall be apportioned by the Board of Directors
among the three classes of directors so as to ensure that no one class has more
than one director more than any other class. To the extent possible, consistent
with the foregoing rule, any newly created directorships shall be added to those
classes whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.

6. QUORUM; ACTION AT MEETING. A majority of the directors at any
time in office shall constitute a quorum for the transaction of business. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each director so
disqualified, provided that in no case shall less than one-third of the number
of directors fixed pursuant to Section 1 above constitute a quorum. If at any
meeting of the Board of Directors there shall be less than such a quorum, a
majority of those present may adjourn the meeting from time to time. Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the Board
of Directors unless a greater number is required by law, by the Bylaws of the
Corporation or by this Restated Certificate of Incorporation.

7. REMOVAL. Directors of the Corporation may be removed only for
cause by the affirmative vote of the holders of at least two-thirds of the
shares of capital stock of the Corporation issued and outstanding and entitled
to vote.

8. VACANCIES. Any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the board, shall
be filled only by a vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. A director elected to fill
a vacancy shall be elected to

-10-

<PAGE> 11

hold office until the next election of the class for which such director shall
have been chosen, subject to the election and qualification of his successor and
to his earlier death, resignation or removal.

9. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC.

Advance notice of stockholder nominations for election of directors and other
business to be brought by stockholders before a meeting of stockholders shall be
given in the manner provided by the Bylaws of the Corporation.

10. AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of
law, this Restated Certificate of Incorporation or the Bylaws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
ELEVENTH.

TWELFTH. Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting. Notwithstanding any other provisions of
law, this Restated Certificate of Incorporation or the Bylaws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
TWELFTH.

THIRTEENTH. Special meetings of stockholders may be called at any time
only by the Chairman of the Board of Directors, the Chief Executive Officer (or
if there is no Chief Executive Officer, the President) or the Board of
Directors. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting. Notwithstanding any other provision of law, this Restated Certificate
of Incorporation or the Bylaws of the Corporation, each as amended, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
shares of capital stock of the Corporation issued and outstanding and entitled
to vote shall be required to amend or repeal, or to adopt any provision
inconsistent with, this Article THIRTEENTH.

-11-

<PAGE> 12

IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Restated Certificate of Incorporation to be signed by
its President and Chief Executive Officer this ____ day of ___________, 1998.

ASPECT MEDICAL SYSTEMS, INC.

By:
----------------------------------------
Nassib G. Chamoun
President and Chief Executive Officer

-12-

<PAGE> 1

EXHIBIT 5

[HALE AND DORR LLP LETTERHEAD]

July 23, 1998

Aspect Medical Systems, Inc.
2 Vision Drive
Natick, MA 01760

Re: Registration Statement on Form S-1
----------------------------------

Ladies and Gentlemen:

This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-57739) (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of 3,565,000 shares of Common Stock, $0.01 par value per share (the "Shares"),
of Aspect Medical Systems, Inc., a Delaware corporation (the "Company"),
including 465,000 Shares issuable upon exercise of an over-allotment option
granted by the Company.

The Shares are to be sold by the Company pursuant to an underwriting
agreement (the "Underwriting Agreement") to be entered into by and among the
Company, BT Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Piper Jaffray Inc., as representatives of the several
underwriters named in the Underwriting Agreement, the form of which has been
filed as Exhibit 1 to the Registration Statement.

We are acting as counsel for the Company in connection with the issue
and sale by the Company of the Shares. We have examined signed copies of the
Registration Statement as filed with the Commission. We have also examined and
relied upon the Underwriting Agreement, minutes of meetings of the stockholders
and the Board of Directors of the Company as provided to us by the Company,
stock record books of the Company as provided to us by the Company, the
Certificate of Incorporation and By-Laws of the Company, each as restated and/or
amended to date, and such other documents as we have deemed necessary for
purposes of rendering the opinions hereinafter set forth.

In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.

<PAGE> 2

Aspect Medical Systems, Inc.
July 23, 1998
Page 2

We assume that the appropriate action will be taken, prior to the offer
and sale of the Shares in accordance with the Underwriting Agreement, to
register and qualify the Shares for sale under all applicable state securities
or "blue sky" laws.

We express no opinion herein as to the laws of any state or
jurisdiction other than the state laws of the Commonwealth of Massachusetts, the
Delaware General Corporation Law statute and the federal laws of the United
States of America.

Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and, when the Shares are issued
and paid for in accordance with the terms and conditions of the Underwriting
Agreement, the Shares will be validly issued, fully paid and nonassessable.

It is understood that this opinion is to be used only in connection
with the offer and sale of the Shares while the Registration Statement is in
effect.

Please note that we are opining only as to the matters expressly set
forth herein, and no opinion should be inferred as to any other matters.

We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.

Very truly yours,

/s/ Hale and Dorr LLP
--------------------------------------
HALE AND DORR LLP

<PAGE> 1
Exhibit 10.1

ASPECT MEDICAL SYSTEMS, INC.

1998 DIRECTOR STOCK OPTION PLAN

1. Purpose.

The purpose of this 1998 Director Stock Option Plan (the "Plan") of
Aspect Medical Systems, Inc. (the "Company") is to advance the interests of the
Company's stockholders by enhancing the Company's ability to attract, retain and
motivate outside directors of the Company by providing such directors with
equity ownership opportunities and thereby better aligning the interests of such
directors with those of the Company's stockholders.

2. Administration.

The Board of Directors of the Company (the "Board") shall supervise and
administer the Plan. Grants of stock options under the Plan and the amount and
nature of the awards to be granted shall be automatic in accordance with Section
5. However, all questions concerning interpretation of the Plan or any options
granted under it shall be resolved by the Board. The Board shall have authority
to adopt, amend and repeal such administrative rules, guidelines and practices
relating to the Plan as it shall deem advisable. The Board may correct any
defect, supply any omission or reconcile any inconsistency in the Plan or any
option in the manner and to the extent it shall deem expedient to carry the Plan
into effect and it shall be the sole and final judge of such expediency. No
member of the Board shall be liable for any action or determination relating to
the Plan. All decisions by the Board shall be made in the Board's sole
discretion and shall be final and binding on all persons having or claiming any
interest in the Plan or in any option granted pursuant to the Plan. No director
or person acting pursuant to the authority delegated by the Board shall be
liable for any action or determination under the Plan made in good faith.

3. Participation in the Plan.

Directors of the Company who are not full-time employees of the Company
or any subsidiary of the Company ("outside directors") shall be eligible to
receive options under the Plan.
<PAGE> 2
4. Stock Subject to the Plan.

(a) The maximum number of shares of the Company's Common Stock, par
value $.01 per share ("Common Stock"), which may be issued under the Plan shall
be 100,000 shares, subject to adjustment as provided in Section 7.

(b) If any outstanding option under the Plan for any reason expires or
is terminated, surrendered or canceled without having been exercised in full or
is forfeited in whole or in part or results in any Common Stock not being
issued, the shares covered by the unexercised portion of such option shall again
become available for issuance pursuant to the Plan. Shares issued under the Plan
may consist in whole or in part of authorized but unissued shares or treasury
shares.

(c) All options granted under the Plan shall be non-statutory options
not entitled to special tax treatment under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code").

5. Terms, Conditions and Form of Options.

Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board shall from time to time approve, which
agreements may contain terms and conditions in addition to but not inconsistent
with those set forth in the Plan.

(a) Option Grant Dates. Subject to adjustment as provided in Section 7,
options shall automatically be granted to all eligible outside directors as
follows:

(i) each person who is an eligible outside director on

April 1, 1998 (the "Initial Grant Date") shall be granted an option (the
"Initial Option") to purchase 10,000 shares of Common Stock on the Initial Grant
Date; provided, however, that Lester J. Lloyd and Donald Stanski shall not be
eligible to receive such option pursuant to the terms of this Section 5(a)(i);

(ii) each person who first becomes an eligible outside
director after the Initial Grant Date shall be granted an Initial Option to
purchase 10,000 shares of Common Stock on the date of his or her initial
election or appointment to the Board; and

(iii) each eligible outside director shall be granted an
additional option (the "Additional Option") to purchase 5,000 shares of Common
Stock as follows (each such date referred to herein as an "Additional Option
Grant Date"): (x) prior to the Company's initial public offering of Common Stock
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "IPO"), on May 1 of each year, commencing May 1, 1999,
provided that he or she is

-2-
<PAGE> 3
an eligible director on such date, and provided further that the Additional
Option Grant Date is at least six months after he or she received an Initial
Option, and (y) following the IPO, on the date of each Annual Meeting of
Stockholders of the Company commencing with the first Annual Meeting of
Stockholders following the IPO, provided that he or she is an eligible director
immediately prior to such Annual Meeting and continues to serve as a director
immediately following such Annual Meeting, and provided further that the
Additional Option Grant Date is at least six months after he or she received an
Initial Option.

