ASPEN TECHNOLOGY INC /DE/, 10-K405, 1999-09-28

ASPEN TECHNOLOGY INC /DE/
10-K405, 1999-09-28
COMPUTER PROGRAMMING SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-24786

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ASPEN TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S> <C>
DELAWARE 04-2739697
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

TEN CANAL PARK 02141
CAMBRIDGE, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 949-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT: COMMON STOCK,
.10 PAR VALUE PER SHARE

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

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

As of September 20, 1999, the aggregate market value of Common Stock (the
only outstanding class of common equity of the registrant) held by nonaffiliates
of the registrant was $249,425,489 , based on a total of 24,041,011 shares of
Common Stock held by nonaffiliates and on a closing price of $10.375 for the
Common Stock as reported on the Nasdaq National Market.

As of September 20, 1999, 25,174,385 shares of Common Stock were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended June 30,
1999. Portions of such proxy statement are incorporated by reference in Part III
of this Form 10-K.
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TABLE OF CONTENTS

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PAGE
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PART I
Item 1. Business.................................................... 2
Item 1A. Risk Factors................................................ 16
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 24
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
Item 7A. Quantitative and Qualitative Market Disclosures............. 36
Item 8. Financial Statements and Supplementary Data................. 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 38

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 38
Item 11. Executive Compensation...................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 38
Item 13. Certain Relationships and Related Transactions.............. 38

PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on
Form 8-K.................................................... 39

SIGNATURES............................................................ 43
</TABLE>

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ASPEN PLUS, ASPENTECH, MIMI, RT-OPT and SPEEDUP are registered trademarks
of the Company, and 1STQUALITY, ASPEN ADVISOR, ASPEN PIMS, BATCH PLUS, CIMVIEW,
CIMWORK, DMCPLUS, DYNAPLUS, INFOPLUS.21, OTISS and PLANTELLIGENCE are trademarks
of the Company.
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This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. Readers are cautioned that all forward-looking statements involve
risks and uncertainties, many of which are beyond our control, including the
factors set forth under "Item. 1A. Risk Factors." Although we believe that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate and there can be no
assurance that actual results will be the same as those indicated by the
forward-looking statements included in this Form 10-K. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved. Moreover, we assume no obligation to update these forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking statements.

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PART I

ITEM 1. BUSINESS

We are the leading supplier of software and service solutions used by
companies in the process industries to design, operate and manage their
manufacturing enterprises. The process industries include manufacturers of
petroleum products, petrochemicals, polymers, specialty chemicals,
pharmaceuticals, pulp and paper, electric power, food and beverages, consumer
products, metals and minerals and semiconductors. We offer a comprehensive set
of focused solutions, integrated plant-wide solutions and enterprise
optimization solutions that help process manufacturers enhance profitability by
improving efficiency, productivity, capacity utilization, safety and
environmental compliance throughout the entire manufacturing life-cycle, from
research and development to engineering, planning and scheduling, procurement,
production and distribution. In addition to our software solutions, we offer
systems implementation, advanced process control, real-time optimization and
other consulting services through our staff of more than 460 project engineers.
As part of our strategy to offer the broadest, most integrated suite of process
manufacturing enterprise optimization solutions, we have acquired businesses
from time to time to obtain technologies and expertise that complement or
enhance its core solutions. We currently have more than 1,000 customers
worldwide, including 46 of the 50 largest chemical companies, 22 of the 25
largest petroleum refiners and 16 of the 20 largest pharmaceutical companies.

INDUSTRY BACKGROUND

Companies in the process industries manufacture products in the form of
bulk solids, liquids, gases, powders, and films by using production methods
involving chemical reactions, combustion, mixing, separation, heating, cooling
and similar processes. The process industries encompass manufacturers of
petroleum products, petrochemicals, polymers, specialty chemicals,
pharmaceuticals, pulp and paper, electric power, food and beverages, consumer
products, metals and minerals and semiconductors. Companies in a number of other
industries, also utilize production techniques with characteristics similar to
those underlying process manufacturing.

In recent years, companies in the process industries have faced several
challenges, which have placed increased pressure on their profitability. These
challenges include intensifying global competition, growth, fluctuating
commodity prices, and more stringent environmental and safety regulations. The
industry has responded to these challenges in several ways. First, they have
rationalized and globalized their production processes through acquisitions,
divestitures, mergers and joint ventures. Second, they have reduced their
overhead expenses by re-engineering the work processes that support their
business and downsizing their supporting organizations. Third, they have
invested in information technology to support reengineered business processes.

The profitability of these companies depends substantially upon the costs
of raw materials, energy and capital; accordingly, the management and
utilization of these inputs significantly affect the companies' financial
results. Unlike labor-intensive businesses, which can materially change the
scale of their business operations by adjusting the sizes of their labor forces,
process manufacturers must focus on improving their production methods in order
to increase output, lower costs and reduce waste. Because of the large volumes
typically produced by process manufacturers, even a relatively small reduction
in raw material or energy requirements or a relatively small improvement in
throughput or product yields can have a dramatic impact on the profitability of
the manufacturing process.

Improvement of production methods in the process industries requires a
thorough understanding of chemical engineering analysis, the fundamental
discipline underlying the manufacturing processes. Due to the number of
variables involved, chemical engineering analysis is complex and calculation
intensive. Because of this complexity and because many process manufacturers
have significantly reduced their engineering staffs, many process manufacturers
are seeking technology-based solutions to aid them in their process
manufacturing decisions, with the objective of moving toward optimization of
their production processes and manufacturing enterprises under existing process
and equipment constraints.

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Increasingly sophisticated process manufacturing optimization solutions
have been introduced to assist process manufacturers in optimizing the design,
operation and management of their manufacturing processes and to help them
coordinate and optimize multiple manufacturing facilities across their
enterprise. In designing manufacturing processes, engineers use tools on desktop
computers to simulate a new or existing process and to optimize tradeoffs
between variables such as capital investment and operating costs. During
operation of the manufacturing process, plant operators rely on automation
systems installed in the plant to control and optimize the manufacturing process
by, for example, accepting a lower yield to increase overall throughput. To
manage the production process, plant managers use information systems to perform
tasks such as planning and scheduling of production, analysis and reporting of
performance, and yield accounting. To optimize multiple manufacturing facilities
planners use supply chain management systems that help them optimize and manage
their production facilities throughout the enterprise. Although early versions
of process manufacturing optimization solutions were limited in scope and
complicated to use, the availability of increasingly powerful, affordable
computers and networks and sophisticated intuitive graphical user interfaces has
expanded the capabilities of the solutions and the market of potential users.

Process manufacturing optimization solutions include applications to
address a broad range of manufacturing activities, including the following:

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DESIGN OPERATE MANAGE
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Process Modeling Advanced Process Control Process Information Management
Design Analysis & Optimization Real-time Optimization Production Scheduling &
Process Improvements Operator Training Planning
Plant Retrofits Quality Assurance
Supply Chain Management
Environmental, Health & Safety
Compliance
</TABLE>

Many process manufacturers have implemented solutions to automate processes
outside the actual methods of production. For many years, companies in the
process industries have sought to control their production processes by
deploying distributed control systems, or DCS, which use computer hardware
systems, communication networks and industrial instruments to measure, record
and automatically control process variables during production. More recently,
process manufacturers have automated key business processes through the
implementation of enterprise resource planning, or ERP, solutions that enhance
their ability to manage resources across the enterprise and enable them to
integrate front- and back-office business functions. DCS and ERP solutions
generally do not, however, incorporate the detailed chemical engineering
knowledge of the manufacturing process or data on the performance of the plant
either to optimize the operation and management of the production process, or
manage relationships with suppliers and customers.

Process manufacturers are increasingly seeking a complete, integrated
family of process manufacturing optimization software products and services that
can be used to improve their efficiency and productivity throughout the entire
manufacturing life-cycle, while at the same time establishing links with the
process manufacturers' existing DCS and ERP solutions and with their customers
and suppliers.

THE ASPENTECH ADVANTAGE

We are the leading supplier of software and service solutions that enable
companies in the process industries to optimize the design, operation and
management of their manufacturing processes and business enterprises. Our
comprehensive suite of solutions helps process manufacturers enhance
profitability by improving efficiency, productivity, capacity utilization,
safety and environmental compliance throughout the entire manufacturing
life-cycle. We believe our customers increasingly view their investments in our
solutions as strategic because of the substantial potential economic benefits
these solutions offer and the broad range of production issues they address. Our
competitive advantage is based on the following key attributes:

TECHNOLOGY LEADERSHIP. We believe we are the technology leader among
providers of process manufacturing optimization solutions. We have achieved this
technology leadership through internal research and development, strategic
acquisitions, and partnerships. For example, we obtained the leading advanced
process control and optimization technologies through our acquisitions of
Dynamic Matrix Control Corporation and
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Setpoint, Inc. in 1996. In 1997, we introduced Batch Plus, a commercialized
version of recipe-based simulation functionality developed in collaboration with
Merck & Co., Inc. We have integrated acquired technologies with existing
products in order to offer solutions that include the best features and
functionality of both. Moreover, we have designed our software solutions to
operate on all major operating system platforms used by process manufacturers
and to be compatible with all major distributed control systems.

BROADEST SUITE OF INTEGRATED SOLUTIONS. We believe our solutions represent
the most complete suite of integrated software and services available for the
design, operation and management of manufacturing processes in the process
industries. Process manufacturers are able to use our solutions across every
stage of the manufacturing life-cycle, from research and development to
engineering, planning and scheduling, procurement, production and distribution.
We are continuing to integrate our software products in order to further
increase the ability of our customers to share models and data across our
different software solutions. In October 1997, we announced the introduction of
Plantelligence, the name for our integrated suite of plant-wide best-in-class
products. Plantelligence is based on the Aspen Framework, software which serves
as a base for integrating our products so they work together in ways that
support specific business processes such as production planning or purchasing
raw material feedstocks. Plantelligence is being further developed to permit,
for example, a buyer for a petroleum refinery to determine how much it will cost
to refine a specific boatload of crude oil under then-current operating
conditions. This information can then be used to help the buyer decide whether
it is economically desirable to purchase that crude oil at then-prevailing
prices. The buyer can perform these analyses using a single graphical user
interface, without needing to understand our individual software solutions used
to perform the analysis. In August 1999, we announced the successful completion
of a technically complex Plantelligence implementation at Equistar's Matagorda
County, Texas facility.

UNPARALLELED PROCESS INDUSTRY EXPERTISE. Over the past 18 years, we have
established a reputation as a leading source of process manufacturing enterprise
optimization expertise. Our significant base of chemical engineering and process
manufacturing experience and knowledge serves as the foundation for the
proprietary solution methods, physical property models and data estimation
techniques embodied in our software solutions. We have enhanced our knowledge
and understanding of process manufacturing optimization solutions over time
through extensive interaction with our customers, which have performed millions
of simulations using our software. These customer relationships have also
enabled us to identify and develop or acquire solutions that best meet the needs
of our customers. To complement our software expertise, we have assembled a
staff of more than 460 project engineers to provide implementation, advanced
process control, real-time optimization and other consulting services to our
customers. We believe our large engineering team provides an important source of
competitive differentiation.

LARGE INSTALLED CUSTOMER BASE. We currently have more than 1,000 customers
worldwide, including 46 of the 50 largest chemical companies, 22 of the 25
largest petroleum refiners and 16 of the 20 largest pharmaceutical companies. We
also have leading customers in other vertical markets such as consumer products,
electric power, pulp and paper, metals and minerals and semiconductors. In
addition, all of the leading engineering and construction firms use our design
software. We consider our relationships with our existing customers to be an
important competitive advantage.

STRATEGY

Our principal objective is to extend our leadership in providing enterprise
optimization solutions for process manufacturers that allow them to optimize the
design, operation and management of their manufacturing processes and
enterprises. The industries we serve produce products that touch people every
day, such as the gasoline that fuels automobiles, the clothes people wear, and
the medicines that improve people's health. By helping process manufacturers
optimize their enterprises we believe we can help improve the quality of some of
these basic products in a way that preserves the environment and makes these
products

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available to greater numbers of people worldwide. Our strategy to achieve these
objectives includes the following key elements:

MAINTAIN OUR LEADERSHIP POSITION IN FOCUSED TECHNOLOGIES. We believe that
we offer the most technologically advanced solutions available for the design,
operation and management of manufacturing processes, particularly in the areas
of process simulation, advanced process control, real-time optimization,
scheduling and planning, process information management and supply chain
management. In order to extend the technological leadership of our individual
software solutions, we intend to continue to recruit and develop outstanding
technical talent, to focus on understanding customer needs, to keep abreast of
technological advances in software and communications and engineering, and to
focus on creating products that are easy to use. We will continue to invest in
research and development and to prioritize product development in accordance
with market needs and with our strategy. From time to time we may pursue
strategic acquisitions of complementary technologies and expertise. We believe
that the use of our individual software solutions in recent years has provided
process manufacturers with increased evidence of the economic benefits that may
be obtained from implementation of these focused solutions.

PROVIDE INTEGRATED PLANT-WIDE SOLUTIONS AND ENTERPRISE OPTIMIZATION. We
believe that process manufacturers can derive substantial additional value
through the integration of our focused solutions. Our strategy is to integrate
our focused solutions to support business processes that cut across many
disciplines both within the plant and across the manufacturing enterprise. In
many situations business processes involve multiple uses of our focused
solutions. For example, in a specialty chemical plant one of the business
processes is to create the production schedule for the coming week. This
business process might involve the our supply chain management products to solve
the scheduling problem, and our simulation and production accounting
technologies to generate data about the status of inventories. By integrating
these technologies and using consistent data and models the planner can perform
the business process more efficiently and accurately without an in-depth
understanding of each of the supporting focused solutions. We believe that
integrated solutions provide value for customers in many ways, including
improving human performance, improving plant performance, increasing product
quality and lowering information technology costs. We continue to invest in the
integration of our products. Specifically, one development effort, the Aspen
Framework, is designed to integrate all of our products. The Aspen Framework is
based on Microsoft Distributed InterNet Architecture, or DNA. We believe we are
well positioned to offer integrated solutions because we own many of the leading
technologies in the industry and can therefore make the required changes in each
of these products needed to achieve an integrated solution.

CONTINUE THE DEVELOPMENT AND IMPLEMENTATION OF THE ASPEN FRAMEWORK. We
plan to continue to develop and implement the Aspen Framework as the backbone of
our Plantelligence solution. The Aspen Framework enables integration between a
plant's enterprise resource planning system, our products and existing plant
software systems. The Aspen Framework is built on the Microsoft DNA and
simplifies the deployment of complex solutions by integrating a plant's
manufacturing and business processes. As customers increasingly demand
integration of their technology to support integrated business and manufacturing
processes, the Aspen Framework will be available as the technology base to
enable this integration.

FOCUS ON OUR CORE VERTICAL MARKETS. We believe that our customers' needs
vary significantly across vertical industries. In order to achieve the full
benefits of our focused and integrated solutions, we believe that we will need
to offer solutions that are tailored to the needs of our customers within
specific vertical industries. In December 1998 we created four industry business
units to facilitate the creation of vertically-focused solutions for several of
the markets we serve. These industry business units will focus on refining,
chemicals and petrochemicals, polymers, and life sciences and specialty
chemicals. Our strategy is to define and deliver the integrated solution for
each major vertical industry that we serve. We plan to create initial
first-of-a-kind implementations of our integrated technologies and then refine
and develop our strategy for penetrating each vertical market in conjunction
with our partners. The implementation of our Plantelligence solution at
Equistar's Matagorda County, Texas polymer production facility in August 1999 is
an example of a first-of-a-kind implementation.

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EXPAND OUR NETWORK OF PARTNERS. We plan to expand our network of partners
to assist in the sale and implementation of our integrated plant solutions and
enterprise optimization solutions. We expect this effort will include working
with our customers, hardware vendors, complementary software vendors, business
consultants, process licensors, engineering and construction firms, and systems
integrators. We believe that these business partners will be helpful in
developing, selling, implementing and maintaining our solutions. For example, we
have entered into an alliance agreement with Equistar Chemicals, L.P., Lyondell
Chemical Company, and BP Amoco, p.l.c. for enterprise optimization, a partnering
agreement with Yokagawa Electric Corporation for the provision of optimization
solutions to their customers, and collaboration and partnering agreements with
OLI Systems, Refining Process Services, Inc., SRI Consulting and Intergraph
Corporation for the provision of software solutions.

INCORPORATE THE INTERNET IN SOLUTION DEVELOPMENT, SALE AND DELIVERY. We
believe that the Internet is an important component of the development, sale and
delivery of our focused solutions, Plantelligence, and enterprise optimization
solutions. Some of our software products, including the Aspen Framework, are
already web-enabled, and a product development web initiative has been
undertaken to direct the web-enablement of our solutions. A core part of our
Internet strategy is the development of electronic commerce, or e-commerce, to
market, sell and deliver our products over the Internet through our website and
the websites of our partners and complementary technology providers. We
currently offer customers the ability to download software patches from our
website as part of customer support and we are developing additional on-line
technical support as part of the enhancement of our customer support service. We
believe that the Internet will enable our customers to use our technology on a
collaborative basis within their own enterprise, and with their suppliers and
customers, and are otherwise exploring new business models which may be made
possible by the Internet.

SOFTWARE AND SERVICE SOLUTIONS

We offer a comprehensive suite of software and service solutions that
enable process manufacturers to optimize their enterprises and the design,
operation and management of their manufacturing processes. Our solutions capture
process knowledge in consistent, accurate and reliable models that customers can
use as the basis for decision-making across the entire manufacturing life-cycle
and provide vital functionality for elements of the manufacturing process that
other software applications, such as ERP and DCS software, do not address. A
number of our software solutions can be linked with ERP solutions and DCS to
improve a customer's ability to gather, analyze and use information across the
entire process manufacturing life-cycle. To enable our customers to take full
advantage of our software solutions, we also offer comprehensive expert
consulting, training and support services. Our solutions can be grouped into
three categories: focused solutions, integrated plant solutions and enterprise
optimization solutions. Our strategy is to provide a migration path for our
customers. So, for example, a customer can start with a single AspenTech focused
solution, add additional focused solutions, integrate these solutions through
our services and integrated products, and finally incorporate our supply chain
solution and optimize their business processes to achieve enterprise
optimization. This migration path provides a means by which each customer can
implement and absorb technology and improve their business processes at their
own rate in accordance with their own pressures and business environment. The
following descriptions explain each of our three product categories in greater
detail.

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FOCUSED SOLUTIONS. We refer to our individual products and services as our
focused solutions, which allow process manufacturers to improve specific aspects
of the design, operation and management of their manufacturing enterprises.
These products are the building blocks for our integrated plant solutions and
enterprise optimization solutions. In many cases these technologies are the
market leaders. The reputation of these products for quality and leading-edge
technology has been a hallmark of our history. The following tables describe our
principal focused software solutions and their applications for the design,
operation and management of manufacturing enterprises:

DESIGN:

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SOFTWARE SOLUTION DESCRIPTION APPLICATIONS
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Aspen Plus.......... Rigorous steady-state modeling Used to design processes, evaluate
system for simulating process changes and analyze
chemically-based manufacturing "what-if" scenarios.
processes involving vapors,
liquids, solids and electrolytes
with a library of equipment and
physical property models.
DynaPlus/SPEEDUP.... Rigorous modeling system for Used to examine process
simulating processes under operability, safety and control as
changing (dynamic) conditions with operating parameters fluctuate
a library of equipment and during plant startup and shutdown
controller models. and other transient conditions.
Batch Plus.......... Batch process modeling system for Used to scale-up and design new
recipe-based processes. processes, and to analyze the
production of one batch or an
entire batch plant.
Aspen Zyqad......... System for integrating, automating Used to integrate and automate
and managing data, applications work flow between engineers
and activities in the engineering designing new process plants or
work process. improving existing facilities.
</TABLE>

We also provide an integrated suite of process design and modeling
technology, known as the Aspen Engineering Suite or AES. AES is comprised of
eight of our products, including Aspen Plus and Aspen Zyqad.

Layered on top of these core, focused solutions are a number of separately
licensed modules that focus on specialized types of analysis for modeling
polymer processes, heat exchanger equipment, separation systems, batch
distillation columns, adsorption processes and other complex systems. All of
these process design software solutions can operate in Windows. Aspen Plus and
SPEEDUP also run on DEC VMS and UNIX.

We typically license our process design software solutions for a term of
three to five years. The annual cost for a single user of one of our process
design software solutions ranges from $10,000 to $30,000, depending on the
solution, the license term and the number of licensed users. The license fee
includes a separate maintenance component that covers customer support,
upgrades, revisions and enhancements during the term of the license.

Implementation of our process design software solutions does not typically
require substantial consulting services, although services may be provided for
customized model designs and process synthesis.

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OPERATION:

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SOFTWARE SOLUTION DESCRIPTION APPLICATIONS
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Aspen RT-Opt.. Real-time optimization system. Used to identify plant adjustments in
order to optimize operations on a
real-time basis.
Aspen IQ...... Inferential sensor modeling and Used to infer infrequently measured
online implementation technology. properties from continuous
measurements for environmental
monitoring and advanced control.
DMCplus....... Advanced process control system using Used to tightly control actual plant
multi-variable model-predictive operations at multiple operating
control technology. constraints.
OTISS......... System for developing operator Used to train operators to better
training simulators. manage daily plant operations and
respond to abnormal situations.
</TABLE>

Aspen RT-Opt operates on DEC VMS and UNIX. DMCplus operates on Windows, DEC
VMS and UNIX. OTISS operates on UNIX, Hewlett-Packard and Sun Solaris.

We typically license our process operation software solutions for terms of
99 years. The list price for a 99-year license of Aspen RT-Opt or DMCplus
generally ranges from $50,000 to $200,000, depending on the solution and on
whether the license covers a single process unit or an entire facility. The list
price for a 99-year license of OTISS is approximately $50,000. Maintenance of
process operation software solutions is available under separate contracts.

Implementation of our process operation software solutions typically
requires substantial consulting services.

MANAGEMENT:

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SOFTWARE SOLUTION DESCRIPTION APPLICATIONS
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InfoPlus.21...... Process information management Used to compare real-time and
system with a real-time database historical information generated
of historical information. by plant systems to present a
unified view of plant operations.
Aspen MIMI....... Supply chain management system, Used to identify best supply chain
including demand management, decisions to maximize asset
inventory control and utilization, minimize raw material
available-to-promise. costs, maximize product values and
control inventories.
Aspen PIMS....... Linear programming-based economic Used to identify short-term and
planning and scheduling system. strategic decisions on feedstock
purchases, capacity utilization
and production planning.
Aspen Advisor.... Yield-accounting solution. Used to track inventory and
material movements into, through
and out of processing plants, in
order to enable manufacturers to
report production data accurately
to ERP and other business systems.
1stQuality....... System to address issues in Used to integrate the management,
polymer manufacturing. usage and monitoring of operating
conditions to reduce transition
time, improve product consistency
and monitor process compliance.
</TABLE>

All of our process management software solutions can operate in Windows.

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We typically license InfoPlus.21, MIMI, Aspen Advisor and 1stQuality for
terms of 99 years and typically license Aspen PIMS for a term of 5 years or 25
years. The list price for an entry-level 99-year InfoPlus.21 license is
approximately $40,000 and varies depending on the number of points of data being
collected. The list price for an entry-level 99-year multi-user site license for
Aspen MIMI is approximately $220,000. The list price for a license of Aspen PIMS
modules ranges from $10,000 to $200,000, depending on the solution and the
license term. The list price for an entry-level 99-year Aspen Advisor license
ranges from $100,000 to $200,000, depending on the number of nodes, and the list
price for an entry-level 99-year 1stQuality license is approximately $150,000
per plant.

Implementation of our process management software solutions typically
requires consulting services, although not to the same extent as process
operation software solutions.

INTEGRATED PLANT SOLUTIONS. Our suite of integrated plant solutions, which
are marketed under the Plantelligence name, enables process manufacturers to
drive their plant operations to higher levels of profitability. Plantelligence
incorporates our focused solutions, and uses the Aspen Framework as a vehicle
for integrating these products so they work together to support specific
business processes. The Aspen Framework facilitates integration of our products
by allowing the various applications to communicate with common databases of
design information, real-time information and documents. The Aspen Framework is
based on Microsoft DNA technology and includes web-enabled features such as XML
and Active Server pages. Plantelligence is designed to integrate with a plant's
hardware systems, enterprise resource planning system, and existing information
technology systems to optimize operation of the plant.

By uniting our products in a common framework, Plantelligence provides a
comprehensive set of business improvements to process plants. We believe the
benefits of integration are an essential part of helping process manufacturers
become more competitive. Integration of the focused technologies enables process
manufacturers to integrate the design, operation and management of their process
plants. Integrating the technologies which support business processes can help
process manufacturers align their people, their resources, and their business
processes to drive their manufacturing enterprises to higher levels of
productivity and overall performance. The value of this integration is enhance
through the ability of different technology products to share the model of the
manufacturing process. By running plants on consistent models that reflect true
economic, chemical and physical constraints, manufacturers obtain the critical
knowledge they need to develop, execute and evaluate their manufacturing plan
and make improvements with each production cycle.

ENTERPRISE OPTIMIZATION. Our enterprise optimization solutions build on
Plantelligence with the addition of our supply chain technology and management
of changed business processes. We believe customers can run their enterprises
more efficiently and effectively by utilizing our integrated technologies to
tightly link their manufacturing operations to the management of their business
with their suppliers and customers. Our enterprise optimization solutions enable
customers with a wide array of manufacturing plants and assets to coordinate
their operations and enable their plants to work together toward common
operating and business goals.

