<PAGE>   1
 
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1998
 
                                                 REGISTRATION NO. 333-
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

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

                            ------------------------
 
<TABLE>
<S>                                <C>                                <C>
             DELAWARE                             3845                            04-2985553
 (STATE OR OTHER JURISDICTION OF      (PRIMARY STANDARD INDUSTRIAL             (I.R.S. EMPLOYER
  INCORPORATION OR ORGANIZATION)      CLASSIFICATION CODE NUMBER)           IDENTIFICATION NUMBER)
</TABLE>
 
                            ------------------------
 
                                TWO VISION DRIVE
                          NATICK, MASSACHUSETTS 01760
                                 (508) 653-0603
    (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                  OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                            ------------------------
 
                               NASSIB G. CHAMOUN
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                          ASPECT MEDICAL SYSTEMS, INC.
                                TWO VISION DRIVE
                          NATICK, MASSACHUSETTS 01760
                                 (508) 653-0603
               (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
               NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
                            ------------------------
 
                                   COPIES TO:
 
<TABLE>
<S>                                                 <C>
               SUSAN W. MURLEY, ESQ.                               LESLIE E. DAVIS, ESQ.
                 HALE AND DORR LLP                            TESTA, HURWITZ & THIBEAULT, LLP
                  60 STATE STREET                                    HIGH STREET TOWER
            BOSTON, MASSACHUSETTS 02109                               125 HIGH STREET
             TELEPHONE: (617) 526-6000                          BOSTON, MASSACHUSETTS 02110
             TELECOPY: (617) 526-5000                            TELEPHONE: (617) 248-7000
                                                                 TELECOPY: (617) 248-7100
</TABLE>
 
                            ------------------------
 
    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:  As soon as
practicable after the effective date hereof.
 
    If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
 
    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ------------
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------
 
    If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
                            ------------------------
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
========================================================================================================================
                                                               PROPOSED MAXIMUM
          TITLE OF EACH CLASS OF SECURITIES                   AGGREGATE OFFERING                    AMOUNT OF
                   TO BE REGISTERED                                PRICE(1)                     REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                              <C>
Common Stock, $.01 par value per share................            $53,475,000                        $15,776
========================================================================================================================
</TABLE>
 
(1) Estimated solely for the purpose of calculating the amount of the
    registration fee pursuant to Rule 457(a) under the Securities Act of 1933,
    as amended.

                            ------------------------
 
    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
 
================================================================================
<PAGE>   2
 
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
 
                                                           SUBJECT TO COMPLETION
                                                                   JUNE 25, 1998
                                             Shares
 
                               [Corporate Logo]
 
                                  Common Stock
                               ------------------
 
     All the           shares of Common Stock offered hereby will be sold by
Aspect Medical Systems, Inc. ("Aspect" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is presently estimated that the initial public offering price will be between
$       and $       per share. See "Underwriting" for the factors to be
considered in determining the initial public offering price. Application has
been made for the quotation of the Common Stock on the Nasdaq National Market
under the symbol "ASPM."
                               ------------------
 
        THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
                    SEE "RISK FACTORS" BEGINNING ON PAGE 5.
                               ------------------
 
  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
 EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
   AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
                               CRIMINAL OFFENSE.
 
<TABLE>
<S>                                <C>                       <C>                       <C>
===============================================================================================================
                                            PRICE                  UNDERWRITING                PROCEEDS
                                              TO                  DISCOUNTS AND                   TO
                                            PUBLIC                 COMMISSIONS                COMPANY(1)
---------------------------------------------------------------------------------------------------------------
Per Share........................             $                         $                         $
---------------------------------------------------------------------------------------------------------------
Total(2).........................             $                         $                         $
===============================================================================================================
</TABLE>
 
(1) Before deducting expenses estimated at $       , payable by the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
              additional shares of Common Stock solely to cover over-allotments,
    if any. To the extent the option is exercised, the Underwriters will offer
    the additional shares at the Price to Public shown above. If the option is
    exercised in full, the total Price to Public, Underwriting Discounts and
    Commissions and Proceeds to Company will be $       , $       and $       ,
    respectively. See "Underwriting."

                               ------------------
 
     The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made through the
facilities of the Depository Trust Company in New York, New York, on or about
            , 1998 against payment therefor in immediately available funds.
 
BT Alex. Brown
 
                              Merrill Lynch & Co.
 
                                                              Piper Jaffray Inc.
 
               THE DATE OF THIS PROSPECTUS IS             , 1998.
<PAGE>   3
 
[Photograph depicting the Company's A-2000 BIS Monitor product with BIS Sensor
affixed to model's forehead]
 
[Photograph depicting the Company's BIS Sensor, BIS Module Kit and Digital
Signal Converter products]
 
                            ------------------------
 
     CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SYNDICATE SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."

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

                                        2

<PAGE>   4
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
 
                                  THE COMPANY
 
     Aspect develops, manufactures and markets anesthesia monitoring systems
that enable anesthesia providers to assess levels of consciousness and
administer the appropriate amount of anesthetics during surgery. The BIS System
incorporates the Company's proprietary disposable BIS Sensors and the A-2000 BIS
Monitor, which was cleared for marketing by the United States Food and Drug
Administration (the "FDA") in February 1998. The BIS System is based on Aspect's
patented core technology, the Bispectral Index (the "BIS index"), which is the
only FDA-cleared, commercially available direct measure of the effects of
anesthesics on the brain. The BIS System was developed over a ten-year period
and is the subject of eight issued and five pending United States patents.
Aspect markets the BIS System through a direct sales organization in the United
States. As of April 4, 1998, more than 600 BIS monitors have been sold to
approximately 100 sites in the United States, and the Company believes that over
100,000 patients have been monitored using the BIS index during surgery.
 
     Each year, more than 29 million patients in the United States and 47
million patients in Europe and Japan receive anesthesia in surgical procedures.
Of these 76 million patients, more than 60% receive general anesthesia or deep
sedation monitored by an anesthesia provider. Historically, anesthesia providers
have had no direct means of assessing levels of consciousness during surgery and
have generally relied on recommended drug dosages and indirect indicators of
consciousness, including blood pressure and heart rate. Changes in these
indirect measures, however, are not reliable indicators of changes in a
patient's levels of consciousness. Using existing monitoring devices, anesthesia
providers are sometimes unable to detect surgical awareness, or the
unintentional regaining of consciousness during surgery. The Company believes
the desire to prevent surgical awareness, as well as the difficulty of
accounting for variability in patient tolerances to anesthetic drugs, leads
anesthesia providers to administer more anesthetic than is required by many of
their patients. Overmedication results in increased drug costs, prolonged and
unpredictable wake-ups from anesthesia and prolonged recovery in the Post
Anesthesia Care Unit (the "PACU"). These factors, in turn, lead to
inefficiencies in operating room (the "OR") and PACU scheduling and increased
personnel costs.
 
     Aspect's BIS index is designed to allow anesthesia providers to measure
directly the effects of anesthetics on the brain in order to assess levels of
consciousness and to administer the appropriate amount of anesthetics for
surgical procedures, while avoiding unintentional overmedication or
undermedication. The BIS index ranges from 100, indicating the patient is awake,
to zero, indicating an absence of electrical brain activity. The Company has
demonstrated in a 302-patient prospective, randomized controlled utility trial
that BIS monitoring provides more controlled and cost-effective dosing of
anesthetic drugs, faster and more predictable recovery from anesthesia and
improved quality of recovery.
 
     Aspect's objective is to become a major multinational anesthesia-monitoring
company by establishing BIS monitoring as the standard of practice in anesthesia
and sedation monitoring in the OR, in the intensive care unit and for procedures
requiring sedation outside the OR. Key elements of the Company's strategy to
accomplish its objective include: (i) a direct sales force for rapid
commercialization, (ii) clinical specialists to educate and to promote the use
of Aspect's BIS System, (iii) OEM relationships to broaden distribution
channels, (iv) technological leadership and (v) new product development.
 
     The Company was organized in Delaware in 1987. The Company's principal
executive offices are located at Two Vision Drive, Natick, Massachusetts 01760,
and its telephone number is (508) 653-0603.
 
                                        3
<PAGE>   5
 
                                  THE OFFERING
 
Common Stock offered by the
  Company.....................             shares
 
Common Stock to be outstanding
  after the offering..........             shares(1)
 
Use of proceeds...............   To fund sales and marketing, research and
                                 development, the sales-type lease program,
                                 possible acquisitions and working capital and
                                 other corporate purposes
 
Proposed Nasdaq National
Market symbol.................   ASPM
 
                         SUMMARY FINANCIAL INFORMATION
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,                   QUARTER ENDED
                                    ------------------------------------------------   --------------------
                                                                                       MARCH 29,   APRIL 4,
                                     1993      1994      1995      1996       1997       1997        1998
                                    -------   -------   -------   -------   --------   ---------   --------
                                                                                           (UNAUDITED)
<S>                                 <C>       <C>       <C>       <C>       <C>        <C>         <C>
STATEMENTS OF OPERATIONS DATA:
  Revenue.........................  $   155   $   852   $ 1,067   $ 1,389   $  3,068   $     415   $ 1,733
  Loss from operations............   (3,885)   (4,491)   (5,607)   (5,477)   (10,308)     (2,224)   (2,941)
  Net loss........................   (3,657)   (4,260)   (5,546)   (5,396)    (9,886)     (2,166)   (2,817)
  Pro forma basic and diluted net
    loss per share(2).............                                             (1.28)                (0.30)
  Weighted average shares used to
    compute pro forma net loss per
    share(2)......................                                             7,707                 9,492
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    APRIL 4, 1998
                                                              -------------------------
                                                              ACTUAL     AS ADJUSTED(3)
                                                              -------    --------------
                                                                     (UNAUDITED)
<S>                                                           <C>        <C>
BALANCE SHEET DATA:
  Cash, cash equivalents and marketable securities..........  $13,206          $
  Working capital...........................................   10,949
  Total assets..............................................   17,456
  Long-term capital lease obligations.......................       81          81
  Total stockholders' equity................................   12,873
</TABLE>
 
---------------
(1) Based on the number of shares of Common Stock outstanding on June 25, 1998.
    Excludes an aggregate of 1,317,031 shares of Common Stock reserved for
    issuance pursuant to exercise of currently outstanding options at a weighted
    average exercise price of $1.13 per share. See "Management -- Executive
    Compensation" and Note 9 of Notes to Financial Statements.
 
(2) See Note 10 of Notes to Financial Statements.
 
(3) Adjusted to give effect to the estimated net proceeds based upon an assumed
    public offering price of $     per share.
 
     Unless otherwise indicated, all information contained in this Prospectus
(i) reflects the conversion of all outstanding shares of the Company's Series
A-1, Series B-1, Series C, and Series D Convertible Preferred Stock (the
"Convertible Preferred Stock") into an aggregate of 9,313,509 shares of Common
Stock at the closing of this offering and (ii) assumes no exercise of the
Underwriters' over-allotment option. The Company follows a system of fiscal
months as opposed to calendar months. Under this system, the first eleven months
of each fiscal year end on a Saturday and the last month of the fiscal year
always ends on December 31.
 
                                        4
<PAGE>   6
 
                                  RISK FACTORS
 
     In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.
 
UNCERTAINTY OF MARKET ACCEPTANCE OF TECHNOLOGY AND PRODUCTS
 
     Commercial introduction of the Company's BIS monitor, BIS Sensor and
related products (collectively, the "BIS System") commenced in late 1996, and to
date sales of BIS Systems have been limited. The commercial success of the BIS
System will depend on its acceptance by hospitals and anesthesia providers as an
accurate, reliable and cost-effective method of monitoring the effects of
anesthetics on the brain in order to assess levels of consciousness. There can
be no assurance that anesthesia providers will modify their current practice
methods and support the BIS System as a complement to current anesthesia
monitoring. In addition, market acceptance of the BIS System will depend in part
on the Company demonstrating that the cost of a BIS System would be offset by a
reduction in costs associated with administering anesthesia, including the costs
of drugs and post-operative recovery time. Even if the Company is successful in
marketing and selling BIS monitors, there can be no assurance that customers
will continue to use such monitors or that the Company will be successful in
generating sales of BIS Sensors. Failure of the Company's BIS System to provide
an accurate and reliable measure of the effects of anesthetics on the brain in
order to assess levels of consciousness, whether because of misuse, malfunction
or otherwise, could have a material adverse effect on market acceptance of BIS
Systems. For example, cases of surgical awareness, or the unintentional
regaining of consciousness during surgery, undetected by Bispectral Index (the
"BIS index") monitoring may occur, and the resulting adverse publicity could
result in the failure of anesthesia providers and hospitals to adopt BIS
Systems, which would have a material adverse effect on the business, financial
condition and results of operations of the Company. In addition, market
acceptance of the Company's BIS System could be adversely affected by events
outside its control, including the introduction of superior competitive products
or the failure of competitive products to perform in accordance with customers'
expectations.
 
LIMITED MARKETING AND SALES EXPERIENCE
 
     The Company has only limited sales and marketing experience in the United
States and no direct sales experience outside the United States. No assurance
can be given that the Company's direct sales force and clinical specialist group
will be successful in promoting BIS Systems. The sales effort is typically
lengthy, in part because the Company generally must educate potential customers
about the clinical benefits and cost effectiveness of BIS Systems. There can be
no assurance that the Company's education or other sales strategies are properly
developed or that they will be successfully implemented. The Company is also
evaluating international and other domestic marketing and sales channels,
including contract sales organizations, distributors and marketing partners. The
Company's failure to develop and implement successfully its sales and marketing
strategy would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Sales, Marketing
and Customers."
 
RELIANCE ON SINGLE PRODUCT FAMILY
 
     The BIS System is the Company's only product. To date, the BIS System has
not achieved widespread market acceptance and sales have been limited. The
failure of the Company to gain widespread market acceptance of BIS Systems would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, sales of BIS Sensors are dependent upon
continued use by customers of the BIS monitors. There can be no assurance that
customers will continue to use BIS monitors or purchase BIS Sensors. Moreover,
there can be no assurance the Company will further enhance its products for use
outside of the operating room (the "OR"), including in the intensive care unit
("ICU"), for conscious sedation or for other applica-
                                        5
<PAGE>   7
 
tions. The Company's failure to develop its products for use outside of the OR
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Uncertainty of Market Acceptance of
Technology and Products" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
LIMITED MANUFACTURING EXPERIENCE; MANUFACTURING EXPANSION
 
     Aspect relies on third-party manufacturers to assemble and manufacture the
components of its BIS monitors. The Company performs final assembly and testing
of the BIS monitors. The Company has historically outsourced the manufacturing
of its BIS Sensor, but in the first quarter of 1998, the Company began
manufacturing a portion of the BIS Sensors in its own manufacturing facility.
The failure of the Company or any contract manufacturer to produce enough
components or products on time, cost-effectively and in compliance with
applicable licensing or regulatory requirements, such as the Good Manufacturing
Practices ("GMPs") of the United States Food & Drug Administration (the "FDA"),
including the FDA's Quality Systems Regulations, would have a material adverse
effect on the Company's business, results of operations and financial condition.
Any termination or modification of any manufacturing arrangement with a
third-party could result in a business interruption for the Company. The Company
may require additional manufacturing capacity within the next two years. There
can be no assurance that the Company will be successful in expanding its
manufacturing facility or relocating its facility to meet demand in a timely
manner or within budget. The Company has only one manufacturing facility and any
loss of, damage to or interruption of production at its facility could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."
 
DEPENDENCE ON SINGLE OR LIMITED SOURCE SUPPLIERS
 
     The Company currently obtains certain key components of its BIS Systems,
including certain components used in the BIS Sensors, from single or limited
sources. The Company purchases components pursuant to purchase orders rather
than long-term supply agreements. The Company has experienced shortages and
delays in obtaining certain components of its BIS Systems in the past. There can
be no assurance that the Company will not experience similar delays or shortages
in the future. The disruption or termination of the supply of components or a
significant increase in the costs of these components from these sources could
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, if the Company is required to change the
manufacturer of a key component of the BIS System, the Company may be required
to verify that the new manufacturer maintains facilities and procedures that
comply with all applicable regulations and guidelines. The delays associated
with verification could delay the manufacture and sale of the Company's BIS
Systems and any delay could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Manufacturing."
 
TECHNOLOGICAL RISKS
 
     The medical industry is characterized by rapid product development and
technological advances. There can be no assurance that new monitoring products,
alternative techniques for evaluating the effects of anesthesia, significant
changes in the methods of delivering anesthesia or new anesthetic agents will
not be developed that will render the Company's current or planned products
obsolete or inferior. New products or technologies used on patients or in the OR
during surgery, or electrical or mechanical interference from new or existing
products or technologies, could also adversely affect the performance of the BIS
index. The effect of technological changes on the Company's business cannot be
predicted and could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     Additional studies, sponsored in part by the Company, are ongoing to assess
the performance of the BIS index in the presence of certain anesthetics, such as
ketamine, and patient populations, such
                                        6
<PAGE>   8
 
as children, not included in the clinical development of the BIS algorithms.
There can be no assurance that the BIS technology will be effective in
monitoring these or other anesthetic agents and patient populations or when
other anesthetic techniques are used. Furthermore, there can be no assurance
that the Company will be successful in developing any product enhancements or
extensions or new products, including products for use in the ICU, for conscious
sedation or for other applications. The failure of the Company to develop
product enhancements or extensions or new products could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
 
     The Company's success is substantially dependent on the ability, experience
and performance of its senior management and other key personnel. The Company
needs to hire, train, retain and motivate additional personnel, particularly
sales representatives and clinical specialists who are responsible for customer
education and training and post-installation customer support. The Company
continues to experience difficulty in recruiting and retaining qualified
personnel because the pool of experienced persons is small and the Company
competes for such personnel with other companies, many of which have greater
resources than the Company. The failure of the Company to hire and retain
required personnel, including sales representatives and clinical specialists,
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Sales, Marketing and
Customers," "Business -- Employees" and "Management."
 
