ASPECT MEDICAL SYSTEMS INC, S-1/A, 1999-10-06

ASPECT MEDICAL SYSTEMS INC
S-1/A, 1999-10-06
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1999

REGISTRATION NO. 333-86295

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

AMENDMENT NO. 1

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
(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 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 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,
please 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.
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<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

PROSPECTUS (Subject to Completion)

Issued ________ , 1999

LOGO
COMMON STOCK
------------------------

ASPECT MEDICAL SYSTEMS, INC. IS OFFERING SHARES OF COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND
$ PER SHARE.

------------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "ASPM."
------------------------

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 9.

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PRICE $ A SHARE
------------------------

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS ASPECT
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total.............................. $ $ $
</TABLE>

Aspect has granted the underwriters the right to purchase up to an additional
shares to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 1999.
------------------------
MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEXM BROWN
U.S. BANCORP PIPER JAFFRAY
, 1999.
<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 or BIS Module Kits and our 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.

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

The BIS Sensor is a 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 is designed to
facilitate the integration of the Company's BIS index into monitoring products
marketed by our original equipment manufacturer and distribution partners. The
BIS Module Kit consists of our proprietary digital signal converter and a small
circuit board that resides in the original equipment manufacturer equipment.

<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.................... 5
RISK FACTORS.......................... 9
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS.......................... 17
USE OF PROCEEDS....................... 18
DIVIDEND POLICY....................... 18
CAPITALIZATION........................ 19
DILUTION.............................. 20
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 22
</TABLE>

<TABLE>
<CAPTION>
PAGE
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<S> <C>
BUSINESS.............................. 31
MANAGEMENT............................ 46
RELATED-PARTY TRANSACTIONS............ 55
PRINCIPAL STOCKHOLDERS................ 57
DESCRIPTION OF CAPITAL STOCK.......... 60
SHARES ELIGIBLE FOR FUTURE SALE....... 63
UNDERWRITERS.......................... 65
LEGAL MATTERS......................... 67
EXPERTS............................... 67
WHERE YOU CAN FIND MORE INFORMATION... 67
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>

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

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted.

UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.

3
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[THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY]

4
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PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and related notes appearing
elsewhere in this prospectus.

ASPECT MEDICAL SYSTEMS, INC.

Clinical trials and routine clinical use of the BIS system have shown that
patient monitoring with the BIS system results in:

- lower drug costs,

- faster wake-up from anesthesia,

- less patient time in the operating room and the post-anesthesia care unit
following surgery,

- higher rates of outpatients bypassing the post-anesthesia care unit and
proceeding to a less costly step-down recovery area directly from the
operating room,

- improvements in the quality of recovery, and

- improvements in the means to assess the risk of surgical awareness, the
unintentional regaining of consciousness during surgery.

As of July 3, 1999, more than 3,450 BIS monitors have been installed
worldwide, including 3,226 BIS monitors in approximately 450 sites in the United
States. These sites include 29 of the 100 largest hospitals and 25% of all
teaching hospitals with anesthesia residency programs. We believe that over
650,000 patients have been monitored using the BIS index during 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. We estimate that approximately 70% of these surgical patients in the
United States, or 20 million patients, receive general anesthesia or deep
sedation monitored by an anesthesia provider. Anesthesia providers historically
have had no direct means of assessing a patient's level of consciousness during
surgery. They have generally relied on recommended drug dosages and on indirect
indicators of consciousness, including blood pressure and heart rate. This
approach cannot always account for variability in patient responses to
anesthesia or changes in anesthetic requirements during the course of surgery.
Consequently, traditional approaches to anesthesia may result in patients being
undermedicated or overmedicated during surgery.

Undermedication may lead to surgical awareness, which is the unintentional
regaining of consciousness during surgery. Overmedication may result from an
effort to ensure that the patient is rendered unconscious to reduce the risk of
surgical awareness. 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 post-anesthesia care
unit.

We market the BIS system in the United States primarily through a direct
sales organization and internationally through distributors and marketing
partners. We have also established original equipment manufacturer relationships
with several patient monitoring and anesthesia equipment companies that will
incorporate our BIS technology into their equipment using the BIS Module Kit.

5
<PAGE> 7

Aspect's objective is to establish the BIS system as a global standard in
anesthesia and sedation monitoring. Key elements of our strategy to accomplish
this objective are to:

- accelerate market penetration through a direct sales force,

- educate and promote the use of the BIS system through clinical
specialists,

- broaden distribution channels through original equipment manufacturer
relationships,

- maintain market leadership through continuous product improvements and
extensions, and

- target new product opportunities through technology development.

We are a Delaware corporation. Our principal executive offices are located
at Two Vision Drive, Natick, Massachusetts 01760 and our telephone number is
(508) 653-0603. Our World Wide Web site address is www.aspectms.com. The
information in the Web site is not incorporated by reference into this
prospectus.

BIS, Bispectral Index, A-1050, A-2000 and Zipprep are our trademarks.
Aspect is a registered trademark licensed to us on a non-exclusive basis. This
prospectus also contains trademarks and trade names of other companies.

6
<PAGE> 8
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THE OFFERING

<TABLE>
<S> <C>
Common stock offered................................. shares
Common stock to be outstanding after this offering... shares
Over-allotment option................................ shares
Use of proceeds...................................... For general corporate purposes, including
working capital and capital expenditures. For
more detailed information, see "Use of
Proceeds" on page 18.
Dividend policy...................................... We do not intend to pay cash dividends on our
common stock. We plan to retain any earnings
for use in the operation and expansion of our
business.
Proposed Nasdaq National Market symbol............... ASPM
</TABLE>

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

Unless otherwise specifically stated, the information throughout this
prospectus does not take into account the possible issuance of additional shares
of common stock to the underwriters pursuant to their rights to purchase
additional shares to cover over-allotments. The information in this prospectus
reflects the conversion of all outstanding shares of our convertible preferred
stock into 11,067,238 shares of common stock.

The number of shares of our common stock that will be outstanding
immediately after the offering excludes 2,172,300 shares issuable upon the
exercise of stock options with a weighted average exercise price of $3.08 per
share and warrants to purchase 192,902 shares of common stock with an exercise
price of $12.50 per share.

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7
<PAGE> 9

SUMMARY CONSOLIDATED FINANCIAL DATA

The following is a summary of financial data included elsewhere in the
prospectus. The information provided for the six months ended July 4, 1998 and
July 3, 1999 and as of July 3, 1999 actual and pro forma as adjusted is
unaudited, but in the opinion of management contains all adjustments, consisting
only of normal, recurring adjustments, which are necessary for a fair statement
of the results of these periods. You should read the following data with the
more detailed information contained in "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our consolidated financial statements appearing elsewhere in
this prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------
--------------------------------------------------- JULY 4, JULY 3,
1994 1995 1996 1997 1998 1998 1999
-------- -------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue....................... $ 852 $ 1,067 $ 1,389 $ 3,068 $ 11,238 $ 4,420 $11,712
Costs of revenue.............. 525 704 1,096 3,602 5,880 2,662 4,236
Research and development...... 2,311 2,870 2,338 2,603 4,042 1,942 2,346
Sales and marketing........... 1,291 1,285 1,561 4,813 10,354 4,670 7,566
General and administrative.... 1,216 1,815 1,871 2,358 4,254 1,960 2,293
-------- -------- ------- -------- -------- ------- -------
Loss from operations.......... (4,491) (5,607) (5,477) (10,308) (13,292) (6,814) (4,729)
Interest income, net.......... 231 61 81 422 459 297 644
Other expense................. -- -- -- -- (774) -- --
-------- -------- ------- -------- -------- ------- -------
Net loss...................... $ (4,260) $ (5,546) $(5,396) $ (9,886) $(13,607) $(6,517) $(4,085)
======== ======== ======= ======== ======== ======= =======
Net loss per share:
Basic and diluted........... $(822.34) $(281.65) $(57.76) $ (15.63) $ (11.70) $ (6.34) $ (2.79)
======== ======== ======= ======== ======== ======= =======
Pro forma basic and
diluted.................. $ (1.31) $ (0.33)
======== =======
Shares used in computing net
loss per share:
Basic and diluted........... 5 20 93 632 1,163 1,028 1,463
Pro forma basic and
diluted.................. 10,352 12,530
</TABLE>

Shares used in computing pro forma basic and diluted net loss per share
above exclude unvested shares of common stock subject to repurchase rights,
which totaled 386,642 and 237,831 at December 31, 1998 and at July 3, 1999,
respectively, but include 11,067,238 shares of common stock issuable upon
conversion of our outstanding convertible preferred stock upon the closing of
this offering.

The pro forma as adjusted column in the consolidated balance sheet data
below gives effect to the conversion of our outstanding convertible preferred
stock into common stock upon the closing of this offering and the sale of
shares of common stock in this offering at an assumed initial public
offering price of $ per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us.

<TABLE>
<CAPTION>
JULY 3, 1999
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 16,111 $
Working capital............................................. 11,217
Total assets................................................ 27,083
Long-term debt.............................................. 1,081
Total stockholders' equity.................................. 15,750
</TABLE>

8
<PAGE> 10

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. Our business, financial condition or operating results
could be materially adversely affected by any of these risks. The trading price
of our common stock could decline due to any of these risks, and you may lose
all or part of your investment.

RISKS RELATED TO OUR BUSINESS

WE WILL NOT BE PROFITABLE IF HOSPITALS AND ANESTHESIA PROVIDERS DO NOT BUY AND
USE OUR BIS SYSTEM IN SUFFICIENT QUANTITIES.

Customers may determine that the cost of the BIS system exceeds cost
savings in drugs, personnel and post-anesthesia care recovery resulting from use
of the BIS system. In addition, hospitals and anesthesia providers may not
accept the BIS system as an accurate means of assessing a patient's level of
consciousness during surgery if patients regain consciousness during surgery
while being monitored with the BIS system. If extensive or frequent malfunctions
occur, these providers may also conclude that the BIS system is unreliable. If
hospitals and anesthesia providers do not accept the BIS system as
cost-effective, accurate or reliable, they will not buy and use the BIS system
in sufficient quantities to enable us to be profitable.

WE DEPEND ON OUR BIS SYSTEM FOR SUBSTANTIALLY ALL OF OUR REVENUE, AND IF THE
BIS SYSTEM DOES NOT GAIN WIDESPREAD MARKET ACCEPTANCE, THEN OUR REVENUE WILL NOT
GROW.

We began selling our current BIS system in early 1998. To date, we have not
achieved widespread market acceptance of the BIS system. Because we currently
depend on our BIS system for substantially all of our revenue and we have no
other significant products, if we fail to achieve widespread market acceptance
we will not be able to sustain or grow our product revenue.

WE EXPECT TO INCUR LOSSES IN THE FUTURE.

We have incurred net losses in each year since inception. We expect to
increase significantly our research and development, sales and marketing and
general and administrative expenses in future periods. We will spend these
amounts before we receive any incremental revenue from these efforts. Therefore,
our losses will be greater than the losses we would incur if we developed our
business more slowly. In addition, we may find that these efforts are more
expensive than we currently anticipate, which would further increase our losses.
Failure to become and remain profitable may depress the market price of our
common stock and our ability to raise capital and continue our operations.

CASES OF SURGICAL AWARENESS DURING MONITORING WITH THE BIS SYSTEM COULD LIMIT
MARKET ACCEPTANCE OF BIS SYSTEMS AND COULD EXPOSE US TO PRODUCT LIABILITY
CLAIMS.

Clinicians have reported to us a total of 24 cases of possible surgical
awareness during surgical procedures monitored with the BIS system. Not all
cases of surgical awareness during surgical procedures monitored with the BIS
system may be reported to us, and we have not systematically solicited reports
of surgical awareness. Anesthesia providers and hospitals may elect not to
purchase and use BIS systems if there is adverse publicity resulting from the
report of cases of surgical awareness that were not detected during procedures
monitored with the BIS system. If anesthesia providers and hospitals do not
purchase and use the BIS system, then we may not sustain or grow our product
revenue. Although we do not claim that patient monitoring with the BIS system
will reduce the incidence of surgical awareness, we may be subject to product
liability claims for cases of surgical awareness during surgical procedures
monitored with the BIS system. These claims could require us to spend
significant time and money in litigation or to pay significant damages.

9
<PAGE> 11

WE MAY NOT BE ABLE TO KEEP UP WITH NEW PRODUCTS OR ALTERNATIVE TECHNIQUES
DEVELOPED BY OTHERS, WHICH COULD IMPAIR OUR ABILITY TO REMAIN COMPETITIVE AND
ACHIEVE FUTURE GROWTH.

The medical industry in which we market our products is characterized by
rapid product development and technological advances. Our current or planned
products are at risk of obsolescence from:

- new monitoring products, based on new or improved technologies,

- new products or technologies used on patients or in the operating room
during surgery in lieu of monitoring devices,

- electrical or mechanical interference from new or existing products or
technologies,

- alternative techniques for evaluating the effects of anesthesia,

- significant changes in the methods of delivering anesthesia, and

- the development of new anesthetic agents.

We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our markets
and continue to grow our business.

IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE ENHANCED OR NEW PRODUCTS WE
COULD LOSE REVENUE OPPORTUNITIES AND CUSTOMERS.

As the market for our BIS system matures, we need to develop and introduce
new products for anesthesia monitoring or other applications. We face at least
the following risks:

- we may not successfully adapt the BIS system to function properly in the
intensive care unit, for procedural sedation, when used with anesthetics
we have not tested or with patient populations we have not studied, such
as infants and young children, and

- our technology is complex, and we may not be able to develop it further
for applications outside anesthesia monitoring.

If we do not successfully adapt the BIS system for new products and
applications both within and outside the field of anesthesia monitoring, then we
could lose revenue opportunities and customers.

IF WE DO NOT DEVELOP AND IMPLEMENT A SUCCESSFUL SALES AND MARKETING STRATEGY,
WE WILL NOT EXPAND OUR BUSINESS.

Our current sales and marketing operation is not sufficient to achieve the
level of market awareness and sales we need to expand our business. We have only
limited sales and marketing experience both in the United States and
internationally and may not be successful in developing and implementing our
strategy. We need to:

- provide or assure that distributors and original equipment manufacturers
provide the technical and educational support customers need to use the
BIS system successfully,

- promote frequent use of the BIS system so that sales of our disposable
BIS Sensors increase,

- encourage our customers to purchase our products prior to availability of
products that are made by original equipment manufacturers incorporating
our technology,

- manage geographically dispersed operations, and

- modify our products for foreign markets.

10
<PAGE> 12

IN ORDER TO REACH THE LEVEL OF SALES WE NEED TO ACHIEVE PROFITABILITY, WE NEED
TO FURTHER DEVELOP OUR DIRECT AND INDIRECT SALES CHANNELS.

In order to increase our sales, we need to add domestic and international
distributors, original equipment manufacturers and other sales channels and
increase sales through these channels. In addition, we need to hire and train
more sales persons and clinical specialists. If we do not further develop our
direct and indirect sales channels, we will not reach the level of sales
necessary to achieve profitability.

OUR THIRD-PARTY DISTRIBUTION AND ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
COULD NEGATIVELY AFFECT OUR PROFITABILITY, CAUSE SALES OF OUR PRODUCTS TO
DECLINE AND BE DIFFICULT TO TERMINATE IF WE ARE DISSATISFIED.

Sales through distributors could be less profitable than direct sales.
Sales of our products through multiple channels could also confuse customers and
cause the sale of our products to decline. We do not control our original
equipment manufacturers and distribution partners. Our partners could sell
competing products and may devote insufficient sales efforts to our products.

Our partners are generally not required to purchase minimum quantities. As
a result, even if we are dissatisfied with the performance of our partners, we
may be unable to terminate our agreements with these partners or enter into
alternative arrangements.

WE MAY NOT BE ABLE TO GENERATE ENOUGH ADDITIONAL REVENUE FROM OUR PLANNED
INTERNATIONAL EXPANSION TO OFFSET THE COSTS ASSOCIATED WITH ESTABLISHING AND
MAINTAINING FOREIGN OPERATIOns.

A component of our growth strategy is to expand our presence in foreign
markets. We conduct international business primarily in Europe and we are
attempting to increase the number of countries in which we do business. It will
be costly to establish international facilities and operations and to promote
the BIS system in international markets. In addition, we have little experience
in marketing and distributing products for these markets. Revenue from
international activities may not offset the expense of establishing and
maintaining these foreign operations.

WE MAY NOT BE ABLE TO MEET THE UNIQUE OPERATIONAL, LEGAL AND FINANCIAL
CHALLENGES THAT WE WILL ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, WHICH MAY
LIMIT THE GROWTH OF OUR BUSINESS.

We are increasingly subject to a number of challenges which specifically
relate to our international business activities. These challenges include:

- failure of local laws to provide the same degree of protection against
infringement of our intellectual property,

- protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets,

- less acceptance by foreign anesthesia providers of the use of disposable
products similar to the BIS Sensor,

- longer sales cycles to sell products like the BIS system to hospitals and
outpatient surgical centers, which could slow our revenue growth from
international sales, and

- longer accounts receivable payment cycles and difficulties in collecting
accounts receivable.

If we are unable to meet and overcome these challenges, our international
operations may not be successful which would limit the growth of our business.

WE MAY EXPERIENCE CUSTOMER DISSATISFACTION AND OUR REPUTATION COULD SUFFER IF
WE FAIL TO MANUFACTURE ENOUGH PRODUCTS TO MEET OUR CUSTOMERS' DEMANDS.

We rely on third-party manufacturers to assemble and manufacture the
components of our BIS monitors and a portion of our BIS Sensors. We manufacture
substantially all BIS Sensors in our own manufacturing facility. We have only
one manufacturing facility and we expect to move our manufacturing facility to a
new

11
<PAGE> 13

location in the first quarter of 2000. If we fail to produce enough products at
our own manufacturing facility or at a third-party manufacturing facility, if we
experience delays in moving to our new facility or if we experience a
termination or modification of any manufacturing arrangement with a third party,
we may be unable to deliver products to our customers on a timely basis. Our
failure to deliver products on a timely basis could lead to customer
dissatisfaction and damage our reputation.

OUR RELIANCE ON SOLE SUPPLIERS COULD ADVERSELY AFFECT OUR ABILITY TO MEET OUR
CUSTOMERS' DEMANDS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.

Some of the components that are necessary for the assembly of our BIS
system, including some of the components used in the BIS Sensor, are currently
provided to us by separate sole suppliers or a limited group of suppliers. We
purchase components through purchase orders rather than long-term supply
agreements and generally do not maintain large volumes of inventory. We have
experienced shortages and delays in obtaining some of the components of our BIS
systems in the past, and we may experience similar delays or shortages in the
future. The disruption or termination of the supply of components could cause a
significant increase in the costs of these components, which could affect our
profitability. A disruption or termination in the supply of components could
also result in our inability to meet demand for our products, which could lead
to customer dissatisfaction and damage our reputation. Furthermore, if we are
required to change the manufacturer of a key component of the BIS system, we may
be required to verify that the new manufacturer maintains facilities and
procedures that comply with quality standards and with all applicable
regulations and guidelines. The delays associated with the verification of a new
manufacturer could delay our ability to manufacture BIS systems in a timely
manner or within budget.

WE MAY BE REQUIRED TO BRING LITIGATION TO ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY RESULT IN SUBSTANTIAL EXPENSE AND MAY DIVERT OUR ATTENTION
FROM THE IMPLEMENTATION OF OUR BUSINESS STRATEGY.

We believe that the success of our business depends, in part, on obtaining
patent protection for our products, defending our patents once obtained and
preserving our trade secrets. We rely on a combination of contractual
provisions, confidentiality procedures and patent, trademark and trade secret
laws to protect the proprietary aspects of our technology. These legal measures
afford only limited protection and competitors may gain access to our
intellectual property and proprietary information. Litigation may be necessary
to enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Any litigation could
result in substantial expense and diversion of our attention from the growth of
the business and may not be adequate to protect our intellectual property
rights.

WE DO NOT OWN THE TRADEMARK "ASPECT" AND ANY COMPETITIVE ADVANTAGE WE DERIVE
FROM THE NAME MAY BE IMPAIRED BY THIRD-PARTY USE.

We are a party to a license agreement with a third party under which we
have obtained the nonexclusive right to make, use or sell products under the
name "Aspect." The licensor of the Aspect name markets products for use in the
health care industry. There may be confusion in the market between the licensor
and us and this confusion would compromise the competitive advantage, if any, we
derive from our name.

WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCTS INFRINGE ON
THEIR INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE THERE IS SUBSTANTIAL
UNCERTAINTY ABOUT THE VALIDITY AND BREADTH OF MEDICAL DEVICE PATENTS.

We may be exposed to future litigation by third parties based on claims
that our products infringe the intellectual property rights of others. This risk
is exacerbated by the fact that 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 litigation or claims against us,
whether or not valid, could result in substantial costs, could place a
significant strain on our financial resources and could harm our reputation. In
addition, intellectual property litigation or claims could force us to do one or
more of the following:

- cease selling, incorporating or using any of our products that
incorporate the challenged intellectual property, which would adversely
affect our revenue,

12
<PAGE> 14

- obtain a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms, if at all,
and

- redesign our products, which would be costly and time-consuming.

WE COULD BE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY CLAIMS WHICH COULD DIVERT
MANAGEMENT ATTENTION AND ADVERSELY AFFECT OUR CASH BALANCES, OUR ABILITY TO
OBTAIN AND MAINTAIN INSURANCE COVERAGE AT SATISFACTORY RATES OR IN ADEQUATE
AMOUNTS AND OUR REPUTATION.

The manufacture and sale of our products expose us to product liability
claims and product recalls, including those which may arise from misuse or
malfunction of, or design flaws in, our products or use of our products with
components or systems not manufactured or sold by us. Product liability claims
or product recalls, regardless of their ultimate outcome, could require us to
spend significant time and money in litigation or to pay significant damages. We
currently maintain insurance; however, it might not cover the costs of any
product liability claims made against us. Furthermore, we may not be able to
obtain insurance in the future at satisfactory rates or in adequate amounts.

DISAPPOINTING QUARTERLY OPERATING RESULTS COULD CAUSE OUR STOCK PRICE TO
DECREASE.

Our operating results have varied significantly from quarter to quarter in
the past. We expect to continue to experience significant fluctuations in
quarterly operating results in the future, making it difficult to predict future
performance. Because of this difficulty in predicting future performance, our
operating results will likely fall below the expectations of securities analysts
or investors in some future quarter or quarters. Our failure to meet these
expectations would likely cause the market price of our common stock to
decrease. We are at risk for fluctuations in our quarterly operating results due
to several factors, many of which are beyond our control, including the timing
and volume of customer orders, customer cancellations, reductions in orders by
our distribution partners and the timing and amount of our expenses.

In addition, because we do not have a significant backlog of customer
orders, revenue in any quarter depends on orders received in that quarter. Our
expenses are relatively fixed and difficult to adjust in response to fluctuating
revenue, which contributes to uncertainty as to quarterly operating results. Our
quarterly results may also be adversely affected because some customers may have
inadequate financial resources to purchase our products or may fail to pay for
our products after receiving them. In particular, hospitals are increasingly
experiencing financial constraints, consolidations and reorganizations as a
result of cost containment measures and declining third-party reimbursement for
services, which may result in decreased product orders or an increase in bad
debts in any quarter.

WE MAY NOT RESERVE AMOUNTS ADEQUATE TO COVER PRODUCT OBSOLESCENCE, CLAIMS AND
RETURNS, WHICH COULD RESULT IN UNANTICIPATED EXPENSES AND FLUCTUATIONS IN
OPERATING RESULTS.

Depending on the timing of new product introductions, competitive factors,
warranty claims and product returns, we may need to reserve amounts in excess of
those currently reserved for product obsolescence, excess inventory, warranty
claims and product returns. These reserves may not be adequate to cover all
costs associated with these items. If these reserves are inadequate, we would be
required to incur unanticipated expenses which could result in unexpected
fluctuations in quarterly operating results.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, WHICH COULD RESULT IN PRICE
REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS.

We expect to face substantial competition from larger medical device
companies that may have greater financial, technical, marketing and other
resources than we do. We may not be able to compete effectively with these
potential competitors. For example, we may face substantial competition from
companies developing sensor products that compete with our proprietary BIS
Sensors for use with our BIS monitors or with third-party monitoring systems or
anesthesia delivery systems that incorporate the BIS index. We also expect to
face competition from companies currently marketing conventional
electroencephalogram, or EEG, monitors using standard and novel
signal-processing techniques. Other companies may develop anesthesia-monitoring
systems that perform better than the BIS system and/or sell for less. In
addition, one or more of

13
<PAGE> 15

our competitors may develop products that are substantially equivalent to our
FDA-approved products, in which case they may be able to use our products as
predicate devices to more quickly obtain FDA approval of their competing
products. Competition in the sale of anesthesia-monitoring systems could result
in price reductions, fewer orders, reduced gross margins and loss of market
share.

OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND GENERATE REVENUE DEPENDS UPON
RECEIPT OF DOMESTIC AND FOREIGN REGULATORY APPROVAL OF OUR PRODUCTS AND
MANUFACTURING OPERATIONS.

Before we can market new products in the United States we must obtain
clearance from the United States Food and Drug Administration, or FDA. If the
FDA concludes that any of our products do not meet the requirements to obtain
clearance of a premarket notification under Section 510(k) of the Food, Drug and
Cosmetic Act, then we would be required to file a premarket approval
application. The approval process for a premarket approval application is
lengthy, expensive and typically requires extensive preclinical and clinical
trial data. We may not obtain clearance of a 510(k) notification or approval of
a premarket approval application with respect to any of our products on a timely
basis, if at all. If we fail to obtain timely clearance or approval for our
products, we will not be able to market and sell our products, which will limit
our ability to generate revenue. We may also be required to obtain clearance of
a 510(k) notification from the FDA before we can market certain previously
marketed products which we modify after they have been cleared. We have made
certain enhancements to our currently marketed products which we have determined
do not necessitate the filing of a new 510(k) notification. However, if the FDA
does not agree with our determination, it will require us to file a new 510(k)
notification for the modification and we may be prohibited from marketing the
modified device until we obtain FDA clearance.

The FDA also requires us to adhere to current Good Manufacturing Practices
regulations, which include production design controls, testing, quality control,
storage and documentation procedures. The FDA may at any time inspect our
facilities to determine whether adequate compliance has been achieved.
Compliance with current Good Manufacturing Practices regulations for medical
devices is difficult and costly. In addition, we may not continue to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve continued
compliance, the FDA may withdraw marketing clearance or require product recall.
When any change or modification is made to a device or its intended use, the
manufacturer may be required to reassess compliance with current Good
Manufacturing Practices regulations, which may cause interruptions or delays in
the marketing and sale of our products.

Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer or shorter than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements.

The Federal, state and foreign laws and regulations regarding the
manufacture and sale of our products are subject to future changes, as are
administrative interpretations of regulatory agencies. If we fail to comply with
applicable federal, state or foreign laws or regulations, we could be subject to
enforcement actions, including product seizures, recalls, withdrawal of
clearances or approvals and civil and criminal penalties.

IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES, WE MAY NOT
BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY.

Our success is substantially dependent on the ability, experience and
performance of our senior management and other key employees. If we lose one or
more of the members of our senior management or other key employees, our ability
to successfully implement our business strategy could be seriously harmed.

IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO
EXPAND OUR BUSINESS.

Our future success will depend largely on our ability to continue to hire,
train, retain and motivate additional skilled personnel, particularly sales
representatives and clinical specialists who are responsible for customer
education and training and post-installation customer support. We continue to
experience difficulty in recruiting and retaining skilled personnel because the
pool of experienced persons is small and we compete

14
<PAGE> 16

for personnel with other companies, many of which have greater resources than we
do. Consequently, if we are not able to attract and retain skilled personnel, we
will not be able to expand our business.

FAILURE OF USERS OF THE BIS SYSTEM TO OBTAIN ADEQUATE REIMBURSEMENT FROM
THIRD-PARTY PAYORS COULD LIMIT MARKET ACCEPTANCE OF THE BIS SYSTEM, WHICH COULD
PREVENT US FROM ACHIEVING PROFITABILITY.

Anesthesia providers are generally not reimbursed separately for patient
monitoring activities utilizing the BIS system. For hospitals and outpatient
surgical centers, when reimbursement is based on charges or costs, patient
monitoring with the BIS system may reduce reimbursements for surgical
procedures, because charges or costs may decline as a result of monitoring with
the BIS system. Failure by hospitals and other users of the BIS system to obtain
adequate 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, which
could prevent us from achieving profitability.

OUR SOFTWARE PRODUCTS AND THOSE OF OUR SUPPLIERS COULD FAIL AS A RESULT OF THE
YEAR 2000 PROBLEM, WHICH COULD CAUSE DISRUPTIONS IN OUR BUSINESS, CAUSE US TO
INCUR UNANTICIPATED EXPENSES, DAMAGE OUR REPUTATION AND CAUSE DELAYS IN PRODUCT
SHIPMENTS OR IN CUSTOMER PURCHASES FROM US.

Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This year 2000 problem could result in
miscalculations, data corruption, system failures or disruptions of operations.
Our products, our internal systems, our customers' systems, our distributors'
systems and our suppliers' systems may experience year 2000 problems, any of
which could cause disruptions to our business. Under the reasonably likely worst
case scenario, our suppliers, including our sole and limited source suppliers,
may not be able to supply us with critical components needed to make our
products. Year 2000 errors or defects in the internal systems of our suppliers
could require us to incur significant unanticipated expenses to remedy any
problems or replace affected vendors and could cause cancellations or delays in
product shipments.

Year 2000 errors or defects in our products could give rise to warranty and
other claims by our customers. In addition, year 2000 errors or defects could be
discovered in our internal software systems and, if errors or defects are
present, the costs of making these systems year 2000 compliant could be
material. We have determined that some older versions of our products are not
year 2000 compliant. Some of our other products or internal systems may contain
undetected errors or defects. Additionally, if we are unable to make our
products and internal systems year 2000 compliant in a timely manner, then we
may experience disruptions in our business operations, our reputation may suffer
and customers may delay or cancel purchases from us, which would decrease our
product revenue.

Changing purchasing patterns of customers impacted by year 2000 issues may
result in reduced purchases of our products. In addition, any year 2000 errors
or defects in our distributors' systems or the products of our original
equipment manufacturer partners could cause a reduction in their orders from us.
Any reduction in purchases of our products could decrease our product revenue.

RISKS RELATED TO THIS OFFERING

OUR STOCK PRICE WILL FLUCTUATE AFTER THIS OFFERING WHICH MAY CAUSE YOUR
INVESTMENT IN OUR STOCK TO SUFFER A DECLINE IN VALUE.

After this offering, an active trading market in our stock might not
develop or continue. If you purchase shares of our common stock in the offering,
you will pay a price that was not established in a competitive market. Rather,
you will pay a price that we negotiated with the representatives of the
underwriters based upon an assessment of the valuation of our stock. The public
market may not agree with or accept this valuation, in which case you may not be
able to sell your shares at or above the initial offering price. See
"Underwriters" on page 65. The market price of our common stock may fluctuate
significantly in response to factors which are beyond our control.

15
<PAGE> 17

In addition, the stock market in general has recently experienced extreme
price and volume fluctuations. In addition, the market prices of securities of
technology and medical device companies have been extremely volatile, and have
experienced fluctuations that often have been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
could result in extreme fluctuations in the price of our common stock, which
could cause a decline in the value of your shares.

WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION DUE TO OUR
EXPECTED STOCK VOLATILITY.

Recently, when the market price of a stock has been volatile, holders of
that stock have occasionally instituted securities class action litigation
against the company that issued the stock. If any of our stockholders were to
bring a lawsuit of this type against us, even if the lawsuit is without merit,
we could incur substantial costs defending the lawsuit. The lawsuit could also
divert the time and attention of our management.

WE MAY NEED ADDITIONAL FINANCING TO EXPAND OUR BUSINESS WHICH COULD BE
DIFFICULT TO OBTAIN.

We expect that the net proceeds from this offering and our existing capital
resources will be sufficient to fund our operations at least through 2000.
However, our future capital requirements will depend upon a number of factors,
including:

- the availability of capital resources required to fund future operating
losses, further develop our marketing and sales organization domestically
and internationally, expand manufacturing capacity, finance our
sales-type lease program, and meet market demand for our BIS systems,

- the progress of our research and development programs, including clinical
trials,

- the receipt of and the time required to obtain regulatory clearances and
approvals,

- the resources we devote to developing, manufacturing and marketing our
BIS systems, and

- the resources, if any, we may devote to the expansion of our business,
including through the possible acquisition of businesses, technologies or
other intellectual property rights.

We may require additional funds, and we cannot be certain that additional
funding will be available when needed or on terms acceptable to us. Further, if
we issue additional equity securities, stockholders may experience additional
dilution, or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of common stock. If we cannot
raise funds on acceptable terms, if and when needed, we may not be able to
develop or enhance our products, take advantage of future opportunities, grow
our business or respond to competitive pressures or unanticipated requirements.

OUR STOCK PRICE COULD BE DEPRESSED BY SHARES BECOMING AVAILABLE FOR SALE.

Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their stock for the first time.
Sales of a substantial number of shares of our common stock in the public market
after this offering could depress the market price of our common stock and could
impair our ability to raise capital through the sale of additional equity
securities. For a more detailed description, see "Shares Eligible for Future
Sale" on page 63.

INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER ASPECT AFTER THIS
OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.

After this offering, our directors, executive officers and principal
stockholders, together with their affiliates, will beneficially own, in the
aggregate, approximately % of our outstanding common stock. As a result,
these stockholders, if acting together, would have the ability to exercise
control over all corporate actions requiring stockholder approval irrespective
of how our other stockholders may vote, including:

- the election of directors,

- the amendment of charter documents,

16
<PAGE> 18

- the approval of certain mergers and other significant corporate
transactions, including a sale of substantially all of our assets, or

- the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD
PREVENT OR DELAY TRANSACTIONS THAT STOCKHOLDERS MAY FAVOR.

Provisions of our restated certificate of incorporation and amended and
restated by-laws may discourage, delay or prevent a merger or acquisition that
stockholders may consider favorable, including transactions in which you might
otherwise receive a premium for your shares. These provisions include:

- authorizing the issuance of "blank check" preferred stock without any
need for action by stockholders,

- providing for a classified board of directors with staggered three-year
terms,

- requiring supermajority stockholder voting to effect certain amendments
to our restated certificate of incorporation and amended and restated
by-laws,

- eliminating the ability of stockholders to call special meetings of
stockholders,

- prohibiting stockholder action by written consent,

- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings, and

- providing for the automatic acceleration of the vesting of stock options
upon a change of control of Aspect.

PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
OF THEIR INVESTMENT.

We expect that the initial public offering price per share will
significantly exceed the net tangible book value per share of the outstanding
common stock. Accordingly, purchasers of common stock in this offering will
suffer immediate and substantial dilution of their investment. In the past, we
have issued options to acquire common stock at prices below the initial public
offering price. To the extent these outstanding options are ultimately
exercised, there will be further dilution to investors in this offering.

WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING AND THE
FAILURE OF MANAGEMENT TO APPLY SUCH FUNDS EFFECTIVELY COULD ADVERSELY AFFECT OUR
ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY OR TO YIELD A FAVORABLE RETURN ON OUR
INVESTMENTS.

We plan to use the proceeds from this offering for general corporate
purposes. Therefore, we will have broad discretion as to how we will spend the
proceeds, and stockholders may not agree with the ways in which we use the
proceeds. We may not be successful in investing the proceeds from this offering
in our operations or external investments to yield a favorable return.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will" and "would" or similar
words. You should read statements that contain these words carefully because
they discuss our future expectations, contain projections of our future results
of operations or of our financial position or state other forward-looking
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in this
prospectus, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. Before you invest in our common stock, you should be
aware that the occurrence of the events described in these risk factors and
elsewhere in this prospectus could have a material adverse effect on our
business, results of operations and financial position.

17
<PAGE> 19

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the
shares of common stock will be approximately $ , assuming an initial
public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us. If the over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $ .

The principal purposes of this offering are to establish a public market
for our common stock, to increase our visibility in the marketplace, to
facilitate future access to public capital markets, to provide liquidity to
existing stockholders and to obtain additional working capital.

We currently intend to use a portion of the net proceeds from this offering
for general corporate purposes, including working capital, product development,
increasing our sales and marketing capabilities and expanding our international
operations. We may also use a portion of the net proceeds to acquire or invest
in complementary businesses or products or to obtain the right to use
complementary technologies. We have no specific understandings, commitments or
agreements relating to an acquisition or investment. Pending these uses, we plan
to invest the net proceeds of this offering in short-term, interest-bearing,
investment-grade securities.

DIVIDEND POLICY

We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation and expansion of our business. Payment of future cash dividends,
if any, will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, operating results,
current and anticipated cash needs and plans for expansion. We have a working
capital line of credit with a bank which prohibits the declaration or payment of
cash dividends without the consent of the lender.

18
<PAGE> 20

CAPITALIZATION

The following table sets forth our capitalization as of July 3, 1999. The
as adjusted information gives effect to the conversion of all of our outstanding
convertible preferred stock into common stock upon the closing of this offering
and assumes the filing of our restated certificate of incorporation after the
closing of this offering authorizing 5,000,000 shares of preferred stock and
60,000,000 shares of common stock. The as adjusted information also gives effect
to the issuance and sale of the shares of common stock in this
offering at an assumed initial public offering price of $ per share, after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us.

<TABLE>
<CAPTION>
JULY 3, 1999
-----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 1,081 $
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; 22,363,224
shares authorized (actual); 11,067,238 issued and
outstanding (actual); (liquidation
preference -- $58,962,591 (actual)); no shares
authorized, issued or outstanding (as adjusted);
(liquidation preference -- $0 (as adjusted))........... 67,560
Common stock, $.01 par value; 17,030,000 shares authorized
(actual); 1,789,905 shares issued and outstanding
(actual); 60,000,000 shares authorized (as adjusted);
shares issued and outstanding (as
adjusted).............................................. 18
Additional paid-in capital................................ 1,056
Warrants.................................................. 146
Notes receivable from employees and directors............. (305)
Deferred compensation..................................... (290)
Accumulated other comprehensive income.................... (1)
Accumulated deficit....................................... (52,434)
--------
Total stockholders' equity........................ 15,750
--------
Total capitalization......................... $ 16,831 $
======== ========
</TABLE>

The outstanding share information excludes 2,170,666 shares of common stock
issuable upon exercise of outstanding options as of July 3, 1999 with a weighted
average exercise price of $3.03 and warrants to purchase 192,902 shares of
common stock with an exercise price of $12.50 per share.

19
<PAGE> 21

DILUTION

Our pro forma net tangible book value as of July 3, 1999, after giving
effect to the conversion of all outstanding shares of convertible preferred
stock into common stock upon the closing of this offering, was approximately
$ million, or $ per share of common stock. Pro forma net tangible book
value per share represents our total assets less total liabilities and
intangibles, divided by the shares of common stock outstanding after giving
effect to the conversion of all outstanding shares of convertible preferred
stock into common stock. Net tangible book value dilution per share to new
investors is the difference between the amount per share paid by purchasers of
common stock in this offering and the pro forma net tangible book value per
share immediately following the offering. After giving effect to the issuance
and sale of the
shares of common stock in this offering, at an assumed offering price of $
per share and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma net tangible book
value as of July 3, 1999 would have been $ million, or $ per share.
This represents an immediate increase in pro forma net tangible book value to
existing stockholders of $ per share. The initial public offering price per
share will significantly exceed the net tangible book value per share.
Accordingly, new investors who purchase common stock in this offering will
suffer an immediate dilution of their investment of $ per share. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of July 3,
1999................................................... $
Increase in pro forma net tangible book value per share
attributable to new investors..........................
Pro forma net tangible book value per share after this
offering..................................................
Dilution per share to new investors......................... $
========
</TABLE>

The following table summarizes, on a pro forma basis, giving effect to the
conversion of all outstanding shares of convertible preferred stock into common
stock upon the closing of this offering, as of July 3, 1999, the difference
between the number of shares of common stock purchased from Aspect, the total
consideration paid to Aspect and the average price per share paid by existing
stockholders and by new investors. In accordance with the following table, new
investors will contribute % of the total consideration for, and own %
of the outstanding shares of, the common stock of Aspect. The calculation below
is based on an assumed initial public offering price of $ per share, before
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 12,857,143 % $ % $
New investors.......................... $
---------- ----- -------- ------
Total........................ 100.0% $ 100.0%
========== ========
</TABLE>

The table above assumes no exercise of stock options or warrants
outstanding at July 3, 1999. As of July 3, 1999, there were outstanding options
to purchase 2,170,666 shares of common stock with a weighted average exercise
price of $3.03 per share and warrants to purchase 192,902 shares of common stock
with an exercise price of $12.50 per share. To the extent all of these
outstanding options and warrants had been exercised as of July 3, 1999, pro
forma net tangible book value per share after this offering would be
$ and total dilution per share to new investors would be $ .

If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to shares, or % of the
total number of shares of common stock outstanding after this offering.

20
<PAGE> 22

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes and other financial information included elsewhere in this prospectus. The
consolidated statements of operations data for the years ended December 31,
1996, 1997 and 1998 and the consolidated balance sheet data as of December 31,
1997 and 1998 are derived from our audited consolidated financial statements
included in this prospectus. The consolidated statements of operations data for
the years ended December 31, 1994 and 1995 and the consolidated balance sheet
data as of December 31, 1994, 1995 and 1996 are derived from our audited
consolidated financial statements not included in this prospectus. The
consolidated financial data as of July 3, 1999 and for the six-months ended July
4, 1998 and July 3, 1999 are derived from our unaudited consolidated financial
statements included in this prospectus and include all adjustments, which are
only normal, recurring adjustments, necessary for a fair statement of the
financial position and results of operations for the unaudited periods. The
historical results presented here are not necessarily indicative of future
results.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------
---------------------------------------------------- JULY 4, JULY 3,
1994 1995 1996 1997 1998 1998 1999
--------- -------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue.......................... $ 852 $ 1,067 $ 1,389 $ 3,068 $ 11,238 $ 4,420 $11,712
Costs and expenses:
Costs of revenue............... 525 704 1,096 3,602 5,880 2,662 4,236
Research and development....... 2,311 2,870 2,338 2,603 4,042 1,942 2,346
Sales and marketing............ 1,291 1,285 1,561 4,813 10,354 4,670 7,566
General and administrative..... 1,216 1,815 1,871 2,358 4,254 1,960 2,293
--------- -------- ------- -------- -------- ------- -------
Total costs and expenses..... 5,343 6,674 6,866 13,376 24,530 11,234 16,441
Loss from operations............. (4,491) (5,607) (5,477) (10,308) (13,292) (6,814) (4,729)
Interest income, net............. 231 61 81 422 459 297 644
Other expense.................... -- -- -- -- (774) -- --
--------- -------- ------- -------- -------- ------- -------
Net loss......................... $ (4,260) $ (5,546) $(5,396) $ (9,886) $(13,607) $(6,517) $(4,085)
========= ======== ======= ======== ======== ======= =======
Net loss per share:
Basic and diluted.............. $ (822.34) $(281.65) $(57.76) $ (15.63) $ (11.70) $ (6.34) $ (2.79)
========= ======== ======= ======== ======== ======= =======
Pro forma basic and diluted.... $ (1.31) $ (0.33)
======== =======
Shares used in computing net loss
per share:
Basic and diluted.............. 5 20 93 632 1,163 1,028 1,463
Pro forma basic and diluted.... 10,352 12,530
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- JULY 3,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities................................... $4,258 $3,329 $2,231 $4,981 $21,273 $16,111
Working capital................................ 4,273 3,054 1,029 3,052 17,286 11,217
Total assets................................... 5,719 4,552 3,973 7,603 28,589 27,083
Long-term debt................................. 423 333 270 118 1,441 1,081
Total stockholders' equity..................... 4,460 3,028 1,066 4,067 19,688 15,750
</TABLE>

21
<PAGE> 23

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

You should read the following discussion and analysis of financial
condition and results of operations together with our financial statements and
related notes appearing elsewhere in this prospectus.

OVERVIEW

We develop, manufacture and market an anesthesia monitoring system that we
call the BIS system. The BIS system enables anesthesia providers to assess and
manage a patient's level of consciousness during surgery. Our proprietary BIS
system includes our BIS monitor or BIS Module Kit and our disposable BIS
Sensors. The BIS system is based on our patented core technology, the Bispectral
Index, which we refer to as the BIS index. The BIS index is the only
FDA-cleared, commercially available, direct measure of the effects of
anesthetics on the brain. Our latest generation monitor, the A-2000 BIS Monitor,
was cleared for marketing by the FDA in February 1998. Our other monitor
products are the A-1000 Monitor, the A-1050 EEG Monitor with BIS and the BIS
Module Kit. After the introduction of the A-2000 BIS Monitor, we ceased active
marketing of the A-1050 Monitor domestically. In addition to the disposable BIS
Sensor, we offer the Zipprep EEG Electrode.

We follow 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 July 4, 1998 relate to the period from January 1, 1998 to
July 4, 1998, and all references to the six months ended July 3, 1999 relate to
the period from January 1, 1999 to July 3, 1999.

We offer 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 11%, 10% and 27% of
revenue in 1996, 1997 and 1998, respectively, and for approximately 30% and 21%
of revenue in the six months ended July 4, 1998 and the six months ended July 3,
1999, respectively.

We derive our revenue primarily from sales of monitors, including related
accessories and BIS Module Kits, and sales of disposable sensors. In 1996, 1997
and 1998, revenue from the sale of monitors represented approximately 87%, 80%
and 67%, respectively, of our revenue, and revenue from the sale of disposable
sensors represented approximately 13%, 20% and 33%, respectively, of our
revenue. In the six months ended July 4, 1998 and the six months ended July 3,
1999, revenue from the sale of monitors represented approximately 73% and 56%,
respectively, of our revenue, and revenue from the sale of disposable sensors
represented approximately 27% and 44%, respectively, of our revenue. We expect
that revenue from the sale of single-use disposable sensors will continue to
increase as a percentage of revenue as the installed base of monitors continues
to grow.

Revenue from domestic sales in 1996, 1997 and 1998 was approximately
$699,000, $1.9 million and $10.3 million, respectively, which represented
approximately 51%, 61% and 92%, respectively, of our revenue. Revenue from
international sales in 1996, 1997 and 1998 was approximately $689,000, $1.2
million and $942,000, respectively, which represented approximately 49%, 39% and
8%, respectively, of our revenue. In the six months ended July 4, 1998 and the
six months ended July 3, 1999, revenue from domestic sales was approximately
$3.8 million and $10.6 million, respectively, which represented approximately
86% and 91%, respectively, of our revenue, and revenue from international sales
was approximately $626,000 and $1.1 million, respectively, which represented
approximately 14% and 9%, respectively, of our revenue.

22
<PAGE> 24

Effective July 1, 1998, our agreement with a third party to distribute our
monitors internationally, except in Japan, was terminated pursuant to the terms
of the agreement. Sales to this third party represented substantially all of our
revenue from international sales in 1996, 1997 and 1998. In the six months ended
July 3, 1999, sales to this third party represented approximately 3% of our
international revenue. In December 1998 and March 1999, we established
subsidiaries in The Netherlands and the United Kingdom, respectively, to
facilitate our entry into the international market. The sales and marketing
efforts of these subsidiaries resulted in the majority of the international
sales for the six months ended July 3, 1999. We are developing our international
sales and distribution program through a combination of distributors and
marketing partners, including companies with which we have entered into original
equipment manufacturer relationships. We expect to enhance our international
third-party distribution program through direct sales efforts and to support our
customers with clinical specialists. In January 1998, we entered into a
three-year distribution agreement with a third party to distribute BIS monitors
in Japan. During 1998 and the six months ended July 3, 1999, sales to this third
party represented approximately 3% and 6% of international revenue,
respectively. As a result of our move into the international market, we
anticipate that international sales will increase in absolute dollars.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, information
expressed as a percentage of revenue. This information has been derived from our
consolidated statements of operations included elsewhere in this prospectus. You
should not draw any conclusions about our future results from the results of
operations for any period.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------- ----------------------------
1996 1997 1998 JULY 4, 1998 JULY 3, 1999
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue...................................... 100% 100% 100% 100% 100%
Costs and expenses:
Costs of revenue........................... 79 117 52 60 36
Research and development................... 168 85 36 44 20
Sales and marketing........................ 112 157 92 106 65
General and administrative................. 135 77 38 44 19
---- ---- ---- ---- ---
Total costs and expenses................ 494 436 218 254 140
Loss from operations......................... (394) (336) (118) (154) (40)
Interest income, net......................... 5 14 4 6 5
Other expense................................ -- -- (7) -- --
---- ---- ---- ---- ---
Net loss..................................... (389)% (322)% (121)% (148)% (35)%
==== ==== ==== ==== ===
</TABLE>

SIX MONTHS ENDED JULY 3, 1999 COMPARED TO SIX MONTHS ENDED JULY 4, 1998

Revenue. Our revenue increased to approximately $11.7 million in the six
months ended July 3, 1999 from approximately $4.4 million in the six months
ended July 4, 1998, an increase of approximately 166%. Revenue from the sale of
monitors increased to approximately $6.6 million in the six months ended July 3,
1999 from approximately $3.2 million in the six months ended July 4, 1998, an
increase of approximately 106%. Revenue from the sale of disposable sensors
increased to approximately $5.1 million in the six months ended July 3, 1999
from approximately $1.2 million in the six months ended July 4, 1998, an
increase of approximately 325%. The growth in revenue from the sale of monitors
was primarily attributable to an increase of approximately 101% in the number of
monitors sold, which resulted from the growth of our direct sales force and the
contribution of our international organization. In addition, sales of the BIS
Module Kit, which was introduced in the second half of 1998, contributed to the
increase in monitor revenue. The increase in revenue from the sale of disposable
sensors was primarily attributable to growth in the installed base of monitors,
which resulted in an increase of approximately 284% in the number of disposable
sensors sold. An

23
<PAGE> 25

increase of approximately 11% in the average selling price of the disposable
sensors also contributed to the increase in revenue.

Our gross profit was approximately 64% of revenue in the six months ended
July 3, 1999 as compared to a gross profit of approximately 40% of revenue in
the six months ended July 4, 1998. The increase in the gross profit percentage
in the six months ended July 3, 1999 as compared to the six months ended July 4,
1998 was primarily attributable to an increase in sales of disposable sensors as
a percentage of revenue. Disposable sensors have a higher profit margin than
monitors. The increase in the gross profit percentage for this period also
resulted from improved manufacturing efficiencies. We expect that sales of
higher margin disposable sensors will continue to increase as a percentage of
revenue as the installed base of monitors continues to grow.

Research and Development. Research and development expenses increased to
approximately $2.4 million in the six months ended July 3, 1999 from
approximately $1.9 million in the six months ended July 4, 1998, an increase of
approximately 26%. Research and development expenses decreased as a percentage
of revenue. The increase in absolute dollars was primarily attributable to an
increase in research and development personnel and related payroll and other
expenses, which represented approximately 86% of the increase. These expenses
were incurred in connection with the continued product development efforts
related to the A-2000 BIS Monitor, BIS Sensor and BIS Module Kit and the
development of products for use outside the operating room in the intensive care
unit and for procedural sedation. We expect research and development expenses to
increase in absolute dollars as we continue to invest in product improvements,
product extensions and technology development.

Sales and Marketing. Sales and marketing expenses increased to
approximately $7.6 million in the six months ended July 3, 1999 from
approximately $4.7 million in the six months ended July 4, 1998, an increase of
approximately 62%. Sales and marketing expenses decreased as a percentage of
revenue. The increase in absolute dollars in 1999 was primarily attributable to
an increase in sales and marketing personnel and related payroll and other
expenses, which represented approximately 84% of the increase, and an increase
in professional education programs, customer support and clinical education
initiatives, development of sales materials and participation at trade shows. We
expect sales and marketing expenses to increase in absolute dollars as we
continue to expand our international operations, increase our direct sales force
and clinical specialists in the United States and engage in activities to
further educate and promote the use of the BIS system by our customers.

General and Administrative. General and administrative expenses increased
to approximately $2.3 million in the six months ended July 3, 1999 from
approximately $2.0 million in the six months ended July 4, 1998, an increase of
approximately 15%. General and administrative expenses decreased as a percentage
of revenue. The increase in absolute dollars was primarily attributable to an
increase in general and administrative personnel to support our growth and
related payroll and other expenses. We expect general and administrative
expenses to increase in absolute dollars as we increase the number of personnel
and related resources required to support our growth.

Interest Income, Net. Interest income, net, increased to approximately
$644,000 in the six months ended July 3, 1999 from approximately $297,000 in the
six months ended July 4, 1998, an increase of approximately 117%. Interest
income increased to approximately $740,000 in the six months ended July 3, 1999
from approximately $313,000 in the six months ended July 4, 1998, an increase of
approximately 136%. The increase in interest income was primarily attributable
to a higher average outstanding balance of cash and investments resulting from
the sale of our convertible preferred stock in February 1998 and December 1998,
which resulted in approximately 24% of the increase, and an increase in our
investment in sales-type leases, which resulted in approximately 76% of the
increase. Interest expense increased to approximately $96,000 in the six months
ended July 3, 1999 from approximately $16,000 in the six months ended July 4,
1998, an increase of approximately 500%, as a result of higher average
outstanding debt obligations under an equipment loan in the second half of 1998.
We expect interest income to increase in absolute dollars because of higher cash
and investments balances resulting from our initial public offering.

