ASPECT MEDICAL SYSTEMS INC, S-1/A, 1999-12-09

ASPECT MEDICAL SYSTEMS INC
S-1/A, 1999-12-09
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1999

REGISTRATION NO. 333-86295
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- --------------------------------------------------------------------------------

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

AMENDMENT NO. 2

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

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

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

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

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

NASSIB G. CHAMOUN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ASPECT MEDICAL SYSTEMS, INC.
TWO VISION DRIVE
NATICK, MASSACHUSETTS
(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 125 HIGH STREET
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110
TELEPHONE: (617) 526-6000 TELEPHONE: (617) 248-7000
TELECOPY: (617) 526-5000 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. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE(3)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per 3,450,000 $13.00 $44,850,000 $12,405.00
share.........................
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes 450,000 shares of Common Stock that the underwriters have the
option to purchase to cover over-allotments, if any.

(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933,
as amended.

(3) A registration fee of $11,190.00 was previously paid, in connection with the
initial filing of the Registration Statement, based on a maximum aggregate
offering price of $40,250,000 and a registration fee rate of .000278. A
registration fee of $1,215.00 is being paid in connection with this filing
based on an increase in the maximum aggregate offering price of $4,600,000
and a registration fee rate of .000264. The total registration fee is
$12,405.00.

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

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

3,000,000 Shares

[ASPECT 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 $11.00 AND
$13.00 PER SHARE.

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

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

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

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PRICE $ A SHARE
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<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
450,000 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
, 2000.

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

MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEX. BROWN
U.S. BANCORP PIPER JAFFRAY

, 1999.
<PAGE> 3
[Aspect logo]

[Photograph depicting Aspect's A-2000 BIS Monitor and the BIS Sensor affixed to
the forehead of a model of a human head]

The following words are to the right of the photograph:

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 and
includes Aspect's digital signal converter.

[Photograph depicting Aspect's BIS Sensor affixed to the forehead of a woman]

The following words are to the right of the photograph:

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 Aspect's BIS Sensor, BIS Module Kit and digital signal
converter products]

The following words are to the right of the photograph:

In 1996, Aspect introduced the BIS Module Kit, which is designed to
facilitate the integration of Aspect's BIS index into monitoring products
marketed by third parties that enter into original equipment manufacturer
arrangements with us.

<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<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
----
<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 , 2000 (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
<PAGE> 5

[THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY]

4
<PAGE> 6

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 October 2, 1999, more than 4,350 BIS monitors have been installed
worldwide, including 3,983 BIS monitors in approximately 550 sites in the United
States. These sites include 31 of the 100 largest hospitals and 28% of all
teaching hospitals with anesthesia residency programs. We believe that over
900,000 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

THE OFFERING

<TABLE>
<S> <C>
Common stock offered................................. 3,000,000 shares
Common stock to be outstanding after this offering... 15,865,699 shares
Over-allotment option................................ 450,000 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 2,714,901 shares issuable upon the
exercise of stock options with a weighted average exercise price of $4.57 per
share and warrants to purchase 192,902 shares of common stock with an exercise
price of $12.50 per share.

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 nine months ended October 3, 1998
and October 2, 1999 and as of October 2, 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
--------------------------------------------------- OCTOBER 3, OCTOBER 2,
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 $ 7,502 $18,838
Costs of revenue............ 525 704 1,096 3,602 5,880 4,125 6,562
Research and development.... 2,311 2,870 2,338 2,603 4,042 3,049 3,567
Sales and marketing......... 1,291 1,285 1,561 4,813 10,354 7,279 11,860
General and
administrative............ 1,216 1,815 1,871 2,358 4,254 3,073 3,551
-------- -------- ------- -------- -------- -------- -------
Loss from operations........ (4,491) (5,607) (5,477) (10,308) (13,292) (10,024) (6,702)
Interest income, net........ 231 61 81 422 459 390 988
Other expense............... -- -- -- -- (774) (825) --
-------- -------- ------- -------- -------- -------- -------
Net loss.................... $ (4,260) $ (5,546) $(5,396) $ (9,886) $(13,607) $(10,459) $(5,714)
======== ======== ======= ======== ======== ======== =======
Net loss per share:
Basic and diluted......... $(822.34) $(281.65) $(57.76) $ (15.63) $ (11.70) $ (9.46) $ (3.81)
======== ======== ======= ======== ======== ======== =======
Pro forma basic and
diluted................ $ (1.31) $ (0.45)
======== =======
Shares used in computing net
loss per share:
Basic and diluted......... 5 20 93 632 1,163 1,105 1,501
Pro forma basic and
diluted................ 10,352 12,568
</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 164,150 at December 31, 1998 and October 2, 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
3,000,000 shares of common stock in this offering at an assumed initial public
offering price of $12.00 per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us.

<TABLE>
<CAPTION>
OCTOBER 2, 1999
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 14,632 $ 47,212
Working capital............................................. 12,193 44,773
Total assets................................................ 27,990 60,570
Long-term debt.............................................. 1,967 1,967
Total stockholders' equity.................................. 14,250 46,830
</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 27 cases of possible surgical
awareness during surgical procedures monitored with the BIS system as of October
2, 1999. 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.

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<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 26.5% 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 3,000,000 shares of
common stock will be approximately $32,580,000, assuming an initial public
offering price of $12.00 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 $37,602,000.

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 October 2, 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 3,000,000 shares
of common stock in this offering at an assumed initial public offering price of
$12.00 per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.

<TABLE>
<CAPTION>
OCTOBER 2, 1999
-----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 1,967 $ 1,967
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); 1,791,134 shares issued and outstanding
(actual); 60,000,000 shares authorized (as adjusted);
15,858,372 shares issued and outstanding (as
adjusted).............................................. 18 159
Additional paid-in capital................................ 1,212 101,211
Warrants.................................................. 146 146
Notes receivable from employees and directors............. (305) (305)
Deferred compensation..................................... (316) (316)
Accumulated other comprehensive income.................... (1) (1)
Accumulated deficit....................................... (54,064) (54,064)
======== ========
Total stockholders' equity........................ 14,250 46,830
======== ========
Total capitalization......................... $ 16,217 $ 48,797
======== ========
</TABLE>

The outstanding share information excludes 2,166,138 shares of common stock
issuable upon exercise of outstanding options as of October 2, 1999 with a
weighted average exercise price of $3.07 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 October 2, 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 $14
million, or $1.11 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 12,858,372 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
3,000,000 shares of common stock in this offering, at an assumed offering price
of $12 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 October 2, 1999 would have been $47 million, or $2.95
per share. This represents an immediate increase in pro forma net tangible book
value to existing stockholders of $1.84 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 $9.05 per share. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 12.00
Pro forma net tangible book value per share as of
October 2, 1999........................................... $ 1.11
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.84
Pro forma net tangible book value per share after this
offering.................................................. 2.95
Dilution per share to new investors......................... $ 9.05
========
</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 October 2, 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 34.4% of the total consideration for, and own 18.9% of
the outstanding shares of, the common stock of Aspect. The calculation below is
based on an assumed initial public offering price of $12 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............... 12,858,372 81.1% $ 68,790,598 65.6% $ 5.35
New investors....................... 3,000,000 18.9 36,000,000 34.4 $ 12.00
---------- ----- ------------ ------
Total..................... 15,858,372 100.0% $104,790,598 100.0%
========== ============
</TABLE>

The table above assumes no exercise of stock options or warrants
outstanding at October 2, 1999. As of October 2, 1999, there were outstanding
options to purchase 2,166,138 shares of common stock with a weighted average
exercise price of $3.07 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 October 2, 1999,
pro forma net tangible book value per share after this offering would be $56
million and total dilution per share to new investors would be $8.93.