COMPETITION
 
     Although products incorporating the BIS index are currently the only
devices cleared by the FDA to measure the effects of anesthetics on the brain,
the Company expects to face substantial competition. The Company believes that
competition will initially come from companies, including patient monitoring
companies, currently marketing conventional EEG monitors utilizing standard
signal-processing techniques such as the Spectral Edge Frequency and Median
Frequency or from companies that market EEG monitors utilizing novel
signal-processing technologies, including at least two companies that are
currently conducting clinical trials on products under development.
Additionally, a number of academic researchers worldwide are studying the
potential use of other techniques to measure the effects of anesthetics,
including the use of auditory evoked potentials, heart rate variability,
pupillary reflexes and skin blood flow measurement techniques. Competitors that
develop a product that is substantially equivalent to an FDA-cleared product
developed by the Company may use the Company's product as a predicate device to
obtain more quickly FDA clearance under the 510(k) process. Accordingly, there
can be no assurance that competitors will not develop and market products that
compete with any of the Company's products in less time than it took the Company
to develop its products. Further, the Company may face substantial competition
from companies developing sensor products that compete with the Company's
proprietary BIS Sensors for use with the Company's BIS monitors. Competitors in
some jurisdictions outside the United States may enter the market without delays
caused by regulatory barriers that exist in the United States. Many of the
Company's potential competitors have substantially greater financial, marketing,
technical, manufacturing and distribution resources than those of the Company
and the Company expects to compete in areas in which the Company has limited
experience, including manufacturing, marketing and sales and customer service
and support. There can be no assurance that the Company will be able to compete
successfully or that competition, including the development and
commercialization of new products and technology, will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Competition."
 
                                        7
<PAGE>   9
 
DEPENDENCE ON PATENTS, TRADEMARKS, LICENSES AND PROPRIETARY RIGHTS
 
     Aspect believes that its success depends, in part, on obtaining patent
protection for its products, defending patents once obtained, preserving its
trade secrets and operating without infringing upon patents and proprietary
rights held by third parties, both in the United States and in foreign
countries. There can be no assurance that the Company has or will develop or
obtain additional rights to products or processes that are patentable, that
patents will issue from any of the pending patent applications filed by the
Company or that claims allowed will be sufficient to protect the Company's
technology or technology that is licensed to the Company. In addition, no
assurances can be given that any patents issued to or licensed by the Company
will not be challenged, invalidated, infringed or circumvented or that the
rights granted thereunder will provide competitive advantages for the Company's
business or products. The Company may be subject to further risks as it expands
its operations in countries where intellectual property laws are not well
developed or are difficult to enforce. Legal protections of the Company's
proprietary rights may be ineffective in those countries. In such event, the
business, results of operations and financial condition of the Company could be
materially adversely affected.
 
     There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. The Company has in
the past been involved in patent litigation and future litigation may be
necessary to protect patents, trade secrets, copyrights or "know-how" owned by
or licensed to the Company or to defend the Company against claimed infringement
of the rights of others and to determine the scope and validity of the
proprietary rights of the Company and others. The validity and breadth of claims
covered in medical technology patents involve complex legal and factual
questions for which important legal principles are unresolved. Any intellectual
property litigation could result in substantial cost to and diversion of effort
by the Company. Adverse determinations in any litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties with unfavorable terms, if at all, and could
prevent the Company from manufacturing, selling or using certain of its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
     The Company also relies on trade secrets and proprietary technology that it
seeks to protect, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, that others will not independently develop substantially equivalent
proprietary information or that third parties will not otherwise gain access to
the Company's trade secrets.
 
     The Company also relies upon trademarks and trade names for the development
and protection of brand loyalty and associated goodwill in connection with its
products. There can be no assurance that any registered or unregistered
trademarks or trade names owned by or licensed to the Company will not be
challenged, cancelled, infringed, circumvented, or be declared generic or
infringing of other third-party marks or provide any competitive advantage to
the Company. The Company also is a party to a license agreement with a third
party pursuant to which it has obtained the nonexclusive right to make, use
and/or sell products under the name "Aspect." The licensor of the Aspect name
markets products for use in the health care industry. There can be no assurance
that there will not be confusion in the market between the Company and such
licensor or that any such confusion would compromise the competitive advantage,
if any, the Company derives from its name. See "Business -- Patents and
Proprietary Rights."
 
HISTORY OF LOSSES; UNCERTAINTY OF PROFITABILITY
 
     The Company has incurred losses since inception. The Company incurred net
losses of $5.5 million, $5.4 million, $9.9 million and $2.8 million during 1995,
1996, 1997 and the quarter ended April 4, 1998, respectively. The Company
expects to continue to incur operating losses in
 
                                        8
<PAGE>   10
 
future periods, and there can be no assurance that the Company will ever achieve
or sustain profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
 
     The Company's results of operations have varied significantly from quarter
to quarter. Quarterly operating results will depend upon several factors, many
of which are not in the Company's control, including commercial acceptance of
the Company's products, both in the United States and internationally, timing
and cancellation of customer orders, cost of product upgrades, continued use by
customers of BIS monitors and, accordingly, sales of BIS Sensors, the
introduction of new products by the Company or competitors, the mix between
pilot production of new products and full scale manufacturing of existing
products, the timing and amount of expenses, the timing and results of clinical
trials, the timing of regulatory approvals and variations in foreign exchange
rates. The Company does not have a significant backlog of customer orders, so
revenues in any quarter depend on orders received in that quarter. The Company's
expenses are relatively fixed and difficult to adjust in response to fluctuating
revenues. In addition, depending on the timing of new product introductions,
competitive factors, warranty claims and product returns, the Company may need
to reserve amounts in excess of those currently reserved for product
obsolescence, excess inventory, warranty claims and product returns. There can
be no assurance that such reserves will be adequate to cover all costs
associated with such items. In addition, quarterly results of operations may be
affected by foreign government controls, export license requirements, political
and economic instability, trade restrictions, changes in tariffs, employee
strikes or disruptions arising under foreign labor laws, standards or
guidelines, or difficulties in staffing and managing international operations.
As a result of these and other factors, the Company expects to continue to
experience significant fluctuations in quarterly operating results, and there
can be no assurance that the Company will be able to achieve or maintain
profitability in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
GOVERNMENT REGULATION
 
     The Company's products and operations are subject to extensive regulation
by numerous governmental authorities. In particular, the Company must obtain
specific clearance from the FDA before it can market new products or certain
modified products in the United States. The FDA administers the Federal Food,
Drug, and Cosmetic Act (the "FDC Act"). The Company has made certain
enhancements to its currently marketed products which it believes do not
necessitate the filing of a new 510(k) notification. However, there can be no
assurance that the FDA would agree with the Company's determination that these
modifications do not require a 510(k) notification. If the FDA requires the
Company to file a new 510(k) notification for any past or future modification to
a cleared device, the Company may be prohibited from marketing the device as
modified until it obtains clearance from the FDA. There can be no assurance that
the Company will obtain 510(k) clearance on a timely basis, if at all, for any
device modification. Furthermore, there can be no assurance that the Company's
future products, if any, will receive 510(k) clearance.
 
     FDA regulations also require companies to adhere to GMPs, which include
production design controls, testing, quality control, storage and documentation
procedures. Compliance with device GMP regulations is difficult, costly and
uncertain. The FDA may at any time inspect the Company's facilities to determine
whether adequate compliance has been achieved. There can be no assurance that
adequate compliance will be achieved or that the FDA will not withdraw marketing
clearance, require product recall or permit marketing if there is inadequate
compliance. In addition, when any change or modification is made to a device or
its intended use, the manufacturer may be required to reassess compliance with
device GMP regulations, which may cause interruptions or delays in the marketing
and sale of the Company's products. Any such interruptions or delays could have
a material adverse effect on the Company's business, financial condition and
results of operations.
 
                                        9
<PAGE>   11
 
     Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements.
 
     Failure to comply with applicable federal, state or foreign laws or
regulations could subject the Company to enforcement actions, including, but not
limited to, product seizures, recalls, withdrawal of clearances or approvals and
civil and criminal penalties against the Company or its responsible officials,
any one or more of which could have a material adverse effect on the Company's
business, results of operations and financial condition. Federal, state and
foreign laws and regulations regarding the manufacture and sale of medical
devices are subject to future changes, as are administrative interpretations of
regulatory agencies. No assurance can be given that such changes will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."
 
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF AVAILABILITY OF ADDITIONAL FINANCING
 
     The Company believes that the anticipated net proceeds from this offering
together with interest thereon and the Company's existing capital resources will
be sufficient to fund its operations at least through 1999. However, the
Company's future liquidity and capital requirements will depend upon numerous
factors, including the resources required to further develop its marketing and
sales organization domestically and internationally, expand manufacturing
capacity, finance the Company's sales-type lease program, and meet market demand
for the Company's products. The Company's capital requirements will also depend
upon the progress of the Company's research and development programs, including
clinical trials, the receipt of and the time required to obtain regulatory
clearances and approvals, the resources the Company devotes to developing,
manufacturing and marketing its products, and the resources, if any, the Company
may devote to the expansion of its business, including through the possible
acquisition of businesses, technologies or other intellectual property rights.
There can be no assurance that the Company will not require additional financing
or will not in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital. Additional
funding may not be available when needed or on terms acceptable to the Company,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
 
POTENTIAL PRODUCT LIABILITY OR RECALL
 
     The manufacture and sale of the Company's products expose it to product
liability claims and product recalls, including those which may arise from
misuse, malfunction or design flaws. There can be no assurance that the
Company's existing insurance coverage will cover the costs of any product
liability claims made against the Company or that the Company will be able to
obtain insurance in the future at satisfactory rates or in adequate amounts.
Product liability claims or product recalls, regardless of their ultimate
outcome, could result in costly litigation and could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Insurance."
 
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
 
     The Company expects that anesthesia providers will not be reimbursed
separately for patient monitoring activities utilizing the Company's BIS
monitor. For hospitals and independent ambulatory surgical centers ("ASCs"),
when reimbursement is based on charges or costs, BIS monitoring may reduce
reimbursements for surgical procedures, because charges or costs may decline as
a result of BIS monitoring. Any reduction in the reimbursement by third-party
payors to hospitals and other users as a result of using the BIS System could
limit market acceptance of the BIS System and
                                       10
<PAGE>   12
 
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
POTENTIAL ADVERSE EFFECTS OF YEAR 2000 PROBLEM
 
     The Company has conducted a software review to identify functions that need
corrections to be "Year 2000" compliant. The Year 2000 problem is the result of
computer programs being written to recognize two digits rather than four to
define the applicable year causing computer programs to interpret a date using
"00" as the year 1900 rather than the year 2000, which could result in product
failures or miscalculations. The Company is undertaking certain corrective
actions in an effort to ensure that software systems incorporated in its
products or used to manage its business will continue to function properly in
the year 2000. However, there can be no assurance that Year 2000 problems will
not be encountered or that the costs incurred to resolve such problems will not
be material. Additionally, there can be no assurance that the Year 2000 problem
will not affect the Company by causing disruptions in the business operations of
persons with whom the Company does business, such as customers or suppliers.
Year 2000 problems could have a material adverse effect on the Company.
 
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
 
     Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or continue after this offering. The initial public
offering price will be determined by negotiations among the Company and the
representatives of the Underwriters, and may not be indicative of the market
price for the Common Stock after this offering. From time to time after this
offering, there may be significant volatility in the market price of the Common
Stock. Quarterly operating results of the Company, deviations in results of
operations from estimates of securities analysts, changes in general conditions
in the economy or the medical equipment industry or other developments affecting
the Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of these companies. Any fluctuations in the equity market
that occur following completion of this offering may adversely affect the market
price of the Common Stock. See "Underwriting."
 
SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE
 
     Sales of substantial amounts of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon completion of this offering, the Company will have outstanding
               shares of Common Stock, assuming no exercise of outstanding
options. On the date of this Prospectus, in addition to the
shares offered hereby, approximately 472,500 shares of Common Stock, which are
not subject to 180-day lock-up agreements (the "Lock-up Agreements") with the
representatives of the Underwriters, will be eligible for immediate sale in the
public market pursuant to Rule 144(k) under the Securities Act of 1933, as
amended (the "Securities Act"). Approximately 336,800 additional shares of
Common Stock which are not subject to the Lock-up Agreements will be eligible
for sale in the public market in accordance with Rule 144 or Rule 701 under the
Securities Act beginning on the 91st day after the date of this Prospectus. Upon
expiration of the Lock-up Agreements 180 days after the date of this Prospectus,
approximately 11,551,000 shares of Common Stock (including approximately 489,000
shares of Common Stock which may be acquired upon the exercise of outstanding
options) will be available for sale in the public market, subject to the
provisions of Rule 144 under the Securities Act. BT Alex. Brown Incorporated may
release any or all shares subject to Lock-up Agreements at any time or from time
to time without notice. Approximately 180 days after the date of this
Prospectus, the Company intends to register an aggregate of approximately
1,900,000 shares of
 
                                       11
<PAGE>   13
 
Common Stock subject to present or future options under its Amended and Restated
1991 Stock Option Plan and 1998 Director Stock Option Plan, as amended. Holders
of approximately 10,138,000 shares of Common Stock have agreed, pursuant to the
Lock-up Agreements, not to offer to sell, contract to sell, transfer, engage in
any hedging transaction with respect to or otherwise dispose of such shares for
180 days after the date of this Prospectus. The Company is unable to predict the
effect that sales made under Rule 144, or otherwise, may have on the then
prevailing market price of the Common Stock. The holders of approximately
9,400,000 shares of Common Stock are entitled to certain incidental and demand
registration rights with respect to such shares. By exercising their
registration rights, such holders could cause a large number of shares to be
registered and sold in the public market at any given time. Sales pursuant to
Rule 144 or other exemptions from registration, or pursuant to registration
rights, may have an adverse effect on the market price for the Common Stock and
could impair the Company's ability to raise capital through offerings of its
equity securities. See "Management -- Executive Compensation -- Stock Plans,"
"Shares Eligible for Future Sale" and "Underwriting."
 
CONTROL BY DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS
 
     Upon completion of this offering, the Company's directors, executive
officers and principal stockholders, together with their affiliates, will
beneficially own approximately      % of the Company's outstanding Common Stock
(approximately      % if the underwriters exercise their overallotment option in
full). As a result, these stockholders, if acting together, would have the
ability to influence or determine the outcome of corporate actions requiring
stockholder approval, including the election of directors and the approval of
certain mergers and other significant corporate transactions, such as a sale of
substantially all of the Company's assets, irrespective of how other
stockholders of the Company may vote. This concentration of ownership may have
the effect of delaying or preventing a change in control of the Company, which
could adversely affect the market price of the Company's Common Stock. See
"Management" and "Principal Stockholders."
 
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS
 
     Certain provisions of the Company's Certificate of Incorporation (the
"Restated Certificate") and Bylaws, as they are each proposed to be amended and
restated concurrently with the closing of the offering, and the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law statute, could
have the effect of delaying, deterring or preventing changes of control or
management of the Company, which could adversely affect the market price of the
Company's Common Stock. See "Description of Capital Stock."
 
IMMEDIATE AND SUBSTANTIAL DILUTION
 
     The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $     per share (after giving effect to
estimated underwriting discounts and commissions and offering expenses). See
"Dilution." In the event the Company offers additional Common Stock in the
future, including shares that may be issued upon exercise of stock options,
purchasers of Common Stock in this offering may experience further dilution in
the net tangible book value per share of the Common Stock of the Company.
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be $          ($          if the Underwriters'
over-allotment option is exercised in full) after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company and assuming an initial public offering price of $     per share.
 
                                       12
<PAGE>   14
 
     The Company expects to use the net proceeds from this offering to fund
sales and marketing, research and development efforts, the sales-type lease
program and working capital and other corporate purposes. A portion of the
proceeds of this offering may be used to acquire businesses, technologies and
other intellectual property rights and products that complement the Company's
business, although the Company has no agreements or understandings with respect
to any such potential transactions. Pending use of the net proceeds, the Company
intends to invest the net proceeds from this offering in short-term, investment
grade, interest-bearing instruments.
 
                                DIVIDEND POLICY
 
     The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and, therefore, does not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion. The Company's credit
agreement restricts the Company from declaring and paying any cash dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 18 of Notes to Financial
Statements.
 
                                       13
<PAGE>   15
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of the Company (i) as of
April 4, 1998, and (ii) as adjusted to give effect to the conversion of all
outstanding shares of the Company's Convertible Preferred Stock into an
aggregate of 9,313,509 shares of Common Stock; the filing of the Company's
Restated Certificate to increase the number of authorized shares of Common Stock
and authorize 5,000,000 shares of authorized but undesignated preferred stock;
and to reflect the issuance and sale of                shares of Common Stock
offered hereby at an assumed initial public offering price of $     per share,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company. The capitalization information set
forth in the table below is qualified by the Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                   APRIL 4, 1998
                                                              -----------------------
                                                               ACTUAL     AS ADJUSTED
                                                              --------    -----------
                                                                  (IN THOUSANDS)
<S>                                                           <C>         <C>
Long-term capital lease obligations.........................  $     81     $     81
                                                              --------     --------
Stockholders' equity:
Preferred stock, $.01 par value; no shares authorized,
  issued or outstanding (actual); 5,000,000 shares
  authorized, no shares issued or outstanding (as
  adjusted).................................................        --           --
Convertible preferred stock, $.01 par value; 18,843,224
  shares authorized (actual); 9,313,509 issued and
  outstanding (actual); (liquidation
  preference -- $41,425,301 (actual)); no shares authorized,
  issued or outstanding (as adjusted); (liquidation
  preference -- $0 (as adjusted))...........................    50,352           --
Common stock, $.01 par value; 14,500,000 shares authorized
  (actual); 1,548,756 shares issued and outstanding
  (actual); 40,000,000 shares authorized (as adjusted);
  10,862,265 shares issued and outstanding (as
  adjusted)(1)..............................................        15
  Additional paid-in-capital................................       340
  Accumulated deficit.......................................   (37,559)     (37,559)
  Less notes receivable from employees and directors........      (274)        (274)
  Less unrealized loss on marketable securities.............        (1)          (1)
  Total stockholders' equity................................    12,873
                                                              --------     --------
          Total capitalization..............................  $ 12,954     $
                                                              ========     ========
</TABLE>
 
---------------
(1) Excludes an aggregate of 1,125,075 shares of Common Stock reserved for
    issuance pursuant to exercise of options outstanding as of April 4, 1998 at
    a weighted average exercise price of $0.74 per share. See "Management --
    Executive Compensation" and Note 9 of Notes to Financial Statements.
 