(b) Option Exercise Price. The option exercise price per share of
Common Stock for each option granted under the Plan shall equal (i) the last
reported sales price per share of Common Stock on the Nasdaq National Market
(or, if the Company is traded on a nationally recognized securities exchange on
the date of grant, the reported closing sales price per share of Common Stock by
such exchange) on the date of grant (or if no such price is reported on such
date such price as reported on the nearest preceding day) or (ii) if the Common
Stock is not traded on the Nasdaq National Market or such an exchange, the fair
market value per share of Common Stock on the date of grant as determined by the
Board.

(c) Options Non-Transferable. Except as the Board may otherwise
determine or provide in an option agreement, any option granted under the Plan
to an optionee shall not be sold, assigned, transferred, pledged or otherwise
encumbered by the person to whom it was granted, either voluntarily or by
operation of law, other than by will or the laws of descent and distribution and
shall be exercisable during the optionee's lifetime only by the optionee or the
optionee's guardian or legal representative.

(d) Exercise Period.

(i) Initial Options. Each Initial Option granted pursuant to
Section 5(a)(i) and (ii) of the Plan shall immediately become exercisable as to
50% of the shares subject to the option on the date such option was granted and
one-sixth of the shares shall become exercisable on each of the first, second
and third anniversaries of the date such option was granted so that such option
shall be fully exercisable three (3) years after the date such option was
granted; provided, however, that the optionee continues to serve as a director
on each such date.

(ii) Additional Options. Each Additional Option granted
pursuant to Section 5(a)(iii) of the Plan shall become exercisable in three
equal annual installments on each of the first, second and third anniversaries
of the date such option was granted so that such option shall be fully
exercisable three (3) years after the date such option was granted; provided,
however, that the optionee continues to serve as a director on each such date.

-3-
<PAGE> 4
(iii) No Fractional Shares. In the event that the vesting
schedule set forth in this Section 5(d) produces a fractional number of shares
issuable upon exercise of such option, the optionee shall receive one less share
on the first anniversary of the date such option was granted than such optionee
shall receive on the second and third anniversaries of the date such option was
granted.

(iv) Board Action. The Board may at any time provide that any
options granted under the Plan become immediately exercisable in full or in
part.

(e) Termination. Each option shall terminate, and may no longer be
exercised, on the earlier of the date (i) 10 years after the date such option
was granted or (ii) 60 days after the optionee ceases to serve as a director of
the Company; provided that, in the event an optionee ceases to serve as a
director due to his or her death or disability (within the meaning of Section
22(e)(3) of the Code or any successor provision), then the exercisable portion
of the option may be exercised within the period of 180 days following the date
the optionee ceases to serve as a director (but in no event later than 10 years
after the date such option was granted) by the optionee or by the person to whom
the option is transferred by will, by the laws of descent and distribution, or
by written notice pursuant to Section 5(g).

(f) Exercise Procedure. An option may be exercised only by written
notice to the Company at its principal office accompanied by payment of the full
consideration for the shares as to which the option is exercised. Such payment
may be made as follows:

(i) in cash or by check, payable to the order of the Company;

(ii) by delivery of a promissory note of the optionee to the
Company on terms determined by the Board;

(iii) by payment of such other lawful consideration as the
Board may determine; or

(iv) any combination of the above permitted forms of payment.

(g) Exercise by Representative Following Death of Director. An
optionee, by written notice to the Company, may designate one or more persons
(and from time to time change such designation), including his or her legal
representative, who, by reason of the optionee's death, shall acquire the right
to exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do so within
the term of the option as provided herein. Any exercise by a representative
shall be subject to the provisions of the Plan.

6. Limitation of Rights.

-4-
<PAGE> 5
(a) No Right to Continue as a Director. Neither the Plan, nor the
granting of an option nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Company will retain the optionee as a director for any period of time.