If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 3,450,000 shares, or 21.2% 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 October 2, 1999 and for the nine-months ended
October 3, 1998 and October 2, 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------
---------------------------------------------------- OCTOBER 3, OCTOBER 2,
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 $ 7,502 $18,838
Costs and expenses:
Costs of revenue.................. 525 704 1,096 3,602 5,880 4,125 6,562
Research and development.......... 2,311 2,870 2,338 2,603 4,042 3,049 3,567
Sales and marketing............... 1,291 1,285 1,561 4,813 10,354 7,279 11,860
General and administrative........ 1,216 1,815 1,871 2,358 4,254 3,073 3,551
--------- -------- ------- -------- -------- -------- -------
Total costs and expenses........ 5,343 6,674 6,866 13,376 24,530 17,526 25,540
Loss from operations................ (4,491) (5,607) (5,477) (10,308) (13,292) (10,024) (6,702)
Interest income, net................ 231 61 81 422 459 390 988
Other expense....................... -- -- -- -- (774) (825) --
--------- -------- ------- -------- -------- -------- -------
Net loss............................ $ (4,260) $ (5,546) $(5,396) $ (9,886) $(13,607) $(10,459) $(5,714)
========= ======== ======= ======== ======== ======== =======
Net loss per share:
Basic and diluted................. $ (822.34) $(281.65) $(57.76) $ (15.63) $ (11.70) $ (9.46) $ (3.81)
========= ======== ======= ======== ======== ======== =======
Pro forma basic and diluted....... $ (1.31) $ (0.45)
======== =======
Shares used in computing net loss
per share:
Basic and diluted................. 5 20 93 632 1,163 1,105 1,501
Pro forma basic and diluted....... 10,352 12,568
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- OCTOBER 2,
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 $14,632
Working capital............................. 4,273 3,054 1,852 3,695 19,343 12,193
Total assets................................ 5,719 4,552 3,973 7,603 28,589 27,990
Long-term debt.............................. 423 333 270 118 1,441 1,967
Total stockholders' equity.................. 4,460 3,028 1,066 4,067 19,688 14,250
</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 nine months ended October 3, 1998 relate to the period from January 1, 1998
to October 3, 1998, and all references to the nine months ended October 2, 1999
relate to the period from January 1, 1999 to October 2, 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 29% and 19%
of revenue in the nine months ended October 3, 1998 and the nine months ended
October 2, 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 nine months ended October 3, 1998 and the nine months ended
October 2, 1999, revenue from the sale of monitors represented approximately 70%
and 54%, respectively, of our revenue, and revenue from the sale of disposable
sensors represented approximately 30% and 46%, 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 nine months ended October 3, 1998 and
the nine months ended October 2, 1999, revenue from domestic sales was
approximately $6.7 million and $17.1 million, respectively, which represented
approximately 90% and 91%, respectively, of our revenue, and revenue from
international sales was approximately $757,000 and $1.7 million, respectively,
which represented approximately 10% 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 nine months
ended October 2, 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 nine months ended October 2, 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 nine months ended October
2, 1999, sales to this third party represented approximately 3% and 4% 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, NINE MONTHS ENDED
----------------------- ----------------------------------
1996 1997 1998 OCTOBER 3, 1998 OCTOBER 2, 1999
---- ---- ---- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue................................ 100% 100% 100% 100% 100%
Costs and expenses:
Costs of revenue..................... 79 117 52 55 35
Research and development............. 168 85 36 40 19
Sales and marketing.................. 112 157 92 97 63
General and administrative........... 135 77 38 41 19
---- ---- ---- ---- ---
Total costs and expenses.......... 494 436 218 233 136
Loss from operations................... (394) (336) (118) (133) (36)
Interest income, net................... 5 14 4 5 6
Other expense.......................... -- -- (7) (11) --
---- ---- ---- ---- ---
Net loss............................... (389)% (322)% (121)% (139)% (30)%
==== ==== ==== ==== ===
</TABLE>

NINE MONTHS ENDED OCTOBER 2, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 3,
1998

Revenue. Our revenue increased to approximately $18.8 million in the nine
months ended October 2, 1999 from approximately $7.5 million in the nine months
ended October 3, 1998, an increase of approximately 151%. Revenue from the sale
of monitors increased to approximately $10.2 million in the nine months ended
October 2, 1999 from approximately $5.3 million in the nine months ended October
3, 1998, an increase of approximately 92%. Revenue from the sale of disposable
sensors increased to approximately $8.6 million in the nine months ended October
2, 1999 from approximately $2.2 million in the nine months ended October 3,
1998, an increase of approximately 291%. The growth in revenue from the sale of
monitors was primarily attributable to an increase of approximately 103% 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 250% in the
number of

23
<PAGE> 25

disposable sensors sold. An increase of approximately 10% in the average selling
price of the disposable sensors also contributed to the increase in revenue.

Our gross profit was approximately 65% of revenue in the nine months ended
October 2, 1999 as compared to a gross profit of approximately 45% of revenue in
the nine months ended October 3, 1998. The increase in the gross profit
percentage in the nine months ended October 2, 1999 as compared to the nine
months ended October 3, 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 and contributed approximately 64% of the
increase in gross profit. 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 $3.6 million in the nine months ended October 2, 1999 from
approximately $3.0 million in the nine months ended October 3, 1998, an increase
of approximately 20%. 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 99% 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 $11.9 million in the nine months ended October 2, 1999 from
approximately $7.3 million in the nine months ended October 3, 1998, an increase
of approximately 63%. 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 88% 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 $3.6 million in the nine months ended October 2, 1999 from
approximately $3.1 million in the nine months ended October 3, 1998, an increase
of approximately 16%. 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
$988,000 in the nine months ended October 2, 1999 from approximately $390,000 in
the nine months ended October 3, 1998, an increase of approximately 153%.
Interest income increased to approximately $1.1 million in the nine months ended
October 2, 1999 from approximately $433,000 in the nine months ended October 3,
1998, an increase of approximately 154%. 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 27% of the
increase, and an increase in our investment in sales-type leases, which resulted
in approximately 73% of the increase. Interest expense increased to
approximately $145,000 in the nine months ended October 2, 1999 from
approximately $43,000 in the nine months ended October 3, 1998, an increase of
approximately 237%, 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

Other Expense. Other expense in the nine months ended October 3, 1998
primarily related to the costs incurred in our proposed initial public offering,
which was terminated in August 1998.

Net Loss. Our net loss decreased to approximately $5.7 million in the nine
months ended October 2, 1999 from approximately $10.5 million in the nine months
ended October 3, 1998, a decrease of approximately 46%, 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 $553,000 in 1998
from approximately $500,000 in 1997, an increase of approximately 11%, due to an
increase

25
<PAGE> 27

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 primarily 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.

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.

26
<PAGE> 28

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited selected operating results for
each of the six fiscal quarters in the period ended October 2, 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
---------------------------------------------------------------------
JULY 4, OCTOBER 3, DECEMBER 31, APRIL 3, JULY 3, OCTOBER 2,
1998 1998 1998 1999 1999 1999
------- ---------- ------------ -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................................. $ 2,687 $ 3,082 $ 3,736 $ 5,327 $ 6,385 $ 7,126
Gross margin............................ 1,236 1,620 1,980 3,274 4,202 4,800
Operating expenses...................... 5,109 4,830 5,248 5,674 6,531 6,773
Net loss................................ (3,700) (3,942) (3,148) (2,120) (1,964) (1,630)
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations primarily from the
sale of our convertible preferred stock. Through October 2, 1999, we raised
approximately $67.6 million from equity financings and have received
approximately $3.4 million in equipment financing and approximately $1.4 million
of financing related to our investments in sales-type leases. We have a working
capital line of credit of which approximately $2.1 million was drawn against at
October 2, 1999. At October 2, 1999, we had approximately $1.3 million primarily
committed to the purchase of equipment related to the expansion of our automated
BIS Sensor production line.

Working capital at October 2, 1999 was approximately $12.2 million compared
to approximately $19.3 million and approximately $3.7 million at December 31,
1998 and 1997, respectively. The decrease in working capital from December 31,
1998 to October 2, 1999 was primarily attributable to continued operating losses
of approximately $5.7 million and an increase in accounts payable and accrued
liabilities of approximately $2.2 million, offset by increases in net accounts
receivable of approximately $2.2 million, investment in sales-type leases of
approximately $1.9 million and inventory of approximately $1.0 million. 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 net accounts receivable and investment in sales-type leases,
offset by a decrease in inventory and increases in accrued liabilities and
current portion of long-term debt.

We used approximately $7.7 million of cash for operations in the nine
months ended October 2, 1999. Cash used for operations during this period was
primarily driven by operating losses, increases in net 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 net 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 $1.1 million of cash from investing activities in
the nine months ended October 2, 1999. We sold approximately $2.9 million, net,
of marketable securities and invested approximately $1.8 million primarily 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, net, in marketable securities and
approximately $3.4 million in manufacturing equipment, leasehold improvements
and new information systems.

We received approximately $2.9 million of cash from financing activities in
the nine months ended October 2, 1999 primarily as a result of approximately
$2.1 million of borrowings under our working capital line of credit at October
2, 1999 and the sale of approximately $1.4 million of our investments in
sales-type leases offset by approximately $600,000 of debt repayments.
Subsequent to October 2, 1999, the borrowings

27
<PAGE> 29

under our working capital line of credit were repaid. 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 October 2, 1999, approximately
$1.6 million was outstanding under the equipment portion of the loan agreement
and approximately $2.1 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 October 2, 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 under which we can finance some
of our existing and future investments in sales-type leases with Americorp
Financial, Inc. In August and September 1999, we financed approximately $1.4
million of investments in sales-type leases. Payments on the outstanding
principal under this financing match the timing of the payments due on the
underlying investments in sales-type leases.

We anticipate that capital expenditures for the remainder of 1999 will be
approximately $980,000. 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 the first quarter of 2000.

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.

INCOME TAXES

We have 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 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 our
value immediately prior to the ownership change. Subsequent ownership changes
may further affect the limitation in future years.

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.

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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,

- 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 have assessed the year 2000 readiness of our
operating, financial and administrative systems, including the hardware and
software that support our systems. This review included 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 has conducted an inventory of and test procedures for all
software and related systems believed to 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 was to ensure that these third-party systems are
year 2000 compliant. The internal evaluation has determined that all our
critical hardware and software are year 2000 compliant. We 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 were
upgraded. Our current scientific software has been transferred and validated.