                                       14
<PAGE>   16
 
                                    DILUTION
 
     The pro forma net tangible book value of the Company as of April 4, 1998
was approximately $12.9 million or $1.19 per share of Common Stock. Pro forma
net tangible book value per share is determined by dividing the Company's
tangible net worth (tangible assets less liabilities) by the number of shares of
Common Stock outstanding, after giving effect to the conversion of the Company's
Convertible Preferred Stock into Common Stock upon the completion of this
offering. After giving effect to the sale of the shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $     per
share and after deducting the estimated underwriting discounts and commissions
and offering expenses payable by the Company, the pro forma net tangible book
value of the Company as of April 4, 1998 would have been $     per share. This
represents an immediate increase in such pro forma net tangible book value of
$     per share to existing stockholders and an immediate dilution of $     per
share to new investors purchasing shares in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively. The following table illustrates the per share
dilution:
 
<TABLE>
<S>                                                           <C>      <C>
Assumed initial public offering price per share.............           $
  Pro forma net tangible book value per share as of April 4,
     1998...................................................  $1.19
  Increase per share attributable to new investors..........
Pro forma net tangible book value per share after this
  offering..................................................
Dilution per share to new investors.........................           $
</TABLE>
 
     The following table summarizes, on a pro forma basis as of April 4, 1998
(after giving effect to the conversion of the Company's Convertible Preferred
Stock upon the completion of this offering) the total number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
consideration paid per share by the existing stockholders and by the new
investors based upon an assumed initial public offering price of $     per share
(before deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company):
 
<TABLE>
<CAPTION>
                             SHARES PURCHASED        TOTAL CONSIDERATION       AVERAGE
                           ---------------------    ----------------------    PRICE PER
                             NUMBER      PERCENT      AMOUNT       PERCENT      SHARE
                           ----------    -------    -----------    -------    ---------
<S>                        <C>           <C>        <C>            <C>        <C>
Existing stockholders....  10,862,265          %    $51,048,830          %      $4.70
New investors............                                                       $
                           ----------     -----     -----------     -----
          Total..........                 100.0%                    100.0%
                           ==========     =====     ===========     =====
</TABLE>
 
     The above information excludes an aggregate of 1,125,075 shares of Common
Stock issuable upon the exercise of options outstanding as of April 4, 1998 with
a weighted average price of $0.74 per share. To the extent that such options are
exercised there will be further dilution to new investors.
 
                                       15
<PAGE>   17
 
                         SELECTED FINANCIAL INFORMATION
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The selected financial information set forth below for the years ended
December 31, 1995, 1996 and 1997, and as of December 31, 1996 and 1997, are
derived from the Company's audited financial statements, which appear elsewhere
in this Prospectus and which have been audited, with respect to the years ended
December 31, 1996 and 1997 and as of December 31, 1996 and 1997, by Arthur
Andersen LLP, independent accountants, and with respect to the year ended
December 31, 1995, by Price Waterhouse LLP, independent accountants. The
selected financial information set forth below as of December 31, 1993, 1994 and
1995 and for the years ended December 31, 1993 and 1994 are derived from audited
financial statements, which are not included in this Prospectus. The selected
financial information for the quarters ended March 29, 1997 and April 4, 1998
and as of April 4, 1998 are derived from the unaudited financial statements
which appear elsewhere in this Prospectus. In the opinion of management, the
unaudited financial statements have been prepared on a basis consistent with the
Company's audited Financial Statements which appear elsewhere in this Prospectus
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the financial position and results of
operations for these unaudited periods. The operating results for the quarter
ended April 4, 1998 are not necessarily indicative of the results to be expected
for the full year ending December 31, 1998. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto, appearing elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31,                    QUARTER ENDED
                                ---------------------------------------------------   --------------------
                                                                                      MARCH 29,   APRIL 4,
                                  1993       1994       1995      1996       1997       1997        1998
                                --------   --------   --------   -------   --------   ---------   --------
                                                                                          (UNAUDITED)
<S>                             <C>        <C>        <C>        <C>       <C>        <C>         <C>
STATEMENTS OF OPERATIONS DATA:
  Revenue.....................  $    155   $    852   $  1,067   $ 1,389   $  3,068    $   415    $ 1,733
  Costs and expenses:
    Costs of revenue..........        80        525        704     1,096      3,602        582      1,211
    Research and development..     2,371      2,311      2,870     2,338      2,603        677        887
    Sales and marketing.......       663      1,291      1,285     1,561      4,813        762      1,840
    General and
      administrative..........       926      1,216      1,815     1,871      2,358        618        736
                                --------   --------   --------   -------   --------    -------    -------
      Total costs and
        expenses..............     4,040      5,343      6,674     6,866     13,376      2,639      4,674
  Loss from operations........    (3,885)    (4,491)    (5,607)   (5,477)   (10,308)    (2,224)    (2,941)
  Interest income.............       233        286        146       144        500         78        133
  Interest expense............        (5)       (55)       (85)      (63)       (78)       (20)        (9)
                                --------   --------   --------   -------   --------    -------    -------
  Net loss....................  $ (3,657)  $ (4,260)  $ (5,546)  $(5,396)  $ (9,886)   $(2,166)   $(2,817)
                                ========   ========   ========   =======   ========    =======    =======
  Net loss per share(1):
    Basic and diluted.........  $(721.36)  $(822.34)  $(281.65)  $(57.76)  $ (16.23)   $(10.38)   $ (2.95)
                                ========   ========   ========   =======   ========    =======    =======
    Pro forma basic and
      diluted.................                                             $  (1.28)              $ (0.30)
                                                                           ========               =======
  Shares used in computing net
    loss per share(1):
    Basic and diluted.........         5          5         20        93        609        209        956
    Pro forma basic and
      diluted.................                                                7,707                 9,492
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                  ------------------------------------------    APRIL 4,
                                                   1993     1994     1995     1996     1997       1998
                                                  ------   ------   ------   ------   ------   -----------
                                                                                               (UNAUDITED)
<S>                                               <C>      <C>      <C>      <C>      <C>      <C>
BALANCE SHEET DATA:
  Cash, cash equivalents and marketable
    securities..................................  $8,134   $4,258   $3,329   $2,231   $4,981     $13,206
  Working capital...............................   8,215    4,273    3,054    1,029    3,052      10,949
  Total assets..................................   8,948    5,719    4,552    3,973    7,603      17,456
  Long-term capital lease obligations...........      --      423      333      270      118          81
  Total stockholders' equity....................   8,736    4,460    3,028    1,066    4,067      12,873
</TABLE>
 
---------------
(1) See Note 10 of Notes to Financial Statements.
 
                                       16
<PAGE>   18
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     This prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus which could cause actual results to differ
materially from those indicated by such forward-looking statements, including
the matters set forth under the caption "Risk Factors."
 
OVERVIEW
 
     Aspect develops, manufactures and markets anesthesia monitoring systems
that enable anesthesia providers to assess levels of consciousness and
administer the appropriate amount of anesthetics during surgery. The BIS System
incorporates the Company's proprietary disposable BIS Sensors and the A-2000 BIS
Monitor, which was cleared for marketing by the FDA in February 1998. The BIS
System is based on Aspect's patented core technology, the BIS index, which is
the only FDA-cleared, commercially available direct measure of the effects of
anesthetics on the brain. In addition to the
A-2000, the Company's other monitor products are the A-1000 monitor and the
A-1050 BIS monitor. After the introduction of the A-2000 monitor, the Company
ceased active marketing of the A-1050 monitor in the United States. In addition
to the Company's disposable BIS Sensor, the Company offers the ZipPrep EEG
electrode.
 
     The Company follows a system of fiscal months as opposed to calendar
months. Under this system, the first eleven months of each fiscal year end on a
Saturday and the last month of the fiscal year always ends on December 31. All
references to the first quarter of 1997 relate to the period from January 1,
1997 to March 29, 1997, and all references to the first quarter of 1998 relate
to the period from January 1, 1998 to April 4, 1998.
 
     The Company offers customers the option either to purchase the BIS monitors
outright or to acquire the BIS monitors pursuant to a sales-type lease agreement
whereby the customer contractually commits to purchase a minimum number of BIS
Sensors per BIS monitor per year. Under this agreement, customers purchase BIS
Sensors and the BIS monitor for the purchase price of the BIS Sensors plus an
additional charge per BIS Sensor to pay for the purchase price of the BIS
monitor and related financing costs over the term of the agreement. The customer
is granted an option to purchase the BIS monitor at the end of the term of the
agreement, which is typically three to five years. Revenue related to BIS
monitors sold pursuant to sales-type leases is recognized at the time of
shipment of the BIS monitors. Sales-type leases accounted for approximately 0%,
11% and 10% of revenue in 1995, 1996 and 1997, respectively, and for
approximately 5% and 26% of revenue in the first quarter of 1997 and the first
quarter of 1998, respectively.
 
     In 1995, 1996 and 1997, revenue from the sale of monitors and related
accessories represented approximately 94%, 87% and 80%, respectively, of the
Company's revenue, and revenue from the sale of disposables represented
approximately 6%, 13% and 20%, respectively, of the Company's revenue. In the
first quarter of 1997 and the first quarter of 1998, revenue from the sale of
monitors and related accessories represented approximately 80% and 74%,
respectively, of the Company's revenue, and revenue from the sale of disposables
represented approximately 20% and 26%, respectively, of the Company's revenue.
The Company expects that revenue from the sale of disposables will continue to
increase as a percentage of total revenue.
 
RESULTS OF OPERATIONS
 
     The following table presents, for the periods indicated, information
expressed as a percentage of revenue. Such information has been derived from the
Statements of Operations included
 
                                       17
<PAGE>   19
 
eleswhere in this Prospectus. The Company's past operating results are not
necessarily indicative of future operating results.
 
<TABLE>
<CAPTION>
                                                            PERCENTAGE OF REVENUE
                                              --------------------------------------------------
                                               YEAR ENDED DECEMBER 31,         QUARTER ENDED
                                              -------------------------    ---------------------
                                                                           MARCH 29,    APRIL 4,
                                              1995      1996      1997       1997         1998
                                              -----     -----     -----    ---------    --------
<S>                                           <C>       <C>       <C>      <C>          <C>
Revenue.....................................   100%      100%      100%       100%         100%
Costs and expenses:
  Costs of revenue..........................    66        79       117        140           70
  Research and development..................   269       168        85        163           51
  Sales and marketing.......................   120       112       157        183          106
  General and administrative................   170       135        77        149           43
                                              ----      ----      ----       ----         ----
          Total costs and expenses..........   625       494       436        635          270
Loss from operations........................  (525)     (394)     (336)     (535)        (170)
Interest income.............................    13        10        16         19            8
Interest expense............................    (8)       (5)       (2)        (5)          (1)
                                              ----      ----      ----       ----         ----
Net loss....................................  (520)%    (389)%    (322)%     (521)%       (163)%
                                              ====      ====      ====       ====         ====
</TABLE>
 
  First Quarter of 1998 Compared to First Quarter of 1997
 
     The Company's revenue increased to $1.7 million in the first quarter of
1998 from $415,000 in the first quarter of 1997. Revenue from the sale of
monitors and related accessories increased to $1.3 million in the first quarter
of 1998 from $331,000 in the first quarter of 1997, and revenue from the sale of
disposables increased to $443,000 in the first quarter of 1998 from $84,000 in
the first quarter of 1997. The growth in sales of monitors and related
accessories was primarily related to an increase in the number of units sold as
a result of the introduction in the United States of the A-2000 monitor and the
growth of the direct sales force. The increase in sales of disposables was
primarily related to growth in the installed base of monitors.
 
     The Company's gross profit was 30% of revenue in the first quarter of 1998
as compared to a negative gross profit of 40% of revenue in the first quarter of
1997. The negative gross profit in the first quarter of 1997 resulted primarily
from under-absorbed overhead costs and provisions for excess and obsolete
inventory. The increase in gross profit in the first quarter of 1998 as compared
to the first quarter of 1997 was primarily due to lower per-unit monitor costs
and improved manufacturing efficiencies.
 
     Research and development expenses increased to $887,000 in the first
quarter of 1998 from $677,000 in the first quarter of 1997, but decreased as a
percentage of revenue. The absolute dollar increase in the first quarter of 1998
was primarily attributable to continued product development efforts related to
the A-2000 monitor and development of products for use outside the OR and an
increase in expenses related to clinical studies.
 
     Sales and marketing expenses increased to $1.8 million in the first quarter
of 1998 from $762,000 in the first quarter of 1997, but decreased as a
percentage of revenue. The increase in absolute dollars was due to an increase
in sales and marketing personnel and an increase in advertising and market
development expenses associated with a promotion program for the BIS monitor
initiated by the Company in the first quarter of 1998.
 
     General and administrative expenses increased to $736,000 in the first
quarter of 1998 from $618,000 in the first quarter of 1997, but decreased as a
percentage of revenue. The absolute dollar increase was primarily attributable
to an increase in general and administrative personnel to support the Company's
growth.
 
     Interest income increased to $133,000 in the first quarter of 1998 from
$78,000 in the first quarter of 1997. The increase in interest income was due to
a higher average outstanding cash and investments balance resulting from sales
of the Company's Convertible Preferred Stock in February 1997 and February 1998.
Interest expense decreased to $9,000 in the first quarter of 1998 from
 
                                       18
<PAGE>   20
 
$20,000 in the first quarter of 1997 as a result of lower average outstanding
capital lease obligations in the first quarter of 1998.
 
  Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
     The Company's revenue increased to $3.1 million in 1997 from $1.4 million
in 1996. Revenue from the sale of monitors and related accessories increased to
$2.5 million in 1997 from $1.2 million in 1996 and revenue from the sale of
disposables increased to $606,000 in 1997 from $181,000 in 1996. The increase in
revenue from the sale of monitors and related accessories was primarily
attributable to the commercial introduction of the A-1050 monitor in 1996 and
the increase in the growth of the direct sales force in 1997. The increase in
revenue from the sale of disposables was primarily attributable to the
commercial introduction of the BIS Sensor in 1997 and growth in the installed
base of monitors. In 1996, the ZipPrep electrode was the Company's only
disposable product.
 
     In 1997, the Company had a negative gross profit percentage of 17% as
compared to a gross profit percentage of 21% in 1996. The negative gross profit
in 1997 and the decrease in gross profit as compared to 1996 resulted primarily
from under-absorbed overhead costs and provisions for excess and obsolete
inventory.
 
     Research and development expenses increased to $2.6 million in 1997 from
$2.3 million in 1996, but decreased as a percentage of revenue in 1997 as
compared to 1996. The absolute dollar increase in 1997 was primarily due to the
new product development efforts related to the A-2000 monitor and the BIS Module
Kit.
 
     Sales and marketing expenses increased to $4.8 million in 1997 from $1.6
million in 1996. This increase was primarily due to an increase in sales and
marketing personnel, including the establishment of the clinical specialist
group, and the related costs of compensation, benefits and travel expenses.
 
     General and administrative expenses increased to $2.4 million in 1997 from
$1.9 million in 1996, but decreased as a percentage of revenue in 1997 as
compared to 1996. The absolute dollar increase was primarily attributable to an
increase in general and administrative personnel to support the Company's
growth.
 
     Interest income increased to $500,000 in 1997 from $144,000 in 1996 due to
an increase in the average outstanding cash and investments balance resulting
from the sale of the Company's Convertible Preferred Stock in February 1997.
Interest expense increased to $78,000 in 1997 from $63,000 in 1996 as a result
of higher average outstanding capital lease obligations in 1997.
 
  Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
     The Company's revenue increased to $1.4 million in 1996 from $1.1 million
in 1995. Revenue from the sale of monitors and related accessories increased to
$1.2 million in 1996 from $1.0 million in 1995, and revenue from the sale of
disposables increased to $181,000 in 1996 from $67,000 in 1995. The increase in
revenue from the sale of monitors and related accessories was primarily
attributable to the commercial introduction of the A-1050 monitor in 1996. The
increase in revenue from the sale of disposables was primarily attributable to
growth in the installed base of monitors.
 
     The Company's gross profit was 21% of revenue in 1996 as compared to 34% of
revenue in 1995. The decrease from 1995 to 1996 was primarily attributable to a
lower average selling price on the A-1050 monitor introduced in 1996 compared to
the A-1000 monitor.
 
     Research and development expenses decreased to $2.3 million in 1996 from
$2.9 million in 1995. This decrease resulted from a reduction in research and
development personnel in the second half of 1995.
 
                                       19
<PAGE>   21
 
     Sales and marketing expenses increased to $1.6 million in 1996 from $1.3
million in 1995, but decreased as a percentage of revenue. The absolute dollar
increase was primarily due to an increase in advertising and marketing expenses
related to the introduction of the A-1050 monitor.
 
     General and administrative expenses increased to $1.9 million in 1996 from
$1.8 million in 1995, but decreased as a percentage of revenue in 1996 as
compared to 1995. The absolute dollar increase was primarily attributable to an
increase in general and administrative personnel to support the Company's
growth.
 
     Interest income remained relatively constant between 1995 and 1996.
Interest expense decreased from $85,000 in 1995 to $63,000 in 1996. The lower
interest expense in 1996 was primarily due to lower average outstanding capital
lease obligations.
 
QUARTERLY RESULTS OF OPERATIONS
 
     The following table sets forth unaudited selected operating results for
each of the five fiscal quarters in the period ended April 4, 1998. The Company
believes that the following selected quarterly information includes all
adjustments (consisting only of normal, recurring adjustments) that the Company
considers necessary to present this information fairly. This financial
information should be read in conjunction with the Company's Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. These
operating results are not necessarily indicative of results for any future
period.
 