In many cases manufacturing facilities have been overlooked as companies
pursued large business process reengineering projects over the last decade. To a
large extent, the manufacturing plants continue to act as silos that maximize
their own efficiency and productivity. However, as the process industries become
increasingly global and interconnected, we believe that process manufacturers
will need to change their business processes at the plant so that they can
optimize their entire manufacturing enterprise rather than the specific plants
that comprise their enterprise. Our enterprise optimization solutions are
designed to enable process manufacturers to adapt to rapid changes in demand and
their business environment, to respond quickly to these changes, act as a single
enterprise, optimize use of resources, meet customer requirements and operate
more profitably.

CONSULTING SERVICES. We offer implementation, advanced process control,
real-time optimization and other consulting services in order to provide our
customers with complete solutions. Customers can frequently use our focused
process design software solutions without assistance from us or our partners.
However, many of the projects in which customers deploy our focused process
operation software solutions and process management software solutions are
sufficiently complex that customers require assistance from us and our

9
<PAGE> 11

partners in order to take full advantage of the benefits of those solutions. Our
integrated plant solutions and enterprise optimization solutions also require
assistance from us and our partners.

Customers that obtain consulting services from us typically engage us to
provide such services over periods of between 1 day and 24 months. We generally
charge customers for consulting services on a fixed-price basis, but charge
customers for certain services, primarily on-site advanced process control and
optimization services, on a time-and-materials basis.

We employ a staff of more than 460 project engineers to provide consulting
services to our customers. We believe this large team of experienced and
knowledgeable project engineers provides an important source of competitive
differentiation. We primarily hire as project engineers individuals who have
obtained doctoral or master's degrees in chemical engineering or a related
discipline or who have significant relevant industry experience. Our employees
include experts in fields ranging from thermophysical properties, distillation,
adsorption processes, polymer processes, industrial reactor modeling, the
identification of empirical models for process control or analysis, large-scale
optimization, supply distribution systems modeling and scheduling methods.

Historically, most licensees of our planning and scheduling solutions and a
limited number of licensees of our process information management and supply
chain management systems have obtained implementation consulting services from
third-party vendors. Our strategy is to continue to develop and expand
relationships with third-party consultants in order to provide a secondary
channel of consulting services to support our process management software
solutions and to provide complementary services.

ACQUISITIONS OF SOFTWARE AND SERVICE SOLUTIONS. As part of our strategy to
offer the broadest, most integrated suite of software and service solutions for
the design, operation and management of manufacturing processes, from time to
time we acquire businesses to obtain technologies and expertise that complement
or enhance our core solutions. We typically combine acquired technologies with
our pre-existing products in order to offer solutions that include the best
features and functionality of both. We provide an upward migration path and
support for any discontinued products.

We have completed 17 acquisitions that have provided us with, or
significantly enhanced, our capabilities in the areas of process information
management, advanced process control and optimization, advanced planning and
scheduling, and supply chain management. We have successfully integrated the
operations of these acquired businesses. The following table describes
AspenTech's acquisitions to date:

<TABLE>
<CAPTION>
BUSINESS ACQUIRED DATE ACQUIRED SOLUTION ACQUIRED OR ENHANCED
- ----------------- ------------------ ------------------------------------
<S> <C> <C>
Prosys Technology Limited................. October 16, 1991 SPEEDUP
Industrial Systems, Inc................... May 25, 1995 Components of InfoPlus.21
Dynamic Matrix Control Corporation........ January 5, 1996 Components of DMCplus and Aspen
RT-Opt
Setpoint, Inc............................. February 9, 1996 Components of DMCplus, Aspen RT-Opt
and InfoPlus.21
B-JAC International, Inc.................. October 1, 1996 Heat exchanger modeler
Process Control Division of Cambridge
Control Limited......................... October 8, 1996 Consulting service capabilities for
advanced process control and
optimization
Basil Joffe Associates, Inc. and PIMS
division of Bechtel Corporation......... December 31, 1996 Aspen PIMS
NeuralWare, Inc........................... August 27, 1997 Neural network technology and tools
integrated with Aspen Plus, DMCplus
and InfoPlus.21
The SAST Corporation Limited.............. August 28, 1997 OTISS and consulting service
capabilities
</TABLE>

10
<PAGE> 12

<TABLE>
<CAPTION>
BUSINESS ACQUIRED DATE ACQUIRED SOLUTION ACQUIRED OR ENHANCED
- ----------------- ------------------ ------------------------------------
<S> <C> <C>
Cimtech S.A./N.V.......................... February 27, 1998 Components of InfoPlus.21
Contas Process Control S.r.L. ............ February 27, 1998 Consulting service capabilities for
advanced process control and
optimization
IISYS, Inc................................ March 6, 1998 Aspen ADVISOR
Zyqad Limited............................. March 16, 1998 Aspen Zyqad
Chesapeake Decision Sciences, Inc......... May 27, 1998 Aspen MIMI
Treiber Controls, Inc..................... May 29, 1998 Software and consulting service
capabilities for advanced process
control and optimization
Process Optimization and Emissions
Monitoring Division of Callidus
Technologies, Inc. ..................... September 14, 1998 Consulting services capabilities for
process optimization and predictive
emissions monitoring
Syllogistics, Inc. ....................... October 14, 1998 Logistics management software
</TABLE>

TECHNOLOGY AND PRODUCT DEVELOPMENT

Our software and services solutions combine three of our core competencies:
our sophisticated modeling capabilities based on fundamental chemical
engineering principles, our extensive experience with a broad variety of
manufacturing processes in the chemicals, petrochemicals, petroleum,
pharmaceuticals, and other industries, and our understanding of how to optimize
and streamline key business processes in these same industries. Our technology
enables customers to optimize the business processes involved in three main
value chains: process innovation, supply chain, and manufacturing operations.

To deliver business process optimization software we focus our product
development in three areas. First, we build software that enables our customers
to model and manage their manufacturing process. We support sophisticated
empirical models generated from advanced mathematical algorithms developed by
our employees. In addition, we support rigorous models of chemical manufacturing
process and the equipment used in those manufacturing processes. We believe that
the development and refinement of highly accurate empirical and rigorous models
such as those developed by us require a deep understanding both of the
fundamental chemistry underlying the manufacturing process and the technology of
modeling. Our models employ advanced mathematical algorithms developed by our
employees and others, such as the dynamic matrix control algorithm for
multi-variable, model-based predictive control and the inside-out algorithm for
simulating distillation. We have used these advanced algorithms to develop
proprietary models that provide highly accurate representations of the chemical
and physical properties of a broad range of materials typically encountered in
the chemicals, petroleum, and other process industries. Second, we develop
software which models key customer work processes and automates the workflow of
these processes. This software integrates our broad product line such that the
data used in the work process is seamlessly passed between the applications used
in each step of the business process. In addition, we have a unique user
interface that intuitively guides the user through the business process. Third,
we are investing significantly in supply chain and data management software.
This software embeds sophisticated optimization technology allowing customers to
optimize their entire corporate supply chain and manufacturing activities. In
addition, this software embeds key knowledge about the details of how
manufacturing and supply chain operations in the process industry function.

Our product development activities are currently focused on strengthening
the integration of our key products, expanding the set of business processes our
software covers, exploiting web technology, and enhancing and simplifying the
user interface. As of June 30, 1999, we employed a product development staff of
more than 290 persons.

11
<PAGE> 13

CUSTOMERS

Our software solutions are installed at more than 1,000 customers
worldwide. The following table sets forth a selection of our customers, whose
agreements with us produced at least $250,000 in fees to AspenTech in fiscal
1998 or 1999:

CHEMICALS AND PETROCHEMICALS
Air Products & Chemicals, Inc.
Allied Signal, Inc.
BASF AG
Bridgestone/Firestone, Inc.
Borealis Exploration Limited
Celanese
Condea Vista Company
DSM N.V.
The Dow Chemical Company
E.I. du Pont de Nemours & Company, Inc.
Elf Atochem
Equistar Chemicals LP
Formosa Petrochemical Corp.
Huntsman Corporation
Kuraray Co., Ltd.
Messer Griesheim GmbH
Mitsubishi Chemical Corporation
Mitsui Chemicals
Nova Chemicals, Ltd.
PCS Systemtechnik GmbH
Reliance Industries Ltd.
Repsol S.A.
Sasol Industries (Pty.) Ltd.
Shell International Chemie Mij B.V.
Sinopec
Union Carbide Chemicals and Plastics Company, Inc
Westlake Management Services Corporation

LIFE SCIENCES AND SPECIALTY CHEMICALS
AstraZeneca
Aventis Research & Technologies
Bayer Corporation
Cabot Corporation
E.I. du Pont de Nemours & Company, Inc.
Eli Lilly
Engelhard Corporation
Genentech, Inc.
Hercules, Inc.
Hoffman-LaRoche, Inc.
Imperial Chemical Industries plc
Merck & Co., Inc.
Novartis Pharma A.G.
Owens Corning
SmithKline Beecham Pharmaceutical
UCB Chemicals

REFINING, OIL AND GAS
AB OMV
Abu Dhabi National Oil Company
Agip Petroli S.p.A.
Amoco Corporation
Arco Products Company
Bharat Petroleum co. Ltd.
BP Amoco plc
Chevron Corporation
Citgo Petroleum Corporation
Conoco Inc
Equilon Enterprises LLC
Exxon Company U.S.A.
Kuwaiti National Petroleum Company
Lyondell Citgo Refining Company Ltd.
Magyar Olaj LS
Mobil Oil Corporation
Motiva Enterprises LLC
Pemex Gas y Petroquimica Basica
Petroleos de Venezuela, S.A.
Phillips Petroleum Company
Repsol Petroleo SA
Shell Oil Company
Star Enterprise
Statoil
Sunoco Inc.
Total-Fina
Valero Refining Company

CPG AND FOODS AND BEVERAGES
Ben & Jerry's Homemade, Inc.
Cargill, Incorporated
General Mills, Inc.
Nestle S.A.
Procter & Gamble
Unilever plc

SEMICONDUCTORS
Mitsubishi Silicon America
Motorola, Inc.
Rockwell Semiconductor Systems
Vishay Silconix

12
<PAGE> 14

METALS AND MINERALS
Alcoa of Australia, Ltd.
Gulf States Steel, Inc.
LTV Corporation
Nippon Steel Chemical Co., Ltd.
Sollac S.A.
Wabash Alloys

ENGINEERING AND CONSTRUCTION
ABB Lummus
Bechtel Group
Chiyoda Corporation
Fluor Corporation
Foster Wheeler Corporation
Jacobs Engineering Group Inc.
Johnson Matthey plc
Kellogg Brown & Root/Halliburton
Kvaerner E & C
Linde AG
Lurgi AG
Raytheon Engineers & Constructors
Snamprogetti SpA
Technip Italy SpA

PULP AND PAPER
Buckeye Cellulose Corporation
Weyerhaeuser
Consolidated Papers, Inc.

POWER AND NUCLEAR
ABB Group
Electrabel SA/NV
Electricite de France
The SGN Group
Westinghouse Electric Corporation

For fiscal 1997, 1998 and 1999, international revenues accounted for
approximately 50.0% 45.4%, and 53.4 %, respectively, of our total revenues. No
individual customer represented more than 10% of our total revenues in fiscal
1997, 1998 or 1999. There can be no assurance that any of the customers listed
above will continue to license software or purchase services from us beyond the
term of any existing agreement.

SALES AND MARKETING

We employ a value-based sales approach, offering customers a comprehensive
suite of software and service solutions that enhance the efficiency and
productivity of their process manufacturing operations. We have increasingly
focused on selling our solutions as a strategic investment by our customers and
therefore targets our principal sales efforts at senior management levels,
including chief executive officers and senior decision-makers in manufacturing,
operations and technology.

Because the complexity and cost of our solutions often result in a sales
cycle of between six and nine months, we believe that the development of
long-term, consultative relationships with our customers is essential to a
successful selling strategy. To develop these relationships, we have organized
our worldwide sales force by industry and have appointed a single sales account
manager to be responsible for our relationship with each customer. In order to
market the specific functionality and other complex technical features of our
software solutions, each sales account manager leads a specialized team of
regional account managers, technical sales engineers and product specialists
organized for each sales and marketing effort. Our technical sales engineers
typically have advanced degrees in chemical engineering or related disciplines
and actively consult with the customer's plant engineers who would be the
ultimate users of our solutions. Product specialists share their detailed
knowledge of the specific features of our software solutions. Each sales team
also includes participants from our business development group who determine the
scope and price of service solutions offered to customers.

We believe that our seasoned direct sales force, consisting of more than
100 individuals as of June 30, 1999, and our ability to sell at senior levels
within customer organizations are important competitive advantages. We have
established direct sales offices in key geographic areas where there are high
concentrations of potential business, including New Jersey, Texas, Brussels,
Cambridge (England), Dusseldorf, Hong Kong, Paris, Singapore and Tokyo. In
geographic areas of lower customer concentration, we use sales agents and other
resellers to leverage our direct sales force and to provide local coverage and
first-line support.

We also supplement our direct sales efforts with a variety of marketing
initiatives, including public relations activities, campaigns to promote
awareness among industry analysts, user groups and our triennial conference,
AspenWorld. AspenWorld has become a prominent forum for industry participants,
including process manufacturing executives and analysts, to discuss emerging
technologies and other process engineering solutions and to attend seminars led
by industry experts. The AspenWorld 97 conference, held in
13
<PAGE> 15

October 1997, attracted more than 1,400 participants. The AspenWorld 2000
conference has been scheduled to be held in February 2000.

We also license our software solutions at a substantial discount to
universities that agree to use its solutions in teaching and research. We
believe that students' familiarity with our solutions will stimulate future
demand once the students enter the workplace. Currently, more than 550
universities use our software solutions in undergraduate instruction.

COMPETITION

We face three primary sources of competition: commercial vendors of
software products for one or more elements in the design, operation and
management of manufacturing processes; vendors of hardware that offer software
solutions in order to add value to their proprietary distributed control system;
and large companies in the process industries that have developed their own
proprietary software solutions. We believe that suppliers of individual software
solutions are under intensifying pressure to offer integrated functionality
beyond their traditional applications and that, at the same time, process
manufacturers are increasingly concluding that it is no longer efficient or
economical for them to continue to develop or support internally developed
software. Certain competitors also supply related hardware products to our
existing and potential customers and may have established relationships that
afford those competitors an advantage in supplying software and services to
those customers. We believe, however, that customers prefer to select
best-in-class software solutions, independent of their selection of underlying
industrial automation hardware platforms. We do not offer our solutions with any
particular hardware and we design our software products to operate effectively
on systems manufactured by all major hardware vendors. As the market for
manufacturing enterprise optimization solutions consolidates further, we believe
that our exclusive focus on developing and marketing best-in-class software and
services will continue to provide a competitive advantage.

Because of the breadth of its software and service offerings, we face
competition from different vendors depending on the solution in question. We
compete with respect to the largest number of its solutions with Simulation
Sciences, Inc., a subsidiary of Invensys plc. With respect to particular
software solutions, we also compete with Chemstations, Inc., AEA Technology
Engineering Software (a subsidiary of AEA Technology plc), OSI Software, Inc.,
The Foxboro Company and Wonderware Corporation (both of which are subsidiaries
of Invensys plc), the Simcon division of ABB Asea Brown Boveri (Holding) Ltd.,
and several smaller competitors, such as Pavilion Technologies, Inc. With
respect to its supply chain management solutions we compete with vendors such as
i2 Technologies, Inc. and Manugistics Group, Inc.

A number of vendors of ERP software products, such as Baan Company N.V.,
J.D. Edwards Inc., Oracle Corporation, PeopleSoft, Inc. and SAP A.G., are
expanding their presence in the market for supply chain management solutions via
internal research and development, acquisitions and sales and marketing
agreements with independent vendors of supply chain management solutions. We
expect to encounter increasing competition from these companies and from DCS
vendors, such as Honeywell Inc., as they expand their software and service
offerings to include additional aspects of process manufacturing.

Our continued success depends on our ability to compete effectively with
our commercial competitors and to persuade our prospective customers to use our
products and services instead of, or in addition to,

14
<PAGE> 16

software developed internally or services provided by their own personnel. In
light of these factors, there can be no assurance that we will be able to
maintain our competitive position.

INTELLECTUAL PROPERTY

We generally enter into non-disclosure agreements with our employees and
customers, and historically have restricted access to our software products'
source codes, which we regard as proprietary information. In a few cases, we
have provided copies of the source code for certain products to customers solely
for the purpose of special customization of the products and have deposited
copies of the source code for certain products in third-party escrow accounts as
security for on-going service and license obligations. In these cases, we rely
on nondisclosure and other contractual provisions to protect our proprietary
rights.

There can be no assurance that the steps taken by us to protect our
proprietary rights will be adequate to deter misappropriation of our technology
or independent development by others of technologies that are substantially
equivalent or superior to our technology. Any such misappropriation of our
technology or development of competitive technologies could have a material
adverse effect on our business, operating results and financial condition. We
could incur substantial costs in protecting and enforcing our intellectual
property rights. Moreover, from time to time third parties may assert patent,
trademark, copyright and other intellectual property rights to technologies that
are important to us. In such an event, we may be required to incur significant
costs in litigating a resolution to the asserted claims. There can be no
assurance that such a resolution would not require that we pay damages or obtain
a license of a third party's proprietary rights in order to continue licensing
our products as currently offered or, if such a license is required, that it
will be available on terms acceptable to the Company.

We believe that, due to the rapid pace of innovation within the industry,
factors such as the technological and creative expertise of our personnel, the
quality of our products, the quality of our technical support and training
courses, and the frequency of software product enhancements are more important
to establishing and maintaining a technology leadership position within the
industry than the various legal protections for our software products and
technology. See "Item 1A. Risk Factors -- Dependence on Proprietary Technology."

EMPLOYEES

As of June 30, 1999, we had a total of 1,448 full-time employees. None of
our employees is represented by a labor union. We have experienced no work
stoppages and believe that our employee relations are good.

While we substantially expanded the breadth and depth of our management
team in recent years, our future success depends to a significant extent on the
continued service of Lawrence B. Evans, the principal founder of AspenTech and
our Chairman and Chief Executive Officer, our other executive officers, and
certain engineering, technical, managerial, sales and marketing personnel. We
believe that our future success will also depend on our continuing ability to
attract, motivate and retain additional highly skilled engineering,

15
<PAGE> 17

technical, managerial and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that we will be successful in attracting,
assimilating and retaining the personnel we require to continue to grow and
operate profitably.

ITEM 1A. RISK FACTORS

In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating the Company and its business.

FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS AND CASH FLOW MAY CAUSE OUR
STOCK PRICE TO FALL.

Our operating results and cash flow have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors,
including purchasing patterns, timing of introductions of new solutions and
enhancements by us and our competitors, and fluctuating economic conditions.
Because license fees for our software products are substantial and the
implementation of our solutions often requires the services of our engineers
over an extended period of time, the sales process for our solutions is lengthy
and can exceed one year. Accordingly, software revenue is difficult to predict,
and the delay of any order could cause our quarterly revenues to fall
substantially below expectations. Moreover, to the extent that we succeed in
shifting customer purchases away from individual software solutions and toward
integrated suites of our software and service solutions, the likelihood of
delays in ordering may increase and the effect of any delay may become more
pronounced.

We ship software products within a short period after receipt of an order
and typically do not have a material backlog of unfilled orders of software
products. Consequently, revenues from software licenses in any quarter are
substantially dependent on orders booked and shipped in that quarter.
Historically, a majority of each quarter's revenues from software licenses has
come from license agreements that have been entered into in the final weeks of
the quarter. Therefore, even a short delay in the consummation of an agreement
may cause revenues to fall below expectations for that quarter. Since our
expense levels are based in part on anticipated revenues, we may be unable to
adjust spending quickly enough to compensate for any revenue shortfall and any
revenue shortfalls would likely have a disproportionately adverse effect on net
income. We expect that these factors will continue to affect our operating
results for the foreseeable future.

Prior to fiscal 1997, and in fiscal 1999, we experienced a net loss for the
first quarter of each fiscal year, in part because a substantial portion of our
total revenues is derived from countries other than the United States where
business is slow during the summer months and also in part because of the timing
of renewals of software licenses. We believe that we may continue to experience
challenges in growing total revenues and net income in the first fiscal quarter
as compared to the immediately preceding fiscal quarter. Because of the
foregoing factors, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance.

Due to all of the foregoing factors, it is possible that in one or more
future quarters our operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Common Stock
would likely be materially adversely affected. As a result of lower than
anticipated license revenue in the fiscal quarter ended September 30, 1998, our
operating results for that fiscal quarter were below the expectations of certain
public market analysts and investors. As a result of lower-than-anticipated
license revenue in the fiscal quarter ended March 31, 1999, our operating
results were again below the expectations of certain public market analysts and
investors.

WE MAY SUFFER LOSSES ON FIXED-PRICE ENGAGEMENTS.

We derive a substantial portion of our total revenues from service
engagements and a majority of these engagements have been undertaken on a
fixed-price basis. We bear the risk of cost overruns and inflation in connection
with fixed-price engagements, and as a result, any of these engagements may be
unprofitable.

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<PAGE> 18

WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES IN THE CHEMICALS, PETROCHEMICALS
AND PETROLEUM INDUSTRIES.

We derive a substantial majority of our total revenues from companies in
the chemicals, petrochemicals and petroleum industries. Accordingly, our future
success depends upon the continued demand for process manufacturing optimization
software and services by companies in these industries. The chemicals,
petrochemicals and petroleum industries are highly cyclical. We believe that
worldwide economic downturns and pricing pressures experienced by chemical,
petrochemical and petroleum companies in connection with cost-containment
measures and environmental regulatory pressures have in the past led to
worldwide delays and reductions in certain capital and operating expenditures by
many of these companies. There can be no assurance that these industry patterns,
as well as general domestic and foreign economic conditions and other factors
affecting spending by companies in these industries, will not have a material
adverse effect on our business, operating results and financial condition.

IF WE ARE UNABLE TO HIRE AND RETAIN QUALIFIED PROJECT ENGINEERS, WE MAY BE
UNABLE TO EXECUTE OUR BUSINESS PLAN SUCCESSFULLY.

We derive a substantial portion of our total revenues from services,
particularly projects involving advanced process control and optimization and
similar projects. These projects can be extremely complex and in general only
highly qualified, highly educated project engineers have the necessary training
and skills to complete these projects successfully. In order to continue to
staff our current and future projects, we will need to attract, motivate and
retain a significant number of highly qualified, highly educated chemical and
other project engineers. We primarily hire as project engineers individuals who
have obtained a doctoral or master's degree in chemical engineering or a related
discipline or who have significant relevant industry experience. As a result,
the pool of potential qualified employees is relatively small, and we face
significant competition for these employees, from not only our direct
competitors but also our clients, academic institutions and other enterprises.
Many of these competing employers are able to offer potential employees
significantly greater compensation and benefits or more attractive lifestyle
choices, career paths or geographic locations than we can. The failure to
recruit and retain a significant number of qualified project engineers could
have a material adverse effect on our business, operating results and financial
condition. Moreover, increasing competition for these engineers may also result
in significant increases in our labor costs, which could have a material adverse
effect on our business, operating results and financial condition.

OUR FAILURE TO INTEGRATE ACQUIRED COMPANIES SUCCESSFULLY COULD DISRUPT OUR
BUSINESS AND ADVERSELY AFFECT OUR OPERATING RESULTS.

Through our acquisitions of Chesapeake and several smaller companies in
1998, we expanded our product and service offerings, entered new markets and
increased our scope of operations and the number of our employees. The
successful and timely integration of Chesapeake and these other companies into
our operations has been critical to our future financial performance. We
continue to need to integrate the software products and technologies from these
acquired companies, retain key employees, and manage geographically dispersed
operations, each of which could pose significant challenges. To succeed in the
market for supply chain management solutions, we must also invest additional
resources, primarily in the areas of software development, sales and marketing,
and consulting expertise, to extend product range and functionality, to extend
name recognition to increase market share, and to implement projects.

OUR FUTURE PERFORMANCE DEPENDS ON THE SUCCESS OF OUR RECENT REORGANIZATION.

In addition, in July 1999, we reorganized the company from being primarily
based on individual technology business units, to a more functionally based
organization. We now have a single product development organization, a single
global solutions organization, a single global customer support organization, an
independent supply chain organization and four industry business units that
focus on key vertical markets. We believe that this organization will enhance
our ability to develop specific industry solutions and market strategies, better
integrate our technologies and provide a common look and feel to products,
improve on the implementation of our solutions and provide better career paths
for engineers, improve the quality of our support services, and rapidly grow our
supply chain business. The successful and timely reorganization of
17
<PAGE> 19

people in these groups may be critical to our future financial performance.
There can be no assurance that the new organization will provide the benefits
expected by us or that we will be able to better integrate the different
technologies, improve the implementation of our solutions, improve the quality
of our support services or rapidly grow our supply chain business. Any failure
to do so could have a material adverse effect on our business, operating results
and financial condition.

WE MAY BE UNABLE TO COMPETE SUCCESSFULLY.