We assessed our non-information technology systems. Some aspects of our
facilities and manufacturing equipment 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
identified the potential problem areas and developed a remediation plan to
correct any issues. This plan included contacting vendors to obtain year 2000
compliance certification for the equipment provided by them as well as executing
date forwarding test protocols to validate the equipment. We 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 did not contact or survey 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 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

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<PAGE> 31

generally. We have funded and will continue to fund all year 2000 compliance
activities principally through cash provided by our financing activities.

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. 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 October 2,
1999, more than 4,350 BIS monitors have been installed worldwide, including
3,983 BIS monitors in approximately 550 sites in the United States. These sites
include 31 of the 100 largest hospitals and 28% of all teaching hospitals with
anesthesia residency programs. We believe that over 900,000 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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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 continue 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 1,463
monitors in approximately 190 sites as of October 3, 1998 and we had
installed 3,983 monitors in approximately 550 sites as of October 2,
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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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 October 2, 1999, we estimate that more
than 900,000 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 30% of revenue for the nine months ended October 3, 1998 to 46% of
revenue for the nine months ended October 2, 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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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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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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<PAGE> 39

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 October 2, 1999, we believe that
more than 900,000 patients have been monitored with the BIS system during
surgery. Although we have not systematically solicited reports of surgical
awareness, only 27 cases of possible surgical awareness during BIS monitoring
had been reported to us as of October 2, 1999. 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 27 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 October 2, 1999, BIS systems have
been installed in approximately 550 sites in the United States.

We market our BIS system in the United States primarily through a direct
sales force. As of October 2, 1999, our domestic sales force was comprised of 21
sales professionals and 28 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 also begun 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.

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

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<PAGE> 40

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 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 October 2, 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

39
<PAGE> 41

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.

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 nine months ended October 3, 1998 and the nine months
ended October 2, 1999, sales to Spacelabs accounted for approximately 14% 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
nine months ended October 2, 1999, we spent approximately $2.3 million, $2.6
million, $4.0 million and $3.6 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.

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<PAGE> 42

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 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.

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<PAGE> 43

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,

- 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 October 2, 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>

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<PAGE> 44

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, manufacturing, 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

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<PAGE> 45

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 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 October 2, 1999, we had 169 full-time employees, of which:

- 20 persons were engaged in research and development activities,

- 34 persons were engaged in manufacturing and engineering,

- 11 persons were engaged in clinical and regulatory affairs,

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

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<PAGE> 46

- 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.

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 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
December 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................ 50 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..................... 43 Vice President of Research and Development
Steven H. Kane....................... 47 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.............. 53 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. Our 1998 Director Stock Option Plan was
initially adopted by our board of directors and stockholders in February 1998.
Under the terms of the director plan, our directors who are not our employees
are eligible to receive nonstatutory options to purchase shares of common stock.
A total of 100,000 shares of common stock may be issued upon exercise of options
granted under the director plan. On October 5, 1999, our board of directors
approved an amendment, subject to stockholder approval, to increase to 200,000
shares of common stock the number of shares that may be issued upon exercise of
options granted under the director plan. As of October 2, 1999, options to
purchase an aggregate of 55,000 shares of common stock at a weighted average
exercise price of $4.94 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

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<PAGE> 51

accountants. The audit committee also reviews Aspect's system of internal
accounting and financial controls. The audit committee consists of Messrs. Lloyd
and Kania.

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

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<PAGE> 53

October 2, 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 1,549,595 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
2,100,000 shares of common stock, subject to adjustment in the event of stock
splits and other similar events, may be issued pursuant to awards granted under
the plan. On October 5, 1999, our board of directors approved an amendment to
the plan, subject to stockholder approval, to increase to 3,000,000 the number
of shares that may be issued pursuant to awards granted under this plan. As of
October 2, 1999, options to purchase an aggregate of 561,543 shares of common
stock at a weighted average exercise price of $5.74 were outstanding under this
plan.

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<PAGE> 54

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.

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.
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<PAGE> 55

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 who are not our employees
are eligible to receive nonstatutory options to purchase shares of common stock.
A total of 100,000 shares of common stock may be issued upon exercise of options
granted under the director plan. On October 5, 1999, our board of directors
approved an amendment, subject to stockholder approval, to increase to 200,000
shares of common stock the number of shares that may be issued upon exercise of
options granted under the director plan. As of October 2, 1999, options to
purchase an aggregate of 55,000 shares of common stock at a weighted average
exercise price of $4.94 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 December 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
192,902 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 October 2, 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 October 2, 1999, 5,123 shares of common stock were
subject to repurchase by us.

55
<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
October 2, 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 October 2, 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 October 2, 1999, 71,250 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 October 2, 1999,
$13,500 of the principal amount of the loan plus accrued interest was
outstanding. Pursuant to the terms of the promissory note, on each of September
24, 1998 and 1999 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, 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 these options as collateral for the loan. The loan bears
interest at 8% per annum. As of October 2, 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 of $0.80 per share, up to the number of
shares which have not yet vested. As of October 2, 1999, 41,927 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 October 2, 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.

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<PAGE> 58

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership
of our common stock as of October 2, 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 October 2, 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 3,000,000 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% 10.0%
1000 Winter Street, Suite 3300
Waltham, MA 02154
One Liberty Fund III, L.P.(2)............................. 1,530,871 11.9 9.7
OneLiberty Ventures
One Liberty Square
Boston, MA 02109
Polaris Venture Partners, L.P.(3)......................... 1,012,692 7.9 6.4
Bay Colony Corporate Center
1000 Winter Street, Suite 3350
Waltham, MA 02154
QuestMark Partners, L.P.(4)............................... 915,750 7.1 5.7
QuestMark Advisers, LLC
One South Street, Suite 800
Baltimore, MD 21202
New Enterprise Associates IV, Limited Partnership(5)...... 654,493 5.1 4.1
1119 St. Paul Street
Baltimore, MD 21202
Orchid & Co., Nominee for T. Rowe Price Threshold Fund
III, L.P.(6)............................................ 646,132 5.0 4.1
T. Rowe Price Assoc. Inc.
100 East Pratt
Baltimore, MD 21202

DIRECTORS AND NAMED EXECUTIVE OFFICERS
Nassib G. Chamoun(7)...................................... 493,614 3.8% 3.1%
J. Breckenridge Eagle(8).................................. 241,200 1.9 1.5
</TABLE>

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<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)...................................... 54,087 * *
Stephen E. Coit(10)....................................... 10,238 * *
Edwin M. Kania, Jr.(11)................................... 1,537,537 12.0 9.7
Donald R. Stanski(12)..................................... 51,688 * *
Terrance McGuire(13)...................................... 1,019,358 7.9 6.4
J. Neal Armstrong(14)..................................... 214,145 1.7 1.3
Steven H. Kane(15)........................................ 226,021 1.8 1.4
Paul J. Manberg(16)....................................... 117,584 * *
Boudewijn L.P.M. Bollen(17)............................... 15,000 * *
All current executive officers and directors as a group
(15 persons)(18)........................................ 4,314,643 32.5 26.5
</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 118,124 shares of common stock subject to options
which are exercisable within 60 days after October 2, 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
5,123 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
150,209 shares which will not become exercisable within 60 days of October
2, 1999.

(8) Includes an aggregate of 30,753 shares of common stock subject to options
which are exercisable within 60 days after October 2, 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
9,342

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 43,747
shares which will not become exercisable within 60 days of October 2, 1999.

(9) Includes 6,042 shares of common stock subject to options which are
exercisable within 60 days after October 2, 1999 and 563 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 8,958 shares which will not become exercisable within 60 days of
October 2, 1999.

(10) Includes 6,666 shares of common stock subject to options which are
exercisable within 60 days after October 2, 1999. Does not include 8,334
shares which will not become exercisable within 60 days of October 2, 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 October 2, 1999. Does not include 8,334
shares which will not become exercisable within 60 days of October 2, 1999.

(12) Includes an aggregate of 31,688 shares of common stock subject to options
which are exercisable within 60 days after October 2, 1999. Does not
include 18,312 shares which will not become exercisable within 60 days of
October 2, 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 October 2, 1999. Does not include 8,334
shares which will not become exercisable within 60 days of October 2, 1999.

(14) Includes an aggregate of 40,990 shares of common stock subject to options
which are exercisable within 60 days after October 2, 1999 and 22,500
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
51,927 shares which will not become exercisable within 60 days of October
2, 1999.

(15) Includes an aggregate of 15,782 shares of common stock subject to options
which are exercisable within 60 days after October 2, 1999 and 71,250
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 31,718
shares which will not become exercisable within 60 days of October 2, 1999.

(16) Includes an aggregate of 39,948 shares of common stock subject to options
which are exercisable within 60 days after October 2, 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 1,216 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 37,552 shares which will not
become exercisable within 60 days of October 2, 1999.

(17) Consists of shares of common stock subject to options which are exercisable
within 60 days after October 2, 1999. Does not include 25,000 shares which
will not become exercisable within 60 days of October 2, 1999.

(18) Includes an aggregate of 399,887 shares of common stock subject to options
which are exercisable within 60 days after October 2, 1999, 895 shares of
common stock subject to warrants exercisable upon completion of this
offering and 154,049 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 543,675 shares which will not become exercisable within 60
days of October 2, 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 October 2, 1999, we had outstanding:

- 1,791,134 shares of common stock held by 103 stockholders of record;

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

- options to purchase 2,166,138 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 15,865,699 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.