<TABLE>
<CAPTION>
                                                         QUARTER ENDED
                               ------------------------------------------------------------------
                               MARCH 29,    JUNE 28,    SEPTEMBER 27,    DECEMBER 31,    APRIL 4,
                                 1997         1997          1997             1997          1998
                               ---------    --------    -------------    ------------    --------
                                                         (IN THOUSANDS)
<S>                            <C>          <C>         <C>              <C>             <C>
Revenue......................   $   415     $   661        $   845         $ 1,147       $ 1,733
Net loss.....................    (2,166)     (2,281)        (2,409)         (3,030)       (2,817)
</TABLE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since its inception, the Company has financed operations primarily from the
sale of its Convertible Preferred Stock. Through April 4, 1998, the Company had
raised approximately $50.4 million from equity financings and had received $1.2
million in equipment lease financing. At April 4, 1998, the Company had
approximately $300,000 committed to the purchase of equipment related to the
automation of the BIS Sensor production line.
 
     Working capital at April 4, 1998 was approximately $10.9 million compared
to approximately $3.1 million and approximately $1.0 million at December 31,
1997 and 1996, respectively. The increases in working capital from 1996 to 1997
and from December 31, 1997 to April 4, 1998 were primarily due to the sale of
the Company's Convertible Preferred Stock in February 1997 and 1998, and
increases in accounts receivable and investment in sales-type leases, offset by
an increase in deferred revenue.
 
     The Company used approximately $2.7 million of cash for operations in the
first quarter of 1998. Cash used for operations during this period was primarily
driven by operating losses, increases in accounts receivable and investment in
sales-type leases, which were partially offset by an increase in deferred
revenue. The Company used approximately $17.5 million for operations during the
three years ended December 31, 1997. Cash used for operations during this period
was also primarily driven by operating losses, increases in accounts receivable
and investment in sales-type leases, offset by increases in accounts payable,
accrued liabilities and deferred revenue.
 
     The Company used approximately $3.0 million of cash for investing
activities in the first quarter of 1998. The Company invested approximately $2.3
million, net, in marketable securities and approximately $710,000 in
manufacturing equipment, leasehold improvements and new information systems. The
Company used approximately $3.0 million for investing activities during the
three
 
                                       20
<PAGE>   22
 
years ended December 31, 1997. The Company invested approximately $1.2 million,
net, in marketable securities and approximately $1.8 million in manufacturing
equipment, leasehold improvements and new information systems.
 
     The Company received approximately $11.6 million of cash from financing
activities in the first quarter of 1998 primarily as a result of the sale by the
Company of its Convertible Preferred Stock in February 1998. The Company
received approximately $20.1 million of cash from financing activities during
the three years ended December 31, 1997. Cash provided by financing activities
during this period was primarily the result of the sale by the Company of its
Convertible Preferred Stock in each of the three years.
 
     In June 1998, the Company entered into a loan agreement with a commercial
bank. Under the terms of this loan agreement, the Company may borrow up to $5.0
million for working capital and equipment. The amount available to the Company
under the working capital portion of the loan agreement is based upon a
percentage of the Company's outstanding accounts receivable. The outstanding
principal under the working capital portion of the loan agreement is due and
payable in December 1999. The principal amount outstanding under the equipment
portion of the loan agreement is due in 36 equal monthly installments commencing
January 1999.
 
     The Company has conducted a software review to identify functions that need
corrections to be "Year 2000" compliant. The Year 2000 problem is the result of
computer programs being written to recognize two digits rather than four to
define the applicable year causing computer programs to interpret a date using
"00" as the year 1900 rather than the year 2000, which could result in product
failures or miscalculations. The Company is undertaking certain corrective
actions in an effort to ensure that software systems incorporated in its
products or used to manage its business will continue to function properly in
the year 2000. However, there can be no assurance that Year 2000 problems will
not be encountered or that the costs incurred to resolve such problems will not
be material. Additionally, there can be no assurance that the Year 2000 problem
will not affect the Company by causing disruptions in the business operations of
persons with whom the Company does business, such as customers or suppliers.
Year 2000 problems could have a material adverse effect on the Company.
 
     The Company believes that the financial resources available to it,
including its current working capital and loan agreement, together with the net
proceeds of this offering, will be sufficient to finance its planned operations
and capital expenditures at least through 1999. However, the Company's future
liquidity and capital requirements will depend upon numerous factors, including
the resources required to further develop its marketing and sales organization
domestically and internationally, to expand manufacturing capacity, to finance
the Company's sales-type lease program and to meet market demand for the
Company's products.
 
                                       21
<PAGE>   23
 
                                    BUSINESS
 
THE COMPANY
 
     Aspect develops, manufactures and markets anesthesia monitoring systems
that enable anesthesia providers to assess levels of consciousness and
administer the appropriate amount of anesthetics during surgery. The BIS System
incorporates the Company's proprietary disposable BIS Sensors and the A-2000 BIS
Monitor, which was cleared for marketing by the FDA in February 1998. The BIS
System is based on Aspect's patented core technology, the BIS index, which is
the only FDA-cleared, commercially available direct measure of the effects of
anesthetics on the brain. The BIS System was developed over a ten-year period
and is the subject of eight issued and five pending United States patents.
Aspect markets the BIS System through a direct sales organization in the United
States. As of April 4, 1998, more than 600 BIS monitors have been sold to
approximately 100 sites in the United States, and the Company believes that over
100,000 patients have been monitored using the BIS index during surgery.
 
MARKET OPPORTUNITY
 
     The three basic objectives of general anesthesia are to render the patient
unconscious, to prevent response to painful stimuli and to ensure the patient
will not move during the surgical procedure. A combination of drugs is typically
used to accomplish these goals, including drugs to induce unconsciousness,
analgesics to provide pain relief and muscle relaxants to immobilize the
patient. Historically, anesthesia providers have had no direct means of
assessing a patient's level of consciousness during surgery and have generally
relied on recommended drug dosages and on indirect indicators of consciousness,
including blood pressure and heart rate. Changes in these indirect measures,
however, are not reliable indicators of changes in a patient's level of
consciousness. Although anesthesia providers can adjust recommended anesthetic
dosages based on individual patient characteristics, these adjustments cannot
always account for variability in patient responses to anesthesia or changes in
anesthetic requirements during the course of surgery.
 
     Each year, approximately 29 million patients in the United States and 47
million patients in Europe and Japan receive anesthesia for surgical procedures,
of whom more than 60% receive general anesthesia or deep sedation monitored by
an anesthesia provider. In the United States, there are approximately 34,000 ORs
in hospitals and 5,000 in independent ambulatory ASCs. In Europe and Japan,
there are approximately 48,000 ORs in hospitals.
 
     Third-party payors and managed care organizations are increasingly
scrutinizing the high cost of surgical care. As a result, hospitals are
implementing programs to control surgical costs, including the cost of
anesthetic drugs and anesthesia recovery, while seeking to improve quality of
care and safety. Programs to accelerate the anesthesia recovery process include
reducing the amount of time patients remain in the OR following the completion
of surgery, reducing the amount of time patients are required to remain in the
Post Anesthesia Care Unit ("PACU") after surgery, and allowing a higher
percentage of patients to bypass the PACU following ambulatory surgery and
proceed immediately to less costly step-down recovery areas.
 
     The Company believes that providing an effective tool for monitoring a
patient's level of consciousness during surgery will contribute to improving the
quality, safety and efficiency of anesthesia care. Using existing monitoring
devices, anesthesia providers are sometimes unable to identify surgical
awareness, or the unintentional regaining of consciousness during surgery,
because anesthetized patients who have received muscle relaxants are unable to
communicate and because changes in vital signs are not reliable indicators of
changes in levels of consciousness. It is estimated that, in the United States,
surgical awareness occurs in approximately 0.2% of surgeries requiring general
anesthesia, or approximately 35,000 procedures per year.
 
     Because of variations in the amount of anesthetic drugs administered for
any given surgery, variations in patient tolerances to anesthetic drugs and the
desire to prevent surgical awareness, the
                                       22
<PAGE>   24
 
Company believes that anesthesia providers tend to administer more anesthetic
than is required by many of their patients. Overmedication contributes to the
high cost of surgical care as a result of increased drug costs, prolonged and
unpredictable wake-ups from anesthesia and prolonged post-anesthesia recovery in
the PACU. These factors, in turn, lead to inefficiencies in OR and PACU
scheduling and increased personnel costs.
 
     In addition to the OR, anesthesia is administered to sedate patients in
ICUs and for diagnostic and therapeutic procedures outside the OR. Many patients
admitted to the ICU receive sedation during their stay. There are approximately
80,000 beds in hospitals in the United States for critical care patients and
over 22 million patient days per year are spent in the ICU. The assessment of a
patient's level of sedation in the ICU is subjective, relies on indirect
measures, and is usually carried out by several different individuals in a
24-hour period, many of whom are not trained in anesthesia. The Company believes
that this may result in overmedication that may extend the patient's length of
stay in the ICU.
 
     Advances in pharmacology and the development of less-invasive diagnostic
and therapeutic procedures have enabled physicians to perform more procedures
outside the OR under conscious sedation rather than general anesthesia. Aspect
estimates that in the United States there are approximately 42,000 rooms in
hospitals, ASCs and doctors' offices where these procedures are performed.
During conscious-sedation procedures, a trained anesthesia provider may or may
not be present depending on the institution's policies and the attending
physician's judgment. One of the risks of conscious sedation is that
overmedication may cause a patient to lose consciousness and fall into a state
of general anesthesia resulting in the loss of protective reflexes, including
the ability to breath without mechanical assistance.
 
THE ASPECT SOLUTION: PATIENT MONITORING WITH THE BIS INDEX
 
     The Company has developed the only FDA-cleared, commercially available
product for use as a direct measure of anesthetic effect on the brain. Aspect's
clinically validated BIS index assists the anesthesia provider in assessing
levels of consciousness and administering appropriate amounts of anesthesia
required for the surgical procedure while avoiding unintentional overmedication
or undermedication. Company-sponsored clinical trials have shown that
administering appropriate levels of anesthetics results in less drug use, and
therefore, lower drug costs, faster wake-up from anesthesia, less patient time
in the OR and the PACU following surgery and improvement in the quality of
recovery. Other studies have shown that when appropriate levels of anesthesia
are administered, patients are more likely to meet criteria for bypassing the
PACU following ambulatory surgery and proceeding immediately to the less costly
step-down recovery area. The Company also believes that the BIS index can be
used to assess the risk of surgical awareness.
 
     The BIS index is a numerical index derived from the combination of several
processed EEG variables that correlate with loss of consciousness and changes in
levels of sedation. The BIS System, which incorporates the BIS index, is
comprised of the Company's anesthesia monitor and single-use, disposable BIS
Sensors. The FDA cleared for marketing the BIS index for use as a direct measure
of anesthetic effect on the brain in October 1996 and cleared the A-2000 BIS
monitor in February 1998.
 
     The following are examples of the benefits of BIS monitoring demonstrated
by the Company in a 302-patient prospective, randomized, controlled clinical
utility trial:
 
     - More controlled and cost-effective dosing of anesthetic drugs:  Patients
       monitored with the BIS index during surgery received 23% less anesthetic
       than patients who were not BIS monitored. Based upon the current average
       cost of the anesthetic drugs used in this utility trial, the Company
       believes that the use of the BIS index could result in drug cost savings
       of up to $18.00 per case.
 
     - Faster and more predictable recovery from anesthesia:  Patients receiving
       BIS monitoring during surgery emerged from unconsciousness 35% to 40%
       faster than patients who did not
 
                                       23
<PAGE>   25
 
       receive BIS monitoring. In addition, only 5% of BIS-monitored patients
       required more than 15 minutes to emerge from anesthesia compared with 16%
       of patients who did not receive BIS monitoring. Moreover, patients who
       received BIS monitoring were eligible for discharge from the PACU 16%
       faster than patients who did not receive BIS monitoring.
 
     - Improved quality of recovery:  Patients received better clinical
       assessments of their recovery by PACU nurses when the BIS index was used.
       In addition, 43% of patients monitored with the BIS index were alert and
       oriented when admitted to the PACU, as compared to 23% of patients not
       monitored with the BIS index during surgery.
 
     The Company believes that the BIS index also provides an effective
indication of the risk of surgical awareness. The Company demonstrated the
correlation of BIS index values with the loss of and return to consciousness in
two clinical efficacy studies, one involving approximately 100 volunteers and
one involving 40 patients. The Company estimates that more than 100,000 patients
have been monitored with the BIS index during surgery. Four cases of surgical
awareness with BIS monitoring have been reported to the Company. In each case,
high BIS index values were noted, indicating that the BIS index correctly
identified the potential risk of awareness in these patients. The Company has
not undertaken the clinical studies necessary to confirm that BIS monitoring
reduces the incidence of surgical awareness because the Company estimates that
surgical awareness typically occurs in only one patient per 500 and, therefore,
the required studies are not practicable.
 
STRATEGY
 
     The BIS index is the only FDA-cleared and commercially available measure of
the effects of anesthetics on the brain. Aspect's objective is to become a major
multinational anesthesia-monitoring company by establishing BIS monitoring as
the standard of practice in anesthesia and sedation monitoring. Key elements of
the Company's strategy to accomplish its objective include the following:
 
     Direct Sales Force for Rapid Commercialization.  Aspect intends to
capitalize on its first-to-the-market position by pursuing a rapid
commercialization strategy that emphasizes use of a direct sales force. The
Company believes that a direct sales force is best able to convey to anesthesia
providers and administrators the clinical benefits and potential cost savings
achievable with BIS monitoring. Flexible sales options allow hospitals to either
purchase BIS monitors outright or acquire BIS monitors by committing to purchase
a minimum number of BIS Sensors per monitor per year. As of April 4, 1998, the
Company has sold more than 600 BIS monitors to approximately 100 sites in the
United States and the Company believes that over 100,000 patients have been
monitored with the BIS Sensor.
 
     Clinical Specialists to Educate and to Promote the Use of Aspect's BIS
System.  Aspect intends to establish a ratio of 1.5 clinical specialists for
each of the Company's sales representatives. The principal responsibilities of
these clinical specialists are to provide education, training and support for
the Company's installed base and to promote appropriate use of BIS Systems.
These activities are designed to increase the use of BIS Sensors in the OR. The
Company expects that clinical specialists will also play a key role in expanding
the use of BIS monitoring to markets outside the OR, including the ICU and
conscious sedation.
 
     OEM Relationships to Broaden Distribution Channels.  The Company believes
that original equipment manufacturer ("OEM") relationships will accelerate
market penetration of the BIS technology. OEM relationships will result in
integration of the BIS index into third-party patient-monitoring systems. The
Company currently is a party to two OEM agreements and expects to enter into
additional OEM relationships with patient-monitoring or medical device companies
over the next several years to expand the channels for distribution of the BIS
System, particularly in international markets.
 
                                       24
<PAGE>   26
 
     Technological Leadership.  Aspect's priority is to improve current
applications of BIS technology and to develop further its signal-processing
technology. In addition, the Company intends to continue to sponsor and support
research of leading clinicians to further document the clinical utility of the
BIS index. The Company intends to protect its intellectual property and
technology leadership position through product innovation, patents and other
proprietary means.
 
     New Product Development.  The Company is continuing to focus both on
product extensions, such as the application of the BIS index for the ICU and
conscious-sedation markets, and on new product development, such as the
application of bispectral analysis to the electrocardiogram (the "ECG"). Each of
these initiatives builds on the Company's core expertise and innovations in
signal-processing technology. Continued innovation and commercialization of new
proprietary products is an essential element in the Company's long-term growth
strategy and the source of potential competitive advantages.
 
PRODUCTS
 
     The following chart summarizes Aspect's product offerings, all of which
have received 510(k) clearance from the FDA:
 
<TABLE>
<CAPTION>
                                           INITIAL
                                          COMMERCIAL
                PRODUCT                    SHIPMENT                     DESCRIPTION
                -------                  ------------                   -----------
<S>                                      <C>             <C>
A-2000 BIS Monitor                       March 1998      Small, lightweight third-generation BIS
                                                         monitor for the OR
BIS Sensor                               1997            Single-piece, single-use disposable
                                                         product for use with A-2000, A-1050 and
                                                         BIS Module Kit
BIS Module Kit(1)                        --              Components of BIS monitoring technology to
                                                         be integrated into OEM monitors
A-1050 EEG Monitor with BIS              1996            Second-generation monitor with BIS index
                                                         and simplified user interface
A-1000 EEG Monitor                       1993            Aspect's first commercial EEG monitor with
                                                         BIS index
ZipPrep EEG Electrode                    1995            EEG electrode with Aspect's ZipPrep
                                                         technology used with A-1000 monitor
</TABLE>
 
---------------
(1) The Company has commenced commercial shipment of the BIS Module Kit. The
    Company does not believe any OEM has commenced commercial shipment of its
    BIS Module product. Each OEM will be required to obtain FDA clearance of its
    BIS Module product.
 
  A-2000 BIS Monitor
 
     Aspect began commercial distribution of the A-2000 BIS Monitor ("A-2000"),
the Company's third-generation monitoring product, in March 1998. The A-2000 is
a compact, portable system designed to accommodate the space limitations and
positioning requirements of surgical settings. The A-2000 displays the BIS index
and supporting information on a high-contrast electro-luminescent display and
includes Aspect's proprietary Digital Signal Converter. The Digital Signal
Converter is a palm-sized module that performs the analog-to-digital conversion
of the EEG and provides the interface between the monitor and the BIS Sensor,
which adheres to the patient's forehead. The A-2000 is compact (7 inches by 6.8
inches by 4 inches) and lightweight (3.1 pounds). The hardware architecture of
the A-2000 employs a 50 megaflops floating-point processor to perform the BIS
index computation and a 25 MIPS RISC processor to perform the user-interface
functions. The list price for the A-2000 is $8,900.
 
                                       25
<PAGE>   27
 
  BIS Sensor
 
     The BIS Sensor is a single-piece, single-use disposable product for use
with the A-2000, the A-1050 and the BIS Module Kit. Aspect's BIS monitors and
BIS Module Kits require the use of the BIS Sensor to generate the BIS index. The
BIS Sensor provides a reliable and simple means of acquiring the high-resolution
EEG signal needed to generate the BIS index. The one-piece design allows quick
and accurate placement on the patient's forehead. The BIS Sensor connects to the
monitor by a single-point proprietary connector. The Company commenced
commercial shipment of the BIS Sensor in January 1997. The list price for the
BIS Sensor is $15.00.
 