Because of the breadth of our software and service offerings, we face
competition from different vendors depending on the solution in question. We
compete with respect to the largest number of our solutions with Simulation
Sciences, Inc., a subsidiary of Invensys plc. With respect to particular
software solutions, we also compete with Chemstations, Inc., AEA Technology
Engineering Software (a subsidiary of AEA Technology plc), OSI Software, Inc.,
The Foxboro Company and Wonderware Corporation (both of which are subsidiaries
of Invensys plc), the Simcon division of ABB Asea Brown Boveri (Holding) Ltd.,
and several smaller competitors, such as Pavilion Technologies, Inc. With
respect to our supply chain management solutions we compete with vendors such as
i2 Technologies, Inc. and Manugistics Group, Inc.

In recent years, there has been consolidation in the markets in which we
compete that has expanded the breadth of product and service offerings by
certain of our competitors, such as the acquisitions by Invensys plc of
Simulation Sciences, Inc. the Foxboro Company and Wonderware Corporation. In
addition, a number of vendors of ERP software products, such as Baan Company
N.V., J.D. Edwards Inc., Oracle Corporation, PeopleSoft, Inc. and SAP A.G., are
expanding their presence in the market for supply chain management solutions via
internal research and development, acquisitions and salesand marketing
agreements with independent vendors of supply chain management solutions. We
expect to encounter increasing competition from these companies and from DCS
vendors, such as Honeywell Inc., as they expand their software and service
offerings to include additional aspects of process manufacturing. As a result of
this consolidation and the expansion of DCS and ERP vendors into additional
markets, from time to time we may compete with divisions of companies with which
we collaborate on other occasions, such as Honeywell Inc. and Invensys plc.
There can be no assurance that our efforts to compete and cooperate
simultaneously with these or other companies will be successful. The further
consolidation of existing competitors or the emergence of new competitors could
have a material adverse effect on our business, operating results and financial
condition.

Some of our competitors also supply related hardware products to our
existing and potential customers and may have established relationships that
afford those competitors an advantage in supplying software and services to
those customers. Our continued success depends on our ability to compete
effectively with our commercial competitors and to persuade prospective
customers to use our products and services instead of, or in addition to,
software developed internally or services provided by their own personnel. In
light of these factors, there can be no assurance that we will be able to
maintain our competitive position.

FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS,
DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.

An element of our business strategy is to continue to pursue strategic
acquisitions that will provide us with complementary products, services and
technologies and with additional engineering personnel. The

18
<PAGE> 20

identification and pursuit of these acquisition opportunities and the
integration of acquired personnel, products, technologies and businesses require
a significant amount of management time and skill. There can be no assurance
that we will be able to identify suitable acquisition candidates, consummate any
acquisition on acceptable terms or successfully integrate any acquired business
into our operations. In light of the consolidation trend in our industry, we
expect to face competition for acquisition opportunities, which may
substantially increase the cost of any acquisition consummated by us. There can
also be no assurance that any future acquisition will not have a material
adverse effect upon our operating results as a result of non-recurring charges
associated with the acquisition or as a result of integration problems in the
fiscal quarters following consummation of the acquisition. Acquisitions may also
expose us to additional risks, including diversion of management's attention,
failure to retain key acquired personnel, assumption of legal or other
liabilities and contingencies, and amortization of goodwill and other acquired
intangible assets, some or all of which could have a material adverse effect on
our business, operating results and financial condition. Moreover, customer
dissatisfaction with, or problems caused by, the performance of any acquired
technologies could have a material adverse impact on our reputation as a whole.
In addition, there can be no assurance that acquired businesses will achieve
anticipated revenues and earnings. We may use Common Stock or Preferred Stock or
may incur long-term indebtedness or a combination thereof for all or a portion
of the consideration to be paid in future acquisitions. The issuance of Common
Stock or Preferred Stock in acquisitions could result in dilution to existing
stockholders, while the use of cash reserves or significant debt financing to
fund acquisitions could reduce our liquidity.

OUR FAILURE TO DEVELOP AND SELL NEW AND ADDITIONAL PRODUCTS AND SERVICES COULD
IMPAIR OUR FINANCIAL RESULTS AND ADVERSELY AFFECT OUR BUSINESS.

The market for software and services for process manufacturing optimization
is characterized by rapidly changing technology and continuing improvements in
computer hardware, operating systems, programming tools, programming languages
and database technology. Our future success will depend on our ability to
enhance our current software products and services, integrate our current and
future software offerings, modify our products to operate on additional or new
operating platforms or systems, and develop in a timely and cost-effective
manner new software and services that meet changing market conditions, including
evolving customer needs, new competitive software and service offerings,
emerging industry standards and changing technology. We have announced our
intention to further integrate our software products with each other and to
integrate those products with ERP, DCS and other business software solutions. We
believe additional development will be necessary before our products are fully
integrated with each other and with these other solutions, particularly with
respect to ERP solutions. In the past, we have experienced delays in the
development and enhancement of new and existing products, and have on occasion
postponed scheduled delivery dates for certain of our products. There can be no
assurance that we will be able to meet customers' expectations with respect to
product development, enhancement and integration or that our software and
services will otherwise address adequately the needs of customers. Like many
other software products, our software has on occasion contained undetected
errors or "bugs." Because new releases of our software products are initially
installed only by a selected group of customers, any errors or "bugs" in those
new releases may not be detected for a number of months after the delivery of
the software. If our products do not perform substantially as expected or are
not accepted in the marketplace, our business, operating results and financial
condition would be materially adversely affected.

OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF OUR CHIEF EXECUTIVE
OFFICER OR OTHER KEY PERSONNEL.

Our future success depends to a significant extent on Lawrence B. Evans,
our principal founder, Chairman and Chief Executive Officer, our other executive
officers, and a number of key engineering, technical, managerial and marketing
personnel. The loss of the services of any of these individuals or groups of
individuals could have a material adverse effect on our business, operating
results and financial condition. None of our executive officers has entered into
an employment agreement with us, and we do not have, and are not contemplating
securing, any significant amount of key-person life insurance on any of our
executive officers or other key employees. In addition to the need to recruit
qualified project engineers, we believe that our future success will also depend
significantly upon our ability to attract, motivate and retain additional
19
<PAGE> 21

highly skilled technical, managerial and marketing personnel. Competition for
such personnel is intense, and there can be no assurance that we will be
successful in attracting, motivating and retaining the personnel we require to
continue to grow and operate profitably.

WE MAY BE SUBJECT TO SIGNIFICANT EXPENSES AND DAMAGES BECAUSE OF LIABILITY
CLAIMS.

The sale and implementation of certain of our software products and
services, particularly in the areas of advanced process control and
optimization, may entail the risk of product liability claims. Our software
products and services are used in the design, operation and management of
manufacturing processes at large facilities, and any failure of the software at
those facilities could result in significant claims for damages or for
violations of environmental, safety and other laws and regulations. Our
agreements with our customers generally contain provisions designed to limit our
exposure to potential product liability claims. It is possible, however, that
the limitation of liability provisions in our agreements may not be effective as
a result of federal, state or local laws or ordinances or unfavorable judicial
decisions. A substantial product liability claim against us could have a
material adverse effect upon our business, operating results and financial
condition.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, AND WE COULD INCUR
SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM INFRINGEMENT OR
CLAIMS OF INFRINGEMENT.

We regard our software as proprietary and rely on a combination of
copyright, patent, trademark and trade secret laws, license and confidentiality
agreements, and software security measures to protect our proprietary rights. We
have United States patents for the expert guidance system in our proprietary
graphical user interface, the simulation and optimization methods in our
optimization software, a process flow diagram generator in our planning and
scheduling software, and a process simulation apparatus in our polymers
software. We have registered or have applied to register certain of our
significant trademarks in the United States and in certain other countries. We
generally enter into non-disclosure agreements with our employees and customers,
and historically have restricted access to our software products' source codes,
which we regard as proprietary information. In a few cases, we have provided
copies of the source code for certain products to customers solely for the
purpose of special customization of the products and have deposited copies of
the source code for some of our products in third-party escrow accounts as
security for on-going service and license obligations. In these cases, we rely
on nondisclosure and other contractual provisions to protect our proprietary
rights.

The laws of certain countries in which our products are licensed do not
protect our products and intellectual property rights to the same extent as the
laws of the United States. The laws of many countries in which we license our
products protect trademarks solely on the basis of registration. We currently
possess a limited number of trademark registrations in certain foreign
jurisdictions and do not possess, and have not applied for, any foreign
copyright or patent registrations. In fiscal 1997, 1998 and 1999, we derived
approximately 50.0%, 45.4% and 53.4% of our total revenues, respectively, from
customers outside the United States. There can be no assurance that the steps
taken by us to protect our proprietary rights will be adequate to deter
misappropriation of its technology or independent development by others of
technologies that are substantially equivalent or superior to our technology.
Any such misappropriation of our technology or development of competitive
technologies could have a material adverse effect on our business, operating
results and financial condition. We could incur substantial costs in protecting
and enforcing our intellectual property rights. Moreover, from time to time
third parties may assert patent, trademark, copyright and other intellectual
property rights to technologies that are important to us. In such an event, we
may be required to incur significant costs in litigating a resolution to the
asserted claims. There can be no assurance that such a resolution would not
require that we pay damage or obtain a license of a third party's proprietary
rights in order to continue licensing our products as currently offered or, if
such a license is required, that it will be available on terms acceptable to us,
if at all.

WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.

We have experienced substantial growth in recent years in the number of our
employees, the scope of our operating and financial systems, and the geographic
area of our operations. Our operations have expanded
20
<PAGE> 22

significantly through both internally generated growth and acquisitions. This
growth has resulted in increased responsibilities for the our management. To
manage our growth effectively, we must continue to expand our management team,
attract, motivate and retain employees, including qualified project engineers,
and implement and improve its operating and financial systems. There can be no
assurance that our current management systems will be adequate or that we will
be able to manage our recent or future growth successfully. Any failure to do so
could have a material adverse effect on our business, operating results and
financial condition.

OUR INTERNATIONAL OPERATIONS FACE ADDITIONAL RISKS.

In fiscal 1997, 1998 and 1999, we derived approximately 50.0%, 45.4% and
53.4% of our total revenues, respectively, from customers outside the United
States. We anticipate that revenues from customers outside the United States
will continue to account for a significant portion of our total revenues for the
foreseeable future. Our operations outside the United States are subject to
additional risks, including unexpected changes in regulatory requirements,
exchange rates, tariffs and other barriers, political and economic instability,
difficulties in managing distributors or representatives, difficulties in
staffing and managing foreign subsidiary operations, difficulties or delays in
translating products and product documentation into foreign languages, and
potentially adverse tax consequences. There can be no assurance that any of
these factors will not have a material adverse effect on our business, operating
results and financial condition.

The impact of future exchange rate fluctuations on our financial condition
and operating results cannot be accurately predicted. In recent years, we have
increased the extent to which we denominate arrangements with customers outside
the United States in the currencies of the country in which the software or
services are provided. From time to time we have engaged in, and may continue to
engage in, hedges of a significant portion of installment contracts denominated
in foreign currencies. There can be no assurance that any hedging policies
implemented by us will be successful or that the cost of such hedging techniques
will not have a significant impact on our business, operating results and
financial condition.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO INCREASE OUR MARKET PENETRATION.

Increased use in the process industries of software and services for
process manufacturing optimization in general and of our software products and
services in particular is critical to our future growth. We believe that a
number of factors will determine our ability to increase market penetration.
These factors include product performance, accuracy of results, reliability,
breadth and integration of product offerings, scope of applications, and ease of
implementation and use. Our failure to achieve increased market penetration in
the process industries would substantially restrict our future growth and could
have a material adverse effect on our business, operating results and financial
condition.

PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD CAUSE INTERNAL SYSTEM FAILURES
THAT IMPAIR OUR OPERATIONS OR COULD REQUIRE THAT WE INCUR SIGNIFICANT
REMEDIATION COSTS.

Many currently installed computer systems and software applications are
designed to accept only two digit entries in the date code field used to
identify years. These date code fields will need to be modified to recognize
twenty-first century years. As a result, computer systems and software
applications used by many companies may need to be upgraded to comply with Year
2000 requirements. Significant uncertainty exists in the software industry
concerning the potential effects of failure to comply with such requirements.

21
<PAGE> 23

either new software products or Year 2000 compliant releases by the end of 1999.
There can be no assurance that we will be able to test or remediate all custom
applications currently in use by our customers, however, we have attempted to
notify all customers who we think should test custom applications. Although we
have obtained representations as to Year 2000 compliance from the sellers of
certain of our acquired technologies, there can be no assurance that we will not
encounter Year 2000 problems arising from these technologies or any other
technologies that we may acquire in the future. Moreover, the ability of our
software products to comply with Year 2000 requirements depends in part upon the
availability of Year 2000 compliant versions of operating systems and software
applications used by or with our products. Any delay by third party vendors in
developing or offering, or the failure to develop or offer, Year 2000 compliant
products or any necessary updates to existing products which operate with our
products, could result in customer delays in purchasing our products and
services or in reduced demand for those products and services, and could also
result in errors that materially impair the utility of one or more of our
products, any of which could have a material adverse effect on our business,
operating results and financial condition. Although we do not expect the costs
associated with its Year 2000 compliance program to be material, there can be no
assurance that unidentified Year 2000 problems will not cause us to incur
material expenses in responding to such problems or otherwise have a material
adverse effect on our business, operating results and financial condition.
Moreover, customer purchasing patterns may be affected by Year 2000 issues as
customers delay purchases in anticipation of the future release of Year 2000
compliant products or releases, and as customers expend significant resources to
upgrade their current software systems and applications for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software products such as those offered by us.

We have reviewed certain internal systems and future system plans to assess
Year 2000 compliance. We expect that our internal system development plans will
address the Year 2000 issue and will correct any existing non-compliant systems
without the need to accelerate the overall information systems implementation
plans. We expect to incur internal staff costs as well as consulting and other
expenses related to system enhancements for the year 2000. We believe that the
cost of any modifications will not be material. Our ability to implement our
information systems plan and to make the necessary modifications or replacements
may be adversely affected by a number of factors outside our control, including
the ability of our personnel to locate and correct all relevant computer codes
in use. We have conducted an assessment of our systems and operations in order
to more fully identify and plan for any Year 2000 risks, although we believe
that our business would not be materially affected by the failure of any
internal systems to be Year 2000 compliant. If there are unidentified
dependencies on internal systems to operate the business, or if any required
modifications are not completed on a timely basis or are more costly to
implement than currently anticipated, our business, financial condition or
results of operations could be materially adversely affected.

OUR COMMON STOCK MAY EXPERIENCE SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS.

The equity markets have from time to time experienced extreme price and
volume fluctuations, particularly in the high technology sector, and those
fluctuations have often been unrelated to the operating performance of
particular companies. In addition, factors such as our financial performance,
announcements of technological innovations or new products by us or our
competitors, as well as market conditions in the computer software or hardware
industries, may have a significant impact on the market price of our Common
Stock.

WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY.

Our Certificate of Incorporation, our By-Laws and certain Delaware laws
contain provisions that may discourage acquisition bids for us and that may
deprive stockholders of certain opportunities to receive a premium for their
shares as part of an acquisition. Preferred Stock may be issued by us in the
future without stockholder approval and upon such terms as the Board of
Directors may determine. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a majority of our
outstanding stock. We have adopted a stockholder rights plan, which may deter or
delay attempts to acquire us or accumulate shares of Common Stock.

22
<PAGE> 24

ITEM 2. PROPERTIES

Our principal offices occupy approximately 110,000 square feet of office
space in Cambridge, Massachusetts. The lease of our principal offices expires on
September 30, 2002. We and our subsidiaries also own or lease office space in
New Providence, New Jersey; Houston, Texas; Midlothian, Virginia; Bothell,
Washington; Brussels, Belgium; Calgary, Alberta, Canada; Cambridge, England;
Warrington, England; Hong Kong; Tokyo, Japan; Best, The Netherlands; Singapore;
and other locations where additional sales and customer support offices are
located. We anticipate a consolidation of our Houston, Texas facilities in late
fiscal 2000 and have signed a lease agreement for new office space which
encompasses approximately 245,000 square feet and has a twelve year commitment.
We believe that our existing and planned facilities are adequate for our current
needs and our needs for the reasonably foreseeable future and that, if
additional space is needed, such space will be available on acceptable terms.

ITEM 3. LEGAL PROCEEDINGS

We are a party to lawsuits in the normal course of our business. We believe
that we have meritorious defenses in all lawsuits in which we or our
subsidiaries are a defendant. We note that (a) securities litigation, in
particular, can be expensive and disruptive to normal business operations and
(b) the results of complex legal proceedings can be very difficult to predict.

On October 5, 1998, a purported class action lawsuit was filed in the
United States District Court for the District of Massachusetts against us and
certain of our officers and directors, on behalf of purchasers of our common
stock between April 28, 1998 and October 2, 1998, the Van Ormer Complaint. The
lawsuit seeks an unspecified amount of damages and claims violations of
Sections10 (b) and 20(a) of the Securities Exchange Act of 1934, alleging that
we issued a series of materially false and misleading statements concerning our
financial condition, our operations and integration of several acquisitions. On
October 26 a second purported class action lawsuit was filed in the United
States District Court for the District of Massachusetts against us and certain
of our officers and directors, on behalf of purchasers of our common stock
between April 28, 1998 and October 2, 1998 which was verbatim identical to the
Van Ormer Complaint except only for the plaintiff's name, the Clancey Complaint.
On November 20, 1998 a third purported class action lawsuit was filed in the
same court against the same defendants which was verbatim identical to the Van
Ormer and Clancey Complaints except only for the plaintiff's name, the expansion
of the class action period from January 27, 1998 to October 2, 1998, and the
addition of references to statements made between January 27, 1998 and April 28,
1998, the Marucci Complaint. On January 27, 1999, in response to a motion to
dismiss filed by us, the plaintiffs consolidated the three complaints and filed
a Consolidated Amended Class Action Complaint. The case was reassigned to a new
judge during the summer for the second time and, as of September 23, 1999, she
had not taken any action or rendered any decision. We believe we have
meritorious legal defenses to the lawsuits and intend to defend vigorously
against these actions. We are currently unable, however, to determine whether
resolution of these matters will have a material adverse impact on our financial
position or results of operations, or reasonably estimate the amount of the
loss, if any, that may result from resolution of these matters.

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

No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 1999.

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<PAGE> 25

PART II

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

MARKET INFORMATION

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "AZPN." The following table sets forth, for the periods indicated,
the high and low sale prices per share of the Common Stock as reported on the
Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1998:
First Quarter............................................. $46.250 $29.500
Second Quarter............................................ 39.875 27.875
Third Quarter............................................. 43.375 23.500
Fourth Quarter............................................ 53.125 37.750
FISCAL 1999:
First Quarter............................................. $56.875 $18.500
Second Quarter............................................ 26.750 6.125
Third Quarter............................................. 18.125 9.125
Fourth Quarter............................................ 12.875 8.250
</TABLE>

HOLDERS

As of June 30, 1999, there were 1,268 holders of record of Common Stock.

DIVIDENDS

We have never declared or paid cash dividends on our capital stock,
although one of our subsidiaries paid dividends to its stockholders prior to its
acquisition by us in fiscal 1995. We currently intend to retain all of our
earnings, if any, for use in its business and do not anticipate paying any cash
dividends in the foreseeable future. In addition, under the terms of our bank
line of credit, we are prohibited from paying any cash dividends. Any future
determination relating to dividend policy will be made at the discretion of our
Board of Directors and will depend on a number of factors, including our future
earnings, capital requirements, financial condition and future prospects and
such other factors as the Board of Directors may deem relevant.

REPRICING OF EMPLOYEE STOCK OPTIONS

On November 11, 1998 our Board of Directors approved the repricing of
certain employee stock options with an exercise price in excess of the fair
market value of our common stock. The exercise price for 2.6 million shares of
employee stock options was reset to $14.125, the closing market price on
November 11, 1998. All such options were adjusted by resetting vesting back one
year. Stock options held by executive officers and directors were not eligible
for the repricing.

SALES OF UNREGISTERED SECURITIES

During fiscal 1999, we issued shares of our Common Stock to the former
equity holders of Syllogistics, Inc., a one employee company, in exchange for
all of the outstanding equity securities of that entity as follows:

<TABLE>
<CAPTION>
SHARES OF
COMMON
BUSINESS ACQUIRED DATE ACQUIRED STOCK ISSUED
- ----------------- ---------------- ------------
<S> <C> <C>
Syllogistics, Inc............................. October 14, 1999 45,000
</TABLE>

All of the shares issued in this transaction were exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended. All of these
shares have been subsequently registered pursuant to shelf

24
<PAGE> 26

registration statement filed with the Securities and Exchange Commission on June
8, 1999 in accordance with registration rights arrangements entered into in
connection with the acquisition.

On June 17, 1998, AspenTech completed the sale of $86,250,000 aggregate
principal amount of our 5 1/4% Convertible Subordinated Debentures due June 15,
2005 (the "Debentures"). The Debentures were sold by us to Goldman, Sachs, &
Co., NationsBanc Montgomery Securities LLC and William Blair & Company, L.L.C.,
Initial Purchasers, which offered and sold the Debentures to qualified
institutional buyers in reliance on Rule 144A under the Securities Act of 1933,
as amended. We initially offered $75,000,000 aggregate principal amount of
Debentures and sold an additional $11,250,000 aggregate principal amount of
Debentures pursuant to the Initial Purchasers' exercise of an over-allotment
option.

The Debentures were offered at a price of 100% of principal amount, or
$86,250,000. The net proceeds received by us from the sale of the Debentures,
after deducting underwriting commissions of $3,018,750 (but before deducting
expenses of the offering), totalled $83,231,250. We intend to use the net
proceeds for working capital and other general corporate purposes. We may use a
portion of the net proceeds to acquire or invest in one or more new
technologies, products or businesses that expand, complement or are otherwise
related to our current business and software and service solutions.

The Debentures are convertible into shares of Common Stock at any time
prior to the close of business on the maturity date, unless previously redeemed
or repurchased, at a conversion price of approximately $52.97 per share of
Common Stock (equivalent to a conversion rate of 18.9791 shares per $1,000
principal amount of Debentures), subject to adjustment in certain events.

25
<PAGE> 27

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated balance sheet data as of June 30, 1998 and 1999
and the selected consolidated statement of operations data for each of the years
ended June 30, 1997, 1998 and 1999 have been derived from the Company's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants, and are included elsewhere in this Form
10-K. The selected consolidated balance sheet data as of June 30, 1995, 1996 and
1997 and the selected consolidated statement of operations data for the years
ended June 30, 1995 and 1996 have been derived from the Company's Consolidated
Financial Statements, which also have been audited by Arthur Andersen LLP but
are not included in this Form 10-K. The following selected consolidated
financial data are qualified by reference to the more detailed Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Form 10-K, and should be read in conjunction with such Consolidated Financial
Statements and Notes and the discussion under "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Software licenses.................. $49,479 $ 70,199 $103,179 $139,390 $ 91,621
Services and other................. 16,540 44,619 90,891 113,165 127,972
------- -------- -------- -------- --------
Total revenues....................... 66,019 114,818 194,070 252,555 219,593
------- -------- -------- -------- --------
Expenses:
Cost of software licenses.......... 3,080 3,992 5,539 8,178 7,862
Cost of services and other......... 10,052 27,220 54,006 68,490 83,346
Selling and marketing.............. 24,276 36,610 56,034 74,926 85,249
Research and development........... 12,652 22,310 33,580 43,553 48,067
General and administrative......... 5,679 10,715 17,072 20,208 23,253
Restructuring and other charges.... -- -- -- -- 17,867
Charge for in-process research and
development..................... -- 24,421 8,664 8,472 --
Costs related to acquisitions...... 950 -- -- 4,984 --
------- -------- -------- -------- --------
Total expenses....................... 56,689 125,268 174,895 228,811 265,644
------- -------- -------- -------- --------
Income (loss) from operations........ 9,330 (10,450) 19,175 23,744 (46,051)
Foreign currency exchange gain
(loss)............................. 34 (223) (236) (454) (94)
Income (loss) on equity in joint
ventures........................... 22 10 26 45 19
Interest income...................... 3,138 3,745 5,556 5,727 9,957
Interest expense..................... (561) (1,323) (151) (377) (5,677)
------- -------- -------- -------- --------
Income (loss) from before provision
for (benefit from) income taxes.... 11,963 (8,241) 24,370 28,685 (41,846)
Provision for (benefit from) income
taxes.............................. 4,854 6,146 10,169 14,049 (16,111)
------- -------- -------- -------- --------
Net income (loss)(1)................. $ 7,109 $(14,387) $ 14,201 $ 14,636 $(25,735)
======= ======== ======== ======== ========
Diluted net income (loss) per
share(2)........................... $ 0.42 $ (0.83) $ 0.63 $ 0.59 $ (1.04)
Basic net income (loss) per
share(2)........................... $ 0.46 $ (0.83) $ 0.66 $ 0.63 $ (1.04)
Weighted average shares
outstanding -- diluted(2).......... 17,113 17,432 22,707 24,883 24,835
Weighted average shares
outstanding -- basic(2)............ 15,321 17,432 21,368 23,415 24,835
</TABLE>

26
<PAGE> 28

<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash-equivalents.......... $ 6,290 $ 14,773 $ 18,284 $ 78,694 $ 33,456
Working capital.................... 31,377 72,560 73,789 172,866 152,143
Total assets....................... 83,259 168,986 203,545 342,882 322,242
Long-term obligations, less current
maturities...................... 4,087 706 462 90,635 89,405
Total stockholders' equity......... 45,824 104,477 137,414 165,016 143,226
</TABLE>

- ---------------
(1) The Company has never declared or paid cash dividends on its capital stock,
although one of the Company's subsidiaries paid dividends to its
stockholders prior to its acquisition by the Company in fiscal 1995.