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<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.

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<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 15,865,699 shares of our common stock assuming no exercise of outstanding
options or warrants. Of these shares, the 3,000,000 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
12,865,699 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

- 9,448,009 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
9,448,009 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.

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<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 6,860,000
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 October 2, 1999, options to purchase 2,166,138 shares of common stock
were issued and outstanding. Upon the expiration of the lock-up period described
above, at least 1,270,313 shares of common stock will be subject to vested
options, based on options outstanding as of October 2, 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............................................. 3,000,000
=========
</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 450,000
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, October 2, 1999 (Unaudited) and Pro Forma October 2,
1999 (Unaudited).......................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and for the Nine Months
Ended October 3, 1998 (Unaudited) and October 2, 1999
(Unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998 and for the
Nine Months Ended October 2, 1999 (Unaudited)............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and for the Nine Months
Ended October 3, 1998 (Unaudited) and October 2, 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
OCTOBER 2,
DECEMBER 31, DECEMBER 31, OCTOBER 2, 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 $ 13,445,731 $ 13,445,731
Marketable securities........................... 4,612,462 4,150,336 1,186,340 1,186,340
Accounts receivable, net of allowance of
$62,400, $200,000 and $347,000 at December 31,
1997 and 1998 and October 2, 1999,
respectively.................................. 719,172 2,108,944 4,198,995 4,198,995
Current portion of investment in sales-type
leases........................................ 136,392 776,275 1,519,884 1,519,884
Inventory....................................... 387,479 270,189 1,246,422 1,246,422
Other current assets............................ 245,962 316,773 515,650 515,650
------------ ------------ ------------ ------------
Total current assets..................... 6,469,974 24,745,510 22,113,022 22,113,022
Property and equipment, net....................... 923,559 2,121,915 2,987,163 2,987,163
Long-term investment in sales-type leases......... 209,074 1,721,825 2,889,970 2,889,970
------------ ------------ ------------ ------------
Total assets............................. $ 7,602,607 $ 28,589,250 $ 27,990,155 $ 27,990,155
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Working capital line of credit.................. $ -- $ -- $ 2,059,616 $ 2,059,616
Current portion of capital lease obligations.... 154,906 126,775 30,731 30,731
Current portion of long-term debt............... -- 720,670 1,093,224 1,093,224
Accounts payable................................ 1,119,055 891,943 1,923,201 1,923,201
Accrued liabilities............................. 1,500,591 3,663,407 4,813,147 4,813,147
------------ ------------ ------------ ------------
Total current liabilities................ 2,774,552 5,402,795 9,919,919 9,919,919
------------ ------------ ------------ ------------
Deferred revenue.................................. 643,000 2,056,893 1,853,611 1,853,611
Long-term debt obligations........................ -- 1,441,339 1,966,643 1,966,643
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
October 2, 1999, respectively (liquidation
preference -- $58,962,591 at October 2, 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 1,791,134
shares issued and outstanding at December 31,
1997 and 1998, and October 2, 1999,
respectively (pro forma -- 60,000,000 shares
authorized, 12,858,372 shares issued and
outstanding).................................. 15,480 17,787 17,911 128,583
Additional paid-in capital...................... 338,970 933,467 1,212,322 68,662,015
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) (316,779) (316,779)
Accumulated other comprehensive income(loss).... 3,098 3,641 (767) (767)
Accumulated deficit............................. (34,742,664) (48,349,897) (54,064,353) (54,064,353)
------------ ------------ ------------ ------------
Total stockholders' equity............... 4,067,375 19,688,223 14,249,982 14,249,982
------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity................................. $ 7,602,607 $ 28,589,250 $ 27,990,155 $ 27,990,155
============ ============ ============ ============
</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)......................... -- -- -- 12,442 124
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)......................... 10,716 -- -- -- --
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)......................... -- 10,840
Payments on notes receivable from employees and
directors (unaudited)............................. -- 859
</TABLE>

<S> <C> <C> <C> <C> <C>
Deferred compensation related to stock options
(unaudited).......................................... -- -- -- -- --
Amortization of deferred compensation related to
stock options (unaudited)......................... -- -- -- -- --
Comprehensive loss:
Net loss (unaudited)................................ (5,714,456) -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable
securities(unaudited)........................... (4,408) -- -- -- --
------------
Comprehensive loss.................................. $ (5,718,864) -- -- -- --
---------- ----------- --------- ---------
Balance, October 2, 1999 (unaudited)................. 11,067,238 $67,560,365 1,791,134 $ 17,911
========== =========== ========= =========

<S> <C> <C> <C> <C> <C>
Deferred compensation related to stock options
(unaudited).......................................... 268,139 -- -- (268,139) --
Amortization of deferred compensation related to
stock options (unaudited)......................... -- -- -- 268,924 --
Comprehensive loss:
Net loss (unaudited)................................ -- -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable
securities(unaudited)........................... -- -- -- -- (4,408)
Comprehensive loss.................................. -- -- -- -- --
---------- -------- --------- --------- -------
Balance, October 2, 1999 (unaudited)................. $1,212,322 $146,606 $(305,323) $(316,779) $ (767)
========== ======== ========= ========= =======

<S> <C> <C>
Deferred compensation related to stock options
(unaudited).......................................... -- --
Amortization of deferred compensation related to
stock options (unaudited)......................... -- 268,924
Comprehensive loss:
Net loss (unaudited)................................ (5,714,456) (5,714,456)
Other comprehensive loss -
Unrealized loss on marketable
securities(unaudited)........................... -- (4,408)
Comprehensive loss.................................. -- --
------------ -----------
Balance, October 2, 1999 (unaudited)................. $(54,064,353) $14,249,982
============ ===========
</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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------------
----------------------------------------- OCTOBER 3, OCTOBER 2,
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) $(10,458,913) $(5,714,456)
Adjustments to reconcile net loss to net cash
used for operating activities -
Depreciation and amortization.................. 189,378 192,571 623,133 392,126 972,685
Provision for doubtful accounts................ 43,000 14,333 146,500 40,000 152,100
Compensation expense related to stock
options...................................... -- -- 96,338 59,886 268,924
Changes in assets and liabilities -
Increase in accounts receivable.............. (92,990) (437,525) (1,536,272) (1,191,906) (2,242,151)
Decrease (increase) in inventory............. 61,193 763,483 117,290 (369,541) (976,233)
Increase in other current assets............. (60,628) (108,343) (70,811) (158,287) (198,877)
Increase in investment in sales-type
leases..................................... -- (345,466) (2,152,634) (1,711,799) (1,911,754)
Increase (decrease) in accounts payable...... 493,575 459,778 (227,112) (793,515) 1,031,258
(Decrease) increase in accrued liabilities... (4,385) 776,260 2,162,816 1,986,204 1,149,740
Increase (decrease) in deferred revenue...... 814,717 (180,000) 1,413,893 1,377,186 (203,282)
----------- ------------ ------------ ------------ -----------
Net cash used for operating activities..... (3,952,578) (8,750,764) (13,034,092) (10,828,559) (7,672,046)
----------- ------------ ------------ ------------ -----------
Cash flows from investing activities:
Acquisition of property and equipment............ (622,384) (958,271) (1,821,489) (1,561,331) (1,837,933)
Purchases of marketable securities............... (23,953,144) (65,379,625) (42,947,415) (38,957,167) (1,810,895)
Proceeds from sales of marketable securities..... 24,045,377 61,647,164 43,410,084 39,850,760 4,770,481
----------- ------------ ------------ ------------ -----------
Net cash (used for) provided by
investing activities..................... (530,151) (4,690,732) (1,358,820) (667,738) 1,121,653
----------- ------------ ------------ ------------ -----------
Cash flows from financing activities:
Proceeds from working capital line of credit..... -- -- -- 1,300,000 2,059,616
Principal payments on capital lease
obligations.................................... (287,616) (427,558) (145,811) (110,003) (96,044)
Proceeds from sale leaseback of property and
equipment...................................... 330,291 -- -- -- --
Proceeds from equipment loan..................... -- -- 2,162,009 1,908,927 --
Payments on equipment loan....................... -- -- -- -- (540,502)
Proceeds from sale of investment in sales-type
leases......................................... -- -- -- -- 1,447,130
Payments on debt related to investment in
sales-type leases.............................. -- -- -- -- (8,768)
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........... -- 48,841 119,901 117,932 10,840
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 14,821,069 2,873,131
----------- ------------ ------------ ------------ -----------
Net (decrease) increase in cash and cash
equivalents...................................... (1,003,155) (985,413) 16,754,486 3,324,772 (3,677,262)
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 $ 3,693,279 $13,445,731
=========== ============ ============ ============ ===========
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 63,084 $ 78,027 $ 94,137 $ 42,979 $ 145,160
=========== ============ ============ ============ ===========
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
$5,714,456 for the nine month period ended October 2, 1999. At October 2, 1999,
the Company had an accumulated deficit of $54,064,353. 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 October 2, 1999,
statements of operations and cash flows for the nine months ended October 3,
1998 and October 2, 1999 and the statement of stockholders' equity for the nine
months ended October 2, 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 nine months ended October 2, 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 nine months ended October 3, 1998 relate to the period from
January 1, 1998 to October 3, 1998, and all references to the nine months ended
October 2, 1999 relate to the period from January 1, 1999 to October 2, 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 October 2, 1999
reflects the conversion of all series of preferred stock into 11,067,238 shares
of common stock as if the conversion occurred on October 2, 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 October 2, 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 October 2, 1999, accounts receivable from
one of the Company's international distributors accounted for approximately 19%,
14% and less than 1%, 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 nine months ended October 3, 1998 and the nine months
ended October 2, 1999, sales to this customer accounted for approximately 14%
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,
---------------------- OCTOBER 2,
1997 1998 1999
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash.............................................. $131,757 $11,122,993 $ 9,314,131
Certificates of deposit........................... -- 6,000,000 4,131,600
U.S. Government debt securities................... 236,750 -- --
-------- ----------- -----------
$368,507 $17,122,993 $13,445,731
======== =========== ===========
</TABLE>