24
<PAGE> 26

Net Loss. Our net loss decreased to approximately $4.1 million in the six
months ended July 3, 1999 from approximately $6.5 million in the six months
ended July 4, 1998, a decrease of 37%, as a result of the factors discussed
above.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Revenue. Our revenue increased to approximately $11.2 million in 1998 from
approximately $3.1 million in 1997, an increase of approximately 261%. Revenue
from the sale of monitors increased to approximately $7.5 million in 1998 from
approximately $2.5 million in 1997, an increase of approximately 200%. Revenue
from the sale of disposable sensors increased to approximately $3.7 million in
1998 from approximately $606,000 in 1997, an increase of approximately 511%. The
increase in revenue from the sale of monitors was primarily attributable to an
increase of approximately 195% in the number of monitors sold, primarily
resulting from the commercial introduction of the A-2000 BIS Monitor. The
introduction of the BIS Module Kit in 1998 and the growth of the direct sales
force in 1998 also contributed to the growth in monitor revenue. The increase in
revenue from the sale of disposable sensors was primarily attributable to the
growth in the installed base of monitors, which resulted in an increase of
approximately 309% in the number of disposable sensors sold. An increase of
approximately 49% in the average selling price of the disposable sensors also
contributed to the increase in revenue.

In 1998, gross profit was approximately 48% of revenue as compared to a
gross loss (revenue less costs of revenue) of approximately 17% of revenue in
1997. The increase in gross profit in 1998 as compared to the gross loss in 1997
was primarily attributable to the introduction of the A-2000 BIS Monitor in 1998
which has a lower per unit cost compared to the A-1050 Monitor, and an increase
in sales of disposable sensors as a percentage of revenue. Disposable sensors
have a higher profit margin than monitors. The increase in gross profit in 1998
also resulted from a higher provision for excess and obsolete inventory in 1997
due to the transition from the A-1050 Monitor to the A-2000 BIS Monitor and
improved manufacturing efficiencies in 1998.

Research and Development. Research and development expenses increased to
approximately $4.0 million in 1998 from approximately $2.6 million in 1997, an
increase of approximately 54%. Research and development expenses decreased as a
percentage of revenue. The increase in absolute dollars in 1998 was primarily
attributable to an increase in research and development personnel and related
payroll and other expenses, which represented approximately 30% of the increase,
an increase in consultants expense, which represented approximately 28% of the
increase, and an increase in expenses related to clinical studies, which
represented approximately 15% of the increase. These expenses were incurred in
connection with the continued product development efforts related to the A-2000
BIS Monitor and the BIS Module Kit, development of products for use outside of
the operating room, in the intensive care unit and for procedural sedation.

Sales and Marketing. Sales and marketing expenses increased to
approximately $10.4 million in 1998 from approximately $4.8 million in 1997, an
increase of approximately 117%. Sales and marketing expenses decreased as a
percentage of revenue. The increase in absolute dollars in 1998 was primarily
attributable to an increase in sales and marketing personnel and related payroll
and other expenses, which represented approximately 68% of the increase, and an
increase in professional education and trade show activities, which together
represented approximately 10% of the increase.

General and Administrative. General and administrative expenses increased
to approximately $4.3 million in 1998 from approximately $2.4 million in 1997,
an increase of approximately 79%. General and administrative expenses decreased
as a percentage of revenue. The increase in absolute dollars in 1998 was
primarily attributable to an increase in general and administrative personnel
and related payroll and other expenses to support our growth, which represented
approximately 37% of the increase, an increase in leased space, which
represented approximately 17% of the increase, and an increase in professional
services, which represented approximately 21% of the increase.

Interest Income, Net. Interest income, net, increased to approximately
$459,000 in 1998 from approximately $422,000 in 1997, an increase of
approximately 9%. Interest income increased to approximately
25
<PAGE> 27

$553,000 in 1998 from approximately $500,000 in 1997, an increase of
approximately 11%, due to an increase in the average outstanding balance of cash
and investments resulting from the sale of our convertible preferred stock in
February 1998 and December 1998. Interest expense increased to approximately
$94,000 in 1998 from approximately $78,000 in 1997, an increase of approximately
21%, as a result of higher average outstanding debt obligations in 1998 related
to borrowings under an equipment loan in the second half of 1998.

Other Expense. Other expense in 1998 related to the costs incurred in our
proposed initial public offering, which was terminated in August 1998.

Net Loss. Our net loss increased to approximately $13.6 million in 1998
from approximately $9.9 million in 1997, an increase of approximately 37%, as a
result of the factors discussed above.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Revenue. Our revenue increased to approximately $3.1 million in 1997 from
approximately $1.4 million in 1996, an increase of approximately 121%. Revenue
from the sale of monitors increased to approximately $2.5 million in 1997 from
approximately $1.2 million in 1996, an increase of approximately 108%. Revenue
from the sale of disposable sensors increased to approximately $606,000 in 1997
from approximately $181,000 in 1996, an increase of approximately 235%. The
increase in revenue in 1997 from the sale of monitors was primarily attributable
to an increase of approximately 152% in the number of monitors sold, primarily
resulting from the commercial introduction of the A-1050 Monitor in 1996 and the
increase in the growth of our direct sales force in 1997. The increase in
revenue from the sale of disposable sensors was primarily attributable to the
commercial introduction of the BIS Sensor in 1997 and growth in the installed
base of monitors, both of which resulted in an increase of approximately 158% in
the number of disposable sensors sold. Additionally, an increase of
approximately 26% in the average selling price of the disposable sensors also
contributed to the increase in revenue. In 1996, the Zipprep EEG Electrode was
our only disposable sensor.

In 1997, we had a gross loss of approximately 17% of revenue as compared to
a gross profit of approximately 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
due to the transition from the A-1050 Monitor to the A-2000 BIS Monitor.

Research and Development. Research and development expenses increased to
approximately $2.6 million in 1997 from approximately $2.3 million in 1996, an
increase of approximately 13%. Research and development expenses decreased as a
percentage of revenue. The increase in absolute dollars in 1997 was primarily
attributable to the new product development efforts related to the A-2000 BIS
Monitor and the BIS Module Kit.

Sales and Marketing. Sales and marketing expenses increased to
approximately $4.8 million in 1997 from approximately $1.6 million in 1996, an
increase of approximately 200%. This increase was primarily attributable 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. General and administrative expenses increased
to approximately $2.4 million in 1997 from approximately $1.9 million in 1996,
an increase of approximately 26%. General and administrative expenses decreased
as a percentage of revenue. The increase in absolute dollars was primarily
attributable to an increase in general and administrative personnel to support
our growth.

Interest Income, Net. Interest income, net, increased to approximately
$422,000 in 1997 from $81,000 in 1996, an increase of approximately 421%.
Interest income increased to approximately $500,000 in 1997 from approximately
$144,000 in 1996, an increase of approximately 247%, due to an increase in the
average outstanding balance of cash and investments resulting from the sale of
our convertible preferred stock in February 1997. Interest expense increased to
approximately $78,000 in 1997 from approximately $63,000 in 1996, an increase of
approximately 24%, as a result of higher average outstanding capital lease
obligations in 1997.

26
<PAGE> 28

Net Loss. Our net loss increased to approximately $9.9 million in 1997
from approximately $5.4 million in 1996, an increase of approximately 83%, 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 3, 1999. We believe
that the following selected quarterly information includes all adjustments
(consisting only of normal, recurring adjustments) that we consider necessary to
present this information fairly. This financial information should be read in
conjunction with the financial statements and related notes appearing elsewhere
in this prospectus. Our results of operations have fluctuated in the past and
are likely to continue to fluctuate significantly from quarter to quarter in the
future. Therefore, results of operations for any previous periods are not
necessarily indicative of results of operations to be recorded in the future.

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
APRIL 4, JULY 4, OCTOBER 3, DECEMBER 31, APRIL 3, JULY 3,
1998 1998 1998 1998 1999 1999
-------- ------- ---------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue.............................. $ 1,733 $ 2,687 $ 3,082 $ 3,736 $ 5,327 $ 6,385
Gross margin......................... 522 1,236 1,620 1,980 3,274 4,202
Operating expenses................... 3,463 5,109 4,830 5,248 5,674 6,531
Net loss............................. (2,817) (3,700) (3,942) (3,148) (2,119) (1,966)
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations primarily from the
sale of our convertible preferred stock. Through July 3, 1999, we raised
approximately $67.6 million from equity financings and have received
approximately $3.4 million in equipment financing. We have a working capital
line of credit of which approximately $1.6 million was drawn against at July 3,
1999. At July 3, 1999, we had approximately $1.3 million committed to the
purchase of equipment related to the expansion of our automated BIS Sensor
production line.

Working capital at July 3, 1999 was approximately $11.2 million compared to
approximately $17.3 million and approximately $3.1 million at December 31, 1998
and 1997, respectively. The decrease in working capital from December 31, 1998
to July 3, 1999 was primarily attributable to continued operating losses of
approximately $4.1 million and an increase in accounts payable and accrued
liabilities of approximately $1.5 million, offset by increases in accounts
receivable of approximately $762,000, investment in sales-type leases of
approximately $593,000, inventory of approximately $466,000 and a decrease in
deferred revenue of approximately $167,000. The increase in working capital from
1997 to 1998 was primarily attributable to the sale of our convertible preferred
stock in February 1998 and December 1998, and an increase in accounts receivable
and investment in sales-type leases, offset by a decrease in inventory and
increases in accrued liabilities, current portion of long-term debt and deferred
revenue.

We used approximately $4.9 million of cash for operations in the six months
ended July 3, 1999. 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 and
accrued liabilities. We used approximately $25.7 million for operations during
the three years ended December 31, 1998. Cash used for operations during this
period was also primarily driven by operating losses, increases in accounts
receivable, investment in sales-type leases and other current assets, offset by
increases in accounts payable, accrued liabilities and deferred revenue.

We received approximately $1.2 million of cash from investing activities in
the six months ended July 3, 1999. We sold approximately $2.6 million, net, of
marketable securities and invested approximately $1.4 million in manufacturing
equipment and information systems. We used approximately $6.6 million for
investing activities during the three years ended December 31, 1998. We invested
approximately $3.2 million,

27
<PAGE> 29

net, in marketable securities and approximately $3.4 million in manufacturing
equipment, leasehold improvements and new information systems.

We received approximately $1.1 million of cash from financing activities in
the six months ended July 3, 1999 primarily as a result of borrowings under our
working capital line of credit at July 3, 1999. We received approximately $47.1
million of cash from financing activities during the three years ended December
31, 1998. Cash provided by financing activities during this period was primarily
the result of the sale of our convertible preferred stock in the three year
period ended December 31, 1998 and proceeds from our equipment loan.

In June 1998, we entered into a loan agreement with Imperial Bank. Under
the terms of this loan agreement, we may borrow up to $5.0 million for working
capital and equipment. The amount available to us under the working capital
portion of the loan agreement is based upon a percentage of our 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 being repaid in
36 equal monthly installments which commenced in January 1999. The loan
agreement contains certain restrictive covenants that require us to maintain
minimum liquidity or debt service coverage ratios. The agreement also restricts
us from declaring and paying cash dividends. At July 3, 1999, approximately $1.8
million was outstanding under the equipment portion of the loan agreement and
approximately $1.6 million was outstanding under the working capital portion of
the loan agreement. No additional amounts are available to us under the
equipment portion of the loan agreement and at July 3, 1999 we had borrowed the
total amount available to us under the working capital portion of the loan
agreement.

In July 1999, we entered into an agreement which allows us to sell some of
our existing and future investments in sales-type leases to Americorp Financial,
Inc. Upon sale, we expect to receive an amount approximately equal to our
investment in sales-type leases sold.

We anticipate that capital expenditures for the remainder of 1999 will be
approximately $2.5 million. These funds will primarily be used for the purchase
of manufacturing equipment and for the preparation of and move to our new
facility, which we anticipate occupying in late 1999.

We believe that the financial resources available to us, including our
current working capital, any future availability under the working capital
portion of our loan agreement, proceeds from selling our investments in
sales-type leases, together with the net proceeds of this offering, will be
sufficient to finance our planned operations and capital expenditures at least
through 2000. However, our future liquidity and capital requirements will depend
upon numerous factors, including the resources required to further develop our
marketing and sales organization domestically and internationally, to expand
manufacturing capacity, to finance our sales-type lease program and to meet
market demand for our products.

YEAR 2000 COMPLIANCE

The year 2000 problem stems from the fact that many currently installed
computer systems include software and hardware products that are unable to
distinguish dates after December 31, 1999. As a result, computer software and/or
hardware used by many companies and governmental agencies may need to be
upgraded to comply with year 2000 requirements or risk system failure or
miscalculations causing disruptions to normal business activities.

We have defined year 2000 compliant or year 2000 readiness as the ability
to:

- correctly handle date information needed for dates after December 31,
1999,

- function according to the product documentation provided for these date
changes, without changes in operation, assuming correct configuration,

- where appropriate, respond to two-digit date input in a way that resolves
the ambiguity as to century in a disclosed, defined and predetermined
manner,

28
<PAGE> 30

- store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century, and

- recognize year 2000 as a leap year.

State of Readiness. We are assessing the year 2000 readiness of our
operating, financial and administrative systems, including the hardware and
software that support our systems. This review includes assessing, validating,
testing and, where necessary, remediating, upgrading and replacing noncompliant
systems, hardware or software, as well as evaluating the need for contingency
planning.

For our currently marketed products, we have completed our year 2000
compliance testing efforts and believe that our current products are year 2000
compliant in all material respects. We have tested the older versions of our
products for year 2000 compliance and have determined that some older versions
of our products are not year 2000 compliant. We have made available to our
customers a description of the year 2000 readiness of these older versions of
our products. We have made available to our customers who are using older
versions of our products which are not year 2000 compliant the option to upgrade
the software to current versions. The upgrades are easy and quick to perform and
require no special skills or tools.

For all other material internal information technology systems, our year
2000 task force is currently conducting an inventory of and developing testing
procedures for all software and related systems we believe may be affected by
year 2000 issues. Since third parties developed and currently support many of
the systems that we use, a significant part of this effort is to ensure that
these third-party systems are year 2000 compliant. To date, the internal
evaluation has determined that all our critical hardware and software are year
2000 compliant. We have identified a small number of desktop computers and
workstations with operating systems that are not year 2000 compliant. The
hardware and operating systems on this equipment are currently being upgraded
and the majority of our scientific software has already been transferred and
validated. This hardware and software migration will be complete by the fourth
quarter of 1999.

We are also conducting an assessment of our non-information technology
systems. Some aspects of our facilities and manufacturing equipment may include
embedded technology, such as microcontrollers. The year 2000 problem could cause
a system failure or miscalculation in such facilities or manufacturing equipment
which could disrupt our operations. Affected areas include security systems,
voice mail and telephone systems and computer-based production and test
equipment. We have identified the potential problem areas and have developed a
remediation plan to correct any issues. This plan includes contacting vendors to
obtain year 2000 compliance certification for the equipment provided by them. We
have completed distribution of a survey of our material suppliers and
sub-contract manufacturers. All but one survey was returned. Two of the eighteen
material suppliers and sub-contract manufacturers who completed our survey have
indicated that they have year 2000 activities to complete. Overall, based upon
their responses to our survey, we believe our material suppliers and
sub-contract manufacturers are taking the necessary steps to ensure that their
systems are year 2000 compliant so that they will be able to continue providing
us with material and services after December 31, 1999 without interruption or
delay.

We have not contacted or surveyed our customers to determine whether their
systems are year 2000 compliant. We do not use electronic data interchange
software with our customers and believe that our risk resulting from our
customer's year 2000 non-compliance is not significant.

Costs. Our costs to date associated with assessment, remediation and
testing activities concerning the year 2000 problem have not been material.
Costs incurred for year 2000 compliance for our products were included in the
continuing costs of research and development. We do not expect that we will
incur material additional costs in connection with identifying, evaluating and
addressing year 2000 compliance issues. It is not possible for us to completely
estimate the costs we have incurred to date or expect to incur in coming months
as most of our expenses are related to, and are expected to continue to relate
to, the operating costs associated with time spent by employees and consultants
in the evaluation process and year 2000 compliance matters generally. We have
funded and will continue to fund all year 2000 compliance activities principally
through cash provided by our financing activities.

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Worst Case Scenario. Our reasonably likely worst case year 2000 scenario
would be that a material third-party vendor or supplier, such as a limited or
sole source supplier, would, as a result of its own year 2000 difficulties, fail
to successfully remediate year 2000 problems in hardware, software or equipment
which is material to our business and operations. If this scenario occurred, we
may be required to seek out new vendors and suppliers, which may not be
available to us on a timely basis, if at all. Furthermore, we would be required
to certify certain new limited or sole source suppliers. If we are required to
seek out or certify new vendors or suppliers, it will be costly and divert
management's attention, which could have a material adverse effect on our
business and operating results.

Contingency Plan. To date, we have no specific contingency plan to address
the effect of year 2000 compliance failures. If, in the future, it comes to our
attention that certain of our products need modifications or certain of our
third party hardware, software and equipment are not year 2000 compliant or
certain vendors are not year 2000 compliant, then we will seek to make the
necessary modifications or substitutions. In such cases, we expect these
modifications or substitutions to be made on a timely basis. However, we may not
be able to modify our products, services, systems and equipment or find
alternative vendors in a timely and successful manner to comply with year 2000
requirements, which could have a material adverse effect on our business,
financial condition and results of operations.

CONVERSION TO EURO

Eleven of the 15 members of the European Union have agreed to adopt the
Euro as their legal currency. Our current information systems allow us to
currently process Euro-denominated transactions. We are also assessing the
business implications of the conversion to the Euro, including long-term
competitive implications and the effect of market risk with respect to financial
instruments. Substantially all of our international sales are denominated in
United States dollars. We do not believe the Euro will have a significant effect
on our business, financial condition or results of operations. We will continue
to assess the impact of Euro conversion issues as the applicable accounting,
tax, legal and regulatory guidance evolves.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Most of our revenue, expenses and
capital spending are transacted in U.S. dollars. However, the expenses and
capital spending of our international subsidiaries are transacted in local
currency. As a result, changes in foreign currency exchange rates or weak
economic conditions in foreign markets could affect our financial results. We do
not use derivative instruments to hedge our foreign exchange risk. Our exposure
to market risk for changes in interest rates relates primarily to our cash and
cash equivalent balances, marketable securities, investment in sales-type leases
and loan agreement. The majority of our investments are in short-term
instruments and subject to fluctuations in U.S. interest rates. Due to the
nature of our short-term investments, we believe that there is no material risk
exposure.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting
for Derivatives and Hedging Activities," which establishes accounting and
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In June
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivatives and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133," which defers the effective date of SFAS 133 to
be effective for all fiscal quarters beginning after June 15, 2000. The adoption
of SFAS 133, as amended, is not expected to have a material effect on our
financial condition and results of operations as we do not currently hold any
derivative instruments or engage in hedging activities.

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BUSINESS

OVERVIEW

We develop, manufacture and market an anesthesia-monitoring system that we
call the BIS system. The BIS system enables anesthesia providers to assess and
manage a patient's level of consciousness during surgery. Our proprietary BIS
system includes our BIS monitor or BIS Module Kit and our single-use, disposable
BIS Sensors. The BIS system is based on our patented core technology, the
Bispectral Index, which we refer to as the BIS index. The BIS index is the only
FDA-cleared, commercially available, direct measure of the effects of
anesthetics on the brain. We developed the BIS system over 10 years, and it is
the subject of 10 issued and six pending United States patents. As of July 3,
1999, more than 3,450 BIS monitors have been installed worldwide, including
3,226 BIS monitors in approximately 450 sites in the United States. These sites
include 29 of the 100 largest hospitals and 25% of all teaching hospitals with
anesthesia residency programs. We believe that over 650,000 patients have been
monitored using the BIS index during surgery. Our latest generation monitor, the
A-2000 BIS Monitor, was cleared for marketing by the FDA in February 1998. We
market the BIS system in the United States primarily through a direct sales
organization and internationally through distributors and marketing partners. We
have also established original equipment manufacturer relationships with several
patient monitoring and anesthesia equipment companies to incorporate our BIS
technology into their equipment using the BIS Module Kit.

Clinical trials and routine clinical use of the BIS system have shown that
patient monitoring with the BIS system results in:

- a reduction in the amount of anesthetics used,

- faster wake-up from anesthesia,

- less patient time in the operating room and the post-anesthesia care unit
following surgery,

- higher rates of outpatients bypassing the post-anesthesia care unit and
proceeding to a less costly step-down recovery area directly from the
operating room,

- improvements in the quality of recovery, and

- improvements in the means to assess the risk of surgical awareness, the
unintentional regaining of consciousness during surgery.

MARKET OPPORTUNITY

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. We estimate that approximately 70% of these surgical patients in the
United States, or 20 million patients, receive general anesthesia or deep
sedation monitored by an anesthesia provider. In the United States, there are
more than 34,000 operating rooms in hospitals and 5,000 operating rooms in
outpatient surgical centers. We believe that the aggregate number of operating
rooms in Europe and Japan exceeds the number of operating rooms in the United
States. Operating rooms represent our initial market opportunity for the sale of
BIS monitors, and surgical procedures utilizing general anesthesia or deep
sedation represent our initial market opportunity for annual sales of BIS
Sensors.

When administering general anesthesia, providers use a combination of drugs
to accomplish three basic objectives:

- to render the patient unconscious,

- to prevent response to pain, and

- to ensure the patient will not move during surgery.

Anesthesia providers historically have had no direct means of assessing a
patient's level of consciousness during surgery. They have generally relied on
recommended drug dosages and on indirect indicators of consciousness, including
blood pressure and heart rate. This approach cannot always account for
variability in
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<PAGE> 33

patient responses to anesthesia or changes in anesthetic requirements during the
course of surgery. Furthermore, indirect measures such as blood pressure and
heart rate are not reliable indicators of a patient's level of consciousness.
Consequently, historical approaches to anesthesia may result in patients being
undermedicated or overmedicated during surgery.

Undermedication may lead to surgical awareness, which is the unintentional
regaining of consciousness during surgery. Surgical awareness may be undetected
during surgery because anesthetized patients who have received muscle relaxants
may be unable to communicate that they are conscious. Published reports estimate
that surgical awareness occurs in approximately 0.2% of procedures requiring
general anesthesia per year. In the United States 0.2% is equal to approximately
35,000 cases of surgical awareness per year.

Overmedication may result from an effort to ensure that the patient is
rendered unconscious to reduce the risk of surgical awareness. 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 post-anesthesia care unit. These factors, in
turn, lead to inefficiencies in operating room and post-anesthesia care unit
scheduling and increased personnel costs.

Additional market opportunities outside the operating room for patient
monitoring with the BIS system include sedation in intensive care units and for
diagnostic and therapeutic procedures. Sedation of patients is achieved through
the use of anesthetic or sedative drugs to affect the level of consciousness.
During sedation, the desired level of consciousness may range from a relaxed but
awake state to a deep state approaching a general anesthetic level.

In the United States, there are more than 83,000 beds in intensive care
units and over 23 million patient days per year are spent in the intensive care
unit. In Western Europe and Japan, there are approximately 91,000 intensive care
unit beds, and over 26 million patient days per year are spent in the intensive
care unit. We believe that approximately one-third of patients in the intensive
care unit could benefit from consciousness monitoring. Currently, the assessment
of a patient's level of sedation in the intensive care unit is subjective and is
conducted only on an intermittent basis during the patient's stay. This
assessment relies on indirect measures and is usually carried out by several
different medical personnel, many of whom are not trained in anesthesia. As a
result, we believe that both overmedication and undermedication occur in
patients in the intensive care unit, both of which may extend the patient's
length of stay. Extending the patient's length of stay in the intensive care
unit may contribute to additional medical complications and increased costs of
care. In addition, undermedication of patients can lead to patient discomfort
and agitation, which may contribute to dangerous complications for the patient.

Each year, approximately 30 million patients undergo diagnostic and
therapeutic procedures using sedation outside the operating room and intensive
care unit, which we refer to as procedural sedation. We estimate that in the
United States there are more than 46,000 rooms in hospitals, outpatient surgical
centers, doctors' offices and dentists' offices where these procedures are
performed. Overmedication during procedural sedation 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. Undermedication during procedural sedation may cause a patient to
experience significant unnecessary discomfort.

We believe that an effective tool for monitoring a patient's level of
consciousness will address the problems of overmedication and undermedication in
anesthesia and sedation monitoring and will contribute to improving the quality,
safety and cost effectiveness of anesthesia and sedation.

THE ASPECT SOLUTION: PATIENT MONITORING WITH THE BIS SYSTEM

We have developed the BIS monitoring system that is based on our
proprietary BIS index, the only FDA-cleared, commercially available, direct
measure of the effects of anesthetics on the brain. Our BIS system is comprised
of our BIS monitor or BIS Module Kit and our single-use, disposable BIS Sensors.
The BIS Sensor is applied to a patient's forehead to acquire the EEG, a measure
of the electrical activity of the brain. The EEG is then analyzed by the BIS
monitor or BIS Module Kit to produce the BIS index. The BIS index is a numerical
index that correlates with levels of consciousness and is displayed as a number
ranging between 100,

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indicating that the patient is awake, and zero, indicating an absence of brain
activity. In October 1996, the FDA cleared the BIS index for marketing for use
as a direct measure of anesthetic effect on the brain, and in February 1998, the
FDA cleared for marketing our A-2000 BIS Monitor.

Our clinically validated BIS index assists anesthesia providers in
assessing levels of consciousness during surgery and minimizing the risk of
unintentional overmedication or undermedication. Clinical trials and routine
clinical use of the BIS system have shown that patient monitoring with the BIS
system results in:

- a reduction in the amount of anesthetics used,

- faster wake-up from anesthesia,

- less patient time in the operating room and the post-anesthesia care unit
following surgery,

- higher rates of outpatients bypassing the post-anesthesia care unit and
proceeding to a less costly step-down recovery area directly from the
operating room,

- improvements in the quality of recovery, and

- improvements in the means to assess the risk of surgical awareness.

Aspect and others have conducted numerous studies to evaluate the clinical
utility of the BIS system. For example, we conducted a 302-patient multicenter,
prospective, randomized, controlled clinical utility trial that demonstrated the
following benefits from using the BIS system:

- Cost-Effective Dosing of Anesthetic Drugs. Patients monitored with the
BIS system during surgery received 23% less anesthetic than patients who
were not monitored with the BIS system. Accordingly, based upon the
average cost of the anesthetic drugs used in this utility trial, the use
of the BIS system could result in drug cost savings of up to $18 per
surgical procedure.

- Faster and More Predictable Recovery From Anesthesia. Patients monitored
with the BIS system during surgery emerged from unconsciousness 35% to
40% faster than patients who were not monitored with the BIS system. Only
5% of patients monitored with the BIS system required more than 15
minutes to emerge from anesthesia compared with 16% of patients who were
not monitored with the BIS system. Moreover, patients who were monitored
with the BIS system were eligible for discharge from the post-anesthesia
care unit 16% faster than patients who were not monitored with the BIS
system.

- Improved Quality of Recovery. Patients received better clinical
assessments of their recovery in post-anesthesia care units when the BIS
system was used. In addition, 43% of patients monitored with the BIS
system were alert and oriented when admitted to the post-anesthesia care
unit, as compared to 23% of patients not monitored with the BIS system
during surgery.

STRATEGY

Our objective is to establish the BIS system as a global standard in
anesthesia and sedation monitoring. Key elements of our strategy to accomplish
our objective include the following:

- Accelerate Market Penetration Through a Direct Sales Force. We will
continue to capitalize on our first-to-market position by utilizing a
direct sales force in the United States to further penetrate the market.
We believe that a direct sales force is best able to convey to anesthesia
providers and administrators the clinical benefits and potential cost
savings achievable when patients are monitored with the BIS system. We
also intend to complement our direct sales force with specialty
distributors in selected markets, the sales organizations of our original
equipment manufacturers and contracts with hospital group purchasing
organizations. In the United States, we had installed 1,005 monitors in
approximately 140 sites as of July 4, 1998 and we had installed 3,226
monitors in approximately 450 sites as of July 3, 1999.

- Educate and Promote the Use of the BIS System Through Clinical
Specialists. We intend to establish and maintain a ratio of
approximately 1.5 clinical specialists for each of our direct sales
representatives.
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<PAGE> 35

The principal responsibilities of these clinical specialists are to
provide education, training and support for the installed base and to
promote use of BIS systems. As of July 3, 1999, we estimate that more
than 650,000 patients have been monitored using the BIS system. As a
result of the growth in the installed base and the efforts of our
clinical specialists, revenue from the sales of BIS Sensors increased
from 27% of revenue for the first six months of 1998 to 44% of revenue
for the first six months of 1999. We expect that clinical specialists
will also play a key role in expanding patient monitoring with the BIS
system outside the operating room, including in the intensive care unit
and procedural sedation markets.

- Broaden Distribution Channels Through Original Equipment Manufacturer
Relationships. We have entered into original equipment manufacturer
agreements with Drager Medizintechnik GmbH, Hewlett-Packard GmbH, Nihon
Kohden Corporation and Spacelabs Medical, Inc. Under these agreements,
our original equipment manufacturers integrate the BIS Module Kit into
their patient-monitoring or anesthesia delivery systems. These systems
will require the use of our BIS Sensor to generate the BIS index. We
believe that original equipment manufacturer relationships will
accelerate market penetration of the BIS technology and provide us with
access to a large installed base of patient monitoring and anesthesia
equipment. We expect to enter into additional original equipment
manufacturer relationships over the next several years to expand the
channels for distribution of the BIS system, particularly in
international markets.

- Maintain Market Leadership Through Continuous Product Improvements and
Extensions. We intend to adapt the BIS technology for use in the
intensive care unit and for procedural sedation. We also plan to utilize
our core expertise in EEG signal processing and sensor technology to
continuously improve the performance of the BIS index in the presence of
noise and motion artifacts. We are developing a BIS Sensor that will
contain an electronic memory device and a smaller BIS Sensor that can be
used with children between the ages of two and eight years. We believe
that these improvements and extensions of the BIS technology will
strengthen our competitive position while providing our customers with
improved products.

- Target New Market Opportunities Through Technology Development. We
intend to continue to focus on new applications for our core technology,
including other neuromonitoring applications, such as the diagnosis of
Alzheimer's disease, and other uses, such as analysis of
electrocardiograms. Continued innovation and commercialization of new
proprietary products are essential elements in our long-term growth
strategy. We intend to protect our technology leadership position and
maintain our competitive advantage through product innovation,
acquisitions of new technologies, by defending our current patents and
other proprietary rights, and by seeking to obtain additional patents and
other proprietary rights.

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PRODUCTS

The following chart summarizes our proprietary product offerings, all of
which have received clearance from the FDA:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
INITIAL
COMMERCIAL
PRODUCT SHIPMENT DESCRIPTION
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A-2000 BIS Monitor 1998 Small, lightweight third-generation BIS monitor
BIS Sensor 1997 Disposable product for use with A-2000, A-1050
and BIS Module Kit
BIS Module Kit 1998 Components of BIS monitoring technology to be
integrated into monitors sold by original
equipment manufacturers
A-1050 EEG Monitor with BIS 1996 Second-generation monitor with BIS index and
simplified user interface
Zipprep EEG Electrode 1995 EEG electrode with our Zipprep technology
- -------------------------------------------------------------------------------------------------------
</TABLE>

A-2000 BIS MONITOR

We began commercial distribution of the A-2000 BIS Monitor, our
third-generation monitor, in February 1998. The A-2000 is a compact,
lightweight, portable monitor designed to accommodate the space limitations and
positioning requirements of surgical settings. The A-2000 displays the BIS index
and supporting information and includes our proprietary digital signal
converter. This converter is a palm-sized module that serves as the interface
between the BIS monitor and the BIS Sensor. The digital signal converter
acquires the EEG signal from the BIS Sensor and converts the EEG signal to
digital format. The EEG signal is then processed and the BIS index is displayed
on the A-2000. The current list price for the A-2000 is $8,900.

BIS SENSOR

We commenced commercial distribution of the BIS Sensor in January 1997. The
BIS Sensor is a single-use, disposable product for use with the A-2000, the
A-1050 and the BIS Module Kit. Our 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 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 current list price for the BIS Sensor is $15.

Our Zipprep self-prepping technology is a key feature of the BIS Sensor.
The technology minimizes patient set-up time and establishes effective
electrical contact with the patient which enables consistent, accurate readings
of the EEG signal. Prior to our development of the Zipprep technology, to obtain
an EEG signal the user prepared a patient's skin by rubbing an abrasive cream
over the forehead 10 to 20 times in order to remove the top layer of skin prior
to applying the electrode.

BIS MODULE KIT

In 1996, we introduced our BIS Module Kit, which is designed to facilitate
the integration of the BIS index into monitoring products marketed by our
original equipment manufacturers. The BIS Module Kit consists of two pieces, our
proprietary digital signal converter and a small circuit board that resides in
the original equipment manufacturer's equipment. The digital signal converter
acquires the EEG signal from the BIS Sensor and converts the EEG signal to
digital format. The circuit board then processes the EEG signal and outputs the
BIS index to the original equipment manufacturer's system.

The common architecture of the BIS Module Kit facilitates integration of
the BIS index into the original equipment manufacturer's system and simplifies
any future software updates of the BIS index technology.

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<PAGE> 37

Each original equipment manufacturer is required to obtain FDA and other
appropriate regulatory clearance of its BIS module product.

TECHNOLOGY

We developed the BIS system, including our proprietary BIS index, over 10
years. The BIS index is a numerical index that correlates with levels of
consciousness and is derived from an analysis of the EEG signal. In general, an
EEG signal changes from a small-amplitude, high-frequency signal while a person
is awake to a large-amplitude, low-frequency signal while a person is deeply
anesthetized. Historically, researchers have used observations about these
changes in the EEG signal to create mathematical algorithms to track the effects
of anesthetics on the brain. However, these algorithms 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 anesthetics and doses.

In developing the BIS index, we sought to improve these early EEG analyses
in two ways. First, by using bispectral analysis, a mathematical tool that
examines signals such as the EEG, we can extract new information from the EEG
signal. Second, we developed proprietary processing algorithms that extract
information from bispectral analysis, power spectral analysis and time domain
analysis. Geophysicists originally used bispectral analysis in the early 1960s
to study ocean wave motion, atmospheric pressure changes and seismic activity.
The advent of high-speed, low-cost digital signal processors has enabled the use
of bispectral analysis for other applications. By using bispectral analysis, we
are able to extract a distinctive fingerprint of the underlying signal structure
of the EEG and represent it as a three-dimensional mathematical model.

We 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, Aspect and others collected a large database of high
fidelity EEG recordings and clinical assessments from patients and volunteers
receiving a wide variety of anesthetics. Researchers used clinical assessments
such as a sedation rating scale, picture or word recall memory tests and
response to stimuli to define levels of consciousness. Using statistical
methods, we identified features within the EEG that correlated with sedation and
loss of consciousness. We then used proprietary statistical methods to combine
these features to generate an interpretive numerical index, which we refer to as
the BIS index. The BIS index ranges from 100, indicating that the patient is
awake, to zero, indicating an absence of electrical brain activity.

CLINICAL DEVELOPMENT

Our clinical research and regulatory affairs group is responsible for:

- establishing collaborative relationships with leading clinical
researchers,

- encouraging publications related to the BIS index in the scientific
literature,

- coordinating with the FDA and other regulatory agencies,

- conducting clinical research with the goal of extending the application
of patient monitoring with the BIS system to other settings and clinical
uses, and

- collecting data for new product development.

We have a clinical database of over 5,000 cases for use in algorithm
development and product validation based on trials that we conducted or
sponsored or that third parties undertook.

In 1996, the FDA cleared the BIS index for marketing as a measure of
anesthetic effect on the brain. The regulatory process involved studies we
conducted 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.

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<PAGE> 38

We evaluated the use of patient monitoring with the BIS system as a measure
of sedation, consciousness and memory function in two clinical trials. In a
multicenter study involving approximately 100 volunteers, we demonstrated that
the BIS index correlated with the level of responsiveness and memory function
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 we partially funded, have generally confirmed these results.

Our multicenter, prospective, randomized, controlled clinical utility trial
of 302 patients demonstrated the outcome benefits of patient monitoring with the
BIS system. This trial compared clinical outcomes of a group of patients
monitored with the BIS system to a similar group of patients who were monitored
under standard clinical practice without the BIS system. The principal efficacy
endpoints were the amounts of anesthetic given and the speed of recovery
following surgery. Patients monitored with the BIS system:

- received 23% less of the anesthetic drug propofol,

- woke up earlier after surgery in the operating room,

- were more likely, 43% versus 23%, to arrive at the post-anesthesia care
unit fully alert and oriented,

- were judged by post-anesthesia care unit nurses to have had better
recovery, and

- met criteria for discharge from the post-anesthesia care unit sooner.

Following FDA clearance of the BIS index, there have been at least five
additional prospective, randomized, clinical studies of patient monitoring with
the BIS system. These studies, one of which we conducted, evaluated the
effectiveness of patient monitoring with the BIS system in conjunction with
various commonly used anesthetics on nearly 300 patients. Each of the five
studies indicated that patient monitoring with the BIS system led to a
statistically significant reduction, ranging from 15% to 38%, in the amount of
anesthetic per patient.

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

In 1997, our clinical study of 1,552 patients documented the clinical
impact and cost-effectiveness of routine monitoring with the BIS system in all
operating rooms of a high-acuity teaching hospital located in Atlanta, Georgia.
Patients received a wide variety of anesthetics typically used in general
practice. We collected comprehensive data on all patients who received general
anesthesia for at least one hour. The results of this clinical study
demonstrated that maintaining BIS index values within a recommended target range
during general anesthesia was associated with improved outcomes in terms of drug
utilization, operating room and post-anesthesia care unit recovery and
associated costs.

In 1999, a major teaching hospital located in Boston, Massachusetts
conducted a clinical study of over 5,000 patients that documented the clinical
impact on patient recovery of routine monitoring with the BIS system in its
outpatient surgery unit. This study compared both the length of stay in the
post-anesthesia care unit and the eligibility of patients to bypass the
post-anesthesia care unit and proceed directly to the step-down recovery area
following surgery, both before and after the installation of BIS monitors in the
hospital's outpatient surgery unit. Overall, the length of stay in the
post-anesthesia care unit was reduced by 16% after the installation of BIS
monitors. In addition, 43% of patients monitored with the BIS system were
eligible to bypass the post-anesthesia care unit and proceed directly to the
step-down recovery area following surgery compared to 24% of patients prior to
monitoring with the BIS system. By the end of the study, the hospital
implemented a formal bypass program which allowed 35% of general anesthesia
patients monitored with the BIS system to bypass the post-anesthesia care unit
and to proceed directly to the step-down recovery area following surgery. Prior
to the implementation of monitoring with the BIS system, the hospital did not
permit patients who received general anesthesia to bypass the post-anesthesia
care unit.
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There are more than 350 scientific articles and abstracts reporting the
results of BIS index performance in studies conducted by us and third parties.
In addition, we collaborate with over 50 clinical research sites.

Several of the studies described above have also shown that patient
monitoring with the BIS system can assist anesthesia providers in assessing the
risk of surgical awareness. Estimates of the frequency of surgical awareness
indicate that awareness occurs in only two patients for every 1,000 surgical
procedures requiring general anesthesia. As of July 3, 1999, we believe that
more than 650,000 patients have been monitored with the BIS system during
surgery. Although we have not systematically solicited reports of surgical
awareness, only 24 cases of possible surgical awareness during BIS monitoring
have been reported to us. These reports may not include all cases of surgical
awareness that might have occurred during patient monitoring with the BIS
system. In most of the 24 cases that were reported to us, when BIS index values
were recorded at the time of awareness, high BIS index values were noted,
indicating that the BIS index correctly identified the increased risk of
awareness in these patients. However, in a small number of these reported cases,
surgical awareness may not have been detected by monitoring with the BIS system.

We have not conducted a prospective, randomized, controlled study to
evaluate whether or not monitoring with the BIS system reduces the incidence of
surgical awareness. A controlled study to evaluate the ability of monitoring
with the BIS system to reduce the frequency of surgical awareness would require
a sample size of up to 50,000 patients, which is not practicable. Because these
studies have not been undertaken, we cannot and do not claim that patient
monitoring with the BIS system will reduce the incidence of surgical awareness.
Although our experience suggests that surgical awareness is more likely to occur
when BIS values are high, we do not believe that our experience proves that
patient monitoring with the BIS system will reduce the frequency of awareness.

SALES, MARKETING AND CUSTOMERS

DOMESTIC

Our customers include anesthesia providers, hospitals, outpatient surgical
centers and individual practitioners in office-based practice. The key customers
that we have initially targeted include larger hospitals with a high ratio of
outpatient surgical procedures to total surgical procedures and outpatient
surgical centers, at or near capacity. Through July 3, 1999, BIS systems have
been installed in approximately 450 sites in the United States.

We market our BIS system in the United States through a direct sales force.
As of July 3, 1999, our domestic sales force was comprised of 20 sales
professionals and 26 clinical specialists. We have developed a financial model
which is used by sales representatives to assist administrators in evaluating
the economic impact of patient monitoring with the BIS system at their hospital.
We believe that our 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 feedback to our marketing and research and development
staffs. We also believe that these visits may help to establish patient
monitoring with the BIS system as a standard in anesthesia monitoring and to
extend patient monitoring with the BIS system into other settings in the
hospital, such as the intensive care unit and procedural sedation rooms.
Clinical specialists generally have nursing backgrounds and have experience in
anesthesia, perioperative care or critical care. We currently expect to
establish and maintain a ratio of approximately 1.5 clinical specialists for
each of our sales representatives.

We have entered into an agreement, dated August 13, 1998, with Novation,
the supply cost management company for VHA Inc. and the University Hospital
Consortium, two national health care alliances. Under this agreement, the
approximately 1,900 member healthcare organizations of VHA and the University
Hospital Consortium will have the right to purchase BIS monitors and BIS Sensors
under the pricing terms contained in the agreement. The member healthcare
organizations of the VHA and the University Hospital Consortium represent 30% of
the teaching and community hospitals in the United States and perform 33% of the
surgical

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<PAGE> 40

procedures in the United States. Novation's field force will work with our sales
force to facilitate the adoption of BIS technology by their member healthcare
organizations.

We offer 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. We believe that the
sales-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.

We conduct several activities for the different constituencies that may be
involved in the decision-making process. For clinical audiences, we exhibit at
tradeshows, sponsor speakers at professional meetings and develop articles for
publication in conjunction with industry experts. In addition, we work with
hospitals to publicize their adoption of patient monitoring with the BIS system
in an effort to assist them in communicating their commitment to improving the
quality and efficiency of patient care.

INTERNATIONAL

In late 1998, we established our international operations and opened our
international headquarters in Leiden, The Netherlands. We are developing our
international sales and distribution program through a combination of
distributors and marketing partners, including companies with which we have
entered into OEM relationships. We expect to complement our international
third-party distribution program through direct sales to select customers and to
support these customers with clinical specialists. As of July 3, 1999, we
employed 10 persons in our international organization. Substantially all
international sales are denominated in United States dollars. See Note 16 of
notes to our consolidated financial statements for domestic and international
financial information.

ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS

We have entered into agreements with three patient monitoring companies,
Hewlett-Packard GmbH, Nihon Kohden Corporation and Spacelabs Medical, Inc. and
one anesthesia equipment company, Drager Medizintechnik GmbH, that provide for
the integration of our BIS technology into their equipment. Spacelabs introduced
a BIS module for its patient monitoring systems in October 1998. We currently
expect that BIS modules for our other three original equipment manufacturers
will be available within the next several years.

Under an OEM Development and Purchase Agreement, dated August 6, 1999,
between Aspect and Hewlett-Packard, we have agreed with Hewlett-Packard to
integrate our BIS technology with Hewlett-Packard's patient monitors. Unless
terminated sooner if milestones are not achieved by October 31, 2001, this
agreement expires on August 6, 2005. The term of the agreement automatically
renews for one-year periods unless either party provides written notice of
termination to the other party, at least 60 days prior to expiration of the
agreement.

Under an International License Agreement, dated January 21, 1998, between
Aspect and Nihon Kohden, we have licensed our technology to Nihon Kohden on a
worldwide non-exclusive basis. Nihon Kohden has the right to incorporate our
technology into its patient monitoring systems. Unless terminated sooner in
accordance with the agreement, the agreement expires on January 21, 2002.

Pursuant to the terms of a Distribution and License Agreement, dated April
1, 1996, between Aspect and Spacelabs Medical, Inc., we have granted to
Spacelabs a worldwide, non-exclusive, royalty-bearing license to the BIS index
to develop, manufacture, market and sell Spacelabs monitoring equipment that
incorporates the BIS index. Spacelabs also has the right to distribute BIS
Senors on a non-exclusive basis throughout the world with the exception of the
United States. Unless earlier terminated, the license expires in April 2006.

39
<PAGE> 41

Under a Product Agreement with Drager Medizintechnik GmbH, dated May 5,
1999, we have agreed to integrate our technology with Drager's patient therapy
and monitoring technology. Unless terminated sooner, this agreement will expire
on December 31, 2005. This agreement automatically renews for successive one-
year periods thereafter unless either party provides written notice of
termination to the other party, at least twelve months prior to expiration of
the renewal period.

For the fiscal years ended December 31, 1996, 1997 and 1998, sales to
Spacelabs accounted for approximately 49%, 35% and 13%, respectively, of our
total revenue. For the six months ended July 4, 1998 and the six months ended
July 3, 1999, sales to Spacelabs accounted for approximately 17% and 3% or our
revenue, respectively.

RESEARCH AND DEVELOPMENT

Our research and development efforts focus primarily on continuing to
improve the function and features of the BIS system and enhancing our technical
leadership in signal-processing technology for use in patient care. We intend to
leverage the BIS technology for the development of new monitoring products and
proprietary disposable sensors for new applications and to take advantage of new
opportunities such as the intensive care unit and procedural sedation markets.

During the fiscal years ended December 31, 1996, 1997 and 1998, and the six
months ended July 3, 1999, we spent $2.3 million, $2.6 million, $4.0 million and
$2.4 million, respectively, in our research and development efforts, including
clinical and regulatory expenses. We expect research and development expenses to
increase in the future as we seek to enhance our existing products and develop
additional products.

Our research and development department has four primary areas of
responsibility:

- algorithm research,

- product development,

- pre-production quality assurance, and

- clinical engineering.

Algorithm research involves developing signal-processing techniques to
analyze the EEG and other electrical signals generated by the body. Our product
development activities include developing and maintaining the hardware and
software, including signal-processing software employed in the 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 our disposable products,
including the BIS Sensor products. Pre-production quality-assurance activities
include testing our products to ensure that they meet FDA guidelines, other
applicable regulatory and international quality standards and internal
verification and validation protocols. Our clinical engineering activities
include optimizing products for use in the clinical environment.

We are developing a BIS Sensor with improved signal processing for
detection and filtration of electrical interference. We also continue to explore
new signal-processing techniques to improve the quality of the BIS index. We are
developing a new version of the BIS Sensor that will contain an electronic
memory device. This memory device will allow information about the sensor, such
as lot code, expiration date and type of sensor, to be stored on the sensor and
to be retrieved by the BIS monitor when used. In addition, we are developing a
smaller BIS Sensor that can be used with children between the ages of two and
eight years. We are exploring the development of other BIS Sensors which offer
advantages in cases where patients may require extended monitoring with the BIS
system, such as in the intensive care unit.

We are also investigating other product areas that utilize our expertise in
anesthesia delivery and monitoring. Specifically, we are exploring the
application of the BIS index to provide additional information about other
effects of anesthetics on the patient. We are evaluating the application of the
BIS index to measure additional states of the brain, including dementia, which
may apply to detection of Alzheimer's

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<PAGE> 42

disease, sleep cycles, seizure detection, and/or other neurological states. We
believe that bispectral analysis may provide a means for extracting and
quantifying subtle physiological information contained in the electrocardiogram,
or ECG, and thus has the potential to enhance the diagnostic accuracy of many
ECG applications, including the early diagnosis and assessment of coronary
artery disease, a more rapid assessment of heart attacks and monitoring for
advanced perioperative ischemia, which is inadequate blood flow to the heart
during surgery, for patients at risk for heart attacks.

Additional studies, some of which we sponsored, are being conducted to
assess the performance of the BIS index in the presence of certain anesthetics,
such as ketamine, and patient populations such as infants and young children,
not included in the clinical development of the BIS algorithms.

MANUFACTURING

We have a 7,000 square foot manufacturing facility located in our Natick,
Massachusetts headquarters. In this facility we assemble all of our BIS
monitors, and we produce substantially all of our BIS Sensors on a
semi-automated production line. Prior to 1998, we outsourced all BIS Sensor
manufacturing. We currently outsource to third parties the production of our
Zipprep EEG Electrodes. In the first quarter of 2000, we expect to move into
approximately 60,000 square feet of development, production and administrative
space.

Our production process for our BIS monitors consists of final assembly,
integration and testing of standard and custom components. Our production
process for our BIS Sensor consists of several manufacturing and assembly
processes using custom components. Qualified sub-contractors, who have met our
supplier certification process and are placed on an approved vendors list,
produce certain custom components.

We maintain a quality-assurance program covering our manufacturing
operations. Suppliers of purchased components are required to meet stated
specifications. We certify suppliers prior to use by conducting audits and
product inspections. We engage in ongoing evaluations of the performance of our
suppliers by evaluating the results of inspections and tests as well as the
timeliness of product deliveries. We employ numerous quality-assurance
procedures during our 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. We
maintain an ongoing post-sale performance-monitoring program.

COMPETITION

The medical device industry is subject to intense competition. We believe
that competition will initially come from companies, including patient
monitoring companies, currently marketing conventional EEG monitors utilizing
standard signal-processing techniques such as spectral edge frequency analyses
and median frequency analyses. We also believe that competition will come 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. Several potential competitive
products are currently being marketed outside the United States although we do
not believe that these products provide any significant advantages relative to
the BIS technology. Additionally, a number of academic researchers worldwide are
studying the potential use of other techniques to measure the effects of
anesthetics. These other products and techniques include the use of auditory
evoked potentials, heart rate variability, pupillary reflexes and skin blood
flow measurement techniques.

We believe that the principal competitive factors in the market for
anesthesia-monitoring products include:

- improved patient outcomes,

- cost effectiveness,

- acceptance by leading anesthesia providers,

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<PAGE> 43

- ease of use for anesthesia providers,

- the publication of peer reviewed clinical studies,

- sales and marketing capability,

- timing and acceptance of product innovation,

- patent protection, and

- product quality.

PATENTS AND PROPRIETARY RIGHTS

Our policy is to prosecute and enforce our patents and proprietary
technology. We intend to continue to file United States and foreign patent
applications to protect technology, inventions and improvements that are
considered important to the development of our business. We also rely upon trade
secrets, know how, continuing technological innovation and licensing
opportunities to develop and maintain our competitive position. We have
established a substantial proprietary position with respect to our products and
our core signal processing technology, bispectral analysis, and its application
to biological signals. As of July 3, 1999, we held 10 United States patents and
had filed six additional United States patent applications. We also have
numerous corresponding patents and pending patent applications in certain major
industrial countries, including Canada, the major European market countries,
Australia and Japan. The following chart summarizes our United States patents
and patent applications:

<TABLE>
<C> <C> <S> <C> <C>
- --------------------------------------------------------------------------------------------------------
NUMBER NUMBER PATENT
OF ISSUED OF PATENT EXPIRATION
PATENTS APPLICATIONS TECHNOLOGY COVERED DATE
- --------------------------------------------------------------------------------------------------------
4 -- Application of Bispectral and higher order March 13, 2007
analysis and various statistical modeling April 30, 2008
technologies to EEG signals June 14, 2011
October 17, 2012
1 1 Methods of ensuring the reliability of the
computed values December 24, 2016
-- 1 Method of evaluating BIS information to facilitate
clinical decision making
2 -- Application of bispectral and higher order May 15, 2007
analysis to electrocardiogram signals June 4, 2008
1 -- Zipprep self-prepping disposable electrode April 26, 2011
technology
1 1 Technology relating to the interface between the
BIS Sensor and the BIS monitor October 20, 2015
-- 3 BIS Sensor technology
1 -- Signal acquisition technology for digital signal
------ ------ converter October 15, 2012
10 6
------ ------
------ ------
- --------------------------------------------------------------------------------------------------------
</TABLE>

We have also been granted a perpetual, royalty-free, non-exclusive license by a
third party to a United States patent covering signal acquisition technology for
digital signal converters.

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. Our existing products are regulated
in the United States as medical devices by the FDA under the Federal Food, Drug,
and Cosmetic Act, or FDC Act. Pursuant to the FDC Act, the FDA regulates the
research, testing, manufac-

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<PAGE> 44

turing, safety, labeling, storage, record keeping, advertising, distribution and
production of medical devices. Noncompliance with applicable regulations can
result in refusal 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 we can introduce a new product in the United States, we
must obtain FDA clearance of a premarket notification under Section 510(k) of
the FDC Act, referred to as a 510(k) notification, or approval of a premarket
approval application under Section 515 of the FDC Act. To date, we have received
clearance of 510(k) notification from the FDA with respect to the following
products:

- Zipprep EEG Electrodes (June 1994),

- A-1050 EEG Monitor with BIS (January 1996),

- BIS Sensor (October 1996),

- BIS Clinical Utility Indication (October 1996), and

- A-2000 BIS Monitor (February 1998).