     Aspect's ZipPrep self-prepping technology is a key feature of the BIS
Sensor because it minimizes patient set-up time and enables consistent, accurate
readings of the EEG signal. Prior to Aspect's development of the ZipPrep
technology, to obtain an EEG signal the user prepared a patient's skin by
rubbing an abrasive cream over the area 10 to 20 times in order to remove the
top layer of skin. The ZipPrep technology contains a non-conductive polymer disk
with multiple, small, flexible tines that are embedded in a standard electrode
hydrogel. As a function of their design, the ZipPrep tines come in contact with
and part the outer layer of dead cells on the skin. This allows the electrode's
hydrogel to quickly penetrate the skin and establish an effective electrical
contact to the patient.
 
  BIS Module Kit
 
     In 1996, Aspect introduced the BIS Module Kit, which requires the use of
the BIS Sensor in order to calculate the BIS index. The BIS Module Kit is
designed to facilitate the integration of the Company's BIS index into
monitoring products marketed by third parties that enter into OEM arrangements
with the Company. The Company is currently a party to two OEM agreements.
 
     The BIS Module Kit consists of two pieces, the Company's proprietary
Digital Signal Converter and a small circuit board that resides in the OEM
equipment. The Digital Signal Converter acquires the EEG signal from the BIS
Sensor, performs the analog-to-digital conversion, and transmits the digitized
EEG signal to the circuit board. The circuit board then processes the EEG signal
and outputs the BIS index to the OEM system.
 
     The Company expects that all OEM licensees of the BIS index technology will
use the common architecture of the BIS Module Kit, which will facilitate
integration of the BIS index into the OEM's system and will simplify any future
software updates of the BIS index technology.
 
TECHNOLOGY
 
     Aspect's BIS System was developed over a ten-year period and combines the
computational power of bispectral analysis with proprietary signal-processing
algorithms. The BIS index is a numerical index derived from the combination of
several processed EEG variables that correlate with loss of consciousness and
changes in levels of sedation. The EEG, the electrical signal generated in the
cortex of the brain, changes in response to anesthetic drugs. In general, the
EEG changes from a low-amplitude, high-frequency signal while a person is awake
to a large-amplitude, low-frequency signal while a person is deeply
anesthetized. Mathematical algorithms based on this observation, such as the
Spectral Edge Frequency and Median Frequency, attempt to track the effects of
anesthetics on the brain. However, these processed EEG parameters have not been
widely adopted because studies have indicated that they generally do not provide
sufficient clinically useful information to assess levels of consciousness with
commonly used anesthetic agents and doses.
 
     In developing the BIS index, the Company sought to improve these early EEG
analyses in two ways. First, by using bispectral analysis, a mathematical tool
that examines non-linear signals such as the EEG, new information is extracted
from the EEG signal. The second improvement involves the development of
proprietary processing algorithms that extract information from bispectral
analysis, power spectral analysis and time domain analysis. Bispectral analysis
was originally used in the early
 
                                       26
<PAGE>   28
 
1960s by geophysicists to study ocean wave motion, atmospheric pressure changes
and seismic activity. Bispectral analysis can now be utilized for other
applications with the advent of high-speed, low-cost digital signal processors.
This technology is based on the non-linear expansion of Fourier analysis, which
provides the means to analyze the frequency, amplitude and phase relationships
within a signal. As a result, a distinctive "fingerprint" of the underlying
process that generates the signal can be obtained. Bispectral analysis extracts
this unique fingerprint and represents it as a three-dimensional mathematical
model of the signal's structure.
 
     The Company created the BIS index to describe changes in the EEG that
relate to the effects of anesthetics on the brain in order to assess levels of
consciousness. Over a number of years, a large database of high-fidelity EEG
recordings and clinical assessments were collected by the Company and third
parties from patients and volunteers receiving a wide variety of anesthetic
agents. The clinical assessments used to define levels of consciousness included
a sedation-rating scale, picture or word recall memory tests, and response to
stimuli. Using statistical methods, Aspect identified features within the EEG
that correlated with sedation and loss of consciousness. The Company used
proprietary multivariate statistical methods to combine these features to
generate an interpretive numerical index, which the Company refers to as the BIS
index. The BIS index ranges from 100, indicating that the patent is awake, to
zero, indicating an absence of electrical brain activity.
 
CLINICAL DEVELOPMENT
 
     The Company's clinical and regulatory affairs research group (i)
establishes collaborative relationships with leading clinical researchers; (ii)
encourages publications related to the BIS index in the scientific literature;
(iii) is responsible for clinical research with the goal of extending the
application of BIS monitoring to other settings and clinical uses; and (iv)
collects data for new product development. The Company has a clinical database
of over 5,000 cases for use in algorithm development and product validation
based on trials conducted or sponsored by the Company or undertaken by third
parties.
 
     In 1996, the FDA cleared for marketing the Company's BIS index as a measure
of anesthetic effect on the brain. The regulatory process involved studies
conducted by the Company on over 900 subjects. These studies characterized the
relationships between the BIS index value and various clinical endpoints,
including movement response to incision, response to verbal command as a measure
of consciousness in volunteers and patients, memory function, drug utilization
and speed of patient recovery following surgery.
 
     The Company evaluated the use of BIS monitoring as a measure of sedation,
consciousness and memory function in two clinical trials. In a multicenter study
involving approximately 100 volunteers, the Company demonstrated that the BIS
index correlated with the level of responsiveness and tracked the loss of
consciousness. In a second trial involving 40 patients, the BIS index reliably
correlated with the return to consciousness after a single injection of either
propofol or thiopental, two anesthetics often used to induce unconsciousness.
Several studies conducted by third parties, some of which were partially funded
by the Company, have generally confirmed these results.
 
     The Company's multicenter, prospective, randomized, clinical utility trial
of 302 patients demonstrated the outcome benefits of BIS monitoring. This trial
compared clinical outcomes of a group of BIS-monitored patients to a similar
group of patients who were monitored under standard clinical practice without
BIS monitoring. The principal efficacy endpoints were the amounts of anesthetic
given and the speed of recovery following surgery. BIS-monitored patients
received 23% less propofol, woke up earlier in the operating room, were more
likely (43% versus 23%) to arrive at the PACU fully alert and oriented, were
judged by PACU nurses to have had better recovery and met criteria for discharge
from the PACU sooner.
 
     Following FDA clearance of the BIS index, there have been five additional
prospective, randomized, clinical studies of BIS monitoring. The studies, one of
which was conducted by the Company, evaluated the effectiveness of BIS
monitoring in conjunction with various commonly used
                                       27
<PAGE>   29
 
anesthetic agents on a total of nearly 300 patients. Each of the five studies
indicated that BIS monitoring led to a statistically significant reduction,
ranging from 15% to 38%, in the amount of anesthetic used per patient.
 
     One of the third-party studies, which was partially funded by the Company,
evaluated whether patients monitored with the BIS index were more likely to
bypass the PACU and proceed directly to the step-down recovery unit following
surgery. In this 60-patient study, approximately 90% of the BIS-monitored
patients were considered eligible to bypass the PACU as compared to 63% of
patients who were not BIS-monitored.
 
     In 1997, the Company's outcome study of 1,552 patients documented the
clinical impact and cost-effectiveness of routine BIS monitoring in all
operating rooms of Grady Hospital, a high-acuity, urban hospital located in
Atlanta, Georgia and affiliated with Emory University. Patients received a wide
variety of anesthetic agents typically used in general practice. Comprehensive
data were collected on all patients who received general anesthesia for at least
one hour. Results demonstrated that maintaining BIS index values within a
recommended target range during anesthetic maintenance was associated with
improved outcomes in terms of drug utilization, OR and PACU recovery and
associated costs.
 
     There are more than 175 scientific articles and abstracts reporting the
results of BIS index performance in studies conducted by the Company and third
parties. In addition, Aspect currently maintains collaborations with over 50
clinical research sites.
 
SALES, MARKETING AND CUSTOMERS
 
     The Company markets its BIS Systems in the United States through a direct
sales force. As of April 4, 1998, the Company's domestic sales force was
comprised of 14 sales professionals and 8 clinical specialists. Aspect has
developed a financial model for use by sales representatives to assist
administrators in evaluating the economic impact of BIS monitoring at their
hospital. Aspect believes that its clinical specialists play a key role in the
ongoing process of developing support for the BIS technology both before and
after the sale of BIS Systems. The principal responsibilities of clinical
specialists are clinical training and education at the time the equipment is
installed. Clinical specialists also make follow-up visits at each customer site
at regularly scheduled intervals. These visits allow clinical specialists to
monitor customer satisfaction and provide continuing feedback to the Company's
marketing and research and development staffs. The Company also believes that
these visits may help to establish BIS monitoring as the standard of practice in
anesthesia monitoring and to extend BIS monitoring into other settings in the
hospital, such as the ICU and conscious-sedation procedure rooms. Clinical
specialists generally have nursing backgrounds and have experience in
anesthesia, perioperative care or critical care. The Company currently plans to
hire several additional sales representatives and clinical specialists prior to
the end of 1998. The Company intends to establish a ratio of 1.5 clinical
specialists for each of the Company's sales representatives.
 
     The Company offers customers the option either to purchase the BIS monitors
outright or to acquire the BIS monitors pursuant to a sales-type lease agreement
whereby the customer contractually commits to purchase a minimum number of BIS
Sensors per BIS monitor per year. Under this agreement, customers purchase the
BIS Sensors and the BIS monitor for the purchase price of the BIS Sensors plus
an additional charge per BIS Sensor to pay for the purchase price of the BIS
monitor and related financing costs over the term of the agreement. The customer
is granted an option to purchase the BIS monitor at the end of the term of the
agreement, which is typically three to five years. The Company believes that the
sale-type lease arrangement in some cases reduces the time required for
customers to adopt the BIS System because it provides them with an option to
utilize their operating budget to fund the purchase.
 
     The Company's customers include anesthesia providers, hospitals, ASCs and
individual practitioners in office-based practice. The key customers that the
Company has targeted initially include
                                       28
<PAGE>   30
 
the larger hospitals and ASCs, at or near capacity, with a high ratio of
outpatient surgical procedures to total surgical procedures. Through April 4,
1998, over approximately 100 sites in the United States have acquired the BIS
System.
 
     The Company conducts several activities for the different constituencies
that may be involved in the decision-making process. For clinical audiences, the
Company exhibits at tradeshows, sponsors speakers at professional meetings and
develops articles for publication in conjunction with industry experts. To
educate consumers and hospital administrators, the Company is conducting a
public-relations campaign to highlight the benefits of BIS monitoring for
hospitals and patients. In addition, the Company works with hospitals to
publicize their adoption of BIS monitoring in an effort to assist them in
communicating their commitment to improving the quality and efficiency of
patient care. The Company believes that such publicity in the local media allows
hospitals to compete more effectively in their service areas and has allowed
Aspect to expand its business in those markets.
 
     In January 1998, the Company entered into a three-year distribution
agreement with Nihon Kohden pursuant to which the Company granted to Nihon
Kohden Corporation ("Nihon Kohden") exclusive rights to distribute the Company's
BIS monitors in Japan. The import and sale of the Company's BIS monitors by
Nihon Kohden is subject to approval by the Japanese Ministry of Health and
Welfare. Nihon Kohden applied for this approval in early 1998.
 
     The Company has hired a president of its newly-developed International
Division and is evaluating several options for international distribution of its
products, including the development of a field organization that includes sales
representatives and clinical specialists in selected countries and international
regions. The Company is also evaluating entering into distribution agreements
with dealers, distributors and anesthesia monitoring companies outside the
United States.
 
RESEARCH AND DEVELOPMENT
 
     The Company's research and development efforts focus primarily on
continuing to improve the function and features of the BIS System and enhancing
the Company's technical leadership in signal-processing technology for use in
patient care. The Company intends to leverage the BIS technology for the
development of new monitoring products and proprietary disposables for new
applications.
 
     During the fiscal years ended December 31, 1995, 1996 and 1997, and the
quarter ended April 4, 1998, the Company expended $2.9 million, $2.4 million,
$2.6 million and $887,000, respectively, in its research and development
efforts, including clinical and regulatory expenses. The Company expects
research and development expenses to increase in the future as it seeks to
enhance its existing products and develop additional products. As of April 4,
1998, the Company employed 15 persons in its research and development group and
six persons in its clinical and regulatory group. For a further discussion of
the Company's clinical and regulatory group, see "-- Clinical Development."
 
     The Company conducts research and development in five areas: algorithm
research, product development, disposable-product development, pre-production
quality assurance and clinical engineering. Algorithm research involves
developing signal-processing techniques to analyze the EEG and other
biopotentials. Product-development activities include developing the hardware
and software, including signal-processing software employed in the Company's BIS
Systems, and coordinating with external resources, particularly with respect to
mechanical engineering and industrial design. Disposable-product research and
development combines expertise in materials science, disposable-products design,
electrode technology and design for manufacturing to develop the Company's
disposable products, including the BIS Sensor products. Pre-production quality-
assurance activities include testing the Company's products to ensure that they
meet FDA guide-
 
                                       29
<PAGE>   31
 
lines, other applicable regulatory and international quality standards and
internal verification and validation protocols.
 
     The Company is currently seeking to improve the BIS index technology for
ICU applications. Sedative agents are frequently used on ICU patients to reduce
anxiety, to enhance patient compliance to various interventional treatments and
to improve patient comfort. The current methods of assessing levels of sedation
in the ICU rely on a variety of indirect, often subjective, assessments
performed by observing physical signs and patient responsiveness to voice or
touch. These assessments are typically carried out by a number of different
health care providers in a 24-hour period, many of whom are not trained in
anesthesia. Patients in the ICU often have a critical illness or injury that
affects one or more organ systems simultaneously resulting in high degrees of
variability in patient responses to drug doses. Another complicating problem in
assessing a patient's level of sedation in the ICU is the effect of muscle
relaxants. These drugs may render the assessment extremely difficult because the
patient's ability to respond to the observer is eliminated due to drug-induced
paralysis. There are reports of patients who do not receive adequate levels of
sedation when these agents are used. In these cases, patients are paralyzed and
subjected to painful and traumatic therapies while the clinician is unaware of
the patient's discomfort. The Company is currently evaluating monitoring
products intended to measure the effects of sedation in the ICU setting.
 
     The Company is also enhancing the BIS index for use in procedures requiring
sedation that are performed outside the OR. In these procedures, the level of
conscious sedation required ranges from light to deep sedation. The types of
procedures where conscious sedation is used include diagnostic endoscopy for
upper gastrointestinal exams, colonoscopy, bronchoscopy, and cystoscopy;
diagnostic and therapeutic radiological procedures, oral surgery, plastic
surgery, interventional cardiac procedures, and some emergency-room procedures.
During these procedures, a trained anesthetist may not be present depending upon
the local institution's policies and the attending physician's judgment. One of
the risks of conscious sedation is that overmedication may cause a patient to
lose consciousness and fall into a state of general anesthesia resulting in the
loss of protective reflexes, including the ability to breath without mechanical
assistance.
 
     The Company is exploring the development of a BIS Sensor with improved
signal-processing systems for detection and filtration of noise in settings
outside the OR and other BIS Sensors which offer advantages in cases where
patients may require extended BIS monitoring, such as in the ICU.
 
     The Company is also conducting preliminary research on the application of
its BIS index technology to ECG signals to diagnose cardiovascular disease. The
Company believes that bispectral analysis may provide a means for extracting and
quantifying subtle physiological information contained in the ECG and thus has
the potential to enhance the diagnostic accuracy of many ECG applications,
including the early diagnosis and assessment of coronary artery disease, a more
rapid assessment of acute myocardial infarctions and advanced perioperative
ischemia monitoring for patients at risk for heart attacks during or after
surgery.
 
     Additional studies, sponsored in part by the Company, are ongoing to assess
the performance of the BIS index in the presence of certain anesthetics, such as
ketamine, and patient populations, such as children, not included in the
clinical development of the BIS algorithms. There can be no assurance that the
BIS technology will be effective in monitoring these or other anesthetic agents
and patient populations or when other anesthetic techniques are used.
Furthermore, there can be no assurance that the Company will be successful in
developing any product enhancements or extensions or new products, including
products for use in the ICU, for conscious sedation or for other applications.
The failure of the Company to develop product enhancements or extensions or new
products on a timely basis or at all could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Technological Risks."
 
                                       30
<PAGE>   32
 
MANUFACTURING
 
     The Company assembles all of its BIS monitors in a 7,000 square foot
manufacturing facility located within its Natick, Massachusetts headquarters.
The Company has historically outsourced the manufacturing of its BIS Sensors. In
the first quarter of 1998, the Company transitioned a portion of its production
of BIS Sensors to its manufacturing facility. The Company currently outsources
to third parties the production of some of its BIS Sensors and all of its
ZipPrep electrodes. The Company is currently building a custom-designed,
semi-automated production line for the high-volume manufacture of its BIS
Sensors that it expects to be operational by late 1998. The Company may require
additional manufacturing capacity within the next two years. The Company will
seek to obtain additional manufacturing facilities as needed. While the Company
believes that additional space on reasonable commercial terms will be available
to meet its future manufacturing needs, there can be no assurance that the
Company will be successful in expanding its manufacturing facility or relocating
its facility to meet demand in a timely manner or within budget.
 
     The Company's production process for its BIS monitors consists of final
assembly, integration and testing of standard and custom components. The
Company's production process for its BIS Sensors consists of several
manufacturing and assembly processes using custom components. Qualified
sub-contractors, who have met the Company's supplier certification process and
are placed on an approved vendors list, produce certain custom components.
 