Available-for-sale securities included in marketable securities at December
31, 1997 and 1998 and October 2, 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
========== ====== ===== ==========
October 2, 1999 -- (unaudited)
U.S. Government debt securities.................. $1,000,000 $ -- $ -- $1,000,000
Corporate debt securities........................ 187,107 -- (767) 186,340
---------- ------ ----- ----------
$1,187,107 $ -- $(767) $1,186,340
========== ====== ===== ==========
</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 October 2, 1999, by contractual maturity, were as follows:

<TABLE>
<CAPTION>
ESTIMATED
FAIR
COST VALUE
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Maturing in one year or less................................ $ 187,107 $ 186,340
Maturing in one to two years................................ 1,000,000 1,000,000
---------- ----------
$1,187,107 $1,186,340
========== ==========
</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,
---------------------- OCTOBER 2,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Total minimum lease payments
receivable............................ $505,474 $3,300,533 $5,621,755
Less -- unearned interest............... 160,008 802,433 1,211,901
-------- ---------- ----------
Net investment in sales-type leases..... 345,466 2,498,100 4,409,854
Less -- current portion............... 136,392 776,275 1,519,884
-------- ---------- ----------
$209,074 $1,721,825 $2,889,970
======== ========== ==========
</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,
-------------------- OCTOBER 2,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials..................................... $322,636 $165,682 $ 604,109
Work-in-progress.................................. -- -- 75,350
Finished goods.................................... 64,843 104,507 566,963
-------- -------- ----------
$387,479 $270,189 $1,246,422
======== ======== ==========
</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 ------------------------ OCTOBER 2,
IN YEARS 1997 1998 1999
---------------------------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer equipment........... 3 $ 707,071 $1,626,676 $2,079,758
Construction in progress..... -- 490,194 98,866 983,929
Machinery and equipment...... 3 to 5 152,735 887,046 1,268,605
Furniture and fixtures....... 3 133,114 308,656 365,513
Shorter of the life of the
lease or the estimated
Leasehold improvements....... remaining useful life 1,485 273,313 298,198
---------- ---------- ----------
1,484,599 3,194,557 4,996,003
Accumulated depreciation and
amortization............... (561,040) (1,072,642) (2,008,840)
---------- ---------- ----------
$ 923,559 $2,121,915 $2,987,163
========== ========== ==========
</TABLE>

At December 31, 1997, 1998 and October 2, 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 $11,723 at
October 2, 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.

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,
------------------------- OCTOBER 2,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Series A-1 convertible preferred stock; 406,898 shares
issued and outstanding, at issuance price, net of
issuance costs........................................ $18,384,462 $18,384,462 $18,384,462
Series B-1 convertible preferred stock; 3,800,428 shares
issued and outstanding, at issuance price, net of
issuance costs.......................................... 7,506,808 7,506,808 7,506,808
Series C convertible preferred stock; 3,439,949 shares
issued and outstanding, at issuance price, net of
issuance costs........................................ 12,834,800 12,834,800 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

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

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

exercisable with an exercise price of $12.50 per share and expire on the earlier
of the third anniversary of the 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 October 2, 1999, the Company has reserved 11,067,238 shares of common
stock for issuance upon conversion of the preferred stock, 3,862,290 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 October 2, 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 October 2,
1999, 1,696,152 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)....................................... 383,510 6.00-11.05 6.80
Exercised (unaudited)..................................... (12,442) .20-4.20 .87
Canceled (unaudited)...................................... (41,946) .375-11.05 4.51
---------- ----------- -----
Outstanding, October 2, 1999 (unaudited).................... 2,166,138 $.20-$45.83 $3.07
========== =========== =====
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, October 2, 1999 (unaudited).................... 866,088 $.20-$45.83 $2.00
</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 October 2, 1999, stock options to purchase 574,955 shares of
common stock were granted with an exercise price of $10.20 per share, stock
options to purchase 7,327 shares of common stock with exercise prices ranging
from $.20 to $6.00 per share were exercised and stock options to purchase 18,865
shares of common stock with exercise prices ranging from $.80 to $11.05 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 October 2, 1999, an aggregate of
164,150 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 October 2, 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 6.59 168,821
0.375 99,604 7.64 59,157
0.80 587,499 8.03 282,590
2.80 185,257 8.53 85,784
4.20 737,662 8.17 230,795
6.00 218,439 9.34 36,221
7.50 128,218 8.26 2,500
11.05 19,017 9.80 --
16.67 207 .88 207
45.83 13 4.5 13
--------- ----- -------
$0.20-$45.83 2,166,138 8.14 866,088
</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 nine months ended October 2, 1999, the Company recorded
additional deferred compensation of approximately $252,000 and $268,100,
respectively, which represents the estimated fair value of stock options granted
to non-employees. The remaining unamortized deferred compensation of $316,779 at
October 2, 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 nine months ended October 3, 1998 and October 2, 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------------
------------------------------------ OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----------- ----------- -------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Risk-free interest rate............... 6.4%-6.8% 6.5%-6.75% 5.47% 4.75%-6.75% 4.34%-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 $1.91 $3.78
</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 October 2, 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 October 2, 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.

1999 EMPLOYEE STOCK PURCHASE PLAN

On October 5, 1999, the Company's 1999 Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Board of Directors, subject to stockholder
approval. The Purchase Plan allows eligible employees the right to purchase
shares of common stock at the lower of 85% of the closing price per share of
common stock on the first or last day of an offering period. Each offering
period is six months. An aggregate of 300,000 shares of common stock have been
reserved for issuance pursuant to the Purchase Plan.

(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.

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

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

(11) DISTRIBUTION AND LICENSING AGREEMENTS

The Company has entered into various distribution, licensing and royalty
agreements relating to its products with distributors covering both the domestic
and the international markets. These agreements have terms ranging from two 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 October 2, 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 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 seven-year lease of approximately 60,000
square feet of development, production and administrative space beginning in the
first quarter of 2000.

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 October 2, 1999 was
approximately $105,000, $138,000 and $133,000, 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,
------------------------ OCTOBER 2,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and payroll-related............ $ 375,121 $1,220,000 $1,958,506
Clinical studies....................... 75,000 254,000 284,000
Warranty............................... 130,000 249,037 399,297
Other.................................. 920,470 1,940,370 2,171,344
---------- ---------- ----------
$1,500,591 $3,663,407 $4,813,147
========== ========== ==========
</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, NINE MONTHS ENDED
------------------------------------- ---------------------------------
1996 1997 1998 OCTOBER 3, 1998 OCTOBER 2, 1999
---------- ---------- ----------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
GEOGRAPHIC AREA BY DESTINATION
Domestic...................... $ 699,362 $1,881,409 $10,296,424 $6,745,010 $17,135,698
International............... 689,426 1,186,164 941,781 757,404 1,701,963
---------- ---------- ----------- ---------- -----------
$1,388,788 $3,067,573 $11,238,205 $7,502,414 $18,837,661
========== ========== =========== ========== ===========
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------
------------------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
GEOGRAPHIC AREA BY DESTINATION
Domestic......................... 51% 61% 92% 90% 91%
International.................. 49 39 8 10 9
--- --- --- --- ---
100% 100% 100% 100% 100%
--- --- --- --- ---
</TABLE>

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

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

(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
Nine months ended October 2, 1999 (unaudited)....... 200,000 152,100 5,100 347,000
</TABLE>

(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 October 2, 1999, $2,059,616 was
outstanding under the working capital portion of the loan agreement and based on
the Company's outstanding accounts receivable at October 2, 1999 there was no
additional availability under the working capital portion of the loan agreement.
Subsequent to October 2, 1999, the borrowings under the working capital portion
of the loan agreement were repaid.

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 October 2, 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 October 2, 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 under which it can sell
some of its existing and future investments in sales-type leases to a
third-party finance company. In August and September 1999, the Company sold
approximately $1.4 million of investments in sales-type leases. In accordance
with Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
the proceeds from these sales are classified as debt. Payments on the
outstanding principal under this debt match the timing of the payments due on
the underlying investments in sales-type leases.

(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]

[Photograph depicting an anesthesia provider standing next to a person
being monitored with Aspect's BIS system and another person in the
background reviewing x-rays.]

The following words appear to the right of the photograph:

Clinical trails 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, and

- improvements in the quality of recovery.

[Photograph depicting a woman sitting in a chair.]