Once we have received clearance of a 510(k) notification, any products we
manufacture or distribute are subject to extensive and continuing regulation by
the FDA, including compliance with current Good Manufacturing Practices
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 FDC Act regulates our quality control and manufacturing procedures by
requiring us to demonstrate and maintain compliance with current Good
Manufacturing Practices regulations, including quality systems regulations, as
specified by the FDA. This regulation requires, among other things, that:

- we use written procedures to control our product development and
manufacturing process,

- we validate, by extensive and detailed testing of every aspect of the
process, our ability to produce devices which meet our manufacturing
specifications,

- we investigate any deficiencies in the manufacturing process or in the
products produced, and

- we maintain detailed record keeping.

The current Good Manufacturing Practices 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 current Good Manufacturing Practices
regulations by conducting periodic inspections of manufacturing facilities. If
violations of applicable regulations are noted during FDA inspections of our
manufacturing facilities, the continued marketing of our products may be
adversely affected. In August 1996, the FDA conducted a routine inspection of
our manufacturing facility to ensure compliance with current Good Manufacturing
Practices regulations. The FDA noted no adverse observations during this
inspection. We believe that we have continued to maintain manufacturing
facilities and procedures that are fully compliant with all applicable
government quality systems regulations and guidelines.

In June 1998, we obtained ISO 9001/EN 46001 international quality systems
registration, a certification showing that our procedures and manufacturing
facilities comply with standards for quality assurance and manufacturing process
control. Our compliance with this registration has been confirmed since June
1998 in semi-annual surveillance audits. The ISO 9001 certification, along with
the EN 46001, the European Medical Device Directive certification, signifies
compliance with the requirements enabling us to affix the CE Mark to

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<PAGE> 45

our 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.

We have established a dedicated regulatory and quality assurance group to
maintain regulatory compliance and manage all of our quality-assurance
activities. This group is responsible for the following activities:

- all regulatory submissions and communications,

- scheduling and performing company-wide audits,

- coordinating product update procedures and corrective actions,

- maintaining adherence 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.

THIRD-PARTY REIMBURSEMENT

Third-party payors, including 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
our products by regulating the maximum amount of reimbursement provided for by
these payors to the anesthesia providers, hospitals, outpatient surgical centers
or physicians' offices where surgical procedures are performed.

We expect that anesthesia providers will not be separately reimbursed for
patient-monitoring activities utilizing the BIS system. When providers, such as
hospitals or outpatient surgical centers, are reimbursed a fixed fee calculated
on a per case, per stay, or per capita basis, the cost of monitoring with the
BIS system will not be recovered by these providers unless the incremental costs
of this monitoring are offset by savings in other costs, such as the costs of
anesthetics or costs of the operating room or post-anesthesia care unit. This
type of reimbursement policy is typical for inpatient hospital procedures and
procedures performed in outpatient surgical centers and we expect it will become
typical for all outpatient surgeries beginning in the year 2000. Patient
monitoring with the BIS system may not result in sufficient savings to offset
these costs. When reimbursement is based on charges or costs, patient monitoring
with the BIS system may have the effect of reducing reimbursement because the
charges or costs for surgical procedures, including operating room and
post-anesthesia care unit charges and costs, may decline as a result of
monitoring with the BIS system.

EMPLOYEES

As of July 3, 1999, we had 164 full-time employees, of which:

- 20 persons were engaged in research and development activities,

- 33 persons were engaged in manufacturing and engineering,

- 11 persons were engaged in clinical and regulatory affairs,

- 77 persons were engaged in sales and marketing and clinical support, and

- 23 persons were engaged in general and administrative functions.

None of our employees is covered by a collective bargaining agreement. We
consider relations with our employees to be good.

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<PAGE> 46

SCIENTIFIC ADVISORS

We seek advice from a number of leading scientists and physicians on
scientific and medical matters, including experts in EEG monitoring,
pharmacology and anesthesia management. These individuals advise us concerning a
number of matters, including:

- our research and development programs,

- the design and implementation of our clinical research program,

- our publication strategies,

- the identification of market opportunities from the clinical perspective,
and

- specific scientific and technical issues.

FACILITIES

We currently lease approximately 23,000 square feet of development,
production, and administrative space in Natick, Massachusetts pursuant to a
lease which expires on October 31, 2000. We have entered into a letter of intent
for a seven-year lease of approximately 60,000 square feet of development,
production and administrative space beginning in the first quarter of 2000. We
expect to move our operations to this space in the first quarter of 2000. Our
international organization is based in approximately 2,800 square feet of office
space in Leiden, The Netherlands, which is expected to be sufficient to meet our
needs for the next 18 months. We believe our current facilities, including the
space to be occupied in the first quarter of 2000, will be sufficient to meet
our needs through mid-2001 and that additional space will be available at a
reasonable cost to meet our space needs thereafter.

INSURANCE

Our business entails the risk of product liability and product recall
claims and any claims of these types could have an adverse impact on us. We have
taken and will continue to take what we believe are appropriate precautions,
including maintaining general liability and commercial liability insurance
policies which include adequate coverage for product liability and product
recall claims. We evaluate our insurance requirements on an ongoing basis to
enable us to maintain adequate level of coverage. However, product liability or
product recall claims could exceed our insurance coverage limits and our
insurance may not be available on commercially reasonable terms or at all.

LITIGATION

We are not a party to any material threatened or pending legal proceedings.

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<PAGE> 47

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of Aspect, their respective ages as of
August 31, 1999 and their positions with Aspect are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Nassib G. Chamoun.................... 37 Chief Executive Officer, President and Director
J. Breckenridge Eagle................ 49 Chairman of the Board of Directors
J. Neal Armstrong.................... 61 Vice President, Chief Financial Officer and Secretary
Jeffrey L. Barrett................... 36 Vice President of Manufacturing and Operations
Philip H. Devlin..................... 42 Vice President of Research and Development
Steven H. Kane....................... 46 Vice President of Sales and Field Operations
Paul J. Manberg, Ph.D................ 45 Vice President of Clinical, Regulatory and Quality
Assurance
Jean M. Nelson....................... 40 Vice President of Marketing
Helgert van Raamt.................... 51 Vice President and Managing Director -- International
Boudewijn L.P.M. Bollen.............. 52 Director
Stephen E. Coit...................... 51 Director
Edwin M. Kania, Jr................... 42 Director
Lester John Lloyd.................... 63 Director
Terrance G. McGuire.................. 43 Director
Donald R. Stanski, M.D............... 49 Director
</TABLE>

Nassib G. Chamoun is a founder of Aspect and has served as a director of
Aspect since 1987. Mr. Chamoun has served as President of Aspect 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 Aspect 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.

J. Breckenridge Eagle has served as a director of Aspect 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 Aspect in 1996 and served as a consultant to Aspect 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.

J. Neal Armstrong has served as Vice President, Chief Financial Officer and
Secretary of Aspect 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. 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 electronics company. Mr. Armstrong holds a bachelors
degree in Business Administration from the University of Texas and is a
certified public accountant.

Jeffrey L. Barrett has served as Vice President of Manufacturing and
Operations of Aspect 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, Inc., serving most recently as its Vice President of Operations.
Mr. Barrett received a bachelors

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<PAGE> 48

degree in Economics and Industrial Engineering from Rutgers University and a
masters degree in Business Administration from Boston University.

Philip H. Devlin has served as Vice President of Research and Development
of Aspect since 1994 and served as Director of Product Development of Aspect
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.

Steven H. Kane has served as Vice President of Sales and Field Operations
of Aspect 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.

Paul J. Manberg has served as Vice President of Clinical, Regulatory and
Quality Assurance of Aspect 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.

Jean M. Nelson has served as Vice President of Marketing of Aspect since
1995 and served as Director of Marketing of Aspect from 1992 to 1995. From 1988
to 1992, she was employed by Nellcor Incorporated, 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.

Helgert van Raamt has served as Vice President and Managing
Director -- International of Aspect since November 1998. From April 1990 to
October 1998, Mr. van Raamt held several positions with Mallinckrodt, Inc., a
specialty chemicals and healthcare company, and its predecessor entities,
Nellcor Puritan Bennett, Inc. and Nellcor Incorporated. From February 1998 to
October 1998, Mr. van Raamt served as Mallinckrodt's Vice President and Managing
Director, Europe and as a member of Mallinckrodt's General Management Committee.
From August 1996 to February 1998, Mr. van Raamt served as Vice President and
Managing Director of Nellcor Puritan Bennett. From July 1995 to August 1996, Mr.
van Raamt was Director of Sales and Marketing at Nellcor Puritan Bennett, and
from April 1990 to July 1995, he held a variety of positions at Nellcor
Incorporated, including General Manager Europe North, Middle East, and Africa
and Director of Sales and Marketing. Mr. van Raamt studied mechanical
engineering at the Technical University of Twente in The Netherlands.

Boudewijn L.P.M. Bollen has served as a director of Aspect since November
1998. Since November 1998, he has been a self-employed consultant. From June
1998 to October 1998, Mr. Bollen served as President -- International of Aspect.
From 1986 to June 1998, Mr. Bollen held several positions with Mallinckrodt,
Inc. and predecessor entities, 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

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<PAGE> 49

holds the equivalent of a bachelors degree in Hotel Business Management from the
Hotel Business School in Maastricht, Holland.

Stephen E. Coit has served as a director of Aspect 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, 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.

Edwin M. Kania, Jr. has served as a director of Aspect 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.

Lester John Lloyd has served as a director of Aspect 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. Mr. Lloyd was a
founder and served as Chief Executive Officer of Nellcor Incorporated from 1981
to 1990.

Terrance G. McGuire has served as a director of Aspect since 1997. He was a
founder and has been a general partner of Polaris Venture Partners, Inc., a
venture capital firm, since June 1996. Since 1992, Mr. McGuire has served as
general partner of Burr, Egan, Deleage & Co., a venture capital firm, and since
1988, he has served as general partner of Beta Partners, a venture capital firm.
Mr. McGuire is also a director of Akamai Technologies, Inc. and deCode Genetics,
Inc.

Donald R. Stanski has served as a director of Aspect 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 the terms of a voting agreement, certain stockholders of Aspect
have the right to nominate persons as their representatives on the 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.

BOARD OF DIRECTORS

The board of directors is currently fixed at eight members. Following this
offering, the board of directors will be divided into three classes, each of
whose members will serve for a staggered three-year term. The board of directors
will consist of three Class I Directors (Messrs. Coit and McGuire and Dr.
Stanski), three Class II Directors (Messrs. Bollen, 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 2000, 2001 and 2002, respectively.

In addition, Aspect's by-laws provide that the authorized number of
directors may be changed only by resolution of the board of directors or by the
stockholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes, so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of the board of directors may have the effect of
delaying or preventing changes in control or management of Aspect.

Each executive officer is elected by, and serves at the discretion of, the
board of directors. Each of Aspect's officers and directors, other than
nonemployee directors, devotes his or her full time to the affairs of Aspect.
There are no family relationships among any of the directors or officers of
Aspect.

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<PAGE> 50

COMPENSATION OF DIRECTORS

We reimburse non-employee directors for reasonable out-of-pocket expenses
incurred in attending meetings of the board of directors or of any committee of
the board of directors. No director who is also an employee of Aspect receives
separate compensation for services rendered as a director.

In addition, Aspect's non-employee directors are eligible to receive stock
options under Aspect's 1998 Director Stock Option Plan.

On June 15, 1998, Mr. Bollen received a stock option to purchase 40,000
shares of common stock in connection with his employment with Aspect. In
November 1998, Mr. Bollen ceased to be an employee of Aspect and was elected to
the board of directors. In accordance with the original terms of his stock
option agreement, the option will continue to vest monthly over four years for
so long as Mr. Bollen continues to serve as a director of Aspect. The option has
an exercise price of $4.20.

1998 Director Stock Option Plan. Aspect's 1998 Director Stock Option Plan
was initially adopted by Aspect's board of directors and stockholders in
February 1998. Under the terms of the director plan, Aspect's directors who are
not employees of Aspect are eligible to receive nonstatutory options to purchase
shares of common stock. A total of 200,000 shares of common stock may be issued
upon exercise of options granted under the director plan. As of July 3, 1999,
options to purchase an aggregate of 60,000 shares of common stock at a weighted
average exercise price of $5.15 were outstanding under the director plan.

Pursuant to the director plan, on April 14, 1998, each non-employee
director (other than Messrs. Bollen and Lloyd and Dr. Stanski) received an
initial option to purchase 10,000 shares of our common stock. Each person who
first becomes a non-employee director after that initial grant date is eligible
to receive an option to purchase 10,000 shares of our common stock on the date
of his or her initial election to the board of directors. In addition, on May 3,
1999, the following non-employee directors received additional options to
purchase 5,000 shares of our common stock: Messrs. Coit, Kania, Lloyd and
McGuire and Dr. Stanski. Upon completion of this offering, each non-employee
director will be eligible to receive an additional option to purchase 5,000
shares of our common stock on the date of each annual meeting of stockholders,
commencing with the 2000 annual meeting of stockholders. Each non-employee
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 that annual meeting of stockholders and
if the grant date of that additional option is at least six months after the
non-employee director receives an initial option. In July 1998, the board of
directors adopted an amendment to the director plan to provide that options held
by non-employee directors would vest and become fully exercisable upon a change
of control event or acquisition event of Aspect, each as defined in the director
plan. In August 1998, our stockholders approved this amendment.

The exercise price per share of initial options that were granted on April
14, 1998 is $2.80 and the exercise price per share of the additional options
granted on May 3, 1999 is $7.50. The exercise price of any other initial options
and of any additional options will be the closing price per share of our 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 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 ten years from the date of grant or 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).

BOARD COMMITTEES

Aspect has a standing audit committee and compensation committee of the
board of directors. The audit committee reviews the results and scope of audits
and other services provided by Aspect's independent accountants. The audit
committee also reviews Aspect's system of internal accounting and financial
controls. The audit committee consists of Messrs. Lloyd and Kania.

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<PAGE> 51

The compensation committee of the board of directors reviews and recommends
to the Board the compensation and benefits of all executive officers of Aspect,
administers Aspect's stock option plan and establishes and reviews general
policies relating to compensation and benefits of employees of Aspect. The
compensation committee consists of Mr. Coit and Dr. Stanski. No interlocking
relationships exist between Aspect's board of directors or compensation
committee and the board of directors or compensation committee of any other
company.

EXECUTIVE COMPENSATION

The table below sets forth the total compensation paid or accrued for the
fiscal years ended December 31, 1998 and December 31, 1997 for our Chief
Executive Officer and each of our four other most highly compensated executive
officers, who received annual compensation in excess of $100,000 for the fiscal
year ended December 31, 1998, collectively referred to below as our named
executive officers. In accordance with the rules of the Securities and Exchange
Commission, the compensation set forth in the table below does not include
medical, group life or other benefits which are available to all of our salaried
employees, and perquisites and other benefits, securities or property which do
not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown
in the table. In the table below, columns required by the regulations of the SEC
have been omitted where no information was required to be disclosed under those
columns.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------- NUMBER OF SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
- --------------------------- ---- ------ ----- --------------------
<S> <C> <C> <C> <C>
Nassib G. Chamoun............................ 1998 $190,000 $63,250 110,000
Chief Executive Officer and President 1997 $170,000 $40,000 200,000

J. Breckenridge Eagle........................ 1998 $167,000 $41,750 74,500
Chairman of the Board of Directors 1997 $157,500 $27,565 --

J. Neal Armstrong............................ 1998 $163,000 $40,750 37,500
Vice President, Chief Financial Officer 1997 $153,750 $26,910 70,000
and Secretary

Steven H. Kane............................... 1998 $172,000 $80,935 28,750
Vice President of Sales and Field
Operations 1997 $127,153 $58,648 180,000

Paul J. Manberg.............................. 1998 $146,000 $32,850 27,500
Vice President of Clinical, Regulatory 1997 $137,500 $24,065 50,000
and Quality Assurance
</TABLE>

- ------------
Mr. Kane commenced employment with us on April 1, 1997 and received a salary for
only nine months of the year ended December 31, 1997.

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<PAGE> 52

OPTION GRANTS IN LAST FISCAL YEAR

The table below sets forth grants of stock options to our named executive
officers. The exercise price per share of each option was equal to the fair
market value of the common stock on the date of grant as determined by the board
of directors. The potential realizable value is calculated based on the term of
the option at its time of grant, which is 10 years. It is calculated assuming
that the fair market value of common stock on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the SEC and do not reflect our estimate of future stock price growth.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
-------------------------------------------------- REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES
NUMBER OF OPTIONS OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM
OPTIONS IN FISCAL BASE PRICE EXPIRATION -------------------
NAME GRANTED YEAR PER SHARE DATE 5% 10%
- ---- ---------- ---------- ----------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Nassib G. Chamoun............. 110,000 6.8% $4.20 7/9/08 $290,549 $736,309
J. Breckenridge Eagle......... 37,000 2.3% $2.80 4/14/08 $ 65,153 $165,112
37,500 2.3% $4.20 7/9/08 $ 99,051 $251,014
J. Neal Armstrong............. 37,500 2.3% $4.20 7/9/08 $ 99,051 $251,014
Steven H. Kane................ 12,500 .8% $0.80 1/22/08 $ 6,289 $ 15,937
6,250 .4% $2.80 4/14/08 $ 11,006 $ 27,890
10,000 .6% $4.20 7/9/08 $ 26,414 $ 66,937
Paul J. Manberg............... 27,500 1.7% $4.20 7/9/08 $ 72,637 $184,077
</TABLE>

- ------------
The dates of exercisability of the options are determined in accordance with
their respective vesting schedules.

OPTION EXERCISES AND YEAR-END OPTION VALUES

The table below sets forth information regarding exercisable and
unexercisable stock options held as of December 31, 1998 by our named executive
officers. There was no public trading market for our common stock as of December
31, 1998. Accordingly, the value of unexercised in-the-money options at fiscal
year end has been calculated by determining the difference between the exercise
price per share and the fair market value of our common stock at fiscal year
end, $6.00, as determined by our board of directors.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nassib G. Chamoun....... 41,667 $116,668 33,333 235,000 $173,332 $848,000
J. Breckenridge Eagle... -- $ -- -- 74,500 $ -- $185,900
J. Neal Armstrong....... 14,583 $ 40,832 11,667 81,250 $ 60,668 $295,000
Steven H. Kane.......... -- $ -- 4,167 24,583 $ 19,584 $ 83,416
Paul J. Manberg......... -- $ -- 18,750 58,750 $ 97,500 $212,000
</TABLE>

STOCK PLANS

Amended and Restated 1991 Stock Option Plan. Our Amended and Restated 1991
Stock Option Plan was initially adopted by the board of directors and approved
by our stockholders in April 1991. As of July 3,

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<PAGE> 53

1999, 3,360,000 shares of common stock were authorized for issuance upon
exercise of outstanding options under this plan and options to purchase an
aggregate of 1,550,687 shares of common stock at a weighted average exercise
price of $2.04 per share were outstanding under this plan.

This plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock and other stock-based awards.

Our officers, employees, directors, consultants and advisors are eligible
to receive awards under this plan. Under present law, however, incentive stock
options may only be granted to employees. No employee may receive any award for
more than 200,000 shares in any calendar year.

Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to any other terms and
conditions specified in connection with the option grant. We may grant options
at an exercise price which may be less than, equal to or greater than the fair
market value of our 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 Internal Revenue Code may not be
granted at an exercise price less than the fair market value of our common stock
on the date of grant, or less than 110% of the voting power of all shares of our
capital stock. The plan permits the board of directors to determine how
optionees may pay the exercise price of their options, including through payment
by cash, check or in connection with a "cashless exercise" through a broker, by
surrender to us of shares of common stock, by delivery to us of a promissory
note, or by any combination of the permitted forms of payment.

Our board of directors administers the plan. Our board of directors has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the plan and to interpret its provisions. It may delegate
authority under the plan to one or more committees of the board of directors
and, subject to certain limitations, to one or more of our executive officers.
Our board of directors has authorized our compensation committee to administer
the plan, including the granting of options to our executive officers. Subject
to any applicable limitations contained in the plan, our board of directors, our
compensation committee or any other committee or executive officer to whom our
board of directors delegates authority, as the case may be, selects the
recipients of awards and determines:

- the number of shares of common stock covered by options and the dates
upon which these options become exercisable,

- the exercise price of options,

- the duration of options, and

- the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of these awards,
including our conditions for repurchase, issue price and repurchase
price.

No award may be granted under the plan after April 1, 2001, but the vesting
and effectiveness of awards previously granted may extend beyond that date. Our
board of directors may at any time amend, suspend or terminate the plan, except
that no award granted after an amendment of the plan and designated as subject
to Section 162(m) of the Internal Revenue Code by the board of directors will
become exercisable, realizable or vested (to the extent that amendment was
required to grant that award) unless and until the amendment is approved by our
stockholders.

1998 Stock Incentive Plan. Our 1998 Stock Incentive Plan was initially
adopted by the board of directors and approved by our stockholders in July 1998.
The 1998 Stock Incentive Plan is intended to replace the 1991 plan. Up to
3,000,000 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 plan. As of July 3, 1999, options to purchase an aggregate of 559,979 shares
of common stock at a weighted average exercise price of $5.56 were outstanding
under this plan.

This plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards.

52
<PAGE> 54

Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to any other terms and
conditions specified in connection with the option grant. We may grant options
at an exercise price which may be less than, equal to or greater than the fair
market value of our 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 Internal Revenue Code may not be
granted at an exercise price less than the fair market value of our 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 all shares of our capital stock). The plan permits the board of
directors to determine how optionees may pay the exercise price of their
options, including through payment by cash, check or in connection with a
"cashless exercise" through a broker, by surrender to us of shares of common
stock, by delivery to us of a promissory note, or by any combination of the
permitted forms of payment.

Our board of directors administers this plan. Our board of directors has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the plan and to interpret its provisions. It may
delegate authority under the plan to one or more committees of the board of
directors and, subject to certain limitations, to one or more of our executive
officers. Our board of directors has authorized our compensation committee to
administer this plan, including the granting of options to our executive
officers. Subject to any applicable limitations contained in the plan, our board
of directors, our compensation committee or any other committee or executive
officer to whom our board of directors delegates authority, as the case may be,
selects the recipients of awards and determines:

- the number of shares of common stock covered by options and the dates
upon which these options become exercisable,

- the exercise price of options,

- the duration of options and

- the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of these awards,
including the conditions for repurchase, issue price and repurchase
price.

The 1998 Stock Incentive Plan provides that, unless otherwise specified, in
the event of a merger, liquidation or other acquisition event, as defined in the
plan, our board of directors is authorized to:

- cause all options to be assumed by the acquiring company,

- in the case of a cash acquisition, cause all options to be accelerated
and the acquiring company to pay cash to the optionees equal to their
spread, and

- in the case of stock options and restricted stock that do not become
fully exercisable upon an acquisition event,

- cause those options to be accelerated in full, and/or

- cause all restricted stock awards to become free of all
restrictions.

No award may be granted under the plan after June 2008, but the vesting and
effectiveness of awards previously granted may extend beyond that date. Our
board of directors may at any time amend, suspend or terminate the plan, except
that no award granted after an amendment of the plan and designated as subject
to Section 162(m) of the Internal Revenue Code by the board of directors shall
become exercisable, realizable or vested, to the extent that amendment was
required to grant that award, unless and until the amendment is approved by our
stockholders.

1998 Director Stock Option Plan. Our 1998 Director Stock Option Plan was
adopted by our board of directors and approved by our stockholders in February
1998. Under the terms of the director plan, directors
53
<PAGE> 55

who are not our employees are eligible to receive nonstatutory options to
purchase shares of common stock. A total of 200,000 shares of common stock may
be issued upon exercise of options granted under the director plan. As of July
3, 1999, options to purchase an aggregate of 60,000 shares of common stock at a
weighted average exercise price of $5.15 were outstanding under the director
plan. For more information about the director plan, see "-- Compensation of
Directors."

1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan
was adopted by our board of directors on October 5, 1999 and is expected to be
approved by the stockholders in 1999, to be effective upon the
closing of this offering. The purchase plan provides for the issuance of a
maximum of 300,000 shares of common stock to participating employees.

The purchase plan will be administered by the compensation committee. All
of our employees, including our directors who are employees, whose customary
employment is for 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 own 5% or more of the total combined voting power or value of our
capital stock immediately after the grant may not participate in the purchase
plan. To participate in the purchase plan, an employee must authorize us to
deduct from one percent to 10 percent of his or her base pay during the offering
period. The exercise price for the option granted in each payment period is 85%
of the lesser of the last reported sale price of the common stock on the first
or last business day of the payment period. No options have been granted to date
under the purchase plan.

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 Aspect 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.

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<PAGE> 56

RELATED-PARTY TRANSACTIONS

PREFERRED STOCK ISSUANCES

Series B-1 Financing. In October 1995, investors, including One Liberty
Fund III, L.P., Charles River Partnership VII, Limited Partnership, New
Enterprise Associates IV, Limited Partnership and Catalyst Ventures, Limited
Partnership, made bridge loans to us in the aggregate amount of $500,000 in
exchange for promissory notes. In November 1995 and June 1996, we sold an
aggregate of 3,800,428 shares of our Series B-1 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 Aspect, One Liberty, Charles River, New
Enterprise Associates 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 promissory notes.
Mr. Kania, a director of Aspect, is a general partner of One Liberty Partners
III, L.P., which is the general partner of One Liberty. Mr. Coit, a director of
Aspect, served as a general partner of Charles River at the time that Charles
River purchased these securities from us.

Series C Financing. In February 1997, August 1997 and October 1997, we
sold an aggregate of 3,439,949 shares of our Series C preferred stock to a group
of existing and new investors, including Messrs. Eagle and Armstrong, Jeffrey L.
Barrett, Vice President of Manufacturing and Operations of Aspect, and Stephen
H. Kane, Vice President of Sales and Field Operations of Aspect, One Liberty,
Charles River, New Enterprise Associates, Orchid & Co., nominee for T. Rowe
Price Threshold Fund III, L.P., Merrill, Pickard, Anderson & Eyre IV Limited
Partnership, Polaris Venture Partners, L.P. and Polaris Venture Partners
Founders' Fund, L.P., 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 Aspect until August 1999, is a Vice President of T. Rowe Price
Associates, Inc., the general partner of T. Rowe Price. Mr. McGuire, a director
of Aspect, is a member of Polaris Venture Management Co., LLC, which is a
general partner of Polaris Venture Partners and Polaris Venture Founders' Fund.

Series D Financing. In February 1998, we sold an aggregate of 1,666,234
shares of our Series D preferred stock to a group of existing and new investors,
including Messrs. Armstrong, Kane, Coit and Lester John Lloyd, a director of
Aspect, One Liberty, Charles River, T. Rowe Price, Polaris Venture Partners,
Polaris Venture Partners Founders' Fund and Merrill Pickard, at a purchase price
of $7.00 per share for an aggregate purchase price of approximately $11.7
million.

Series E Financing. In December 1998, we sold an aggregate of 1,753,729
shares of our Series E preferred stock and warrants to purchase an aggregate of
192,903 shares of our common stock to a group of existing and new investors,
including a trust for which Mr. Lloyd is a trustee, One Liberty, Charles River,
T. Rowe Price, Polaris Venture Partners, Polaris Venture Founders' Fund and
QuestMark Partners, L.P., at a purchase price of $10.00 per unit for an
aggregate purchase price of approximately $17.5 million. The warrants have an
exercise price of $12.50 per share.

LOANS TO EXECUTIVE OFFICERS

In February 1997, we entered into a pledge agreement with Nassib Chamoun,
our Chief Executive Officer and President, pursuant to which we loaned to Mr.
Chamoun $68,214, on a full recourse basis, 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
these options as collateral for the loan. The loan bears interest at 8% per
annum. As of July 3, 1999, $60,634 of the principal amount of the loan plus
accrued interest was outstanding. In the event that Mr. Chamoun ceases to be
employed by us, we will have the right, for 90 days after that termination of
employment, to purchase from Mr. Chamoun, for a repurchase price equal to the
original exercise price of $0.20 per share, up to the number of shares which
have not yet vested. As of July 3, 1999, 20,519 shares of common stock were
subject to repurchase by us.

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<PAGE> 57

In May 1997, we loaned $80,000 to Mr. Chamoun. The loan is represented by
two promissory notes and is secured by a security interest in securities of
Aspect owned by Mr. Chamoun. The loan bears interest at 6.42% per annum. As of
July 3, 1999, $65,927 of the principal amount of the loan plus accrued interest
was outstanding.

In May 1997, we entered into a pledge agreement with Mr. Kane, pursuant to
which we loaned Mr. Kane $60,750, on a full recourse basis, 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
these options as collateral for the loan. The loan bears interest at 8% per
annum. As of July 3, 1999, $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 us, we will have the right, for 90 days after that termination of
employment, to purchase from Mr. Kane, for a repurchase price equal to the
original exercise price of $0.375 per share, up to the number of shares which
have not yet vested. As of July 3, 1999, 82,500 shares of common stock were
subject to repurchase by us.

In September 1997, we loaned $27,000 to Mr. Barrett. The loan is evidenced
by a promissory note and bears interest at 8% per annum. As of July 3, 1999,
$15,188 of the principal amount of the loan plus accrued interest was
outstanding. Pursuant to the terms of the promissory note, on September 24, 1998
we forgave the payment by Mr. Barrett of $8,152 and that amount was considered
and treated as compensation to Mr. Barrett by us. In addition, pursuant to the
terms of the promissory note, in the event that Mr. Barrett is employed by us on
each of September 24, 1999, 2000 and 2001, respectively, we will forgive the
payment by Mr. Barrett of $8,152 on each of those date and those amounts will be
considered and treated as compensation to Mr. Barrett by us.

In April 1998, we entered into a pledge agreement with Mr. Barrett,
pursuant to which we loaned to Mr. Barrett $63,000, on a full recourse basis,
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 his options as collateral for the loan. The loan bears
interest at 8% per annum. As of July 3, 1999, the entire principal amount of the
loan plus accrued interest was outstanding. In the event that Mr. Barrett ceases
to be employed by us, we will have the right, for 90 days after that 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 3, 1999, 47,396 shares of common stock were subject
to repurchase by us.

In November 1998, we entered into a pledge agreement with Mr. Chamoun,
pursuant to which we loaned Mr. Chamoun $33,334, on a full recourse basis. Mr.
Chamoun pledged 41,667 shares of common stock as collateral for this loan. The
loan bears interest at 8% per annum. As of July 3, 1999, the entire principal
amount of the loan plus accrued interest was outstanding.

We have adopted a policy providing that all material transactions between
us and our officers, directors and other affiliates must be:

- approved by a majority of the members of our board of directors and by a
majority of the disinterested members of our board of directors, and

- on terms no less favorable to us than could be obtained from unaffiliated
third parties.

56
<PAGE> 58

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership
of our common stock as of August 1, 1999, and as adjusted to reflect the sale of
the shares of common stock in this offering, by:

- each person who owns beneficially more than 5% of the outstanding shares
of our common stock,

- each of our directors and the named executive officers, and

- all of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power with
respect to shares. Shares of common stock issuable under stock options that are
exercisable within 60 days after August 1, 1999 or issuable pursuant to
outstanding warrants that may be exercised upon completion of this offering are
deemed outstanding for computing the percentage ownership of the person holding
the options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person. Unless otherwise indicated below, to
our knowledge, all persons named in the table have sole voting and investment
power with respect to their shares of common stock, except to the extent
authority is shared by spouses under community property laws. Unless otherwise
indicated, the address of each person owning more than 5% of the outstanding
shares of common stock is c/o Aspect Medical Systems, Inc., Two Vision Drive,
Natick, Massachusetts 01760. The percentage of common stock outstanding reflects
the conversion, upon the closing of this offering, of all outstanding shares of
preferred stock into an aggregate of 11,067,238 shares of common stock. The
number of shares of common stock deemed outstanding after this offering includes
the shares of common stock being offered for sale in this offering but
assumes no exercise of the underwriters' over-allotment option.

<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON
STOCK OUTSTANDING
-----------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
5% STOCKHOLDERS
Charles River Partnership VII, Limited Partnership(1)..... 1,586,503 12.3% %
1000 Winter Street, Suite 3300
Waltham, MA 02154
One Liberty Fund III, L.P.(2)............................. 1,530,871 11.9
OneLiberty Ventures
One Liberty Square
Boston, MA 02109
Polaris Venture Partners, L.P.(3)......................... 1,012,692 7.9
Bay Colony Corporate Center
1000 Winter Street, Suite 3350
Waltham, MA 02154
QuestMark Partners, L.P.(4)............................... 915,750 7.1
QuestMark Advisers, LLC
One South Street, Suite 800
Baltimore, MD 21202
New Enterprise Associates IV, Limited Partnership(5)...... 654,493 5.1
1119 St. Paul Street
Baltimore, MD 21202
Orchid & Co., Nominee for T. Rowe Price Threshold Fund
III, L.P.(6)............................................ 646,132 5.0
T. Rowe Price Assoc. Inc.
100 East Pratt
Baltimore, MD 21202

DIRECTORS AND NAMED EXECUTIVE OFFICERS
Nassib G. Chamoun(7)...................................... 480,698 3.7% %
J. Breckenridge Eagle(8).................................. 237,583 1.8
</TABLE>

57
<PAGE> 59

<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON
STOCK OUTSTANDING
-----------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Lester John Lloyd(9)...................................... 53,670 *
Stephen E. Coit(10)....................................... 10,238 *
Edwin M. Kania, Jr.(11)................................... 1,537,537 12.0
Donald R. Stanski(12)..................................... 50,146 *
Terrance McGuire(13)...................................... 1,019,358 7.9
J. Neal Armstrong(14)..................................... 209,666 1.6
Steven H. Kane(15)........................................ 223,391 1.7
Paul J. Manberg(16)....................................... 114,355 *
Boudewijn L.P.M. Bollen(17)............................... 13,333 *
All current executive officers and directors as a group
(15 persons)(18)........................................ 1,716,835 13.0
</TABLE>

- ------------
* Less than 1% of the outstanding common stock.
(1) Includes 550 shares of common stock subject to a warrant exercisable upon
completion of this offering.
(2) Includes 275 shares of common stock subject to a warrant exercisable upon
completion of this offering. Mr. Kania, a director of Aspect, is a general
partner of One Liberty Partners III, L.P., a general partner of One
Liberty. Mr. Kania disclaims beneficial ownership of the shares held by One
Liberty, except to the extent of his pecuniary interest therein.
(3) Includes 55,111 shares held by Polaris Venture Partners Founders' Fund.
Also includes 518 shares of common stock subject to a warrant exercisable
by Polaris Venture Partners upon completion of this offering and 31 shares
of common stock subject to a warrant exercisable by Polaris Venture
Partners Founders' Fund upon completion of this offering. North Star
Ventures directly or indirectly provides investment advisory services to
various venture capital funds, including Polaris Venture Partners and
Polaris Venture Partners Founders' Fund. The general partner of these funds
exercises sole voting and investment power with respect to the shares held
by the funds. The principals of North Star Ventures, including Mr. McGuire,
a director of Aspect, are members of Polaris Venture Management Co., L.L.C.
(the general partner of both Polaris Venture Partners and Polaris Venture
Partners Founders' Fund). 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 shares held by
all of these funds except to the extent of his proportionate pecuniary
interests therein.
(4) Includes 186,661 shares held by QuestMark Partners Side Fund, L.P. Also
includes 70,213 shares of common stock subject to a warrant exercisable by
QuestMark Partners, L.P. upon completion of this offering and 20,537 shares
of common stock subject to a warrant exercisable by QuestMark Partners Side
Fund upon completion of this offering.
(5) Includes 154,203 shares held by Catalyst. New Enterprise Associates 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 2,750 shares of common stock subject to a warrant exercisable upon
completion of this offering. Also includes 5,000 shares of common stock
held by T. Rowe Price Threshold Fund Associates, Inc. Mr. Jordan, a former
director of Aspect, is a Vice President of T. Rowe Price Associates, Inc.,
the general partner of T. Rowe Price. Mr. Jordan disclaims beneficial
ownership of the shares by T. Rowe Price, except to the extent of his
pecuniary interest therein.

(7) Includes an aggregate of 105,208 shares of common stock subject to options
which are exercisable within 60 days after August 1, 1999. 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
15,387 shares of common stock subject to repurchase by Aspect if Mr.
Chamoun ceases to be employed by or provide services to Aspect. Does not
include 163,125 shares which will not become exercisable within 60 days of
August 1, 1999.

(8) Includes an aggregate of 27,136 shares of common stock subject to options
which are exercisable within 60 days after August 1, 1999, 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 15,572

58
<PAGE> 60

shares of common stock subject to repurchase by Aspect if Mr. Eagle ceases
to be employed by or provide services to Aspect. Does not include 47,364
shares which will not become exercisable within 60 days of August 1, 1999.

(9) Includes 5,625 shares of common stock subject to options which are
exercisable within 60 days after August 1, 1999 and 1,705 shares of common
stock subject to repurchase by Aspect if Mr. Lloyd ceases to provide
services to Aspect. Also includes 652 shares of common stock held by Lester
John Lloyd and/or Lynne Dewar Lloyd, Trustees or Successor Trustees under
the Lloyd Trust U/A/D 10/05/88, of which Mr. Lloyd disclaims beneficial
ownership, and 71 shares of common stock subject to a warrant exercisable
by Lester John Lloyd and/or Lynne Dewar Lloyd, Trustees or Successor
Trustees under the Lloyd Trust U/A/D 10/05/88, upon completion of this
offering, of which Mr. Lloyd disclaims beneficial ownership. Does not
include 9,375 shares which will not become exercisable within 60 days of
August 1, 1999.

(10) Includes 6,666 shares of common stock subject to options which are
exercisable within 60 days after August 1, 1999. Does not include 8,334
shares which will not become exercisable within 60 days of August 1, 1999.
(11) Includes 1,530,871 shares held by One Liberty. See Note 2 above. Also
includes 6,666 shares of common stock subject to options which are
exercisable within 60 days after August 1, 1999. Does not include 8,334
shares which will not become exercisable within 60 days of August 1, 1999.
(12) Includes an aggregate of 30,146 shares of common stock subject to options
which are exercisable within 60 days after August 1, 1999. Does not include
19,854 shares which will not become exercisable within 60 days of August 1,
1999.
(13) Includes 957,550 shares held by Polaris Venture Partners and 55,142 shares
held by Polaris Venture Partners Founders' Fund. See Note 3 above. Also
includes 6,666 shares of common stock subject to options which are
exercisable within 60 days after August 1, 1999. Does not include 8,334
shares which will not become exercisable within 60 days of August 1, 1999.

(14) Includes an aggregate of 36,511 shares of common stock subject to options
which are exercisable within 60 days after August 1, 1999 and 27,000 shares
of common stock subject to repurchase by Aspect if Mr. Armstrong ceases to
be employed by or provide services to Aspect. Does not include 56,406
shares which will not become exercisable within 60 days of August 1, 1999.

(15) Includes an aggregate of 13,152 shares of common stock subject to options
which are exercisable within 60 days after August 1, 1999 and 78,750 shares
of common stock subject to repurchase by Aspect if Mr. Kane ceases to be
employed by or provide services to Aspect. Does not include 33,697 shares
which will not become exercisable within 60 days of August 1, 1999.

(16) Includes an aggregate of 36,719 shares of common stock subject to options
which are exercisable within 60 days after August 1, 1999. 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 3,612 shares of common stock
subject to repurchase by Aspect if Mr. Manberg ceases to be employed by or
provide services to Aspect. Does not include 40,781 shares which will not
become exercisable within 60 days of August 1, 1999.

(17) Consists of shares of common stock subject to options which are exercisable
within 60 days after August 1, 1999. Does not include 26,667 shares which
will not become exercisable within 60 days of August 1, 1999.

(18) Includes an aggregate of 345,642 shares of common stock subject to options
which are exercisable within 60 days after August 1, 1999 and 194,407
shares of common stock subject to repurchase by Aspect if the stockholder
ceases to be employed by or provide services to Aspect. Does not include
522,269 shares which will not become exercisable within 60 days of August
1, 1999.

59
<PAGE> 61

DESCRIPTION OF CAPITAL STOCK

After this offering, we will be authorized to issue 60,000,000 shares of
common stock, $.01 par value per share, and 5,000,000 shares of preferred stock,
$.01 par value per share. As of July 3, 1999, we had outstanding:

- 1,789,905 shares of common stock held by 102 stockholders of record;

- 11,067,238 shares of preferred stock held by 95 stockholders of record;

- options to purchase 2,170,666 shares of common stock; and

- warrants to purchase 192,902 shares of common stock.

Upon the closing of this offering, all outstanding shares of preferred
stock will automatically convert into 11,067,238 shares of common stock, which
will result in an aggregate of shares of common stock
outstanding. The options and warrants will remain outstanding.

The following summary is qualified by reference to the provisions of
applicable law and to our restated certificate of incorporation and amended and
restated by-laws included as exhibits to the registration statement of which
this prospectus is a part.

COMMON STOCK

Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders. Holders of our common stock do
not have cumulative voting rights. Directors are elected by a plurality of the
votes of the shares present in person or by proxy at the meeting. Holders of
common stock are entitled to receive proportionately any lawful dividends as may
be declared by our board of directors. However, all dividends are subject to
preferences that may be applicable to the holders of any outstanding shares of
preferred stock. In the event of a liquidation, dissolution or winding up of the
affairs of Aspect, whether voluntarily or involuntarily, the holders of common
stock will be entitled to receive proportionately all of our remaining assets
available for distribution to stockholders. This distribution would be subject
to the rights of the holders of any outstanding shares of preferred stock.
Holders of common stock have no preemptive, redemption, conversion or
subscription rights. Our outstanding shares of common stock are fully paid and
non-assessable. The shares of common stock offered by us in this offering will
also be, when issued and paid for, fully paid and non-assessable. The rights,
powers, preferences and privileges of holders of common stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock which we may designate and issue in the future. Upon
the closing of this offering, there will be no shares of preferred stock
outstanding.

PREFERRED STOCK

Our board of directors is authorized, without further stockholder approval,
to issue up to an aggregate of 5,000,000 shares of preferred stock, in one or
more series. Our board of directors is also authorized, subject to the
limitations prescribed by Delaware law, to establish the number of shares to be
included in each series and to fix the voting powers, preferences,
qualifications and special or relative rights or privileges of each series. Our
board of directors is authorized to issue preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of common stock.

The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. However, the issuance of preferred
stock or of rights to purchase preferred stock could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a majority of our outstanding common stock. We have
no current plans to issue any preferred stock.

60
<PAGE> 62

WARRANTS

The warrants have an exercise price of $12.50. The warrants have net
exercise provisions under which the holder may, instead of paying the exercise
price in cash, surrender the warrant and receive a net amount of shares, based
on the fair market value of our shares of common stock at the time of exercise
of the warrant, after deducting the exercise price. These warrants expire on the
third anniversary of the date of this offering. However, if our common stock is
traded on a national exchange or trading system and the average closing price of
our common stock equals or exceeds $25.00 for 25 consecutive trading days, then
we have the right to require the holders to exercise their warrants. If the
holders do not exercise their warrants, the warrants will be automatically
exercised according to the net exercise provisions described above.

REGISTRATION RIGHTS

Pursuant to the terms of a registration rights agreement, the holders of
11,067,238 shares of common stock are entitled to rights with respect to the
registration of those shares under the Securities Act of 1933. The holders of
warrants to purchase 192,902 shares of common stock are also party to the
registration rights agreement and entitled to these registration rights. Under
that agreement, if we propose to register any of our securities under the
Securities Act of 1933, either for our own account or for the account of other
security holders, the holders of registration rights are entitled to notice of
the registration and to include their registrable shares in the registration.
However, in the event of a registration pursuant to an underwritten public
offering of our common stock, the underwriters have the right to limit the
number of shares included in the registration.

The holders of registration rights 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 shares then outstanding, require
us to prepare and file a registration statement under the Securities Act of 1933
with respect to their registrable shares. We are required to effect only three
of these demand registrations. In addition, at any time after we become eligible
to file a registration statement on Form S-3 (or any successor form), holders of
registration rights may request us to effect a registration on Form S-3 of
registrable shares having an aggregate offering price of at least $250,000.
These rights terminate six years following the date of this prospectus.

DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS

Upon the closing of this offering, our restated certificate of
incorporation will provide that:

- the board of directors be divided into three classes, with staggered
three-year terms,

- directors may be removed only for cause by the vote of the holders of at
least two-thirds of the shares of our capital stock entitled to vote, and

- any vacancy on the board of directors, however occurring, including a
vacancy resulting from an enlargement of the board, may only be filled by
vote of a majority of the directors then in office.

These provisions could discourage, delay or prevent a change in control of
Aspect or an acquisition of Aspect at a price which many stockholders may find
attractive. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of common stock.
These provisions may also have the effect of discouraging a third party from
initiating a proxy contest, making a tender offer or attempting to change the
composition or policies of our board of directors.

Upon the closing of this offering, our restated certificate of
incorporation and amended and restated by-laws will also provide that:

- stockholder action may be taken only at a duly called and convened annual
or special meeting of stockholders and then only if properly brought
before the meeting,

- stockholder action not be taken by written action in lieu of a meeting,

- special meetings of stockholders may be called only by our Chairman of
the Board, our Chief Executive Officer or by our board of directors, and
61
<PAGE> 63

- in order for any matter to be considered "properly brought" before a
meeting, a stockholder must comply with requirements regarding providing
certain information and advance notice to us.

These provisions could delay, until the next stockholders' meeting, actions
which are favored by the holders of a majority of our outstanding voting
securities. These provisions may also discourage another person or entity from
making a tender offer for our common stock, because a person or entity, even if
it acquired a majority of our outstanding voting securities, would be able to
take action as a stockholder only at a duly called stockholders' meeting, and
not by written consent.

The Delaware General Corporation Law provides that the 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 by-laws, as the case may be, requires a greater
percentage. Our restated certificate of incorporation will require the vote of
the holders of at least 75% of our capital stock entitled to vote to amend or
repeal any of the foregoing provisions. The 75% stockholder vote would be in
addition to any separate class vote that might be required pursuant to the terms
of any series of preferred stock that might be then outstanding.

Aspect 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 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. 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.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our certificate of incorporation provides that our directors will not be
personally liable to us or to our stockholders for monetary damages for breach
of fiduciary duty as a director, except that the limitation will not eliminate
or limit liability to the extent that the elimination or limitation of this
liability is not permitted by the Delaware General Corporation Law as it exists
or may later be amended.

Our certificate of incorporation further provides for the indemnification
of our directors and officers to the fullest extent permitted by Section 145 of
the Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is Boston EquiServe
L.P.

62
<PAGE> 64

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since some shares of common stock will not be available for sale shortly after
this offering because of the contractual and legal restrictions on resale
described below, sales of substantial amounts of common stock in the public
market after these restrictions lapse could adversely affect the prevailing
market price and our ability to raise equity capital in the future.

Prior to this offering, there has been no public market for our common
stock. Upon completion of this offering, we will have outstanding an aggregate
of shares of our common stock assuming no exercise of outstanding options
or warrants. Of these shares, the shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, unless those shares are purchased by "affiliates" as that term is
defined in Rule 144 under the Securities Act of 1933. The remaining 12,857,872
shares of common stock held by existing stockholders are "restricted securities"
as that term is defined in Rule 144 under the Securities Act of 1933 or are
subject to the contractual restrictions described below. Of these remaining
securities:

- 2,838,708 shares which are not subject to the 180-day lock-up period
described below may be sold immediately after completion of
this offering,

- 578,982 additional shares which are not subject to the 180-day lock up
period described below may be sold beginning 90 days after the
effective date of this offering, and

- 9,440,182 additional shares may be sold upon expiration of the 180-day
lock-up period described below.

Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or 701 under the
Securities Act of 1933, which rules are summarized below.

LOCK-UP AGREEMENTS

Our officers and directors and stockholders holding an aggregate of
9,440,182 shares of common stock have signed lock-up agreements under which they
agreed not to transfer or dispose of, directly or indirectly, any shares of
common stock or any securities convertible into or exercisable or exchangeable
for shares of common stock, for a period ending 180 days after the date of this
prospectus. Transfers or dispositions by our officers, directors and
stockholders can be made sooner:

- with the written consent of Morgan Stanley & Co. Incorporated,

- as a bona fide gift,

- to immediate family members, or

- to a trust, the beneficiaries of which are immediate family members.

RULE 144

In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned shares of our common stock for
at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:

- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering, or

- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.

63
<PAGE> 65

RULE 144(k)

Shares eligible for sale under Rule 144(k) may be sold immediately upon the
completion of this offering. Under Rule 144(k), a person may sell shares
acquired from us immediately upon completion of this offering, without regard to
manner of sale, the availability of public information or volume, if:

- the person is not one of our affiliates at any time during the three
months preceding a sale, and

- the person has beneficially owned the shares proposed to be sold for at
least two years, including the holding period of any prior owner other
than an affiliate.

RULE 701

In general, under Rule 701 of the Securities Act of 1933, any of our
employees, consultants or advisors who purchases shares from us in connection
with a compensatory stock plan or other written agreement is eligible to resell
those shares 90 days after the effective date of this offering in reliance on
Rule 144, but without compliance with various restrictions, including the
holding period, contained in Rule 144.

REGISTRATION RIGHTS

Upon completion of this offering, the holders of 11,067,238 shares of our
common stock, or their transferees, will be entitled to rights with respect to
the registration of those shares under the Securities Act of 1933. The holders
of warrants to purchase 192,902 shares of our common stock will also be entitled
to these registration rights. See "Description of Capital Stock -- Registration
Rights" on page 61.

STOCK OPTIONS

Immediately after the 180-day lock-up period expires, we intend to file a
registration statement under the Securities Act of 1933 covering shares
of common stock reserved for issuance under our Amended and Restated 1991 Stock
Option Plan, 1998 Stock Incentive Plan, 1999 Employee Stock Purchase Plan and
1998 Director Stock Option Plan. That registration statement is expected to
become effective as soon as it is filed. Accordingly, shares registered under
that registration statement will, subject to vesting provisions and limitations
as to the volume of shares that may be sold by our affiliates under Rule 144
described above, be available for sale in the open market immediately after the
180-day lock-up period expires.

As of July 3, 1999, options to purchase 2,170,666 shares of common stock
were issued and outstanding. Upon the expiration of the lock-up period described
above, at least 1,192,952 shares of common stock will be subject to vested
options, based on options outstanding as of July 3, 1999.

WARRANTS

Upon completion of this offering, there will be warrants outstanding to
purchase 192,902 shares of common stock at an exercise price of $12.50 per
share. Any shares purchased pursuant to the "cashless exercise" feature of
outstanding warrants may be sold approximately 90 days after completion of this
offering, subject to the requirements of Rule 144.

EFFECT OF SALES OF SHARES

Prior to this offering, there has been no public market for our 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 our common stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of our common stock in the public market
could adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.

64
<PAGE> 66

UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Deutsche Bank Securities Inc. and U.S.
Bancorp Piper Jaffray Inc. are acting as representatives, have severally agreed
to purchase, and Aspect has agreed to sell to the underwriters, the respective
number of shares of common stock set forth opposite the names of the
underwriters below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Deutsche Bank Securities Inc................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total.............................................
=========
</TABLE>

The underwriters are offering the shares of our common stock subject to
their acceptance of the shares from us and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of our common stock offered in this
offering are subject to the approval of legal matters by their counsel and to
customary closing conditions. The underwriters are obligated to take and pay for
all of the shares of our common stock offered by this prospectus if any shares
are taken. However, the underwriters are not required to take or pay for the
shares covered by the over-allotment options described below.

The underwriters initially propose to offer part of the shares of our
common stock directly to the public at the initial public offering price listed
on the cover page of this prospectus and part to dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any underwriters may allow, and these dealers may reallow, a
concession not in excess of $ a share to other underwriters or to other
dealers. After the initial offering of the shares of our common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.

We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of
additional shares of our common stock at the public offering price set forth on
the cover page of this prospectus, less underwriting discounts and commissions.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
our common stock offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of the additional
shares of our common stock as the number set forth next to the names of all
underwriters in the preceding table. If the underwriters' over-allotment option
is exercised in full, the total price to the public would be $ , the
total underwriters' discounts and commissions would be $ , and the
total proceeds to us would be $ .

Each of Aspect and our directors and executive officers and substantially
all other stockholders has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, during the
period ending 180 days after the date of this prospectus, he, she or it will not
directly or indirectly:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock, or

- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of our
common stock,

whether any transaction described above is to be settled by delivery of our
common stock or other securities, in cash or otherwise.

65
<PAGE> 67

The restrictions described in this paragraph do not apply to:

- the sale of shares to the underwriters,

- transactions by any person other than Aspect relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares, or

- the sale or transfer of shares of common stock to an acquiror in
connection with the sale of Aspect pursuant to a merger, sale of stock or
otherwise.

The underwriters have informed us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered by them.

We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "ASPM."

In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of our common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in our common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of our common stock, the underwriters may bid for, and purchase, shares of
our common stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing our common stock in the offering, if the syndicate repurchases
previously distributed shares of our common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of our common stock
above independent market levels. The underwriters are not required to engage in
these activities and may end any of these activities at any time.

We and the underwriters have agreed to indemnify each other against
liabilities in connection with this offering, including liabilities under the
Securities Act of 1933.

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares of common stock offered in
this offering for our directors, officers, employees and related persons.
Individuals purchasing these shares must have a retail account with Morgan
Stanley & Co. Incorporated and must commit to the purchase of these shares
within one day after the date of this prospectus. The number of shares of common
stock available for sale to the general public will be reduced to the extent
these persons purchase reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered in this prospectus.