(b) No Stockholder Rights for Options. No optionee nor a designated
beneficiary thereof shall have any rights as a stockholder with respect to any
shares of Common Stock to be distributed with respect to an option until
becoming the record holder of such shares.

7. Adjustment to Common Stock.

In the event of any stock split, stock dividend, recapitalization,
reorganization, merger, consolidation, combination, exchange of shares,
liquidation, spin-off or other similar change in capitalization or event, or any
distribution to holders of Common Stock other than a normal cash dividend, (i)
the number and class of securities available under this Plan, (ii) the number
and class of securities subject to future option grants, and (iii) the number
and class of securities and exercise price per share subject to each outstanding
option shall be appropriately adjusted by the Company (or substituted options
may be made, if applicable) to the extent the Board shall determine, in good
faith, that such an adjustment (or substitution) is necessary and appropriate.
If this Section 7 applies and Section 8 also applies to any event, Section 8
shall be applicable to such event, and this Section 7 shall not be applicable.

8. Modification, Extension and Renewal of Options.

The Board shall have the power to modify or amend outstanding options;
provided, however, that no modification or amendment may (i) have the effect of
altering or impairing any rights or obligations of any option previously granted
without the consent of the optionee, or (ii) modify the number of shares of
Common Stock subject to the option (except as provided in Section 7).

9. Amendment of the Plan.

The Board may amend, suspend or terminate the Plan or any portion
thereof at any time, provided that no amendment shall be made without
stockholder approval if such approval is necessary to comply with any applicable
tax or regulatory requirements. Amendments requiring stockholder approval shall
become effective when adopted by the Board.

10. Withholding.

Each optionee shall pay to the Company, or make provision satisfactory
to the Board for payment of, any taxes required by law to be withheld in
connection with

-5-
<PAGE> 6
options granted under the Plan to such optionee no later than the date of the
event creating the tax liability. The Board may allow optionees to satisfy such
tax obligations in whole or in part in shares of Common Stock, including shares
retained from the option creating the tax obligation, valued at their fair
market value as determined by the Board in good faith. The Company may, to the
extent permitted by law, deduct any such tax obligations from any payment of any
kind otherwise due to an optionee.

11. Notice.

Any written notice to the Company required by any of the provisions of
the Plan shall be addressed to the Treasurer of the Company and shall become
effective when it is received.

12. Governing Law.

The provisions of the Plan, all determinations made and actions taken
pursuant hereto and all options made hereunder shall be governed by and
interpreted in accordance with the laws of the State of Delaware, without regard
to any applicable conflicts of law.

13. Effective Date and Term of Plan.

The Plan shall become effective on the date of approval by the
stockholders of the Company. No options shall be granted under the Plan after
the completion of ten years from the earlier of (i) the date on which the Plan
was adopted by the Board or (ii) the date the Plan was approved by the Company's
stockholders, but options previously granted may extend beyond that date.

Adopted by the Board on February 6, 1998

Approved by the stockholders as of February 13, 1998

-6-
<PAGE> 7

ASPECT MEDICAL SYSTEMS, INC.

AMENDMENT TO

1998 DIRECTOR STOCK OPTION PLAN

The 1998 Director Stock Option Plan (the "Director Stock Option Plan") of Aspect
Medical Systems, Inc. be and hereby is amended as follows:

1. The date "April 1, 1998" in the first line of Section 5(a)(i) of the
Director Stock Option Plan be and hereby is deleted and replaced with
the date "April 14, 1998."

2. Sections 5(d)(i) and (ii) of the Director Stock Option Plan are hereby
deleted and new Sections 5(d)(i) and (ii) are inserted in lieu thereof
which read as follows:

"(i) INITIAL OPTIONS. Except as provided in 5(f) below, each
Initial Option granted pursuant to Section 5(a)(i) and (ii) of the
Plan shall immediately become exercisable as to 50% of the shares
subject to the option on the date such option was granted and
one-sixth of the shares shall become exercisable on each of the first,
second and third anniversaries of the date such option was granted so
that such option shall be fully exercisable three (3) years after the
date such option was granted; provided, however, that the optionee
continues to serve as a director on each such date.

(ii) ADDITIONAL OPTIONS. Except as provided in 5(f) below, each
Additional Option granted pursuant to Section 5(a)(iii) of the Plan
shall become exercisable in three equal annual installments on each of
the first, second and third anniversaries of the date such option was
granted so that such option shall be fully exercisable three (3) years
after the date such option was granted; provided, however, that the
optionee continues to serve as a director on each such date."