(2) Computed as described in Note 2(i) of Notes to Consolidated Financial
Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Since its founding in 1981, the Company has developed and marketed software
and services to companies in the process industries. The Company's revenues have
increased at an average compounded rate of 34.8% since fiscal 1994, when the
Company filed its initial public offering. In addition to internally generated
growth, the Company has acquired 17 businesses since May 1995, including
Industrial Systems, Inc. ("ISI") in the fourth quarter of fiscal 1995, DMCC and
Setpoint in the third quarter of fiscal 1996, and Chesapeake in the fourth
quarter of fiscal 1998.

The Company acquired DMCC, Setpoint and four other, less material
businesses in transactions accounted for as purchases. The Company's results of
operations include the results of operations of DMCC, Setpoint and these four
other companies only for periods subsequent to their respective dates of
acquisition. As of result, period-to-period comparisons of the Company's results
of operations may not be meaningful. See Note 4 of Notes to Consolidated
Financial Statements.

The Company acquired ISI, Chesapeake and eight other businesses in
transactions accounted for as poolings of interests. Of these acquisitions, only
the acquisitions of ISI and Chesapeake were material to the Company's financial
condition and results of operations. Accordingly, the Company has restated its
consolidated financial statements to reflect the historic operations of ISI and
Chesapeake but not the other, immaterial acquisitions.

The Company's operating results for fiscal 1999 were adversely affected by
a lower than expected level of license revenues. The shortfall resulted
primarily from delayed decision making driven by economic difficulties among
customers in our core vertical markets of refining, chemicals, and
petrochemicals. These lower revenues resulted in lower than planned operating
results and a net loss for fiscal 1999.

In April 1999, Company management undertook certain actions to restructure
its business. In connection with this restructuring, the Company has reduced its
staff by approximately 200 employees, about twelve percent of the global
workforce and began consolidating facilities, streamlining operations and
rationalizing certain non-core products and activities acquired in recent years.
As a result of these measures, the Company has recorded a $17.9 million one-time
charge for restructuring and other costs in fiscal 1999.

The Company typically licenses its process design software solutions for
terms of 3 to 5 years, its process operation software solutions for terms of 99
years, its planning and scheduling software solutions for terms of 5 or 25
years, and its other process management software solutions for terms of 99
years. See "Item 1. Business -- Software and Service Solutions."

License revenue, including license renewals, consists principally of
revenue earned under fixed-term and perpetual software license agreements and is
generally recognized upon shipment of the software if collection of the
resulting receivable is probable, the fee is fixed or determinable, and
vendor-specific objective evidence

27
<PAGE> 29

exists to allocate the total fee to all delivered and undelivered elements of
the arrangement. The Company uses installment contracts as a standard business
practice and has a history of successfully collecting under the original payment
terms without making concessions on payments, products or services. The Company
recognizes revenues from customer support ratably over the term of the support
agreement. If a customer elects to pay for a license in annual installments, the
Company charges an implicit amount of interest and recognizes interest income
over the term of the license. A substantial majority of the Company's term
licenses have been renewed upon expiration. However, there can be no assurance
that customers will continue to renew expiring term licenses at the historical
rate.

The Company derives a significant portion of its revenue from consulting
projects related to the implementation of its software solutions, particularly
in connection with projects involving advanced process control, real-time
optimization and information management software. For fiscal 1999, the Company
derived 41.7% of its total revenues from the licensing of software products and
58.3% of its total revenues from the provision of services. The Company
generally charges customers for consulting services on a fixed-price basis, but
charges customers for certain services, primarily on-site advanced process
control and optimization services and supply chain, on a time-and-materials
basis. Service revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the portion of costs incurred to
date as a percentage of the estimated total (primarily labor) costs for each
contract. Service revenues from time-and-materials contracts are recognized as
the related services are performed. Training revenues are recognized as services
are performed. Services that have been performed but for which billings have not
been made are recorded as unbilled receivables, and billings for which services
have not been performed are recorded as unearned revenue in the Company's
Consolidated Balance Sheets.

The Company licenses its software in U.S. dollars and certain foreign
currencies. The Company hedges all material foreign currency-denominated
receivables with specific hedge contracts in amounts equal to those receivables.
While the Company has experienced minor foreign currency exchange gains or
losses due to foreign exchange rate fluctuations, the impact of such movements
has not been material in any period. The Company does not expect fluctuations in
foreign currencies to have a significant impact on either its revenues or
expenses in the foreseeable future.

The Company's operating costs include the amortization of intangible
assets, including goodwill, arising from acquisitions accounted for as
purchases. The net balance of these intangible assets as of June 30, 1999 was
$9.1 million and is being amortized over periods ranging from 5 to 12 years. The
amortization from acquisitions that was charged to operations was $2.7 million
for fiscal 1998 and $3.0 million for fiscal 1999. Amortization expense for
fiscal 2000 will range from $611,000 to $361,000 per quarter, on a declining
schedule; fiscal 2001 amortization expense will decline from $361,000 to
$318,000 per quarter while fiscal 2002 will range from $318,000 to $190,000 per
quarter. Thereafter amortization expense will continue to decline through its
completion in fiscal 2009.

28
<PAGE> 30

RESULTS OF OPERATIONS

The following table sets forth the percentage of total revenues represented
by certain consolidated statement of operations data for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenues:
Software licenses......................................... 53.2% 55.2% 41.7%
Service and other......................................... 46.8 44.8 58.3
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
----- ----- -----
Expenses:
Cost of software licenses................................. 2.9 3.2 3.6
Cost of service and other................................. 27.8 27.1 38.0
Selling and marketing..................................... 28.9 29.7 38.8
Research and development.................................. 17.3 17.2 21.9
General and administrative................................ 8.8 8.0 10.6
Restructuring and other charges........................... -- -- 8.1
Charge for in-process research and development............ 4.5 3.4 --
Costs related to acquisitions............................. -- 2.0 --
----- ----- -----
Total expenses.............................................. 90.2 90.6 121.0
----- ----- -----
Income (loss) from operations............................... 9.8 9.4 (21.0)
Interest income........................................... 2.9 2.3 4.5
Interest expense.......................................... (0.1) (0.1) (2.5)
Other income (expense), net............................... (0.1) (0.2) --
----- ----- -----
Income (loss) before provision for (benefit from) income
taxes..................................................... 12.5 11.4 (19.0)
Provision for (benefit from) income taxes................. 5.2 5.6 (7.3)
----- ----- -----
Net income (loss)........................................... 7.3% 5.8% (11.7)%
===== ===== =====
</TABLE>

COMPARISON OF FISCAL 1999 TO FISCAL 1998

REVENUES. Revenues are derived from software licenses and services. Total
revenues for fiscal 1999 decreased 28.5% to $219.6 million from $252.6 million
in fiscal 1998.

Software license revenues represented 41.7% and 55.2% of total revenues for
fiscal 1999 and 1998, respectively. Revenues from software licenses in fiscal
1999 decreased 34.3% to $91.6 million from $139.4 million in fiscal 1998.
Software license revenues are attributable to software license renewals covering
existing users, the expansion of existing customer relationships through
licenses covering additional users, licenses of additional software products,
and, to a lesser extent, to the addition of new customers. The decrease in
fiscal 1999 license revenues resulted primarily from delayed decision making
driven by economic difficulties among customers in our core vertical markets of
refining, chemicals, and petrochemicals.

Total revenues from customers outside the United States were $117.3 million
or 53.4% of total revenues and $114.7 million or 45.4% of total revenues for
fiscal 1999 and 1998, respectively. The geographical mix of revenues can vary
from period to period.

Revenues from service and other consist of consulting services,
post-contract support on software licenses, training and sales of documentation.
Revenues from service and other for fiscal 1999 increased 11.6% to $128.0
million from $113.2 million for fiscal 1998. This increase reflects a continued
focus during fiscal 1999 on providing high value-added consulting and training
services to existing customers. Revenues from service and other for both fiscal
1999 and 1998 was adversely affected by lower-than-planned levels of consultant
utilization. The lower fiscal 1999 utilization was attributable to the delay of
project starts by clients, while the

29
<PAGE> 31

fiscal 1998 utilization shortfall was attributable to temporary mismatches
between types and geographies of scheduled projects, the skill sets and
locations of available personnel and the timing of certain project starts.

Neither the Company's joint venture or similar activities nor any
discounting or similar activities have historically had a material effect on the
Company's revenues.

COST OF SOFTWARE LICENSES. Cost of software licenses consists of
royalties, amortization of previously capitalized software costs, costs related
to delivery of software (including disk duplication and third-party software
costs), printing of manuals and packaging. Cost of software licenses for fiscal
1999 decreased 3.9% to $7.9 million from $8.2 million in fiscal 1998. Cost of
software licenses as a percentage of revenues from software licenses increased
to 8.6% for fiscal 1999 from 5.9% for fiscal 1998. This increase was due to
relatively flat expenses spread over a lower revenue base.

COST OF SERVICE AND OTHER. Cost of service and other consists of the cost
of execution of application consulting services, technical support expenses, the
cost of training services and the costs of manuals that are sold as separate
items. Cost of service and other for fiscal 1999 increased 21.7% to $83.3
million from $68.5 million for fiscal 1998. Cost of service and other as a
percentage of revenues from services and other increased to 65.1% for fiscal
1999 from 60.5% for fiscal 1998. This percentage increase reflects a cost base
that was increased to support a projected higher revenue level. This higher
revenue level was not realized due to lower utilization rates attributable to
the delay of project starts by clients.

SELLING AND MARKETING. Selling and marketing expenses for fiscal 1999
increased 13.8% to $85.2 million from $74.9 million for fiscal 1998 while
increasing as a percentage of revenues to 38.8% from 29.7%. The dollar and
percentage increases were attributable to a cost base that was increased to
support a higher revenue level that was not achieved. A significant component of
the April 1999 restructuring included selective reduction of sales and marketing
staff in certain markets and geographic locations. These selective reductions
were made to correspond to the customer opportunities in certain of our core
vertical markets and customer locations. The Company continues to selectively
invest in sales personnel and regional sales offices to improve the Company's
geographic proximity to its customers, to maximize the penetration of existing
accounts and to add new customers.

RESEARCH AND DEVELOPMENT. Research and development expenses consist of
personnel and outside consultancy costs required to conduct the Company's
product development efforts. Capitalized research and development costs are
amortized over the estimated remaining economic life of the relevant product,
not to exceed three years. Research and development expenses for fiscal 1999
increased 10.4% to $48.1 million from $43.6 million for fiscal 1998 while
increasing as a percentage of total revenues to 21.9% from 17.2%. The increase
in costs principally reflects continued investment in development of the
Company's individual software solutions and increased development of the Aspen
Framework as the backbone of our Plantelligence solution. The Company
capitalized 5.8% of its total research and development costs during fiscal 1999
as compared to 8.2% in fiscal 1998.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of administrative, executive, financial and legal
personnel, outside professional fees and amortization of intangibles. General
and administrative expenses for fiscal 1999 increased 15.1% to $23.3 million
from $20.2 million for fiscal 1998, and increasing as a percentage of total
revenues to 10.6% from 8.0%. The increase in costs was due primarily to payments
to strategic consultants to assist in the realignment of the business,
litigation support, and the increase in the reserve for bad debts.

RESTRUCTURING AND OTHER CHARGES. In the fourth quarter of fiscal 1999, the
Company undertook certain actions to restructure its business. The restructuring
resulted from a lower than expected level of license revenues which adversely
affected fiscal 1999 operating results. The license revenue shortfall resulted
primarily from delayed decision making driven by economic difficulties in
certain of our core vertical markets. The restructuring plan resulted in a
pre-tax restructuring charge totaling $17.9 million. The principal charges in
the restructuring plan include: the reduction of workforce, $4,324; the
close-down or consolidation of a number of offices and facilities, $10,224; the
rationalizing of certain non-core products and activities acquired in recent
years yielding the writing off of $3,060 of assets; and, other general cost
reductions of $259.
30
<PAGE> 32

INTEREST INCOME. Interest income is generated from the license of software
pursuant to installment contracts for process design software and the investment
of excess cash in short-term investments. Under these installment contracts, the
Company offers customers the option to make annual payments for its term
licenses instead of a single license fee payment at the beginning of the license
term. A substantial majority of the process design modeling customers elect to
license these products through installment contracts. The Company believes this
election is made principally because the customers prefer to pay for the
Company's process design software out of their operating budgets, rather than
out of their capital budgets. Included in the annual payments is an implicit
interest established by the Company at the time of the license. The Company
sells a portion of the installment contracts to unrelated financial
institutions. The interest earned by the Company on the installment contract
portfolio in any one year is the result of the implicit interest established by
the Company on installment contracts and the size of the contract portfolio.
Interest income was $10.0 million for fiscal 1999 as compared to $5.7 million in
fiscal 1998. The increase reflects the interest income generated from excess
cash from the Company's 5 1/4% convertible debentures, which was not issued and
outstanding until June 1998.

INTEREST EXPENSE. Interest expense is generated from interest charged on
the Company's 5 1/4% convertible debentures, bank line of credit and capital
lease obligations. Interest expense in fiscal 1999 increased to $5.7 million
from $0.4 million in fiscal 1998. The increase is primarily related to the
interest expense on the Company's 5 1/4% convertible debentures, which did not
exist until June 1998.

PROVISION FOR/BENEFIT FROM INCOME TAXES. The effective tax rate in fiscal
1999 is calculated as a percentage of loss before taxes. The effective tax rate
changed for fiscal 1999 to 38.5% of pre-tax loss as compared to 33.6% of net
income exclusive of the non-recurring charge for in-process research and
development for fiscal 1998. This change was primarily due to utilization of
carrybacks of the fiscal 1999 taxable loss to prior years taxable income and the
generation of certain tax credits.

COMPARISON OF FISCAL 1998 TO FISCAL 1997

REVENUES. Revenues are derived from software licenses and services. Total
revenues for fiscal 1998 increased 30.1% to $252.6 million from $194.1 million
in fiscal 1997.

Software license revenues represented 55.2% and 53.2% of total revenues for
fiscal 1998 and 1997, respectively. Revenues from software licenses in fiscal
1998 increased 35.1% to $139.4 million from $103.2 million in fiscal 1997. The
growth in software license revenues was attributable to software license
renewals covering existing users, the expansion of existing customer
relationships through licenses covering additional users, licenses of additional
software products, and, to a lesser extent, to the addition of new customers.

Total revenues from customers outside the United States were $114.7 million
or 45.4% of total revenues and $97.0 million or 50.0% of total revenues for
fiscal 1998 and 1997, respectively. The geographical mix of revenues can vary
from quarter to quarter.

Revenues from service and other for fiscal 1998 increased 24.5% to $113.2
million from $90.9 million for fiscal 1997. This increase reflects a continued
focus during fiscal 1998 on providing high value-added consulting and training
services to existing customers. Revenues from service and other for fiscal 1998
was adversely affected by lower-than-planned levels of consultant utilization
attributable to temporary mismatches between types and geographies of scheduled
projects, the skill sets and locations of available personnel and the timing of
certain project starts. During the second half of fiscal 1998 the Company
implemented programs intended to mitigate these issues through, for example,
targeted sales incentives and improved information flow between sales and
consulting personnel.

Neither the Company's joint venture or similar activities nor any
discounting or similar activities have historically had a material effect on the
Company's revenues.

COST OF SOFTWARE LICENSES. Cost of software licenses for fiscal 1998
increased 47.6% to $8.2 million from $5.5 million in fiscal 1997. Cost of
software licenses as a percentage of revenues from software licenses increased
to 5.9% for fiscal 1998 from 5.4% for fiscal 1997. This increase was due to the
generation of a greater portion of sales having third-party software and royalty
costs in the fourth quarter of fiscal 1998.
31
<PAGE> 33

COST OF SERVICE AND OTHER. Cost of service and other for fiscal 1998
increased 26.8% to $68.5 million from $54.0 million for fiscal 1997. Cost of
service and other as a percentage of revenues from services and other increased
to 60.5% for fiscal 1998 from 59.4% for fiscal 1997. This percentage increase
reflects a change in mix to more application consulting services, which have a
higher cost base, and, to a lesser extent, special payments made in connection
with a transitional incentive compensation plan for consultants based on hours
billed.

SELLING AND MARKETING. Selling and marketing expenses for fiscal 1998
increased 33.7% to $74.9 million from $56.0 million for fiscal 1997 while
increasing slightly as a percentage of revenues to 29.7% from 28.9%. The dollar
and percentage increases were attributable in part to compensation earned by
sales personnel who exceeded their quotas and earned commissions at higher
rates.

RESEARCH AND DEVELOPMENT. Research and development expenses for fiscal
1998 increased 29.7% to $43.6 million from $33.6 million for fiscal 1997 while
decreasing slightly as a percentage of total revenues to 17.2% from 17.3%. The
increase in costs principally reflects continued investment in development of
the Company's core modeling products and a common software architecture
encompassing the Company's expanded family of software products. The Company
capitalized 8.2% of its total research and development costs during fiscal 1998
as compared to 6.6% in fiscal 1997.

GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal
1998 increased 18.4% to $20.2 million from $17.1 million for fiscal 1997, while
decreasing as a percentage of total revenues to 8.0% from 8.8%. These costs did
not grow at the same rate as revenues, as the Company's infrastructure was able
to support a larger revenue base; however, the increased dollar amounts reflect
the growth in the scale and scope of the Company's operations.

CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with several
acquisitions during fiscal 1998 and 1997, the Company allocated $8.5 million and
$8.7 million, respectively, of the purchase prices to in-process research and
development based upon independent appraisals. These costs were charged to
operations as of the respective acquisition dates, because they related to
projects that had not yet reached technological feasibility and that had no
alternative future use until completion of development. At the respective times
of the acquisitions, these projects required substantial additional development
and testing by the Company in order to reach technological feasibility and there
was no assurance that these projects would reach technological feasibility or
develop into products that could be sold by the Company.

COST RELATED TO ACQUISITIONS. In connection with several acquisitions by
the Company during fiscal 1998 that were accounted for as poolings of interests,
the Company incurred $5.0 million in expenses, primarily investment banking and
professional service fees related to the transactions.

INTEREST INCOME. Interest income was $5.7 million for fiscal 1998 as
compared to $5.6 million in fiscal 1997.

INTEREST EXPENSE. Interest expense in fiscal 1998 increased to $0.4
million from $0.2 million in fiscal 1997.

PROVISION FOR INCOME TAXES. The effective tax rate in fiscal 1998 is
calculated as a percentage of income before taxes, exclusive of the
non-recurring charges for in-process research and development. The effective tax
rate decreased for fiscal 1998 to 33.6% of pre-tax income from 35.9% for fiscal
1997. This decrease was primarily due to utilization of foreign loss carrybacks,
foreign tax credits, and research and development credits.

QUARTERLY RESULTS

The Company's operating results and cash flow have fluctuated in the past
and may fluctuate significantly in the future as a result of a variety of
factors, including purchasing patterns, timing of introductions of new solutions
and enhancements by the Company and its competitors, and fluctuating economic
conditions. Because license fees for the Company's software products are
substantial and the implementation of the Company's solutions often requires the
services of the Company's engineers over an extended period of time,

32
<PAGE> 34

the sales process for the Company's solutions is lengthy and can exceed one
year. Accordingly, software revenue is difficult to predict, and the delay of
any order could cause the Company's quarterly revenues to fall substantially
below expectations. Moreover, to the extent that the Company succeeds in
shifting customer purchases away from point solutions and toward integrated
suites of its software and service solutions, the likelihood of delays in
ordering may increase and the effect of any delay may become more pronounced.

The Company ships software products within a short period after receipt of
an order and usually does not have a material backlog of unfilled orders of
software products. Consequently, revenues from software licenses, including
license renewals in any quarter are substantially dependent on orders booked and
shipped in that quarter. Historically, a majority of each quarter's revenues
from software licenses has been derived from license agreements that have been
consummated in the final weeks of the quarter. Therefore, even a short delay in
the consummation of an agreement may cause revenues to fall below expectations
for that quarter. The company's revenues in certain quarters of fiscal 1999 were
lower than expected due to delayed decision making of economic difficulties
among certain customers. These lower revenues resulted in lower than planned
operating results and a net operating loss in each quarter of fiscal 1999.
Additionally, since the Company's expense levels are based in part on
anticipated revenues, the Company may be unable to adjust spending in a timely
manner to compensate for any revenue shortfall and any revenue shortfalls would
likely have a disproportionately adverse effect on net income. The Company
expects that these factors will continue to affect its operating results for the
foreseeable future.

Prior to fiscal 1997, and in fiscal 1999, we experienced a net loss for the
first quarter of each fiscal year, in part because a substantial portion of the
Company's total revenues is derived from countries other than the United States
where business is slow during the summer months and also in part because of the
timing of renewals of software licenses. We believe that we may continue to
experience challenges in growing total revenues and net income in the first
fiscal quarter as compared to the immediately preceding fiscal quarter. Because
of the foregoing factors, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.

Because of the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.

33
<PAGE> 35

The following table presents selected quarterly statement of operations
data for fiscal 1998 and 1999. These data are unaudited but, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of these data in accordance with
generally accepted accounting principles.

<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999
-------------------------------------- ---------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
-------- ------- ------- ------- -------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses............. $24,388 $32,465 $38,691 $43,846 $ 16,004 $28,673 $22,191 $ 24,753
Service and other............. 25,065 27,738 29,697 30,665 30,705 32,982 32,001 32,284
------- ------- ------- ------- -------- ------- ------- --------
Total revenues.................. 49,453 60,203 68,388 74,511 46,709 61,655 54,192 57,037
------- ------- ------- ------- -------- ------- ------- --------
Expenses:
Cost of software licenses..... 1,672 1,752 1,540 3,214 1,667 1,943 2,149 2,103
Cost of service and other..... 14,712 16,356 17,274 20,148 19,973 21,040 21,204 21,129
Selling and marketing......... 15,186 17,621 19,876 22,243 19,145 21,609 22,207 22,288
Research and development...... 10,163 10,358 10,998 12,034 11,604 11,937 12,297 12,229
General and administrative.... 4,502 4,839 5,309 5,558 5,475 5,625 6,235 5,918
Restructuring and other
charges..................... -- -- -- -- -- -- -- 17,867
Charge for in-process research
and development............. -- -- 8,472 -- -- -- -- --
Costs related to
acquisitions................ 509 -- 475 4,000 -- -- -- --
------- ------- ------- ------- -------- ------- ------- --------
Total expenses.................. 46,744 50,926 63,944 67,197 57,864 62,154 64,092 81,534
------- ------- ------- ------- -------- ------- ------- --------
Income (loss) from operations... 2,709 9,277 4,444 7,314 (11,155) (499) (9,900) (24,497)
Other expense, net.............. (67) (91) (162) (89) 218 28 (115) (206)
Interest income, net............ 1,453 1,347 1,358 1,192 1,152 1,212 1,005 911
------- ------- ------- ------- -------- ------- ------- --------
Income (loss) before provision
for (benefit from) income
taxes......................... 4,095 10,533 5,640 8,417 (9,785) 741 (9,010) (23,792)
Provision for (benefit from)
income taxes.................. 1,460 3,791 5,073 3,725 (3,425) 260 (3,153) (9,793)
------- ------- ------- ------- -------- ------- ------- --------
Net income (loss)............... $ 2,635 $ 6,742 $ 567 $ 4,692 $ (6,360) $ 481 $(5,857) $(13,999)
======= ======= ======= ======= ======== ======= ======= ========
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

In recent years, the Company has financed its operations principally
through cash generated from sales of securities through private placements and
public offerings of its Common Stock and the Debentures, operating activities,
the sale of installment contracts to third parties and, at certain times during
the year, borrowings under a bank line of credit.

To date, the Company received a total of $87.0 million of net proceeds from
its initial public offering and subsequent public offerings. A portion of the
total net proceeds was used for working capital and other general corporate
purposes, to pay a portion of the purchase prices of DMCC and Setpoint and to
repay outstanding indebtedness under the Company's bank line of credit,
subordinated notes and a promissory note issued in conjunction with the purchase
of Setpoint. In the fourth quarter of fiscal 1998, the Company received a total
of $82.4 million from its sale of the Debentures. A portion of these net
proceeds was used for working capital and other general corporate purposes. The
Company evaluates on an ongoing basis potential opportunities to acquire or
invest in technologies, products, services, businesses or engineering personnel
that expand, complement or are otherwise related to the Company's current
business and products.

In fiscal 1997 and 1998 operating activities provided $3.1 million and
$19.7 million of cash, respectively, primarily as a result of net income and
increases in accounts payable, accrued expenses and deferred revenue, offset in
part by increases in long-term installments receivable and accounts receivable.
In fiscal 1999, operating activities used $9.0 million of cash primarily as a
result of the net loss, offset in part by increases in accounts payable and
accrued expenses and a decrease in long-term installments receivable.

In recent years, the Company has had arrangements to sell long-term
contracts to two financial institutions, General Electric Capital Corporation
and Fleet Business Credit Corporation (formerly Sanwa Business Credit
Corporation). These contracts represent amounts due over the life of existing
term licenses.