PRICING OF THE OFFERING

Prior to this offering, there has been no public market for our shares of
common stock. Consequently, the initial public offering price for our shares of
common stock will be determined by negotiations between us and the
representatives of the underwriters. Among the factors to be considered in
determining the initial public offering price will be:

- our record of operations, our current financial position and future
prospects,

- the experience of our management,

- sales, earnings and other financial and operating information in recent
periods, and

- the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.

The estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.

66
<PAGE> 68

LEGAL MATTERS

The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.

EXPERTS

The audited consolidated financial statements as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus and elsewhere in the registration statement 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.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (including the exhibits and schedules to the registration
statement) under the Securities Act of 1933 with respect to the common stock we
propose to sell in this offering. This prospectus, which is part of the
registration statement, does not contain all the information set forth in the
registration statement. For further information about us and the common stock we
propose to sell in this offering, we refer you to the registration statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to, are not necessarily complete, and in
each instance reference is made to the copy of each contract, agreement or other
document filed as an exhibit to the registration statement, each statement being
qualified by this reference.

You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file at the Securities and
Exchange Commission's public reference room at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee, by writing to the Securities
and Exchange Commission. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Aspect's Securities and Exchange Commission filings, including the
registration statement, will also be available to you on the Securities and
Exchange Commission's website (http://www.sec.gov).

We intend to distribute to our stockholders annual reports containing
audited consolidated financial statements. We also intend to make available to
our stockholders, within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, reports containing interim unaudited financial
information.

67
<PAGE> 69

ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998, July 3, 1999 (Unaudited) and Pro Forma July 3, 1999
(Unaudited)............................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and for the Six Months
Ended July 4, 1998 (Unaudited) and July 3, 1999
(Unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998 and for the
Six Months Ended July 3, 1999 (Unaudited)................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and for the Six Months
Ended July 4, 1998 (Unaudited) and July 3, 1999
(Unaudited)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 70

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Aspect Medical Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Aspect
Medical Systems, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1998, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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.
and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
March 15, 1999

F-2
<PAGE> 71

ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, JULY 3, JULY 3, 1999
1997 1998 1999 (NOTE 2)
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 368,507 $ 17,122,993 $ 14,549,785 $ 14,549,785
Marketable securities........................... 4,612,462 4,150,336 1,561,589 1,561,589
Accounts receivable, net of allowance of
$62,400, $200,000 and $347,500 at December 31,
1997 and 1998 and July 3, 1999,
respectively.................................. 719,172 2,108,944 2,870,845 2,870,845
Current portion of investment in sales-type
leases........................................ 136,392 776,275 1,369,502 1,369,502
Inventory....................................... 387,479 270,189 736,614 736,614
Other current assets............................ 245,962 316,773 379,922 379,922
------------ ------------ ------------ ------------
Total current assets..................... 6,469,974 24,745,510 21,468,257 21,468,257
Property and equipment, net....................... 923,559 2,121,915 2,991,655 2,991,655
Long-term investment in sales-type leases......... 209,074 1,721,825 2,622,856 2,622,856
------------ ------------ ------------ ------------
Total assets............................. $ 7,602,607 $ 28,589,250 $ 27,082,768 $ 27,082,768
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Working capital line of credit.................. $ -- $ -- $ 1,568,750 $ 1,568,750
Current portion of capital lease obligations.... 154,906 126,775 59,038 59,038
Current portion of long-term debt............... -- 720,670 720,670 720,670
Accounts payable................................ 1,119,055 891,943 1,695,995 1,695,995
Accrued liabilities............................. 1,500,591 3,663,407 4,317,368 4,317,368
Deferred revenue................................ 643,000 2,056,893 1,889,487 1,889,487
------------ ------------ ------------ ------------
Total current liabilities................ 3,417,552 7,459,688 10,251,308 10,251,308
------------ ------------ ------------ ------------
Long-term debt obligations........................ -- 1,441,339 1,081,004 1,081,004
Long-term capital lease obligations............... 117,680 -- -- --
------------ ------------ ------------ ------------
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;
22,363,224 shares authorized, 7,647,275,
11,067,238 and 11,067,238 shares issued and
outstanding at December 31, 1997 and 1998 and
July 3, 1999, respectively (liquidation
preference -- $58,962,591 at July 3, 1999)
(pro forma -- no shares authorized, issued or
outstanding).................................. 38,726,070 67,560,365 67,560,365 --
Common Stock, $.01 par value; 17,030,000 shares
authorized, 1,548,027, 1,778,692 and 1,789,905
shares issued and outstanding at December 31,
1997 and 1998, and July 3, 1999, respectively
(pro forma -- 60,000,000 shares authorized,
12,857,143 shares issued and outstanding)..... 15,480 17,787 17,899 128,571
Additional paid-in capital...................... 338,970 933,467 1,055,969 68,505,662
Warrants........................................ -- 146,606 146,606 146,606
Notes receivable from employees and directors... (273,579) (306,182) (305,323) (305,323)
Deferred compensation........................... -- (317,564) (289,931) (289,931)
Accumulated other comprehensive income(loss).... 3,098 3,641 (766) (766)
Accumulated deficit............................. (34,742,664) (48,349,897) (52,434,363) (52,434,363)
------------ ------------ ------------ ------------
Total stockholders' equity............... 4,067,375 19,688,223 15,750,456 15,750,456
------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity................................. $ 7,602,607 $ 28,589,250 $ 27,082,768 $ 27,082,768
============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 72

ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 73

ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
CONVERTIBLE ---------------------
PREFERRED STOCK
COMPREHENSIVE ------------------------ PAR
LOSS SHARES AMOUNT SHARES VALUE
------------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995........................... 2,481,940 $22,454,371 93,424 $ 934
Issuance of Series B-1 convertible preferred stock,
net of issuance costs of approximately $14,000.... -- 1,725,386 3,436,899 -- --
Comprehensive loss:
Net loss............................................ $ (5,396,438) -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable securities.......... (2,506) -- -- -- --
------------
Comprehensive loss.................................. (5,398,944) -- -- -- --
---------- ----------- --------- ---------
Balance, December 31, 1996........................... 4,207,326 25,891,270 93,424 934
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
Comprehensive loss:
Net loss............................................ (9,885,855) -- -- -- --
Other comprehensive income -
Unrealized gain on marketable securities.......... 3,260 -- -- -- --
------------
Comprehensive loss.................................. (9,882,595) -- -- -- --
---------- ----------- --------- ---------
Balance, December 31, 1997........................... 7,647,275 38,726,070 1,548,027 15,480
Issuance of Series D convertible preferred stock,
net of issuance costs of approximately $73,000.... -- 1,666,234 11,573,816 -- --
Issuance of Series E convertible preferred stock and
warrants, net of issuance costs of approximately
$130,000.......................................... -- 1,753,729 17,260,479 -- --
Issuance of common stock upon exercise of common
stock options..................................... -- -- -- 230,665 2,307
Deferred compensation related to stock options...... -- -- -- -- --
Reversal of unamortized deferred compensation
related to canceled stock options................. -- -- -- -- --
Payments on notes receivable........................ -- -- -- -- --
Amortization of deferred compensation related to
stock options..................................... -- -- -- -- --
Comprehensive loss:
Net loss............................................ (13,607,233) -- -- -- --
Other comprehensive income -
Unrealized gain on marketable securities.......... 543 -- -- -- --
------------
Comprehensive loss.................................. (13,606,690) -- -- -- --
---------- ----------- --------- ---------
Balance, December 31, 1998........................... 11,067,238 67,560,365 1,778,692 17,787
Issuance of common stock upon exercise of common
stock options (unaudited)......................... -- -- -- 11,213 112
Payments on notes receivable from employees and
directors (unaudited)............................. -- -- -- -- --

<CAPTION>
NOTES
RECEIVABLE ACCUMULATED
ADDITIONAL FROM OTHER
PAID-IN EMPLOYEES DEFERRED COMPREHENSIVE
CAPITAL WARRANTS AND DIRECTORS COMPENSATION INCOME(LOSS)
---------- -------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995........................... $ 31,096 $ -- $ -- -$-........ $ 2,344
Issuance of Series B-1 convertible preferred stock,
net of issuance costs of approximately $14,000.... -- -- -- -- --
Comprehensive loss:
Net loss............................................ -- -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable securities.......... -- -- -- -- (2,506)
Comprehensive loss.................................. -- -- -- -- --
---------- -------- --------- --------- -------
Balance, December 31, 1996........................... 31,096 -- -- -- (162)
Issuance of Series C convertible preferred stock,
net of issuance costs of approximately $61,000.... -- -- -- -- --
Issuance of common stock upon exercise of common
stock options..................................... 307,874 -- (273,579) -- --
Comprehensive loss:
Net loss............................................ -- -- -- -- --
Other comprehensive income -
Unrealized gain on marketable securities.......... -- -- -- -- 3,260
Comprehensive loss.................................. -- -- -- -- --
---------- -------- --------- --------- -------
Balance, December 31, 1997........................... 338,970 -- (273,579) --........ 3,098
Issuance of Series D convertible preferred stock,
net of issuance costs of approximately $73,000.... -- -- -- -- --
Issuance of Series E convertible preferred stock and
warrants, net of issuance costs of approximately
$130,000.......................................... -- 146,606 -- -- --
Issuance of common stock upon exercise of common
stock options..................................... 180,595 -- (63,001) -- --
Deferred compensation related to stock options...... 758,152 -- -- (758,152) --
Reversal of unamortized deferred compensation
related to canceled stock options................. (344,250) -- -- 344,250 --
Payments on notes receivable........................ -- -- 30,398 -- --
Amortization of deferred compensation related to
stock options..................................... -- -- -- 96,338 --
Comprehensive loss:
Net loss............................................ -- -- -- -- --
Other comprehensive income -
Unrealized gain on marketable securities.......... -- -- -- -- 543
Comprehensive loss.................................. -- -- -- -- --
---------- -------- --------- --------- -------
Balance, December 31, 1998........................... 933,467 146,606 (306,182) (317,564) 3,641
Issuance of common stock upon exercise of common
stock options (unaudited)......................... 7,266 -- -- -- --
Payments on notes receivable from employees and
directors (unaudited)............................. -- -- 859 -- --

TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balance, December 31, 1995........................... $(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
Comprehensive loss:
Net loss............................................ (5,396,438) (5,396,438)
Other comprehensive loss -
Unrealized loss on marketable securities.......... -- (2,506)
Comprehensive loss.................................. -- --
------------ -----------
Balance, December 31, 1996........................... (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
Comprehensive loss:
Net loss............................................ (9,885,855) (9,885,855)
Other comprehensive income -
Unrealized gain on marketable securities.......... -- 3,260
Comprehensive loss.................................. -- --
------------ -----------
Balance, December 31, 1997........................... (34,742,664) 4,067,375
Issuance of Series D convertible preferred stock,
net of issuance costs of approximately $73,000.... -- 11,573,816
Issuance of Series E convertible preferred stock and
warrants, net of issuance costs of approximately
$130,000.......................................... -- 17,407,085
Issuance of common stock upon exercise of common
stock options..................................... -- 119,901
Deferred compensation related to stock options...... -- --
Reversal of unamortized deferred compensation
related to canceled stock options................. -- --
Payments on notes receivable........................ -- 30,398
Amortization of deferred compensation related to
stock options..................................... -- 96,338
Comprehensive loss:
Net loss............................................ (13,607,233) (13,607,233)
Other comprehensive income -
Unrealized gain on marketable securities.......... -- 543
Comprehensive loss.................................. -- --
------------ -----------
Balance, December 31, 1998........................... (48,349,897) 19,688,223
Issuance of common stock upon exercise of common
stock options (unaudited)......................... -- 7,378
Payments on notes receivable from employees and
directors (unaudited)............................. -- 859
</TABLE>
<TABLE>
Deferred compensation related to stock options (unaudited). -- -- -- -- --
<S> <C> <C> <C> <C> <C>
Amortization of deferred compensation related to stock
options (unaudited).................................. -- -- -- -- --
Comprehensive loss:
Net loss (unaudited)................................... (4,084,466) -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable securities(unaudited)... (4,407) -- -- -- --
------------
Comprehensive loss..................................... $ (4,088,873) -- -- -- --
---------- ----------- --------- ---------
Balance, July 3, 1999 (unaudited)....................... 11,067,238 $67,560,365 1,789,905 $ 17,899
========== =========== ========= =========

<CAPTION>
Deferred compensation related to stock options (unaudited). 115,236 -- -- ) (115,236 --
<S> <C> <C> <C> <C> <C>
Amortization of deferred compensation related to stock
options (unaudited).................................. -- -- -- 142,869 --
Comprehensive loss:
Net loss (unaudited)................................... -- -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable securities(unaudited)... -- -- -- -- (4,407)
Comprehensive loss..................................... -- -- -- -- --
---------- -------- --------- --------- -------
Balance, July 3, 1999 (unaudited)....................... $1,055,969 $146,606 $(305,323) $(289,931) $ (766)
========== ======== ========= ========= =======

<CAPTION>
Deferred compensation related to stock options (unaudited). -- --
<S> <C> <C>
Amortization of deferred compensation related to stock
options (unaudited).................................. -- 142,869
Comprehensive loss:
Net loss (unaudited)................................... (4,084,466) (4,084,466)
Other comprehensive loss -
Unrealized loss on marketable securities(unaudited)... -- (4,407)
Comprehensive loss..................................... -- --
------------ -----------
Balance, July 3, 1999 (unaudited)....................... $(52,434,363) $15,750,456
============ ===========
</TABLE>

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

F-5
<PAGE> 74

ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------
----------------------------------------- JULY 4, JULY 3,
1996 1997 1998 1998 1999
----------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(5,396,438) $ (9,885,855) $(13,607,233) $(6,517,068) $(4,084,466)
Adjustments to reconcile net loss to net cash used
for operating activities -
Depreciation and amortization................... 189,378 192,571 623,133 160,474 509,943
Provision for doubtful accounts................. 43,000 14,333 146,500 40,000 151,015
Compensation expense related to stock options... -- -- 96,338 64,305 142,869
Changes in assets and liabilities -
Increase in accounts receivable............... (92,990) (437,525) (1,536,272) (626,831) (912,916)
Decrease (increase) in inventory.............. 61,193 763,483 117,290 (563,650) (466,425)
Increase in other current assets.............. (60,628) (108,343) (70,811) (160,855) (63,150)
Increase in investment in sales-type leases... -- (345,466) (2,152,634) (1,088,303) (1,494,257)
Increase (decrease) in accounts payable....... 493,575 459,778 (227,112) 103,787 804,052
(Decrease) increase in accrued liabilities.... (4,385) 776,260 2,162,816 1,433,163 653,961
Increase (decrease) in deferred revenue....... 814,717 (180,000) 1,413,893 1,052,830 (167,405)
----------- ------------ ------------ ----------- -----------
Net cash used for operating activities...... (3,952,578) (8,750,764) (13,034,092) (6,102,148) (4,926,779)
----------- ------------ ------------ ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment............. (622,384) (958,271) (1,821,489) (1,133,750) (1,379,683)
Purchases of marketable securities................ (23,953,144) (65,379,625) (42,947,415) (38,316,566) (1,761,464)
Proceeds from sales of marketable securities...... 24,045,377 61,647,164 43,410,084 36,098,460 4,345,802
----------- ------------ ------------ ----------- -----------
Net cash (used for) provided by
investing activities...................... (530,151) (4,690,732) (1,358,820) (3,351,856) 1,204,655
----------- ------------ ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from working capital line of credit...... -- -- -- -- 1,568,750
Principal payments on capital lease obligations... (287,616) (427,558) (145,811) (74,546) (67,737)
Proceeds from sale leaseback of property and
equipment....................................... 330,291 -- -- -- --
Proceeds from equipment loan...................... -- -- 2,162,009 775,831 --
Payments on equipment loan........................ -- -- -- -- (360,335)
Proceeds from issuance of convertible preferred
stock and warrants, net of issuance costs....... 3,436,899 12,834,800 28,980,901 11,573,816 --
Proceeds from issuance of common stock............ -- 48,841 119,901 80,023 7,379
Payments received on notes receivable from
employees and directors......................... -- -- 30,398 30,397 859
----------- ------------ ------------ ----------- -----------
Net cash provided by financing activities... 3,479,574 12,456,083 31,147,398 12,385,521 1,148,916
----------- ------------ ------------ ----------- -----------
Net (decrease) increase in cash and cash
equivalents....................................... (1,003,155) (985,413) 16,754,486 2,931,517 (2,573,208)
Cash and cash equivalents, beginning of period...... 2,357,075 1,353,920 368,507 368,507 17,122,993
----------- ------------ ------------ ----------- -----------
Cash and cash equivalents, end of period............ $ 1,353,920 $ 368,507 $ 17,122,993 $ 3,300,024 $14,549,785
=========== ============ ============ =========== ===========
Supplemental disclosure of cash flow information:
Interest paid..................................... $ 63,084 $ 78,027 $ 94,137 $ 16,112 $ 95,887
=========== ============ ============ =========== ===========
Supplemental disclosure of noncash financing
activities:
Capital lease obligations totaling $367,000,
including sale leaseback transactions, were
incurred in 1996
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 75

ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

(1) DESCRIPTION OF OPERATIONS

Aspect Medical Systems, Inc. and its subsidiaries (the "Company") develops,
manufactures and markets an anesthesia monitoring system that enables anesthesia
providers to assess and manage a patient's level of consciousness. The BIS
system incorporates the Company's proprietary disposable BIS Sensors and the
Company's BIS monitor or BIS Module Kit. The Company's latest generation BIS
monitor, the A-2000 BIS Monitor, was cleared for marketing by the United States
Food and Drug Administration in February 1998. The BIS system is based on the
Company'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 Company incurred net losses of $5,396,438, $9,885,855 and $13,607,233
for the years ended December 31, 1996, 1997 and 1998, respectively, and at July
3, 1999 had an accumulated deficit of $52,434,363. Principal risks that may
affect the business, results of operations and financial condition of the
Company include the Company's ability to raise sufficient capital to fund
operations, 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 consolidated balance sheet as of July 3, 1999, statements
of operations and cash flows for the six months ended July 4, 1998 and July 3,
1999 and the statement of stockholders' equity for the six months ended July 3,
1999 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 3, 1999 are not necessarily indicative of results to be
expected for the entire year or for any other interim period.

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 July 4, 1998 relate to the period from
January 1, 1998 to July 4, 1998, and all references to the six months ended July
3, 1999 relate to the period from January 1, 1999 to July 3, 1999.

UNAUDITED PRO FORMA PRESENTATION

Under the terms of the Company's restated certificate of incorporation, all
outstanding preferred stock will be converted automatically into shares of
common stock upon the closing of the Company's initial public offering. Also,
upon the closing of the Company's initial public offering, the authorized
capital stock of the Company will consist of 60,000,000 shares of common stock
and 5,000,000 shares of preferred stock, the terms of which will not be
designated. The unaudited pro forma balance sheet information at July 3, 1999
reflects the conversion of all series of preferred stock into 11,067,238 shares
of common stock as if the conversion occurred on July 3, 1999.

F-7
<PAGE> 76
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.

FOREIGN CURRENCY TRANSLATION

Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for revenue and expenses. The
functional currency of the Company's international subsidiaries is the U.S.
dollar; therefore, translation adjustments are recorded in the consolidated
statements of operations and have not been material.

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

The Company invests its excess cash in money market accounts, certificates
of deposit, 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.

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, 1997 and 1998 and July 3, 1999. The securities are reported at fair value,
with any unrealized gains and losses excluded from earnings and reported as
other comprehensive income.

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.

RESEARCH AND DEVELOPMENT COSTS

The Company charges research and development costs to operations as
incurred.

INVENTORY

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

ADVERTISING COSTS

Advertising costs are expensed as incurred. These costs are included in
sales and marketing expense in the consolidated statements of operations.

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

F-8
<PAGE> 77
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

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.

At December 31, 1997 and 1998 and July 3, 1999, accounts receivable from
one of the Company's international distributors accounted for approximately 19%,
14% and 2%, respectively, of the total amounts due to the Company. For the years
ended December 31, 1996, 1997 and 1998, sales to this customer accounted for
approximately 49%, 35% and 13%, respectively, of the Company's total revenue.
For the six months ended July 4, 1998 and the six months ended July 3, 1999,
sales to this customer accounted for approximately 17% and 3% of the Company's
total revenue, respectively. 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 Financial Accounting Standards Board ("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.

F-9
<PAGE> 78
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

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, bank loans and capital lease obligations,
approximate their carrying values.

(3) CASH EQUIVALENTS AND MARKETABLE SECURITIES

Cash and cash equivalents consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JULY 3,
1997 1998 1999
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash.............................................. $131,757 $11,122,993 $ 1,687,575
Certificates of deposit........................... -- 6,000,000 4,092,033
Corporate debt securities......................... -- -- 8,770,177
U.S. Government debt securities................... 236,750 -- --
-------- ----------- -----------
$368,507 $17,122,993 $14,549,785
======== =========== ===========
</TABLE>

Available-for-sale securities included in marketable securities at December
31, 1997 and 1998 and July 3, 1999 consist of the following:

<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
========== ====== ===== ==========
December 31, 1998 --
Corporate debt securities........................ $3,136,075 $ 241 $ -- $3,136,316
Municipal notes.................................. 1,010,620 3,400 -- 1,014,020
---------- ------ ----- ----------
$4,146,695 $3,641 $ -- $4,150,336
========== ====== ===== ==========
July 3, 1999 -- (unaudited)
U.S. Government debt securities.................. $1,001,704 $ -- $(766) $1,000,938
Corporate debt securities........................ 560,651 -- -- 560,651
---------- ------ ----- ----------
$1,562,355 $ -- $(766) $1,561,589
========== ====== ===== ==========
</TABLE>

F-10
<PAGE> 79
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

The amortized cost and estimated fair value of investments in debt
securities at July 3, 1999, by contractual maturity, were as follows:

<TABLE>
<CAPTION>
ESTIMATED
FAIR
COST VALUE
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Maturing in one year or less................................ $ 560,651 $ 560,651
Maturing in one to two years................................ 1,001,704 1,000,938
---------- ----------
$1,562,355 $1,561,589
========== ==========
</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.

(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 3,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Total minimum lease payments
receivable............................ $505,474 $3,300,533 $5,133,165
Less -- unearned interest............. 160,008 802,433 1,140,807
-------- ---------- ----------
Net investment in sales-type leases..... 345,466 2,498,100 3,992,358
Less -- current portion............... 136,392 776,275 1,369,502
-------- ---------- ----------
$209,074 $1,721,825 $2,622,856
======== ========== ==========
</TABLE>

Future minimum lease payments due under non-cancelable leases as of
December 31, 1998 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
1999........................................................ $1,226,664
2000........................................................ 892,561
2001........................................................ 559,384
2002........................................................ 402,093
2003........................................................ 219,831
----------
$3,300,533
==========
</TABLE>

(5) INVENTORY

Inventory consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JULY 3,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials...................................... $322,636 $165,682 $390,439
Work-in-progress................................... -- -- 30,325
Finished goods..................................... 64,843 104,507 315,850
-------- -------- --------
$387,479 $270,189 $736,614
======== ======== ========
</TABLE>

F-11
<PAGE> 80
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED 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 3,
IN YEARS 1997 1998 1999
---------------------------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer equipment........... 3 $ 707,071 $1,626,676 $1,977,124
Construction in progress..... -- 490,194 98,866 768,375
Machinery and equipment...... 3 to 5 152,735 887,046 1,158,846
Furniture and fixtures....... 3 133,114 308,656 361,649
Shorter of the life of the
lease or the estimated
Leasehold improvements....... remaining useful life 1,485 273,313 292,863
---------- ---------- ----------
1,484,599 3,194,557 4,558,857
Accumulated depreciation and
amortization............... (561,040) (1,072,642) (1,567,202)
---------- ---------- ----------
$ 923,559 $2,121,915 $2,991,655
========== ========== ==========
</TABLE>

At December 31, 1997, 1998 and July 3, 1999, property and equipment held
under capital leases totaled approximately $521,651, $86,944 and $12,788,
respectively. Accumulated depreciation of these assets totaled approximately
$458,988 and $67,850 at December 31, 1997 and 1998, respectively, and $10,657 at
July 3, 1999.

During 1996, the Company entered into sale-leaseback transactions. The
Company received proceeds of approximately $330,000 from the sale of these
assets. 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,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.......................... $12,254,000 $16,693,000
Tax credit carryforwards.................................. 1,119,000 1,292,000
Other..................................................... 782,000 1,507,000
----------- -----------
Gross deferred tax assets............................... 14,155,000 19,492,000
Valuation allowance..................................... (14,155,000) (19,492,000)
----------- -----------
Net deferred tax asset.................................. $ -- $ --
=========== ===========
</TABLE>

The Company has provided a full valuation allowance against its gross
deferred tax assets at December 31, 1997 and 1998 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 $41,452,000 and
$1,292,000, respectively, at December 31, 1998 that will expire commencing in
the year 2002 through the year 2018 if not utilized.

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

F-12
<PAGE> 81
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

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, 1998, the Company's authorized capital stock consisted
of 17,030,000 shares of common stock, $.01 par value, and 22,363,224 shares of
preferred stock, $.01 par value. Of the 22,363,224 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, 1,760,000 shares are designated
Series E convertible preferred stock, 406,898 shares are designated Series A-2
convertible preferred stock, 3,800,428 shares have been designated Series B-2
convertible preferred stock, 3,500,000 shares have been designated Series C-2
convertible preferred stock, 1,714,286 shares have been designated Series D-2
convertible preferred stock and 1,760,000 shares have been designated Series E-2
convertible preferred stock.

CONVERTIBLE PREFERRED STOCK

Convertible preferred stock outstanding consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JULY 3,
1997 1998 1999
----------- ----------- -----------
<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 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 11,573,816
Series E convertible preferred stock; 1,753,729 shares
issued and outstanding, at issuance price, net of
issuance costs........................................ -- 17,260,479 17,260,479
----------- ----------- -----------
$38,726,070 $67,560,365 $67,560,365
=========== =========== ===========
</TABLE>

In 1995 and 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.

In December 1998, the Company issued 1,753,729 shares of Series E
convertible preferred stock and warrants to purchase 192,902 shares of common
stock for net proceeds of $17,407,085. The warrants are fully exercisable with
an exercise price of $12.50 per share and expire on the earlier of the third
anniversary of the

F-13
<PAGE> 82
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

Company's initial public offering or December 2008. However, if the common stock
is traded on a national exchange or trading system and the average closing
market price per share of common stock over 25 consecutive trading days equals
or exceeds $25.00, the Company has the right to require the exercise of the
warrants. The Company has allocated the proceeds received between the Series E
convertible preferred stock and the warrants based on the estimated fair market
value of the convertible preferred stock and the warrants.

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

VOTING RIGHTS

Except as set forth in the restated certificate of incorporation, the
holders of the convertible preferred stock are entitled to 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 share of convertible preferred stock 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 in which the price per common share
equals or exceeds $14.00, resulting in gross proceeds of at least $20,000,000.
The number of shares of common stock into which holders of convertible 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 holders of Series E convertible preferred stock will receive an amount equal
to the greater of (i) $10.00 per share plus any dividends declared and/or
accrued but unpaid on such shares or (ii) the amount per share that would have
been payable had all series of Preferred Stock been converted into common stock.
If the remaining assets of the Company available for distribution are
insufficient to pay the Series E preferred stockholders the full amount they are
entitled to, the holders of Series E stock shall share ratably in any
distribution of the assets. Thereafter, the remaining assets shall be
distributed ratably as follows: 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 holders of
convertible preferred stock (other than Series E convertible preferred stock)
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 convertible preferred stock are entitled to dividends when
and if declared by the Board of Directors.

COMMON STOCK

At July 3, 1999, the Company has reserved 11,067,238 shares of common stock
for issuance upon conversion of the preferred stock, 3,863,519 shares of common
stock for issuance under the Company's stock option plans, and 192,902 for
issuance upon the exercise of outstanding warrants.

F-14
<PAGE> 83
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

(9) STOCK OPTION PLANS

At July 3, 1999, the Company's stock option plans provided for the
granting, at the discretion of the Board of Directors, of options for the
purchase of up to 5,560,000 shares of common stock to employees, directors and
advisors. Option prices are determined by the Board of Directors. At July 3,
1999, 1,692,853 shares were available for future grant under the Company's stock
option plans.

A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE OPTION
NUMBER OF OPTION PRICE PRICE PER
SHARES PER SHARE SHARE
---------- ------------ --------------
<S> <C> <C> <C>
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................................................. (1,454,603) .20-.375 .22
Canceled.................................................. (77,376) .20-.375 .20
---------- ----------- -----
Outstanding, December 31, 1997.............................. 1,070,626 .20-45.83 .74
Granted................................................... 1,613,632 .80-11.05 6.18
Exercised................................................. (230,665) .20-4.20 1.32
Canceled.................................................. (616,577) .20-45.83 10.07
---------- ----------- -----
Outstanding, December 31, 1998.............................. 1,837,016 .20-45.83 2.31
Granted (unaudited)....................................... 364,110 6.00-7.50 6.57
Exercised (unaudited)..................................... (11,213) .20-4.20 .66
Canceled (unaudited)...................................... (19,247) .375-4.20 2.35
---------- ----------- -----
Outstanding, July 3, 1999 (unaudited)....................... 2,170,666 $.20-$45.83 $3.03
========== =========== =====
Exercisable, December 31, 1996.............................. 1,347,642 $.20-$45.83 $ .29
Exercisable, December 31, 1997.............................. 170,747 $.20-$45.83 $ .96
Exercisable, December 31, 1998.............................. 406,706 $.20-$45.83 $ .83
Exercisable, July 3, 1999 (unaudited)....................... 727,737 $.20-$45.83 $1.80
</TABLE>

On September 17, 1998, the Company's Board of Directors authorized the
repricing of 480,698 stock options previously granted under the Company's stock
option plans. The repricing provided for the exercise price of the options to be
reduced from $11.05 per share to $4.20 per share, the estimated fair market
value of the Company's common stock at that time.

Subsequent to July 3, 1999, stock options to purchase 19,400 shares of
common stock were granted with an exercise price of $11.05 per share, stock
options to purchase 729 shares of common stock with an exercise price of $4.20
per share were exercised and stock options to purchase 17,037 shares of common
stock with exercise prices ranging from $4.20 to $7.50 per share were canceled.

During 1997 and 1998, the Company accelerated the vesting of certain
employees' and directors' stock options. These employees and directors exercised
options to acquire 1,495,470 shares of common stock. The shares of common stock
are subject to a repurchase right by the Company and the number of shares
subject to the repurchase provision decreases over time in accordance with the
vesting schedule of the original option grant. The option exercise price was
paid in the form of cash of $45,735 and by delivery to the Company of full
recourse promissory notes of $336,580. In the event that any holder of shares of
common stock which remain

F-15
<PAGE> 84
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

subject to the repurchase provision 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 the repurchase provision. As of July 3, 1999, an aggregate of 237,831
shares remain subject to repurchase.

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

A summary of outstanding and exercisable options as of July 3, 1999 is as
follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL NUMBER
PRICE OUTSTANDING LIFE EXERCISABLE
-------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.20 190,222 6.84 161,790
0.375 99,604 7.89 52,907
0.80 587,999 8.28 241,373
2.80 185,257 8.78 74,604
4.20 743,254 8.43 184,710
6.00 226,085 9.49 10,633
7.50 138,025 8.36 1,500
16.67 207 1.13 207
45.83 13 4.74 13
--------- ----- -------
$0.20-$45.83 2,170,666 8.36 727,737
</TABLE>

In 1998, the Company recorded deferred compensation in connection with
certain stock option grants, of approximately $506,250, which represents the
aggregate difference between the estimated fair market value of the common stock
and the exercise price of the stock options. In connection with an employee
termination, an option to purchase 85,000 shares of common stock was canceled,
and the related unamortized deferred compensation of $344,250 was reversed. In
1998 and in the six months ended July 3, 1999, the Company recorded additional
deferred compensation of approximately $252,000 and $115,200, respectively,
which represents the estimated fair value of stock options granted to
non-employees. The remaining unamortized deferred compensation of $289,931 at
July 3, 1999 will be recognized as compensation expense over the vesting term of
the related options.

In October 1995, the 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 1996,
1997, 1998 and the six months ended July 4, 1998 and July 3, 1999 using the
Black-Scholes option-pricing model prescribed by SFAS No. 123. The following
table shows the weighted

F-16
<PAGE> 85
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

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, ----------------------------
------------------------------------ JULY 4, JULY 3,
1996 1997 1998 1998 1999
----------- ----------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Risk-free interest rate................ 6.4%-6.8% 6.5%-6.75% 5.47% 5.1%-6.75% 4.58%-4.98%
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...................... $0.15 $0.48 $1.92 $4.46 $4.51
</TABLE>

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:

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.

1991 AMENDED AND RESTATED STOCK OPTION PLAN

The Company's 1991 Amended and 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 3,360,000 shares of common stock to employees,
directors and advisors. Option prices are determined by the Board of Directors.

F-17
<PAGE> 86
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

1998 STOCK INCENTIVE PLAN

The Company's 1998 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors on July 8, 1998 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. At July 3, 1999, the Incentive Plan provided 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).

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. At July 3, 1999, a total of 100,000 shares of
common stock could 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.

(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 as the inclusion of common stock issuable pursuant to the
exercise of stock options, warrants 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.

(11) DISTRIBUTION AND LICENSING AGREEMENTS

The Company has entered into various distribution, licensing and royalty
agreements relating to its products with distributors covering the international
market. These agreements have terms ranging from three to ten years. In
connection with these agreements, approximately $643,000 and $1,770,000 in
revenue was deferred as of December 31, 1997 and 1998, respectively, and
approximately $1,674,000 was deferred as of July 3, 1999. 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

F-18
<PAGE> 87
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

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 the 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, 1996, 1997 and 1998.

(13) COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases office space under operating leases that expire in
October 2000. Rent expense was approximately $335,000, $346,000 and $414,000 in
1996, 1997 and 1998, respectively. Future gross minimum lease commitments for
all operating leases as of December 31, 1998 are as follows:

<TABLE>
<S> <C>
1999..................................................... $ 495,000
2000..................................................... 434,000
2001..................................................... 93,000
2002..................................................... 97,000
2003..................................................... 45,000
Thereafter............................................... 23,000
----------
Total minimum lease payments............................. $1,187,000
==========
</TABLE>

The Company has entered into a letter of intent for a seven-year lease of
approximately 60,000 square feet of development, production and administrative
space beginning in the fourth quarter of 1999.

SUBLEASES

During 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 1996 and 1997 approximated $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 and 1998,
the Company loaned a total of $107,000 and $53,000, respectively, to certain
employees of the Company. The loans are evidenced by promissory notes bearing
interest with rates ranging from 6.42% to 8% per annum. The outstanding balance
on these notes at December 31, 1997 and 1998 and July 3, 1999 was approximately
$105,000, $138,000 and $134,000, respectively.

F-19
<PAGE> 88
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

(15) ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JULY 3,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and payroll-related............ $ 375,121 $1,220,000 $1,430,163
Clinical studies....................... 75,000 254,000 284,000
Warranty............................... 130,000 249,037 360,804
Other.................................. 920,470 1,940,370 2,242,401
---------- ---------- ----------
$1,500,591 $3,663,407 $4,317,368
========== ========== ==========
</TABLE>

(16) SEGMENT INFORMATION AND ENTERPRISE REPORTING

The Company has adopted the FASB's Statements of Financial Accounting
Standards No. 131, or SFAS 131, Disclosures about Segments of an Enterprise and
Related Information, effective for fiscal years beginning after December 31,
1997. The Company operates in one reportable segment as it has one family of
anesthesia monitoring systems. The Company does not disaggregate financial
information by product or geographically, other than export sales by region and
sales by product, for management purposes. Substantially all of the Company's
assets are located within the United States. All of the Company's products are
manufactured in the United States.

Revenue by geographic destination and as a percentage of total revenue is
as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------- ---------------------------
1996 1997 1998 JULY 4, 1998 JULY 3, 1999
---------- ---------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
GEOGRAPHIC AREA BY DESTINATION
Domestic....................... $ 699,362 $1,881,409 $10,296,424 $3,794,447 $10,636,817
International.................. 689,426 1,186,164 941,781 625,718 1,075,380
---------- ---------- ----------- ---------- -----------
$1,388,788 $3,067,573 $11,238,205 $4,420,165 $11,712,197
========== ========== =========== ========== ===========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------- ---------------------------
1996 1997 1998 JULY 4, 1998 JULY 3, 1999
---------- ---------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
GEOGRAPHIC AREA BY DESTINATION
Domestic....................... 51% 61% 92% 86% 91%
International.................. 49 39 8 14 9
--- --- --- --- ---
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, 1996................................. $ 7,000 $ 43,000 $ -- $ 50,000
December 31, 1997................................. 50,000 14,333 1,933 62,400
December 31, 1998................................. 62,400 146,500 8,900 200,000
Six months ended July 3, 1999....................... 200,000 151,015 3,515 347,500
</TABLE>

F-20
<PAGE> 89
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

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

(18) LOAN AGREEMENTS

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. Interest on the working capital portion of the loan
agreement was at the prime rate plus 0.5% until September 30, 1998 at which time
it became the prime rate plus 0.25%. There were no borrowings under the working
capital loan as of December 31, 1998. As of July 3, 1999, $1,568,750 was
outstanding under the working capital portion of the loan agreement and based on
the Company's outstanding accounts receivable at July 3, 1999 there was no
additional availability under the working capital portion of the loan agreement.

During 1998, the Company borrowed approximately $2,162,000 under the
equipment portion of the loan agreement. The principal amount outstanding under
the equipment portion of the loan agreement is due in 36 equal monthly
installments of approximately $60,000, which commenced in January 1999. Interest
on the equipment 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. As of July 3, 1999, no additional amounts are available
to the Company under the equipment portion of the loan agreement.

The loan agreement contains certain restrictive covenants including minimum
liquidity or debt service coverage ratios. The agreement also restricts the
Company from declaring and paying cash dividends. As of July 3, 1999, the
Company was in compliance with these covenants or had received a waiver from the
bank for any events of default.

In July 1999, the Company entered into an agreement which allows it to sell
some of its existing and future investments in sales-type leases to a
third-party finance company. Upon the sale, the Company expects to receive an
amount approximately equal to the Company's investment in sales-type leases
sold.

(19) OTHER EXPENSE

In 1998, the Company incurred approximately $775,000 in one-time charges
related to a proposed initial public offering that was terminated in August
1998.

F-21
<PAGE> 90

[Aspect Medical Systems LOGO]
<PAGE> 91
[INSIDE BACK COVER OF PROSPECTUS]

Aspect's clinically validated BIS index assists anesthesia providers in
assessing levels of consciousness during surgery and minimizing the risk of
unintentional overmedication or undermedication.

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

Clinical trails and routine clinical use of the BIS system have shown that
patient monitoring with the BIS system results in:

- a reduction in the amount of anesthetics used,

- faster wake-up from anesthesia,

- less patient time in the operating room and the post-anesthesia care unit
following surgery, and

- improvements in the quality of recovery.

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

Clinical experience and published data have also shown that when anesthesia
is managed during outpatient surgery using the BIS index, patients are more
likely to bypass the post-anesthesia care unit and proceed immediately to the
less costly step-down recovery area directly from the operating room.

[Company Logo]

<PAGE> 92

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, the NASD filing fee and the Nasdaq
National Market listing fee.

<TABLE>
<S> <C>
SEC registration fee................................... *
NASD filing fee........................................ *
Nasdaq National Market listing fee..................... 95,000
Blue Sky fees and expenses............................. 15,000
Transfer Agent and Registrar fees...................... *
Accounting fees and expenses........................... *
Legal fees and expenses................................ *
Printing and mailing expenses.......................... *
Miscellaneous.......................................... *
--------
Total............................................. $ *
========
</TABLE>

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

* To be filed by amendment.

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 by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the

II-1
<PAGE> 93

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 7 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 of 1933 (the "Securities Act").

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Set forth below is information regarding shares of Common Stock and
Preferred Stock issued, and options and warrants granted, by the Registrant
within the past three years. Further included is the consideration, if any,
received by the Registrant for such shares, options and warrants and information
relating to the section of the Securities Act, or rule of the Securities and
Exchange Commission under which exemption from registration was claimed.

Some of the transactions described below involved directors, officers and
5% stockholders of the Registrant. See "Related-Party Transactions."

Certain Sales of Securities. Within the past three years, the Registrant
has issued the following securities that were not registered under the
Securities Act.

(a) Issuances of Capital Stock and Warrants.

1. On February 26, 1997, August 8, 1997 and October 7, 1997, the
Registrant 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.

2. On February 13, 1998, the Registrant 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.

3. On December 17, 1998, the Registrant issued and sold an aggregate
of 1,753,729 shares of its Series E Convertible Preferred Stock, coupled
with Warrants to purchase an aggregate of 192,902 shares of Common Stock,
to a group of investors at a purchase price of $10.00 per share.

(b) Stock Option Grants.

The Registrant's Amended and Restated 1991 Stock Option Plan was adopted by
the Board of Directors and approved by the stockholders of the Registrant in
April 1991. As of July 3, 1999, options to purchase 1,697,901 shares of Common
Stock had been exercised for an aggregate consideration of $631,585 and options

II-2
<PAGE> 94

to purchase 1,550,687 shares of Common Stock, at a weighted average exercise
price of $2.04 per share, were outstanding under the plan.

The Registrant's 1998 Stock Incentive Plan was adopted by the Board of
Directors and approved by the stockholders of the Registrant in July 1998. As of
July 3, 1999, no options under this plan have been exercised, however, options
to purchase 559,979 shares of Common Stock, at a weighted average exercise price
of $5.56 per share, were outstanding under the plan.

The Registrant's 1998 Director Stock Option Plan was adopted by the Board
of Directors and approved by the stockholders of the Registrant in February
1998. As of July 3, 1999, options to purchase 5,000 shares of Common Stock had
been exercised for an aggregate consideration of $14,000 and options to purchase
60,000 shares of Common Stock, at a weighted average exercise price of $5.15 per
share, were outstanding under such plan.

No underwriters were involved in the foregoing sales of securities. The
sales were made in reliance upon exemptions from the registration provisions of
the Securities Act set forth in Sections 3(b) and 4(2) thereof relative to sales
by an issuer not involving any public offering or the rules and regulations
thereunder or, in the case of options to purchase Common Stock, Rule 701 of the
Securities Act. All of the foregoing securities are deemed restricted securities
for purposes of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation of the Registrant.
3.2* Form of Restated Certificate of Incorporation to be in
effect upon the closing of the offering.
3.3** By-Laws of the Registrant, as amended.
3.4* Form of Amended and Restated By-laws of the Registrant to be
in effect upon the closing of the offering.
4.1** Specimen common stock certificate.
4.2* See Exhibits 3.2 and 3.4 for provisions of the Registrant's
certificate of incorporation and by-laws defining the rights
of holders of common stock.
5.1* Opinion of Hale and Dorr LLP.
10.1** 1998 Director Stock Option Plan, as amended.
10.2+** International Distribution Agreement, dated as of January
21, 1998, by and between the Registrant and Nihon Kohden
Corporation.
10.3+** International License Agreement, dated as of January 21,
1998, by and between the Registrant and Nihon Kohden
Corporation.
10.4** Trademark License Agreement, dated May 25, 1994, by and
between the Registrant and Aspect Electronics, Inc.
10.5** License Agreement, dated as of October 31, 1995, by and
between the Registrant and Siemens Medical Systems, Inc.
10.6+ Product Agreement, dated May 5, 1999, by and between the
Registrant and Drager Medizintechnik GmbH.
10.7+ OEM Development and Purchase Agreement, dated August 6,
1999, by and between the Registrant and Hewlett-Packard
GmbH.
10.8+ Letter Agreement, dated August 3, 1999, by and between the
Registrant and Hewlett Packard GmbH.
</TABLE>

II-3
<PAGE> 95

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <S>
10.9+** Distribution and License Agreement, dated as of April 1,
1996, between SpaceLabs Medical, Inc. and the Registrant.
10.10** Property Lease at 2 Vision Drive, by and between the
Registrant 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, by and between the Registrant and
Teachers Insurance Association of America, dated June 15,
1995.
10.11** Lease Extension Agreement, dated as of August 7, 1997, by
and between the Registrant and Vision Drive, Inc.
10.12** Loan Agreement, dated as of June 22, 1998, by and between
the Registrant and Imperial Bank, together with Revolving
Loans Promissory Note, dated June 22, 1998, made in favor of
Imperial Bank by the Registrant, Equipment Loans Promissory
Note, dated June 22, 1998, made in favor of Imperial Bank by
the Registrant, Security Agreement, dated as of June 22,
1998, by and between the Registrant and Imperial Bank,
Trademark Collateral Security and Pledge Agreement, dated as
of June 22, 1998, by and between the Registrant and Imperial
Bank, Patent Collateral Security and Pledge Agreement, dated
as of June 22, 1998, by and between the Registrant and
Imperial Bank and Agreement to Provide Insurance, dated June
22, 1998, by and between the Registrant and Imperial Bank.
10.13** Promissory Note, dated February 18, 1997, as amended on
April 14, 1997, made in favor of the Registrant by Nassib G.
Chamoun, together with Pledge Agreement, dated as of
February 18, 1997, as amended on April 14, 1997, by and
between the Registrant and Nassib G. Chamoun.
10.14** Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, by and between the
Registrant and Nassib G. Chamoun.
10.15** Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, by and between the
Registrant and Nassib G. Chamoun.
10.16** Form of Promissory Note made in favor of the Registrant by
certain directors and executive officers, together with Form
of Pledge Agreement, by and between the Registrant and
certain directors and executive officers, together with a
schedule of material terms.
10.17** Promissory Note, dated September 24, 1997, made in favor of
the Registrant by Jeffrey Barrett.
10.18** Promissory Note, dated April 10, 1998, made in favor of the
Registrant by Jeffrey Barrett, together with Pledge
Agreement, dated as of April 10, 1998, by and between the
Registrant and Jeffrey Barrett.
10.19** Series E Convertible Preferred Stock and Warrant Purchase
Agreement, dated December 17, 1998, by and among the
Registrant and the several purchasers named on Schedule I
thereto.
10.20** Fourth Amended and Restated Right of First Refusal and
Co-Sale Agreement, dated December 17, 1998, by and among the
Registrant and the several parties named on Schedules I, II
and III thereto.
10.21** Fourth Amended and Restated Registration Rights Agreement,
dated December 17, 1998, by and among the Registrant and the
several purchasers named on the signature pages thereto.
10.22** Fourth Amended and Restated Voting Agreement, dated December
17, 1998, by and among the Registrant and the several
parties named on Schedules I, II and III thereto.
10.23** Form of Warrant to purchase the Registrant's common stock,
together with schedule of Warrantholders.
10.24+ Supplier Agreement, dated August 13, 1999, between Novation,
LLC and the Registrant.
10.25+ Medical Products Distribution Agreement, dated October 1,
1999, between Hewlett-Packard Company and the Registrant.
23.1* Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
</TABLE>

II-4
<PAGE> 96

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <S>
23.2 Consent of Arthur Andersen LLP.
24.1** Power of Attorney.
27.1** Financial Data Schedule for fiscal year end December 31,
1998.
27.2** Financial Data Schedule for the six months ended July 3,
1999.
</TABLE>

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

+ Confidential treatment has been requested as to certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act. Such
portions have been omitted and filed separately with the Securities and
Exchange Commission.

** Previously filed.

Schedules have been omitted because they are not required or because the
required information is presented in the Company's consolidated financial
statements or related notes.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant 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.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
contained in the Registrant's Restated Certificate of Incorporation, the
Underwriting Agreement, the laws of the State of Delaware, or otherwise, the
Registrant 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
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant 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 Registrant will, unless in
the opinion of its counsel that 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 Registrant 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 Registrant 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> 97

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Natick,
Massachusetts on October 2, 1999.

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. 1 to the 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* President, Chief Executive October 2, 1999
- --------------------------------------------------- Officer and Director
Nassib G. Chamoun (Principal Executive Officer)

/s/ J. BRECKENRIDGE EAGLE* Chairman of the Board of October 2, 1999
- --------------------------------------------------- Directors
J. Breckenridge Eagle

/s/ J. NEAL ARMSTRONG Vice President and Chief October 2, 1999
- --------------------------------------------------- Financial Officer (Principal
J. Neal Armstrong Financial and Accounting
Officer)

/s/ BOUDEWIJN L.P.M. BOLLEN* Director October 2, 1999
- ---------------------------------------------------
Boudewijn L.P.M. Bollen

/s/ STEPHEN E. COIT* Director October 2, 1999
- ---------------------------------------------------
Stephen E. Coit

/s/ EDWIN M. KANIA* Director October 2, 1999
- ---------------------------------------------------
Edwin M. Kania

/s/ LESTER J. LLOYD* Director October 2, 1999
- ---------------------------------------------------
Lester J. Lloyd

/s/ TERRANCE MCGUIRE* Director October 2, 1999
- ---------------------------------------------------
Terrance McGuire

/s/ DONALD STANSKI* Director October 2, 1999
- ---------------------------------------------------
Donald Stanski

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

II-6
<PAGE> 98

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation of the Registrant.
3.2* Form of Restated Certificate of Incorporation to be in
effect upon the closing of the offering.
3.3** By-Laws of the Registrant, as amended.
3.4* Form of Amended and Restated By-laws of the Registrant to be
in effect upon the closing of the offering.
4.1** Specimen common stock certificate.
4.2* See Exhibits 3.2 and 3.4 for provisions of the Registrant's
certificate of incorporation and by-laws defining the rights
of holders of common stock.
5.1* Opinion of Hale and Dorr LLP.
10.1** 1998 Director Stock Option Plan, as amended.
10.2+** International Distribution Agreement, dated as of January
21, 1998, by and between the Registrant and Nihon Kohden
Corporation.
10.3+** International License Agreement, dated as of January 21,
1998, by and between the Registrant and Nihon Kohden
Corporation.
10.4** Trademark License Agreement, dated May 25, 1994, by and
between the Registrant and Aspect Electronics, Inc.
10.5** License Agreement, dated as of October 31, 1995, by and
between the Registrant and Siemens Medical Systems, Inc.
10.6+ Product Agreement, dated May 5, 1999, by and between the
Registrant and Drager Medizintechnik GmbH.
10.7+ OEM Development and Purchase Agreement, dated August 6,
1999, by and between the Registrant and Hewlett-Packard
GmbH.
10.8+ Letter Agreement, dated August 3, 1999, by and between the
Registrant and Hewlett Packard GmbH.
10.9+** Distribution and License Agreement, dated as of April 1,
1996, between SpaceLabs Medical, Inc. and the Registrant.
10.10** Property Lease at 2 Vision Drive, by and between the
Registrant 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, by and between the Registrant and
Teachers Insurance Association of America, dated June 15,
1995.
10.11** Lease Extension Agreement, dated as of August 7, 1997, by
and between the Registrant and Vision Drive, Inc.
10.12** Loan Agreement, dated as of June 22, 1998, by and between
the Registrant and Imperial Bank, together with Revolving
Loans Promissory Note, dated June 22, 1998, made in favor of
Imperial Bank by the Registrant, Equipment Loans Promissory
Note, dated June 22, 1998, made in favor of Imperial Bank by
the Registrant, Security Agreement, dated as of June 22,
1998, by and between the Registrant and Imperial Bank,
Trademark Collateral Security and Pledge Agreement, dated as
of June 22, 1998, by and between the Registrant and Imperial
Bank, Patent Collateral Security and Pledge Agreement, dated
as of June 22, 1998, by and between the Registrant and
Imperial Bank and Agreement to Provide Insurance, dated June
22, 1998, by and between the Registrant and Imperial Bank.
10.13** Promissory Note, dated February 18, 1997, as amended on
April 14, 1997, made in favor of the Registrant by Nassib G.
Chamoun, together with Pledge Agreement, dated as of
February 18, 1997, as amended on April 14, 1997, by and
between the Registrant and Nassib G. Chamoun.
</TABLE>

<PAGE> 99

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.14** Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, by and between the
Registrant and Nassib G. Chamoun.
10.15** Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, by and between the
Registrant and Nassib G. Chamoun.
10.16** Form of Promissory Note made in favor of the Registrant by
certain directors and executive officers, together with Form
of Pledge Agreement, by and between the Registrant and
certain directors and executive officers, together with a
schedule of material terms.
10.17** Promissory Note, dated September 24, 1997, made in favor of
the Registrant by Jeffrey Barrett.
10.18** Promissory Note, dated April 10, 1998, made in favor of the
Registrant by Jeffrey Barrett, together with Pledge
Agreement, dated as of April 10, 1998, by and between the
Registrant and Jeffrey Barrett.
10.19** Series E Convertible Preferred Stock and Warrant Purchase
Agreement, dated December 17, 1998, by and among the
Registrant and the several purchasers named on Schedule I
thereto.
10.20** Fourth Amended and Restated Right of First Refusal and
Co-Sale Agreement, dated December 17, 1998, by and among the
Registrant and the several parties named on Schedules I, II
and III thereto.
10.21** Fourth Amended and Restated Registration Rights Agreement,
dated December 17, 1998, by and among the Registrant and the
several purchasers named on the signature pages thereto.
10.22** Fourth Amended and Restated Voting Agreement, dated December
17, 1998, by and among the Registrant and the several
parties named on Schedules I, II and III thereto.
10.23** Form of Warrant to purchase the Registrant's common stock,
together with schedule of Warrantholders.
10.24+ Supplier Agreement, dated August 13, 1999, between Novation,
LLC and the Registrant.
10.25+ Medical Products Distribution Agreement, dated October 1,
1999, between Hewlett-Packard Company and the Registrant.
23.1* Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1** Power of Attorney.
27.1** Financial Data Schedule for fiscal year end December 31,
1998.
27.2** Financial Data Schedule for the six months ended July 3,
1999.
</TABLE>

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

** Previously filed.

<PAGE> 1
Drager/Aspect Product Agreement
Drager-Aspect Vers1.doc
20.04.99

Exhibit 10.6

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

Drager/Aspect Product Agreement

between

Aspect Medical Systems, Inc.
2 Vision Drive
Natick
MA 01760-2059
USA

- hereinafter called "Aspect" -

and

Drager Medizintechnik GmbH
Moislinger Allee 53 - 55
23558 Lubeck
Germany
- hereinafter called "Drager" -

- Aspect and Drager together hereinafter called "the Parties" -

<PAGE> 2
Drager/Aspect Product Agreement
20.04.99
- 2 -

Whereas Aspect has a long-standing tradition of designing, manufacturing and
distributing neuromonitors including the BIS (Bispectral Index) and Sensors for
neuromonitors.