3. A new Section 5(f) is hereby added to the Director Option Plan which
reads as follows:

"(f) ACQUISITION AND CHANGE IN CONTROL EVENTS

(1) DEFINITIONS

(a) An "Acquisition Event" shall mean:

(i) any merger or consolidation of the Company with
or into another entity as a result of
<PAGE> 8

which the Common Stock is converted into or
exchanged for the right to receive cash,
securities or other property; or

(ii) any exchange of shares of the Company for cash,
securities or other property pursuant to a
statutory share exchange transaction.

(b) A "Change in Control Event" shall mean:

(i) the acquisition by an individual, entity or group
(within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of
beneficial ownership of any capital stock of the
Company if, after such acquisition, such Person
beneficially owns (within the meaning of Rule
13d-3 promulgated under the Exchange Act)
30% or more of either (x) the then-outstanding
shares of common stock of the Company (the
"Outstanding Company Common Stock") or (y) the
combined voting power of the then-outstanding
securities of the Company entitled to vote
generally in the election of directors (the
"Outstanding Company Voting Securities");
PROVIDED, HOWEVER, that for purposes of this
subsection (i), the following acquisitions shall
not constitute a Change in Control Event: (A) any
acquisition directly from the Company (excluding
an acquisition pursuant to the exercise,
conversion or exchange of any security
exercisable for, convertible into or exchangeable
for common stock or voting securities of the
Company, unless the Person exercising, converting
or exchanging such security acquired such
security directly from the Company or an
underwriter or agent of the Company), (B) any
acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company, or (C) any acquisition by any
corporation pursuant to a Business Combination
(as defined below) which complies with clauses
(x) and (y) of

<PAGE> 9
subsection (iii) of this definition; or

(ii) such time as the Continuing Directors (as defined
below) do not constitute a majority of the Board
(or, if applicable, the Board of Directors of a
successor corporation to the Company), where the
term "Continuing Director" means at any date a
member of the Board (x) who was a member of the
Board on the date of the initial adoption of this
Plan by the Board or (y) who was nominated or
elected subsequent to such date by at least a
majority of the directors who were Continuing
Directors at the time of such nomination or
election or whose election to the Board was
recommended or endorsed by at least a majority of
the directors who were Continuing Directors at
the time of such nomination or election;
PROVIDED, HOWEVER, that there shall be excluded
from this clause (y) any individual whose initial
assumption of office occurred as a result of an
actual or threatened election contest with
respect to the election or removal of directors
or other actual or threatened solicitation of
proxies or consents, by or on behalf of a person
other than the Board; or

(iii) the consummation of a merger, consolidation,
reorganization or statutory share exchange
involving the Company or a sale or other
disposition of all or substantially all of the
assets of the Company (a "Business Combination"),
unless, immediately following such Business
Combination, each of the following two conditions
is satisfied: (x) all or substantially all of the
individuals and entities who were the beneficial
owners of the Outstanding Company Common Stock
and Outstanding Company Voting Securities
immediately prior to such Business Combination
beneficially own, directly or indirectly, more
than 50% of the then-outstanding shares of
common stock and the combined voting power of the
then-outstanding securities entitled to vote

<PAGE> 10
generally in the election of directors,
respectively, of the resulting or acquiring
corporation in such Business Combination (which
shall include, without limitation, a corporation
which as a result of such transaction owns the
Company or substantially all of the Company's
assets either directly or through one or more
subsidiaries) (such resulting or acquiring
corporation is referred to herein as the
"Acquiring Corporation") in substantially the
same proportions as their ownership of the
Outstanding Company Common Stock and Outstanding
Company Voting Securities, respectively,
immediately prior to such Business Combination
and (y) no Person (excluding the Acquiring
Corporation or any employee benefit plan (or
related trust) maintained or sponsored by the
Company or by the Acquiring Corporation)
beneficially owns, directly or indirectly, 30% or
more of the then-outstanding shares of common
stock of the Acquiring Corporation, or of the
combined voting power of the then- outstanding
securities of such corporation entitled to vote
generally in the election of directors (except to
the extent that such ownership existed prior to
the Business Combination).