The following words appear to the left of the photograph:

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.

[Aspect 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........................................ $ 12,405
NASD filing fee........................................ 4,985
Nasdaq National Market listing fee..................... 95,000
Blue Sky fees and expenses............................. 15,000
Transfer Agent and Registrar fees...................... 2,000
Accounting fees and expenses........................... 250,000
Legal fees and expenses................................ 350,000
Printing and mailing expenses.......................... 150,000
Miscellaneous.......................................... 20,610
--------
Total............................................. $900,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

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

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

Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination 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 October 2, 1999, options to purchase 1,698,401 shares of
Common Stock had been exercised for an aggregate consideration of $631,985 and
options

II-2
<PAGE> 94

to purchase 1,549,595 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
October 2, 1999, options to purchase 729 shares of Common Stock had been
exercised for an aggregate consideration of $3,062 and options to purchase
561,543 shares of Common Stock, at a weighted average exercise price of $5.74
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 October 2, 1999, options to purchase 5,000 shares of Common Stock
had been exercised for an aggregate consideration of $14,000 and options to
purchase 55,000 shares of Common Stock, at a weighted average exercise price of
$4.94 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:

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 nine months ended October 2,
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. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Natick,
Massachusetts on December 8, 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. 2 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 December 8, 1999
- --------------------------------------------------- Officer and Director
Nassib G. Chamoun (Principal Executive
Officer)

/s/ J. BRECKENRIDGE EAGLE* Chairman of the Board of December 8, 1999
- --------------------------------------------------- Directors
J. Breckenridge Eagle

/s/ J. NEAL ARMSTRONG Vice President and Chief December 8, 1999
- --------------------------------------------------- Financial Officer (Principal
J. Neal Armstrong Financial and Accounting
Officer)

/s/ BOUDEWIJN L.P.M. BOLLEN* Director December 8, 1999
- ---------------------------------------------------
Boudewijn L.P.M. Bollen

/s/ STEPHEN E. COIT* Director December 8, 1999
- ---------------------------------------------------
Stephen E. Coit

/s/ EDWIN M. KANIA* Director December 8, 1999
- ---------------------------------------------------
Edwin M. Kania

/s/ LESTER J. LLOYD* Director December 8, 1999
- ---------------------------------------------------
Lester J. Lloyd

/s/ TERRANCE MCGUIRE* Director December 8, 1999
- ---------------------------------------------------
Terrance McGuire

/s/ DONALD STANSKI* Director December 8, 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 nine months ended October 2,
1999.
</TABLE>

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

** Previously filed.

<PAGE> 1

EXHIBIT 3.2

RESTATED

CERTIFICATE OF INCORPORATION

ASPECT MEDICAL SYSTEMS, INC.

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

1. The Corporation filed its original Certificate of Incorporation with
the Secretary of State of the State of Delaware on October 14, 1987 under the
name "Biometrak Corporation". The Certificate of Incorporation was amended by a
Certificate of Amendment of Certificate of Incorporation filed on February 18,
1988, a Certificate of Amendment of Certificate of Incorporation filed on April
8, 1988, a Certificate of Amendment of Certificate of Incorporation filed on
February 8, 1989, a Certificate of Amendment of Certificate of Incorporation
filed on November 21, 1989, a Certificate of Amendment of Certificate of
Incorporation filed on July 11, 1990, a Certificate of Amendment of Certificate
of Incorporation filed on September 19, 1991, a Certificate of Amendment of
Certificate of Incorporation filed on March 12, 1992, a Certificate of Amendment
of Certificate of Incorporation filed on May 21, 1993 and a Certificate of
Amendment of Certificate of Incorporation filed on August 8, 1994. A Restated
Certificate of Incorporation was filed with the Secretary of State of the State
of

<PAGE> 2

Delaware on November 1, 1995, which Restated Certificate of Incorporation was
amended by a Certificate of Amendment of Restated Certificate of Incorporation
filed on June 27, 1996. A Restated Certificate of Incorporation was filed with
the Secretary of State of the State of Delaware on February 25, 1997. A Restated
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on February 13, 1998, which Restated Certificate of Amendment was
amended by a Certificate of Amendment of Restated Certificate of Incorporation
filed on August, 18, 1998. A Restated Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on December 17, 1998, which
Restated Certificate of Incorporation was amended by a Certificate of Amendment
to the Restated Certificate of Incorporation filed on _____________, 1999.

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

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

-2-

<PAGE> 3

FIRST. The name of the Corporation is:

Aspect Medical Systems, Inc.

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

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

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

FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Sixty Five Million (65,000,000)
shares, consisting of (i) Sixty Million (60,000,000) shares of Common Stock,
$.01 par value per share ("Common Stock"), and (ii) Five Million (5,000,000)
shares of Preferred Stock, $.01 par value per share ("Preferred Stock"), which
may be issued from time to time in one or more series as set forth in Part B of
this Article FOURTH.

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

A. COMMON STOCK.

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

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

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

-3-

<PAGE> 4

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

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

B. PREFERRED STOCK.

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

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

FIFTH. The Corporation shall have a perpetual existence.

-4-

<PAGE> 5

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

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

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

NINTH. 1. ACTION, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF
THE CORPORATION. The Corporation shall indemnify each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or

-5-

<PAGE> 6

other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 6
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation.

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

3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the
other provisions of this Article, to the extent that an Indemnitee has been
successful, on

-6-

<PAGE> 7

the merits or otherwise, in defense of any action, suit or proceeding referred
to in Sections 1 and 2 of this Article, or in defense of any claim, issue or
matter therein, or on appeal from any such action, suit or proceeding, he shall
be indemnified against all expenses (including attorneys' fees) actually and
reasonably incurred by him or on his behalf in connection therewith. Without
limiting the foregoing, if any action, suit or proceeding is disposed of, on the
merits or otherwise (including a disposition without prejudice), without (i) the
disposition being adverse to the Indemnitee, (ii) an adjudication that the
Indemnitee was liable to the Corporation, (iii) a plea of guilty or NOLO
CONTENDERE by the Indemnitee, (iv) an adjudication that the Indemnitee did not
act in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Corporation, and (v) with respect to any criminal
proceeding, an adjudication that the Indemnitee had reasonable cause to believe
his conduct was unlawful, the Indemnitee shall be considered for the purposes
hereof to have been wholly successful with respect thereto.

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

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<PAGE> 8

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

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

7. REMEDIES. The right to indemnification or advances as granted by this
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise provided by law, the burden of proving that the
Indemnitee is not entitled to

-8-

<PAGE> 9

indemnification or advancement of expenses under this Article shall be on the
Corporation. Neither the failure of the Corporation to have made a determination
prior to the commencement of such action that indemnification is proper in the
circumstances because the Indemnitee has met the applicable standard of conduct,
nor an actual determination by the Corporation pursuant to Section 6 that the
Indemnitee has not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that the Indemnitee has not met the
applicable standard of conduct. The Indemnitee's expenses (including attorneys'
fees) incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the Corporation.

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

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

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

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<PAGE> 10

the portion of such expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement to which the Indemnitee is entitled.

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

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

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

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

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

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

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<PAGE> 11

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

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

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

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

4. TERMS OF OFFICE. Each director (other than a director elected to fill
a vacancy in accordance with Section 8) shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director was elected; PROVIDED, that each initial director in Class I shall
serve for a term ending on the date of the annual meeting in 2000; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting in 2001; and each initial director in Class III shall serve for a term
ending on the date of the annual meeting in 2002; and PROVIDED, FURTHER, that
the term of each director shall be subject to the election and qualification of
his successor and to his earlier death, resignation or removal.

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

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<PAGE> 12

classes whose terms of office are to expire at the earliest dates following such
allocation, unless otherwise provided from time to time by resolution adopted by
the Board of Directors.

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

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

8. VACANCIES. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the board, shall be filled
only by a vote of a majority of the directors then in office, although less than
a quorum, or by a sole remaining director. A director elected to fill a vacancy
shall be elected to hold office until the next election of the class for which
such director shall have been chosen, subject to the election and qualification
of his successor and to his earlier death, resignation or removal.

9. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the Bylaws of the Corporation.

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

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<PAGE> 13

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

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

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<PAGE> 14

IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Restated Certificate of Incorporation to be signed by
its President and Chief Executive Officer this ____ day of ___________, 1999.

ASPECT MEDICAL SYSTEMS, INC.

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

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<PAGE> 1

EXHIBIT 3.4

AMENDED AND RESTATED BYLAWS

ASPECT MEDICAL SYSTEMS, INC.