Whereas Drager has a long-standing tradition of designing, manufacturing and
distributing medical equipment.

Whereas Drager is in the process of designing a new anesthesia workplace.

Whereas Drager wishes to integrate Aspect's BIS technology and to offer a
Drager-BIS-Module as an option into this and other workplace solutions for the
future standard and high-end market segments.

Whereas Aspect desires to sell and Drager desires to purchase, on the terms and
conditions set forth below in this Agreement, certain quantities of Aspect BIS
Module Kits and the required Sensors manufactured by Aspect.

Now, therefore,

in consideration of the mutual covenants, terms and conditions hereinafter
expressed, the Parties agree as follows:

1. DEFINITIONS

1.1 The term "Aspect BIS Module Kits" shall mean Aspect's BIS Module Kits
as further defined in the specifications in Exhibit A.

The Parties hereto may change Exhibit A, to the extent it may then be
necessary to reflect a subsequent modification made pursuant to Clause
7 of this Agreement.

1.2 The term "Drager-BIS-Module" shall mean an Aspect BIS Module Kit that
is integrated by Drager into a Drager Workplace.

<PAGE> 3
Drager/Aspect Product Agreement
20.04.99
- 3 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

1.3 The term "Aspect BIS Sensor" shall mean a single use disposable sensor
for the use with the Aspect BIS Module Kits or the Aspect stand-alone
BIS monitor.

1.4 The term [**] shall mean [**] in accordance with [**] Aspect BIS Module
Kits sold by Aspect [**].

1.5 The term "Products" shall mean the Aspect BIS Module Kits, the
Drager-BIS-Modules, the Aspect's BIS Sensors,[**].

1.6 The term "Drager Workplace" shall mean a combination of devices for
patient therapy and monitoring with a compatible and harmonized human
interface having direct access to all device components. The definition
Drager Workplace includes a Drager anesthesia workplace and a Drager
intensive care workplace for adults and neonates.

2. DRAGER'S RIGHTS TO PURCHASE AND SELL AND ASPECT'S RESPONSIBILITIES

2.1 Drager shall have the non-exclusive right during the term of this
Agreement to purchase the Aspect BIS Module Kit for the sole purpose of
integrating the Aspect BIS Module Kit into a Drager Workplace and
reselling the finished Drager-BIS-Module worldwide.

Subject to Clause 2.2 Drager shall have the exclusive right during the
term of this Agreement to purchase the [**] except in the USA. Aspect
shall not have the right to manufacture or distribute [**].

Drager shall have the non-exclusive right during the term of this
Agreement to purchase the Aspect BIS Sensor for the non-exclusive
resale worldwide except in the USA.

2.2 Drager will sell the Drager-BIS-Module, [**] and the Aspect BIS Sensor
through its designated distribution network, and Aspect shall not with
respect to the Drager-BIS-Module [**] make any sales promotion, shall
not establish any branch, shall not have any supply depot or supply the
Drager-BIS-Module [**] or to any party other than Drager.

<PAGE> 4
Drager/Aspect Product Agreement
20.04.99
- 4 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

It is understood, however, that in the event that Drager distributes
[**] and Drager's[**] are not using, on average, at least [**] the
number of sensors used by users of Aspect's standalone BIS Monitors in
the U.S. Drager shall then grant Aspect a non-exclusive royalty-free
right and license under its rights to [**] manufacture, use, import,
sell and offer to sell Aspect BIS Sensors [**].

2.3 Aspect agrees to provide all reasonable help for Drager with respect to
the design and/or integration of the Aspect BIS Module Kit into a new
Drager Workplace.

2.4 Drager agrees not to use the Drager-BIS-Module for an integration into
stand-alone single parameter monitoring equipment.

2.5 Aspect shall obtain any official approvals, permits, licenses and other
consent required to sell Aspect's BIS Module Kit and Aspect's BIS
Sensor worldwide, at such time and in such manner as determined by
Aspect or required by Drager to serve reasonable commercial purposes of
both companies. Drager shall receive copies of any such documents.

Drager shall obtain any official approvals, permits, licenses and other
consent required to sell Drager products worldwide, in such time and in
such manner as determined by Drager. If necessary, Aspect shall receive
copies of any such documents belonging to the Drager-BIS-Module [**].
Aspect will provide any reasonable support required by Drager to obtain
the necessary approvals for the Drager-BIS-Module [**].

2.6 The parties intend to agree on a co-marketing concept for the Products.

3. PRICES

3.1 The prices for Aspect BIS Module Kits and BIS Sensors shall be as set
forth in Exhibit B hereto. The price per product is FOB, Boston as per
Incoterms 1990. All prices for Aspect BIS Module Kits and BIS Sensors
are exclusive of all taxes, levies and assessments imposed on such
products purchased hereunder, excluding taxes based on Aspect's
possession thereof prior to the originally scheduled delivery and taxes
on Aspect's net income from the transaction. Drager intends to
introduce the new Drager anesthesia workplace to the market [**].

<PAGE> 5
Drager/Aspect Product Agreement
20.04.99
- 5 -

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

3.2 Prices, billing and all payments due hereunder shall be in US$.

3.3 September of each year with effect on 1st January of the following
year, the prices for Aspect's BIS Module Kit set forth in Exhibit B may
be adjusted by mutual Agreement. The first adjustment of prices may be
made prior to October 1, 2002 with effect on January 1, 2003.

The prices for Aspect's BIS Sensor will be based on the Sensor Price
Schedule set forth in Exhibit B applied to the prevailing List Price of
the BIS Sensor in the U.S.

Any adjustments to BIS Sensor prices may only be made prior to October
1 of each year for effect on January 1 of the following year. [**]
prices will be based on the Sensor Price Schedule set forth in Exhibit
B for the Aspect BIS Sensor to which will be added possible additional
costs required [**].

4. PURCHASE

4.1 All Products shall be ordered in writing, specifying the product type,
number of units, desired delivery date and means of shipment. Purchase
orders may be sent by facsimile machine. Such orders shall be
considered to have been accepted by Aspect only upon Aspect's issuance
of written acknowledgment confirming its acceptance of the purchase
order. Aspect's acknowledgment may be sent by facsimile machine and
shall state delivery date.

4.2 Ownership of, title to, and risk of loss with respect to any product
sold to Drager hereunder shall pass to Drager upon delivery to carrier
in Boston packed and ready for shipment to Drager. Aspect shall ship
products in a manner consistent with Aspect's usual shipping practices.
Transportation and shipping charges from Boston, including costs
incurred by Aspect relating to packing, storage, documentation and
similar items which result from special shipping instructions of
Drager, and the cost of any insurance which Drager may request in
connection with the products, shall be added to the price stated on
invoices and shall be paid by Drager at the time that payment of the
purchase price for such products is due and payable.

<PAGE> 6
Drager/Aspect Product Agreement
20.04.99
- 6 -

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

4.3 Drager shall have the right to handle the purchase of Products via
another company belonging to the Drager Group. Drager will inform
Aspect in writing with respect to such decision. Drager will further
ensure that this company will adhere to the provisions of this
Agreement.

5. FORECAST, DELIVERY TIME

5.1 Drager shall provide a non-binding quarterly rolling forecast for a
minimum of the successive two quarters.

5.2 Aspect shall ship the Products in lots of 50 units.

5.3 Aspect shall ship Aspect BIS Module Kits within (eight) 8 weeks of its
receipt of purchase orders therefore, assuming the quantity ordered is
reasonably consistent with the forecast.

5.4 Aspect shall ship [**] within (four) 4 weeks of its receipt of purchase
orders therefore, assuming the quantity ordered is reasonably
consistent with the forecast.

5.5 In the event of cancellation of any purchase order, Drager will be
liable to Aspect for the payment of reasonable cancellation charges.

6. PAYMENT; INSPECTIONS; RETURNS

6.1 All purchases hereunder shall be paid within thirty (30) days from date
of invoice to Drager.

6.2 All Products received by Drager shall conform in all material respects
to the specifications set forth in Exhibit A.

Receiving inspection by Drager may be performed on a sampling basis
which shall be in accordance with the Testing Specifications as
established in Exhibit C. Exhibit C will be negotiated later.

<PAGE> 7
Drager/Aspect Product Agreement
20.04.99
- 7 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

Acceptance by Drager on a sampling basis shall not prejudice or
restrict the right of Drager to accumulate and return at Aspect's
expense for full credit or replacement (freight and insurance prepaid
to Drager) non-conforming Products discovered during Drager's
inspection process, which in no event shall extend beyond the warranty
period provided in Clause 8. Any such return must be made within 30
days of discovery of any such Products' nonconformance by Drager.

Aspect must be given the opportunity to inspect and/or correct Products
for which Drager shall request credit or replacement to enable Aspect
to determine for itself that said Products do not meet specifications,
and such credit or replacement shall be made by Aspect only if and when
it determines that Products do not meet specifications. No Product may
be returned without Aspect's approval, which, subject to the last
sentence of the preceding Paragraph under this Clause 6.2, shall not be
unreasonably withheld.

7. MODIFICATION OF PRODUCTS

7.1. Aspect shall inform Drager

(a) about planned modifications of Aspect's BIS Module Kit,
Aspect's BIS Sensors, [**] and modifications relating to BIS
of Aspect's stand alone Monitor,

(b) of any modification which will affect the approval of the
Products or the Drager Workplace and /or the proper function
within the Drager Workplace.

In case (b), Aspect shall not be allowed to modify Aspect's BIS Module
Kit, Aspect's BIS Sensor [**] sold to Drager without Drager's prior
written consent. Additionally Drager shall have the right to decide if
Drager wishes to take over the modification. If Drager refuses to take
over the modification, Aspect shall be obliged to deliver the
unmodified Aspect BIS Module Kit, Aspect's BIS Sensors [**] or a period
of [**] beginning with the date Drager announces its decision. After
this [**] period Aspect can cease to deliver the unmodified Aspect BIS
Module Kit, Aspect's BIS Sensors [ **]. In the event that Aspect
believes that a modification or improvement relates to patient safety,
Drager will accept these modifications under the condition that Aspect
will agree to repair or replace Aspect's BIS Module Kits, Aspect's BIS
Sensors or [**] previously provided to Drager or Drager customers at no
charge.

<PAGE> 8
Drager/Aspect Product Agreement
20.04.99
- 8 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

7.2. Drager shall promptly inform Aspect of any proposed modification which
will affect Aspect product approval.

7.3 Aspect agrees in principle to [**]. Aspect and Drager must agree on a
mutually-acceptable time [**] to the Aspect BIS Module Kit pursuant to
this Section 7.3.

8. WARRANTY

8.1 Subject to Exhibit E, Aspect hereby warrants to Drager that for a
period of [**] after each Product is sold by Drager, or an authorized
Drager Distributor and delivered to an end user, or [**] after such
Products are received from Aspect by Drager, whichever period shall be
shorter, that such Products will conform in all material respects to
the specifications set forth in Exhibit A and be free from any defects
in workmanship and materials. In the event of a breach of the warranty
under this Section, Aspect's responsibility and Drager's remedy shall
first be repair or replacement of the Product, at Aspect's option. In
the event that, after Aspect has attempted to repair or replace the
product, the Product does not conform to the warranty provided in this
Section 8.1, Aspect will refund the purchase price for such Product.
This paragraph summarizes Aspect's responsibility and Drager's sole
remedy with respect to the warranty set forth in this Section 8.1.

8.2 Notwithstanding the foregoing, Aspect's warranty as set forth above
does not cover:

(i) defects emanating from improper or unauthorized use or
maintenance of such products by Drager or any subsequent
purchaser thereof;

(ii) normal deterioration or normal wear and tear;

(iii) disposable items such as the [**] Aspect BIS Sensor after the
expiration date marked on the Sensor packaging

(iv) catastrophe, fault or negligence of Drager or anyone claiming
through or on behalf of Drager; or

(v) subject to Exhibit A, causes external to the Products
including without limitation power or air conditioning
failure.

<PAGE> 9
Drager/Aspect Product Agreement
20.04.99
- 9 -

8.3 THE PROVISIONS OF THE FOREGOING WARRANTIES ARE IN LIEU OF ANY OTHER
WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL (INCLUDING ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE).

9. QUALITY ASSURANCE

Aspect shall adhere to a quality assurance system in accordance with
the Quality Assurance Agreement as established in Exhibit D.

10. SERVICE

10.1 Drager assumes full responsibility to render service with respect to
the maintenance, repair, or replacement of Products, accessory items,
or parts therefor sold by Drager.

10.2 Aspect agrees to supply Drager, at Drager's expense, with any and all
special tools and equipment reasonably required for Drager to service,
maintain or test the Products sold hereunder. Drager agrees to make
payment for such items to Aspect within thirty (30) days from the date
of invoice.

10.3 Aspect shall adhere to the Service Agreement as per Exhibit E. Exhibit
E will be negotiated later.

11. TRAINING AND DOCUMENTS

Aspect personnel shall be made available free of charge for a
reasonable number of training sessions reasonably required by Drager
with respect to the sales and application know-how, the maintenance,
repair or replacement of the Products, or parts therefore.

Aspect will supply Drager free of charge with a reasonable quantity of
technical, sales and application materials for internal purposes in
English and German (if available) such as manuals and other technical
materials relating to the Aspect BIS Module Kits and Aspect's BIS
Sensors. Aspect will supply Drager at cost price with a reasonable
quantity of catalogues and literature relating to the Aspect BIS Module
Kits and Aspect's BIS Sensors.

<PAGE> 10
Drager/Aspect Product Agreement
20.04.99
- 10 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

Drager agrees to provide, at its own expense, and subject to Aspect's
prior written approval, translation and printing of technical, sales,
operation and service materials in the language(s) commonly used in the
areas where Drager will sell the Products.

Drager Lubeck will coordinate training and flow of information for all
Drager participants. Training will be held in English language.

12. REPLACEMENT PARTS

Subject to Exhibit E, Aspect agrees to supply Drager with replacement
parts for the Aspect BIS Module Kits sold hereunder for a period of ten
(10) years after the date of the last sale of Aspect BIS Module Kits by
Aspect to Drager hereunder. Prices for the replacement parts will be
set by Aspect in accordance with Clause 3. Drager shall make payment of
the replacement parts supplied hereunder within thirty (30) days from
the date of invoice.

13. PATENT INDEMNITY

13.1 (a) Except as provided below, Aspect shall defend and indemnify Drager
from and against any damages, liabilities, costs and expenses
(including reasonable attorneys' fees) arising out of any claim that
the Aspect BIS Module, the Aspect BIS Sensor [**] infringe a valid
patent or copyright or misappropriates a trade secret of a third party,
provided that (i) Drager shall have promptly provided Aspect written
notice thereof and reasonable cooperation, information, and assistance
in connection therewith, and (ii) Aspect shall have sole control and
authority with respect to the defense, settlement, or compromise
thereof. Should any Product become or, in Aspect's opinion, be likely
to become the subject of an injunction preventing its use as
contemplated herein, Aspect may, at its option, (1) procure for Drager
the right to continue using such product, (2) replace or modify such
product so that it becomes non-infringing, or, if (1) and (2) are not
reasonably available to Aspect after consultation in good faith with
Drager, then (3) terminate Drager's rights to the allegedly infringing
product and refund to Drager the amount which Drager has paid to Aspect
for such products which are in the possession of Drager or its
subdistributors. Drager will immediately inform Aspect as soon as
Drager becomes aware of any threatened or actual liability claim by a
third party relating to the Aspect BIS Module, [**] and the Aspect BIS
Sensor.

<PAGE> 11
Drager/Aspect Product Agreement
20.04.99
- 11 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

(b) Aspect shall have no liability or obligation to Drager hereunder
with respect to any patent, copyright or trade secret infringement or
claim thereof based upon (i) use of the Products by Drager in
combination with devices or products other than the Drager Workplace,
(ii) use of the Products in an application or environment for which
such Products were not designed or contemplated, (iii) modifications,
alterations or enhancements of the Products not created by or for
Aspect, or (iv) any claims of infringement of a patent, copyright or
trade secret in which Drager or any affiliate of Drager has an
interest. Drager shall indemnify and hold Aspect harmless from all
costs, damages and expenses (including reasonable attorneys' fees)
arising from any claim enumerated in clauses (i) through (iv) above,
provided that (i) Aspect shall have promptly provided Drager written
notice thereof and reasonable cooperation, information, and assistance
in connection therewith, and (ii) Drager shall have sole-control and
authority with respect to the defense, settlement or compromise
thereof. Aspect will immediately inform Drager as soon as Aspect
becomes aware of any threatened or actual liability claim by a third
party relating to Clause (iv) above.

(c) the foregoing states the entire liability of the Parties with
respect to infringement of patents, copyrights and trade secrets by the
Products or any part thereof or by their operation.

13.2 The obligation of the Parties hereto as set forth in this Clause 13
shall continue notwithstanding the termination of this Agreement.

14. TRADEMARK

Any Drager-BIS-Module [**] sold by Drager under this Agreement shall
bear the trademark of Drager.

Drager is required to mark the Drager-BIS-Module [**] additionally to
the Drager trademark with the Aspect BIS(TM) trademark as approved by
Aspect and in accordance with the following provisions:

(a) Ownership. Drager acknowledges and agrees that Aspect is the sole and
exclusive owner of all right, title and interest in and to the
following trademarks (the "Aspect Trademarks"): "Aspect", "BIS", "BIS
Sensor".

Drager recognizes the value of the Aspect Trademarks and the good will
associated with the Aspect Trademarks. Drager agrees that its use of
the

<PAGE> 12
Drager/Aspect Product Agreement
20.04.99
- 12 -

Aspect Trademarks and any good will arising therefrom shall inure to
the benefit of Aspect. Nothing contained herein shall create, nor shall
be construed as an assignment of, any right, title or interest in or to
the Aspect Trademarks to Drager, other than the grant of a license in
Section 14(c) below; it being acknowledged and agreed that all other
right, title and interest in and to the Aspect Trademarks is expressly
reserved by Aspect. Drager shall keep the Aspect Trademarks free from
all liens, mortgages or other encumbrances. Drager agrees that it will
not attack or otherwise challenge the title, validity or any other
rights of Aspect in or to the Aspect Trademarks.

(b) Notice. All Products that use the Aspect Trademarks shall be
accompanied, where reasonable and appropriate, by a proprietary notice
with respect to Aspect consisting of the following elements:

1. The statement "[insert trademark(s)] is a proprietary trademark(s)
of Aspect."

2. Drager will include the "(TM)" or "(R)" symbol, as instructed by
Aspect, a reasonable time before the first prominent use of the Aspect
Trademark in the Products.

3. Drager shall reproduce copyright and trademark notices of Aspect in
the relating documents.

(c) License. Aspect hereby grants to Drager a nonexclusive, worldwide,
royalty-free license (without the right to sublicense) to use the
Aspect Trademarks to designate and promote Products. Drager shall have
no other right to use, display or utilize the Aspect Trademarks for any
other purpose or in any other manner.

(d) Quality Standards. Upon reasonable notice and request, Aspect may
inspect copies of the Products, advertising and promotional materials
on which the Aspect Trademarks are used so that Aspect may monitor
compliance with this Agreement. Quality standards are further described
in Exhibit D to this Agreement.

(e) Protection and Infringement. Drager agrees to cooperate with and assist
Aspect in obtaining, maintaining, protecting, enforcing and defending
Aspect proprietary rights in and to the Aspect Trademarks. In the event
that Drager learns of any infringement, threatened infringement or
passing-off of the Aspect Trademarks, or that any third party claims or
alleges that the Aspect Trademarks infringe the rights of the third
party or are otherwise liable to

<PAGE> 13
Drager/Aspect Product Agreement
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- 13 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

cause deception or confusion to the public, Drager shall be required to
notify Aspect giving the particulars thereof, and Drager shall provide
necessary information and assistance to Aspect in the event that Aspect
decides that proceedings should be commenced.

(f) Termination. In addition to the termination rights set forth in Section
21 hereof, in the event that Drager is in material breach of any
provision of this Section 14, Aspect may, upon [**] written notice,
terminate the license granted in Section 14(c) if Drager does not cure
such breach or default within such 30-day period. The parties recognize
that curing such breach or default may require development of a new
version of the Product. If this is the case, then Drager will be deemed
to have cured such breach or default if, within the 30-day cure period,
Drager presents to Aspect a plan for revision of the Product that will
cure such breach or default, such plan is reasonably acceptable to
Aspect, and such revision is released and distributed within three
months following written notice of such breach or default.

In addition to the provisions of Section 21 hereof, upon termination of
the license granted in Section 14(c), or upon termination of this
Agreement, for whatever cause except Sections 21.5, 21.6 and 21.7:

1. Drager shall immediately cease and desist from any further use
of the Aspect Trademarks and any trademarks confusingly
similar thereto, either directly or indirectly;

2. All rights in the Aspect Trademarks granted to Drager
hereunder shall immediately revert to Aspect;

3. In the event that this Agreement is terminated for any reason
other than a material breach or material default by Drager,
Drager shall have a period of 30 days thereafter to dispose of
all of the unsold Products bearing the Aspect Trademarks and
advertising and promotional materials relating thereto which
had been completed by it prior to such termination, provided
such Products and materials were in the process of manufacture
more than 30 days before such termination.

<PAGE> 14
Drager/Aspect Product Agreement
20.04.99
- 14 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

15. PRODUCT RECALL PROGRAM

In the event of any recall of the Product by Aspect or required by
Drager for safety or efficacy reasons resulting from Aspect's failure
to supply any BIS Module Kits, Aspect BIS Sensors, [**] that (1)
conform in all material respects to the specifications set forth in
Exhibit A or (2) are free from defects in workmanship and materials,
Aspect agrees to repair or replace all recalled Products previously
supplied to Drager at no expense to Drager. Aspect also agrees to
consult with Drager to establish a reasonable process for managing the
recall. Drager will maintain all necessary sales records to facilitate
the recall.

16. PRODUCT LIABILITY

16.1 Aspect will indemnify, protect, and save Drager harmless from all
claims, demands, suit, or actions for damages to property or person
which may be sustained by any third party, and which are caused by any
defect or deficiency in the design or manufacture of any of the
Products sold to Drager under this Agreement.

The foregoing indemnity shall survive the expiration or termination of
this Agreement, but Aspect shall not be responsible for any loss or
damage caused by acts or omissions of Drager. Aspect shall have no
liability or responsibility of any kind to Drager under this Clause 16
for any claims, demands, suits, or actions unless Aspect shall have
been notified within 30 days time following notification to Drager of
any such claims, demands, suits, or actions and shall have an adequate
opportunity to defend. Aspect shall have the sole control and authority
with respect to the defense, settlement or compromise thereof.

Should Drager desire to have its own counsel participate in any such
action or suit, the cost of such counsel shall be borne exclusively by
Drager. The obligation of the Parties set forth in this Clause 16 shall
continue notwithstanding the termination of this Agreement.

<PAGE> 15
Drager/Aspect Product Agreement
20.04.99
- 15 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

16.2 Drager will indemnify, protect, and save Aspect harmless from all
claims, demands, suit, or actions for damages to property or person
which may be sustained by any third party and which are caused by any
defect or deficiency in the design or manufacture of the Drager
Workplace or of that portion of the Drager-BIS-Module developed or
manufactured by Drager, or which relate to the failure of Drager to
incorporate the Aspect BIS Module Kit within the Drager-BIS-Module in
accordance with the technical information provided by Aspect, or
Drager's activities in connection with use or sale of the Products.

The foregoing indemnity shall survive the expiration or termination of
this Agreement, but Drager shall not be responsible for any loss or
damage caused by acts or omissions of Aspect. Drager shall have no
liability or responsibility of any kind to Aspect under this Clause 16
for any claims, demands, suits, or actions unless Drager shall have
been notified within 30 days time following notification to Aspect of
any such claims, demands, suits, or actions and shall have an adequate
opportunity to defend. Drager shall have sole control and authority
with respect to the defense, settlement or compromise thereof.

Should Aspect desire to have its own counsel participate in any such
action or suit, the cost of such counsel shall be borne exclusively by
Aspect. The obligation of the Parties set forth in this Clause 16 shall
continue notwithstanding the termination of this Agreement.

17. CURRENT pEEG-MONITOR PROJECT

17.1 It is Drager's intention that the Product will become the sole source
for monitoring the level of hypnosis in Drager anesthesia Workplaces
and it is Drager's intention to discontinue distribution of the pEEG
monitor. However, Drager shall be free to provide alternative
technology in the event that

(i) necessary regulatory approvals for the Products are withdrawn
and will not be granted during a [**] period after withdrawn,

(ii) approvals have not been granted within a period of [**]
following the completion of the Drager-BIS-Module and
submission of the necessary requests for approvals to the
appropriate regulatory agencies

<PAGE> 16
Drager/Aspect Product Agreement
20.04.99
- 16 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

(iv) Aspect's market share worldwide for monitoring the effect of
anesthesia on the brain with BIS [**].

(v) Aspect stops or reduces marketing and product improvement
activities materially below the level currently performed.

17.2 Drager may offer in Drager anesthesia workplaces and in other Drager
products complementary parameters but not directly competing parameters
to Aspect's Bispectral Index. Any parameter claimed to be a measure of
the hypnotic effect of anesthetics based on processing of the
continuous EEG, is considered to be directly competing. Complementary
parameters will only be provided in addition to the BIS.

Notwithstanding the foregoing, Drager is free to offer EEG parameters
based on the continuous EEG such as median frequency, spectral edge
frequency, compressed spectral array (CSA) and/or density spectral
array (DSA), and may also offer evoked potentials, in addition to the
BIS.

17.3 In the event that the Aspect's BIS Module Kit sold to Drager contains
applications unique to Drager Aspect shall for the term of this
Agreement and [**] after its termination refrain from selling similar
products to any third party.

18. FORCE MAJEURE

Neither Aspect nor Drager shall be liable for any delay in, or failure
of, performance hereunder due to any contingency reasonably beyond its
control, rendering performance commercially unreasonable including, but
not limited to, an act of God, war (declared or undeclared),
mobilization, riot, strike, labor dispute, fire, flood, shortages, or
failure or delays of energy, materials, supplies or equipment,
unavailability of transportation, goods or services, transportation
embargoes or delays, or breakdowns in machinery or equipment,
governmental restrictions or actions but shall not include any royalty
or other payment imposed or agreed to by Aspect or Drager resulting
from a third party claim of intellectual property right infringement or
violation as further described in Clause 13; provided, however, that
the Party affected shall exert its reasonable best efforts to eliminate
or cure or overcome any of such causes and to resume performance of its
covenants.

<PAGE> 17
Drager/Aspect Product Agreement
20.04.99
- 17 -

19. SECRECY

19.1 If marked as "Confidential Information", Drager and Aspect are each
obliged to preserve in strict confidence any trade secrets,
confidential information and technical information of the other Party
and to refrain from disclosing, during the period of this Agreement and
any time after expiration of this Agreement, any such information to
third parties. Notwithstanding the foregoing, information which is
orally or visually disclosed to the recipient by the disclosing party,
or is disclosed in writing without an appropriate letter, proprietary
stamp or legend, shall constitute Confidential Information if the
disclosing party, within thirty (30) days after such disclosure,
delivers to the recipient a written document or documents describing
such Confidential Information and referencing the place and date of
such oral, visual or written disclosure and the names of the employees
or officers of the recipient to whom such disclosure was made.

Both Parties represent and warrant that they have exercised, and will
continue to exercise the same standard of due care in hiring,
supervising and selecting those employees to whom they disclose such
confidential information, so that the confidentiality of all such
information is protected. No such confidential information disclosed by
either party to the other in connection with this Agreement shall be
disclosed to any person or entity other than the recipient's employees
and contractors directly involved with the recipient's use of such
information who are bound by written agreement to protect the
confidentiality of such information, and such information shall be
otherwise protected by the recipient from disclosure to others with the
same degree of care accorded to its own proprietary information.

19.2 The Parties' obligation of non-disclosure shall not apply with respect
to such information, which

(1) is already known to the receiving Party before disclosure by
the divulging Party, providing that the receiving Party has
written records to substantiate its knowledge; or

(2) is in the public domain at the time of disclosure to the
receiving Party or, after such disclosure, enters into the
public domain through no fault of the receiving Party;

(3) is independently developed by the receiving Party without
reference to or reliance on the Confidential Information; or

<PAGE> 18
Drager/Aspect Product Agreement
20.04.99
- 18 -

(4) is lawfully disclosed to the receiving Party by a third party
under circumstances permitting its unrestricted disclosure by
the receiving party.

Upon termination of this Agreement, each party shall promptly deliver
to the other all confidential information of the other party in the
possession or control of such party and all copies thereof. The
obligations under this Section 19 shall continue for both parties for a
period of 3 years after delivery by Aspect to Drager of the last
Product under this Agreement.

20. RELATIONSHIP BETWEEN THE PARTIES

During the term hereof, the relationship of the Parties is that of
seller (Aspect) and buyer (Drager).

Nothing herein contained shall be deemed to authorize or empower either
Party, its affiliates, its agents or employees, to act as agent for the
other Party or conduct business in the name, or for the account of the
other Party or any of its affiliates or otherwise bind it or them in
any manner.

21. TERM AND TERMINATION

21.1 This Agreement shall come into force when it has been duly signed by
both Parties and shall remain in force until December 31, 2005, unless
earlier terminated in accordance with the provisions hereof.

It shall be automatically renewed thereafter for additional periods of
one (1) calendar year each unless one Party gives at least twelve (12)
calendar months prior to the end of the original term hereof and each
one (1) year period thereafter a written notice to the other Party of
its intention to terminate. First notice of termination may not be
given until December 31, 2004 with effect on December 31, 2005.

<PAGE> 19
Drager/Aspect Product Agreement
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- 19 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

21.2 Aspect shall have the right to terminate this Agreement, effective upon
the delivery of written notice to Drager, in the event Drager fails to
make any payment when due to Aspect pursuant to this Agreement or any
invoice for Products. Aspect will grant [**] to Drager after Drager's
receipt of Aspect's written demand for payment, provided Aspect has
submitted proof of delivery in order to rectify any payment problem or
discrepancy and has stated that the Agreement will be terminated if
Drager fails to make the due payment [**].

21.3 Furthermore, either Party may terminate this Agreement if the other
Party commits any material breach of its obligations hereunder (other
than payment defaults addressed in Clauses 21.2 hereof) and such breach
is not resolved within [**] after written notice thereof is given to
the Party in breach of this Agreement.

21.4 Should Drager or Aspect at any time during the period of this Agreement
be adjudged bankrupt or insolvent, or have a Receiver appointed in
respect of its assets or shall make any arrangement or composition with
its creditors or shall be wound up, whether voluntarily or
compulsorily, or make a general assignment for the benefit of
creditors, then in such event the other Party may, at its option,
terminate this Agreement effective upon giving notice thereof in
writing to the other. In the event either Drager or Aspect exercises
this option, said Party shall incur no liability or obligation with
respect to said termination.

21.5 In the event of the merger, consolidation or sale of substantially all
assets of Aspect to a competitor of Drager, Drager may, at its option,
terminate Section 17 of this Agreement effective upon giving notice
thereof in writing to Aspect. In the event Drager wishes to exercise
this option, Drager shall do so within 30 days following written notice
from Aspect of the merger, consolidation or sale of substantially all
assets of Aspect, and neither Aspect (or its successors) or Drager
shall incur liability or obligation with respect to said termination.

In the event of the merger, consolidation or sale of substantially all
assets of Drager to a company outside of the Drager-Group, Aspect may,
at its option, terminate this Agreement effective upon giving notice
thereof in writing to Drager. In the event Aspect exercises this
option, Aspect shall do so within 30 days following written notice from
Drager of the merger, consolidation or sale of substantially all assets
of Drager, and neither Drager (or its successors) or Aspect shall incur
liability or obligation with respect to said termination.

<PAGE> 20
Drager/Aspect Product Agreement
20.04.99
- 20 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

21.6 Subject to the second paragraph of this Section 21.6, in the event of
termination the Parties agree that Drager shall have the right to
purchase the Aspect BIS Module Kit [**] following termination of the
Agreement or Aspect BIS Sensors [**] following termination of the
Agreement.

In the event of termination of the Agreement as a result of a material
breach of the Agreement by Drager in accordance with Sections 21.2 or
Section 21.3, Drager shall not be permitted to continue to purchase
[**] Aspect BIS Sensors beyond [**] termination of the Agreement. If
Aspect intends [**].

21.7 In the event of termination, the Parties further agree to finalize
current sales projects. A complete list of these sales projects has to
be exchanged by the Parties no later than fourteen (14) days after the
termination.

21.8 Due to the fact that some Exhibits of this Agreement will be negotiated
later each Party shall have the right to terminate this Agreement if
the Parties cannot reasonably agree on the content of one of these
Exhibits.

22. MISCELLANEOUS

22.1 This Agreement shall not be assignable either in whole or in part
without the prior written consent of the other Party except, subject to
Section 21.5, to a party that acquires all or substantially all of
either Parties' business by merger, sale of assets, or otherwise.

22.2 Subject to Clause 21.1 hereof, this Agreement shall inure to the
benefit of and be binding upon the Parties hereto.

22.3 The headings used herein are for ease of reference only and are not to
be used in interpretation or construction of this Agreement.

22.4 The provisions of this Agreement and its Exhibits shall not be
extended, varied, changed, modified or supplemented other than by
agreement in writing signed by the Parties hereto.

22.5 In the event of any inconsistency or conflict between the provisions of
this Agreement and any Purchase Order or other document, the provisions
of this Agreement shall prevail.

<PAGE> 21
Drager/Aspect Product Agreement
20.04.99
- 21 -

22.6 All notices or other communications which shall or may be given
pursuant to this Agreement shall be in writing in the English language
and shall be delivered by personal delivery, certified mail, or telefax
at the address set forth below, or at such other address as such party
may hereafter designate in writing as the appropriate address for the
receipt of such notice.

To Aspect at:

Aspect Medical Systems, Inc.
2 Vision Drive
Natick
MA 01760-2059
USA
Tel.: 508-647-2072
Fax: 508-647-2059
Attention: J.Breckenridge Eagle

To Drager at:

Drager Medizintechnik GmbH
Moislinger Allee 53 - 55
D-23558 Lubeck
Federal Republic of Germany
Tel.: 451-882-2295
Fax: 451-882-2793
Attention: Business Unit Anaesthesia, Swen Grunitz-Post

All notices shall be deemed served on the day on which personally
served, or of by certified mail, or telefax on the date of actual
receipt.

21.7 The waiver by either Party hereto of any default hereunder or of any
breach of any covenant, agreement or condition contained herein shall
not be construed to constitute a waiver of any other default or breach
hereof whether similar or otherwise.

22.8 If any provision of this Agreement should be held unenforceable, or
illegal with respect to any jurisdiction, it (i) shall be deemed
severable from the other provisions which shall remain valid and
enforceable; and (ii) shall remain in effect in other jurisdiction
where such provision is otherwise enforceable and legal.

<PAGE> 22
Drager/Aspect Product Agreement
20.04.99
- 22 -

This Agreement may be executed simultaneously in multiple counterparts,
each of which shall be deemed an original and all of which together
shall constitute one and the same agreement.

22.10 Neither party shall have the right to sublicense any of the rights or
licenses granted under this agreement outside the company group without
the other's prior written consent.

21.11 Compliance with Laws. Drager shall comply with all laws, legislation,
rules, regulations, governmental requirements and industry standards
with respect to the Products, and the performance by Drager of its
obligations hereunder, existing in any jurisdiction into which Drager
directly or indirectly distributes the Products. Aspect shall inform
Drager if export of Aspect's BIS Module Kit or Aspect's Sensors are
restricted to any country or require certain permission in any country.

21.12 IN THE EVENT THAT U.S. LAW IS APPLIED TO THIS AGREEMENT, ASPECT OR
DRAGER SHALL NOT BE LIABLE FOR ANY LOSS OF DATA, LOSS OF PROFITS OR
LOSS OF USE OF THE PRODUCTS OR FOR ANY INDIRECT DAMAGES OF ANY KIND
(WHETHER SPECIAL, INCIDENTAL, CONSEQUENTIAL OR OTHER INDIRECT DAMAGES)
IN CONNECTION WITH THE USE OR PERFORMANCE OF THE PRODUCTS.

23. APPLICABLE LAW

This Agreement shall be governed, construed and interpreted in
accordance with the laws of Switzerland, without regard to its conflict
of laws principles.

The United Nations Convention on contracts for the International Sale
of Goods shall not apply.

24. DISPUTE SETTLEMENT, PLACE OF JURISDICTION

24.1 The Parties shall try to settle any dispute arising in connection with
this present Agreement amicably. In case of a local sales conflict a
task force of Drager and Aspect consisting of the persons named under
Clause 22.6 will take care of such dispute settlement.

<PAGE> 23
Drager/Aspect Product Agreement
20.04.99
- 23 -

24.2 In the event disputes cannot be settled amicably according to Clause
24.1, in connection with this present Agreement shall be exclusively
and finally settled by the courts of Zurich.

Natick, ......April 29, 1999..... Lubeck, .......May 5, 1999..............

J. Breckenridge Eagle [Illegible]
................................. ........................................
Aspect Medical Systems, Inc. Drager Medizintechnik GmbH

<PAGE> 24
Drager/Aspect Product Agreement
20.04.99
- 24 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

EXHIBIT A

of the Drager/Aspect Product Agreement
between Aspect Medical Systems, Inc.
and Drager Medizintechnik GmbH

Products

1.1 The Drager-BIS-Module will incorporate Aspect's BIS Module Kit.

Aspect's BIS 'Module Kit' is designed specifically for OEM applications
and allows the integration of Aspect's BIS monitoring technology into
OEM equipment. The BIS Engine will interface to the patient via the
Aspect BIS sensor and to the OEM equipment utilizing a serial (RS-232)
3-wire interface and the necessary power connections.

The BIS Module Kit consists of a Digital Signal Converter (DSC-2) that
is placed in proximity to the patient and a small circuit board that
resides in the OEM equipment. The DSC-2 is a small (palm sized)
front-end to the BIS Engine circuit board that provides the patient
interface and performs the high performance analog to digital
conversion of the EEG signals. The EEG signals are transmitted in
digital format from the DSC-2 to the BIS engine circuit board via a 12
foot cable that is hard wired connected at the DSC-2.

The BIS Engine circuit board measures 3 x 4 inches. This board performs
digital signal processing on the digitized EEG signal and outputs the
Bispectral Index to the OEM system via the RS-232 serial connection.
The board is constructed using double sided surface mount techniques.
The connections to the BIS Engine circuit board are a serial interface
(RS-232), power, and DSC connections.

Detailed Technical Specifications:

Digital Output: [**]

Main Parameters: [**]

Electrical Safety: [**]

<PAGE> 25
Drager/Aspect Product Agreement
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Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

Power: [**]

Artifact Rejection: [**]

Bispectral Index: [**]

Digital Signal Converter (DSC-2)

Description: [**]

Weight: [**]

Dimensions: [**]

Cable Length: [**]

BIS Engine PCB

Physical: [**]

Processing Power: [**]

Software Upgrades
The BIS engine software is stored in reprogrammable FLASH memory.
Software upgrades can be accomplished on-site or remotely via the serial
interface.

Serial Identifier
Each BIS engine is given a unique serial identifier. This allows for
electronic identification/tracking of every BIS Engine.

<PAGE> 26
Drager/Aspect Product Agreement
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- 26 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

[Graphic of Aspect BIS Module Kit and Sensor]

1.2 In addition to the main parameters indicated in Exhibit A, Section 1.1,
the Aspect BIS Module Kit shall also provide [**].

When the Drager-BIS-Module is in use in a Drager Workplace System,
there[**].

1.3 Aspect shall ensure that all BIS enhancements that Aspect develops for
Aspect's stand alone BIS monitor will be available in the BIS Module
Kit sold to Drager as appropriate and as soon as reasonably possible.

Drager will agree to distribute a modified BIS Sensor in the event
Aspect determines that an enhancement to the BIS Module Kit requires
the use of a modified Sensor. All conditions, prices and so on won't be
changed for the new sensors. If this occurs, [**]. Possible additional
costs will be incorporated in the transfer price [**] and reasonable
volumes will be required.

In the event that Aspect develops a different product involving a
different type of index, patient sensor, or application, Aspect and
Drager will develop a mutually-satisfactory new, or amended, agreement.

1.4 For integration into a Drager Workplace, Drager will design an Drager
Workplace specific Drager-BIS-Module. Aspect will grant all reasonable
help to Drager designing the Drager-BIS-Module.

1.5 On the [**]. The possibility to use [**] the original Aspect BIS
monitor will be negotiated later. Possible additional costs [**] will
be incorporated in the transfer price and reasonable volumes will be
required.

1.6 Both Parties agree to work out a common technical requirement
specification for the Products. The latest version of this technical
requirement specification signed by both Parties will be the
specification of the Product to be manufactured by Aspect for Drager.

Natick, .....4/29/99............. Lubeck, .........May 5, 1999 ...........

J. Breckenridge Eagle [illegible]
................................. ........................................
Aspect Medical Systems, Inc. Drager Medizintechnik GmbH

<PAGE> 27
Drager/Aspect Product Agreement
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- 27 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

EXHIBIT B

of the Drager/Aspect Product Agreement
between Aspect Medical Systems, Inc.
and Drager Medizintechnik GmbH

PRICES AND DISCOUNTS

The price for one Aspect BIS Module Kit is US$[**].

The components consists of [**].

Drager shall have the right to manufacture on a royalty free basis the
circuit board based on design specifications provided by Aspect. In
this case the price for the remaining components is US$[**] for one
Aspect BIS Module Kit. The Parties will agree in the future on the
terms of a manufacturing license.

The price of the Aspect BIS Module Kit always includes 5 Sensors.
Drager agrees to supply these Sensors together with each
Drager-BIS-Module to its customers.

The Parties agree that Aspect will grant to Drager an additional
discount on the price of the Aspect BIS Module Kit depending on a
certain yearly quantity : Aspect will grant an additional discount of
[**] for a yearly quantity of more than [**] Aspect BIS Module Kits.

Aspect [**], subsequent to the date of this agreement, for products
sold by Aspect [**]. Aspect will provide Drager with [**].

The price to Drager for the Aspect-BIS-Sensor will be as follows:

The transfer price to Drager for the Aspect BIS Sensor will vary
between[**] of the List Price of the Aspect BIS Sensor in the United
States. This is equivalent to a discount off of Aspect's List price in
the United States for the BIS Sensor between [**].

<PAGE> 28
Drager/Aspect Product Agreement
20.04.99
- 28 -

Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.

As of January 1, 1999, the List Price for Aspect's BIS Sensor is
US$15.00 The actual amount of the discount off the U.S. List Price will
depend upon the volume of Aspect BIS Sensors shipped by Drager for use
with Drager-BIS-Modules. Prior to the shipment by Drager of the first
[**]Drager-BIS-Modules, the discount available to Drager for purchase
of the Aspect BIS Sensors will be set at [**] of Aspect's List Price
for the BIS Sensor in the United States. Following the shipment of the
first [**] Drager-BIS-Modules, the discount available to Drager will
depend upon the volume of Aspect BIS Sensors shipped each quarter
divided by the number of documented Drager-BIS-Modules installed minus
the first [**] Drager-BIS-Modules installed. Using this formula, the
Aspect BIS Sensor price schedule is as follows:

Sensor Shipments per module per quarter-Note 1 Discount off US List price
- ---------------------------------------------- --------------------------

[**] [**]

Note 1: Sensor consumption rate calculated based on total Aspect BIS Sensors
shipped during the quarter divided by the average Drager-BIS Module installed
base during the quarter minus [**].

In the event that Drager [**] in accordance with the same discount schedule as
above, with possible additional costs as noted in Section 1.5 of Exhibit A.

According to Clause 2.1 of the Agreement Drager shall not distribute Sensors in
the USA. Therefore, Aspect will pay a commission to Drager of [**] of the
amounts paid by the customer for each Sensor shipped for use with a
Drager-BIS-Module in the USA.

Natick, .......4/29/99 ............ Lubeck, ......May 5, 1999 ......

J. Breckenridge Eagle [illegible]
................................... .................................
Aspect Medical Systems, Inc. Drager Medizintechnik GmbH

<PAGE> 29
Drager/Aspect Product Agreement
20.04.99
- 29 -

EXHIBIT C

of the Drager/Aspect Product Agreement
between Aspect Medical Systems, Inc.
and Drager Medizintechnik GmbH

TESTING SPECIFICATIONS FOR THE PRODUCTS

(to be negotiated later)

Natick, .......4/29/99 ................ Lubeck, ......May 5, 1999 .......

J. Breckenridge Eagle [illegible]
....................................... ..................................
Aspect Medical Systems, Inc. Drager Medizintechnik GmbH

<PAGE> 30
Drager/Aspect Product Agreement
20.04.99
- 30 -

EXHIBIT D

of the Drager/Aspect Product Agreement
between Aspect Medical Systems, Inc.
and Drager Medizintechnik GmbH

QUALITY ASSURANCE AGREEMENT

(to be negotiated later)

Natick, .......4/29/99 ................. Lubeck, ......May 5, 1999 ....

J. Breckenridge Eagle [illegible]
........................................ ...............................
Aspect Medical Systems, Inc. Drager Medizintechnik GmbH

<PAGE> 31
Drager/Aspect Product Agreement
20.04.99
- 31 -

EXHIBIT E

of the Drager/Aspect Product Agreement
between Aspect Medical Systems, Inc.
and Drager Medizintechnik GmbH

SERVICE AGREEMENT

(to be negotiated later)

Natick, .......4/29/99 ................. Lubeck, ......May 5, 1999 ....

J. Breckenridge Eagle [illegible]
........................................ ...............................
Aspect Medical Systems, Inc. Drager Medizintechnik GmbH

<PAGE> 1
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

Exhibit 10.7

ASPECT MEDICAL SYSTEMS, INC.

OEM DEVELOPMENT AND PURCHASE AGREEMENT

Agreement dated this Sixth day of August, 1999 , by and between Aspect
Medical Systems, Inc, a Delaware corporation with its principal offices located
at Two Vision Drive, Natick, Massachusetts ("Aspect") and Hewlett-Packard GmbH
("HP"), a German corporation with its principal offices located in Germany at
71034 Boblingen, Herrenberger Str. 110-140, for the purchase and/or license by
HP of products under the terms and conditions contained in this Agreement.

1. BACKGROUND.

(a) Aspect is a developer, manufacturer and distributor of medical
devices, equipment, accessories and related hardware, software
and related products and accessories.

(b) HP is a manufacturer of medical equipment, in particular of
multiparameter patient monitors.

(c) Aspect and HP intend to make available to HP customers a solution
to integrate Aspect's BIS technology with HP's patient monitors.
In a first phase of the cooperation Aspect and HP will develop
appropriate components in a joint project (the "BIS Project").
In the second phase of the cooperation, HP intends to purchase
and/or license specified products for integration with its own
systems and products. Aspect agrees to sell and/or license to HP
the products described below, subject to the terms and conditions
contained in this Agreement.

(d) It is the intention of both Parties to negotiate a separate,
independent distribution agreement (the "Distribution Agreement")
under which HP will also sell the Aspect 2000 BIS Monitor and
Aspect BIS Sensors in certain geographies.

2. DEFINITIONS.

"Aspect's Bispectral Index" or "BIS" is Aspect's proprietary processed
EEG parameter that measures the hypnotic effects of anesthetic and
sedative agents on the brain during surgery.

"HP Patient Monitors" means a family of multi-parameter modular
patient monitoring systems manufactured by or for HP. When the HP BIS
System is complete, HP Patient Monitors will display BIS data
(waveforms, numerics, status info), and provide setup and operation
information (user interface), alarming, and network connectivity.

"HP BIS System" is the sum of all components involved in integrating
the BIS with HP Patient Monitors.

<PAGE> 2
"HP BIS Module" is a standard size parameter module for HP Patient
Monitors to convert the data as delivered by the HP BIS Engine from
the BIS Protocol to the HP Patient Monitor's internal format.

"Module Cable" is a cable used to connect the HP BIS Engine to the HP
BIS Module.

"DSC Cable" is a cable used to connect the Digital Signal Converter to
the HP BIS Engine.

"HP BIS Engine" is the processing unit for deriving the BIS data from
the raw EEG signal and consists of Aspect's "BIS Engine" board
modified for HP and built into a housing with appropriate connectors
to connect to the DSC Cable and the Module Cable.

"Digital Signal Converter" (or "DSC") is used to amplify the analog
EEG signals as acquired by the BIS sensors and convert it from analog
to digital signals.

"Aspect BIS Module Kit" means the bundle of all components of the HP
BIS System that are developed and manufactured by Aspect and
licensed/sold to HP under this Agreement: DSC, DSC Cable, HP BIS
Engine, and Module Cable.

"Aspect BIS Sensor" means a single use disposable sensor manufactured
by Aspect for use with the Aspect A2000 BIS monitor or with the Aspect
BIS Module Kit and that is required to generate Aspect's Bispectral
Index.

"Sensor Startup Kit" is a set of Aspect BIS Sensors that may be part
of each HP BIS System sale by HP in selected geographies outside North
America.

"A2000" means Aspect's stand-alone BIS monitor for use with the Aspect
BIS Sensor and that generates Aspect's Bispectral Index.

"Aspect Products" means Aspect BIS Module Kits and any other product
that can be ordered by HP as listed in Exhibit A (Aspect Products and
Purchase Prices).

"Software" means Aspect software programs in binary code form which
are designed for use with the Aspect BIS Module Kit.

"BIS Protocol" is Aspect's proprietary communication protocol provided
for purposes of communication between the HP BIS Engine, the HP BIS
Module and HP Patient Monitors

"Documentation" means the BIS Engine Serial Interface Specification.

"Territory" shall mean all countries in which HP is permitted under
this Agreement to distribute Aspect Products.

"Party" or "Parties" shall mean Aspect and HP each individually or
jointly.

<PAGE> 3

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

3. BIS MODULE DEVELOPMENT PROJECT.

3.1. PROJECT SCOPE

(a) Aspect and HP will be performing activities to develop a HP BIS
System. Aspect will modify Aspect's standard BIS Engine product
described in Exhibit B to create a HP BIS Engine. HP will develop
a HP BIS Module to interface with Aspect's modified BIS Engine.

(b) The following specifications/documents will be created and agreed
upon by both parties prior to completion of Phase 1 of the Module
Development Project:

- Functional Technical Specification (FTS): This is a
specification that defines the interface between the HP BIS
Engine and the HP BIS Module. This document is an HP
specification that is derived principally from
specifications and materials from Aspect.

- System Hazard Analysis: To be performed in Phase 1 of the
project.

- External Specification: Specification describing the HP BIS
Module and the Aspect BIS Module Kit as a system from the
customer's viewpoint.

- Project Plan: The project plan will include a detailed
project schedule, detailed project description, and other
information not included in the FTS.

3.2. PROJECT TIMING

The overall project duration is expected to be approximately [**]. The product
introduction is planned for [**]. The expected major project milestones are
described below:

[**] [**]

3.3. PROJECT PHASE DESCRIPTIONS

The following phases of the project closely correlate with the standard internal
project phases of the HP development process.

<PAGE> 4

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

PHASE 1: PROJECT DEFINITION

Phase 1 defines the project at a high level.

The principal technical issues to resolve are [**].

At the end of Phase 1 the following documents are created: External
Specification (preliminary), Functional Technical Specification (preliminary),
an initial Hazard Analysis, and a detailed Project Schedule., In addition, HP
shall create internal Functional Plans, including a development plan,
verification and validation plan, manufacturing plan, marketing plan,and
regulatory plan.

PHASE 2A: SPECIFICATION

In Phase 2A the detailed design specifications are created: External
Specification (Final), Technical Specification (Final), Hazard Analysis (Final)
and definition of Aspect's Qualification Test Procedure (verification and
validation plan for all items identified under the Functional Technical
Specification).

PHASE 2B: DESIGN (IMPLEMENTATION)

The actual electrical, circuit schematics, and mechanical design and
implementation is performed in Phase 2B. The output of Phase 2B is a functional
prototype. This functional prototype is intended to be a faithful representation
of the product, including actual molded materials, electronics and software.
During this phase, the Outgoing Inspection Procedure from Aspect is also
defined.

PHASE 3: VERIFICATION

Design verification testing of software, electronics and mechanical components
is performed in Phase 3. Additionally EMI testing of the system is performed in
this phase of the project. Aspect will perform [**] with the BIS Module.