34
<PAGE> 36

During fiscal 1999, installment contracts decreased by $3.3 million to $56.6
million, net of $32.3 million of installment contracts sold to General Electric
Capital Corporation and Fleet Business Credit Corporation. During fiscal 1998,
installment contracts increased by $9.8 million to $59.8 million, net of $51.3
million of installment contracts sold to General Electric Capital Corporation
and Fleet Business Credit Corporation. During fiscal 1997, installment contracts
increased by $20.3 million to $50.0 million, net of $30.2 million of installment
contracts sold to General Electric Capital Corporation and Fleet Business Credit
Corporation. The Company's arrangements with these two financial institutions
provide for the sale of installment contracts up to certain limits and with
certain recourse obligations. At June 30, 1999, June 30, 1998 and June 30, 1997,
the balance of the uncollected principal portion of the contracts sold to these
two financial institutions was $91.5 million, $87.6 million and $57.8 million,
respectively, for which the Company had partial recourse obligations of $3.8
million, $4.5 million and $6.6 million, respectively. The availability under
these arrangements will increase as the financial institutions receive payment
on installment contracts previously sold.

The Company maintains a $30.0 million bank line of credit, expiring on
December 31, 2000, that provides for borrowings of specified percentages of
eligible accounts receivable and eligible current installment contracts.
Advances under the line of credit bear interest at a rate (7.75% at June 30,
1999) equal to the bank's prime rate or, at the Company's option, a rate (5.24%
at June 30, 1999) equal to a defined LIBOR plus a specified margin. The line of
credit agreement requires the Company to provide the bank with certain periodic
financial reports and to comply with certain financial tests, including
maintenance of minimum levels of consolidated net income before taxes and of the
ratio of current assets to current liabilities. Additionally, the line is
secured by certain of the Company's marketable securities. As of June 30, 1999,
there were no outstanding borrowings under the line of credit.

As of June 30, 1999, the Company had cash and cash-equivalents totaling
$33.5 million, as well as short-term investments totaling $63.5 million. The
Company's commitments as of June 30, 1999 consisted primarily of leases on its
headquarters and other facilities. See "Item 1. Business -- Properties." There
were no other material commitments for capital or other expenditures. The
Company believes its current cash balances, availability of sales of its
installment contracts, availability under its bank line of credit and cash flows
from its operations will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months.

YEAR 2000 RESERVES

We have implemented a Year 2000 compliance program. This program includes
implementation of Year 2000 compliance processes for the software products and
services which we provide to customers, as well as processes to ensure
compliance of our internal business operations and those of our suppliers. We
have tested or modified all current versions of our software products. We have
not tested all prior versions of all products or current products used on Year
2000 non-compliant systems. We have implemented procedures to review all service
projects performed for customers, to ensure Year 2000 compliant services are
provided. We have carried out some testing and remediation of custom
applications previously developed by or for our customers, and prior
non-compliant versions of standard software products have been or are planned to
be replaced with either new software products or Year 2000 compliant releases by
the end of 1999. There can be no assurance that we will be able to test or
remediate all custom applications currently in use by our customers, however, we
have attempted to notify all customers who we think should test custom
applications. Although we have obtained representations as to Year 2000
compliance from the sellers of certain of our acquired technologies, comply with
Year 2000 requirements depends in part upon the availability of Year 2000
compliant versions of operating systems and software applications used by or
with our products. Any delay by third party vendors in developing or offering,
or the failure to develop or offer, Year 2000 compliant products or any
necessary updates to existing products which operate with our products, could
result in customer delays in purchasing
35
<PAGE> 37

our products and services or in reduced demand for those products and services,
and could also result in errors that materially impair the utility of one or
more of our products, any of which could have a material adverse effect on our
business, operating results and financial condition. Although we do not expect
the costs associated with its Year 2000 compliance program to be material, there
can be no assurance that unidentified Year 2000 problems will not cause us to
incur material expenses in responding to such problems or otherwise have a
material adverse effect on our business, operating results and financial
condition. Moreover, customer purchasing patterns may be affected by Year 2000
issues as customers delay purchases in anticipation of the future release of
Year 2000 compliant products or releases, and as customers expend significant
resources to upgrade their current software systems and applications for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by us.

INFLATION

Inflation has not had a significant impact on the Company's operating
results to date, nor does the Company expect it to have significant impact
during fiscal 2000.

ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET DISCLOSURES

Information relating to quantitative and qualitative disclosure about
market risk is set forth under the captions "Notes to Consolidated Financial
Statements," 2(c), 2(h), 2(k), and 12 and below under the captions "Investment
Portfolio" and "Foreign Exchange Hedging".

INVESTMENT PORTFOLIO

The Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments in instruments that meet high
credit quality standards, as specified in the Company's investment policy
guidelines; the policy also limits the amount of credit exposure to any one
issuer and the types of instruments approved for investment. The Company does
not expect any material loss with respect to its investment portfolio. The
following table provides information about the Company's investment portfolio.
For investment securities, the table presents principal cash flows and related
weighted average interests rates by expected maturity dates.

Principal (Notional) Amounts by Expected Maturity in U.S. Dollars (in 000s,
except interest rates)

<TABLE>
<CAPTION>
FAIR VALUE AT FY2004 &
6/30/99 FY2000 FY2001 FY2002 FY2003 THEREAFTER
------------- ------- ------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents................... $20,811 $20,811 -- -- -- --
Weighted Average Interest Rate..... 4.92% 4.92% -- -- -- --
Investments........................ $63,512 $32,688 $12,867 $14,959 $2,998 --
Weighted Average Interest Rate..... 6.08% 5.93% 6.19% 6.33% 6.03% --
Total Portfolio.................... $84,323 $53,499 $12,867 $14,959 $2,998 --
Weighted Average Interest Rate..... 5.80% 5.54% 6.19% 6.33% 6.03% --
</TABLE>

36
<PAGE> 38

IMPACT OF FOREIGN CURRENCY RATE CHANGES

During fiscal 1999, most currencies in Europe and Asia/Pacific fluctuated,
with a general weakening of the U.S. dollar in the first two quarters of fiscal
1999 and a strengthened U.S. dollar in the third and fourth quarters of fiscal
1999. However, the translation of the parent Company's intercompany receivables
and foreign entities assets and liabilities did not have a material impact on
the consolidated results of the company. Foreign exchange forward contracts are
only purchased to hedge certain customer accounts receivable amounts denominated
in a foreign currency.

Effective January 1, 1999 the functional currency of several foreign
subsidiaries was changed from the U.S. dollar to the respective foreign
currency. This change was made as significant changes in economic facts and
circumstances related to the Company's operations in those foreign countries
occurred.

FOREIGN EXCHANGE HEDGING

The company enters into foreign exchange forward contracts to reduce its
exposure to currency fluctuations on customer accounts receivables denominated
in foreign currency. The objective of these contracts is to neutralize the
impact of foreign currency exchange rate movement on the Company's operating
results. The Company does not use derivative financial instruments for
speculative or trading purposes. The Company had $6.4 million of foreign
exchange forward contracts denominated in British, French, Japanese, Swiss,
German, Belgium and Netherlands currencies which represented underlying customer
accounts receivable transactions at the end of fiscal 1999. The gains and losses
on these contracts are included in earnings when the underlying foreign currency
denominated transaction is recognized. Gains and loss related to these
instruments for fiscal 1999 were not material to the company. Looking forward,
the Company does not anticipate any material adverse effect on its consolidated
financial position, results of operations, or cash flows resulting from the use
of these instruments. However, there can be no assurance that these strategies
will be effective or that transaction losses can be minimized or forecasted
accurately.

The following table provides information about the Company's foreign
exchange forward contracts at the end of fiscal 1999. The table presents the
value of the contracts in U.S. dollars at the contract exchange rate as of the
contract maturity date. The average contract rate approximates the weighted
average contractual foreign currency exchange rate and the forward position in
U.S. dollars approximates the fair value on the contract at the end of fiscal
1999.

Forward contracts to sell foreign currencies for U.S. Dollars related to
customer accounts receivable:

<TABLE>
<CAPTION>
AVERAGE
CONTRACT FORWARD AMOUNT
CURRENCY RATE IN U.S. DOLLARS CONTRACT ORIGINATION DATE CONTRACT MATURITY DATE
- -------- -------- ---------------- ------------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Belgian Franc........... 29.90 $ 23 Various: May 98 Various: Jan 00
British Pound
Sterling.............. 1.57 1,425 Various: Jun 97 - Jan 99 Various: Jul 99 - Aug 00
French Franc............ 5.48 484 Various: Apr 98 - Jan 99 Various: Feb 00 - Dec 01
German Deutsche Mark.... 1.58 1,105 Various: Apr 97 - Apr 99 Various: Jul 99 - Jul 01
Japanese Yen............ 116.52 3,214 Various: Jan 97 - Jun 99 Various: Jul 99 - Jun 02
Netherlands Guilder..... 1.74 10 Various: Jan 99 Various: Jul 99
Swiss Franc............. 1.34 124 Various: Jan 99 Various: Feb 00 - Feb 01
------
Total................... $6,385
======
</TABLE>

37
<PAGE> 39

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of the Company are listed in the
Index to Financial Statements filed in Item 14(a)(i) as part of this Form 10-K.

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

There have been no changes or disagreements with accountants on accounting
or financial disclosure matters during the Company's two most recent fiscal
years.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required under this Item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after June 30, 1999, under the heading "Election of Directors."

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

38
<PAGE> 40

PART IV

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

(a)(1) FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Financial Statements:
Balance Sheets as of June 30, 1998 and 1999............... F-3
Statements of Operations for the years ended June 30,
1997, 1998 and 1999.................................... F-4
Statements of Stockholders' Equity for the years ended
June 30, 1997, 1998 and 1999........................... F-5
Statements of Cash Flows for the years ended June 30,
1997, 1998 and 1999.................................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>

(a)(2) FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on Schedule........ S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>

All other schedules are omitted because they are not required or the
required information is shown in the Consolidated Financial Statements or Notes
thereto.

(a)(3) EXHIBITS

<TABLE>
<S> <C>
3.1 (1) Certificate of Incorporation of the Company.
3.2 (1) By-laws of the Company.
4.1 (2) Specimen Certificate for Shares of the Company's Common
Stock, $.10 par value.
4.2 (1) Rights Agreement dated as of March 12, 1998 between the
Company and American Stock Transfer and Trust Company, as
Rights Agent, including related forms of the following:
(a) Certificate of Designation of Series A Participating
Cumulative Preferred Stock of the Company.
(b) Right Certificate.
4.3 (3) Indenture dated as of June 17, 1998 between the Company and
The Chase Manhattan Bank, as trustee, with respect to up to
$86,250,000 principal amount of 5 1/4% Convertible
Subordinated Debentures due June 15, 2005 of the Company.
4.4 (3) Form of 5 1/4% Convertible Subordinated Debentures due June
15, 2005 of the Company (included in Sections 2.2, 2.3 and
2.4 of the Indenture filed as Exhibit 4.1).
10.1 (4) Lease Agreement between the Company and Teachers Insurance
and Annuity Association of America regarding Ten Canal Park,
Cambridge, Massachusetts.
10.2 (4) System License Agreement between the Company and the
Massachusetts Institute of Technology, dated March 30, 1982,
as amended.
10.3 (4)+ Non-Equilibrium Distillation Model Development and License
Agreement between the Company and Koch Engineering Company,
Inc., as amended.
10.4 (4)+ Letter, dated October 19, 1994, from the Company to Koch
Engineering Company, Inc., pursuant to which the Company
elected to extend the term of the Company's license under
the Non-Equilibrium Distillation Model Development and
License Agreement.
10.5 (4)+ Batch Distillation Computer Program Development and License
Agreement between Process Simulation Associates, Inc. and
Koch Engineering Company, Inc.
10.6 (4)+ Agreement between the Company and Imperial College of
Science, Technology and Medicine regarding Assignment of
SPEEDUP.
</TABLE>

39
<PAGE> 41
<TABLE>
<S> <C>
10.7 (4) Subordinated Note and Warrant Purchase Agreement dated as of
May 7, 1991 between the Company and Massachusetts Capital
Resource Company.
10.8 (4) Subordinated Note due 1998 dated as of May 7, 1991 issued by
the Company to Massachusetts Capital Resource Company.
10.9 (4) Common Stock Purchase Warrant No. 91-1.
10.10 (4) Common Stock Purchase Warrant No. 91-2.
10.11 (4) Subordinated Note Purchase Agreement dated as of August 22,
1994 between the Company and Massachusetts Capital Resource
Company.
10.12 (4) Subordinated Note due 1997 dated as of August 22, 1994
issued by the Company to Massachusetts Capital Resource
Company.
10.13 (4) Security Agreement dated as of July 24, 1989 between the
Company and Massachusetts Capital Resource Company, as
amended.
10.14 (4) Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Company and Lawrence B. Evans.
10.15 (4) Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Company and Joseph F. Boston.
10.16 (4) Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Company and Paul W. Gallier.
10.17 (4) Noncompetition, Confidentiality and Proprietary Rights
Agreement between the Company and Herbert I. Britt.
10.18 (4) 1988 Non-Qualified Stock Option Plan, as amended.
10.19 (5) 1995 Stock Option Plan.
10.20 (5) 1995 Directors Stock Option Plan.
10.21 (5) 1995 Employees' Stock Purchase Plan.
10.22 (4) Vendor Program Agreement between the Company and General
Electric Capital Corporation.
10.23 (6) Rider No. 1, dated December 14, 1994, to Vendor Program
Agreement between the Company and General Electric Capital
Corporation.
10.24 (4)+ Letter Agreement between the Company and Sanwa Business
Credit Corporation.
10.25 (4) Form of Employee Confidentiality and Non-Competition
Agreement.
10.26 (4) Equity Joint Venture Contract between the Company and China
Petrochemical Technology Company.
10.27 (7) Amended and Restated Agreement and Plan of Reorganization,
dated as of May 12, 1995, by and among the Company,
Industrial Systems, Inc. and the stockholders of Industrial
Systems, Inc.
10.28 (8) Stock Purchase Agreement dated as of December 15, 1995,
among the Company, Dynamic Matrix Control Corporation and
Charles R. Cutler, June A. Cutler, Charles R. Johnston and
Cheryl Lynne Johnston, as shareholders of Dynamic Matrix
Control Corporation.
10.29 (8) Share Purchase Agreement dated as of January 5, 1996 among
the Company, Amelinc Corporation and Cegelec S.A.
</TABLE>

40
<PAGE> 42
<TABLE>
<S> <C>
10.30 (9) Further Amended and Restated Revolving Credit Agreement
dated as of February 15, 1996 among the Company, Prosys
Modeling Investment Corporation, Industrial Systems, Inc.,
Dynamic Matrix Control Corporation and Setpoint, Inc., as
the Borrowers, the Lenders Parties thereto, and Fleet Bank
of Massachusetts, N.A., as Agent and Lender, together with
related forms of the following (each in the form executed by
each of such Borrowers):
(a) Amended and Restated Revolving Credit Note.
(b) Patent Conditional Assignment and Security Agreement.
(c) Trademark Collateral Security Agreement.
(d) Security Agreement.
10.31(10) 1996 Special Stock Option Plan.
10.32(10) Change in Control Agreement between the Company and Lawrence
B. Evans dated August 12, 1997.
10.33(10) Change in Control Agreement between the Company and Joseph
F. Boston dated August 12, 1997.
10.34(10) Change in Control Agreement between the Company and David
McQuillin dated August 12, 1997.
10.35(10) Change in Control Agreement between the Company and Mary A.
Palermo dated August 12, 1997.
10.36(10) Change in Control Agreement between the Company and Joel B.
Rosen dated August 12, 1997.
10.37(10) Change in Control Agreement between the Company and Stephen
J. Doyle dated August 12, 1997.
10.38(3) Registration Rights Agreement, dated as of June 17, 1998,
between the Company and Goldman, Sachs & Co., NationsBanc
Montgomery Securities LLC and William Blair & Company,
L.L.C.
10.39(11) Declaration of Registration Rights made as of April 27, 1998
by the Company for the benefit of former stockholders of
Chesapeake Decision Sciences, Inc.
10.40(12) Agreement and Plan of Reorganization dated as of April 28,
1998, among the Company, AT Acquisition Corp., Chesapeake
Decision Sciences, Inc. and Dr. Thomas E. Baker
10.41(13) Change in Control Agreement between the Company and Lisa W.
Zappala dated November 3, 1998.
10.42(14) Employment Agreement between Chesapeake Decision Sciences,
Inc., a wholly-owned subsidiary of the Company, and Thomas
E. Baker dated January 20, 1999.
10.43 Change in Control Agreement between the Company and David
Mushin dated December 30, 1998.
22.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included in signature page to Form 10-K).
27.1 Financial Data Schedules for fiscal year ended June 30,
1999.
</TABLE>

- ---------------
(1) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated March 12, 1998 (filed on March 27, 1998), and incorporated herein by
reference.

(2) Previously filed as an exhibit to the Company's Registration Statement on
Form 8-A, as amended by Amendment No. 1 thereto (filed on June 12, 1998),
and incorporated herein by reference.

(3) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 17, 1998 (filed on June 19, 1998), and incorporated herein by
reference.

(4) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 33-83916) filed on September 13, 1994, and
incorporated herein by reference.

(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 333-11651) filed on September 9, 1996, and
incorporated herein by reference.

41
<PAGE> 43

(6) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 33-88734) filed on January 29, 1995, and
incorporated herein by reference.

(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1995, and incorporated herein
by reference.

(8) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated January 5, 1996, as amended by Amendment Nos. 1, 2, 3 and 4 thereto,
and incorporated herein by reference.

(9) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996, and incorporated herein
by reference.

(10) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997, and incorporated herein by
reference.

(11) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 (Registration No. 333-63483) filed on September 16, 1998, and
incorporated herein by reference.

(12) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated May 27, 1998 (filed June 3, 1998), and incorporated herein by
reference.

(13) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998 and incorporated
herein by reference.

(14) Previously filed as exhibit 10.36 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 1998 and incorporated herein
by reference.

+ Certain portions have been granted Confidential Treatment by the Securities
and Exchange Commission at the request of the Company pursuant to Rule 406
under the Securities Act of 1933.

(b) REPORTS ON FORM 8-K

On May 10, 1999, the Company filed a Current Report on Form 8-K dated April
27, 1999 with respect to a press release of the Company reporting third fiscal
quarter results and announcing a restructuring program intended to reduce costs
and improve productivity.

42
<PAGE> 44

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cambridge, Commonwealth of Massachusetts, as of September 28, 1999.

ASPEN TECHNOLOGY, INC.

By: /s/ LAWRENCE B. EVANS
------------------------------------
Lawrence B. Evans
Chairman of the Board and
Chief Executive Officer

POWER OF ATTORNEY

We, the undersigned officers and directors of Aspen Technology, Inc.,
hereby severally constitute and appoint Lawrence B. Evans, Lisa W. Zappala and
Stephen J. Doyle, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Annual Report on Form 10-K filed herewith
and any and all amendments to said Annual Report and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable Aspen Technology, Inc. to comply with the provisions of the
Securities Exchange Act of 1934 and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys, or any of them, to said Annual Report and any
and all amendments thereto.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of September 28, 1998.

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

/s/ LAWRENCE B. EVANS Chairman of the Board and Chief Executive
- -------------------------------------------------------- Officer (Principal Executive Officer)
Lawrence B. Evans

/s/ LISA W. ZAPPALA Chief Financial Officer
- -------------------------------------------------------- (Principal Financial and Accounting Officer)
Lisa W. Zappala

/s/ JOSEPH F. BOSTON Director
- --------------------------------------------------------
Joseph F. Boston

/s/ GRESHAM T. BREBACH, JR. Director
- --------------------------------------------------------
Gresham T. Brebach, Jr.

/s/ DOUGLAS R. BROWN Director
- --------------------------------------------------------
Douglas R. Brown

/s/ JOAN C. MCARDLE Director
- --------------------------------------------------------
Joan C. McArdle

/s/ ALISON ROSS Director
- --------------------------------------------------------
Alison Ross
</TABLE>

43
<PAGE> 45

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2

Consolidated Balance Sheets as of June 30, 1998 and 1999.... F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1997, 1998 and 1999.................. F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 46

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Aspen Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Aspen
Technology, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss) and cash flows for each of the three
years in the period ended June 30, 1999. 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 Aspen Technology, Inc. and
subsidiaries as of June 30, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
August 4, 1999

F-2
<PAGE> 47

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 78,694 $ 33,456
Short-term investments.................................... 34,987 63,512
Accounts receivable, net of reserves of $1,482 in 1998 and
$1,288 in 1999.......................................... 71,803 73,858
Unbilled services......................................... 18,077 16,634
Current portion of long-term installments receivable, net
of unamortized discount of $1,016 in 1998 and $1,478 in
1999.................................................... 23,643 25,344
Deferred tax asset........................................ -- 2,752
Prepaid expenses and other current assets................. 10,831 12,157
-------- --------
Total current assets............................... 238,035 227,713
-------- --------
Long-term installments receivable, net of unamortized
discount of $7,305 in 1998 and $5,797 in 1999............. 36,203 31,231
-------- --------
Property and leasehold improvements, at cost:
Land...................................................... 727 727
Building and improvements................................. 8,790 6,261
Computer equipment........................................ 33,096 35,946
Purchased software........................................ 16,599 23,449
Furniture and fixtures.................................... 11,746 11,792
Leasehold improvements.................................... 5,356 4,440
-------- --------
76,314 82,615
Less -- Accumulated depreciation and amortization........... 33,578 45,775
-------- --------
42,736 36,840
-------- --------
Computer software development costs, net of accumulated
amortization of $6,314 in 1998 and $8,967 in 1999......... 5,696 6,011
-------- --------
Land........................................................ 925 925
-------- --------
Intangible assets, net of accumulated amortization of $6,066
in 1998 and $9,027 in 1999................................ 12,857 9,143
-------- --------
Deferred tax asset.......................................... -- 4,757
-------- --------
Other assets................................................ 6,430 5,622
-------- --------
$342,882 $322,242
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations.................. $ 2,187 $ 2,360
Accounts payable.......................................... 6,139 7,798
Accrued expenses.......................................... 32,406 34,814
Unearned revenue.......................................... 6,008 10,116
Deferred revenue.......................................... 17,888 20,482
Deferred income taxes..................................... 541 --
-------- --------
Total current liabilities.......................... 65,169 75,570
-------- --------
Long-term obligations, less current portion................. 4,385 3,155
-------- --------
5 1/4% Convertible subordinated debentures.................. 86,250 86,250
-------- --------
Deferred revenue, less current portion...................... 15,074 13,528
-------- --------
Other liabilities........................................... 914 513
-------- --------
Deferred income taxes....................................... 6,074 --
-------- --------
Commitments and contingencies (Notes 11, 12, and 13)
Stockholders' equity:
Common stock, $.10 par value --
Authorized -- 40,000,000 shares
Issued -- 24,729,741 shares in 1998 and 25,166,051
shares in 1999......................................... 2,473 2,517
Additional paid-in capital.................................. 148,342 154,480
Retained earnings (deficit)................................. 14,922 (11,257)
Treasury stock, at cost -- 230,330 shares in 1998 and
230,430 shares in 1999.................................... (502) (502)
Accumulated other comprehensive loss........................ (219) (2,012)
-------- --------
Total stockholders' equity......................... 165,016 143,226
-------- --------
$342,882 $322,242
======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 48

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Software licenses........................................ $103,179 $139,390 $ 91,621
Service and other........................................ 90,891 113,165 127,972
-------- -------- --------
194,070 252,555 219,593
-------- -------- --------
Expenses:
Cost of software licenses................................ 5,539 8,178 7,862
Cost of service and other................................ 54,006 68,490 83,346
Selling and marketing.................................... 56,034 74,926 85,249
Research and development................................. 33,580 43,553 48,067
General and administrative............................... 17,072 20,208 23,253
Restructuring and other charges.......................... -- -- 17,867
Charge for in-process research and development........... 8,664 8,472 --
Costs related to acquisitions............................ -- 4,984 --
-------- -------- --------
174,895 228,811 265,644
-------- -------- --------
Income (loss) from operations......................... 19,175 23,744 (46,051)
Foreign currency exchange loss............................. (236) (454) (94)
Income on equity in joint ventures......................... 26 45 19
Interest income............................................ 5,556 5,727 9,957
Interest expense........................................... (151) (377) (5,677)
-------- -------- --------
Income (loss) before provision for (benefit from)
income taxes........................................ 24,370 28,685 (41,846)
Provision for (benefit from) income taxes.................. 10,169 14,049 (16,111)
-------- -------- --------
Net income (loss)........................................ $ 14,201 $ 14,636 $(25,735)
======== ======== ========
Net income (loss) per share:
Diluted.................................................. $ 0.63 $ 0.59 $ (1.04)
======== ======== ========
Basic.................................................... $ 0.66 $ 0.63 $ (1.04)
======== ======== ========
Weighted average shares outstanding:
Diluted.................................................. 22,707 24,883 24,835
======== ======== ========
Basic.................................................... 21,368 23,415 24,835
======== ======== ========
</TABLE>