(2) EFFECT ON OPTIONS

(a) ACQUISITION EVENT. Upon the occurrence of an
Acquisition Event (regardless of whether such event
also constitutes a Change in Control Event), or the
execution by the Company of any agreement with respect
to an Acquisition Event (regardless of whether such
event will result in a Change in Control Event), the
Board shall provide that all outstanding options shall
be assumed, or equivalent options shall be substituted,
by the acquiring or succeeding corporation (or an
affiliate thereof); PROVIDED THAT if such Acquisition
Event also constitutes a Change in Control Event,
except to the extent specifically provided to the
contrary in the instrument evidencing any option or any
other

<PAGE> 11

agreement between an optionee and the Company, such
assumed or substituted options shall be immediately
exercisable in full upon the occurrence of such
Acquisition Event. For purposes hereof, an option shall
be considered to be assumed if, following consummation
of the Acquisition Event, the option confers the right
to purchase, for each share of Common Stock subject to
the option immediately prior to the consummation of the
Acquisition Event, the consideration (whether cash,
securities or other property) received as a result of
the Acquisition Event by holders of Common Stock for
each share of Common Stock held immediately prior to
the consummation of the Acquisition Event (and if
holders were offered a choice of consideration, the
type of consideration chosen by the holders of a
majority of the outstanding shares of Common Stock);
provided, however, that if the consideration received
as a result of the Acquisition Event is not solely
common stock of the acquiring or succeeding corporation
(or an affiliate thereof), the Company may, with the
consent of the acquiring or succeeding corporation,
provide for the consideration to be received upon the
exercise of options to consist solely of common stock
of the acquiring or succeeding corporation (or an
affiliate thereof) equivalent in fair market value to
the per share consideration received by holders of
outstanding shares of Common Stock as a result of the
Acquisition Event.

Notwithstanding the foregoing, if the acquiring or
succeeding corporation (or an affiliate thereof) does not
agree to assume, or substitute for, such options, then the
Board shall, upon written notice to the optionees, provide
that all then unexercised options will become exercisable in
full as of a specified time prior to the Acquisition Event
and will terminate immediately prior to the consummation of
such Acquisition Event, except to the extent exercised by
the optionees before the consummation of such Acquisition
Event; provided, however, in the event of an Acquisition
Event under the terms of which holders of Common Stock will
receive upon consummation thereof a cash payment for each
share of Common Stock surrendered pursuant to such
Acquisition Event (the "Acquisition Price"), then the

<PAGE> 12
Board may instead provide that all outstanding options shall
terminate upon consummation of such Acquisition Event and
that each optionee shall receive, in exchange therefor, a
cash payment equal to the amount (if any) by which (A) the
Acquisition Price multiplied by the number of shares of
Common Stock subject to such outstanding options (whether or
not then exercisable), exceeds (B) the aggregate exercise
price of such options.

(b) CHANGE IN CONTROL EVENT THAT IS NOT AN ACQUISITION
EVENT. Upon the occurrence of a Change in Control Event
that does not also constitute an Acquisition Event,
except to the extent specifically provided to the
contrary in the instrument evidencing any option or any
other agreement between a optionee and the Company, all
options then-outstanding shall automatically become
immediately exercisable in full."

Amended by the Board of Directors on
July 9, 1998

Approved by the Stockholders on
______________ __, 1998

<PAGE> 1

Exhibit 16

July 22, 1998

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Aspect Medical Systems, Inc.
--------------------------

Ladies and Gentlemen:

We have read the paragraph entitled "Change in Independent Public Accountants"
included in the Prospectus constituting part of the Registration Statement on
Form S-1 of Aspect Medical Systems, Inc. and are in agreement with the
statements contained therein.

Yours very truly,

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.

/s/ Arthur Andersen LLP

Boston, Massachusetts

July 22, 1998

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 3, 1996, relating to
the financial statements of Aspect Medical Systems, Inc. for the year ended
December 31, 1995, which appears in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedule for the year
ended December 31, 1995 listed under Item 16(b) of this Registration Statement
when such schedule is read in conjunction with the financial statements referred
to in our report. The audit referred to in such report also included this
schedule. We also consent to the references to us under the headings "Experts"
and "Selected Financial Information" in such Prospectus. However, it should be
noted that PricewaterhouseCoopers LLP has not prepared or certified such
"Selected Financial Information."

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
July 22, 1998