     The Company maintains a quality-assurance program covering its
manufacturing operations. Suppliers of purchased components are required to meet
stated specifications. The Company certifies suppliers prior to use by
conducting audits and product inspections. The Company engages in ongoing
evaluations of the performance of its suppliers by evaluating the results of
inspections and tests as well as the timeliness of product deliveries. The
Company employs numerous quality-assurance procedures during its in-house
manufacturing processes to ensure finished products meet specification.
Quality-assurance procedures include operator training, process validation,
equipment calibration, inspection and testing. All manufacturing procedures and
processes are formally approved and updated using established revision-control
procedures. Documentation of in-process and final-testing results is maintained
in device history records for every unit. The Company maintains an ongoing
post-sale performance-monitoring program.
 
     Although most of the standard components utilized by the Company in
manufacturing its products are available from more than one vendor, certain key
components of the Company's BIS Systems, including certain components used in
the BIS Sensor, are currently provided to the Company by single or limited
sources. A significant unplanned event at a supplier, including shortages of raw
materials or components, could have a material adverse effect on the Company's
operations. In addition, any termination or modification of any manufacturing
arrangement with a third party could result in a business interruption for the
Company. The Company has only one manufacturing facility, and any loss of,
damage to, or interruption of production at its facility could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Limited Manufacturing Experience; Manufacturing
Expansion."
 
COMPETITION
 
     The medical device market is highly competitive and characterized by rapid
product development and technological advances. The future success of the
Company will depend in part upon its ability to anticipate and keep pace with
advancing technology and competitive innovations. However, there can be no
assurance that the Company will be successful in identifying, developing and
marketing new products or enhancing its existing products. In addition, there
can be no assurance that new monitoring products or alternative techniques for
evaluating the effects of anesthesia or other significant changes in the methods
of delivering anesthesia will not be developed that will render the Company's
current or planned products obsolete or inferior. Rapid technological
development by competitors may result in the Company's products becoming obso-
 
                                       31
<PAGE>   33
 
lete before the Company recovers a significant portion of the research,
development and commercialization expenses incurred with respect to such
products.
 
     Although the BIS monitor is currently the only device to be cleared by the
FDA for use in the United States as a direct measure of anesthetic effect on the
brain, the Company expects to face significant competition in the future. The
Company believes that competition will initially come from companies, including
patient monitoring companies, currently marketing conventional EEG monitors
utilizing standard signal-processing techniques such as the Spectral Edge
Frequency and Median Frequency, or companies that market EEG monitors utilizing
novel signal-processing technologies, including at least two companies that are
currently conducting clinical trials on products under development.
Additionally, a number of academic researchers worldwide are studying the
potential use of other techniques to measure the effects of anesthesia,
including the use of auditory evoked potentials, heart rate variability,
pupillary reflexes and skin blood flow measurement techniques. In addition, the
Company may face substantial competition from companies developing sensor
products that are competitive with the Company's proprietary BIS Sensors for use
with the Company's BIS monitors. Competitors in some jurisdictions outside the
United States may enter the market without the delay caused by regulatory
barriers that exist in the United States. Many potential competitors have
substantially greater financial, marketing, technical, manufacturing and
distribution resources than those of the Company. In addition, the Company will
compete on the basis of a number of factors in areas in which the Company has
limited experience, including manufacturing efficiencies, marketing and sales
capabilities and customer service. There can be no assurance that the Company
will be able to compete successfully against competitors or that competition,
including the development and commercialization of new products and technology,
will not have a material adverse effect on the Company's business, financial
condition or results of operations. See "Risk Factors -- Competition."
 
PATENTS AND PROPRIETARY RIGHTS
 
     The Company's policy is to prosecute and enforce its patents and
proprietary technology. The Company intends to continue to file United States
and foreign patent applications to protect technology, inventions and
improvements that are considered important to the development of its business.
The Company also relies upon trade secrets, know how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position. As of June 25, 1998, the Company held eight United States patents and
several foreign patents and had filed five additional United States patent
applications and numerous patent applications in certain major industrial
countries, including Canada, the major European market countries, Australia and
Japan.
 
     The Company has established a substantial proprietary position with respect
to its core signal-processing technology, bispectral analysis, and its
application to biological signals. A series of four issued United States patents
covers the application of bispectral and higher order analysis to EEG signals,
along with various statistical-modeling techniques. Two United States patent
applications cover innovative methods of ensuring the reliability of the
computed values; of these, one has been allowed but has not yet issued and the
other is pending. The Company also holds two issued United States patents
covering the application of its core technology to ECG applications. The Company
holds one United States patent and three United States patent applications
covering its proprietary electrode and sensor technology. The issued patent
covers the Company's ZipPrep self-prepping disposable electrode technology, a
patent application covers the Company's proprietary sensor interconnection
technology, and two other patent applications cover the Company's proprietary
disposable BIS Sensor technology. The Company owns a United States patent that
covers signal acquisition technology for the Company's Digital Signal Converter
and has been granted a perpetual, royalty-free, non-exclusive license to a
second United States patent covering this technology by a third party.
 
                                       32
<PAGE>   34
 
     The Company believes that its competitive position and success has depended
on, in part, and will continue to depend on the ability of the Company to obtain
patent protection for its products, to defend patents once obtained, to preserve
its trade secrets and to operate without infringing upon patents and proprietary
rights held by third parties, both in the United States and in foreign
countries. There can be no assurance that the Company has or will develop or
obtain additional rights to products or processes that are patentable, that
patents will issue from any of the pending patent applications filed by the
Company or that claims allowed will be sufficient to protect the Company's
technology or technology that is licensed to the Company. In addition, no
assurances can be given that any patents issued to the Company will not be
challenged, invalidated, infringed or circumvented or that the rights granted
thereunder will provide competitive advantages for the Company's business or
products. Protection of patent rights outside the United States could be more
costly and result in a greater diversion of effort and resources of management
than protection of patent rights inside the United States. In such event, the
business, results of operations and financial condition of the Company could be
materially adversely affected.
 
     There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. The Company has in
the past been involved in patent litigation and future litigation may be
necessary to protect patents, trade secrets, copyrights or "know-how" owned by
the Company or to defend the Company against claimed infringement of the rights
of others and to determine the scope and validity of the proprietary rights of
the Company and others. The validity and breadth of claims covered in medical
technology patents involve complex legal and factual questions for which
important legal principles are unresolved. Any such litigation could result in
substantial cost to and diversion of effort by the Company. Adverse
determinations in any such litigation could subject the Company to significant
liabilities to third parties, could require the Company to seek licenses from
third parties with unfavorable terms, if at all, and could prevent the Company
from manufacturing, selling or using certain of its products, any of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
 
     The Company also relies on copyrights, trade secrets and proprietary
technology that it seeks to protect, in part, through confidentiality agreements
with employees, consultants and other parties. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, that others will not independently develop
substantially equivalent proprietary information or that third parties will not
otherwise gain access to the Company's trade secrets.
 
     The Company also relies upon trademarks and trade names for the development
and protection of brand loyalty and associated goodwill in connection with its
products. The Company's policy is to protect its trademarks, trade names and
associated goodwill by, among other methods, filing United States and foreign
trademark applications relating to its products and business. The Company owns
numerous United States and foreign trademark registrations and applications. The
Company's registered and unregistered trademark rights relate to the majority of
the Company's products. There can be no assurance that any registered or
unregistered trademarks or trade names owned by or licensed to the Company or
licensed to the Company will not be challenged, cancelled, infringed,
circumvented, be declared generic or infringing of other third-party marks or
provide any competitive advantage to the Company. The Company also is a party to
a license agreement with a third party pursuant to which it has obtained the
nonexclusive right to make, use and/or sell products under the name "Aspect."
The licensor of the Aspect name markets monitors for use in the healthcare
industry. There can be no assurance that there will not be confusion in the
market between the Company and such licensor. In addition, there can be no
assurance that other companies in the medical device industry will not emerge
with the same or a similar name and thereby create confusion in the market or
that any such confusion would compromise the competitive advantage, if any, the
Company derives from its name.
 
                                       33
<PAGE>   35
 
GOVERNMENT REGULATION
 
     The manufacture and sale of medical diagnostic devices intended for
commercial distribution and use are subject to extensive government regulation
in the United States and in other countries. The Company's existing products are
regulated in the United States as medical devices by the FDA under the Federal
Food, Drug, and Cosmetic Act ("FDC Act"). Pursuant to the FDC Act, the FDA
regulates the research, testing, manufacturing, safety, labeling, storage,
record keeping, advertising, distribution and production of medical devices.
Noncompliance with applicable regulations can result in failure of the
government to grant clearance for devices, withdrawal of prior clearances or
approvals, total or partial suspension of production, fines, injunctions, civil
penalties, recall or seizure of products and criminal prosecution.
 
     Generally, before the Company can introduce a new product in the United
States, the Company must obtain FDA clearance of a premarket notification under
Section 510(k) of the FDA Act ("510(k)") or approval of a PMA application under
Section 515 of the FDC Act. To date, the Company has received 510(k) clearance
from the FDA with respect to the following products: A-1000 (December 1992);
ZipPrep EEG Electrodes (June 1994); A-1050 (January 1996); BIS Sensor (October
1996); BIS Clinical Utility Indication (October 1996) and A-2000 (February
1998). While the Company has been successful to date in obtaining regulatory
approval of its products through the 510(k) notification process, there can be
no assurance that any of the Company's future products will meet the
requirements for 510(k) clearance. If the FDA concludes that any product does
not meet such requirements, then a PMA would be required and the process for
obtaining regulatory approval would be significantly delayed.
 
     Once 510(k) clearance has been received, any products manufactured or
distributed by the Company are subject to extensive and continuing regulation by
the FDA, including compliance with GMP regulations, recordkeeping requirements,
reporting of adverse experience with the use of the device, post-market
surveillance, and other actions deemed necessary by the FDA. A new 510(k)
notification is also required when a medical device manufacturer makes a change
or modification to a legally marketed device that could significantly affect the
safety or effectiveness of the device, or where there is a major change or
modification in the intended use of the device. When any change or modification
is made to a device or its intended use, the manufacturer must make the initial
determination whether the change or modification is of a kind that would
necessitate the filing of a new 510(k) notification. The FDA's regulations
provide only limited guidance for making this determination. The Company has
made certain enhancements to its currently marketed products which it believes
do not necessitate the filing of a new 510(k) notification. There can be no
assurance that the FDA would agree with the Company's determinations that these
modifications do not require 510(k) notification. If the FDA requires the
Company to file a new 510(k) notification for any past or future modification to
a cleared device, the Company may be prohibited from marketing the device as
modified until it obtains clearance from the FDA. There can be no assurances
that the Company will obtain 510(k) clearance on a timely basis, if at all, for
any device modification.
 
     The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company to demonstrate and maintain compliance with
GMPs, including Quality Systems Regulations, as specified by the FDA. This
regulation requires, among other things, that (i) the product development and
manufacturing process be controlled by the use of written procedures and (ii)
the ability to produce devices which meet the manufacturer's specifications be
validated by extensive and detailed testing of every aspect of the process. The
regulation also requires investigation of any deficiencies in the manufacturing
process or in the products produced and detailed record keeping. The GMP
regulations are applicable to manufacturers that produce components specifically
for use in a medical device, and require design controls and maintenance of
service records.
 
                                       34
<PAGE>   36
 
     The FDA monitors compliance with GMP by conducting periodic inspections of
manufacturing facilities. If violations of applicable regulations are noted
during FDA inspections of the Company's manufacturing facilities, the continued
marketing of the Company's products may be adversely affected.
 
     The GMP regulations are subject to change and depend heavily on
administrative interpretations. There can be no assurance that future changes in
regulations or interpretations made by the FDA or other regulatory bodies, with
possible retroactive effect, will not adversely affect the Company. In August
1996, the FDA conducted a routine inspection of the Company's manufacturing
facility to ensure compliance with GMP regulations. The FDA noted no adverse
observations during this inspection. The Company believes that it has continued
to maintain manufacturing facilities and procedures that are fully compliant
with all applicable government quality systems regulations and guidelines.
However, adverse findings during future FDA facility inspections could have
material adverse effects on the Company's business, financial condition, and
result of operations.
 
     Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Failure to comply with foreign regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     In June 1998, the Company obtained ISO 9001/EN46001 international quality
systems registration, a certification showing that the Company's procedures and
manufacturing facilities comply with standards for quality assurance and
manufacturing process control. The ISO 9001 certification, along with the
EN46001, the European Medical Device Directive ("MDD") certification, signifies
compliance with the requirements enabling the Company to affix the CE Mark to
its current products. The CE Mark denotes conformity with European standards for
safety and allows certified devices to be placed on the market in all European
Union countries. After June 1998, medical devices may not be sold in European
Union countries unless they display the CE Mark. However, there can be no
assurance that the Company will be able to maintain regulatory approvals or
clearances for its products in foreign countries. See "Risk
Factors -- Government Regulation."
 
     The Company has established a dedicated regulatory and quality assurance
group to maintain regulatory compliance and manage all quality-assurance
activities for the Company. This group is responsible for all regulatory
submissions and communications, scheduling and performing company-wide audits,
coordinating product update procedures and corrective actions, and maintaining
document control activities. Other quality-related responsibilities include
complaint handling, adhering to appropriate procedures and applicable
requirements related to the FDA's quality systems regulations, and coordinating
appropriate documentation for FDA and ISO 9001/EN 46001 review and audits.
 
THIRD-PARTY REIMBURSEMENT
 
     Third-party payors such as Medicare, Medicaid, private health insurance
carriers, managed care organizations, health care administration authorities in
foreign countries and other organizations may affect the pricing or demand for
the Company's products by regulating the maximum amount of reimbursement
provided for by such payors to the anesthesia providers, hospitals, ASCs or
physician's offices where surgical procedures are performed.
 
     The Company does not expect that anesthesia providers will be separately
reimbursed for patient monitoring activities utilizing the Company's BIS
monitor. When providers, such as hospitals or ASCs, are reimbursed a fixed fee
calculated on a per case, per stay, or per capita basis, which is typical for
inpatient hospital procedures and procedures performed in ASCs, the cost of BIS
monitoring will not be recovered by these providers unless the incremental costs
of BIS monitoring are offset by savings in other costs, such as the costs of
anesthetic drugs or costs of the OR or PACU.
                                       35
<PAGE>   37
 
There can be no assurance that BIS monitoring will result in sufficient savings
to offset these costs. When reimbursement is based on charges or costs, BIS
monitoring may have the effect of reducing reimbursement because the charges or
costs for surgical procedures, including OR and PACU charges and costs, may
decline as a result of BIS monitoring. Failure by hospitals and other users of
the BIS Systems to obtain sufficient reimbursement from third-party payors, or
any reduction in the reimbursement by third-party payors to hospitals and other
users as a result of using the BIS System, could limit market acceptance of the
BIS System and have a material adverse effect on the Company's business, results
of operations and financial condition. See "Risk Factors -- Limitations on
Third-Party Reimbursement."
 
EMPLOYEES
 
     As of April 4, 1998, the Company had 77 full-time employees. Approximately
15 persons were engaged in research and development activities, 17 persons were
engaged in manufacturing and engineering, six persons were engaged in clinical
and regulatory affairs, 28 persons were engaged in sales and marketing and
clinical support and 11 persons were engaged in general and administrative
functions. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers relations with its employees to be good.
 
SCIENTIFIC ADVISORS
 
     The Company utilizes a number of scientists and physicians to advise it on
scientific and medical matters, including experts in EEG monitoring,
pharmacology and anesthesia management. These individuals advise the Company
concerning its research and development programs, the design and implementation
of the Company's clinical research program, the Company's publication
strategies, the identification of market opportunities from the clinical
perspective and specific scientific and technical issues.
 
FACILITIES
 
     The Company currently leases approximately 23,000 square feet of
development, production, and administrative space in Natick, Massachusetts
pursuant to a lease which expires on October 31, 2000. The Company believes its
current facilities will be sufficient to meet the Company's needs through the
first half of 1999 and that additional space will be available at a reasonable
cost to meet the Company's space needs thereafter.
 
INSURANCE
 
     The business of the Company entails the risk of product liability and
product recall claims and any such claims could have an adverse impact on the
Company. The Company has taken and will continue to take what it believes are
appropriate precautions, including maintaining general liability and commercial
liability insurance policies which include adequate coverage for product
liability and product recall claims. The Company evaluates its insurance
requirements on an ongoing basis to enable it to maintain adequate levels of
coverage. However, there can be no assurance that product liability or product
recall claims will not exceed such insurance coverage limits or that such
insurance will be available on commercially reasonable terms or at all.
 
LITIGATION
 
     The Company is not a party to any material threatened or pending legal
proceedings.
 
                                       36
<PAGE>   38
 
                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The executive officers and directors of the Company, their respective ages
as of June 15, 1998 and their positions with the Company are as follows:
 
<TABLE>
<CAPTION>
                 NAME                    AGE                         POSITION
                 ----                    ---                         --------
<S>                                      <C>    <C>
Nassib G. Chamoun......................  36     Chief Executive Officer, President and Director
J. Breckenridge Eagle..................  48     Chairman of the Board of Directors
J. Neal Armstrong......................  60     Vice President, Chief Financial Officer and
                                                Secretary
Jeffrey Barrett........................  35     Vice President of Manufacturing and Operations
Boudewijn L.P.M. Bollen................  51     President - International
Philip Devlin..........................  41     Vice President of Research and Development
Steven H. Kane.........................  45     Vice President of Sales and Field Operations
Paul J. Manberg, Ph.D. ................  43     Vice President of Clinical, Regulatory and Quality
                                                  Assurance
Jean Nelson............................  39     Vice President of Marketing
Stephen E. Coit(1).....................  50     Director
Edwin M. Kania, Jr. (2)................  40     Director
Lester John Lloyd(2)...................  62     Director
Terrance McGuire.......................  42     Director
Donald Stanski, M.D.(1)................  48     Director
</TABLE>
 
---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
 
     Mr. Chamoun is a founder of the Company and has served as a director of the
Company since 1987. Mr. Chamoun has served as President of the Company since
1996 and Chief Executive Officer since 1995. Mr. Chamoun served as Chairman of
the Board of Directors, from 1987 to 1996, and as Chief Scientific Officer from
1991 to 1995. Mr. Chamoun also served as President and Chief Executive Officer
prior to 1995 at various times since founding the Company in 1987. From 1984 to
1987, Mr. Chamoun was a fellow in cardiovascular physiology at the Lown
Cardiovascular Laboratory of the Harvard School of Public Health. Mr. Chamoun
earned a bachelors degree in Electrical Engineering from Northeastern University
and a masters degree in Computer Engineering from Boston University.
 