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

F-4
<PAGE> 49

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK RETAINED OTHER TREASURY STOCK
--------------------- ADDITIONAL EARNINGS COMPREHENSIVE -----------------
NUMBER OF $.10 PAR PAID-IN (ACCUMULATED INCOME NUMBER OF
SHARES VALUE CAPITAL DEFICIT) (LOSS) SHARES COST
---------- -------- ---------- ------------ ------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996.............. 20,758,343 $2,076 $110,388 $ (7,121) $ (364) 230,396 $(502)
Issuance of common stock in an
immaterial pooling.............. 104,162 10 165 527 -- -- --
Issuance of common stock in the
purchase of businesses.......... 155,740 16 5,892 -- -- -- --
Issuance of common stock under
employee stock purchase plans... 210,085 21 3,549 -- -- -- --
Exercise of stock options and
warrants........................ 507,545 51 4,152 -- -- -- --
ESOP contribution................. 696,154 70 268 -- -- -- --
Retired stock..................... (89,630) (9) (33) -- -- -- --
Translation adjustment, not tax
effected........................ -- -- -- -- 101 -- --
Issuance of treasury stock to
charity......................... -- -- -- -- -- (66) --
Unrealized market loss on
investments, net of $4 tax
effect.......................... -- -- -- -- (7) -- --
Tax benefit related to stock
options......................... -- -- 3,963 -- -- -- --
Net income........................ -- -- -- 14,201 -- -- --
Comprehensive net income for the
year ended June 30, 1997........
---------- ------ -------- -------- -------- ------- -----
BALANCE, JUNE 30, 1997.............. 22,342,399 2,235 128,344 7,607 (270) 230,330 (502)
Issuance of common stock in
immaterial poolings............. 766,443 77 2,046 (7,321) -- -- --
Issuance of common stock under
employee stock purchase plans... 115,617 11 3,867 -- -- -- --
Exercise of stock options and
warrants........................ 525,830 53 7,194 -- -- -- --
ESOP contribution................. 983,145 98 380 -- -- -- --
Retired stock..................... (3,693) (1) (1) -- -- -- --
Translation adjustment, not tax
effected........................ -- -- -- -- 98 -- --
Unrealized market loss on
investments, net of $31 tax
effect.......................... -- -- -- -- (47) -- --
Tax benefit related to stock
options......................... -- -- 6,512 -- -- -- --
Net income........................ -- -- -- 14,636 -- -- --
Comprehensive net income for the
year ended June 30, 1998........
---------- ------ -------- -------- -------- ------- -----
BALANCE, JUNE 30, 1998.............. 24,729,741 2,473 148,342 14,922 (219) 230,330 (502)
Issuance of common stock in an
immaterial pooling.............. 45,000 5 443 (444) -- -- --
Issuance of common stock under
employee stock purchase plans... 267,324 27 4,371 -- -- -- --
Exercise of stock options and
warrants........................ 123,986 12 901 -- -- -- --
Purchase of treasury stock........ -- -- -- -- -- 100 --
Translation adjustment, not tax
effected........................ -- -- -- -- (1,574) -- --
Unrealized market loss on
investments, net of $135 tax
effect.......................... -- -- -- -- (219) -- --
Tax benefit related to stock
options......................... -- -- 423 -- -- -- --
Net loss.......................... -- -- -- (25,735) -- -- --
Comprehensive net loss for the
year ended June 30, 1999........
---------- ------ -------- -------- -------- ------- -----
BALANCE, JUNE 30, 1999.............. 25,166,051 $2,517 $154,480 $(11,257) $ (2,012) 230,430 $(502)
========== ====== ======== ======== ======== ======= =====

TOTAL
STOCKHOLDERS COMPREHENSIVE
EQUITY INCOME (LOSS)
------------ -------------
<S> <C> <C>
BALANCE, JUNE 30, 1996.............. $104,477
Issuance of common stock in an
immaterial pooling.............. 702
Issuance of common stock in the
purchase of businesses.......... 5,908
Issuance of common stock under
employee stock purchase plans... 3,570
Exercise of stock options and
warrants........................ 4,203
ESOP contribution................. 338
Retired stock..................... (42)
Translation adjustment, not tax
effected........................ 101 $ 101
Issuance of treasury stock to
charity......................... -- --
Unrealized market loss on
investments, net of $4 tax
effect.......................... (7) (7)
Tax benefit related to stock
options......................... 3,963
Net income........................ 14,201 14,201
--------
Comprehensive net income for the
year ended June 30, 1997........ $ 14,295
-------- ========
BALANCE, JUNE 30, 1997.............. 137,414
Issuance of common stock in
immaterial poolings............. (5,198)
Issuance of common stock under
employee stock purchase plans... 3,878
Exercise of stock options and
warrants........................ 7,247
ESOP contribution................. 478
Retired stock..................... (2)
Translation adjustment, not tax
effected........................ 98 98
Unrealized market loss on
investments, net of $31 tax
effect.......................... (47) (47)
Tax benefit related to stock
options......................... 6,512
Net income........................ 14,636 14,636
--------
Comprehensive net income for the
year ended June 30, 1998........ $ 14,687
-------- ========
BALANCE, JUNE 30, 1998.............. 165,016
Issuance of common stock in an
immaterial pooling.............. 4
Issuance of common stock under
employee stock purchase plans... 4,398
Exercise of stock options and
warrants........................ 913
Purchase of treasury stock........ --
Translation adjustment, not tax
effected........................ (1,574) (1,574)
Unrealized market loss on
investments, net of $135 tax
effect.......................... (219) (219)
Tax benefit related to stock
options......................... 423
Net loss.......................... (25,735) (25,735)
--------
Comprehensive net loss for the
year ended June 30, 1999........ $(27,528)
-------- ========
BALANCE, JUNE 30, 1999.............. $143,226
========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 50

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 14,201 $ 14,636 $(25,735)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization........................... 11,655 14,144 18,310
Charge for in-process research and development.......... 8,664 8,472 --
Deferred income taxes................................... (1,646) (2,749) (14,124)
Writeoff of assets related to restructuring............. -- -- 3,060
Changes in assets and liabilities --
Accounts receivable................................... (9,107) (28,728) (1,367)
Prepaid expenses and other current assets............. (4,686) (388) (2,030)
Long-term installments receivable..................... (20,251) (9,394) 3,271
Accounts payable and accrued expenses................. 4,513 14,954 4,560
Unearned revenue...................................... (7,835) 1,713 4,040
Deferred revenue...................................... 7,597 5,744 1,057
-------- -------- --------
Net cash provided by (used in) operating
activities.......................................... 3,105 18,404 (8,958)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and leasehold improvements........... (20,199) (19,356) (7,549)
Increase in computer software development costs........... (2,384) (3,900) (2,966)
Increase (decrease) in other assets....................... (549) (3,981) 338
(Decrease) increase in short-term investments............. 22,194 (18,413) (28,744)
Decrease in other liabilities............................. (815) (28) (401)
Cash acquired in immaterial poolings...................... 792 (1,123) --
Cash used in the purchase of business, net of cash
acquired................................................ (6,232) (9,911) (1,200)
-------- -------- --------
Net cash used in investing activities............... (7,193) (56,712) (40,522)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock under employee stock purchase
plans................................................... 3,570 3,878 4,398
Issuance of common stock under employee stock ownership
plan.................................................... 338 478 --
Exercise of stock options and warrants.................... 4,203 7,247 913
Repurchase of common stock................................ (42) (2) --
Proceeds from 5 1/4% convertible subordinated
debentures.............................................. -- 86,250 --
Payments of long-term debt and capital lease
obligations............................................. (571) 769 (947)
-------- -------- --------
Net cash provided by financing activities........... 7,498 98,620 4,364
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 101 98 (122)
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 3,511 60,410 (45,238)
Cash and cash equivalents, beginning of period.............. 14,773 18,284 78,694
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 18,284 $ 78,694 $ 33,456
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes................................ $ 4,074 $ 1,363 $ 2,985
======== ======== ========
Cash paid for interest.................................... $ 199 $ 245 $ 4,709
======== ======== ========
Supplemental schedule of noncash investing and financing
activities:
Increase in equipment under capital lease obligations..... $ -- $ 2,351 $ --
======== ======== ========
Increase in additional paid-in capital and decrease in
accrued expenses relating to the tax benefit of exercise
of nonqualified stock options........................... $ 3,963 $ 6,512 $ 423
======== ======== ========
Supplemental disclosure of cash flows related to
acquisitions:
The Company acquired certain companies as described in
Note 4. These acquisitions are summarized as follows --
Fair value of assets acquired, excluding cash........... $ 15,469 $ 11,316 $ 1,290
Issuance of common stock related to acquisitions........ (5,908) -- --
Payments in connection with the acquisitions, net of
cash acquired.......................................... (6,232) (9,911) (1,200)
-------- -------- --------
Liabilities assumed................................... $ 3,329 $ 1,405 $ 90
======== ======== ========
</TABLE>

During the fiscal year 1997, the Company acquired B-JAC International, Inc.
During the fiscal year 1998, the Company acquired NeuralWare, Inc., The SAST
Corporation Limited, Cimtech S.A./N.V., Contas Process Control S.r.L., Zyqad
Limited and Treiber Controls, Inc. During the fiscal year 1999, the Company
acquired Syllogistics, Inc. All of these acquisitions were accounted for as
poolings of interests. Due to their immateriality to the financial position and
results of operations of the Company, the historical financial statements were
not restated.

The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 51

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999

(1) OPERATIONS

Aspen Technology, Inc. and subsidiaries (the Company) is a supplier of
software and service solutions that companies in the process industries use to
design, operate and manage their manufacturing processes. The process industries
include manufacturers of chemicals, petrochemicals, petroleum products,
pharmaceuticals, pulp and paper, electric power, food and beverages, consumer
products, and metals and minerals. The Company offers a comprehensive,
integrated suite of process manufacturing optimization solutions that help
process manufacturers enhance profitability by improving efficiency,
productivity, capacity utilization, safety and environmental compliance
throughout the entire manufacturing life-cycle, from research and development to
engineering, planning and scheduling, procurement, production and distribution.
In addition to its broad range of software solutions, the Company offers system
implementation, advanced process control, real-time optimization and other
consulting services through its staff of project engineers. The Company has
operations and customers worldwide.

(2) SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the results of
operations of the Company and its wholly owned subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.

(b) CASH AND CASH EQUIVALENTS

Cash and cash equivalents are stated at cost, which approximates market,
and consist of short-term, highly liquid investments with original maturities of
less than three months.

Securities purchased to be held for indefinite periods of time, and not
intended at the time of purchase to be held until maturity, are classified as
available-for-sale securities. Securities classified as available-for-sale are
included in short-term investments and cash and cash equivalents and are
required to be recorded at market value in the accompanying consolidated
financial statements. Unrealized gains and losses have been accounted for as a
separate component of consolidated stockholders' equity and comprehensive income
(loss).

F-7
<PAGE> 52
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

Available-for-sale investments as of June 30, 1998 and 1999 are as follows
(in thousands):

<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1999
-------------------- -------------------
TOTAL TOTAL TOTAL TOTAL
CONTRACTED MARKET AMORTIZED MARKET AMORTIZED
DESCRIPTION MATURITY VALUE COST VALUE COST
- ----------- ----------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents.................. N/A $ 12,883 $ 12,883 $12,645 $12,645
Commercial paper........................... 0-3 months 30,811 30,845 18,570 18,570
Money market funds......................... 0-3 months -- -- 2,241 2,241
Repurchase agreement....................... 0-3 months 35,000 35,000 -- --
-------- -------- ------- -------
Total cash and cash
equivalents.................... 78,694 78,728 33,456 33,456
-------- -------- ------- -------
SHORT-TERM INVESTMENTS:
Money market funds......................... N/A 30,926 30,948 -- --
Certificates of deposit.................... 4-11 months 9 9 1,450 1,449
Corporate and foreign bonds................ 4-12 months 1,757 1,760 31,238 31,282
Corporate and foreign bonds................ 1-5 years 2,295 2,292 30,824 31,056
-------- -------- ------- -------
Total short term investments..... 34,987 35,009 63,512 63,787
-------- -------- ------- -------
$113,681 $113,737 $96,968 $97,243
======== ======== ======= =======
</TABLE>

(d) DEPRECIATION AND AMORTIZATION

The Company provides for depreciation and amortization, computed using the
straight-line and declining balance methods, by charges to operations in amounts
estimated to allocate the cost of the assets over their estimated useful lives,
as follows:

<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- -------------
<S> <C>
Building and improvements................................... 7-30 years
Computer equipment.......................................... 3-5 years
Purchased software.......................................... 3 years
Furniture and fixtures...................................... 3-10 years
Leasehold improvements...................................... Life of lease
</TABLE>

(e) LAND

In connection with the acquisition of Setpoint, Inc. in fiscal 1996, the
Company acquired land that is being held for investment purposes. The land was
recorded at its appraised value at the date of acquisition.

(f) REVENUE RECOGNITION

Effective July 1, 1998, the Company adopted Statement of Position (SOP) No.
97-2, "Software Revenue Recognition". SOP 97-2 was issued by the American
Institute of Certified Public Accountants in October 1997 in order to provide
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. The adoption of SOP 97-2 did not have a
material impact on the Company's financial position, results of operations or
cash flows. License revenue, including license renewals, consists principally of
revenue earned under fixed-term and perpetual software license agreements and is
generally recognized upon shipment of the software if collection of the
resulting receivable is probable, the fee is fixed or

F-8
<PAGE> 53
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

determinable, and vendor-specific objective evidence exists to allocate the
total fee to all delivered and undelivered elements of the arrangement. The
Company uses installment contracts as a standard business practice and has a
history of successfully collecting under the original payment terms without
making concessions on payments, products or services.

Service revenues from fixed-price contracts are recognized using the
percentage-of-completion method, measured by the percentage of costs (primarily
labor) incurred to date as compared to the estimated total costs (primarily
labor) for each contract. When a loss is anticipated on a contract, the full
amount thereof is provided currently. Service revenues from time and expense
contracts and consulting and training revenue are recognized as the related
services are performed. Services that have been performed but for which billings
have not been made are recorded as unbilled services, and billings that have
been recorded before the services have been performed are recorded as unearned
revenue in the accompanying consolidated balance sheets.

Installments receivable represent the present value of future payments
related to the financing of noncancellable term and perpetual license agreements
that provide for payment in installments over a one- to five-year period. A
portion of each installment agreement is recognized as interest income in the
accompanying consolidated statements of operations. The interest rates utilized
for the years ended June 30, 1997, 1998 and 1999 were 8.5% to 11%, 8.5%, and
8.5%, respectively.

(g) COMPUTER SOFTWARE DEVELOPMENT COSTS

Certain computer software development costs are capitalized in the
accompanying consolidated balance sheets. Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Amortization of capitalized computer software development costs is provided on a
product-by-product basis using the straight-line method, beginning upon
commercial release of the product, and continuing over the remaining estimated
economic life of the product, not to exceed three years. Total amortization
expense charged to operations was approximately $1,143,000, $1,263,000 and
$2,653,000 in fiscal 1997, 1998 and 1999, respectively.

(h) FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's foreign subsidiaries are
translated in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52, Foreign Currency Translation. The determination of functional currency
is based on the subsidiaries' relative financial and operational independence
from the Company. Foreign currency exchange and translation gains or losses for
certain wholly owned subsidiaries are credited or charged to the accompanying
consolidated statements of operations since the functional currency of the
subsidiaries is the U.S. dollar. Gains and losses from foreign currency
translation related to entities whose functional currency is their local
currency are credited or charged to the cumulative translation adjustment
account, included in stockholders' equity in the accompanying consolidated
balance sheets. Effective January 1, 1999, the functional currency of several
foreign subsidiaries was changed from the U.S. dollar to the respective foreign
currency. This change was made as significant changes in economic facts and
circumstances related to the Company's operations in those foreign countries
occurred.

At June 30, 1998 and 1999, the Company had long-term installments
receivable of approximately $4,953,000 and $3,295,000 denominated in foreign
currencies. The June 1999 installments receivable mature through June 2002 and
have been hedged with specific foreign currency contracts. There have been no
material gains or losses recorded relating to hedge contracts for the periods
presented.

F-9
<PAGE> 54
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

(i) NET INCOME (LOSS) PER SHARE

Basic earnings per share was determined by dividing net income (loss) by
the weighted average common shares outstanding during the period. Diluted
earnings per share was determined by dividing net income (loss) by diluted
weighted average shares outstanding. Diluted weighted average shares reflects
the dilutive effect, if any, of common equivalent shares. Common equivalent
shares include common stock options and warrants to the extent their effect is
dilutive, based on the treasury stock method.

The calculations of basic and diluted weighted average shares outstanding
are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Basic weighted average common shares outstanding......... 21,368 23,415 24,835
Weighted average potential common shares................. 1,339 1,468 --
------ ------ ------
Diluted weighted average shares outstanding.............. 22,707 24,883 24,835
====== ====== ======
</TABLE>

The following potential common shares were excluded from the calculation of
dilutive weighted average shares outstanding as their effect would be
anti-dilutive (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1997 1998 1999
---- ----- -----
<S> <C> <C> <C>
Convertible debt............................................ -- 1,623 1,628
Options and warrants........................................ 190 -- 5,301
--- ----- -----
Total....................................................... 190 1,623 6,929
=== ===== =====
</TABLE>

(j) MANAGEMENT ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions 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.

(k) CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash and cash equivalents,
investments, accounts receivable and installments receivable. The Company places
its cash and cash equivalents and investments in highly rated institutions.
Concentration of credit risk with respect to receivables is limited to certain
customers (end users and distributors) to which the Company makes substantial
sales. To reduce risk, the Company routinely assesses the financial strength of
its customers, hedges specific foreign receivables and routinely sells its
receivables to financial institutions with limited recourse and without
recourse. As a result, the Company believes that its accounts and installments
receivable credit risk exposure is limited. The Company maintains an allowance
for potential credit losses but historically has not experienced any significant
losses related to individual customers or groups of customers in any particular
industry or geographic area. As of June 30, 1998 and 1999, the Company had one
customer and no customers, respectively that represented 10% of total accounts
receivable.

F-10
<PAGE> 55
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

(l) FINANCIAL INSTRUMENTS

Financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable and installments receivable. The estimated fair
value of these financial instruments approximates their carrying value and,
except for accounts receivable and installments receivable, is based primarily
on market quotes.

(m) INTANGIBLE ASSETS AND IMPAIRMENT OF LONG-LIVED ASSETS

Intangible assets consist of the following at June 30, 1998 and 1999 (in
thousands):

<TABLE>
<CAPTION>
ESTIMATED JUNE 30, JUNE 30,
USEFUL LIFE 1998 1999
----------------- -------- --------
<S> <C> <C> <C>
Goodwill...................................... 10 years $ 5,397 $ 5,547
Acquired Technology........................... 5 years 7,826 7,162
Acquired Assembled Workforce.................. 5-7 years 2,859 2,748
Acquired Uncompleted Contracts................ Life of contracts 913 913
Other Intangible assets....................... 5-12 years 1,928 1,800
------- -------
18,923 18,170
Less-Accumulated Amortization................. 6,066 9,027
------- -------
$12,857 $ 9,143
======= =======
</TABLE>

The Company evaluates it long-lived assets, which include property and
leasehold improvements and intangible assets for impairment as events and
circumstances indicate the carrying amount may not be recoverable and at a
minimum each balance sheet date. The Company evaluates the realizability of its
long-lived assets based on profitability and undiscounted cash flow expectations
for the related asset or subsidiary. Management believes that as of each of the
balance sheet dates presented none of the Company's long-lived assets were
impaired. See Note 3 for discussion regarding restructuring and other charges.

(n) COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) 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. Comprehensive income (loss) is disclosed
in the accompanying consolidated statements of stockholders' equity and
comprehensive income (loss). The components of accumulated other comprehensive
income (loss) as of June 30, 1997, 1998, and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -------
<S> <C> <C> <C>
Unrealized loss on investments, net of taxes............. $ (9) $ (56) $ (275)
Cumulative translation adjustment........................ (261) (163) (1,737)
----- ----- -------
Total accumulated other comprehensive income (loss)...... $(270) $(219) $(2,012)
===== ===== =======
</TABLE>

(o) NEW ACCOUNTING STANDARDS

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. In June 1999, the FASB issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of SFAS No. 133. SFAS No. 137 amends the effective

F-11
<PAGE> 56
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

date of SFAS No. 133 to now be for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not expect adoption of this
statement to have a material impact on its consolidated financial position or
results of operations.

(3) RESTRUCTURING AND OTHER CHARGES

In the fourth quarter of fiscal 1999, the Company undertook certain actions
to restructure its business. The restructuring resulted from a lower than
expected level of license revenues which adversely affected fiscal year 1999
operating results. The license revenue shortfall resulted primarily from delayed
decision making driven by economic difficulties among customers in certain of
our core vertical markets. The restructuring plan resulted in a pre-tax
restructuring charge totaling $17.9 million. The principal actions in the
restructuring plan include the reduction of workforce, the close-down or
consolidation of a number of offices and facilities, the rationalizing of
certain non-core products and activities acquired in recent years and other
general cost reductions. The restructuring and other charge is broken down as
follows:

<TABLE>
<CAPTION>
RESTRUCTURING WRITE-OFF
AND OTHER OF ASSETS, FISCAL 1999 ACCRUED EXPENSES,
CHARGES AND OTHER PAYMENTS JUNE 30, 1999
------------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Close-down/consolidation of
facilities.......................... $10,224 $5,440 $ 24 $4,760
Employee severance, benefits and
related costs....................... 4,324 -- 2,386 1,938
Write-off of assets................... 3,060 3,060 -- --
Other................................. 259 101 57 101
------- ------ ------ ------
$17,867 $8,601 $2,467 $6,799
======= ====== ====== ======
</TABLE>

Close-down/consolidation of facilities: Approximately $10.2 million of the
restructuring charge relates to the termination of facility leases and other
lease-related costs. The facility leases have remaining terms ranging from one
month to six years. The amount accrued reflects the Company's best estimate of
actual costs to buy out the leases in certain cases or the net cost to sublease
the properties in other cases. Included in this amount is the write off of
certain assets, primarily building and leasehold improvements and adjustments to
certain obligations that relate to the closing of facilities.

Employee Severance, Benefits and Related Costs: The reduction in workforce,
by function, resulting in the employee severance costs detailed above is as
follows:

<TABLE>
<S> <C>
Services.................................................... 82
Selling and Marketing....................................... 59
Research and Development.................................... 38
General and Administrative.................................. 26
---
205
===
</TABLE>

Write-off of assets: Approximately $3.1 million of the restructuring and
other charge relates to the write-off of certain assets that have been
determined to be of no further value to the Company as a direct consequence of
the change in the business plans that have been made as a result of the
restructuring. These business plan changes are the result of management's
assessment and rationalization of certain non-core products and activities
acquired in recent years. The write-off was based on management's assessment of
the current fair value of certain assets, including intangible assets, and their
resale value, if any.

F-12
<PAGE> 57
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

(4) ACQUISITIONS

(a) ACQUISITIONS DURING FISCAL YEAR 1997

During fiscal year 1997, the Company acquired B-JAC International, Inc.
(B-JAC), the Process Control Division of Cambridge Control Limited (the
Cambridge Control Division), the PIMS Division of Bechtel Corporation and Basil
Joffe Associates, Inc.

The Company exchanged 104,162 shares of its common stock valued at
approximately $3,400,000 for all outstanding shares of B-JAC, a major supplier
of detailed heat exchanger modeling software. The acquisition has been accounted
for as a pooling of interests and as a result of its immateriality as compared
to the Company's financial position and results of operations, the historical
financial statements were not restated.

The Company's acquisitions of the Cambridge Control Division, the PIMS
Division and Basil Joffe Associates, Inc. were all accounted for as purchase
transactions. Total purchase price for these acquisitions was approximately
$12,217,000 plus approximately $3,011,000 in assumed liabilities and acquisition
related costs. The Cambridge Control Division specialized in advanced process
control solutions, specifically aimed toward process manufacturing controls
applications for the refining, petrochemical and pulp and paper industries. The
PIMS Division and a related software development organization, Basil Joffe
Associates, Inc., developed and sold proprietary PIMS software used by companies
in process industries for economic planning and scheduling based on linear
programming models. Pro forma information related to these acquisitions is not
presented as it is not material.

The results of operations of these companies from the dates of acquisition
forward are included in the Company's consolidated statements of operations. The
fair market value of assets acquired and liabilities assumed was based on an
independent appraisal. The portion of the purchase price allocated to in-process
research and development represents projects that had not yet reached
technological feasibility and had no alternative future use. The purchase price
was allocated to the fair value of assets acquired and liabilities assumed as
follows (in thousands):

<TABLE>
<CAPTION>
DESCRIPTION AMOUNT LIFE
- ----------- ------- ----------
<S> <C> <C>
Purchased in-process research and development............... $ 8,664 --
Acquired technology......................................... 600 5 years
Intangible assets........................................... 5,530 5-12 years
-------
14,794
Net book value of tangible assets acquired, less liabilities
assumed................................................... (2,429)
-------
12,365
Less -- Deferred taxes...................................... 148
-------
$12,217
=======
</TABLE>

(b) ACQUISITIONS DURING FISCAL YEAR 1998

During fiscal year 1998, the Company acquired 100% of the outstanding
shares of NeuralWare, Inc., The SAST Corporation Limited, Cimtech S.A./N.V.,
Contas Process Control S.r.L., Zyqad Limited, and Treiber Controls, Inc. The
Company exchanged 766,443 shares of its common stock and paid approximately
$841,000 in cash for all outstanding shares of the acquired companies. These
acquisitions were accounted for as poolings

F-13
<PAGE> 58
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

of interest and were immaterial to the Company's financial position and results
of operations. Accordingly, the historical financial statements of the Company
have not been restated.