Clinical field trials are started in Phase 3. It is anticipated that field
trials of the BIS Module System will be conducted in [**] hospitals in Europe
and [**] hospitals in the US. The completion of field trials occurs by the end
of Phase 4.

During this phase, results of the Qualification Tests and Outgoing Inspection
will also be reviewed for all prototypes.

PHASE 4: VALIDATION

The following tasks are accomplished during Phase 4: Software Validation: Formal
validation testing of the BIS Module System.

<PAGE> 5

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

Manufacturing Pilot Build: It is expected that [**] systems will be built, of
which [**] units will be required at the beginning of Phase 3 for clinical field
trials. The systems will be used for clinical trials, engineering test, and for
sales demos. Final Test Procedure: Used to 100% test the Aspect BIS Module Kit
and HP BIS Module as a final test in manufacturing.

3.4 PROJECT MANAGEMENT.

(a) Each party shall appoint a "Project Manager" who oversees and
manages the joint project on a day-to-day basis.

(b) The Project Managers shall meet regularly based on the project
needs to assess the project status and discuss and resolve any
issues or problems. These meetings may be held face-to-face or as
telephone or video conferences.

(d) Each Party shall bear its own communication and travel costs.

(e) All communication in conjunction with this Agreement shall be
directed to the appropriate person and address as listed in
Exhibit C (Contact Persons/Addresses).

3.5. JOINT RESPONSIBILITIES.

(a) Both Parties will actively work together in performing a joint
Hazard Analysis for the HP BIS System at the beginning of the BIS
Project.

(b) Both Parties will generate a joint External Specification of the
HP BIS System.

(c) The parties will jointly develop and agree on a Verification and
Validation Plan for testing the performance and safety of the
entire BIS System prior to its release to shipment.

(d) The verification and validation of the HP BIS System will be
performed under HP's overall responsibility at HP's Boeblingen
premises. Aspect agrees to support this effort as defined in the
Verification and Validation Plan and as may be required in case
of problems. Verification and validation of Aspect's BIS Module
Kit will be performed by Aspect in Aspect's Natick facility.
After successful validation by HP of the HP BIS System, Aspect
will also validate the HP BIS System output and confirm in a
written certificate that the BIS value as displayed on the HP
Patient Monitor is equivalent to Aspect's BIS implementation.

(e) Both parties will inform each other of any planned change in its
products that may affect compatibility of the HP BIS System
components or the available regulatory approvals. The Change
Notification Agreement Form (attached as Exhibit D) will be used
for this purpose.

<PAGE> 6

(f) Both parties will provide each other reasonable engineering
consultation free of charge.

(g) Aspect and HP will provide each other free of charge with certain
number of prototypes and product samples for development,
verification and validation, and getting regulatory approvals.

3.6. HP RESPONSIBILITIES.

(a) HP shall develop the HP BIS Module according to the mutually
agreed Functional Technical Specification and External
Specification at HP's own cost.

(b) HP will take responsibility for the development, design and
performance of the HP BIS Module and for the combination of the
Aspect components (BIS Module Kit) with the HP components (HP BIS
Module, HP Patient Monitor) of the HP BIS System.

3.7. ASPECT RESPONSIBILITIES.

(a) Aspect shall develop the HP BIS Engine, the DSC Cable and the
Module Cable according to the mutually agreed specifications at
Aspect's own cost.

(b) Aspect will take responsibility for the development, design and
performance of the Aspect BIS Module Kit.

(c) Aspect shall make available the BIS Protocol specification to HP
for implementation into the HP BIS Module or otherwise into HP
Patient Monitors.

(d) Aspect will undertake reasonable efforts to maintain backward
compatibility for future versions of the BIS Protocol, however no
guarantee is given.

(e) Aspect will inform HP of future changes to the BIS Protocol as
early as possible and make available such changed BIS Protocol
specification to HP. The Change Notification Agreement Form
(attached as Exhibit D) will be used for this purpose.
Notwithstanding anything to the contrary in the Change
Notification Agreement Form, HP shall not withhold its approval
of any future changes to the BIS Protocol as provided in Section
3.7 (d).

4. PURCHASE AND SALE OBLIGATIONS; LICENSES.

(a) General. Subject to the terms and conditions of this Agreement,
Aspect agrees to sell to HP the Aspect Products listed on Exhibit
A (Aspect Products and Purchase Prices). For these products,
Aspect grants to HP or HP's subdistributors a non-exclusive,
worldwide distribution right for the term of this Agreement. HP
represents and warrants that the components of the Aspect BIS
Module Kits purchased from Aspect under this Agreement shall be
used as components in, incorporated into, or integrated with,
systems and products which HP sells or leases to third-party
users in the regular course of business. HP further certifies
that the components of the Aspect BIS Module Kits will only be
resold, leased, rented, licensed or otherwise transferred to
third parties for use as a part of an HP BIS System or as
replacement parts used in HP BIS Systems.

<PAGE> 7

(b) BIS Sensors. Apart from section 4.a., Aspect hereby grants HP the
right to distribute Aspect BIS Sensors solely to HP's customers
outside North America and solely for use with HP BIS Systems.

(c) Sensor Startup Kit. Aspect hereby grants HP the right to sell the
Sensor Startup Kit for use with the HP BIS System in geographies
outside North America.

(d) Software License. Aspect hereby grants to HP a non-exclusive and
non-transferable worldwide license, without the right to
sublicense (except to purchasers of HP BIS Systems and to HP's
subdistributors), during the term of the Agreement to use the
Software and related Documentation provided by Aspect solely in
connection with operation of the components of Aspect BIS Module
Kit in the HP BIS System. Thereafter, Aspect grants to HP a right
to use the Software and related Documentation used in conjunction
with the HP BIS Systems being sold by HP on the date of
termination with respect to service and support of installed HP
BIS Systems for a period of 10 years, after termination of the
Agreement. All rights granted to HP customers to use the HP BIS
System shall be irrevocable as long as such customers are in
compliance with the terms of use for such HP BIS Systems and does
not cure such non-compliant use within 90 days of being notified.
HP shall not disclose, furnish, transfer, distribute or otherwise
make available the Software, the Documentation or any portion
thereof in any form to any third party (other than to purchasers
of HP BIS Systems and to HP's subdistributors) and shall not
duplicate the Software, the Documentation or any part thereof
(other than for HP's internal use). Title to and ownership of and
all proprietary rights in or related to the Software, the
Documentation and all partial or complete copies thereof shall at
all times remain with Aspect or its licensor(s). This Agreement
shall not be construed as a sale of any rights in the Software,
the Documentation, any copies thereof or any part thereof. All
references in this Agreement to sale, resale or purchase of the
BIS Module Kits or the components thereof, or references or like
effect, shall, with respect to the Software and the Documentation
mean licenses or sublicenses of the Software and the
Documentation pursuant to this Section 4. HP shall not
disassemble, decompile or otherwise reverse engineer the Software
or any part thereof, except if Aspect is required under
applicable law to permit HP to reverse engineer any Software. In
such event, HP may reverse engineer the Software but only to the
extent Aspect is required to permit such reverse engineering. HP
shall retain and shall not alter or obscure any notices, markings
or other insignia which are affixed to the Software, the
Documentation or any part thereof at the time it receives such
Software or such Documentation.

(e) BIS Protocol License. Aspect hereby grants to HP a non-exclusive,
worldwide, irrevocable, royalty-free license to implement
Aspect's proprietary BIS Protocol and sell it to HP's end
customers as part of its products for use solely with the Aspect
BIS Module Kit.

<PAGE> 8

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

5. ROYALTIES.

(a) For each BIS Module Kit that HP is purchasing from Aspect HP
shall pay a purchase price for the BIS Module Kit and a royalty
fee as specified in Exhibit A (Aspect Products and Purchase
Prices).

(b) Within 30 days after the Effective Date, HP shall pay Aspect an
amount of [**] US$ as prepaid royalties, which will be credited
against the actual royalty component of the purchase price that
is due for the sale of the first [**] Aspect BIS Module Kits.
[**].

(c) In the event that the Agreement is terminated by HP because
Aspect is unable to deliver a HP BIS Engine before October
31st,[**](in accordance with Section 23.2, paragraph b), or in
the event Aspect fails to deliver the first [**] Aspect BIS
Module Kits for whatever reason, excluding breach by HP or
failure to order then Aspect shall refund HP according to the
following rules:

(i) Aspect shall refund to HP that part of the prepayment that
is not yet consumed by unit royalties, however not more than
[**] US$.

(ii) Aspect shall [**].

(d) Aspect agrees [**] in accordance with Section 5 (c) [**]. HP
agrees [**] in connection with [**]. At such time [**].

6. SCOPE OF DELIVERY

(a) Purchase Orders. Purchase orders (via Fax, e-mail, other
electronic transmission or paper) for Aspect Products to be
purchased under this Agreement (the "Orders") must be received by
Aspect during the term of this Agreement and must specify a
delivery date in accordance with the lead-time schedule outlined
below under Section 6, paragraph e) All HP Purchase Orders will
make reference to the appropriate engineering drawing or
manufacturing reference numbers.

(b) Order Acknowledgements. HP purchase orders will be acknowledged
by Aspect within 5 days after receipt of the order, provided that
the order is technically correct and that the requested delivery
time is within the agreed lead time and that the latest forecast
provided by HP is not exceeded by more than [**] and the quantity
ordered does not exceed by more than [**] the quantity ordered in
the preceding month. If the requested delivery time is lower than
the agreed lead time, or if HP's latest forecast is exceeded by
more than [**], Aspect shall use reasonable efforts to complete
the order requirements and to acknowledge the order within 10
days of its receipt. Order acknowledgements shall not be
unreasonably withheld.

(c) Forecasts. HP shall furnish to Aspect a non-binding monthly
forecast during the term of this Agreement with the number and
type of Aspect Products for which HP expects to submit orders for
the following twelve months. Existing open purchase orders are
not usually reflected in these forecast numbers.

<PAGE> 9

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

(d) Cancellation Charges. In the event of the cancellation of any
Order by HP, HP shall be liable for the payment of cancellation
charges based on the number of days prior to scheduled delivery
that written notice of cancellation is received by Aspect, as
outlined below:
<TABLE>
<CAPTION>
<S> <C>
> 10 weeks prior to acknowledged delivery [**]
6 - 10 weeks prior to acknowledged delivery [**] of order value
4 - 6 weeks prior to acknowledged delivery [**] of order value
2 - 4 weeks prior to acknowledged delivery [**] of order value
< 2 weeks prior to acknowledged delivery [**] of order value
</TABLE>

(e) Lead Times. Lead times for the Aspect BIS Module Kit are expected
to be 12 weeks.

7. PRICES.

(a) Purchase Prices. The prices of Aspect Products purchased by HP
hereunder (the "Purchase Prices") which are ordered during the
term of the Agreement shall be as set forth in Exhibit A (Aspect
Products and Purchase Prices).

(b) Purchase Price Changes. In consideration of the market situation
and after consultation with HP, the Purchase Prices set forth in
Exhibit A (Aspect Products and Purchase Prices) will be reviewed
12 months after first delivery of production units and annually
thereafter. Any price increase will become effective only after
mutual agreement between both Parties, subject to the following:

(i) In the event the materials cost for the Aspect BIS Module
Kit increases by more than [**]. Aspect shall have the right
no more than once per year during the term of this Agreement
to increase the Purchase Price of the Aspect BIS Module Kit
by an equivalent amount by giving HP written notice of such
increase not less than [**] days prior to the date upon
which the increased Purchase Price is to become effective.
No Purchase Price increase shall apply to Orders for Aspect
Products accepted by Aspect prior to or during such [**] day
period which are to be delivered within [**] days of the
date of such notice.

(a) Aspect may reduce the Purchase Price of any Aspect Product at any
time. Such reduction shall be applicable to all Aspect Products
not shipped at the time of the reduction.

(b) [**] the Purchases Prices [**].

(c) Taxes. All prices for Aspect Products are exclusive of all
federal, state and local taxes, levies and assessments, and HP
shall be responsible for the payment of all such taxes, levies
and/or assessments imposed on Aspect Products purchased and/or
licensed by HP hereunder, excluding taxes based on Aspect's net
income

<PAGE> 10

from the transaction. HP shall be responsible for providing in a
timely manner all documentation, in the nature of exemption
certificates or otherwise, necessary to allow Aspect to refrain
from collections, such as sales tax, which it would otherwise be
obligated to make

8. TERMS OF PAYMENT.

(a) Invoices. HP shall pay to Aspect the Purchase Price of all Aspect
Products shipped hereunder within 30 days after the receipt of
Aspect's invoice. Nothing herein shall affect Aspect's right to
withhold shipment or otherwise exercise its rights under Section
24 (Termination) hereof in the event of HP's failure to make
payment when due for Aspect Products delivered to HP. Aspect's
invoices to HP for Aspect Products purchased under this Agreement
shall be addressed to:

Hewlett-Packard GmbH
Department ASC-AP
Postfach 1430
D-71004 Boeblingen
Germany

Late Payment Charge. Subject to applicable law, service and/or
interest charges not exceeding the lesser of 1-1/2% per month
or the highest amount permitted by law may, at the election of
Aspect, be assessed on amounts past due more than 30 days.

9. SHIPMENT AND DELIVERY.

(a) Delivery Location. Each shipment must indicate the exact address
of the recipient on the outside of the packaging as follows:

Hewlett-Packard GmbH
HSG-E Healthcare Solution Group Europe
c/o Js. Mueller Spedition GmbH
Eugen Zeyer Str. 1
D-75382 Althengstett
Germany

(b) All shipments hereunder shall be freight collect, F.C.A. point of
origin (Incoterms 1990). All Aspect Products shall be deemed
delivered and subject to HP's dominion and control when placed in
the possession of the carrier, packed and ready for shipment to
HP.. Aspect shall cooperate with HP in the documentation and
proof of loss claims promptly presented by HP to the appropriate
carrier and/or insurer.

(c) Delivery and Packaging Instructions Delivery and Packaging
requirements will need to conform to the standards outlined in
the HP Delivery and Packaging Standard (attached as Exhibit E)

<PAGE> 11

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

(d) Delivery Date and Date of Dispatch. The requested delivery date
will be specified on the HP Purchase Order. Aspect will utilize
reasonable efforts to ensure that the order is delivered in
accordance with Aspect's order acknowledgement and that the the
date of dispatch is 10 days prior to the delivery date.

10. ACCEPTANCE.

Any Aspect Product shipped hereunder may be subjected to inspection and
performance testing by HP, in accordance with applicable product specifications
in effect at the time of delivery of such Aspect Products to HP. HP shall
provide written notice to Aspect of the rejection of any such Aspect Product
within [**] days of the date of receipt of any Aspect Product; if more than [**]
of Aspect Products received in any single shipment do not pass HP's inspection
or performance testing HP may reject the entire shipment lot. Aspect shall have
[**] days from receipt of a notice from HP rejecting an Aspect Product either,
at its option, to make any necessary repairs to the defective Aspect Product or
to replace it. If Aspect replaces an Aspect Product, HP shall dispose of the
replaced Aspect Product in accordance with Aspect's instructions and at Aspect's
expense. HP's sole remedy for rejected Aspect Products shall be limited to
repair or replacement of such Aspect Products.

11. WARRANTY.

(a) General. Aspect warrants solely to HP that Aspect Products
(including Software) delivered hereunder shall perform
substantially in accordance with the specifications in Exhibit B
(Aspect's Standard Module Kit) or other applicable product
specifications as published by Aspect in effect at the time of
delivery of such Aspect Product (including Software), and shall
be free from defects in materials and workmanship, when given
normal, proper and intended usage, for [**] from the date of
installation of the HP BIS System at HP's end customer site, or
[**] from the date of shipment by Aspect to HP, whichever is less
. Aspect agrees, during the applicable warranty period, to repair
or replace (at Aspect's option) all defective Aspect Products
within [**] after date of return to Aspect and without cost to
HP. This warranty shall not apply to expendable components and
supply items, such as, but not limited to, cables (except for
failures occurring within [**] of receipt of shipment), fuses and
bulbs (or disposable items such as an Aspect BIS Sensor after the
expiration date marked on the Sensor packaging); nor shall Aspect
have any obligation under this Agreement to make repairs or
replacements which are required by normal wear and tear, or which
result, in whole or in part, from catastrophe, fault or
negligence of HP, or anyone claiming through or on behalf of HP,
or from improper or unauthorized use of Aspect Products, or use
of Aspect Products in a manner for which they were not designed,
or by causes external to Aspect Products such as, but not limited
to, power or air conditioning failure.

<PAGE> 12

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

(b) Warranty Procedures. HP shall notify Aspect of any Aspect
Products which it believes to be defective during the applicable
warranty period and which are covered by the warranties set forth
in paragraph (a). At Aspect's option, such Aspect Products shall
be returned by HP to Aspect's designated facility for examination
and testing, or may be repaired on site by Aspect. Aspect shall
either repair or replace, within [**] of receipt by Aspect, any
such Aspect Product found to be so defective and promptly return
such Aspect Products to HP. Transportation and insurance costs,
and/or risk of loss or damage during shipments, shall be borne by
Aspect. Should Aspect's examination and testing not disclose any
defect covered by the foregoing warranty, Aspect shall so advise
HP and dispose of or return the Aspect Product in accordance with
HP's instructions and at HP's sole expense.

(c) Repair Warranty. Aspect warrants its repair work and/or
replacement parts for the duration of the original warranty
period as set forth in paragraph (a) or at least [**] whichever
is longer.

(d) LIMITATION. THE PROVISIONS OF THE FOREGOING WARRANTIES ARE IN
LIEU OF ANY OTHER WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN
OR ORAL (INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE). THE FOREGOING WARRANTIES EXTEND TO HP ONLY
AND SHALL NOT BE APPLICABLE TO ANY OTHER PERSON OR ENTITY
INCLUDING, WITHOUT LIMITATION, CUSTOMERS OF HP.

12. SERVICE AND SUPPORT.

(a) Service and Support. HP shall be responsible for providing
installation, customer training, service and support (including
repair) to its end customers for the Aspect Products sold
hereunder and HP shall bear all related costs incurred for labor,
parts, or travel to perform such service.

(b) Central Repair Service. For the term of this Agreement, Aspect
agrees to provide central repair service to HP for Aspect
Products sold hereunder at a charge and as further detailed in
Exhibit F (Service/Repair).

(c) Excessive Failure Rate. If the Annual Failure Rate of Aspect's
BIS Module Kit excluding out-of-box failures and cables exceeds
the value as specified in Exhibit B (Aspect's Standard Module
Kit) by more than [**] then Aspect shall reimburse HP for any
additional cost (including material and labor, ) incurred by HP
for repairing the units in excess of the above limit.

(d) Service Period. For a period of [**] following the last delivery
to HP of the applicable Aspect Product ordered by HP hereunder,
Aspect shall make available repair service (or at Aspect's sole
discretion, exchange units for the Aspect Products) for purchase
by HP and third party users of the Aspect products at

<PAGE> 13

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

Aspect's then-current prices for such repair services and
exchange units. After expiry of this [**] period, Aspect may, in
its sole discretion, continue to supply repair services (and/or
exchange units for the Aspect Products) subject to the mutual
written agreement of the Parties.

(e) Service Reporting. Aspect shall maintain a complete record of all
repair activities performed on any Aspect products received for
repair, and will provide HP with a monthly report on all service
actions including failure and repair statistics at a sub-
assembly levelas laid down in Exhibit F (Service/Repair). Service
Reports for each product shall be sent electronically by email to
responsible procurement and technical marketing engineer (Contact
Persons shown in Exhibit C, Contact Persons / Addresses).
Rootcause analysis is to be performed and reported by Aspect in
case of abnormal failures, incidents and malfunctions.

13. QUALITY ASSURANCE.

(a) Both parties agree to maintain ISO900x, EN460x, European
directive 93/42/EEC Annex II ("MDD AX-II") certification status
and compliance with the U.S. Food and Drug Administration's
("FDA") Quality System Regulation ("QSR"), the European Medical
Device Directive ("MDD"), and other appropriate regulations
pertinent to the development, manufacturing and marketing of this
kind of medical product.

(b) All Products developed under this Agreement shall fully comply
with the above quality requirements and guidelines (MDD AX-II,
FDA QSR, etc.)

(c) If the actual Annual Failure Rate (,,AFR") of the BIS Module Kit
or subcomponents thereof exceeds the expected value specified in
Exhibit B (Aspect's Standard Module Kit) by more than [**] then
Aspect agrees to investigate the root cause of the problem and
take the appropriate corrective actions to bring the AFR back
into the specified range.

14. REGULATORY MATTERS.

(a) Aspect shall assume full regulatory responsibility for the Aspect
Products, including obtaining and maintaining all applicable
governmental authorizations and regulatory approvals required to
distribute the BIS Module Kit. Both Parties will work together to
develop a regulatory plan during phase 1 of the Project which
defines precisely what these regulatory and localization
requirements are for all countries where the HP BIS System is
intended to be sold. In particular, Aspect shall be responsible
for generating its own Device Master Record for the BIS Module
Kit and obtaining the CE-mark. It is understood that the BIS
Module Kit will be a component of the HP BIS System for which HP
assumes full regulatory responsibility as provided in Section 14
(c).

<PAGE> 14

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

(b) HP shall assume full regulatory responsibility for the HP
Products, including obtaining and maintaining all applicable
governmental authorizations and regulatory approvals required to
distribute the HP Patient Monitors and the HP BIS Module in all
countries in the Territory.

(c) HP shall assume the regulatory responsibility for the combination
of the Aspect and HP components in the HP BIS System. Aspect
shall fully support HP as required in the process of obtaining
regulatory approvals by making available to HP any required
information, data, certificates, or technical files in the
requested formats.

(d) For bringing the Aspect Products into the market in countries
affected by the European Medical Device Directive ("MDD"), Aspect
is the legally responsible manufacturer under the MDD as named in
detail in Exhibit C (Contact Persons/Addresses). The Aspect
Products shall be marked accordingly.

(e) HP and Aspect shall inform each other in writing immediately
about any event that may require incident reporting in any
country of the Territory.

(f) In the event of any recall of an Aspect Product required by a
governmental agency for safety or efficacy reasons, or requested
by Aspect at its sole discretion, which is the result of Aspect's
failure to supply Aspect Products that (1) conform in all
material respects to the applicable published specifications
(including the specifications set forth in Exhibit B (Aspect's
Standard Module Kit)) or (2) are free from defects in material
and workmanship (when given normal, proper and intended usage),
Aspect agrees to repair or replace at its own costs all Aspect
Products subject to the recall and previously delivered to HP.
Aspect also agrees to consult with HP to establish a reasonable
process for managing the recall and Aspect shall [**] that are
consistent with the recall process agreed to by the Parties.. In
the event the recall is not required by a governmental agency for
safety or efficacy reasons, but is instead requested by Aspect at
its sole discretion, Aspect will be responsible for determining
the scope of the recall, including the number of units, timeframe
for the recall, and criteria for completion. HP agrees to
maintain all necessary sales records to facilitate the recall.

(g) HP may at its sole discretion delegate some of the obligations
under this Section 14 to its subdistributors.

(h) For the purpose of facilitating product traceability, all
Products purchased from Aspect by HP will require identification
of an internal order number and tracking code.

15. PRODUCT CHANGES; DISCONTINUED PRODUCTS; FUTURE PRODUCTS; CONTINUED SUPPLY.

(a) Product Changes. Aspect shall have the right, at any time and
from time to time, to make substitutions and modifications to
Aspect Products, provided that such substitutions or
modifications will not materially affect form, fit or function of
Aspect

<PAGE> 15

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

Products. In the event that any proposed substitution or modification
affects, in Aspect's reasonable judgment, the form, fit or function of
a Aspect Product, Aspect shall give HP written notice of such proposed
substitution or modification at least [**] prior to its taking effect
and HP shall have the right, during such [**] period and for [**]
thereafter, to order Aspect Products without such substitution or
modification for delivery within [**] after such substitution or
modification takes effect. Aspect shall give written notice of any
proposed change to the Aspect Products using the Supplier Change
Notification Agreement Form (attached as Exhibit D) and provide the
appropriate verification and validation information evaluating the
affect on the HP BIS System. Notwithstanding anything to the contrary
in the Change Notification Agreement Form, HP shall not unreasonably
withhold its approval of any such changes.

(b) Discontinued Products. Aspect agrees to notify HP in writing not less
than [**] in advance of the discontinuance of any Aspect Product. HP
shall be able to place orders for at least [**] after receipt of the
written notice in any case. In addition, HP shall be entitled to
determine its lifetime-buy quantities and place a corresponding last
purchase order.

(c) Future Products. The Aspect Products are designed for use in measuring
the effects of anesthetic and sedative agents on the brain during
surgery. In the event that Aspect develops a product involving a
different type of index, patient sensor, or application, Aspect and HP
agree to discuss a new agreement for the purchase of such new product
or products by HP.

(d) Continued Supply. In the event that (a) Aspect makes an assignment for
the benefit of creditors, or a receiver, trustee in bankruptcy or
similar officer is appointed to take charge of any or all of Aspect's
property, or Aspect files a voluntary petition under federal
bankruptcy laws or similar state statutes or such a petition is filed
against Aspect and is not dismissed within sixty (60) days, and (b)
Aspect fails to deliver Aspect Products ordered by HP under this
Agreement within [**] of the delivery date specified on a purchase
order complying with Section 4 and accepted by Aspect in accordance
with Section 4, upon request of HP, Aspect shall grant to HP, a
nonexclusive license to use the Manufacturing Materials to make and
have made the Aspect Products for use in the HP BIS System, until [**]
after Aspect is ready and able to deliver Aspect Products to HP under
the terms of this Agreement and has notified HP thereof. This includes
a non-exclusive license to use any tools, design documentation, or any
other manufacturing materials which may be necessary. The
manufacturing materials supplied by Aspect shall include a list of the
Aspect suppliers of parts for Aspect Products. Upon exercise by HP of
the manufacturing license set forth above, HP shall pay Aspect a
"Manufacturing License Fee" equal to the royalty specified on Exhibit
A (Aspect's Products and Purchase Prices).

<PAGE> 16

16. OWNERSHIP AND PROTECTION OF RESULTS.

(a) It is expressly agreed that neither Aspect nor HP will transfer to any
Party any patent rights, copyrights or intellectual property of any
kind that either Party owns at the effective date of this agreement.

(b) Aspect shall retain the title to and possession of any models,
patterns, dies, molds, jigs, fixtures, and other tools made for or
obtained in connection with this Agreement and solely related to the
Aspect Products, even if made for, obtained by or paid for by HP.

(c) If there are developments (including patentable inventions) conceived,
created or reduced to practice as part of the joint development
project then the rights to such developments shall be retained (a) by
Aspect if conceived, created or reduced to practice solely by Aspect,
or (b) by HP, if solely conceived, created or reduced to practice by
HP, or (c) jointly by HP and Aspect (without any duty to account to
the other) if jointly developed by HP and Aspect provided that:

HP shall assign to Aspect all rights to any development relating to
Aspect's BIS Module Kit

and Aspect shall assign to HP all rights to any development relating
to the HP Patient Monitor or HP BIS Module subject to Aspect's
retained rights to the BIS Protocol.

17. DOCUMENTATION AND TRAINING.

Aspect agrees to provide HP with such product literature, operations
and maintenance manuals, other information and training (including training to
avoid possible misrepresentation of Aspect's Bispectral Index) as is mutually
agreed, to enable HP properly to sell and maintain Aspect Products, provided
that in no event shall the source code or source listings of Aspect Software be
required to be disclosed or provided by Aspect to HP pursuant to this Section 17
or otherwise. Such training needs to begin at least three months prior to
introduction of the HP BIS System and will be defined as part of the Project's
marketing plan.

18. CONFIDENTIALITY.

No confidential information disclosed by either party to the other in
connection with this Agreement shall be disclosed to any person or entity other
than the recipient party's employees and contractors directly involved with the
recipient party's use of such information who are bound by written agreement to
protect the confidentiality of such information, and such information shall
otherwise be protected by the recipient party from disclosure to others with the
same degree of care accorded to its own confidential information of like
importance. In addition, each party and its representatives shall use the
confidential information only for the purposes specified under this Agreement
and such information shall not be used for any other purpose without the prior
written consent of the disclosing party. To be subject to this provision,
information must be delivered in writing and designated as proprietary or, if
initially delivered orally, must be confirmed

<PAGE> 17

in writing as confidential within 30 days after the oral disclosure. Information
will not be subject to this provision if it is or becomes a matter of public
knowledge without the fault of the recipient party, if it was a matter of
written record in the recipient party's files prior to disclosure to it by the
other party, or if it was or is received by the recipient party from a third
person under circumstances permitting its unrestricted disclosure by the
recipient party. Upon termination of this Agreement, each party shall promptly
deliver to the other all confidential information of the other party in the
possession or control of such party and all copies thereof, provided that each
party may retain a copy thereof for archival purposes. The obligations under
this Section 18 shall continue for both parties for a period of 10 years after
delivery by Aspect to HP of the last Aspect Product under this Agreement. HP is
entitled to transmit confidential information of Aspect to Hewlett-Packard
Company and to its subsidiaries and affiliated companies. In this case these
companies may only use such information to the same extent as HP is entitled to
under this Agreement. HP will be responsible that these companies comply with
the confidentiality provisions of this Agreement.

19. INDEMNITIES.

19.1. INDEMNITIES BY ASPECT.

(a) Except as provided below, Aspect shall defend and indemnify HP
from and against any damages, liabilities, costs and expenses
(including reasonable attorneys' fees and court costs) arising
out of any claim that Aspect Products purchased and/or licensed
hereunder infringe any patent or copyright or misappropriate a
trade secret of a third party, provided that (i) HP shall have
promptly provided Aspect written notice thereof and reasonable
cooperation, information, and assistance in connection therewith,
and (ii) Aspect shall have sole control and authority with
respect to the defense, settlement, or compromise thereof. Should
any Aspect Products delivered hereunder become or, in Aspect's
opinion, be likely to become the subject of such a claim, Aspect
may, at its option, either (x) procure for HP the right to
continue purchasing and using such Aspect Products, or (y)
replace or modify such Aspect Products so that they become
non-infringing or if (x) and (y) are not reasonably available to
Aspect, then (z) terminate HP's rights under this Agreement to
purchase the allegedly infringing Product and refund to HP the
amount which HP has paid to Aspect for such Products which are in
the possession of HP, upon return of such Products in their
unopened packages to Aspect at its principal facility in the
United States (freight and insurance at Aspect's expense). In
such event, Aspect may withhold further shipments of infringing
or potentially infringing Aspect Products.

Aspect shall have no liability or obligation to HP hereunder with
respect to any patent, copyright infringement or trade secret
misappropriation or claim thereof based upon

(i) compliance with designs, plans or specifications of HP,

(ii) use of Aspect Products by HP in combination with devices or
products not purchased and/or licensed hereunder where the
Aspect Products would not themselves be infringing,

<PAGE> 18

(iii)use of the Aspect Products by HP in an application or
environment for which such Aspect Products were not designed
or contemplated, or

(iv) modifications of the Aspect Products by HP

(b) Aspect's liability hereunder shall not exceed the purchase and/or
license price paid by HP for the Aspect Products found to be
infringing. The foregoing states the entire liability of Aspect
with respect to infringement or misappropriation of patents,
copyrights and trade secrets by the Products or any part thereof
or by their operation.

(c) In the event that any claim is brought against HP as a result of
personal injuries and/or property damages resulting from that
portion of the HP BIS System developed and manufactured by
Aspect, and provided further that such claims do not arise as a
result of the misuse of the HP BIS System , or the use of the HP
BIS System in an application for which it was not designed by
Aspect, where such claim would not have occurred but for such
misuse or use, Aspect agrees that it shall indemnify and hold HP
harmless from and against any damages, liabilities, costs and
expenses arising out of such claim, provided that HP shall
promptly provide Aspect written notice thereof and reasonable
cooperation, information and assistance in connection therewith
and Aspect shall have sole control and authority with respect to
the defense, settlement or compromise.

19.2. INDEMNITIES BY HP.

(a) Except as provided below, HP shall defend and indemnify Aspect
from and against any damages, liabilities, costs and expenses
(including reasonable attorneys' fees and court costs) incurred by
Aspect as a result of or arising from HP's activities under this
Agreement, including, without limitation, product liability,
customer warranty and service claims, provided that

(i) Aspect shall have promptly provided HP written notice
thereof and reasonable cooperation, information and
assistance in connection therewith, and

(ii) HP shall have sole control and authority with respect to the
defense, settlement or compromise thereof, and provided
further that

(iii) HP shall not be liable to Aspect under this Section 19.2 to
the extent that such damages, liabilities, costs and
expenses arise from Aspect's negligence or a breach of any
representation or warranty by Aspect hereunder.

20. TRADEMARKS.

20.1. ASPECT TRADEMARKS.

(a) Ownership. HP acknowledges and agrees that Aspect is the sole and
exclusive owner of all right, title and interest in and to the
trademarks (the "Aspect Trademarks") identified on Exhibit H
(Aspect Trademarks). HP recognizes the value of the Aspect
Trademarks and the good will associated with the Aspect
Trademarks. HP agrees that its use of the Aspect Trademarks and
any good will

<PAGE> 19

arising therefrom shall inure to the benefit of Aspect. Nothing
contained herein shall create, nor shall be construed as an assignment
of, any right, title or interest in or to the Aspect Trademarks to HP,
other than the grant of a license in Section 20.1 (c) below; it being
acknowledged and agreed that all other right, title and interest in
and to the Aspect Trademarks is expressly reserved by Aspect. HP shall
keep the Aspect Trademarks free from all liens, mortgages or other
encumbrances. HP agrees that it will not attack or otherwise challenge
the title, validity or any other rights of Aspect in or to the Aspect
Trademarks.

(b) Notice. All HP BIS Systems that use the Aspect Trademarks shall
be accompanied, where reasonable and appropriate, by a
proprietary notice consisting of the following elements:

(i) The statement "[insert trademark(s)] is a trademark(s) of
Aspect Medical Systems, Inc."

(ii) HP will include the "(TM)" or "(R)" symbol, as instructed by
Aspect, after the first prominent use of the Aspect
Trademark in the HP Patient Monitor and related materials.
HP shall have a period of 30 days in which to begin to use
the "(R)" symbol in replacement of the "(TM)" symbol upon
receiving instruction to do so by Aspect. HP may continue to
deliver stocked literature before the change becomes
effective.

(iii) HP shall reproduce copyright and trademark notices of Aspect
on the "splash screen" or in the same location where HP
reproduces its own copyright notices .

(c) License. Aspect hereby grants to HP a nonexclusive, worldwide,
royalty-free license (without the right to sublicense) to use the
Aspect Trademarks to designate and promote Aspect Products in HP
BIS Systems. HP shall have no other right to use, display or
utilize the Aspect Trademarks for any other purpose or in any
other manner.

(d) Quality Standards.

(i) Upon reasonable notice and request, and at a mutually
acceptable date and location, Aspect may inspect the
advertising and promotional materials on which the Aspect
Trademarks are used so that Aspect may monitor compliance
with this Agreement.

(ii) Compliance. Aspect acknowledges the high standards of
quality and excellence established by HP with respect to
products bearing HP's trademarks. HP acknowledges the high
standards of quality and excellence established by Aspect
with respect to products bearing the Aspect Trademarks. HP
agrees that HP Patient Monitors with which the Aspect
Trademarks are used shall be of such quality so as to
maintain such high standards and to reflect well upon
Aspect. HP agrees to adhere to HP's own or the following
quality standards (whichever may be more rigorous) for use
of the Aspect Trademarks by HP:

- In order to ensure that Aspect Products and HP Patient
Monitors distributed under the Aspect Trademarks comply
with the consistent quality standards of Aspect, all
Aspect Products and HP Patient Monitors distributed by
or for HP

<PAGE> 20

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

which bear an Aspect Trademark shall conform to those
standards which Aspect provides to HP in writing. HP
shall cause each major new release of such HP Patient
Monitors to comply with such standards or remove the
Aspect Trademark(s) from any such new release, which
does not comply with such standards. HP shall have a
period of 30 days in which to bring newly shipped HP
Patient Monitors into compliance with any standard
provided to it by Aspect following the date of this
Agreement.

- HP acknowledges that if Aspect Products or HP Patient
Monitor products bearing the Aspect Trademarks fail to
satisfy the quality standards set forth above, the
substantial good will which Aspect have built and now
possess in the Aspect Products and in the Aspect
Trademarks will be impaired.

(e) Protection and Infringement. HP agrees to cooperate with and
assist Aspect in obtaining, maintaining, protecting, enforcing
and defending Aspect' proprietary rights in and to the Aspect
Trademarks. In the event that HP learns of any infringement,
threatened infringement or passing-off of the Aspect Trademarks,
or that any third party claims or alleges that the Aspect
Trademarks infringe the rights of the third party or are
otherwise liable to cause deception or confusion to the public,
HP shall notify Aspect giving the particulars thereof, and HP
shall provide necessary information and assistance to Aspect in
the event that Aspect decides that proceedings should be
commenced.

(f) Termination. In addition to the termination rights set forth in
Section 23 hereof, in the event that HP is in material breach of
any provision of this Section 20, Aspect may, upon [**] written
notice, terminate the license granted in Section 20.1 (c) if HP
does not cure such breach or default within such [**] period. The
parties recognize that curing such breach or default may require
development of a new version of HP BIS System. If this is the
case, then HP will be deemed to have cured such breach or default
if, within the [**] cure period, HP presents to Aspect a plan for
revision of HP Product that will cure such breach or default,
such plan is reasonably acceptable to Aspect, and such revision
is released and distributed within three months following written
notice of such breach or default.

In addition to the provisions of Section 23 hereof, upon
termination of the license granted in Section 20.1 (c), or upon
termination of this Agreement, for whatever cause:

(i) HP shall immediately cease and desist from any further use
of the Aspect Trademarks and any trademarks confusingly
similar thereto, either directly or indirectly;

(ii) All rights in the Aspect Trademarks granted to HP hereunder
shall immediately revert to Aspect;

(iii) In the event that this Agreement is terminated for any
reason other than a material breach or material default by
HP, HP shall have a period of 30 days thereafter to dispose
of all of the unsold HP BIS Systems bearing the

<PAGE> 21

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

Trademarks and advertising and promotional materials
relating thereto which had been completed by it prior to
such termination, provided such HP BIS Systems and materials
were in the process of manufacture more than [**] before
such termination.

(g) Promotional Claims. The general form of any promotional claims by
HP regarding Aspect's Bispectral Index technology and/or the
integration of this technology in HP Patient Monitors, and the
specific form of the use of Aspect's trade names and trademarks,
and of intended use claims regarding Aspect's Bispectral Index
technology, in promotional material, advertisement, and/or in
written technical literature shall be subject to review and
approval by Aspect prior to its publication or display.

20.2. HP TRADEMARKS.

(a) The general form of any potential claim by Aspect that HP uses
Aspect's Bispectral Index technology as part of the HP Patient
Monitors, and the specific form of the use of HP's trade names
and trademarks in promotional material, advertisement, and/or in
written technical literature shall be subject to review and
approval by HP prior to its publication or display.

(b) Upon termination of this Agreement any reference to HP and it's
trademarks must be immediately removed from any literature or
other display and must no longer be distributed.

21. EXPORT.

HP shall not export, directly or indirectly, HP BIS Systems or other
products, information or materials provided by Aspect hereunder, to any
country for which the United States requires any export license or other
governmental approval at the time of export without first obtaining such
license or approval. It shall be HP's responsibility to comply with the
latest United States export regulations, and HP shall defend and indemnify
Aspect from and against any damages, fines, penalties, assessments,
liabilities, costs and expenses (including reasonable attorneys' fees and
court costs) arising out of any claim that HP BIS Systems or other
products, information or materials provided by Aspect hereunder were
exported or otherwise shipped or transported in violation of applicable
laws and regulations.

22. CO-MARKETING PROGRAM.

(a) HP and Aspect may agree to undertake co-marketing programs in certain
geographies.

(b) HP and Aspect have agreed on a co-marketing program in North America
as described in Exhibit G (Co-Marketing Program) to this Agreement.

<PAGE> 22

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

23. TERM; DEFAULT AND TERMINATION.

23.1. TERM AND RENEWAL.

The initial term of this Agreement shall commence on the date first
specified above (the "Effective Date") and shall continue for a period
of 6 years. The term of this Agreement shall be automatically renewed
for successive 12 month periods unless either party provides written
notice of termination to the other party at least 60 days prior to
expiration of the Agreement.

23.2. TERMINATION FOR GOOD CAUSE.

(a) The Agreement may be terminated by Aspect giving 30 days written
notice to HP in the event HP has not commercially introduced an
HP BIS System by October 31st [**].

(b) The Agreement may be terminated by HP giving 30 days written
notice to Aspect if Aspect has failed to provide a BIS Module Kit
with the necessary regulatory approvals to HP by October 31st
[**].

(i) if either Party assigns this Agreement or any of its rights
or obligations hereunder except in connection with the sale
of such Party's business to which this Agreement relates
(the word "assign" to include, without limiting the
generality thereof, a transfer of a majority interest in the
Party) without the prior written consent of the respective
other Party. Notwithstanding the foregoing, it is understood
that this Agreement shall be assigned to Agilent
Technologies GmbH, at Herrenberger Strasse 110 - 130,
D-71034 Boeblingen, Germany and that Aspect consents to such
assignment.; or

(ii) if either Party shall neglect or fail to perform or observe
any of its obligations to the other Party hereunder,
including, without limiting the generality thereof, the
timely payment of any sums dueor Aspect's inability to
deliver Aspect Products, and such failure is not cured
within [**] in the event of a default in the payment of
amounts owed the other Party) after written notice thereof
from the other Party; or

(iii) if there is (w) a dissolution, termination of existence,
liquidation, insolvency or business failure of either Party,
or the appointment of a custodian or receiver of any part of
either Party's property, if such appointment is not
terminated or dismissed within thirty (30) days; (x) a
composition or an assignment or trust mortgage for the
benefit of creditors by either Party; (y) the commencement
by either Party of any bankruptcy proceeding under

<PAGE> 23

Confidential Materials omitted and filed separately
with the Securities and Exchange Commission. Asterisks
denote omissions.

the United States Bankruptcy Code or any other federal or
state bankruptcy, reorganization, receivership, insolvency
or other similar law affecting the rights of creditors
generally; or (z) the commencement against either Party of
any proceeding under the United States Bankruptcy Code or
any other federal or state bankruptcy, reorganization,
receivership, insolvency or other similar law affecting the
rights of creditors generally, which proceeding is not
dismissed within thirty (30) days.

(d) Remedies. Upon any event of default, and in addition to any other
remedies either Party may have at law or in equity, the
non-defaulting Party may cancel any outstanding Order, refuse to
make or take further Orders or deliveries, cancel any discount
given, and declare all obligations immediately due and payable.
The non-defaulting Party shall have all the remedies of a secured
party under the Uniform Commercial Code and any other applicable
law. The defaulting Party shall be liable for the other Party's
expense of retaking, holding, preparing for sale, selling and the
like, including reasonable attorneys' fees and legal expenses in
the event of default. Cancellation fees shall not be due and
payable.

23.3. INSURANCE.

Upon request, Aspect shall provide evidence of product liability,
general liability and property damage insurance against an insurable
claim or claims which might or could arise regarding Aspect products
purchased from Aspect. Such insurance will contain a minimum limit of
liability for bodily injury and property damage of not less than [**]
US$.

24. GENERAL PROVISIONS.

(a) Force Majeure. In the event that either Party is prevented from
performing, or is unable to perform, any of its obligations under this
Agreement due to any act of God, fire, casualty, flood, war, strike,
lock out, failure of public utilities, injunction or any act,
exercise, assertion or requirement of governmental authority,
epidemic, destruction of production facilities, insurrection,
inability to procure materials, labor, equipment, transportation or
energy sufficient to meet manufacturing needs, or any other cause
beyond the reasonable control of the Party invoking this provision,
and if such Party shall have used its best efforts to avoid such
occurrence and minimize its duration and has given prompt written
notice to the other Party, then the affected Party's performance shall
be excused and the time for performance shall be extended for the
period of delay or inability to perform due to such occurrence.

(b) Publicity. Neither Party shall originate any publicity, news release
or other public announcement relating to this Agreement or the
existence of an arrangement between the Parties without the prior
written approval of the other Party, except as otherwise required by
law.

<PAGE> 24

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

(c) Waiver. The waiver by either Party of a breach or a default of any
provision of this Agreement by the other Party shall not be construed
as a waiver of any succeeding breach of the same or any other
provision, nor shall any delay or omission on the part of either Party
to exercise or avail itself of any right, power or privilege that it
has, or may have hereunder, operate as a waiver of any right, power or
privilege by such Party.

(d) No Agency. Nothing contained in this Agreement shall be deemed to
constitute either Party as the agent or representative of the other
Party, or both Parties as joint ventures or partners for any purpose.
Neither Party shall be responsible for the acts or omissions of the
other Party, and neither Party will have authority to speak for,
represent or obligate the other Party in any way without prior written
authority from the other Party.

(e) Survival of Obligations. All obligations of either Party which, by
their nature, require performance after the expiration or termination
of this Agreement, namely the sections on Royalties (5.(c)), Warranty
(11), Service and Support (12), Regulatory Matters (14), Ownership and
Protection of Results (16), Confidentiality (18), Indemnities (19),
Trademarks (20) shall survive the expiration or termination of this
Agreement and continue to be enforceable.

(f) LIMITATION ON LIABILITY. EXCEPT AS PROVIDED IN SECTION 19.1, ASPECT'S
LIABILITY ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING OF ASPECT
PRODUCTS OR THEIR USE OR DISPOSITION, WHETHER BASED UPON WARRANTY,
CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE AMOUNT OF [**] US$ .
IN NO EVENT SHALL ASPECT BE LIABLE TO HP OR ANY OTHER PERSON OR ENTITY
FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR OTHER INDIRECT DAMAGES
(INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS, LOSS OF DATA OR LOSS
OF USE DAMAGES) ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING OF
ASPECT PRODUCTS.

(g) Severability. In the event that any provision of this Agreement is
held by a court of competent jurisdiction to be unenforceable because
it is invalid or in conflict with any law of any relevant
jurisdiction, the validity of the remaining provisions shall not be
affected and the rights and obligations of the Parties shall be
construed and enforced as if the Agreement did not contain the
particular provisions held to be unenforceable.

(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.

(i) Notices. Any notice or communication with regard to the termination of
or changes to this Agreement from one Party to the other shall be in
writing and either personally delivered or sent via certified mail,
postage prepaid and return receipt requested addressed, to such other
Party at the address of such Party specified in this Agreement or such
other address as either Party may from time to

<PAGE> 25

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

time designate by notice hereunder.

(j) Entire Agreement. This Agreement constitutes the entire agreement
between the Parties. No waiver, consent, modification or change of
terms of this Agreement shall bind either Party unless in writing
signed by both Parties, and then such waiver, consent, modification or
change shall be effective only in the specific instance and for the
specific purpose given. There are no understandings, agreements,
representations or warranties, expressed or implied, not specified
herein regarding this Agreement or the Aspect Products purchased
and/or licensed hereunder. Only the terms and conditions contained in
this Agreement shall govern the transactions contemplated hereunder,
notwithstanding any additional, different or conflicting terms which
may be contained in any Order or other document provided by one Party
to the other. Failure of Aspect to object to provisions contained in
any Order or other document provided by HP shall not be construed as a
waiver of the terms and conditions of this Agreement nor an acceptance
of any such provision. Retention by HP of Aspect Products delivered
hereunder shall be conclusively deemed to be a confirmation of the
terms and conditions hereof.

(k) Headings. Captions and headings contained in this Agreement have been
included for ease of reference and convenience and shall not be
considered in interpreting or construing this Agreement.

(l) Exhibits: The following Exhibits shall be part of this Agreement:

Exhibit A: Aspect Products and Purchase Prices

Exhibit B: Aspect's Standard Module Kit

Exhibit C: Contact Persons/Addresses Prices

Exhibit D: Change Notification Agreement

Exhibit E: Delivery and Packaging Standard

Exhibit F: Service/Repair

Exhibit G: Co-Marketing Program

Exhibit H: Aspect Trademarks

Exhibit I: [**]

<PAGE> 26

IN WITNESS WHEREOF, this Agreement has been duly executed as a sealed
instrument as of the date specified above.

Aspect Medical Systems, Inc. Hewlett-Packard GmbH

By: J. Breckenridge Eagle By: Anthony [illegible]
------------------------ ------------------------------
Title: Chairman Title: General Manager
--------------------- ---------------------------
Patient Monitoring Division

<PAGE> 27

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

EXHIBIT (A):ASPECT'S PRODUCTS AND PURCHASE PRICES
<TABLE>
<CAPTION>

ORDERABLE ASPECT HP UNITS (EA) Aspect HP ROYALTIES
PARTS / PRODUCTS PART NO. ID Number CASES (PK) List Price Base Price (US$)
(US$) (US$) - Note A
- ---------------------------------- -------- --------- ---------- ---------- --------------- ---------
<S> <S> <C> <C> <C> <C> <C>
BIS MODULE KIT (new unit, includes tbd tbd 1 ea [**] [**] [**]
DSC, DSC Cable, HP BIS Engine,
Module Cable, User Manual)

Sensor Startup Kit 5 ea [**] [**]

DSC (replacement) [**] [**]

DSC Cable (replacement) [**] [**]

HP BIS Engine (replacement) [**] [**]

Module Cable (replacement) [**] [**]

User Manual [**] [**]
Service Manual [**] [**]

BIS Application Note (english) [**] [**]

BIS Application Note (french) [**] [**]

... [**]
BIS Brochure [**] [**]
[**]

</TABLE>

Note A:

The HP Purchase Price is the sum of the HP Base Price (based on number of units
purchased per year) and the Royalties (based on cumulative number of units
sold). In addition to the HP Base Price specified above, HP shall pay to Aspect
for each BIS Module Kit purchased an additional sum to allow Aspect [**]. It is
currently estimated [**] per module kit.

<PAGE> 28

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

EXHIBIT (B): ASPECT'S STANDARD MODULE KIT

ASPECT'S STANDARD BIS MODULE KIT.

Aspect's BIS 'Module Kit' is designed specifically for OEM applications and
allows the integration of Aspect's BIS monitoring technology into OEM equipment.
The BIS Engine will interface to the patient via the Aspect BIS sensor and to
the OEM equipment utilizing a serial (RS-232) 3-wire interface and the necessary
power connections.

The BIS Module Kit consists of a Digital Signal Converter (DSC-2) that is placed
in proximity to the patient and a small circuit board that resides in the OEM
equipment. The DSC-2 is a small (palm sized) front-end to the BIS Engine circuit
board that provides the patient interface and performs the high performance
analog to digital conversion of the EEG signals. The EEG signals are transmitted
in digital format from the DSC-2 to the BIS engine circuit board via a 12 foot
cable that is hard wired connected at the DSC-2.

The BIS Engine circuit board measures 3 x 4 inches. This board performs digital
signal processing on the digitized EEG signal and outputs the Bispectral Index
to the OEM system via the RS-232 serial connection. The board is constructed
using double sided surface mount techniques. The connections to the BIS Engine
circuit board are a serial interface (RS-232), power, and DSC connections.

Detailed Technical Specifications:
----------------------------------

Digital Output: [**]
[**]

Main Parameters: [**]
[**]

Electrical Safety: [**]

Power: [**]
[**]
[**]

Artifact Rejection: [**]

Bispectral Index: [**]

Digital Signal Converter (DSC-2)
--------------------------------
Description: [**]

<PAGE> 29

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

Weight: [**]

Dimensions: [**]
[**]

Cable Length: [**]

BIS Engine PCB

Physical: [**]

Processing Power: [**]

Software Upgrades

The BIS engine software is stored in reprogrammable FLASH memory.
Software upgrades can be accomplished on-site or remotely via the serial
interface.

Serial Identifier

Each BIS engine is given a unique serial identifier. This allows for
electronic identification/tracking of every BIS Engine.

Annual Failure Rate

The current combined annual failure rate for the BIS Engine and the DSC
is [**]. During Phase 1 of the Project, this information will need to be
broken down by age of equipment

<PAGE> 1
Exhibit 10.8

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

HEWLETT-PACKARD GMBH
Medical Products Group
Herrenberger Strasse 110 - 140
D-71034 Boeblingen
Germany

August 27, 1999

Mr J. Breckenridge Eagle
Chairman
Aspect Medical Systems, Inc.
2 Vision Drive
Natick, MA 01760-2059
USA

Dear Breck,

As we discussed on Friday, the following is confirmation of our willingness to
allow Aspect to set the expectation that customers purchasing the stand-alone
A2000 monitor in North America will be able to purchase an exchange to the HP
BIS module solution, once it becomes available, [**]. This interim program is
designed to bridge-the-gap until such time that Aspect and HP are able to
announce and implement the joint co-marketing program, as defined under our
overall agreement. The following conditions need to apply:

1. Orders for this exchange will only be taken once the module is released in
North America;

2. Customers need to be made aware that there may be some additional costs for
upgrading their existing Viridia CMS and Viridia 24/26 monitors in order to
be compatible with the BIS module;

3. Customers ordering this exchange will do so directly from Aspect and Aspect
will be responsible for delivering and installing the modules at the
customer's site (some basic "knobology" training will need to be provided
to the Aspect salesforce by HP's North American operation);

4. Aspect will supply HP with a complete list of all customers (name, address
and date of installation) who take advantage of this exchange;

5. These exchange modules can only be offered to customers who purchased an
A2000 monitor between the effective date of our agreement and the
introduction of the joint co-marketing agreement in North America (a copy
of the customer's original purchase order will be required at the time of
ordering the modules);

6. HP will supply Aspect with up to a maximum of [**] BIS module systems for
this purpose, at a price of [**] each (assumes that all customer ordering,
delivery and installation is performed by Aspect, as outlined above).
Warranty and after-sales servicing responsibility will remain with HP;

7. Aspect will offer HP [**] for the HP BIS module kits required to cover
module systems sold as part of this program.

I think you'll agree that this compromise solution will help to allay any risk
of a customer postponing his decision to purchase BIS technology.