     Mr. Eagle has served as a director of the Company from 1988 to 1991 and
from 1996 to the present. Mr. Eagle has served as Chairman of the Board of
Directors since November 1996. He served as President and Chief Operating
Officer of the Company in 1996 and served as a consultant to the Company in
1995. From 1989 to 1995, he served as President of ECS, Inc., a medical practice
management company which he founded in 1989. From 1981 to 1988, he served as
Chief Financial Officer, Vice President and General Manager of The Health Data
Institute, Inc., a health care services company, which he co-founded. Mr. Eagle
earned a bachelors degree in Psychology and a masters degree in Public Health
from Yale University and received a masters degree in Business Administration
from Harvard Business School.
 
     Mr. Armstrong has served as Vice President and Chief Financial Officer of
the Company since 1996. From 1990 to 1996, he served as Vice President of
Finance, Chief Financial Officer and a director of Haemonetics, Inc., a
manufacturer of blood processing systems ("Haemonetics"). From 1985 to 1990, he
served as Vice President of Finance and Administration, Treasurer and Chief
Financial Officer at BTU International, a manufacturer of thermal processing
systems. He previously served for 14 years in senior operating and financial
positions at Texas Instruments, Inc., an
 
                                       37
<PAGE>   39
 
electronics company. Mr. Armstrong holds a bachelors degree in Business
Administration from the University of Texas and is a certified public
accountant.
 
     Mr. Barrett has served as Vice President of Manufacturing and Operations of
the Company since 1997. From 1996 to 1997, he served as Vice President of
Manufacturing at Aksys, Ltd., a developer of dialysis equipment. From 1989 to
1996, Mr. Barrett served in a variety of manufacturing and operating positions
at Haemonetics, serving most recently as its Vice President of Operations. Mr.
Barrett received a bachelors degree in Economics and Industrial Engineering from
Rutgers University and a masters degree in Business Administration from Boston
University.
 
     Mr. Bollen has served as President - International of the Company since
June 1998. From 1986 to 1997, Mr. Bollen held several positions at Nellcor
Puritan Bennett, Inc., a medical device company, including Executive Vice
President for Worldwide Sales, Service and Distribution, Vice President of
European Sales and Marketing, and Vice President and Managing Director for
Europe. From 1981 to 1986, Mr. Bollen served as Vice President of Marketing and
Sales in Europe for Bentley Laboratories, Inc., a manufacturer of specialized
monitoring and medical equipment. Mr. Bollen holds the equivalent of a bachelors
degree in Hotel Business Management from the Hotel Business School in
Maastricht, Holland.
 
     Mr. Devlin has served as Vice President of Research and Development of the
Company since 1994 and served as Director of Product Development of the Company
from 1990 to 1994. From 1984 to 1985 and 1986 to 1990, he served as Software
Engineer and Manager of Software Engineering at Lifeline Systems, Inc., a
medical products and communications company. From 1980 to 1984, he served as
Chief Biomedical Engineer at Beth Israel Hospital in Boston, Massachusetts and
from 1985 to 1986, he served as Technical Marketing Engineer in the Medical
Product Group of Hewlett-Packard Company, a manufacturer of computers and
medical devices. Mr. Devlin holds a bachelors and masters degree in Electrical
Engineering from Northeastern University.
 
     Mr. Kane has served as Vice President of Sales and Field Operations of the
Company since 1997. From 1990 to 1997, he served as Area Vice President, Sales
and Operations, Northeastern United States at Pyxis Corp., a medical technology
company. From 1988 to 1990, he served as Regional Manager, Eastern United
States, at IVAC Corp., an intravenous infusion therapy systems company.
 
     Dr. Manberg has served as Vice President of Clinical, Regulatory and
Quality Assurance of the Company since 1991. From 1984 to 1990, he served in a
variety of clinical research positions at Serono Laboratories, a pharmaceutical
company, most recently as Vice President, Research and Development. From 1979 to
1984, he served as a Clinical Research Scientist at Burroughs-Wellcome Company,
a pharmaceutical company, and served as an Adjunct Research Scientist at the
University of North Carolina. Dr. Manberg received a bachelors degree in
Biological Sciences from the State University of New York at Binghamton and a
doctorate in Pharmacology from the University of North Carolina at Chapel Hill.
 
     Ms. Nelson has served as Vice President of Marketing of the Company since
1992. From 1988 to 1992, she was employed by Nellcor, Inc., a medical device
company, serving from 1990 to 1992 as Manager of Advanced Technologies, from
1989 to 1990 as Multi-Function Monitor Group Manager and from 1988 to 1989 as
New Products Manager. From 1984 to 1988, Ms. Nelson served as a consultant with
Bain and Company, Inc., a strategic management consulting firm. Ms. Nelson
earned a bachelors degree in Metallurgy and Materials Engineering from Lehigh
University and a masters degree in Business Administration from the University
of Chicago Graduate School of Business.
 
     Mr. Coit has served as a director of the Company since 1987. He has been a
self-employed artist since 1997. From 1995 to 1997, Mr. Coit served as a general
partner of Charles River Ventures, a venture capital firm. From 1984 to 1994,
Mr. Coit served as a general partner of Merrill, Pickard, Anderson & Eyre, a
venture capital firm. Since 1989, Mr. Coit has also served as a director of
International Data Group, a provider of media research and conferences to the
information technology industry.
 
                                       38
<PAGE>   40
 
     Mr. Kania has served as a director of the Company since 1995. Mr. Kania is
a founding general partner of OneLiberty Ventures, a venture capital firm.
Previously, he was a general partner at a predecessor firm, Morgan Holland
Ventures, which he joined in 1985. Mr. Kania is also a director of Anesta
Corporation.
 
     Mr. Lloyd has served as a director of the Company from 1991 to April 1995
and from November 1995 to the present. He served as President and Chairman of
Aradigm, Inc., a medical device company, from 1992 to 1997. From 1995 to the
present, Mr. Lloyd has also served as Chairman of the Board of Alere Medical,
Inc., a chronic disease monitoring company. Mr. Lloyd is also a director of
Molecular Dynamics, Inc.
 
     Mr. McGuire has served as a director of the Company since 1997. He has been
a general partner of Polaris Venture Partners, a venture capital firm, since
1996. From 1992 to the present, Mr. McGuire has served as general partner of
Burr, Egan, Deleage & Co., a venture capital firm, and from 1988 to the present,
he has served as general partner of Beta Partners, a venture capital firm. Mr.
McGuire is also a director of Ascent Pediatrics, Inc., Cubist Pharmaceuticals,
Inc. and Integ Incorporated.
 
     Dr. Stanski has served as a director of the Company since 1996. Dr. Stanski
has been a professor of anesthesia and medicine (Clinical Pharmacology) at
Stanford University since 1979 and is an anesthesiologist/clinical
pharmocologist. He served as Chair of the Department of Anesthesia at Stanford
University from 1992 to 1997. Dr. Stanski received his medical degree from the
University of Calgary, Canada, and his anesthesiology training at the
Massachusetts General Hospital.
 
     Pursuant to a Third Amended and Restated Voting Agreement dated February
13, 1998 among the Company and certain stockholders of the Company, certain
stockholders have the right to nominate persons as their representatives on the
Company's Board of Directors. Each of the current directors has been nominated
to serve as a director pursuant to this agreement. This agreement will terminate
concurrently with the closing of this offering.
 
     The Company's Restated Certificate, to be filed concurrently with the
closing of this offering, provides that the Board of Directors of the Company
will be divided into three classes, each of whose members will serve for a
staggered three-year term. The Board will consist of two Class I Directors, two
Class II Directors and three Class III Directors. At each annual meeting of
stockholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring. The terms
of the Class I Directors, Class II Directors and Class III Directors expire upon
the election and qualification of successor directors at the annual meeting of
stockholders held during the calendar years 1999, 2000 and 2001, respectively.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has a Compensation Committee comprised of Mr. Coit
and Dr. Stanski, which makes recommendations concerning salaries and incentive
compensation for employees of and consultants to the Company and administers and
grants stock options pursuant to the Company's stock option plans. The Board of
Directors has an Audit Committee comprised of Messrs. Lloyd and Kania, which
reviews the results and scope of the annual audit, other services provided by
the Company's independent public accountant and other matters relating to
internal control systems.
 
DIRECTOR COMPENSATION
 
     All of the directors are reimbursed for expenses incurred in connection
with their attendance at Board of Directors and committee meetings. In addition,
non-employee directors of the Company are eligible to receive stock options
under the Company's 1998 Director Stock Option Plan.
 
     1998 Director Stock Option Plan.  The Company's 1998 Director Stock Option
Plan, as amended (the "Director Plan"), was adopted by the Board of Directors
and stockholders of the Company in February 1998. Under the terms of the
Director Plan, directors of the Company who are not employees of the Company or
any subsidiary of the Company ("Outside Directors") are eligible
                                       39
<PAGE>   41
 
to receive nonstatutory options to purchase shares of Common Stock. A total of
100,000 shares of Common Stock may be issued upon exercise of options granted
under the Director Plan.
 
     Pursuant to the Director Plan, on April 14, 1998 (the "Initial Grant
Date"), each Outside Director (other than Mr. Lloyd and Dr. Stanski) received an
option to purchase 10,000 shares of Common Stock, and each person who first
becomes an Outside Director after the Initial Grant Date will be granted an
option to purchase 10,000 shares of Common Stock on the date of his or her
initial election to the Board (the "Initial Options"). In addition, each Outside
Director shall be granted an additional option to purchase 5,000 shares of
Common Stock (the "Additional Options") on the date of each Annual Meeting of
Stockholders, commencing with the 1999 Annual Meeting of Stockholders. Each
Outside Director will be eligible to receive an Additional Option if he or she
is serving as a director immediately prior to the Annual Meeting of Stockholders
and continues to serve immediately following such Annual Meeting of
Stockholders, and, if the grant date of such Additional Option is at least six
months after the Outside Director receives an Initial Option.
 
     The exercise price per share of Initial Options granted on the Initial
Grant Date was $2.80. The exercise price of Initial Options granted after the
Initial Grant Date and of any Additional Options will be the closing price per
share of Common Stock on the date of grant. Initial Options are exercisable as
to one-half of the shares as of the date of grant and as to one-sixth ( 1/6th)
of the shares on the first, second and third anniversaries of the date of grant,
provided that the optionee continues to serve as a director. Additional Options
are exercisable in three equal annual installments on each of the first, second
and third anniversaries of the date of grant, provided that the optionee
continues to serve as a director. Options granted under the Director Plan
terminate on the earlier of (i) ten years from the date of grant or (ii) sixty
days after the optionee ceases to serve as a director (180 days after the
optionee ceases to serve as a director if due to death or disability).
 
EXECUTIVE COMPENSATION
 
     The following table sets forth the annual and long-term compensation for
the year ended December 31, 1997 by its Chief Executive Officer and President
and its four other most highly compensated executive officers in 1997 who were
serving as executive officers on December 31, 1997 (the Chief Executive Officer
and such other executive officers are hereinafter referred to as the "Named
Executive Officers"):
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                         LONG-TERM COMPENSATION
                                                ANNUAL COMPENSATION      ----------------------
                  NAME AND                    -----------------------     NUMBER OF SECURITIES
             PRINCIPAL POSITION               SALARY ($)    BONUS ($)    UNDERLYING OPTIONS(1)
             ------------------               ----------    ---------    ----------------------
<S>                                           <C>           <C>          <C>
Nassib G. Chamoun...........................   $170,000      $40,000            200,000
  Chief Executive Officer and President
J. Breckenridge Eagle.......................    157,500       27,565                 --
  Chairman of the Board of Directors
J. Neal Armstrong...........................    153,750       26,910             70,000
  Vice President, Chief Financial Officer
  and Secretary
Steven H. Kane(2)...........................    127,153       58,648            180,000
  Vice President of Sales and Field
  Operations
Paul J. Manberg.............................    137,500       24,065             50,000
  Vice President of Clinical, Regulatory and
  Quality Assurance
</TABLE>
 
---------------
(1) Represents the number of shares covered by options to purchase shares of the
    Company's Common Stock granted during the year ended December 31, 1997.
 
                                       40
<PAGE>   42
 
(2) Mr. Kane commenced employment with the Company on April 1, 1997 and received
    a salary for only nine months of the year ended December 31, 1997. His
    current annual base salary is $165,000.
 
  Option Grants During 1997
 
     The following table sets forth grants of stock options to each of the Named
Executive Officers during the year ended December 31, 1997.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                             INDIVIDUAL GRANTS                     POTENTIAL REALIZABLE VALUE
                           -----------------------------------------------------        AT ASSUMED ANNUAL
                           NUMBER OF    PERCENT OF TOTAL   EXERCISE                   RATES OF STOCK PRICE
                           SECURITIES       OPTIONS        OR BASE                      APPRECIATION FOR
                           UNDERLYING       GRANTED         PRICE                        OPTION TERM(2)
                            OPTIONS     TO EMPLOYEES IN      PER      EXPIRATION   ---------------------------
          NAME             GRANTED(1)     FISCAL YEAR       SHARE        DATE           5%            10%
          ----             ----------   ----------------   --------   ----------   ------------   ------------
<S>                        <C>          <C>                <C>        <C>          <C>            <C>
Nassib G. Chamoun........   200,000          19.21%         $ .80      11/4/07       $100,623       $254,999
J. Breckenridge Eagle....        --             --             --           --             --             --
J. Neal Armstrong........    70,000            6.7%           .80       9/8/07         35,218         89,250
Steven H. Kane...........   180,000           17.3%          .375      4/14/07         42,450        107,578
Paul J. Manberg..........    50,000            4.8%           .80       9/8/07         25,156         63,750
</TABLE>
 
---------------
(1) The dates of exercisability of the options are determined in accordance with
    their respective vesting schedules.
 
(2) Amounts reported in these columns represent amounts that may be realized
    upon exercise of the options immediately prior to the expiration of their
    term assuming the specified compound rates of appreciation (5% and 10%) on
    the market value of the Common Stock on the date of option grant over the
    term of the options. These numbers are calculated based on rules promulgated
    by the Securities and Exchange Commission and do not reflect the Company's
    estimate of future stock price growth. Actual gains, if any, on stock option
    exercises and Common Stock holdings are dependent on the timing of such
    exercise and the future performance of the Common Stock. There can be no
    assurance that the rates of appreciation assumed in this table can be
    achieved or that the amounts reflected will be received by the individuals.
 
  Option Exercises and Year-End Option Values
 
     The following table sets forth certain information regarding the aggregate
number of shares of Common Stock acquired upon option exercises by the Named
Executive Officers and the value
 
                                       41
<PAGE>   43
 
realized upon such exercises during the year ended December 31, 1997 and the
number and value of unexercised options held by each of the Named Executive
Officers on December 31, 1997.
 
                         FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                          NUMBER OF SHARES
                                                       UNDERLYING UNEXERCISED       VALUE OF UNEXERCISED
                            NUMBER OF                          OPTIONS              IN-THE-MONEY OPTIONS
                              SHARES                     AT FISCAL YEAR-END         AT FISCAL YEAR-END(2)
                             ACQUIRED       VALUE     -------------------------   -------------------------
NAME                      ON EXERCISE(1)   REALIZED   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
----                      --------------   --------   -------------------------   -------------------------
<S>                       <C>              <C>        <C>                         <C>
Nassib G. Chamoun.......     378,964       $227,378          --/200,000                      --
J. Breckenridge Eagle...     189,482        113,689           2,625/--                   $1,575 / --
J. Neal Armstrong.......     120,000         72,000           0/70,000                       --
Steven H. Kane..........     180,000         76,500              --                          --
Paul J. Manberg.........      81,207         48,724           --/50,000                      --
</TABLE>
 
---------------
 
(1) Represents shares acquired upon exercise of stock options that are subject
    to repurchase by the Company. See Note 9 to Notes to Financial Statements.
 
(2) Represents the difference between the exercise price and the fair market
    value of the Common Stock at fiscal year end ($0.80) as determined by the
    Board of Directors of the Company.
 
  Stock Plans
 
     Amended and Restated 1991 Stock Option Plan.  The Company's Amended and
Restated 1991 Stock Option Plan (the "1991 Plan") was initially adopted by the
Board of Directors and approved by the stockholders of the Company in April
1991. As of April 4, 1998, 3,460,000 shares were authorized for issuance upon
exercise of outstanding options under the 1991 Plan and options to purchase an
aggregate of 1,125,075 shares of Common Stock at a weighted average exercise
price of $0.74 per share were outstanding under the 1991 Plan.
 
     The 1991 Plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonstatutory stock options, restricted stock and other stock-based
awards (collectively, "Awards").
 
     Officers, employees, directors, consultants and advisors of the Company are
eligible to receive Awards under the 1991 Plan. Under present law, however,
incentive stock options may only be granted to employees. The maximum number of
shares with respect to which an Award may be granted to any participant under
the 1991 Plan may not exceed 200,000 shares per calendar year.
 
     Optionees receive the right to purchase a specified number of shares of
Common Stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. Options may be
granted at an exercise price which may be less than, equal to or greater than
the fair market value of the Common Stock on the date of grant. Under present
law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Code may not be
granted at an exercise price less than the fair market value of the Common Stock
on the date of grant (or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of the voting
power of the Company). The 1991 Plan permits the Board of Directors to determine
the manner of payment of the exercise price of options, including through
payment by cash, check or in connection with a "cashless exercise" through a
broker, by surrender to the Company of shares of Common Stock, by delivery to
the Company of a promissory note, or by any combination of the permitted forms
of payment.
 