Additionally, the Company acquired 100% of the outstanding shares of IISYS,
Inc. for an aggregate purchase price of approximately $8,400,000 in cash and the
assumption of approximately $1,600,000 in debt. For financial statement
purposes, this acquisition was accounted for as a purchase, and accordingly, the
results of operations from the date of acquisition are included in the Company's
consolidated statements of operations. The fair market value of assets acquired
and liabilities assumed was based on an independent appraisal. The portion of
the purchase price allocated to in-process research and development represents
projects that had not yet reached technological feasibility and had no
alternative future use. Pro forma information related to these acquisitions is
not presented as it is not material. The purchase price was allocated to the
fair market value of assets acquired and liabilities as follows (in thousands):

<TABLE>
<CAPTION>
DESCRIPTION AMOUNT LIFE
- ----------- ------- -------
<S> <C> <C>
Purchased in process research and development............... $ 8,472 --
Acquired technology......................................... 2,178 5 years
Intangible assets........................................... 392 5 years
-------
11,042
Net book value of tangible assets acquired, less liabilities
assumed................................................... (321)
-------
10,721
Less -- Deferred taxes...................................... 800
-------
$ 9,921
=======
</TABLE>

On May 27, 1998, the Company acquired Chesapeake Decision Sciences, Inc.
and subsidiaries (CDI), a provider of software and services for the supply chain
management market. The Company exchanged 2,961,959 shares of its common stock
for all the outstanding shares of CDI common stock. The Company placed 296,196
of these shares into escrow as security for indemnification obligations of CDI
relating to representation, warranties and tax matters. This merger was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements of the Company have been restated to give retroactive effect to the
combination of CDI. The Company incurred approximately $4.0 million of expenses
related to this acquisition, which were charged to operations in the quarter
ending June 30, 1998.

CDI maintained an Employee Stock Ownership Plan and Trust (the Plan) in
which CDI made discretionary contributions on an annual basis based on 10% of
all eligible employees' base salaries. The common stock shares were then
allocated based on a formula determined by management. CDI's discretionary
contributions for the years ended June 30, 1997 and 1998 were approximately
$338,000 and $478,000, respectively. The Plan was frozen as of May 27, 1998 and
all outstanding shares were converted into the Company's common stock.

CDI also maintained a defined contribution 401(k) profit sharing plan
covering all full-time employees. The plan provided for CDI to make matching
contributions under a defined formula. In addition, CDI could make discretionary
contributions to the plan determined annually by management. During fiscal years
ended June 30, 1997, and 1998 CDI made matching contributions of approximately
$183,000 and $314,000, respectively. This plan was merged with the Company's
plan as of June 1, 1998.

F-14
<PAGE> 59
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

The following information details the results of operations of the Company
and CDI for the periods before the pooling of interests combination was
consummated (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Revenue --
The Company............................................... $180,299 $234,461
CDI....................................................... 13,771 18,094
-------- --------
Combined.................................................. $194,070 $252,555
======== ========
Net income (loss) --
The Company............................................... $ 13,155 $ 14,922
CDI....................................................... 1,046 (286)
-------- --------
Combined.................................................. $ 14,201 $ 14,636
======== ========
Net income (loss) per share --
Diluted --
The Company............................................. $ 0.63 $ 0.67
======== ========
CDI..................................................... $ 0.60 $ (0.11)
======== ========
Combined................................................ $ 0.63 $ 0.59
======== ========
Net income (loss) per share --
Basic
The Company............................................. $ 0.67 $ 0.72
======== ========
CDI..................................................... $ 0.60 $ (0.11)
======== ========
Combined................................................ $ 0.66 $ 0.63
======== ========
</TABLE>

On September 14, 1998, the Company paid $1.2 million in cash for certain
assets and personnel of Callidus Technologies, Inc., a consulting firm that
specializes in the modeling of predictive emissions monitoring. This acquisition
has been accounted for as a purchase transaction. The purchase price has been
allocated to various assets, primarily intangible assets, based on their fair
values. On October 14, 1998 the Company issued 45,000 shares of its common stock
for all the outstanding shares of Syllogistics, Inc., a provider of logistics
management software. This acquisition was accounted for as pooling of interests.
Pro forma information related to these acquisitions is not presented as it is
not material.

(5) LINE OF CREDIT

The Company has a revolving line-of-credit agreement with a bank, which
provides for borrowings up to $30,000,000, subject to certain limitations. There
is an annual commitment fee of $50,000. At the Company's election, borrowings
bear interest on the basis of the applicable LIBOR, as defined (5.24% as of June
30, 1999), or at the bank's prime rate (7.75% as of June 30, 1999). The line is
subject to certain covenants, including profitability and operating ratios, as
defined. Additionally, the line is secured by certain of the Company's
marketable securities. As of June 30, 1999, no amounts were outstanding under
this line and approximately $22,616,000 was available for future borrowings as
approximately $7,384,000 was reserved for certain performance bonds relating to
outstanding letters of credit and service contracts. The line of credit expires
on December 31, 2000.

F-15
<PAGE> 60
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

(6) LONG-TERM OBLIGATIONS

Long-term obligations consist of the following at June 30, 1998 and 1999
(in thousands):

<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
-------- --------
<S> <C> <C>
Capital lease obligation due in monthly installments of
approximately $55,000 plus interest at 9.3% per year
through April 2001........................................ $2,060 $1,062
Credit arrangement of a Belgian subsidiary with a bank...... 1,339 256
Mortgage payable of a UK subsidiary due in annual
installments of approximately $95,000 plus interest at
6.75% per year............................................ 1,251 1,176
Note payable of a Belgian subsidiary with payments due of
approximately $1,500,000 in September 1999 and then annual
installments ranging from approximately $98,000 to
$126,000 through June 2012, plus interest ranging from
8.5% to 10%, payable in June 2010, 2011, and 2012......... 953 2,565
Convertible Debenture of a Belgian subsidiary due in 2000,
interest payable at an annual rate of 6%. This note is
convertible into approximately 7,500 shares of the
Company's common stock at the option of the holder........ 403 385
Note payable due in annual installments of $125,000 plus
interest at 9.5% per year................................. 423 --
Other obligations........................................... 143 71
------ ------
6,572 5,515
Less -- Current maturities.................................. 2,187 2,360
------ ------
$4,385 $3,155
====== ======
</TABLE>

Maturities of these long term obligations are as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDING JUNE 30, AMOUNT
- --------------------- ------
<S> <C>
2000........................................................ $2,360
2001........................................................ 1,251
2002........................................................ 217
2003........................................................ 202
2004........................................................ 193
Thereafter.................................................. 1,292
------
5,515
Less -- Current maturities.................................. 2,360
------
$3,155
======
</TABLE>

(7) 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES

In June 1998, the Company sold $86.3 million of 5 1/4% Convertible
subordinated debentures (the Debentures) to qualified institutional buyers in
reliance on Rule 144A under the Securities Act of 1933. The Debentures are
convertible into shares of the Company's common stock at any time prior to June
15, 2005, unless previously redeemed or repurchased, at a conversion price of
$52.97 per share, subject to adjustment in certain events. Interest on the
Debentures is payable on June 15 and December 15 of each year. The Debentures
are redeemable in whole or part at the option of the Company at any time on or
after June 15,

F-16
<PAGE> 61
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

2001 at the following redemption prices expressed as a percentage of principal
plus accrued interest through the date of redemption:

<TABLE>
<CAPTION>
12 MONTHS
BEGINNING REDEMPTION
JUNE 15 OF PRICE
- ---------- ----------
<S> <C>
2001. ...................................................... 103.00%
2002. ...................................................... 102.25%
2003. ...................................................... 101.50%
2004. ...................................................... 100.75%
</TABLE>

In the event of a change of control, as defined, each holder of the
Debentures may require the Company to repurchase its Debentures, in whole or in
part, for cash or, at the Company's option, for common stock (valued at 95% of
the average last reported sale prices for the 5 trading days immediately
preceding the repurchase date) at a repurchase price of 100% of the principal
amount of the Debentures to be repurchased, plus accrued interest to the
repurchase date. The Debentures are unsecured obligations subordinate in right
of payment to all existing and future senior debt of the Company, as defined,
and effectively subordinate in right of payment to all indebtedness and other
liabilities of the Company's subsidiaries. The Company has filed a shelf
registration statement in respect of the Debentures and common stock issuable
upon conversion thereof.

In connection with this financing the Company incurred approximately $3.9
million of issuance costs. These costs have been classified as other assets in
the accompanying consolidated balance sheets and are being amortized, as
interest expense, over the term of the Debentures. Approximately $3.0 million of
issuance costs related to fees paid to investment bankers in connection with the
sale of these Debentures.

(8) PREFERRED STOCK

The Company's Board of Directors is authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue, from time to
time, up to an aggregate of 10,000,000 shares of preferred stock in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges, which may include, among others, dividend rights, voting
rights, redemption and sinking fund provisions, liquidation preferences and
conversion rights, as shall be determined by the Board of Directors in a
resolution or resolutions providing for the issuance of such series. Any such
series of preferred stock, if so determined by the Board of Directors, may have
full voting rights with the common stock or superior or limited voting rights
and may be convertible into common stock or another security of the Company.

(9) COMMON STOCK

(a) WARRANTS

During fiscal 1992, the Company issued warrants to purchase 60,000 shares
of common stock to a research consultant at an exercise price of $3.34 per
share. In February 1995, warrants to purchase 27,000 shares of common stock were
exercised and sold as part of the Company's offering of common stock. In 1996,
warrants to purchase 1,150 shares were exercised. In 1997, warrants to purchase
5,700 shares were exercised and warrants to purchase 774 shares were terminated.
In 1998, warrants to purchase 3,513 shares were exercised and warrants to
purchase 283 shares were terminated. The remaining warrants to purchase 21,580
shares of common stock are exercisable through June 30, 2001.

During fiscal 1993, the Company issued warrants to purchase 12,000 shares
of common stock to two research consultants at an exercise price of $2.67 per
share. In 1997, warrants to purchase 2,250 shares were

F-17
<PAGE> 62
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

exercised. In 1998, warrants to purchase the remaining 750 shares were
exercised. In 1999, warrants to purchase the remaining 9,000 shares were
exercised.

In connection with the August 1997 acquisition of NeuralWare, Inc. the
Company converted warrants and options to purchase NeuralWare common stock into
warrants and options to purchase 10,980 and 6,618 shares of the Company's common
stock, respectively. All shares are currently exercisable with exercise prices
that range between $61.73 and $135.80 per share.

In connection with the March 1998 acquisition of Zyqad Limited, the Company
converted warrants to purchase Zyqad common stock into warrants to purchase
47,490 shares of the Company's common stock. All of these warrants were
exercised in 1999 at an exercise price of $28.94 per share.

(b) STOCK OPTIONS

In November 1995, the Board of Directors approved the establishment of the
1995 Stock Option Plan (the 1995 Plan) and the 1995 Directors Stock Option Plan
(the 1995 Directors Plan), which provided for the issuance of incentive stock
options and nonqualified options. Under these plans, the Board of Directors may
grant stock options to purchase up to an aggregate of 3,827,687 (as adjusted)
shares of common stock. Shares available for grant under these plans were
increased on July 1, 1996 and 1997 by an amount equal to 5% of the outstanding
shares as of the preceding June 30. In December 1997, the shareholders approved
an amendment to the 1995 Plan. The amendment provides for three annual increases
in the number of shares for which options may be granted, beginning July 1, 1998
by an amount equal to 5% of the outstanding shares on the preceding June 30. On
July 1, 1998 and 1999 the number of shares available under the 1995 plan were
increased by 1,237,712 and 1,247,711 shares, respectively. In December 1996, the
shareholders of the Company approved the establishment of the 1996 Special Stock
Option Plan (the 1996 Plan). This plan provides for the issuance of incentive
stock options and nonqualified options to purchase up to 500,000 shares of
common stock. The exercise price of options are granted at a price not less than
100% of the fair market value of the common stock on the date of grant. Stock
options become exercisable over varying periods and expire no later than 10
years from the date of grant. The following is a summary of stock option
activity in fiscal 1997, 1998 and 1999:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, June 30, 1996. ................................ 2,940,758 $11.65
Options granted........................................... 680,000 31.30
Options exercised......................................... (484,205) 8.21
Options terminated........................................ (157,616) 16.61
--------- ------
Outstanding, June 30, 1997. ................................ 2,978,937 16.44
Options granted........................................... 2,092,637 30.00
Options exercised......................................... (512,321) 14.41
Options terminated........................................ (108,064) 18.80
--------- ------
Outstanding, June 30, 1998. ................................ 4,451,189 22.96
Options granted........................................... 1,297,281 13.83
Options exercised......................................... (67,496) 12.85
Options terminated........................................ (379,907) 17.30
--------- ------
Outstanding, June 30, 1999.................................. 5,301,067 $14.14
========= ======
</TABLE>

F-18
<PAGE> 63
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

As of June 30, 1999, there were 464,942, 42,000 and 19,874 shares of common
stock available for grant under the 1995 Plan, the 1995 Directors Plan and the
1996 Plan, respectively. On July 1, 1999, the number of shares available under
the 1995 Plan were increased by 1,247,711.

In connection with the 1995 acquisition of Industrial Systems, Inc. (ISI),
the Company assumed the ISI option plan (the ISI Plan). The final 13,040 options
that were outstanding under the ISI Plan were exercised in fiscal 1997.

The following tables summarize information about stock options outstanding
and exercisable at June 30, 1999:

<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT JUNE 30, CONTRACTUAL EXERCISE AT JUNE 30, EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.05.......................... 143,648 0.9 $ 1.05 143,648 $ 1.05
1.83 -- 2.66................. 178,606 2.6 2.66 178,606 2.66
3.33 -- 4.00................. 215,564 4.9 3.36 215,564 3.36
7.00 -- 11.50................. 599,856 7.8 7.90 326,975 7.63
13.12 -- 19.12................. 3,572,938 8.1 14.39 1,318,420 14.74
24.87 -- 32.25................. 558,455 7.9 28.95 271,461 29.90
40.18.......................... 32,000 7.5 40.19 -- --
----------- ------ --------- ------
June 30, 1999................... 5,301,067 $14.14 2,454,674 $12.69
=========== ====== ========= ======
Exercisable, June 30, 1998...... 1,827,859 $17.25
========= ======
Exercisable, June 30, 1997...... 1,160,258 $ 9.47
========= ======
</TABLE>

On November 11, 1998 the Company's Board of Directors approved the
repricing of certain employee stock options with exercise prices in excess of
the fair market value of the Company's common stock. The exercise price for the
2.62 million shares of employee stock options that were repriced was reset to
$14.125, the closing market price on November 11, 1998. In connection with the
repricing, the accumulated vesting of options outstanding was reduced by one
year. Stock options held by executive officers and directors were not eligible
for such repricing. The option data in Note 9(b) has been restated to reflect
this repricing.

(d) FAIR VALUE OF STOCK OPTIONS

SFAS No. 123 Accounting for Stock-Based Compensation requires the
measurement of the fair value of stock options 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, Accounting for Stock
Issued to Employees, and elect the disclosure-only alternative under SFAS No.
123.

F-19
<PAGE> 64
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

Had compensation cost for the Company's option plans been determined based
on the fair value at the grant dates, as prescribed in SFAS No. 123, the
Company's net income (loss), and net income (loss) per share would have been as
follows:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net (loss) income (in thousands) --
As reported........................................ $14,201 $14,636 $(25,735)
Pro forma.......................................... 9,520 2,179 (46,173)
Net (loss) income per share --
Diluted --
As reported..................................... $ 0.63 $ 0.59 $ (1.04)
Pro forma....................................... 0.42 0.09 (1.86)
Basic --
As reported..................................... $ 0.66 $ 0.63 $ (1.04)
Pro forma....................................... 0.45 0.09 (1.86)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period:

<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Risk free interest rates...................... 6.42-6.76% 5.60-6.28% 4.39-5.49%
Expected dividend yield....................... None None None
Expected life................................. 5 Years 5 Years 5 Years
Expected volatility........................... 58% 75% 136%
Weighted average fair value per option........ $23.49 $25.57 $13.37
</TABLE>

(e) EMPLOYEE STOCK PURCHASE PLANS

In December 1995, the Company's Board of Directors approved the 1995
Employees' Stock Purchase Plan, under which the Board of Directors may grant
stock purchase rights for a maximum of 500,000 shares through November 2005. In
October 1997, the Company's Board of Directors approved the 1998 Employee Stock
Purchase Plan, under which the Board of Directors may grant stock purchase
rights for a maximum of 1,000,000 shares through September 30, 2007.

Participants are granted options to purchase shares of common stock on the
last business day of each semiannual payment period for 85% of the market price
of the common stock on the first or last business day of such payment period,
whichever is less. The purchase price for such shares is paid through payroll
deductions, and the current maximum allowable payroll deduction is 10% of each
eligible employee's compensation. Under the plans, the Company issued 210,085
shares, 115,617 shares and 267,324 during fiscal 1997, 1998 and 1999,
respectively. As of June 30, 1999, there were 732,676 shares available for
future issuance under the 1998 Employee Stock Purchase Plan. In addition on July
1, 1999, the Company issued 197,652 shares under the 1998 Employee Stock
Purchase Plan. No shares of common stock were available for future issuance
under the 1995 Employees' Stock Purchase Plan.

(f) STOCKHOLDER RIGHTS PLAN

During fiscal 1998, the Board of Directors of the Company adopted a
Stockholder Rights Agreement (the Rights Plan) and distributed one Right for
each outstanding share of Common Stock. The Rights were issued to holders of
record of Common Stock outstanding on March 12, 1998. Each share of Common Stock

F-20
<PAGE> 65
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

issued after March 12, 1998 will also include one Right, subject to certain
limitations. Each Right when it becomes exercisable will initially entitle the
registered holder to purchase from the Company one one-hundredth (1/100th) of a
share of Series A Preferred Stock at a price of $175.00 (the Purchase Price).

The Rights will become exercisable and separately transferable when the
Company learns that any person or group has acquired beneficial ownership of 15%
or more of the outstanding Common Stock or on such other date as may be
designated by the Board of Directors following the commencement of, or first
public disclosure of an intent to commence, a tender or exchange offer for
outstanding Common Stock that could result in the offer or becoming the
beneficial owner of 15% or more of the outstanding Common Stock. In such
circumstances, holders of the Rights will be entitled to purchase, for the
Purchase Price, a number of hundredths of a share of Series A Preferred Stock
equivalent to the number of shares of Common Stock (or, in certain
circumstances, other equity securities) having a market value of twice the
Purchase Price. Beneficial holders of 15% or more of the outstanding Common
Stock, however, would not be entitled to exercise their Rights in such
circumstances. As a result, their voting and equity interests in the Company
would be substantially diluted if the Rights were to be exercised.

The Rights expire in March 2008, but may be redeemed earlier by the Company
at a price of $.01 per Right, in accordance with the provisions of the Rights
Plan.

(10) INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is measured based on the difference
between the financial statement and tax bases of assets and liabilities, as
measured by the enacted tax rates.

Income (loss) before provision for (benefit from) income taxes consists of
the following (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Domestic............................................. $21,312 $22,068 $(43,365)
Foreign.............................................. 3,058 6,617 1,519
------- ------- --------
Total...................................... $24,370 $28,685 $(41,846)
======= ======= ========
</TABLE>

The provisions for (benefit from) income taxes shown in the accompanying
consolidated statements of operations are composed of the following (in
thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Federal --
Current............................................ $ 7,176 $ 8,185 $ (3,655)
Deferred........................................... 1,092 1,893 (13,111)
State --
Current............................................ 1,011 746 104
Deferred........................................... 198 857 (1,013)
Foreign --
Current............................................ 692 2,368 1,564
------- ------- --------
$10,169 $14,049 $(16,111)
======= ======= ========
</TABLE>

F-21
<PAGE> 66
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

The provision for income taxes differs from the federal statutory rate due
to the following:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
1997(1) 1998(1) 1999
PROVISION PROVISION BENEFIT
--------- --------- -------
<S> <C> <C> <C>
Federal tax at statutory rate........................... 34.5% 34.5% 35.0%
State income tax, net of federal tax benefit............ 5.6 4.2 2.1
Foreign tax............................................. (0.9) (1.0) (2.7)
Tax credits generated................................... (4.1) (4.7) 5.3
Permanent differences, net.............................. 1.3 0.6 (0.7)
Valuation allowance and other........................... (0.5) -- (0.5)
---- ---- ----
Provision for/Benefit from income taxes................. 35.9% 33.6% 38.5%
==== ==== ====
</TABLE>

- ---------------
(1) Calculated based on pretax income, before nondeductible charges for
in-process research and development and costs related to acquisitions, of
$26,704,000 and $41,780,000 for 1997 and 1998, respectively.

The components of the net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheets are as follows (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
-------- ------
<S> <C> <C>
Deferred tax assets......................................... $ 6,560 $2,978
Deferred tax liabilities.................................... (13,175) 4,531
-------- ------
$ (6,615) $7,509
======== ======
</TABLE>

The approximate tax effect of each type of temporary difference and carry
forward is as follows (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Revenue related............................................. $(4,492) $ 2,174
US Income tax credits....................................... -- 1,896
US operating losses carryforward............................ -- 1,595
Restructuring items......................................... -- 4,166
Nondeductible reserves and accruals......................... 422 408
Intangible assets........................................... (2,720) (1,561)
Other temporary differences................................. 175 174
------- -------
(6,615) 8,852
Valuation allowance......................................... -- (1,343)
------- -------
$(6,615) $ 7,509
======= =======
</TABLE>

The tax credits and net operating loss carryforwards expire at various
dates from 1999 through 2019. Due to the uncertainty surrounding the realization
and timing of these tax attributes, the Company has recorded a valuation
allowance of approximately $1,343,000 as of June 30, 1999.

The Tax Reform Act of 1986 contains provisions that may limit the net
operating loss and tax credit carryforwards available to be used in a any given
year in the event of significant changes in ownership, as defined.

F-22
<PAGE> 67
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

(11) OPERATING LEASES

The Company leases its facilities and various office equipment under
noncancellable operating leases with terms in excess of one year. Rent expense
charged to operations was approximately $5,017,000, $6,383,000 and $7,185,000
for the years ended June 30, 1997, 1998 and 1999, respectively. Future minimum
lease payments under these leases as of June 30, 1999 are as follows (in
thousands):

<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Year Ending June 30,
2000...................................................... $ 7,562
2001...................................................... 7,900
2002...................................................... 8,097
2003...................................................... 5,231
2004...................................................... 4,892
Thereafter.................................................. 35,143
-------
$68,825
=======
</TABLE>

(12) SALE OF INSTALLMENTS RECEIVABLE

The Company sold, with limited recourse, certain of its installment
contracts to two financial institutions for $51,304,000 and $32,349,000 during
fiscal 1998 and 1999, respectively. The financial institutions have partial
recourse to the Company only upon nonpayment by the customer under the
installments receivable. The amount of recourse is determined pursuant to the
provisions of the Company's contracts with the financial institutions and varies
depending on whether the customers under the installment contracts are foreign
or domestic entities. Collections of these receivables reduce the Company's
recourse obligation, as defined.

At June 30, 1999, the balance of the uncollected principal portion of the
contracts sold with partial recourse was approximately $91,536,000. The
Company's potential recourse obligations related to these contracts is
approximately $3,799,000 as of June 30, 1999. In addition, the Company is
obligated to pay additional costs to the financial institutions in the event of
default by the customer.

(13) COMMITMENTS AND CONTINGENCIES

The Company has entered into agreements with seven executive officers
providing for the payment of cash and other benefits in certain events of their
voluntary or involuntary termination within three years following a change in
control. Payment under these agreements would consist of a lump sum equal to
approximately three years of each executive's annual taxable compensation. The
agreements also provide that the payment would be increased in the event that it
would subject the officer to excise tax as a parachute payment under the federal
tax code. The increase would be equal to the additional tax liability imposed on
the executive as a result of the payment.

On October 5, 1998, October 26, 1998 and November 20, 1998, three purported
class action lawsuits were filed in the United States District Court for the
District of Massachusetts against the Company and certain of its officers and
directors, on behalf of purchasers of its common stock between April 28, 1998
and October 2, 1998. The lawsuits seek an unspecified amount of damages and
claims violations of Sections 10 (b) and 20(a) of the Securities Exchange Act of
1934, alleging that the Company issued a series of materially false and
misleading statements concerning its financial conditions, its operations and
integration of several acquisitions. On January 27, 1999, in response to a
motion to dismiss filed by the Company, the plaintiffs consolidated the three
complaints and filed a Consolidated Amended Class Action Complaint. The case was
reassigned to a new judge during the summer for the second time and, as of
September 23, 1999, she had not
F-23
<PAGE> 68
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

taken any action or rendered any decision. The Company believes it has
meritorious legal defenses to the lawsuits and intend to defend vigorously
against these actions. We are currently unable, however, to determine whether
resolution of these matters will have a material adverse impact on its financial
position or results of operations, or reasonably estimate the amount of the
loss, if any, that may result from resolution of these matters.

(14) RETIREMENT PLAN

The Company maintains a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code covering all eligible employees, as defined.
Under the plan, a participant may elect to defer receipt of a stated percentage
of his or her compensation, subject to limitation under the Internal Revenue
Code, which would otherwise be payable to the participant for any plan year. The
Company may make discretionary contributions to this plan.. During 1997, the
plan was modified to provide, among other changes, for the Company to make
matching contributions equal to 25% of pretax employee contributions up to a
maximum of 6% of an employee's salary. During the fiscal years ended June 30,
1997, 1998 and 1999, the Company made matching contributions of approximately
$385,000, $839,000 and $1,000,000, respectively.

The Company does not provide postretirement benefits to any employees as
defined under SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions.

(15) JOINT VENTURES

In May 1993, the Company entered into an Equity Joint Venture agreement
with China Petrochemical Technology Company to form a limited liability company
governed by the laws of the People's Republic of China. This company has the
nonexclusive right to distribute the Company's products within the People's
Republic of China. The Company invested $300,000 on August 6, 1993, which
represents a 30% equity interest in the joint venture.