With best regards

/s/ Steve Bebb
- --------------------------
Steve Bebb
Market Development Manager

<PAGE> 1
EXHIBIT 10.24

Confidential Materials omitted and filed separately with the
Securities and Exchange commission. Asterisks denote omissions.

FOR PURCHASES DIRECT FROM SUPPLIER
NOT SUBJECT TO COMPETITIVE BID PROCESS

SUPPLIER AGREEMENT

BETWEEN

NOVATION, LLC

AND

ASPECT MEDICAL
--------------
("SUPPLIER")

MS90690
--------
(CONTRACT NUMBER GOES HERE)
---------------------------

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
1. INTRODUCTION............................................................................................1
a. Purchasing Opportunities for Members....................................................................1
b. Supplier................................................................................................1
c. Contract Prices; Non-Price Specifications; Committed Programs...........................................1

2. BASIC TERMS.............................................................................................1
a. Purchase of Products....................................................................................1
b. Optional Purchasing Arrangement.........................................................................1
c. Market Competitive Terms................................................................................2
d. Changes in Contract Prices..............................................................................2
e. Notification of Changes in Pricing Terms................................................................2
f. Underutilized Businesses................................................................................2

3. TERM AND TERMINATION....................................................................................2
a. Term....................................................................................................2
b. Termination by Novation.................................................................................3
c. Termination by Supplier.................................................................................3

4. PRODUCT SUPPLY..........................................................................................3
a. Delivery and Invoicing..................................................................................3
b. Product Fill Rates; Confirmation and Delivery Times.....................................................3
c. Bundled Terms...........................................................................................3
d. Discontinuation of Products; Changes in Packaging.......................................................4
e. Replacement or New Products.............................................................................4
f. Member Services.........................................................................................4
g. Product Deletion........................................................................................4
h. Return of Products......................................................................................5
i. Failure to Supply.......................................................................................5

5. PRODUCT QUALITY.........................................................................................5
a. Free From Defects.......................................................................................5
b. Product Compliance......................................................................................5
c. Patent Infringement.....................................................................................6
d. Product Condition.......................................................................................6
e. Recall of Products......................................................................................6
f. Shelf Life..............................................................................................6

6. CENTURY COMPLIANCE......................................................................................6
a. Definitions.............................................................................................6
b. Representations.........................................................................................7
c. Remedies................................................................................................7
d. Noncompliance Notice....................................................................................7
e. Survival................................................................................................8
</TABLE>

<PAGE> 3

<TABLE>
<CAPTION>
<S> <C>
7. REPORTS AND OTHER INFORMATION REQUIREMENTS...............................................................8
a. Report Content..........................................................................................8
b. Report Format and Delivery..............................................................................8
c. Other Information Requirements..........................................................................9

8. OBLIGATIONS OF NOVATION..................................................................................9
a. Information to Members..................................................................................9
b. Marketing Services......................................................................................9

9. MARKETING FEES...........................................................................................9
a. Calculation.............................................................................................9
b. Payment.................................................................................................9

10. ADMINISTRATIVE DAMAGES..................................................................................10

11 NONPAYMENT OR INSOLVENCY OF A MEMBER....................................................................11

12. INSURANCE...............................................................................................11
a. Policy Requirements....................................................................................11
b. Self-Insurance.........................................................................................11
c. Amendments, Notices and Endorsements...................................................................11

13. COMPLIANCE WITH LAW AND GOVERNMENT PROGRAM PARTICIPATION................................................11
a. Compliance With Law....................................................................................11
b. Government Program Participation.......................................................................12

14. RELEASE AND INDEMNITY...................................................................................12

15. BOOKS AND RECORDS; FACILITIES INSPECTIONS...............................................................12

16 USE OF NAMES, ETC.......................................................................................13

17. CONFIDENTIAL INFORMATION................................................................................13
a. Nondisclosure..........................................................................................13
b. Definition.............................................................................................13

18 MISCELLANEOUS...........................................................................................13
a. Choice of Law..........................................................................................13
b. Not Responsible........................................................................................14
c. Third Party Beneficiaries..............................................................................14
d. Notices................................................................................................14
e. No Assignment..........................................................................................14
f. Severability...........................................................................................14
g. Entire Agreement.......................................................................................15
</TABLE>

<PAGE> 4

INDEX OF DEFINED TERMS

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
Agreed Percentage......................................................................................10
Calendar-Related........................................................................................7
Century Noncompliance...................................................................................7
Clients.................................................................................................1
Confidential Information...............................................................................14
Contract Prices.........................................................................................1
Effective Date..........................................................................................2
FDA....................................................................................................12
Federal health care program............................................................................12
Gregorian calendar......................................................................................7
Guidebook...............................................................................................9
Indemnitees............................................................................................12
Legal Requirements.....................................................................................12
Marketing Fees..........................................................................................9
Members.................................................................................................1
Non-Price Specifications................................................................................1
Novation................................................................................................1
Novation Database.......................................................................................1
Products................................................................................................1
Reporting Month.........................................................................................8
Special Conditions......................................................................................1
Supplier................................................................................................i
Systems.................................................................................................7
Term....................................................................................................3
timely..................................................................................................8
</TABLE>

<PAGE> 5

NOVATION, LLC

SUPPLIER AGREEMENT

1. INTRODUCTION.

a. PURCHASING OPPORTUNITIES FOR MEMBERS. Novation, LLC ("Novation") is
engaged in providing purchasing opportunities with respect to high quality
products and services to participating health care providers ("Members").
Members are entitled to participate in Novation's programs through their
membership or other participatory status in any of the following client
organizations: VHA Inc., University HealthSystem Consortium, and HealthCare
Purchasing Partners International, LLC (collectively, "Clients"). Novation is
acting as the exclusive agent for each of the Clients and certain of each
Client's subsidiaries and affiliates, respectively (and not collectively), with
respect to this Agreement. A current listing of Members is maintained by
Novation in the electronic database described in the Guidebook referred to in
Subsection 7.c below ("Novation Database"). A provider will become a "Member"
for purposes of this Agreement at the time Novation adds the provider to the
Novation Database and will cease to be a "Member" for such purposes at the time
Novation deletes the provider from the Novation Database.

b. SUPPLIER. Supplier is the manufacturer of products listed on Exhibit
A, the provider of installation, training and maintenance services for such
products, and the provider of any other services listed on Exhibit A (such
products and/or services are collectively referred to herein as "Products").

c. CONTRACT PRICES; NON-PRICE SPECIFICATIONS; COMMITTED PROGRAMS. A
description of the Products and pricing therefor ("Contract Prices") is attached
hereto as Exhibit A, the other specifications are attached hereto as Exhibit B
("Non-Price Specifications"), and the Special Conditions are attached hereto as
Exhibit C ("Special Conditions").

2. BASIC TERMS.

a. PURCHASE OF PRODUCTS. Novation and Supplier hereby agree that Supplier
will make the Products available for purchase by the Authorized Distributors at
the Contract Prices for resale to the Members in accordance with the terms of
this Agreement; provided, however, that this Agreement will not constitute a
commitment by any person to purchase any of the Products.

b. OPTIONAL PURCHASING ARRANGEMENT. Novation and Supplier agree that each
Member will have the option of purchasing the Products under the terms of this
Agreement or under the terms of any other purchasing or pricing arrangement that
may exist between such Member and Supplier at any time during the Term;
provided, however, that, regardless of the arrangement, Supplier will comply
with Sections 7 and 9 below. If any Member uses any other purchasing or pricing
arrangement with Supplier when ordering products covered by any contract between
Supplier and Novation, Supplier will notify such Member of the pricing and other
significant terms of the applicable Novation contract.

<PAGE> 6

c. MARKET COMPETITIVE TERMS. Supplier agrees that the prices, quality,
value and technology of all Products purchased under this Agreement will remain
market competitive at all times during the Term. Supplier agrees to provide
prompt written notice to Novation of all offers for the sale of the Products
made by Supplier during the Term on terms that are more favorable to the offeree
than the terms of this Agreement. Supplier will lower the Contract Prices or
increase any discount applicable to the purchase of the Products as necessary to
assure market competitiveness. If at any time during the Term Novation receives
information from any source suggesting that Supplier's prices, quality, value or
technology are not market competitive, Novation may provide written notice of
such information to Supplier, and Supplier will, within five (5) business days
for Novation's private label Products and within ten (10) business days for all
other Products, advise Novation in writing of and fully implement all
adjustments necessary to assure market competitiveness.

d. CHANGES IN CONTRACT PRICES. Unless otherwise expressly agreed in any
exhibit to this Agreement, the Contract Prices will not be increased and any
discount will not be eliminated or reduced during the Term. In addition to any
changes made to assure market competitiveness, Supplier may lower the Contract
Prices or increase any discount applicable to the purchase of the Products at
any time.

e. NOTIFICATION OF CHANGES IN PRICING TERMS. Supplier will provide not
less than sixty (60) days' prior written notice to Novation and not less than
forty-five (45) days' prior written notice to all Members of any change in
pricing terms permitted or required by this Agreement. For purposes of the
foregoing notification requirements, a change in pricing terms will mean any
change that affects the delivered price to the Member, including, without
limitation, changes in list prices, discounts or pricing tiers or schedules.
Such prior written notice will be provided in such format and in such detail as
may be required by Novation from time to time, and will include, at a minimum,
sufficient information to determine line item pricing of the Products for all
affected Members.

f. UNDERUTILIZED BUSINESSES. Certain Members may be required by law,
regulation and/or internal policy to do business with underutilized businesses
such as Minority Business Enterprises (MBE), Disadvantaged Business Enterprises
(DBE), Small Business Enterprises (SBE), Historically Underutilized Businesses
(HUB) and/or Women-owned Business Enterprises (WBE). To assist Novation in
helping Members meet these requirements, Supplier will comply with all Novation
policies and programs with respect to such businesses and will provide, on
request, Novation or any Member with statistical or other information with
respect to Supplier's utilization of such businesses as a vendor, distributor,
contractor or subcontractor.

3. TERM AND TERMINATION.

a. TERM. This Agreement will be effective as of the effective date set
forth in Exhibit D attached hereto ("Effective Date"), and, unless sooner
terminated, will continue in full force and effect for the initial term set
forth in the Non-Price Specifications and for any renewal terms set forth in the
Non-Price Specifications by Novation's delivery of written notice of renewal to
Supplier not less than ten (10) days prior to the end of the initial term or any
renewal term, as

<PAGE> 7

Confidential Materials omitted and filed separately with the
Securities and Exchange commission. Asterisks denote omissions.

applicable. The initial term, together with the renewal terms, if any, are
collectively referred to herein as the "Term."

b. TERMINATION BY NOVATION. Novation may terminate this Agreement at any
time for any reason whatsoever by delivering not less than [**] prior written
notice thereof to Supplier. In addition, Novation may terminate this Agreement
immediately by delivering written notice thereof to Supplier upon the occurrence
of either of the following events:

(1) Supplier breaches this Agreement; or

(2) Supplier becomes bankrupt or insolvent or makes an unauthorized assignment
or goes into liquidation or proceedings are initiated for the purpose of having
a receiving order or winding up order made against Supplier, or Supplier applies
to the courts for protection from its creditors.

Novation's right to terminate this Agreement due to Supplier's breach in
accordance with this Subsection is in addition to any other rights and remedies
Novation, the Clients or the Members may have resulting from such breach,
including, but not limited to, Novation's and the Clients' right to recover all
loss of Marketing Fees resulting from such breach through the date of
termination and for [**] thereafter.

c. TERMINATION BY SUPPLIER. Supplier may terminate this Agreement at any
time for any reason whatsoever by delivering not less than [**] prior written
notice thereof to Novation.

4. PRODUCT SUPPLY.

a. DELIVERY AND INVOICING. On and after the Effective Date, Supplier
agrees to deliver Products ordered by the Members to the Members, FOB
destination, and will direct its invoices to the Members in accordance with this
Agreement. Supplier agrees to prepay and absorb charges, if any, for
transporting Products to the Members. Payment terms are [**]. Supplier will make
whatever arrangements are reasonably necessary with the Members to implement the
terms of this Agreement; provided, however, Supplier will not impose any
purchasing commitment on any Member as a condition to the Member's purchase of
any Products pursuant to this Agreement.

b. PRODUCT FILL RATES; CONFIRMATION AND DELIVERY TIMES. Supplier agrees
to provide product fill rates to the Members of greater than [**], calculated as
line item orders. Supplier will provide confirmation of orders from Members via
the electronic data interchange described in the Guidebook referred to in
Subsection 7.c below within two (2) business days after placement of the order
and will deliver the Products to the Members within ten (10) business days after
placement of the order.

<PAGE> 8

Confidential Materials omitted and filed separately with the
Securities and Exchange commission. Asterisks denote omissions.

c. BUNDLED TERMS. Supplier agrees to give Novation prior written notice
of any offer Supplier makes to any Member to sell products that are not covered
by this Agreement in conjunction with Products covered by this Agreement under
circumstances where the Member has no real economic choice other than to accept
such bundled terms.

d. DISCONTINUATION OF PRODUCTS; CHANGES IN PACKAGING. Supplier will have
no unilateral right to discontinue any of the Products or to make any changes in
packaging which render any of the Products substantially different in use,
function or distribution. Supplier may request Novation in writing to agree to a
proposed discontinuation of any Products or a proposed change in packaging for
any Products at least [**] prior to the proposed implementation of the
discontinuation or change. Under no circumstances will any Product
discontinuation or packaging changes be permitted under this Agreement without
Novation's agreement to the discontinuation or change. In the event Supplier
implements such proposed discontinuation or change without Novation's agreement
thereto in writing, in addition to any other rights and remedies Novation or the
Members may have by reason of such discontinuation or change, (i) Novation will
have the right to terminate any or all of the Product(s) subject to such
discontinuation or change or to terminate this Agreement in its entirety
immediately upon becoming aware of the discontinuation or change or any time
thereafter by delivering written notice thereof to Supplier; (ii) the Members
may purchase products equivalent to the discontinued or changed Products from
other sources and Supplier will be liable to the Members for all reasonable
costs in excess of the Contract Prices plus any other damages which they may
incur; and (iii) Supplier will be liable to Novation and the Clients for any
loss of Marketing Fees resulting from such unacceptable discontinuation or
change plus any other damages which they may incur.

e. REPLACEMENT OR NEW PRODUCTS. Supplier will have no unilateral right to
replace any of the Products listed in Exhibit A with other products or to add
new products to this Agreement. Supplier may request Novation in writing to
agree to a replacement of any of the Products or the addition of a new product
that is closely related by function or use to an existing Product at least [**]
prior to the proposed implementation of the replacement or to the new product
introduction. Under no circumstances will any Product replacement or new product
addition to this Agreement be permitted without Novation's agreement to the
replacement or new product.

f. MEMBER SERVICES. Supplier will consult with each Member to identify
the Member's policies relating to access to facilities and personnel. Supplier
will comply with such policies and will establish a specific timetable for sales
calls by sales representatives to satisfy the needs of the Member. Supplier will
promptly respond to Members' reasonable requests for verification of purchase
history. If requested by Novation or any Members, Supplier will provide, at
Supplier's cost, on-site inservice training to Members' personnel for pertinent
Products.

g. PRODUCT DELETION. Notwithstanding anything to the contrary contained
in this Agreement, Novation may delete any one or more of the Products from this
Agreement at any time, at will and without cause, upon not less than [**] prior
written notice to Supplier.

<PAGE> 9

Confidential Materials omitted and filed separately with the
Securities and Exchange commission. Asterisks denote omissions.

h. RETURN OF PRODUCTS. Any Member, in addition to and not in limitation
of any other rights and remedies, will have the right to return Products to
Supplier under any of the following circumstances: (1) the Product is ordered or
shipped in error; (2) the Product is no longer needed by the Member due to
deletion from its standard supply list or changes in usage patterns, provided
the Product is returned at least [**] prior to its expiration date and is in a
re-salable condition; (3) the Product is received outdated or is otherwise
unusable; (4) the Product is received damaged, or is defective or nonconforming;
(5) the Product is one which a product manufacturer or supplier specifically
authorizes for return; and (6) the Product is recalled. Supplier agrees to
accept the return of Products under these circumstances without charge and for
full credit.

i. FAILURE TO SUPPLY. In the event of Supplier's failure to perform its
supply obligations in accordance with the terms of this Section 4, the Member
may purchase products equivalent to the Products from other sources and Supplier
will be liable to the Member for all reasonable costs in excess of the Contract
Prices plus any other damages which they may incur. In such event, Supplier will
also be liable to Novation and the Clients for any loss of Marketing Fees
resulting from such failure plus any other damages which they may incur. The
remedies set forth in this Subsection are in addition to any other rights and
remedies Novation, the Clients or the Members may have resulting from such
failure.

5. PRODUCT QUALITY.

a. FREE FROM DEFECTS. Supplier warrants the Products against defects in
material, workmanship, design and manufacturing. Supplier will make all
necessary arrangements to assign such warranty to the Members. Supplier further
represents and warrants that the Products will conform to the specifications,
drawings, and samples furnished by Supplier or contained in the Non-Price
Specifications and will be safe for their intended use. If any Products are
defective and a claim is made by a Member on account of such defect, Supplier
will, at the option of the Member, either replace the defective Products or
credit the Member. Supplier will bear all costs of returning and replacing the
defective Products, as well as all risk of loss or damage to the defective
Products from and after the time they leave the physical possession of the
Member. The warranties contained in this Subsection will survive any inspection,
delivery, acceptance or payment by a Member. In addition, if there is at any
time wide-spread failure of the Products, the Member may return all said
Products for credit or replacement, at its option. This Subsection and the
obligations contained herein will survive the expiration or earlier termination
of this Agreement. The remedies set forth in this Subsection are in addition to
and not a limitation on any other rights or remedies that may be available
against Supplier.

b. PRODUCT COMPLIANCE. Supplier represents and warrants to Novation, the
Clients and the Members that the Products are, if required, registered, and will
not be distributed, sold or priced by Supplier in violation of any federal,
state or local law. Supplier represents and warrants that as of the date of
delivery to the Members all Products will not be adulterated or misbranded
within the meaning of the Federal Food, Drug and Cosmetic Act and will not
violate or cause

<PAGE> 10

a violation of any applicable law, ordinance, rule, regulation or order.
Supplier agrees it will comply with all applicable Good Manufacturing Practices
and Standards contained in 21 C.F.R. Parts 210, 211, 225, 226, 600, 606, 610,
640, 660, 680 and 820. Supplier represents and warrants that it will provide
adequate warnings and instructions to inform users of the Products of the risks,
if any, associated with the use of the Products. Supplier's representations;
warranties and agreements in this Subsection will survive the expiration or
earlier termination of this Agreement.

c. PATENT INFRINGEMENT. Supplier represents and warrants that sale or use
of the Products will not infringe any United States patent. Supplier will, at
its own expense, defend every suit which will be brought against Novation or a
Member for any alleged infringement of any patent by reason of the sale or use
of the Products and will pay all costs, damages and profits recoverable in any
such suit. This Subsection and the obligations contained herein will survive the
expiration or earlier termination of this Agreement. The remedies set forth in
this Subsection are in addition to and not a limitation on any other rights or
remedies that may be available against Supplier.

d. PRODUCT CONDITION. Unless otherwise stated in the Non-Price
Specifications or unless agreed upon by a Member in connection with Products it
may order, all Products will be new. Products which are demonstrators, used,
obsolete, seconds, or which have been discontinued are unacceptable unless
otherwise specified in the Non-Price Specifications or the Member accepts
delivery after receiving notice of the condition of the Products.

e. RECALL OF PRODUCTS. Supplier will reimburse Members for any cost
associated with any Product corrective action, withdrawal or recall requested by
Supplier or required by any governmental entity. In the event a product recall
or a court action impacting supply occurs, Supplier will notify Novation in
writing within twenty-four (24) hours of any such recall or action. Supplier's
obligations in this Subsection will survive the expiration or earlier
termination of this Agreement.

f. SHELF LIFE. Sterile Products and other Products with a limited shelf
life sold under this Agreement will have the longest possible shelf life and the
latest possible expiration dates. Unless required by stability considerations,
there will not be less than an eighteen (18) month interval between a Product's
date of delivery by Supplier to the Member and its expiration date.

6. CENTURY COMPLIANCE.

a. DEFINITIONS. For purposes of this Section, the following terms have
the respective meanings given below:

(1) "Systems" means any of the Products, systems of distribution for
Products and Product manufacturing systems that consist of or include any
computer software, computer firmware, computer hardware (whether general or
special purpose), documentation, data, and other similar or related items of the
automated, computerized, and/or software systems that are provided by or through
Supplier or utilized to manufacture or distribute the Products provided by or
through Supplier pursuant to this Agreement, or any component part thereof, and
any services provided by or through Supplier in connection therewith.

<PAGE> 11

(2) "Calendar-Related" refers to date values based on the "Gregorian
calendar" (as defined in the Encyclopedia Britannica, 15th edition, 1982, page
602) and to all uses in any manner of those date values, including without
limitation manipulations, calculations, conversions, comparisons, and
presentations.

(3) "Century Noncompliance" means any aspects of the Systems that fail to
satisfy the requirements set forth in Subsection 6.b below.

b. REPRESENTATIONS. Supplier warrants, represents and agrees that the
Systems satisfy the following requirements:

(1) In connection with the use and processing of Calendar-Related data,
the Systems will not malfunction, will not cease to function, will not generate
incorrect data, and will not produce incorrect results.

(2) In connection with providing Calendar-Related data to and accepting
Calendar-Related data from other automated, computerized, and/or software
systems and users via user interfaces, electronic interfaces, and data storage,
the Systems represent dates without ambiguity as to century.

(3) The year component of Calendar-Related data that is provided by the
Systems to or that is accepted by the Systems from other automated,
computerized, and/or software systems and user interfaces, electronic
interfaces, and data storage is represented in a four-digit CCYY format, where
CC represents the two digits expressing the century and YY represents the two
digits expressing the year within that century (e.g., 1996 or 2003).

(4) Supplier has verified through testing that the Systems satisfy the
requirements of this Subsection including, without limitation, testing of each
of the following specific dates and the transition to and from each such date:
September 9, 1999; September 10, 1999; December 31, 1999; January 1, 2000;
February 28, 2000; February 29, 2000; March 1, 2000; December 31, 2000; January
1, 2001; December 31, 2004; and January 1, 2005.

c. REMEDIES. In the event of any Century Noncompliance in the Systems in
any respect, in addition to any other remedies that may be available to Novation
or the Members, Supplier will, at no cost to the Members, promptly under the
circumstances (but, in all cases, within thirty (30) days after receipt of a
written request from any Member, unless otherwise agreed by the Member in
writing) eliminate the Century Noncompliance from the Systems.

d. NONCOMPLIANCE NOTICE. In the event Supplier becomes aware of (i) any
possible or actual Century Noncompliance in the Systems or (ii) any
international, governmental, industrial, or other standard (proposed or adopted)
regarding Calendar-Related data and/or processing, or Supplier begins any
significant effort to conform the Systems to any such standard, Supplier will
promptly provide the Members with all relevant information in writing and will
timely provide the Members with updates to such information. Supplier will
respond promptly and fully to inquiries by the Members, and timely provide
updates to any responses provided to the Members,

<PAGE> 12

Confidential Materials omitted and filed separately with the
Securities and Exchange commission. Asterisks denote omissions.

with respect to (i) any possible or actual Century Noncompliance in the Systems
or (ii) any international, governmental, industrial, or other standards. In the
foregoing, the use of "timely" means promptly after the relevant information
becomes known to or is developed by or for Supplier.

e. SURVIVAL. Supplier's representations, warranties and agreements in
this Section will continue in effect throughout the Term and will survive the
expiration or earlier termination of this Agreement.

7. REPORTS AND OTHER INFORMATION REQUIREMENTS.

a. REPORT CONTENT. Within [**] after the end of each full and partial
month during the Term ("Reporting Month"), Supplier will submit to Novation a
report in the form of a diskette containing the following information in form
and content reasonably satisfactory to Novation:

(1) the name of Supplier, the Reporting Month and year and the Agreement
number (as provided to Supplier by Novation);

(2) with respect to each Member (described by LIC number (as provided to
Supplier by Novation), health industry number (if applicable), full name, street
address, city, state, zip code and, if applicable, tier and committed status),
the number of units sold and the amount of net sales for each Product on a line
item basis, and the sum of net sales and the associated Marketing Fees for all
Products purchased by such Member directly or indirectly from Supplier during
the Reporting Month, whether under the pricing and other terms of this Agreement
or under the terms of any other purchasing or pricing arrangements that may
exist between the Member and Supplier;

(3) the sum of the net sales and the associated Marketing Fees for all
Products sold to all Members during the Reporting Month; and

b. REPORT FORMAT AND DELIVERY. The reports required by this Section will
be submitted electronically in Excel Version 7 or Access Version 7 and in
accordance with other specifications established by Novation from time to time
and will be delivered to:

Novation
Attn: SRIS Operations
220 East Las Colinas Boulevard
Irving, TX 75039

c. OTHER INFORMATION REQUIREMENTS. In addition to the reporting
requirements set forth in Subsections 7.a and 7.b above, the parties agree to
facilitate the administration of this Agreement by transmitting and receiving
information electronically and by complying with the information requirements
set forth in Exhibit E attached hereto. Supplier further agrees that,

<PAGE> 13

except to the extent of any inconsistency with the provisions of this Agreement,
it will comply with all information requirements set forth in the Novation
Information Requirements Guidebook ("Guidebook"). On or about the Effective
Date, Novation will provide Supplier with a current copy of the Guidebook and
will thereafter provide Supplier with updates and/or revisions to the Guidebook
from time to time.

8. OBLIGATIONS OF NOVATION.

a. INFORMATION TO MEMBERS. After the execution of this Agreement,
Novation, in conjunction with the Clients, will deliver a summary of the
purchasing arrangements covered by this Agreement to each Member and will, from
time to time, at the request of Supplier, deliver to each Member reasonable and
appropriate amounts and types of materials supplied by Supplier to Novation
which relate to the purchase of the Products.

b. MARKETING SERVICES. Novation, in conjunction with the Clients, will
market the purchasing arrangements covered by this Agreement to the Members.
Such promotional services may include, as appropriate, the use of direct mail,
contact by Novation's field service delivery team, member support services, and
regional and national meetings and conferences. As appropriate, Novation, in
conjunction with the Clients, will involve Supplier in these promotional
activities by inviting Supplier to participate in meetings and other reasonable
networking activities with Members.

9. MARKETING FEES.

a. CALCULATION. Supplier will pay to Novation, as the authorized
collection agent for each of the Clients and certain of each Client's
subsidiaries and affiliates, respectively (and not collectively), marketing fees
("Marketing Fees") belonging to any of the Clients or certain of their
subsidiaries or affiliates equal to the Agreed Percentage of the aggregate gross
charges of all net sales of the Products to the Members directly or indirectly
from Supplier, whether under the pricing and other terms of this Agreement or
under the terms of any other purchasing or pricing arrangements that may exist
between the Members and Supplier. Such gross charges will be determined without
any deduction for uncollected accounts or for costs incurred in the manufacture,
provision, sale or distribution of the Products, and will include, but not be
limited to, charges for the sale of products, the provision of installation,
training and maintenance services, and the provision of any other services
listed on Exhibit A. The "Agreed Percentage" will be defined in the Non-Price
Specifications.

b. PAYMENT. On or about the Effective Date, Novation will advise Supplier
in writing of the amount determined by Novation to be Supplier's monthly
estimated Marketing Fees. Thereafter, Supplier's monthly estimated Marketing
Fees may be adjusted from time to time upon written notice from Novation based
on actual purchase data. No later than the tenth (10th) day of each month,
Supplier will remit the monthly estimated Marketing Fees for such month to
Novation. Such payment will be adjusted to reflect the reconciliation between
the actual Marketing Fees payable for the second month prior to such month with
the estimated Marketing Fees actually paid during such prior month. Supplier
will pay all estimated and adjusted Marketing Fees by check made payable to
"Novation, LLC." All checks should reference the

<PAGE> 14

Confidential Materials omitted and filed separately with the
Securities and Exchange commission. Asterisks denote omissions.

Agreement number. Supplier will include with its check the reconciliation
calculation used by Supplier to determine the payment adjustment, with separate
amounts shown for each Client's component thereof. Checks sent by first class
mail will be mailed to the following address:

Novation
75 Remittance Dr., Suite 1420
Chicago, IL 60675-1420

Checks sent by courier (Federal Express, United Parcel Service or messenger)
will be addressed as follows:

The Northern Trust Company
801 S. Canal St.
4th Floor Receipt & Dispatch
Chicago, IL 60607
Attn: Novation, Suite 1420
Telephone: (312) 630-8100, #9

10. ADMINISTRATIVE DAMAGES. Novation and Supplier agree that Novation would
incur additional administrative costs if Supplier fails to provide notice of
change in pricing terms as required in Subsection 2.e above, fails to provide
reports as required in Section 7 above, or fails to pay Marketing Fees as
required in Section 9 above, in each case within the time and manner required by
this Agreement. Novation and Supplier further agree that the additional
administrative costs incurred by Novation by reason of any such failure to
Supplier is uncertain, and they therefore agree that the following schedule of
administrative damages constitutes a reasonable estimation of such costs and
were determined according to the principles of just compensation:

1st failure................................................................[**]
2nd failure:...............................................................[**]
3rd failure:...............................................................[**]
4th failure:...............................................................[**]
5th failure:...............................................................[**]
6th & each subsequent failure:.............................................[**]

Novation's right to recover administrative damages in accordance with this
Section is in addition to any other rights and remedies Novation or the Clients
may have by reason of Supplier's failure to pay the Marketing Fees or provide
the reports or notices within the time and manner required by this Agreement.

11. NONPAYMENT OR INSOLVENCY OF A MEMBER. If a Member fails to pay Supplier for
Products, or if a Member becomes bankrupt or insolvent or makes an assignment
for the benefit of creditors or goes into liquidation, or if proceedings are
initiated for the purpose of having a

<PAGE> 15

Confidential Materials omitted and filed separately with the
Securities and Exchange commission. Asterisks denote omissions.

receiving order or winding up order made against a Member, or if a Member
applies to the court for protection from its creditors, then, in any such case,
this Agreement will not terminate, but Supplier will have the right, upon prior
written notice to Novation and the Member, to discontinue selling Products to
that Member.

12. INSURANCE.

a. POLICY REQUIREMENTS. Supplier will maintain and keep in force during
the Term product liability, general public liability and property damage
insurance against any insurable claim or claims which might or could arise
regarding Products purchased from Supplier. Such insurance will contain a
minimum combined single limit of liability for bodily injury and property damage
in the amounts of not less than [**] per occurrence and [**] in the aggregate;
will name Novation, the Clients and the Members, as their interests may appear,
as additional insureds, and will contain an endorsement providing that the
carrier will provide directly to all named insured copies of all notices and
endorsements. Supplier will provide to Novation, within fifteen (15) days after
Novation's request, an insurance certificate indicating the foregoing coverage,
issued by an insurance company licensed to do business in the relevant states
and signed by an authorized agent.

b. SELF-INSURANCE. Notwithstanding anything to the contrary in Subsection
12.a above, Supplier may maintain a self-insurance program for all or any part
of the foregoing liability risks, provided such self-insurance policy in all
material respects complies with the requirements applicable to the product
liability, general public liability and property damage insurance set forth in
Subsection 12.a. Supplier will provide Novation, within fifteen (15) days after
Novation's request: (1) the self-insurance policy; (2) the name of the company
managing the self-insurance program and providing reinsurance, if any; (3) the
most recent annual reports on claims and reserves for the program; and (4) the
most recent annual actuarial report on such program.

c. AMENDMENTS, NOTICES AND ENDORSEMENTS. Supplier will not amend, in any
material respect that affects the interests of Novation, the Clients or the
Members, or terminate said liability insurance or self-insurance program except
after thirty (30) days' prior written notice to Novation and will provide to
Novation copies of all notices and endorsements as soon as practicable after it
receives or gives them.

13. COMPLIANCE WITH LAW AND GOVERNMENT PROGRAM PARTICIPATION.

a. COMPLIANCE WITH LAW. Supplier represents and warrants that to the best
of its knowledge, after due inquiry, it is in compliance with all federal, state
and local statutes, laws, ordinances and regulations applicable to it ("Legal
Requirements") which are material to the operation of its business and the
conduct of its affairs, including Legal Requirements pertaining to the safety of
the Products, occupational health and safety, environmental protection,
nondiscrimination, antitrust, and equal employment opportunity. During the Term,
Supplier will: (1) promptly notify Novation of any lawsuits, claims,
administrative actions or other proceedings

<PAGE> 16

asserted or commenced against it which assert in whole or in part that Supplier
is in noncompliance with any Legal Requirement which is material to the
operation of its business and the conduct of its affairs and (2) promptly
provide Novation with true and correct copies of all written notices of adverse
findings from the U.S. Food and Drug Administration ("FDA") and all written
results of FDA inspections which pertain to the Products.

b. GOVERNMENT PROGRAM PARTICIPATION. Supplier represents and warrants
that it is not excluded from participation, and is not otherwise ineligible to
participate, in a "Federal health care program" as defined in 42 U.S.C. ss.
1320a-7b(f) or in any other government payment program. In the event Supplier is
excluded from participation, or becomes otherwise ineligible to participate in
any such program during the Term, Supplier will notify Novation in writing
within three (3) days after such event, and upon the occurrence of such event,
whether or not such notice is given to Novation, Novation may immediately
terminate this Agreement upon written notice to Supplier.

14. RELEASE AND INDEMNITY. SUPPLIER WILL RELEASE, INDEMNIFY, HOLD HARMLESS,
AND, IF REQUESTED, DEFEND NOVATION, THE CLIENTS AND THE MEMBERS, AND THEIR
RESPECTIVE OFFICERS, DIRECTORS, REGENTS, AGENTS, SUBSIDIARIES, AFFILIATES AND
EMPLOYEES (COLLECTIVELY, THE "INDEMNITEES"), FROM AND AGAINST ANY CLAIMS,
LIABILITIES, DAMAGES, ACTIONS, COSTS AND EXPENSES (INCLUDING, WITHOUT
LIMITATION, REASONABLE ATTORNEYS' FEES, EXPERT FEES AND COURT COSTS) OF ANY KIND
OR NATURE, WHETHER AT LAW OR IN EQUITY, INCLUDING CLAIMS ASSERTING STRICT
LIABILITY, ARISING FROM OR CAUSED IN ANY PART BY (1) THE BREACH OF ANY
REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT OF SUPPLIER CONTAINED IN THIS
AGREEMENT; (2) THE CONDITION OF ANY PRODUCT, INCLUDING A DEFECT IN MATERIAL,
WORKMANSHIP, DESIGN OR MANUFACTURING; OR (3) THE WARNINGS AND INSTRUCTIONS
ASSOCIATED WITH ANY PRODUCT. SUCH OBLIGATION TO RELEASE, INDEMNIFY, HOLD
HARMLESS AND DEFEND WILL APPLY EVEN IF THE CLAIMS, LIABILITIES, DAMAGES,
ACTIONS, COSTS AND EXPENSES ARE CAUSED BY THE NEGLIGENCE, GROSS NEGLIGENCE OR
OTHER CULPABLE CONDUCT OF INDEMNITEES; PROVIDED, HOWEVER, THAT SUCH
INDEMNIFICATION, HOLD HARMLESS AND RIGHT TO DEFENSE WILL NOT BE APPLICABLE WHERE
THE CLAIM, LIABILITY, DAMAGE, ACTION, COST OR EXPENSE ARISES SOLELY AS A RESULT
OF AN ACT OR FAILURE TO ACT OF INDEMNITEES. THIS SECTION AND THE OBLIGATIONS
CONTAINED HEREIN WILL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS
AGREEMENT. THE REMEDIES SET FORTH IN THIS SECTION ARE IN ADDITION TO AND NOT A
LIMITATION ON ANY OTHER RIGHTS OR REMEDIES THAT MAY BE AVAILABLE AGAINST
SUPPLIER.

15. BOOKS AND RECORDS; FACILITIES INSPECTIONS.. Supplier agrees to keep,
maintain and preserve complete, current and accurate books, records and accounts
of the transactions contemplated by this Agreement and such additional books,
records and accounts as are necessary to establish and verify Supplier's
compliance with this Agreement. All such books, records and accounts will be
available for inspection and audit by Novation representatives at any time
during the Term and for two (2) years thereafter, but only during reasonable
business hours and upon reasonable notice. Novation agrees that its routine
audits will not be conducted more frequently than twice in any consecutive
twelve (12) month period, subject to Novation's right to conduct

<PAGE> 17

special audits whenever it deems it to be necessary. In addition, Supplier will
make its manufacturing and packaging facilities available for inspection from
time to time during the Term by Novation representatives, but only during
reasonable business hours and upon reasonable notice. The exercise by Novation
of the right to inspect and audit is without prejudice to any other or
additional rights or remedies of either party.

16. USE OF NAMES, ETC. Supplier agrees that it will not use in any way in its
promotional, informational or marketing activities or materials (i) the names,
trademarks, logos, symbols or a description of the business or activities of
Novation or any Client or Member without in each instance obtaining the prior
written consent of the person owning the rights thereto; or (ii) the existence
or content of this Agreement without in each instance obtaining the prior
written consent of Novation.

17. CONFIDENTIAL INFORMATION.

a. NONDISCLOSURE. Supplier agrees that it will:

(1) keep strictly confidential and hold in trust all Confidential
Information, as defined in Subsection 17.b below, of Novation, the Clients and
the Members;

(2) not use the Confidential Information for any purpose other than the
performance of its obligations under this Agreement, without the prior written
consent of Novation;

(3) not disclose the Confidential Information to any third party (unless
required by law) without the prior written consent of Novation; and

(4) not later than thirty (30) days after the expiration or earlier
termination of this Agreement, return to Novation, the Client or the Member, as
the case may be, the Confidential Information.

b. DEFINITION. "Confidential Information," as used in Subsection 17.a
above, will consist of all information relating to the prices and usage of the
Products (including all information contained in the reports produced by
Supplier pursuant to Section 7 above) and all documents and other materials of
Novation, the Clients and the Members containing information relating to the
programs of Novation, the Clients or the Members of a proprietary or sensitive
nature not readily available through sources in the public domain. In no event
will Supplier provide to any person any information relating to the prices it
charges the Members for Products ordered pursuant to this Agreement without the
prior written consent of Novation.

18. MISCELLANEOUS.

a. CHOICE OF LAW. This Agreement will be governed by and construed in
accordance with the internal substantive laws of the State of Texas and the
Texas courts will have jurisdiction over all matters relating to this Agreement;
provided, however, the terms of any agreement between Supplier and a Member will
be governed by and construed in accordance with the choice of law and venue
provisions set forth in such agreement.

<PAGE> 18

b. NOT RESPONSIBLE. Novation and the Clients and their subsidiaries and
affiliates will not be responsible or liable for any Member's breach of any
purchasing commitment or for any other actions of any Member. In addition, none
of the Clients will be responsible or liable for the obligations of another
Client or its subsidiaries or affiliates or the obligations of Novation or
Supplier under this Agreement.

c. THIRD PARTY BENEFICIARIES. All Clients and Members are intended third
party beneficiaries of this Agreement. All terms and conditions of this
Agreement which are applicable to the Clients will inure to the benefit of and
be enforceable by the Clients and their respective successors and assigns. All
terms and conditions of this Agreement which are applicable to the Members will
inure to the benefit of and be enforceable by the Members and their respective
successors and assigns.

d. NOTICES. Except as otherwise expressly provided herein, all notices or
other communications required or permitted under this Agreement will be in
writing and will be deemed sufficient when mailed by United States mail, or
delivered in person to the party to which it is to be given, at the address of
such party set forth below:

If to Supplier:

To the address set forth by Supplier on the signature page of this Agreement

If to Novation:

Novation
Attn: General Counsel
220 East Las Colinas Blvd.
Irving, TX 75039

or such other address as the party will have furnished in writing in accordance
with the provisions of this Subsection.

e. NO ASSIGNMENT. No assignment of all or any part of this Agreement may
be made without the prior written consent of the other party; except that
Novation may assign its rights and obligations to any affiliate of Novation. Any
assignment of all or any part of this Agreement by either party will not relieve
that party of the responsibility of performing its obligations hereunder to the
extent that such obligations are not satisfied in full by the assignee. This
Agreement will be binding upon and inure to the benefit of the parties'
respective successors and assigns.

f. SEVERABILITY. Whenever possible, each provision of this Agreement will
be interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Agreement will be prohibited by or invalid
under applicable law, such provision will be ineffective to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Agreement. Each party will, at its own

<PAGE> 19

expense, take such action as is reasonably necessary to defend the validity and
enforceability of this Agreement and will cooperate with the other party as is
reasonably necessary in such defense.

g. ENTIRE AGREEMENT. This Agreement, together with the exhibits listed
below, will constitute the entire agreement between Novation and Supplier. This
Agreement, together with the exhibits listed below and each Member's purchase
order will constitute the entire agreement between each Member and Supplier. In
the event of any inconsistency between this Agreement and a Member's purchase
order, the terms of this Agreement will control, except that the Member's
purchase order will supersede Sections 4 and 5 of this Agreement in the event of
any inconsistency with such Sections. No other terms and conditions in any
document, acceptance, or acknowledgment will be effective or binding unless
expressly agreed to in writing. The following exhibits are incorporated by
reference in this Agreement:

Exhibit A Product and Service Description and Pricing

Exhibit B Non-Price Specifications

Exhibit C Special Conditions

Exhibit D Effective Date

Exhibit E Other Information Requirements

[Other Exhibits Listed, if any] EXHIBIT F

SUPPLIER: Aspect Medical Systems, Inc.

ADDRESS: 2 Vision Dr
Natick, MA 01760

SIGNATURE: /s/ J. Neal Armstrong

TITLE: VP & CFO DATE: 8/13/99

NOVATION, LLC

SIGNATURE: /s/ Edward Peterson

TITLE: Group Sr. Vice President DATE: 8/10/99

<PAGE> 20

Confidential Materials omitted and filed separately with
the Securities and Exchange Commission. Asterisks denote omissions.

EXHIBIT A

ASPECT
MEDICAL SYSTEMS, INC.
Novation Pricing 1999 Sales Option A-2000
Revenue Units Only
A-2000 Monitor $ [**]

Sensors $[**] per case
(case of [**] at $[**] each)

<TABLE>
<CAPTION>
Price per Monitor Sensor Contract Pricing Schedule**
- ------------------------------------------
Annual Volume Unit
per Monitor Price
----------------------------------
Number Total Cost
of OCR's Per Monitor Pricing Without Sensor Purchase Agreement 1 -- 251 [**]
- ----------------- --------------------- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 OR [**] Pricing With Sensor Purchase Agreement 252 -- 299 [**]
2 - 5 OR's [**] 300 -- 359 [**]
6 - 12 OR's [**] 360 -- 407 [**]
13 - 29 OR's [**] 408 -- 455 [**]
20" OR's [**] 456 -- 503 [**]
> 504 [**]
- ----------------- --------------------- ------------------------------------------------------------------------------------
</TABLE>

1. SENSOR CONTRACT PRICING SCHEDULE

** Customers must issue a P.O. which commits to a 12 month minimum purchase
volume of a minimum of [**]. Sensor shipments must be rounded up to the
nearest multiple of [**].

Customers who use more sensors than contracted for during the 12 month contract
year, which begins and has its

<PAGE> 21

Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

anniversary on the date of the contract, will receive a year-end rebate from
Aspect.
For example: customer who signs an agreement to purchase 300 sensors per year at
$[**] but uses 456 sensors for the year will receive a rebate equal to $[**]
(i.e. the difference Between $[**] and $[**] per sensor times the total sensors
used.

2. RENTAL AGREEMENT OPTION:
(a.) $[**] per month monitor rental
(b.) $[**] per Sensor
(c.) [**] Months minimum rental

<PAGE> 22

Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

EXHIBIT B

Non-Price Specifications

The term of the contract is three (years), commencing on September 1, 1999
through August 30, 2002, with [**] one-year renewals. Pricing will be firm from
[**], 1999 through [**].

Aspect Medical agrees to pay Novation a marketing fee to be defined as [**] on
all Novation contracted sales.

Warranty as expressed in 5(a) is valid from [**] from the date purchase.

<PAGE> 23

EXHIBIT C

SPECIAL CONDITIONS

N/A

<PAGE> 24

EXHIBIT D

EFFECTIVE DATE

This Agreement will be effective on September 01, 1999 Through August 30, 2002.

<PAGE> 25

EXHIBIT E

OTHER INFORMATION REQUIREMENTS

Novation and Supplier desire to facilitate contract administration
transactions ("Transactions") by electronically transmitting and receiving data
in agreed formats in substitution for conventional paper-based documents and to
assure that such Transactions are not legally invalid or unenforceable as a
result of the use of available electronic technologies for the mutual benefit of
the parties.

The parties agree as follows:

1. PREREQUISITES.

a. DOCUMENTS; STANDARDS. Each party will electronically communicate to or
receive from the other party all of the required documents listed in the
Novation Electronic Communication Requirements Schedule attached hereto
(collectively "Documents"). All Documents will be communicated in accordance
with the standards set forth in the applicable sections of the Novation
Information Requirements Guidebook ("Guidebook"). Supplier agrees that the
Guidebook is the Confidential Information of Novation and will not disclose
information contained therein to any other party.

b. THIRD PARTY SERVICE PROVIDERS. Document swill be communicated
electronically to each party, as specified in the Guidebook, through any third
party service provider ("Provider") with which either party may contract or
VHAseCure.net(TM). Either party may modify its election to use, not use or
change a Provider upon thirty (30) days' prior written notice. Each party will
be responsible for the costs of any Provider with which it contracts, unless the
parties otherwise mutually agree in writing.

c. SIGNATURES. Each party will adopt as its signature an electronic
identification consisting of symbol(s) or code(s) which are to be affixed to or
contained in each Document transmitted by such Party ("Signatures"). Each party
agrees that any Signature of such party affixed to or contained in any
transmitted Document will be sufficient to verify such party originated and
intends to be bound by such Document. Neither party will disclose to any
unauthorized person the Signatures of the other party.

2. TRANSMISSIONS.

a. VERIFICATION. Upon proper receipt of any Document, the receiving party
will promptly and properly transmit a functional acknowledgement in return,
unless otherwise specified in the Guidebook.

b. ACCEPTANCE. If acceptance of a Document is required by the Guidebook,
any such Document which has been properly received will not give rise to any
obligation unless and until the party initially transmitting such Document has
properly received in return an Acceptance Document (as specified in the
Guidebook).

<PAGE> 26

c. GARBLED TRANSMISSION. If any properly transmitted Document is received
in an unintelligible or garbled form, the receiving party will promptly notify
the originating party (if identifiable from the received Document) in a
reasonable manner. In the absence of such a notice, the originating party's
records of the contents of such Document will control.

3. TRANSACTION TERMS.

a. CONFIDENTIALITY. No information contained in any Document or otherwise
exchanged between the parties will be considered confidential, except to the
extent provided by written agreement between the parties, or by applicable law.

b. VALIDITY; ENFORCEABILITY. Any Document properly transmitted pursuant
to this Agreement will be considered, in connection with any Transaction, to be
a "writing" or "in writing" and any such Document when containing, or to which
there is affixed, a Signature ("Signed Documents") will be deemed for all
purposes to have been "signed" and to constitute an "original" when printed from
electronic files or records established and maintained in the normal course of
business.

4. STANDARDS.

ASC x 12 - Novation Information Requirements Guidebook

5. THIRD PARTY SERVICE PROVIDERS.

(If the parties will be transmitting Documents directly, insert "NONE")

<TABLE>
<CAPTION>
COMPANY VAN NAME ADDRESS TELEPHONE
- ------- -------- ------- ---------
NUMBER
------

<S> <C> <C> <C>
Novation AT&T 12976 Hollander Drive 800/624-5672
Bridgeton, MO 63044
</TABLE>

6. CONTRACT PRICING (PHARMACY).

Supplier will transmit contract pricing information electronically, to include
new contracts, contract renewals and any changes to a current contract. This
will be sent in a timely manner and in compliance with ANSI ASC X12-845 (Price
Authorization) and Novation Contract Pricing Guidelines. Contract pricing
information will include the following:

-2-
<PAGE> 27

Supplier Identification Number
HIN (Health Industry Number if Supplier is a HIN subscriber)
DEA Number (if HIN is not available)
Supplier Assigned Number (if HIN and DEA are not available)
Supplier Name
Supplier Contract Number
MFG Contract Number
Contract Effective Date
Contract Expiration Date
Member(s) (Member name, HIN or DEA number, Member start/stop dates)
Product Identifier
NDC
UPC (if NDC is not available)
Trade Name
Package Count
Package UOM
Selling Unit Price
Item Contract Effective Date
Item Contract Expiration Date

7. CONTRACT PRICING (MEDICAL/SURGICAL).

Supplier will communicate contract pricing information electronically, to
include new contracts, contract renewals and any changes to the current
contract. This will be sent in a timely manner and in compliance with the
Guidebook.

-3-

<PAGE> 28

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

Exhibit F

Exceptions

SUPPLIER NAME: ASPECT MEDICAL SYSTEMS, INC.
-----------------------------------------------------------------

PRINTED NAME: J. Neal Armstrong
-----------------------------------------------------------------

AUTHORIZED SIGNATURE: /s/ J. Neal Armstrong
----------------------------------------------------------

TITLE: Vice President and Chief Financial Officer
-------------------------------------------------------------------------

DATE: 6/15/99
--------------------------------------------------------------------------

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Page Paragraph Exception
No. No.
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 2. a. Is changed to read as follows:
PURCHASE OF PRODUCTS. Novation and Supplier hereby agree that Supplier will make the
Products available for purchase by the [**] in accordance with the terms of this
Agreement; provided, however, that this Agreement will not constitute a commitment
by any person to purchase any of the Products.

1 2.b. Is changed to read as follows:
OPTIONAL PURCHASING ARRANGEMENT. Novation and Supplier agree that each Member will
have the option of purchasing the Products under the terms of this Agreement or
under the terms of any other purchasing or pricing arrangement that may exist
between such Member and Supplier at any time during the Term; [**] in accordance
with [**]. If any Member uses any other purchasing or pricing arrangement with
Supplier when ordering products covered by any contract between Supplier and
Novation, Supplier will notify [**] of the pricing and other significant terms of
the applicable Novation contract.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

Page 1 of 7 Pages

<PAGE> 29

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2 2.c. Is changed to read as follows:
MARKET COMPETITIVE TERMS. Supplier agrees that the prices, quality, value and
technology of all Products purchased under this Agreement will remain market
competitive at all times during the Term. [**]. If at any time during the Term
Novation receives information from any source suggesting that Supplier's prices,
quality, value or technology are not market competitive, Novation may provide
written notice of such information to Supplier, and Supplier will, [**] advise
Novation in writing of and fully implement all adjustments necessary to assure
market competitiveness.
- ------------------------------------------------------------------------------------------------------------------------
2 2.d. Is changed to read as follows:
CHANGES IN CONTRACT PRICES. [**] unless otherwise expressly agreed in any exhibit to
this Agreement, the Contract Prices will not be increased and any discount will not
be eliminated or reduced during the Term. In addition to any changes made to assure
market competitiveness, Supplier may lower the Contract Prices or increase any
discount applicable to the purchase of the Products at any time.
- ------------------------------------------------------------------------------------------------------------------------
2 2.f. Is changed to read as follows:
UNDERUTILIZED BUSINESSES. Certain Members may be required by law, regulation and/or
internal policy to do business with underutilized businesses such as Minority
Business Enterprises (MBE), Disadvantaged Business Enterprises (DBE), Small Business
Enterprises (SBE), Historically Underutilized Businesses (HUB) and/or
Women-owned Business Enterprises (WBE). To assist Novation in helping Members meet
these requirements, Supplier will[**] comply with all Novation policies and programs
with respect to such businesses and will [**] provide, on request, Novation or any
Member with statistical or other information with respect to Supplier's utilization
of such businesses as a vendor, distributor, contractor or subcontractor.
- ------------------------------------------------------------------------------------------------------------------------
3 3.b. Is changed to read as follows:
TERMINATION BY NOVATION. Novation may terminate this Agreement at any time for any
reason whatsoever by delivering not less than [**] prior written notice thereof to
Supplier. In addition, Novation may terminate this Agreement immediately by
delivering written notice thereof to Supplier upon the occurrence of either of the
following events:

(0)1 Supplier breaches this Agreement [**]; or

(0)2 Supplier becomes [**] for the purpose of having a receiving order or
winding up order made against Supplier, or Supplier applies to the courts for
protection from its creditors.

[**]
- ------------------------------------------------------------------------------------------------------------------------
3 3.c. Is changed to read as follows:
TERMINATION BY SUPPLIER. Supplier may terminate this Agreement at any time for any
reason whatsoever by delivering not less than [**] prior written notice thereof to
Novation. [**].