<PAGE> 2

AMENDED AND RESTATED BYLAWS

TABLE OF CONTENTS

<TABLE>
<S> <C>
ARTICLE 1 - Stockholders....................................................................................1
1.1 Place of Meetings...............................................................................1
1.2 Annual Meeting..................................................................................1
1.3 Special Meetings................................................................................1
1.4 Notice of Meetings..............................................................................1
1.5 Voting List.....................................................................................2
1.6 Quorum..........................................................................................2
1.7 Adjournments....................................................................................2
1.8 Voting and Proxies..............................................................................2
1.9 Action at Meeting...............................................................................3
1.10 Nomination of Directors.........................................................................3
1.11 Notice of Business at Annual Meetings...........................................................4
1.12 Action without Meeting..........................................................................5
1.13 Organization....................................................................................5

ARTICLE 2 - Directors.......................................................................................5
2.1 General Powers..................................................................................5
2.2 Number; Election and Qualification..............................................................5
2.3 Classes of Directors............................................................................6
2.4 Terms of Office.................................................................................6
2.5 Allocation of Directors Among Classes in the Event of Increases or
Decreases in the Number of Directors............................................................6
2.6 Vacancies.......................................................................................6
2.7 Resignation.....................................................................................7
2.8 Regular Meetings................................................................................7
2.9 Special Meetings................................................................................7
2.10 Notice of Special Meetings......................................................................7
2.11 Meetings by Telephone Conference Calls..........................................................7
2.12 Quorum..........................................................................................7
2.13 Action at Meeting...............................................................................8
2.14 Action by Consent...............................................................................8
2.15 Removal.........................................................................................8
2.16 Committees......................................................................................8
2.17 Compensation of Directors.......................................................................8
</TABLE>

<PAGE> 3

<TABLE>
<S> <C>
ARTICLE 3 - Officers........................................................................................8
3.1 Enumeration.....................................................................................9
3.2 Election........................................................................................9
3.3 Qualification...................................................................................9
3.4 Tenure..........................................................................................9
3.5 Resignation and Removal.........................................................................9
3.6 Vacancies.......................................................................................9
3.7 Chairman of the Board and Vice Chairman of the Board............................................9
3.8 President......................................................................................10
3.9 Vice Presidents................................................................................10
3.10 Secretary and Assistant Secretaries............................................................10
3.11 Treasurer and Assistant Treasurers.............................................................11

ARTICLE 4 - Capital Stock..................................................................................11
4.1 Issuance of Stock..............................................................................11
4.2 Certificates of Stock..........................................................................11
4.3 Transfers......................................................................................12
4.4 Lost, Stolen or Destroyed Certificates.........................................................12
4.5 Record Date....................................................................................12

ARTICLE 5 - General Provisions.............................................................................13
5.1 Fiscal Year....................................................................................13
5.2 Corporate Seal.................................................................................13
5.3 Waiver of Notice...............................................................................13
5.4 Voting of Securities...........................................................................13
5.5 Evidence of Authority..........................................................................13
5.6 Certificate of Incorporation...................................................................13
5.7 Transactions with Interested Parties...........................................................13
5.8 Severability...................................................................................14
5.9 Pronouns.......................................................................................14

ARTICLE 6 - Amendments.....................................................................................14
6.1 By the Board of Directors......................................................................14
6.2 By the Stockholders............................................................................14
6.3 Certain Provisions.............................................................................15
</TABLE>

<PAGE> 4

AMENDED AND RESTATED

BY-LAWS

ASPECT MEDICAL SYSTEMS, INC.

ARTICLE 1 - STOCKHOLDERS

1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors, the Chairman of the Board or the
President or, if not so designated, at the registered office of the corporation.

1.2 ANNUAL MEETING. The annual meeting of stockholders for the election
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors, the Chairman of the Board or the President (which date shall not be a
legal holiday in the place where the meeting is to be held) at the time and
place to be fixed by the Board of Directors, the Chairman of the Board or the
President and stated in the notice of the meeting. If no annual meeting is held
in accordance with the foregoing provisions, the Board of Directors shall cause
the meeting to be held as soon thereafter as convenient. If no annual meeting is
held in accordance with the foregoing provisions, a special meeting may be held
in lieu of the annual meeting, and any action taken at that special meeting
shall have the same effect as if it had been taken at the annual meeting, and in
such case all references in these By-Laws to the annual meeting of the
stockholders shall be deemed to refer to such special meeting.

1.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at
any time only by the Chairman of the Board of Directors, the Chief Executive
Officer (or if there is no Chief Executive Officer, the President) or the Board
of Directors. Business transacted at any special meeting of stockholders shall
be limited to matters relating to the purpose or purposes stated in the notice
of meeting.

1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than ten nor more than 60 days before the date of the meeting to
each stockholder entitled to vote

<PAGE> 5

at such meeting. The notices of all meetings shall state the place, date and
hour of the meeting. The notice of a special meeting shall state, in addition,
the purpose or purposes for which the meeting is called. If mailed, notice is
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at the stockholder's address as it appears on the records of the
corporation.

1.5 VOTING LIST. The officer who has charge of the stock ledger of the
corporation shall prepare, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, at a place within the city where the meeting is
to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time of the meeting, and may be inspected by any
stockholder who is present.

1.6 QUORUM. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.

1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any
other time and to any other place at which a meeting of stockholders may be held
under these By-Laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.

1.8 VOTING AND PROXIES. Each stockholder shall have one vote for each
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
by law, the Certificate of Incorporation or these By-Laws. Each stockholder of
record entitled to vote at a meeting of stockholders, or to express consent or
dissent to corporate action in writing without a meeting, may vote or express
such consent or dissent in person or may authorize another person or persons to
vote or act for him by proxy executed in writing (or in such other manner
permitted by the General Corporation Law of the State of Delaware) by the
stockholder or his authorized agent and delivered to the Secretary of the
corporation. No such proxy shall

<PAGE> 6

be voted or acted upon after three years from the date of its execution, unless
the proxy expressly provides for a longer period.

1.9 ACTION AT MEETING. When a quorum is present at any meeting, the
holders of a majority of the stock present or represented and voting on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of a majority of the
stock of that class present or represented and voting on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. Any election by stockholders shall be determined
by a plurality of the votes cast by the stockholders entitled to vote at the
election.

1.10 NOMINATION OF DIRECTORS. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors. Nomination for election to the Board of Directors of the corporation
at a meeting of stockholders may be made by the Board of Directors or by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting who complies with the notice procedures set forth in this Section
1.10. Such nominations, other than those made by or on behalf of the Board of
Directors, shall be made by timely notice in writing to the Secretary of the
corporation. To be timely, a stockholder's notice must be delivered to, or
mailed and received by, the Secretary at the principal executive offices of the
corporation not less than 70 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that (i)
in the event that the date of the annual meeting is advanced by more than 20
days, or delayed by more than 70 days, from such anniversary date, notice by the
stockholder to be timely must be so delivered or received not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of the seventieth day prior to such annual meeting or the
tenth day following the day on which notice of the date of such annual meeting
was mailed or public disclosure of the date of such annual meeting was made,
whichever first occurs, and (ii) with respect to the annual meeting of
stockholders of the corporation to be held in the year 2000, to be timely, a
stockholder's notice must be so received not earlier than the ninetieth day
prior to such annual meeting and not later than the close of business on the
later of (A) the sixtieth day prior to such annual meeting and (B) the tenth day
following the day on which notice of the date of such annual meeting was mailed
or public disclosure of the date of such annual meeting was made, whichever
first occurs. A stockholder's notice to the Secretary shall set forth (a) as to
each proposed nominee (i) the name, age, business address and, if known,
residence address of each such nominee, (ii) the principal occupation or
employment of each such nominee, (iii) the number of shares of stock of the
corporation which are beneficially owned by each such nominee, and (iv) any
other information concerning the nominee that must be disclosed as to nominees
in proxy solicitations pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to be named as
a nominee and to serve

<PAGE> 7

as a director if elected); and (b) as to the stockholder giving the notice (i)
the name and address, as they appear on the corporation's books, of such
stockholder and (ii) the class and number of shares of the corporation which are
beneficially owned by such stockholder. In addition, to be effective, the
stockholder's notice must be accompanied by the written consent of the proposed
nominee to serve as a director if elected. The corporation may require any
proposed nominee to furnish such other information as may reasonably be required
by the corporation to determine the eligibility of such proposed nominee to
serve as a director of the corporation.

The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.

1.11 NOTICE OF BUSINESS AT ANNUAL MEETINGS. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
brought before the meeting by or at the direction of the Board of Directors, or
(c) otherwise properly brought before an annual meeting by a stockholder. For
business to be properly brought before an annual meeting by a stockholder, if
such business relates to the election of directors of the corporation, the
procedures in Section 1.10 must be complied with. If such business relates to
any other matter, the stockholder must have given timely notice thereof in
writing to the Secretary. To be timely, a stockholder's notice must be delivered
to, or mailed and received by, the Secretary at the principal executive offices
of the corporation not less than 70 days nor more than 90 days prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that (i) in the event that the date of the annual meeting is advanced by more
than 20 days, or delayed by more than 70 days, from such anniversary date,
notice by the stockholder to be timely must be so delivered or received not
earlier than the ninetieth day prior to such annual meeting and not later than
the close of business on the later of the seventieth day prior to such annual
meeting or the tenth day following the day on which notice of the date of such
annual meeting was mailed or public disclosure of the date of such annual
meeting was made, whichever first occurs, and (ii) with respect to the annual
meeting of stockholders of the corporation to be held in the year 2000, to be
timely, a stockholder's notice must be so received not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of (A) the sixtieth day prior to such annual meeting and
(B) the tenth day following the day on which notice of the date of such annual
meeting was mailed or public disclosure of the date of such annual meeting was
made, whichever first occurs. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual

<PAGE> 8

meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in these By-Laws to the contrary, no business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this Section 1.11
and except that any stockholder proposal which complies with Rule 14a-8 of the
proxy rules (or any successor provision) promulgated under the Securities
Exchange Act of 1934, as amended, and is to be included in the corporation's
proxy statement for an annual meeting of stockholders shall be deemed to comply
with the requirements of this Section 1.11.