In November 1993, the Company invested approximately $100,000 in a
Cyprus-based corporate joint venture, representing approximately a 14% equity
interest. The Company had a two-year option to purchase additional shares in the
joint venture corporation, which would increase its equity interest to 22.5%. In
December 1995, the Company exercised its option to acquire these additional
shares for approximately $125,000.

The Company is accounting for these investments using the equity method.
The net investments are included in other assets in the accompanying
consolidated balance sheets. In the accompanying consolidated statements of
operations for the years ended June 30, 1997, 1998 and 1999, the Company has
recognized approximately $26,000, $45,000, and $19,000, respectively, as its
portion of the income from these joint ventures.

F-24
<PAGE> 69
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

(16) ACCRUED EXPENSES

Accrued expenses in the accompanying consolidated balance sheets consist of
the following (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Income taxes................................................ $14,279 $ 9,635
Payroll and payroll-related................................. 8,366 7,645
Royalties and outside commissions........................... 1,985 2,471
Restructuring and other charges............................. -- 6,799
Other....................................................... 7,776 8,264
------- -------
$32,406 $34,814
======= =======
</TABLE>

(17) RELATED PARTY TRANSACTIONS

Smart Finance & Co., a company of which a director of the Company is the
President, provides advisory services to the Company from time to time. In
fiscal 1997, 1998 and 1999, payments of approximately $222,000, $62,000 and
$279,000, respectively, were made by the Company to Smart Finance & Co. as
compensation for services rendered. Included in fiscal 1999 was approximately
$200,000 paid in relation to services rendered at arm's length in fiscal 1998
relating to the 5 1/4% Convertible Debenture Offering.

(18) SEGMENT AND GEOGRAPHIC INFORMATION

The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in fiscal 1999. SFAS No. 131 established
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also established standards for
disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is the Chief Executive Officer of the Company.

The Company is organized geographically and by line of business. The
Company has two major line of business operating segments: license and service
and other. The Company also evaluates certain subsets of business segments by
vertical industries as well as by product categories. While the Executive
Management Committee evaluates results in a number of different ways, the line
of business management structure is the primary basis for which it assesses
financial performance and allocates resources.

The license line of business is engaged in the development and licensing of
software. The software can be classified into three broad categories: process
design software, process operation software and process management software. The
service and other line of business offers implementation, advanced process
control, real-time optimization and other consulting services in order to
provide its customers with complete solutions.

The accounting policies of the line of business operating segments are the
same as those described in the summary of significant accounting policies. The
Company does not track assets or capital expenditures by operating segments.
Consequently, it is not practical to show assets, capital expenditures,
depreciation or amortization by operating segments.

F-25
<PAGE> 70
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

The following table presents a summary of operating segments (in
thousands):

<TABLE>
<CAPTION>
SERVICE AND
LICENSE OTHER TOTAL
-------- ----------- --------
<S> <C> <C> <C>
Year ended June 30, 1997 --
Revenues from unaffiliated customers............. $103,179 $ 90,891 $194,070
Cost of revenue.................................. 5,539 54,006 59,545
Research and development......................... 29,961 3,619 33,580
-------- -------- --------
Operating margin(1).............................. $ 67,679 $ 33,266 $100,945
======== ======== ========
Year ended June 30, 1998 --
Revenues from unaffiliated customers............. $139,390 $113,165 $252,555
Cost of revenue.................................. 8,178 68,490 76,668
Research and development......................... 39,045 4,508 43,553
-------- -------- --------
Operating margin(1).............................. $ 92,167 $ 40,167 $132,334
======== ======== ========
Year ended June 30, 1999 --
Revenues from unaffiliated customers............. $ 91,621 $127,972 $219,593
Cost of revenue.................................. 7,862 83,346 91,208
Research and development......................... 42,898 5,169 48,067
-------- -------- --------
Operating margin(1).............................. $ 40,861 $ 39,457 $ 80,318
======== ======== ========
</TABLE>

- ---------------
(1) The Operating Margins reported reflect only the expenses of the line of
business and do not represent the actual margins for each operating segment
since they do not contain an allocation for selling and marketing, general
and administrative, development and other corporate expenses incurred in
support of the line of business.

PROFIT RECONCILIATION (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Total operating margin for reportable segments..... $100,945 $132,334 $ 80,318
Selling and marketing.............................. (56,034) (74,926) (85,249)
General and administrative......................... (17,072) (20,208) (23,253)
Restructuring and other charges.................... -- -- (17,867)
Charge for in-process research and development..... (8,664) (8,472) --
Costs related to acquisitions...................... -- (4,984) --
Interest and other income and expense.............. 5,195 4,941 4,205
-------- -------- --------
Income (loss) before provision for (benefit from)
income taxes..................................... $ 24,370 $ 28,685 $(41,846)
======== ======== ========
</TABLE>

F-26
<PAGE> 71
ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999

GEOGRAPHIC INFORMATION:

Domestic and export sales as a percentage of total revenues are as follows:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
United States............................................... 50.0% 54.6% 46.6%
Europe...................................................... 30.6 28.4 35.7
Japan....................................................... 8.7 4.6 4.5
Other....................................................... 10.7 12.4 13.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

Revenues, income (loss) from operations and identifiable assets for the
Company's North American, European and Asian operations are as follows (in
thousands). The Company has intercompany distribution arrangements with its
subsidiaries. The basis for these arrangements, disclosed below as transfers
between geographic locations, is cost plus a specified percentage for services
and a commission rate for sales generated in the geographic region.

<TABLE>
<CAPTION>
NORTH AMERICA EUROPE ASIA ELIMINATIONS CONSOLIDATED
------------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997 --
Revenues....................... $184,193 $33,421 $ 8,143 $ (31,687) $194,070
======== ======= ======= ========= ========
Identifiable assets............ $232,599 $ 7,493 $ 1,191 $ (53,564) $187,719
======== ======= ======= ========= ========
Year ended June 30, 1998 --
Revenues....................... $224,541 $52,944 $ 9,316 $ (34,246) $252,555
======== ======= ======= ========= ========
Identifiable assets............ $405,606 $22,231 $(1,128) $(102,380) $324,329
======== ======= ======= ========= ========
Year ended June 30, 1999 --
Revenues....................... $183,814 $62,352 $13,324 $ (39,897) $219,593
======== ======= ======= ========= ========
Identifiable assets............ $344,730 $55,260 $ 8,735 $(101,637) $307,088
======== ======= ======= ========= ========
</TABLE>

F-27
<PAGE> 72

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To Aspen Technology, Inc.:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Aspen Technology, Inc. and
subsidiaries, included in this Form 10-K, and have issued our report thereon
dated August 4, 1999. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in Item
14(a)-2 is the responsibility of the Company's management, is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein, in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
August 4, 1999

S-1
<PAGE> 73

SCHEDULE II

ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE, CHARGED TO BALANCE,
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS OTHER PERIOD
- ----------- ------------ ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
June 30, 1997(1)............... $ 730,685 $ 120,000 $ (222,850) $211,882 $ 839,717
June 30, 1998(1)............... 839,717 180,000 (136,000) 598,000 1,481,717
June 30, 1999(2)............... 1,481,717 689,000 (1,107,619) 225,000 1,288,098
RESERVES FOR RESTRUCTURING:
June 30, 1997.................. $ -- $ -- $ -- $ -- $ --
June 30, 1998.................. -- -- -- -- --
June 30, 1999.................. -- 9,266,966 (2,467,816) -- 6,799,150
</TABLE>

- ---------------
(1) Other relates to amounts acquired in acquisitions.

(2) Other relates to miscellaneous income item classified into the allowance for
doubtful accounts.

S-2

<PAGE> 1
Exhibit 10.43

CHANGE IN CONTROL AGREEMENT

AGREEMENT dated as of December 30, 1998 by and between Aspen Technology,
Inc., a Massachusetts corporation (the "Company"), and David Mushin (the
"Executive").

WHEREAS, the Company considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel;
and

WHEREAS, the Company has determined that appropriate steps should be taken
to reinforce and encourage the continued attention and dedication of members of
the Company's management, including the Executive, to their assigned duties
with the Company without distraction in the face of potentially disturbing
circumstances arising from the possibility of a Change in Control (as defined
herein);

NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other valuable consideration, the Company and the
Executive hereby agree as follows:

1. Defined Terms. The definitions of capitalized terms used in this
Agreement are provided in the last section hereof.

2. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect through June 30, 2002. Thereafter, this Agreement
shall be automatically renewed for successive one year terms unless the Company
sends written notice of termination to the Executive at least 60 days before
the expiration date of this Agreement, which termination will be effective at
that expiration date. If a Change in Control shall have occurred during the
term of this Agreement, however, this Agreement shall continue in effect for a
period of three years beyond the last day of the month in which the Change in
Control occurred. Notwithstanding the foregoing provisions of this Section 2,
this Agreement shall terminate, unless earlier terminated in accordance with
this Agreement, (i) one year after the Executive is notified in accordance with
Section 9 hereof that the Compensation Committee, upon recommendation of the
Company's chief executive officer, has voted to terminate this Agreement or
(ii) if earlier, immediately after the Executive is notified in accordance with
Section 9 hereof that the Compensation Committee has determined that the
Executive's level of responsibility (other than reporting responsibility) has
substantially changed from the Executive's current level of responsibility,
<PAGE> 2
-2-

in either case only if the notification occurs prior to a Potential Change in
Control that results in a Change in Control.

3. Payments After Change in Control.

3.1 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the
Company shall pay the Executive's full salary to the Executive through the Date
of Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of any compensation or benefit
plan, program or arrangement maintained by the Company during such period.

3.2 Subject to Section 3.3, the Company shall pay to the Executive the
payments described in this Section 3.2 (the "Severance Payments") upon the
termination of the Executive's employment following a Change in Control and
during the term of this Agreement, in addition to the payments and benefits
described in Section 3.1, unless such termination is (i) by the Company for
Cause, (ii) by reason of death, (iii) by the Executive without Good Reason, or
(iv) after the Executive shall have attained age 70. In lieu of any further
salary payments to the Executive for periods subsequent to the Date of
Termination and in lieu of any severance benefits otherwise payable to the
Executive under any then existing broad-based employee severance plan, the
Company shall pay to the Executive a lump sum severance payment, in cash, equal
to three times the sum of (x) the higher of the Executive's annual base salary
in effect immediately prior to the occurrence of the event or circumstance upon
which the Notice of Termination is based or in effect immediately prior to the
Change in Control and (y) the higher of the average of the annual bonuses paid
to the Executive for the three years (or the number of years employed, if less)
immediately preceding the occurrence of the event or circumstance upon which
the Notice of Termination is based or the Change in Control. In lieu of any
further life, disability, accident and health insurance benefits otherwise due
to the Executive, the Company shall pay to the Executive a lump sum amount, in
cash, equal to the cost to the Company (as determined by the Company in good
faith with reference to its most recent actual experience) of providing such
benefits, to the extent that the Executive is eligible to receive such benefits
immediately prior to the Notice of Termination, for a period of three years
commencing on the Date of Termination.

3.3 The payments provided for in Section 3.2 shall be made not later than
the fifth day following the Date of Termination.

<PAGE> 3
-3-

3.4 The Company also shall pay to the Executive all legal fees and expenses
incurred by the Executive in seeking to obtain or enforce any benefit or right
provided by this Agreement, payable within five business days after delivery of
the Executive's written requests for payment accompanied with such evidence of
fees and expenses incurred as the Company reasonably may require.

4. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.

4.1 Notwithstanding any other provisions of this Agreement, in the event
that any payment or benefit received or to be received by the Executive in
connection with a Change in Control or the termination of the Executive's
employment (all such payments and benefits, including the Severance Payments,
the "Total Payments") is determined to be subject (in whole or part) to the
Excise Tax, then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including without limitation any income taxes and
Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount
equal to the Total Payments. Notwithstanding the foregoing provisions of this
Section 4.1, if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the Total Payments do not exceed 110% of the
greatest amount (the "Reduced Amount") that could be paid to the Executive such
that the receipt thereof would not give rise to any Excise Tax, then no
Gross-Up Payment shall be made to the Executive and the Total Payments shall be
reduced to the Reduced Amount.

4.2 All determinations required to be made under this Section 4, including
whether and when a Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utiliized in arriving at such determination,
shall be made by the Company's accountants or such other certified public
accounting firm reasonably acceptable to the Company as may be designated by
the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive.

5. TERMINATION PROCEDURES.

5.1 NOTICE OF TERMINATION. After a Change in Control and during the term
of this Agreement, any purported termination of the Executive's employment
(other than by reason of death) shall be communicated by written Notice of
Termination from one party hereto to the other party hereto in accordance with
Section 8. Further, a Notice of Termination for
<PAGE> 4
-4-

Cause is required to include a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board at a meeting of the Board which was called and held for the purpose of
considering such termination (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board) finding that, in the good faith opinion of the Board,
the Executive was guilty of conduct set forth in the definition of Cause.

5.2 Date of Termination. "Date of Termination", with respect to any
purported termination of the Executive's employment after a Change in Control
and during the term of this Agreement, shall mean the date specified in the
Notice of Termination (which, in the case of a termination by the Company
otherwise than for Cause, shall not be less than thirty days and, in the case of
a termination by the Executive, shall not be less than fifteen days nor more
than sixty days, respectively, from the date such Notice of Termination is
given).

6. No Mitigation. If the Executive's employment by the Company is
terminated during the term of this Agreement, the Executive is not required to
seek other employment or to attempt in any way to reduce any amounts payable to
the Executive by the Company pursuant to Section 3. Further, the amount of any
payment or benefit provided for in Section 3 shall not be reduced by any
compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any mount claimed to be
owed by the Executive to the Company, or otherwise.

7. Executive's Covenants. The Executive agrees that, subject to the terms
and conditions of this Agreement, in the event of a Potential Change in Control
during the term of this Agreement, the Executive will remain in the employ of
the Company until the earliest of (i) a date which is six months from the date
of such Potential Change of Control, (ii) the date of a Change in Control, (iii)
the date of termination by the Executive of the Executive's employment for Good
Reason (determined by treating the Potential Change in Control as a Change in
Control in applying the definition of Good Reason), by reason of death or
Retirement; or (iv) the termination by the Company of the Executive's employment
for any reason.

8. Successors; Binding Agreement.

8.1 In addition to any obligations imposed by law upon any successor to the
Company, the Company will require any successor

<PAGE> 5
-5-

(whether direct or indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
the Company in the same amount and on the same terms as the Executive would be
entitled to hereunder if the Executive were to terminate the Executive's
employment for Good Reason after a Change in Control, except that, for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination.

8.2 This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives. If the Executive shall die
while any amount would still be payable to the Executive hereunder (other than
amounts which, by their terms, terminate upon the death of the Executive) if
the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement
to the Executive's representatives.

9. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth below, or to such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
actual receipt:

To the Company:
Aspen Technology, Inc.
Ten Canal Park
Cambridge, MA 02141

Attention: General Counsel

To the Executive:
David Mushin
Oak House
Coopers Green Lane
St. Albans
<PAGE> 6
-6-

Hertfordshire AL4 9HR
England

10. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and such officer as may be specifically
designated by the Board. Except as expressly provided herein, no waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Massachusetts, and this Agreement shall be an instrument under seal. All
references to sections of the Exchange Act or the Code shall be deemed also to
refer to any successor provisions to such sections. Any payments provided for
hereunder shall be paid net of any applicable withholding required under
federal, state or local law and any additional withholding to which the
Executive has agreed.

11. Settlement of Disputes; Arbitration. All claims by the Executive for
benefits under this Agreement shall be directed to and determined by the Board
and shall be in writing. Any denial by the Board of a claim for benefits under
this Agreement shall be delivered to the Executive in writing and shall set
forth the specific reasons for the denial and the specific provisions of this
Agreement relied upon. Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Boston, Massachusetts, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. The Executive shall, however, be entitled to
seek specific performance of the Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.

12. Definitions. For purposes of this Agreement, the following terms
shall have the-meanings indicated below:

"Beneficial owner" shall have the meaning defined in Rule 13d-3
under the Exchange Act.
<PAGE> 7
-7-

"Board" shall mean the Board of Directors of the Company.

"Cause" for termination by the Company of the Executive's employment, after
any Change in Control, shall mean (i) the willful and continued failure by the
Executive to substantially perform the Executive's duties with the Company
(other than any such failure resulting from the Executive's incapacity due to
physical or mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination for Good Reason by the Executive) after a
written demand for substantial performance is delivered to the Executive by the
Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in gross misconduct which
is demonstrably and materially injurious to the Company or any of its
subsidiaries, monetarily or otherwise. No act, or failure to act, on the
Executive's part shall be deemed "willful" unless done, or omitted to be done,
by the Executive not in good faith and without reasonable belief that the
Executive's act, or failure to act, was in the best interest of the Company.

A "Change in Control" shall be deemed to have occurred if the conditions
set forth in any one of the following paragraphs shall have been satisfied:

(a) Continuing Directors constitute two-thirds or less of the
membership of the Board, whether as the result of a proxy contest or for
any other reason or reasons; or

(b) Any Person is or becomes the Beneficial owner, directly or
indirectly, of securities of the Company representing twenty-five percent
or more of the combined voting power of the Company's then outstanding
voting securities; or

(c) There is a change in control of the Company of a nature that
would be required to be reported on Form 8-K or item 6(e) of Schedule 14A
of Regulation 14A or any similar item, schedule or form under the Exchange
Act, as in effect at the time of the change, whether or not the Company is
then subject to such reporting requirement, including without limitation
any merger or consolidation of the Company with any other corporation,
other than (i) a merger or consolidation
<PAGE> 8
-8-

which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving or parent entity) fifty-one percent or more of the combined
voting power of the voting securities (entitled to vote generally for
the election of directors) of the Company or such surviving or parent
entity outstanding immediately after such merger or consolidation and
which would result in those persons who are Continuing Directors
immediately prior to such merger or consolidation constituting more
than two-thirds of the membership of the Board or the board of such
surviving or parent entity immediately after, or subsequently at any
time as contemplated by or as a result of, such merger or
consolidation or (ii) a merger or consolidation effected to implement
a recapitalization of the company (or similar transaction) in which no
Person acquired twenty-five percent or more of the combined voting
power of the Company's then outstanding securities; or

(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets (or
any transaction having a similar effect).

"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.

"Company" shall mean Aspen Technology, Inc. and any successor to its
business and/or assets which assumes or agrees to perform this Agreement, by
operation of law or otherwise.

"Compensation Committee" shall mean the Compensation and Nominating
Committee of the Board.

"Continuing Director" shall mean any director (i) who has continuously
been a member of the Board since not later than the date of a Potential Change
in Control or (ii) who is a successor of a director described in clause (i), if
such successor (and any intervening successor) shall have been recommended or
elected to succeed a Continuing Director by a majority of the then
Continuing Directors.
<PAGE> 9
-9-

"Date of Termination" shall have the meaning stated in Section 5.2 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"Excise Tax" shall mean the tax imposed by Section 4999 of the Code.
"Executive" shall mean the individual named in the first paragraph of this
Agreement.
"Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent) of any one of the following acts or failures to act by the Company
unless, in the case of any act or failure to act described in paragraph (a),
(e), (f) or (g) below, such act or failure to act is corrected prior to the
Date of Termination specified in the Notice of Termination given in respect
thereof or, in the case of paragraph (c) below, such act is not objected to in
writing by the Executive within four months after notification by the Company
to the Executive of the Company's intention to take the action contemplated by
such paragraph (c):

(a) the assignment to the Executive of any duties inconsistent with
the Executive's status as a senior executive officer of the Company or
a meaningful alteration, adverse to the Executive, in the nature or
status of the Executive's responsibilities) other than reporting
responsibilities) from those in effect immediately prior to the
Change in Control;

(b) a reduction by the Company in the Executive's annual base salary
as in effect on the date hereof or as the same may be increased from
time to time except for across-the-board salary reductions similarly
affecting all senior executives of the Company and all senior
executives of any Person in control of the Company;

(c) the Company's requiring the Executive to be based anywhere other
than the Boston Metropolitan Area (or, if different, the metropolitan
area in which the Company's principal executive offices are located
immediately prior to the Change in Control) except for required travel
on the Company business to an extent substantially consistent with the
Executive's present business travel obligations;
<PAGE> 10
-10-

(d) the failure by the Company, without the Executive's consent, to pay
to the Executive any portion of the Executive's current compensation,
or to pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of the Company,
within fourteen days of the date such compensation is due;

(e) the failure by the Company to continue in effect any compensation plan
in which the Executive participates immediately prior to the Change in
Control which is material to the Executive's total compensation, or
the failure by the Company to continue the Executive's participation
therein on a basis not materially less favorable, both in terms of the
amount of benefits provided and the level of the Executive's
participation relative to other participants, as existed at the time
of the Change in Control;

(f) the failure by the Company to continue to provide the Executive with
benefits substantially similar to those enjoyed by the Executive under
any of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was participating
at the time of the Change in Control, the taking of any action by the
Company which would directly or indirectly materially reduce any of
such benefits or deprive the Executive of any material fringe benefit
enjoyed by the Executive at the time of the Change in Control, or the
failure by the Company to provide the Executive with the number of
paid vacation days to which the Executive is entitled on the basis of
years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the Change in Control;
or

(g) any purported termination of the Executive's employment which is not
effected pursuant to a Notice of Termination satisfying the
requirements of Section 5.1.

"Notice of Termination" shall have the meaning stated in Section 5.1.

"Person" shall have the meaning given in Section 3(a)(9) of the Exchange
Act, as modified and used in Sections 13(d) and 14(d). thereof; however, a
Person shall not include (i) the Company or any of its subsidiaries, (ii) a
trustee or other fiduciary holding securities under an
<PAGE> 11
-11-

employee benefit plan of the Company or any of its subsidiaries, (iii) an
underwriter temporarily holding securities pursuant to a registered offering of
such securities in accordance with an agreement with the Company, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.

"Potential Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall have been
satisfied:

(a) the Company enters into an agreement, the consummation of which
would result in the occurrence of a Change in Control;

(b) the Company or any Person publicly announces an intention to take
or to consider taking actions which, if consummated, would constitute a Change
in Control;

(c) any Person becomes the Beneficial Owner, directly or indirectly,
of securities of the Company representing fifteen percent or more of the
combined voting power of the Company's then outstanding securities (entitled to
vote generally for the election of directors); or

(d) the Board adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control has occurred.

"Severance Payments" shall mean those payments described in Section 3.2
hereof.

"Total Payments" shall mean those payments described in Section 4 hereof.

IN WITNESS WHEREOF, the Company and the Executive have executed and
delivered this Agreement on the date first written above.

ASPEN TECHNOLOGY, INC.

By: /s/ Lawrence B. Evans
---------------------
Lawrence B. Evans

By: /s/ David A.Mushin
---------------------
David Mushin

<PAGE> 1
EXHIBIT 22.1 SUBSIDIARIES OF THE COMPANY

U.S. DOMESTIC SUBSIDIARIES
Syllogistics, Inc. California
Aspen Technology (Asia), Inc. Delaware
AspenTech EMEA, Inc. Delaware
Lakewood Corporation Delaware
AspenTech Securities Corporation Massachusetts
Chesapeake Decision Sciences, Inc. New Jersey
Chesapeake Properties New Jersey
NeuralWare, Inc. Pennsylvania
S.A.S.T., Inc. Texas
AspenTech, Inc. Texas
IISYS, Inc. Texas
Treiber Controls, Inc. Texas
Industrial Systems, Inc. Washington

FOREIGN SUBSIDIARIES
CimTech S.A./N.V. Belgium
Cimtrade Trading S.A. Belgium
AspenTech Europe S.A./N.V. Belgium
AspenTech Canada Ltd. Canada
Special Analysis and Computing Services Limited England
Special Analysis and Simulation Technology Limited England
AspenTech Asia, Ltd. Hong Kong
Aspen Technology S.r.l. Italy
AspenTech Japan Co. Ltd. Japan
AspenTech Europe B.V. Netherlands
Chesapeake Europe, Ltd. United Kingdom
AspenTech, Ltd. United Kingdom
Zyqad Ltd. United Kingdom
The SAST Corporation Limited United Kingdom
Setpoint Systems, Ltd. United Kingdom
SAST Process, Ltd. United Kingdom

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos. 333-44575, 333-80223, 333-80225, 333-21593
and 333-11651.

/s/ Arthur Andersen LLP
------------------------------

Boston, Massachusetts
September 28, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999 INCLUDED IN THE COMPANY'S
FORM 10-K FOR SUCH PERIOD, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 33,456
<SECURITIES> 63,512
<RECEIVABLES> 91,780
<ALLOWANCES> (1,288)
<INVENTORY> 0
<CURRENT-ASSETS> 227,713
<PP&E> 82,615
<DEPRECIATION> 45,775
<TOTAL-ASSETS> 322,242
<CURRENT-LIABILITIES> 75,570
<BONDS> 0
0
0
<COMMON> 2,517
<OTHER-SE> 140,709
<TOTAL-LIABILITY-AND-EQUITY> 322,242
<SALES> 91,621
<TOTAL-REVENUES> 219,593
<CGS> 7,862
<TOTAL-COSTS> 91,208
<OTHER-EXPENSES> 48,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,677
<INCOME-PRETAX> (41,846)
<INCOME-TAX> (16,111)
<INCOME-CONTINUING> (46,051)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,735)
<EPS-BASIC> (1.04)
<EPS-DILUTED> (1.04)

</TABLE>