[**]
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

Page 2 of 7 Pages

<PAGE> 30

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3 4.a. Is changed to read as follows:
DELIVERY AND INVOICING. On and after the Effective Date, Supplier agrees to deliver
Products ordered by the Members to the Members, FOB destination, and will direct its
invoices to the Members in accordance with this Agreement. Supplier agrees to prepay
and [**} for transporting Products to the Members. [**]. Supplier will make whatever
arrangements are reasonably necessary with the Members to implement the terms of
this Agreement; provided, however, Supplier will not impose any purchasing
commitment on any Member as a condition to the Member's purchase of any Products
pursuant to this Agreement, [**].
- ------------------------------------------------------------------------------------------------------------------------
3 4.b. Is changed to read as follows:
PRODUCT FILL RATES; CONFIRMATION AND DELIVERY TIMES. Supplier agrees to provide
product fill rates to the Members of greater than ninety-five percent (95%),
calculated as line item orders. [**].
- ------------------------------------------------------------------------------------------------------------------------
4 4.d. Is changed to read as follows:
DISCONTINUATION OF PRODUCTS; CHANGES IN PACKAGING. Supplier will have no unilateral
right to discontinue any of the Products or to make any changes in packaging which
render any of the Products substantially different in use, function or distribution.
[**].
- ------------------------------------------------------------------------------------------------------------------------
4 4.e. Is changed to read as follows:
REPLACEMENT OR NEW PRODUCTS. Supplier will have no unilateral right to replace any
of the Products listed in Exhibit A with other products or to add new products to
this Agreement.[**].
- ------------------------------------------------------------------------------------------------------------------------
5 4.g. This subsection is deleted in its entirety.
- ------------------------------------------------------------------------------------------------------------------------
5 4.h. Is changed to read as follows:
RETURN OF PRODUCTS. Any Member, in addition to and not in limitation of any other
rights and remedies, will have the right to return Products to Supplier under any of
the following circumstances: [**]. Supplier agrees to accept the return of Products
under these circumstances without charge and for full credit.
- ------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------
5 4.i. Is changed to read as follows:
FAILURE TO SUPPLY. In the event of Supplier's failure to perform its supply
obligations in accordance with the terms of this Section 4, [**]. The remedies set
forth in this Subsection are in addition to any other rights and remedies Novation,
the Clients or the Members may have resulting from such failure.
- ------------------------------------------------------------------------------------------------------------------------
5 5.a. This subsection is deleted in its entirety and replaced with the following:
[**]
- ------------------------------------------------------------------------------------------------------------------------
6 5.c. [**]
- ------------------------------------------------------------------------------------------------------------------------
6 5.f. Is changed to read as follows:
SHELF LIFE. Sterile Products and other Products with a limited shelf life sold under
this Agreement will have the longest possible shelf life and the latest possible
expiration dates. Unless required by stability considerations, there will not be
less than a [**] interval between a Product's date of delivery by Supplier to the
Member and its expiration date.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

Page 3 of 7 Pages

<PAGE> 31

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
6 6.a. through e. Is changed to read as follows:
a. DEFINITIONS. FOR PURPOSES OF THIS SECTION, THE FOLLOWING TERMS HAVE THE
RESPECTIVE MEANINGS GIVEN BELOW:

(1) "SYTEMS" MEANS ANY OF THE PRODUCTS, SYSTEMS OF DISTRIBUTION FOR PRODUCTS
[**].

(2) "CALENDAR-RELATED" REFERS TO DATE VALUES BASED ON THE "GREGORIAN CALENDAR"
(AS DEFINED IN THE ENCYCLOPEDIA BRITANNICA, 15TH EDITION, 1982, PAGE 602) AND TO ALL
USES IN ANY MANNER OF THOSE DATE VALUES, INCLUDING WITHOUT LIMITATION MANIPULATIONS,
CALCULATIONS, CONVERSIONS, COMPARISONS, AND PRESENTATIONS.

(3) "CENTURY NONCOMPLIANCE" MEANS ANY ASPECTS OF THE SYSTEMS THAT FAIL TO
SATISFY THE REQUIREMENTS SET FORTH IN SUBSECTION 6.B BELOW.

b. REPRESENTATIONS. SUPPLIER WARRANTS, REPRESENTS AND AGREES THAT THE SYSTEMS
SATISFY THE FOLLOWING REQUIREMENTS:

(1) IN CONNECTION WITH THE USE AND PROCESSING OF [**] CALENDAR-RELATED DATA,
THE SYSTEMS WILL NOT MALFUNCTION, WILL NOT CEASE TO FUNCTION, WILL NOT GENERATE
INCORRECT DATA, AND WILL NOT PRODUCE INCORRECT RESULTS.

(2) IN CONNECTION WITH PROVIDING CALENDAR-RELATED DATA TO AND ACCEPTING [**]
CALENDAR-RELATED DATA FROM OTHER AUTOMATED, COMPUTERIZED, AND/OR SOFTWARE SYSTEMS
AND USERS VIA USER INTERFACES, ELECTRONIC INTERFACES, AND DATA STORAGE, THE SYSTEMS
REPRESENT DATES WITHOUT AMBIGUITY AS TO CENTURY.

(3) THE YEAR COMPONENT OF CALENDAR-RELATED DATA THAT IS PROVIDED BY THE SYSTEMS
TO OR THAT IS ACCEPTED BY THE SYSTEMS FROM OTHER AUTOMATED, COMPUTERIZED, AND/OR
SOFTWARE SYSTEMS AND USER INTERFACES, ELECTRONIC INTERFACES, AND DATA STORAGE IS
REPRESENTED IN A FOUR-DIGIT CCYY FORMAT, WHERE CC REPRESENTS THE TWO DIGITS
EXPRESSING THE CENTURY AND YY REPRESENTS THE TWO DIGITS EXPRESSING THE YEAR WITHIN
THAT CENTURY (E.G., 1996 OR 2003).

(0)3 SUPPLIER HAS VERIFIED THROUGH TESTING THAT THE SYSTEMS SATISFY THE
REQUIREMENTS OF THIS SUBSECTION INCLUDING, WITHOUT LIMITATION, TESTING OF EACH OF
THE FOLLOWING SPECIFIC DATES AND THE TRANSITION TO AND FROM EACH SUCH DATE:
SEPTEMBER 9, 1999; SEPTEMBER 10, 1999; DECEMBER 31, 1999; JANUARY 1, 2000; FEBRUARY
28, 2000; FEBRUARY 29, 2000; MARCH 1, 2000; DECEMBER 31, 2000; JANUARY 1, 2001;
DECEMBER 31, 2004; AND JANUARY 1, 2005.

c. REMEDIES. IN THE EVENT OF ANY CENTURY NONCOMPLIANCE IN THE SYSTEMS IN ANY
RESPECT, IN ADDITION TO ANY OTHER REMEDIES THAT MAY BE AVAILABLE TO NOVATION OR THE
MEMBERS, SUPPLIER WILL, AT NO COST TO THE MEMBERS, PROMPTLY UNDER THE CIRCUMSTANCES
(BUT, IN ALL CASES, WITHIN THIRTY (30) DAYS AFTER RECEIPT OF A WRITTEN REQUEST FROM
ANY MEMBER, UNLESS OTHERWISE AGREED BY THE MEMBER IN WRITING) ELIMINATE THE CENTURY
NONCOMPLIANCE FROM THE SYSTEMS.

d. NONCOMPLIANCE NOTICE. IN THE EVENT SUPPLIER BECOMES AWARE OF (i) ANY
POSSIBLE OR ACTUAL CENTURY NONCOMPLIANCE IN THE SYSTEMS OR (ii) ANY INTERNATIONAL,
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

Page 4 of 7 Pages

<PAGE> 32

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
9 7.b. IS CHANGED TO READ AS FOLLOWS:
REPORT FORMAT AND DELIVERY. THE REPORTS REQUIRED BY THIS SECTION WILL BE SUBMITTED
ELECTRONICALLY IN EXCEL 97 OR ACCESS 97 AND IN ACCORDANCE WITH OTHER SPECIFICATIONS
ESTABLISHED BY NOVATION FROM TIME TO TIME AND WILL BE DELIVERED TO:

NOVATION
ATTN: SRIS OPERATIONS
220 EAST LAS COLINAS BOULEVARD
IRVING, TX 75039
- ------------------------------------------------------------------------------------------------------------------------
9 7.c. IS CHANGED TO READ AS FOLLOWS:
OTHER INFORMATION REQUIREMENTS. IN ADDITION TO THE REPORTING REQUIREMENTS [**] OF
THIS AGREEMENT [**].
- ------------------------------------------------------------------------------------------------------------------------
9 9.a. IS CHANGED TO READ AS FOLLOWS:
CALCULATION. SUPPLIER WILL PAY TO NOVATION, AS THE AUTHORIZED COLLECTION AGENT FOR
EACH OF THE CLIENTS AND CERTAIN OF EACH CLIENT'S SUBSIDIARIES AND AFFILIATES,
RESPECTIVELY (AND NOT COLLECTIVELY), MARKETING FEES ("MARKETING FEES") BELONGING TO
ANY OF THE CLIENTS OR CERTAIN OF THEIR SUBSIDIARIES OR AFFILIATES EQUAL TO THE
AGREED PERCENTAGE OF THE AGGREGATE GROSS CHARGES OF ALL NET SALES OF THE PRODUCTS TO
THE MEMBERS DIRECTLY OR INDIRECTLY FROM SUPPLIER, WHETHER UNDER THE PRICING AND
OTHER TERMS OF THIS AGREEMENT OR UNDER THE TERMS OF ANY OTHER PURCHASING OR PRICING
ARRANGEMENTS THAT MAY EXIST BETWEEN THE MEMBERS AND SUPPLIER. [**]. THE "AGREED
PERCENTAGE" WILL BE DEFINED IN THE NON-PRICE SPECIFICATIONS.
- ------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------
10 10 IS CHANGED TO READ AS FOLLOWS:
ADMINISTRATIVE DAMAGES. NOVATION AND SUPPLIER AGREE THAT NOVATION WOULD INCUR
ADDITIONAL ADMINISTRATIVE COSTS IF SUPPLIER FAILS TO PROVIDE NOTICE OF CHANGE IN
PRICING TERMS AS REQUIRED IN SUBSECTION 2.e ABOVE, FAILS TO PROVIDE REPORTS AS
REQUIRED IN SECTION 7 ABOVE, OR FAILS TO PAY MARKETING FEES AS REQUIRED IN SECTION 9
ABOVE, IN EACH CASE WITHIN THE TIME AND MANNER REQUIRED BY THIS AGREEMENT. NOVATION
AND SUPPLIER FURTHER AGREE THAT THE ADDITIONAL ADMINISTRATIVE COSTS INCURRED BY
NOVATION BY REASON OF ANY SUCH FAILURE TO SUPPLIER IS UNCERTAIN, AND THEY THEREFORE
AGREE THAT THE FOLLOWING SCHEDULE OF ADMINISTRATIVE DAMAGES CONSTITUTES A REASONABLE
ESTIMATION OF SUCH COSTS AND WERE DETERMINED ACCORDING TO THE PRINCIPLES OF JUST
COMPENSATION:

1 [**]

NOVATION'S RIGHT TO RECOVER ADMINISTRATIVE DAMAGES IN ACCORDANCE WITH THIS SECTION
IS IN ADDITION TO ANY OTHER RIGHTS AND REMEDIES NOVATION OR THE CLIENTS MAY HAVE BY
REASON OF SUPPLIER'S FAILURE TO PAY THE MARKETING FEES OR PROVIDE THE REPORTS OR
NOTICES WITHIN THE TIME AND MANNER REQUIRED BY THIS AGREEMENT.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

Page 5 of 7 Pages

<PAGE> 33

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
11 12.a. IS CHANGED TO READ AS FOLLOWS:
POLICY REQUIREMENTS. SUPPLIER WILL MAINTAIN AND KEEP IN FORCE DURING THE TERM
PRODUCT LIABILITY, GENERAL PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE AGAINST
ANY INSURABLE CLAIM OR CLAIMS WHICH MIGHT OR COULD ARISE REGARDING PRODUCTS
PURCHASED FROM SUPPLIER. SUCH INSURANCE WILL CONTAIN A MINIMUM COMBINED SINGLE LIMIT
OF LIABILITY FOR BODILY INJURY AND PROPERTY DAMAGE IN THE AMOUNTS OF [**]. SUPPLIER
WILL PROVIDE TO NOVATION, WITHIN FIFTEEN (15) DAYS AFTER NOVATION'S REQUEST, AN
INSURANCE CERTIFICATE INDICATING THE FOREGOING COVERAGE, ISSUED BY AN INSURANCE
COMPANY LICENSED TO DO BUSINESS IN THE RELEVANT STATES AND SIGNED BY AN AUTHORIZED
AGENT.
- ------------------------------------------------------------------------------------------------------------------------
12 12.c. IS CHANGED TO READ AS FOLLOWS:
[**].
- ------------------------------------------------------------------------------------------------------------------------
12 14 Is changed to read as follows:
RELEASE AND INDEMNITY. SUPPLIER WILL RELEASE, INDEMNIFY, HOLD HARMLESS, AND, IF
REQUESTED, [**], AND THEIR RESPECTIVE OFFICERS, DIRECTORS, REGENTS, AGENTS,
SUBSIDIARIES, AFFILIATES AND EMPLOYEES (COLLECTIVELY, THE "INDEMNITEES"), FROM AND
AGAINST ANY CLAIMS, LIABILITIES, DAMAGES, ACTIONS, COSTS AND EXPENSES (INCLUDING,
WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES, EXPERT FEES AND COURT COSTS) OF ANY
KIND OR NATURE, WHETHER AT LAW OR IN EQUITY, INCLUDING CLAIMS ASSERTING STRICT
LIABILITY, ARISING FROM OR CAUSED IN ANY PART BY (1) THE BREACH OF ANY
REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT OF SUPPLIER CONTAINED IN THIS
AGREEMENT; (2) THE CONDITION OF ANY PRODUCT, INCLUDING A DEFECT IN MATERIAL,
WORKMANSHIP, DESIGN OR MANUFACTURING; OR (3) [**]. THIS SECTION AND THE OBLIGATIONS
CONTAINED HEREIN WILL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS
AGREEMENT. THE REMEDIES SET FORTH IN THIS SECTION ARE IN ADDITION TO AND NOT A
LIMITATION ON ANY OTHER RIGHTS OR REMEDIES THAT MAY BE AVAILABLE AGAINST SUPPLIER.
SUPPLIER SHALL [**] THEREOF.

[**].
- ------------------------------------------------------------------------------------------------------------------------
13 17.a. THROUGH THIS SECTION IS DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING:
b. [**]
- ------------------------------------------------------------------------------------------------------------------------
14 18.a. IS CHANGED TO READ AS FOLLOWS:
CHOICE OF LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF DELAWARE.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

Page 6 of 7 Pages

<PAGE> 34

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
14 18.c. IS CHANGED TO READ AS FOLLOWS:
THIRD PARTY BENEFICIARIES. [**] CLIENTS AND MEMBERS ARE INTENDED THIRD PARTY
BENEFICIARIES OF THIS AGREEMENT. [**] THIS AGREEMENT WHICH [**] WILL INURE TO THE
BENEFIT OF AND BE ENFORCEABLE BY THE CLIENTS AND THEIR RESPECTIVE SUCCESSORS AND
ASSIGNS. [**] THIS AGREEMENT WHICH [**] WILL INURE TO THE BENEFIT OF AND BE
ENFORCEABLE BY THE MEMBERS AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS.
- ------------------------------------------------------------------------------------------------------------------------
15 18.e. IS CHANGED TO READ AS FOLLOWS:
NO ASSIGNMENT. [**] ANY ASSIGNMENT OF ALL OR ANY PART OF THIS AGREEMENT BY EITHER
PARTY WILL NOT RELIEVE THAT PARTY OF THE RESPONSIBILITY OF PERFORMING ITS
OBLIGATIONS HEREUNDER TO THE EXTENT THAT SUCH OBLIGATIONS ARE NOT SATISFIED IN FULL
BY THE ASSIGNEE. THIS AGREEMENT WILL BE BINDING UPON AND INURE TO THE BENEFIT OF THE
PARTIES' RESPECTIVE SUCCESSORS AND ASSIGNS.
- ------------------------------------------------------------------------------------------------------------------------
15 18.g. IS CHANGED TO READ AS FOLLOWS:
ENTIRE AGREEMENT. THIS AGREEMENT, TOGETHER WITH THE EXHIBITS LISTED BELOW, WILL
CONSTITUTE THE ENTIRE AGREEMENT BETWEEN NOVATION, MEMBERS AND SUPPLIER. THIS
AGREEMENT, TOGETHER WITH THE EXHIBITS LISTED BELOW AND EACH MEMBER'S PURCHASE ORDER
WILL CONSTITUTE THE ENTIRE AGREEMENT BETWEEN EACH MEMBER AND SUPPLIER. [**]. NO
OTHER TERMS AND CONDITIONS IN ANY DOCUMENT, ACCEPTANCE, OR ACKNOWLEDGMENT WILL BE
EFFECTIVE OR BINDING UNLESS EXPRESSLY AGREED TO IN WRITING. THE FOLLOWING EXHIBITS
ARE INCORPORATED BY REFERENCE IN THIS AGREEMENT:

EXHIBIT A PRODUCT AND SERVICE DESCRIPTION AND PRICING

EXHIBIT B NON-PRICE SPECIFICATIONS

EXHIBIT C SPECIAL CONDITIONS

EXHIBIT D EFFECTIVE DATE

EXHIBIT E OTHER INFORMATION REQUIREMENTS

EXHIBIT F EXCEPTIONS

[OTHER EXHIBITS LISTED, IF ANY]
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

Page 7 of 7 Pages

<PAGE> 1
EXHIBIT 10.25

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

MEDICAL PRODUCTS DISTRIBUTION AGREEMENT

_______________________________________________________________

MEDICAL PRODUCTS DISTRIBUTION AGREEMENT

BETWEEN ASPECT MEDICAL SYSTEMS

AND

HEWLETT-PACKARD COMPANY

Effective Date: Oct 01, 1999

Confidential

Agreement # CP-99-00004

Page 1 of 17
<PAGE> 2

MEDICAL PRODUCTS DISTRIBUTION AGREEMENT

GENERAL

This Distribution Agreement between Aspect Medical Systems (referred to
herein as "AMS"), with its principal offices at 2 Vision Drive, Natick, MA
01760-2059 and Hewlett-Packard Company (referred to herein as "HP") with
its offices at 3000 Minuteman Rd. Andover, MA 01810 (the "Parties") is
effective Oct 01, 1999 ("Effective Date").

WHEREAS AMS manufactures medical products and seeks to establish a
distribution channel in certain territories, and,

WHEREAS HP manufactures and distributes medical products and seeks to
distribute additional products to its customers; and,

WHEREAS AMS desires to appoint HP as an authorized Distributor in certain
territories of certain medical products, accessories and related goods to
be supplied by AMS and HP desires to accept such appointment.

THEREFORE HP agrees to purchase and AMS agrees to sell such Products upon
the following terms and conditions:

ARTICLE 1. DEFINITIONS

The following terms have the meaning indicated here when used in this
Agreement:

"AFFILIATE": Any person, firm, corporation, other legal entity which
controls or is controlled by or under common control with either AMS or HP.

"DISTRIBUTOR": HP.

"EXHIBITS": Documents attached to, incorporated by reference in, or added
to this Agreement at a later date.

"PRICES": Net US$ prices at which AMS shall sell Products to HP as set
forth in EXHIBIT 1.

"PRODUCTS": All medical products, supplies, accessories, parts and related
goods listed in EXHIBIT 1 as well as any and all updates, enhancements,
follow-on or related products that the parties mutually agree to add to
Exhibit 1.

"TERRITORIES": Countries and locations as set forth in EXHIBIT 2.

ARTICLE 2. APPOINTMENT

2.1 AMS hereby appoints HP as a non-exclusive Distributor for the Products
in the Territories.

2.2 Distributor may make sales outside the Territories if, and only if,
prior written permission is given by AMS, which shall not be unreasonably
withheld, and the product meets the regulatory requirements of the
Territory.

2.3 AMS agrees and confirms that Distributor may sub-contract any or all of
its obligations hereunder pursuant to ARTICLE 7.

Confidential

Agreement # CP-99-00004

Page 2 of 17
<PAGE> 3

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

MEDICAL PRODUCTS DISTRIBUTION AGREEMENT

2.4 Distributor agrees to exert its reasonable commercial efforts to
promote, sell and support the Products to ultimate users of the Products.

2.5 The obligations set forth herein are in lieu of any "best efforts" or
similar obligation.

ARTICLE 3. RELATIONSHIP

3.1 The relationship of Distributor to AMS shall be that of an independent
contractor engaged in purchasing Products from AMS for resale to
Distributor's customers.

3.2 Nothing contained in this Agreement shall be deemed to create a
partnership or joint venture between the Parties. Neither the making nor
the performance of this Agreement shall be construed in any manner to have
established a joint venture or partnership.

3.3 Neither Party shall hold itself out as the agent of the other, nor
shall they incur any indebtedness or obligations in the name of, or which
shall be binding on the other, without the prior written consent of the
other. Each Party assumes full responsibility for its own personnel under
laws and regulations of the governmental authorities of the competent
jurisdiction.

ARTICLE 4. AGREEMENT PRECEDENCE AND DOCUMENTS

4.1 This Agreement supersedes any previous communication, representations,
or agreements between the Parties, whether oral or written, regarding
transactions hereunder.

4.2 All Exhibits attached to the Agreement shall be deemed a part of this
Agreement and incorporated herein. Terms that are defined in this
Agreement, and used in any Exhibit, have the same meaning in the Exhibit as
in this Agreement. The following Exhibits are hereby made a part of this
Agreement:

Exhibit 1 - Products and Prices
Exhibit 2 - Territories
Exhibit 3 - General Provisions
Exhibit 4 - Product Support Requirements

ARTICLE 5. TERM OF AGREEMENT

The term of this Agreement shall be for the period October 01, 1999 to
September 30, 2001 inclusive. This Agreement will remain in effect until
expiry unless terminated earlier as provided in ARTICLE 6. In the event of
such expiration or any early termination, this Agreement shall continue to
apply to all orders previously accepted by AMS unless cancelled by
Distributor pursuant to ARTICLE 6.

ARTICLE 6. TERMINATION

6.1 Not withstanding ARTICLE 5 above, this Agreement is terminable by
either party at any time after the expiry of the first year with or without
cause [**].

6.2 To the extent permitted by law, if either Party becomes insolvent, is
unable to pay its debts when due, files for bankruptcy, is subject of
involuntary bankruptcy, has a receiver appointed, or has its assets
assigned, the other Party may terminate this Agreement immediately upon
notice to the other party and may cancel any unfulfilled obligations.

Confidential

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6.3 If either Party hereto shall fail to perform any of the obligations
imposed upon it under the terms of this Agreement, the other Party may
terminate the Agreement upon three months written notice. Such termination
shall be effective three months after deposit of the notice in the mail
unless the other Party cures the breach within such three month period.

6.4 Distributor shall immediately cease to be an authorized AMS distributor
upon the effective date of termination of this Agreement. Distributor shall
thereafter refrain from representing itselfas an authorized AMS distributor
and from using any AMS trademark or trade name.

6.5 [**].

ARTICLE 7. ASSIGNMENT AND MODIFICATION OF AGREEMENT

7.1 During the term of this Agreement, the rights of the Distributor under
this Agreement shall not be assigned nor shall the performance of
Distributor's duties hereunder be delegated, without the other AMS's prior
written consent which shall not be unreasonably withheld except either
Distributor may assign this Agreement (i) to an Affiliate that is an
Affiliate as of date of execution of this Agreement or (ii) to an Affiliate
whose assets consist entirely of the assets of an Affiliate or Affiliates
that were Affiliates as of the date of execution of this Agreement
(collectively the "permitted assignees").

7.2 An assignment of such rights for purpose of Section 7.1 shall include
any transaction including but not limited to, any merger, consolidation or
purchase of stock that results in a third party that is not a permitted
assignee controlling, directly or indirectly, a legal entity that holds
such rights. For purpose of this provision, the term "control" shall mean
the beneficial ownership, directly or indirectly, of fifty per cent (50%)
or more of voting shares of such entity. In the event of a change in
control by AMS, AMS shall give HP prompt notice and this Distribution
Agreement shall survive the change in control.

7.3 No sale, assignment or other transfer of any rights of a Party
hereunder shall be effective unless the purchaser, assignee or transferee
assumes such Party's obligations under this Agreement. Any assignment shall
not relieve the assigning Party of its responsibility for obligations
hereunder.

7.4 Except as set forth in Article 7.5 below, modifications of this
Agreement shall be effective and binding only if agreed in writing and
executed by respective duly authorized representative of each of the
Parties hereto.

7.5 Distributor may, at its option, delete Products from individual
Territories.

7.6 Neither Party's failure to exercise any of its rights under this
Agreement will constitute or be deemed a waiver or forfeiture of those
rights.

7.7 This Agreement may be assigned by HP to any new company that is formed
which essentially contains the elements of HP's measurement businesses.

ARTICLE 8. PRICES AND PAYMENTS

8.1 Distributor sets the end user selling prices at the sole judgement of
the Distributor.

8.2 Prices, which Distributor shall pay AMS for the Products purchased,
shall be the prices appearing in the EXHIBIT 1.

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Demonstration Prices for the AS2000 System will be $[**]. Demonstration
Prices for the BIS Sensor will be [**].

[**] the date of this Agreement. If there are additions or changes to
Products, Distributor will have the right to purchase these products and
prices will be established and Exhibits so revised.

8.3 Prices include the Product, labeling, packaging, freight, duties and
insurance to the F.O.B point of Leiden, Netherlands.

8.4 [**] under this Agreement. [**]

8.5 Orders issued by Distributor with requested or acknowledged delivery
dates within thirty (30) days after the effective date of any price change
will be billed at the lower price. This includes backlog and orders already
placed but have not received acknowledged delivery dates.

8.6 Payment shall be in U.S. dollars with a [**] discount if paid within
[**] ays fully payable without discount in net thirty days, after the later
of receipt by Distributor of an invoice or the corresponding Products.
Invoices must include details such as HP order number, HP product numbers
and quantities as reference. Distributor may deduct from AMS invoices any
monies owned to Distributor.

8.7 In competitive situations or as part of a large order, Distributor and
AMS may agree on a special price arrangement and split the cost of
additional discounts.

ARTICLE 9. SHIPMENT AND DELIVERY

9.1 Distributor will submit written (fax or electronic) orders to AMS after
receipt from the customer. Acknowledgment of delivery date will be received
by Distributor within no more than five work days. Distributor will not be
obligated to stock Products. Distributor may without charge postpone,
decrease, increase or cancel any order by notice to AMS, if such notice is
given at least ninety days prior to the delivery date. Distributor may
without charge decrease any order by a maximum of [**] by notice to AMS, if
such notice is given within ninety days prior to the delivery date.

9.2 AMS will make every reasonable effort to meet delivery within [**] days
or the date quoted or acknowledged. AMS shall give Distributor prompt
notice of any prospective failure to meet the acknowledged delivery date.
If AMS fails to deliver Products for [**] days beyond the agreed delivery
date, Distributor may cancel such orders without charge.

9.3 Distributor may request changes in delivery dates, quantity and
configuration for Products appearing on its orders at no charge provided
written notice of said changes is received by AMS at least [**] working
days prior to requested date.

9.4 Upon Distributor's request with the necessary information, AMS shall
evaluate special requests for suitability of software or suitability of a
particular hardware interface between Products and hardware/software used
by Distributor's customers and inform Distributor of the result within a
reasonable time.

9.5 AMS shall provide a packing list with Distributor's purchase order
number, HP product numbers (the HP equivalent of AMS's part numbers),
serial numbers, quantity shipped and date shipped with each unit shipped.
If applicable, the packing list should also provide lot number, batch
number or any shelf life information (ie. datecode).

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9.6 AMS shall preserve, package, handle, and pack Products so as to protect
the Products from loss or damage, in conformance with good commercial
practice, government regulations, and other applicable requirements. AMS
shall mark the exterior of the boxes with the associated Product and serial
numbers of the contents. AMS shall be responsible for any loss or damage
due to its failure to properly preserve, package, handle, or pack Products.
Distributor shall not be required to assert any claims for such loss or
damage against the common carrier involved. AMS will ship Products in the
final packaging as intended to be received by the end user as ordered

9.7 Title to Products and risk of loss or damage will pass to Distributor
when Products are delivered to the defined Distributor location specified
in EXHIBIT 3- General Provisions.

9.8 Distributor will be the exporter of record and obtains duty drawback
rights to Products. If Products delivered under this Agreement are
imported, AMS shall when possible allow Distributor to be the importer of
record. If Distributor is not the importer of record and AMS obtains duty
drawback rights to the Products, AMS shall, upon Distributor's request,
provide Distributor with documents required by the customs authorities of
the country of receipt to prove importation and transfer duty drawback
rights to Distributor

9.9 Items missing in shipment will be promptly replaced and shipped at no
charge to Distributor.

ARTICLE 10. ADVERTISING, PROMOTIONS, TRADEMARKS AND COPYRIGHTED MATERIAL

10.1 AMS agrees to provide sample quantities of current or new sales
literature, artwork, advertising materials, promotional plans and other
information or programs reasonably related to this Agreement. Distributor
specific literature and advertising will be the responsibility of
Distributor.

10.2 AMS together with Distributor will evaluate requirements and define
promotional plans to which both will adhere. AMS will also provide
recommended reference sites and will actively pursue clinical evaluations
and the development of local/country reference sites and clinical trials.

10.3 AMS hereby grants Distributor a revocable license to use any AMS
trademark or trade name associated with the Products solely in the
advertisement and promotion of the Products during the term of this
Agreement. Except as provided in this paragraph, Distributor shall have no
right, title or interest in or to any patent, trademark of trade name
belonging to AMS.

10.4 AMS hereby grants Distributor a revocable license to reproduce
materials provided to Distributor by AMS as is reasonable for promotion,
demonstration, sale and support of AMS Products, including but not limited
to posting such materials on the Internet, Intranet, or web.

ARTICLE 11. SALES AND SUPPORT

11.1 HP will provide AMS with a forecast of [**] projected sales unit
volumes. Quantities listed in such correspondence between the Parties are
only estimates made as an accommodation for planning purposes and do not
constitute a commitment to purchase such quantity. Distributor may revise
any forecasts in its sole discretion. [**] within this Agreement.

11.2 Distributor agrees to purchase demonstration Product and to maintain
trained staff capable of demonstrating and selling the Products. AMS agrees
to provide, at its costs, reasonable sales training and material and
support to the Distributor. Distributor agrees to participate in AMS's
sales and marketing meetings, Product and competitive training courses or
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agreed upon. AMS agrees to provide sales training in a mutually agreeable
location each six (6) months and upon product launch if sooner.

11.3 Distributor agrees to maintain trained staff capable of supporting the
Products. AMS agrees to provide, at no charge, reasonable service training
and support. Distributor agrees to participate in AMS's service training
programs. AMS undertakes to provide initial technical service training
prior to the time both Parties agree that distribution into the Territory
is to commence. Thereafter Distributor will send technicians to update
technical knowledge as mutually agreed upon.

11.4 AMS shall provide documentation to enable Distributor to establish the
support plan and deliver support services for the Products and Territories.
The product support plan shall prepared by both Parties and agreed upon
prior to the time distribution is to commence. AMS shall support the
Distributor with service information, parts (as provided in Section 11.5),
training and technical and clinical assistance and back-up support by
letter, fax, e-mail or telephone as appropriate.

11.5 Distributor agrees to purchase necessary spare parts and test
equipment to support systems installed in Territories. Spare parts to
support in-warranty repairs will be replaced for Distributor at no cost.
Out-of-warranty spare parts are at Distributor's cost.

11.6 Distributor shall use its reasonable efforts to handle and resolve
feedback from its customers. AMS shall have ultimate responsibility for
resolution of Product related issues. Problems that can not be resolved
locally will be escalated in accordance with ARTICLE 26.

ARTICLE 12. QUALITY ASSURANCE

12.1 AMS agrees to maintain ISO9001, EN46001 and Directive 93/42/EEC Annex
II certification status and compliance with the Food and Drug
Administration's (FDA) Quality System Regulation, the Medical Device
Directive and/or appropriate regulations that apply to countries within and
outside the European Union. As manufacturer, AMS will comply with all
applicable regulations and standards that pertain to manufacturers for
Products and Territories set forth herein.

12.2 Distributor will, from time to time, inform AMS of applicable
regulations in the Territories and AMS shall ensure that Products comply
with all such regulations.

12.3 Upon request, AMS agrees to furnish to Distributor any information
required to enable the Distributor to comply with all applicable
regulations and standards that pertain to distributors for Products and
Territories set forth herein.

12.4 If the Products and/or Territories covered in this Agreement are
modified, then AMS will maintain compliance with local regulations where
Products are manufactured and where Products are sold prior to the time
that both Parties agree that the distribution is to commence.

ARTICLE 13. MODIFICATION OF PRODUCTS

13.1 All Products marketed by Distributor shall be sold only in the form as
packaged by AMS. Distributor shall not alter or change Product or its
package, prior to sale.

13.2 AMS shall not, without the Distributor's prior written consent, make
any process or design changes affecting regulatory status or Product
specifications of Products in the Territories

13.3 AMS will affix "Distributed by Hewlett-Packard" labels as requested
by Distributor.

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13.4 AMS shall provide Distributor written notice of all Product
discontinuances [**] months prior to the last order date.

13.5 AMS agrees [**].

ARTICLE 14. EXPORT CERTIFICATION, PRODUCT REGISTRATION AND LOCALIZATION

14.1 Upon request, AMS shall provide at its own costs and expenses export
certificates issued by US Government and other documents that are necessary
for import and sale of the Products in the defined Territories. As required
by governments of any Territory, AMS agrees to site inspections of AMS's
factory.

14.2 AMS shall obtain and maintain at its costs all such Product
registrations that are necessary for demonstration and sale of Products as
required by law in the defined Territories.

14.3 AMS shall comply with all applicable regulatory requirements for
Product localization, including labeling and documentation as required in
countries agreed to by AMS and HP.

14.4 Upon mutual agreement, Distributor may provide Product registration
and/or localization assistance. In the case of documentation localization,
all master documentation is maintained and controlled, for the purpose of
quality system compliance, by AMS.

ARTICLE 15. IMPORT LICENSES AND EXPORT CONTROLS

15.1 AMS shall be responsible for obtaining and maintaining any export
license(s) required for delivery of the Products to Distributor under this
Agreement.

15.2 Upon Distributor's request, AMS shall provide an appropriate
certification stating the country of origin for Products, sufficient to
satisfy the requirements of (i) the customs authorities of the country of
ultimate destination, (ii) any applicable export licensing regulations,
including those of the United States, and (iii) requirements for duty
drawback.

15.3 AMS shall mark every Product (or the Product's container if there is
not room on the Product itself) with the country of origin. AMS shall, in
marking the Products, comply with the requirements of the customs
authorities of the country of ultimate destination. For each shipment of
Products of US origin issue a certificate specifying the US Export Control
Classification Number (ECCN number). Products must not be resold, exported
or re-exported in violation of the US Export Administration Act.

ARTICLE 16. WARRANTY AND LIMITATION OF REMEDIES

16.1. The Products listed on the attached Exhibits are covered by a [**]
written warranty starting from the date of delivery of the Products to
Distributor (the "User Warranty"). Such Products shall be referred to as
the "Warranty Products".

16.2 Distributor will supply a copy of the User Warranty with each Warranty
Product sold herein.

16.3 If Distributor finds that any Product is defective prior to its sale
by Distributor, Distributor shall contact an authorized AMS representative
and describe the defect. AMS will grant approval, provide the values for
customs purposes, and a return authorization number for repair or
replacement of the

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Product. Distributor undertakes to quote the authorization number on all
documentation that accompanies Products being returned. Distributor should
ensure that equipment is suitably packed for export and that accurate
values, as specified by AMS, are used in documentation. These defective
units will be promptly replaced at no charge to Distributor.

16.4 After AMS approves the return of the defective units, AMS will inform
Distributor as to the return location and send return labels to Distributor
or advise all details by electronic means.

16.5 AMS shall be entitled to verify the reason for the return and to
determine in its discretion whether to replace (rather than repair) the
unit. AMS shall not repair or replace units free of charge if the failure
is due to any of the following reasons:

i Damage from abuse or misuse;
ii Attempted repair by unauthorized service center; or
iii Repossession

16.6 For any Product repaired or replaced under warranty, the warranty
period will terminate at the end of the original warranty period as
provided in Article 16.1 or no less than six (6) months after the repair or
replacement.

16.7 AMS warrants that no Product provided hereunder shall be adulterated
or misbranded, with the meaning of the Federal Food, Drug, and Cosmetic
Act.

16.8 AMS warrants that the Products provided herein will be "Year 2000
Compliant". Year 2000 Compliant Products will perform without error, loss
of data or loss of functionality arising from any failure to process,
calculate, compare or sequence date data accurately. In addition, Year 2000
Compliant Products will not cause any associated products or systems in
which they may be used to fail in any of the ways described above.

16.9 AMS warrants that that all Products shall (i) conform strictly to its
specifications, , (ii) be free from defects in design, material, and
workmanship when used for their proper and intended purposes, and (iii) be
free from all liens, encumbrances, and other claims against title.

16.10 In addition to warranties specified above, where an exceptionally
high failure rate occurs [**]. Product Support Requirements), AMS
undertakes to apply additional resources to return the failure rate to
normal as soon as reasonably practicable. AMS shall reimburse Distributor
for costs incurred by Distributor in case of such abnormal failures.
Failure is defined as a situation where the end user cannot fully utilize
the Product.

ARTICLE 17. IN-WARRANTY REPAIR

17.1 AMS shall cover parts costs and Distributor shall cover labor costs
for field repair during the warranty period as set forth in ARTICLE 16.1.
In such case, Distributor may purchase replacement parts for no charge from
AMS.

17.2 If Warranty Products are returned to AMS, then parts and labor costs
for returned Products are covered by AMS. Distributor or its customer must
pay for transportation, insurance and handling charges of shipment of
Product to AMS for repair or replacement. Repaired or replaced Warranty
Products will be returned to sender at AMS's expense

17.3 Distributor shall perform installation services at Distributor's
expense.

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ARTICLE 18. OUT OF WARRANTY REPAIR

18.1 Distributor or its customer shall bear all shipping charges for
out-of-warranty repairs.

18.2 Repairs made by AMS outside of the warranty period shall be billed at
the AMS repair charge set forth in EXHIBIT 1. Such out-of-warranty repairs
will have a [* *] parts warranty.

18.3. Out of warranty repairs performed by AMS will be formed at AMS's
facility set forth in EXHIBIT 3.

18.4 AMS shall provide technical support and make out of warranty repair
parts for the Products available to Distributor, at Distributor's cost, for
a term of [* *] after Distributor ships the last Product. If unable to
provide such service and support, AMS shall provide Distributor with a
mutually agreeable alternative. In the case of termination of this
Agreement on any grounds other than a breach of this Agreement by
Distributor, AMS shall at the request of Distributor guarantee a continued
supply of Product and its updates or supply sufficient data regarding
product reliability to allow for the possible incremental purchase of
Product for the Distributor's standard [*] support life.

ARTICLE 19. COMPLAINTS, QUALITY RECORDS AND RECALLS

19.1 Distributor will notify, in writing, AMS's quality assurance
department of all Product complaints or any regulatory/conformance issues
that may affect the marketability of Products. AMS shall notify the
appropriate regulatory agent(s) if required and shall conduct any safety
investigations or other necessary follow-up activities. Distributor will
provide any information essential to such activities. AMS will promptly
notify Distributor if corrective action is necessary in the Territory.

19.2 Distributor shall keep records of the names and addresses of customers
and Product serial numbers for the active Product life to enable
Distributor to notify customers of Product safety information. Distributor
shall maintain the following information when distributing AMS's Products:

- Name and address of initial consignee
- Identification of device and quantity of devices shipped
- Date of shipment

19.3 Upon request, Distributor will supply AMS a quarterly report of
repairs, maintenance or service activity for Products. The report will
include the product number, serial number, fault found, action taken and
date of the activity.

19.4 In the event of any recall of a Product required by a governmental
agency for safety or efficacy reasons, or requested by Aspect at its sole
discretion, which is the result of AMS's failure to supply Products that
(1) conform in all material respects to the applicable published
specifications or (2) are free from defects in material and workmanship
(when given normal, proper and intended usage), AMS agrees to repair or
replace at its own costs all Products subject to the recall and previously
delivered to Distributor. AMS also agrees to consult with Distributor to
establish a reasonable process for managing the recall and Aspect shall be
responsible for all reasonable out-of-pocket expenditures incurred by
Distributor (including, but not limited to shipping costs, labor and travel
costs) that are consistent with the recall process agreed to by the
Parties.. In the event the recall is not required by a governmental agency
for safety or efficacy reasons, but is instead requested by AMS at its sole
discretion, AMS will be responsible for determining the scope of the
recall, including the number of units, timeframe for the recall, and
criteria for completion. Distributor agrees to maintain all necessary sales
records to facilitate the recall.

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ARTICLE 20. PRODUCT STEWARDSHIP

20.1 AMS shall accept back, free of charge, any material including the
Products and packaging returned freight prepaid by Distributor from any
country that legally requires product take back from the user at the end of
product life.

20.2 AMS shall, upon request, provide available environmentally related
information regarding materials included in Products and packaging that AMS
ships to Distributor including material safety data sheets.

ARTICLE 21. FORCE MAJEURE

No Party to this Agreement shall be liable for failure or delay of
performance of any of its obligations hereunder if such failure or delay is
due to causes beyond its reasonable control including, without limitation,
natural disasters, fires, earthquake or storm, strikes, failures of public
utilities or common carriers, acts of war, or intervention, acts restraints
or regulations of any governmental authority including compliance with any
order of any governmental considerations; provided that any such delay or
failure shall be remedied by such Party as soon as possible after removal
of the cause of such failure. A Party suffering such delay or which expects
to suffer such delay shall promptly notify the other Party in writing of
the cause and expected duration of such delay. In the event a delay lasts
or is expected to last more than sixty (60) days the other Party shall have
the option to terminate this Agreement upon written notice.

ARTICLE 22. CONFIDENTIALITY

Both Parties agree to keep in confidence the terms and conditions of this
Agreement.

ARTICLE 23. INTELLECTUAL PROPERTY RIGHTS AND INDEMNITY

AMS shall, except as otherwise provided below, defend or settle any claim
made or any suit proceeding brought against Distributor and its
subsidiaries, assigns, subcontractors, and customers so far as it is based
on an allegation that any Product furnished herein infringes a patent,
utility model, industrial design, copyright, trade secret, mask work of
trademark of the United States, or of the country where the Product is
sold, if notified promptly in writing and given information, assistance and
the sole authority to defend or settle same (at AMS's expense), and AMS
shall pay all damages and costs finally awarded in any such suit or
proceeding against Distributor. In case said Product is in such suit held
to infringe and the use or sale of said Product is enjoined, or in the case
of a settlement as referred to above, AMS shall have the option at its own
expense, to procure for Distributor the right to continue using or selling
said Product, or replace same with a non-infringing Product, or modify same
so it becomes non-infringing; in the event that none of the previous
options are commercially feasible, then AMS shall grant a refund to
Distributor of the price paid by Distributor for any of such Products
returned to AMS by Distributor. Notwithstanding anything to the contrary
above, in no event shall AMS have any liability under this Section 23 for
any such claims resulting from (a) modifications to the Products by anyone
other than AMS where the unmodified Products do not infringe, (b) the
combination of the Products with other products not provided by AMS, or (c)
use of the Products for purposes for which they were not intended. The
foregoing states the entire liability of AMS for infringement by Products
furnished herein.

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ARTICLE 24. INDEMNITY AND LIMITATION OF LIABILITY

24.1 AMS shall indemnify Distributor and its Affiliates from and against
any and all liabilities, claims, demands, damages, costs and expenses or
money judgements (including legal fees) incurred by or rendered against any
of them from third party claims or actions for personal injury or property
damage which arise out of a defect due to defective design, parts,
packaging, labeling, faulty workmanship of Products of which AMS is the
manufacturer or is the Party responsible for failure to warn except to the
extent that such personal injuries or property damage arise out of
Distributor's (or its Affiliates) negligence or breach of this Agreement
(as set forth in herein).

24.2 EXCEPT AS PROVIDED HEREIN, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO
THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, OR
PUNITIVE DAMAGES OF ANY KIND WHATSOEVER INCLUDING BUT NOT LIMITED TO LOST
PROFITS, IN CONJUNCTION WITH OR ARISING OUT OF THE PERFORMANCE UNDER THIS
AGREEMENT OR THE USE OR PERFORMANCE OF PRODUCTS AND SUPPORT SERVICES EVEN
IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
CONSEQUENTIAL LOSS FOR THE PURPOSES OF THIS AGREEMENT SHALL MEAN AND
INCLUDE WITHOUT LIMITATION OF THE GENERAL STATEMENT EARLIER APPEARING, IN
EACH CASE WHETHER ARISING IN TORT OR CONTRACT AND INCLUDING IN EACH CASE
NEGLIGENCE:

(a) LOSS OF PROFITS;
(b) LOSS OF CONTRACTS;
(c) LOSS OF ANTICIPATED SAVINGS;
(d) LOSS OF DATA;
(e) LOSS OF BUSINESS;
(f) LOSS OF GOODWILL;
(g) LOSS OF REVENUE;
(h) LOSS OF ORDERS; AND LOSSES ARISING PRIOR TO THE COMMENCEMENT
OF THE CONTRACT ARE ALSO EXCLUDED.

24.3 The above limitation of liability shall not apply to damages with
respect to the indemnity for the infringement of intellectual property
rights as provided in Article 23.

24.4 This indemnity shall not be affected or terminated by reason of
termination or expiration of this Agreement.

ARTICLE 25. INSURANCE

Upon request, AMS shall provide evidence of product liability, general
liability and property damage insurance against an insurable claim or
claims, which might or could arise regarding AMS products purchased from
AMS. Such insurance will contain a minimum limit of liability for bodily
injury and property damage of not less than [**] US$.

ARTICLE 26. CONFLICT RESOLUTION

26.1 The appointed representatives set forth in EXHIBIT 3- General
Provisions shall address conflicts that arise relative to this Agreement.
If these representatives can not resolve such conflicts, then AMS and the
Distributor shall promptly establish a review board comprised of
appropriate members of management from AMS and the Distributor to resolve
the conflict.

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26.2 In the event that the review board of the Parties does not resolve a
dispute within thirty (30) days from the date of escalation, then the
Parties agree to consider seriously the use of mediation. Such mediation
process shall be non-binding and voluntary. The Parties shall agree on the
procedural aspects of the mediation, including the venue, during the time
that the mediation is being considered.

26.3 If the Parties do not attempt to resolve a dispute through the
foregoing mediation process or upon failure of or withdrawal from such
mediation process, then either of the Parties may elect to pursue any
remedies available at law.

26.4 The laws of Commonwealth of Massachusetts, USA, will govern any
disputes arising in connection with this Agreement. AMS and HP hereby
consent to the jurisdiction and venue of the courts located in the
Commonwealth of Massachusetts.

ARTICLE 27. ADMINISTRATION AND NOTICES

Any notices pursuant to this Agreement shall be sent to the address(s)
specified Exhibit 3- General Provisions.

By signing this document, the Parties below indicate their Agreement with
and acceptance of this Agreement, including all Exhibits.

ARTICLE 28.

Within [**] days following the [**] Aspect [**]. In the event that [**].
The Parties will agree [**]. HP will be responsible for providing Aspect
with documentation,[**], the locations of such modules, and the dates of
installation.

SIGNATURES

For Aspect Medical Systems For Hewlett-Packard Company

/s/ Neal Armstrong /s/ James A. Cyrier
----------------------------- ------------------------------

Authorized Representative Signature Authorized Representative Signature

Name: Neal Armstrong Name: James A. Cyrier

Title: Vice President and CFO Title: Vice-President of Medical
Products Group Worldwide
Sales and Marketing

/s/ Jay Mazelsky
------------------------------

Authorized Representative Signature

Name: Jay Mazelsky

Title: Medical Supplies General
Manager.

Effective Date Oct 01, 1999

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EXHIBIT 1 - PRODUCTS AND PRICES

The following Exhibit is attached to and form part of the Distribution
Agreement between AMS and Hewlett-Packard Company

Technical descriptions of Product are specified in AMS documents numbered:
075-0002 (Operator's Manual) and 070-0015 (Service Manual)

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<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PART DESCRIPTION ESTIMATED YEARLY LEAD PRICE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AMS# 186-0075 A-2000 Monitoring System; [**] [**] [**]

- --------------------------------------------------------------------------------------------------------------
AMS# 186-0100 BIS Sensor [**] [**] [**]

- --------------------------------------------------------------------------------------------------------------
</TABLE>

SERVICE REPAIR PARTS PRICES: (note: boards & displays are needed for
support strategy Exh. 4)

<TABLE>
<CAPTION>
PART DESCRIPTION LEAD TIME PRICE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
186-0067 BIS Sensor Interface Cable [**] [**]
==== ====
- --------------------------------------------------------------------------------------------------------------
150-0037 Pole Clamp Assy [**] [**]
==== ====
- --------------------------------------------------------------------------------------------------------------
185-0071 A-2000 Signal Converter [**] [**]
==== ====
- --------------------------------------------------------------------------------------------------------------
140-0017 Main PCB Rev 3 Board [**] [**]
==== ====
- --------------------------------------------------------------------------------------------------------------
140-0018 Interconnect Board - Rev 2 [**] [**]
==== ====
- --------------------------------------------------------------------------------------------------------------
195-0020 Power Boards Rev 2 [**] [**]
==== ====
- --------------------------------------------------------------------------------------------------------------
465-0012 Assembly EL Display [**] [**]
==== ====
- --------------------------------------------------------------------------------------------------------------
Replacement Service Manual [**] [**]
==== ====
- --------------------------------------------------------------------------------------------------------------
070-0015 Replacement Operators Manual [**] [**]
==== ====
- --------------------------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------------------------
</TABLE>

Confidential

Agreement # CP-99-00004

Page 14 of 17
<PAGE> 15

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

MEDICAL PRODUCTS DISTRIBUTION AGREEMENT

EXHIBIT 2 - TERRITORIES

The following Exhibit is attached to and form part of the Distribution Agreement
between AMS and Hewlett-Packard Company

Herein, the Territories are established for the above referenced Agreement.

------------------------
REGIONS
------------------------
[**]
====
------------------------
[**]
------------------------
[**]
------------------------

Confidential

Agreement # CP-99-00004

Page 15 of 17
<PAGE> 16

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

MEDICAL PRODUCTS DISTRIBUTION AGREEMENT

EXHIBIT 3 - GENERAL PROVISIONS

The following Exhibit is attached to and form part of the Distribution Agreement
between AMS and Hewlett-Packard Company

Any notice pursuant to this Agreement should be sent certified mail to the
Address(s) below:

Hewlett-Packard Company
3000 Minuteman Road
Andover, Massachusetts, USA 01810-1099

AMS's address

Ship-to address for Products from AMS to HP:

Invoice-to address for Products from AMS to HP:

For information concerning this Agreement, contact the appropriate person below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
AMS COMPANY ROLE: NAME: LOCATION: PHONE NUMBER:
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES MANAGER [**] [**] [**]
- ----------------------------------------------------------------------------------------------
QUALITY/ REGULATORY [**] [**]
ASSURANCE MANAGER
- ----------------------------------------------------------------------------------------------
SERVICE TECHNICAL [**] [**] [**]
SUPPORT MANAGER
- ----------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
HP ROLE: NAME: LOCATION: PHONE NUMBER:
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALLIANCE MANAGER [**] [**] [**]
- ----------------------------------------------------------------------------------------------
QUALITY/REGULATORY [**] [**] [**]
ENGINEER
- ----------------------------------------------------------------------------------------------
SERVICE TECHNICAL [**] [**] [**]
SUPPORT MANAGER
- ----------------------------------------------------------------------------------------------
ORDER FULFILLMENT [**] [**] [**]
ENGINEER
- ----------------------------------------------------------------------------------------------
PRODUCT MANAGER [**] [**] [**]
- ----------------------------------------------------------------------------------------------
PROGRAM MANAGER [**] [**] [**]
- ----------------------------------------------------------------------------------------------
</TABLE>

Confidential

Agreement # CP-99-00004

Page 16 of 17
<PAGE> 17

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

MEDICAL PRODUCTS DISTRIBUTION AGREEMENT

EXHIBIT 4 - PRODUCT SUPPORT REQUIREMENTS

The following Exhibit is attached to and form part of the Distribution
Agreement between Aspect Medical Systems and Hewlett-Packard Company

The following Exhibit establishes the support requirements for the A-2000
Monitoring System covered by this Agreement.

1. GENERAL SUPPORT STRATEGY: The support strategy [**].

2. [**].

3. [**].

4. [**].

5. AVERAGE PARTS COSTS PER FAILURE: The average parts cost per repair (board
swap) is the price of the power board in Exhibit 1.

6. GUARANTEED PARTS AVAILABILITY: AMS will provide spare parts within 48 hours
of receipt of order.

7. GUARANTEED RESPONSE TIME: AMS will provide response to escalated customer
issues within [**] for safety-related issues or [**] otherwise.

8. REPAIR PARTS INVENTORY: AMS recommends spare parts stock of 2 boards and 2
displays for every 20 monitors sold.

Confidential

Agreement # CP-99-00004

Page 17 of 17

<PAGE> 1
Exhibit 23.2

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
October 1, 1999