The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 1.11, and if he should so
determine, the chairman shall so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.

1.12 ACTION WITHOUT MEETING. Stockholders of the corporation may not
take any action by written consent in lieu of a meeting.

1.13 ORGANIZATION. The Chairman of the Board, or in his absence the
Vice Chairman of the Board designated by the Chairman of the Board, or the
President, in the order named, shall call meetings of the stockholders to order,
and shall act as chairman of such meeting; provided, however, that the Board of
Directors may appoint any stockholder to act as chairman of any meeting in the
absence of the Chairman of the Board. The Secretary of the corporation shall act
as secretary at all meetings of the stockholders; but in the absence of the
Secretary at any meeting of the stockholders, the presiding officer may appoint
any person to act as secretary of the meeting.

ARTICLE 2 - DIRECTORS

2.1 GENERAL POWERS. The business and affairs of the corporation shall
be managed by or under the direction of a Board of Directors, who may exercise
all of the powers of the corporation except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws. In the event of a vacancy in the
Board of Directors, the remaining directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.

<PAGE> 9

2.2 NUMBER; ELECTION AND QUALIFICATION. The number of directors which
shall constitute the whole Board of Directors shall be determined by resolution
of the Board of Directors, but in no event shall be less than three. The number
of directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one or more
directors. The directors shall be elected at the annual meeting of stockholders
by such stockholders as have the right to vote on such election.
Directors need not be stockholders of the corporation.

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

2.4 TERMS OF OFFICE. Each director (other than a director elected to
fill a vacancy in accordance with Section 2.6) shall serve for a term ending on
the date of the third annual meeting following the annual meeting at which such
director was elected; provided, that each initial director in Class I shall
serve for a term ending on the date of the annual meeting of stockholders in
2000; each initial director in Class II shall serve for a term ending on the
date of the annual meeting of stockholders in 2001; and each initial director in
Class III shall serve for a term ending on the date of the annual meeting of
stockholders in 2002; and provided further, that the term of each director shall
be subject to the election and qualification of his successor and to his earlier
death, resignation or removal.

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

<PAGE> 10

2.6 VACANCIES. Any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the size of the
Board, shall be filled only by vote of a majority of the directors then in
office, although less than a quorum, or by a sole remaining director. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office, and a director chosen to fill a position resulting from
an increase in the number of directors shall hold office until the next election
of the class for which such director shall have been chosen, subject to the
election and qualification of his successor and to his earlier death,
resignation or removal.

2.7 RESIGNATION. Any director may resign by delivering his written
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.

2.8 REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.

2.9 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President, two or more directors, or by
one director in the event that there is only a single director in office.

2.10 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 24 hours in advance of the meeting, (ii) by sending a telegram, telecopy,
telex or electronic mail message, or delivering written notice by hand, to his
last known business or home address at least 24 hours in advance of the meeting,
or (iii) by mailing written notice to his last known business or home address at
least 72 hours in advance of the meeting. A notice or waiver of notice of a
meeting of the Board of Directors need not specify the purposes of the meeting.

2.11 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members
of any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.

<PAGE> 11

2.12 QUORUM. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.

2.13 ACTION AT MEETING. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these By-Laws.

2.14 ACTION BY CONSENT. Any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.

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

2.16 COMMITTEES. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the corporation
and may authorize the seal of the corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine, any committee may make rules for the conduct
of its business, but unless otherwise provided by the directors or in such
rules,

<PAGE> 12

its business shall be conducted as nearly as possible in the same manner as is
provided in these By-laws for the Board of Directors.

2.17 COMPENSATION OF DIRECTORS. Directors may be paid such compensation
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.

ARTICLE 3 - OFFICERS

3.1 ENUMERATION. The officers of the corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.

3.2 ELECTION. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.

3.3 QUALIFICATION. No officer need be a stockholder. Any two or more
offices may be held by the same person.

3.4 TENURE. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.

3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his
or her written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.

Any officer may be removed at any time, with or without cause, by vote
of a majority of the entire number of directors then in office.

<PAGE> 13

Except as the Board of Directors may otherwise determine, no officer
who resigns or is removed shall have any right to any compensation as an officer
for any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the year
or otherwise, unless such compensation is expressly provided in a duly
authorized written agreement with the corporation.

3.6 VACANCIES. The Board of Directors may fill any vacancy occurring in
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.

3.7 CHAIRMAN OF THE BOARD AND VICE CHAIRMAN OF THE BOARD. The Board of
Directors may appoint a Chairman of the Board. If the Board of Directors
appoints a Chairman of the Board, he shall perform such duties and possess such
powers as are assigned to him by the Board of Directors. Unless otherwise
provided by the Board of Directors, he shall preside at all meetings of the
stockholders and at all meetings of the Board of Directors. If the Board of
Directors appoints a Vice Chairman of the Board, he shall, in the absence or
disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be vested in him by the Board
of Directors.

3.8 PRESIDENT. The President shall, subject to the direction of the
Board of Directors, have general charge and supervision of the business of the
corporation. Unless the Board of Directors has designated the Chairman of the
Board or another officer as Chief Executive Officer, the President shall be the
Chief Executive Officer of the corporation. The President shall perform such
other duties and shall have such other powers as the Board of Directors may from
time to time prescribe.

3.9 VICE PRESIDENTS. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.

<PAGE> 14

3.10 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.

Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.

In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.

3.11 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall perform
such duties and shall have such powers as may from time to time be assigned to
him or her by the Board of Directors or the President. In addition, the
Treasurer shall perform such duties and have such powers as are incident to the
office of treasurer, including without limitation the duty and power to keep and
be responsible for all funds and securities of the corporation, to deposit funds
of the corporation in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.

The Assistant Treasurers shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.

3.12 SALARIES. Officers of the corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.

<PAGE> 15

ARTICLE 4 - CAPITAL STOCK

4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.

4.2 CERTIFICATES OF STOCK. Every holder of stock of the corporation
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him or her in the corporation. Each such certificate shall be signed
by, or in the name of the corporation by, the Chairman or Vice Chairman, if any,
of the Board of Directors, or the President or a Vice President, and the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary
of the corporation. Any or all of the signatures on the certificate may be a
facsimile.

Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
By-Laws, applicable securities laws or any agreement among any number of
stockholders or among such holders and the corporation shall have conspicuously
noted on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction.

4.3 TRANSFERS. Except as otherwise established by rules and regulations
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-Laws, the corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-Laws.

4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The corporation may issue
a new certificate of stock in place of any previously issued certificate alleged
to have been lost,

<PAGE> 16

stolen or destroyed, upon such terms and conditions as the Board of Directors
may prescribe, including the presentation of reasonable evidence of such loss,
theft or destruction and the giving of such indemnity as the Board of Directors
may require for the protection of the corporation or any transfer agent or
registrar.

4.5 RECORD DATE. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders, or entitled to receive payment of any
dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than ten days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.

If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating to such purpose.

A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.

ARTICLE 5 - GENERAL PROVISIONS

5.1 FISCAL YEAR. Except as from time to time otherwise designated by
the Board of Directors, the fiscal year of the corporation shall begin on the
first day of January in each year and end on the last day of December in each
year.

5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall
be approved by the Board of Directors.

5.3 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.

<PAGE> 17

5.4 VOTING OF SECURITIES. Except as the directors may otherwise
designate, the President or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.

5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.

5.6 CERTIFICATE OF INCORPORATION. All references in these By-Laws to
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.

5.7 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:

(1) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board or committee in good
faith authorizes the contract or transaction by the affirmative votes
of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum;

(2) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction
is specifically approved in good faith by vote of the stockholders; or

(3) The contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee of the Board of Directors, or the stockholders.

<PAGE> 18

Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.

5.8 SEVERABILITY. Any determination that any provision of these By-Laws
is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.

5.9 PRONOUNS. All pronouns used in these By-Laws shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.

ARTICLE 6 - AMENDMENTS

6.1 BY THE BOARD OF DIRECTORS. These By-Laws may be altered, amended or
repealed or new by-laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.

6.2 BY THE STOCKHOLDERS. Except as otherwise provided in Section 6.3,
these ByLaws may be altered, amended or repealed or new by-laws may be adopted
by the affirmative vote of the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
any regular or special meeting of stockholders, provided notice of such
alteration, amendment, repeal or adoption of new by-laws shall have been stated
in the notice of such regular or special meeting.

6.3 CERTAIN PROVISIONS. Notwithstanding any other provision of law, the
Certificate of Incorporation or these By-Laws, and notwithstanding the fact that
a lesser percentage may be specified by law, the affirmative vote of the holders
of at least seventy-five percent (75%) of the shares of the capital stock of the
corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with Section 1.3,
Section 1.10, Section 1.11, Section 1.12, Section 1.13, Article 2 or Article 6
of these By-Laws.

<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
December 7, 1999

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