                                       42
<PAGE>   44
 
     The 1991 Plan is administered by the Board of Directors. The Board of
Directors has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the 1991 Plan and to interpret the
provisions thereof. Pursuant to the terms of the 1991 Plan, the Board of
Directors may delegate authority under the 1991 Plan to one or more committees
of the Board of Directors and, subject to certain limitations, to one or more
executive officers of the Company. The Board of Directors has authorized the
Compensation Committee to administer the 1991 Plan, including the granting of
options to executive officers. Subject to any applicable limitations contained
in the 1991 Plan, the Board of Directors, the Compensation Committee or any
other committee or executive officer to whom the Board of Directors delegates
authority, as the case may be, selects the recipients of Awards and determines
(i) the number of shares of Common Stock covered by options and the dates upon
which such options become exercisable, (ii) the exercise price of options, (iii)
the duration of options, and (iv) the number of shares of Common Stock subject
to any restricted stock or other stock-based Awards and the terms and conditions
of such Awards, including the conditions for repurchase, issue price and
repurchase price.
 
     No Award may be granted under the 1991 Plan after April 1, 2001, but the
vesting and effectiveness of Awards previously granted may extend beyond that
date. The Board of Directors may at any time amend, suspend or terminate the
1991 Plan, except that no Award granted after an amendment of the 1991 Plan and
designated as subject to Section 162(m) of the Code by the Board of Directors
will become exercisable, realizable or vested (to the extent such amendment was
required to grant such Award) unless and until such amendment is approved by the
Company's stockholders.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The current members of the Compensation Committee of the Board of Directors
are Mr. Coit and Dr. Stanski. No executive officer of the Company has served as
a director or member of the compensation committee (or other committee serving
an equivalent function) of any other entity, whose executive officers served as
a director of or member of the Compensation Committee of the Board of Directors.
 
                                       43
<PAGE>   45
 
                              CERTAIN TRANSACTIONS
 
     In October 1995, certain investors, including One Liberty Fund III, L.P.
("Liberty III"), Charles River Partnership VII, Limited Partnership ("CRL VII"),
New Enterprise Associates IV, Limited Partnership ("NEA") and Catalyst Ventures,
Limited Partnership ("Catalyst"), made bridge loans to the Company in the
aggregate amount of $500,000 in exchange for promissory notes (the "October 1995
Notes"). In November 1995 and June 1996, the Company sold an aggregate of
3,800,428 shares of its Series B-1 Convertible Preferred Stock to a group of
existing and new investors, including Messrs. J. Breckenridge Eagle, the
Chairman of the Board of Directors, and J. Neal Armstrong, Vice President, Chief
Financial Officer and Secretary of the Company, Liberty III, CRL VII, NEA and
Catalyst, at a purchase price of $2.00 per share for an aggregate purchase price
of approximately $7.6 million. The purchase price was paid, in part, by the
cancellation and conversion of the October 1995 Notes. Mr. Kania, a director of
the Company, is a general partner of One Liberty Partners III, L.P., which is
the general partner of Liberty III. Mr. Coit, a director of the Company, served
as a general partner of CRL VII at the time that CRL VII purchased these
securities from the Company.
 
     In February 1997, August 1997 and October 1997, the Company sold an
aggregate of 3,439,949 shares of its Series C Convertible Preferred Stock to a
group of existing and new investors, including Messrs. Eagle and Armstrong,
Jeffrey Barrett, Vice President of Manufacturing of the Company, and Stephen H.
Kane, Vice President of Sales and Field Operations of the Company, Liberty III,
CRL VII, NEA, Orchid & Co., nominee for T. Rowe Price Threshold Fund III, L.P.
("T. Rowe Price"), Merrill, Pickard, Anderson & Eyre IV Limited Partnership
("MPAE"), Polaris Venture Partners, L.P. ("Polaris V.P.") and Polaris Venture
Partners Founders' Fund, L.P. ("Polaris F.F."), at a purchase price of $3.75 per
share for an aggregate purchase price of approximately $12.9 million. Mr.
Jordan, who served as a director of the Company until June 1998, is a Vice
President of T. Rowe Price Threshold Fund Associates, Inc., the general partner
of T. Rowe Price. Mr. McGuire, a director of the Company, is a member of Polaris
Venture Management Co., LLC, which is a general partner of Polaris V.P. and
Polaris F.F. Mr. McGuire is also a general partner of Polaris Venture Partners.
 
     In February 1998, the Company issued and sold an aggregate of 1,666,234
shares of its Series D Convertible Preferred Stock to a group of existing and
new investors, including Messrs. Armstrong, Kane and Coit and Lester John Lloyd,
a director of the Company, CRL VII, Liberty III, Orchid & Co., Polaris V.P.,
Polaris F.F. and MPAE, at a purchase price of $7.00 per share for an aggregate
purchase price of approximately $11.7 million.
 
     In February 1997, the Company entered into a Pledge Agreement with Mr.
Nassib Chamoun, the Company's Chief Executive Officer and President, pursuant to
which the Company loaned to Mr. Chamoun, on a full recourse basis, $68,214,
representing 90% of the aggregate exercise price of certain options exercised by
Mr. Chamoun. Mr. Chamoun pledged the shares of Common Stock issued upon exercise
of such options as collateral for the loan. The loan bears interest at 8% per
annum. As of April 4, 1998, the entire principal amount of the loan plus accrued
interest was outstanding.
 
     In May 1997, the Company loaned $80,000 to Mr. Chamoun. The loan is
represented by two promissory notes and is secured by a security interest in
certain securities of the Company owned by Mr. Chamoun. The loan bears interest
at 6.42% per annum. As of April 4, 1998, the entire principal amount of the loan
plus accrued interest was outstanding.
 
     In May 1997, the Company entered into a Pledge Agreement with Mr. Kane,
pursuant to which the Company loaned Mr. Kane, on a full recourse basis,
$60,750, representing 90% of the aggregate exercise price of certain options
exercised by Mr. Kane. Mr. Kane pledged the shares of Common Stock issued upon
exercise of such options as collateral for the loan. The loan bears interest at
8% per annum. As of April 4, 1998, the entire principal amount of the loan plus
accrued interest was outstanding.
 
                                       44
<PAGE>   46
 
     In September 1997, the Company loaned $27,000 to Mr. Barrett. The loan is
evidenced by a promissory note and bears interest at 8% per annum. Pursuant to
the terms of the promissory note, in the event that Mr. Barrett is employed by
the Company on each of September 24, 1998, 1999, 2000 and 2001, respectively,
the Company will forgive the payment by Mr. Barrett of $8,152 on each of such
dates and such amounts will be considered and treated as compensation to Mr.
Barrett by the Company.
 
     In April 1998, the Company entered into a Pledge Agreement with Mr.
Barrett, pursuant to which the Company loaned to Mr. Barrett, on a full recourse
basis, $63,000, representing 90% of the aggregate exercise price of certain
options exercised by Mr. Barrett. Mr. Barrett pledged the shares of Common Stock
issued upon exercise of such options as collateral for the loan. The loan bears
interest at 8% per annum. As of April 4, 1998, the entire principal amount of
the loan plus accrued interest was outstanding.
 
     The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
 
                                       45
<PAGE>   47
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 25, 1998, and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered hereby, by
(i) each person (or group of affiliated persons) who is known to the Company to
own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's directors and Named Executive Officers, and (iii) all
directors and executive officers of the Company as a group:
 
<TABLE>
<CAPTION>
                                                                                PERCENTAGE
                                                           NUMBER OF            OWNED(1)(2)
                                                             SHARES       -----------------------
                                                          BENEFICIALLY    BEFORE THE    AFTER THE
BENEFICIAL OWNERS                                           OWNED(1)       OFFERING     OFFERING
-----------------                                         ------------    ----------    ---------
<S>                                                       <C>             <C>           <C>
5% STOCKHOLDERS
Charles River Partnership VII, Limited Partnership......   1,580,953         14.3%             %
  1000 Winter Street, Suite 3300
  Waltham, MA 02154
One Liberty Fund III, L.P.(3)...........................   1,528,096         13.8%             %
  One Liberty Ventures
  One Liberty Square
  Boston, MA 02109
Polaris Venture Partners, L.P.(4).......................   1,007,143          9.1%             %
  Bay Colony Corporate Center
  1000 Winter Street, Suite 3350
  Waltham, MA 02154
New Enterprise Associates IV, Limited Partnership(5)....     654,493          5.9%             %
  1119 St. Paul Street
  Baltimore, MD 21202
Orchid & Co., Nominee for T. Rowe Price
  Threshold Fund III, L.P...............................     618,382          5.6%             %
  T. Rowe Price Assoc. Inc.
  100 East Pratt
  Baltimore, MD 21202
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Nassib G. Chamoun(6)....................................     387,990          3.5%             %
J. Breckenridge Eagle(7)................................     210,447          1.9%             %
Lester John Lloyd(8)....................................      50,030            *             *
Stephen E. Coit(9)......................................       5,000            *              %
Edwin M. Kania, Jr.(10).................................   1,533,096         13.9%             %
Donald Stanski(11)......................................      39,354            *             *
Terrance McGuire(12)....................................   1,012,143          9.2%             %
J. Neal Armstrong(13)...................................     177,530          1.6%             %
Steven H. Kane(14)......................................     212,062          1.9%             %
Paul J. Manberg(15).....................................      91,178            *             *
All current executive officers and directors as a group
  (14 persons)(16)......................................   3,985,595         35.8%             %
</TABLE>
 
---------------
    * Indicates less than 1%
 
 (1) Reflects the conversion, simultaneously with the closing of this offering,
     of all outstanding shares of preferred stock of the Company into an
     aggregate of 9,313,509 shares of Common Stock. The number of shares of
     Common Stock deemed outstanding after this offering includes the
                    shares of Common Stock of the Company being offered for sale
     in
 
                                       46
<PAGE>   48
 
     this offering. The persons and entities named in the table have sole voting
     and investment power with respect to the shares beneficially owned by them,
     except as noted below. Share numbers include shares of Common Stock
     issuable pursuant to outstanding options that may be exercised within the
     60-day period following June 25, 1998.
 
 (2) Assumes no exercise of the Underwriters' over-allotment option.
 
 (3) Mr. Kania, a director of the Company, is a General Partner of One Liberty
     Partners III, L.P., a General Partner of Liberty III. Mr. Kania disclaims
     beneficial ownership of the shares held by Liberty III, except to the
     extent of his pecuniary interest therein.
 
 (4) Includes 54,829 shares held by Polaris F.F. North Star Ventures directly or
     indirectly provides investment advisory services to various venture capital
     funds, including Polaris V.P. and Polaris F.F. The respective general
     partners of these funds exercise sole voting and investment power with
     respect to the shares held by such funds. The principals of North Star
     Ventures are members of Polaris Venture Management Co., L.L.C. (the General
     Partner of both Polaris V.P. and Polaris F.F.). As members of these funds,
     they may be deemed to share voting and investment powers for the shares
     held by the funds. These principals disclaim beneficial ownership of all
     such shares held by all of the aforementioned funds except to the extent of
     their proportionate pecuniary interests therein. Mr. McGuire, a director of
     the Company, is a member of Polaris Venture Management Co., L.L.C. (which
     is the general partner of both Polaris V.P. and Polaris F.F.). As a member
     of these funds, he may be deemed to share voting and investment power with
     respect to the shares held by the funds. Mr. McGuire disclaims beneficial
     ownership of all the shares held by these funds except to the extent of his
     proportionate pecuniary interest therein.
 
 (5) Includes 154,203 shares held by Catalyst. New Enterprise Associates IV,
     Limited Partnership is a General Partner of Catalyst and may be deemed to
     share voting and investment power with respect to the shares held by
     Catalyst.
 
 (6) Includes an aggregate of 12,500 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998. Also includes
     50,000 shares of Common Stock held by The Nassib G. Chamoun 1998
     Irrevocable Trust, of which Mr. Chamoun disclaims beneficial ownership, and
     87,235 shares of Common Stock subject to repurchase by the Company under
     certain circumstances. Does not include 145,833 shares which will not
     become exercisable within 60 days of June 25, 1998.
 
 (7) Includes 35,000 shares of Common Stock held by Jeanne Warren Eagle as
     Trustee for the Trust for John Warren Eagle, of which Mr. Eagle disclaims
     beneficial ownership, and 75,003 shares of Common Stock subject to
     repurchase by the Company under certain circumstances. Does not include
     37,000 shares which will not become exercisable within 60 days of June 25,
     1998.
 
 (8) Includes an aggregate of 2,708 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998 and 9,699 shares
     of Common Stock subject to repurchase by the Company under certain
     circumstances. Does not include 7,292 shares which will not become
     exercisable within 60 days of June 25, 1998.
 
 (9) Includes 5,000 shares of Common Stock subject to options which are
     exercisable within 60 days after June 25, 1998. Does not include 5,000
     shares which will not become exercisable within 60 days of June 25, 1998.
 
(10) Includes 1,528,096 shares held by Liberty III. See Note 4 above. Also
     includes 5,000 shares of Common Stock subject to options which are
     exercisable within 60 days after June 25, 1998. Does not include 5,000
     shares which will not become exercisable within 60 days of June 25, 1998.
 
(11) Includes an aggregate of 19,354 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998. Does not include
     25,646 shares which will not become exercisable within 60 days of June 25,
     1998.
 
                                       47
<PAGE>   49
 
(12) Includes 952,314 shares held by Polaris V.P. and 54,829 shares held by
     Polaris F.F. See Note 5 above. Also includes 5,000 shares of Common Stock
     subject to options which are exercisable within 60 days after June 25,
     1998. Does not include 5,000 shares which will not become exercisable
     within 60 days of June 25, 1998.
 
(13) Includes an aggregate of 4,375 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998 and 62,500 shares
     of Common Stock subject to repurchase by the Company under certain
     circumstances. Does not include 55,417 shares which will not become
     exercisable within 60 days of June 25, 1998.
 
(14) Includes an aggregate of 1,823 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998 and 131,250 shares
     of Common Stock subject to repurchase by the Company under certain
     circumstances. Does not include 16,927 shares which will not become
     exercisable within 60 days of June 25, 1998.
 
(15) Includes an aggregate of 13,542 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998. Also includes
     3,571 shares of Common Stock held by Paul Manberg, as Custodian under the
     Uniform Transfer to Minors Act, for Shawn Joseph Manberg, 3,571 shares of
     Common Stock held by Paul Manberg, as Custodian under the Uniform Transfer
     to Minors Act, for Kate Michelle Manberg and 20,384 shares of Common Stock
     subject to repurchase by the Company under certain circumstances. Does not
     include 36,458 shares which will not become exercisable within 60 days of
     June 25, 1998.
 
(16) Includes an aggregate of 74,458 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998 and 492,733 shares
     of Common Stock subject to repurchase by the Company under certain
     circumstances. Does not include 207,335 shares which will not become
     exercisable within 60 days of June 25, 1998.
 
                                       48
<PAGE>   50
 
                          DESCRIPTION OF CAPITAL STOCK
 
     As of June 25, 1998, there were outstanding an aggregate of 11,061,824
shares of Common Stock, assuming the conversion of all of the Company's
Convertible Preferred Stock, held of record by 145 stockholders.
 
     Upon closing of this offering, the authorized capital stock of the Company
will consist of 40,000,000 shares of Common Stock and 5,000,000 shares of
undesignated preferred stock, $.01 par value per share (the "Preferred Stock").
Immediately after the sale of the                shares of Common Stock offered
hereby, there will be                shares of Common Stock outstanding and no
shares of Preferred Stock outstanding.
 
     The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, (i) the provisions of the Company's Restated Certificate and
amended By-Laws (to be filed and effected, respectively, on or before the
closing of this offering) and (ii) the provisions of applicable law.
 
COMMON STOCK
 
     Holders of Common Stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of Common Stock are entitled to receive dividends if, as and when declared by
the Board of Directors out of funds legally available therefor. See "Dividend
Policy." Upon the liquidation, dissolution or winding up of the Company, holders
of Common Stock are entitled to share ratably in the assets of the Company
available for distribution to its stockholders, subject to the preferential
rights of any then outstanding shares of Preferred Stock. No shares of Preferred
Stock will be outstanding immediately following the closing of this offering.
The Common Stock outstanding upon the effective date of the Registration
Statement, and the shares offered by the Company hereby, upon issuance and sale,
will be fully paid and nonassessable.
 
PREFERRED STOCK
 
     Upon closing of this offering, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the relative rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders. The Company believes that the power to issue
Preferred Stock will provide flexibility in connection with possible corporate
transactions. The issuance of Preferred Stock could adversely affect the voting
power of the holders of Common Stock and restrict their rights to receive
payment upon liquidation and could have the effect of delaying, deferring or
preventing a change-in-control of the Company. See "-- Delaware Law and Certain
Charter and By-Law Provisions." The Company has no present plans to issue any
shares of Preferred Stock.
 
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
 
     The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder' for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
 
                                       49
<PAGE>   51
 
     The Restated Certificate, which will become effective concurrently with the
closing of this offering, provides for the division of the Board of Directors
into three classes as nearly equal in size as possible with staggered three-year
terms. See "Management." The Restated Certificate also provides that, after the
closing of this offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The Restated
Certificate further provides that special meetings of the stockholders may only
be called by the Chairman of the Board, the President or the Board of Directors.
Under the Company's Bylaws, in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with certain requirements
regarding advance notice to the Company. The foregoing provisions could have the
effect of delaying until the next stockholders' meeting stockholder actions
which are favored by the holders of a majority of the outstanding voting
securities of the Company. These provisions may also discourage another person
or entity from making a tender offer for the Common Stock, because such person
or entity, even if it acquired a majority of the outstanding voting securities
of the Company, would be able to take action as a stockholder (such as electing
new directors or approving a merger) only at a duly called stockholders'
meeting, and not by written consent.
 
     The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or bylaws, as the case may
be, requires a greater percentage. The Restated Certificate and the Bylaws
require the affirmative vote of the holders of at least 75% of the shares of
capital stock of the Company issued and outstanding and entitled to vote to
amend or repeal any of the provisions described in the prior two paragraphs.
 
     The Restated Certificate contains certain provisions permitted under the
General Corporation Law of Delaware relating to the liability of directors. The
provisions eliminate a director's liability for monetary damages for a breach of
fiduciary duty, except in certain circumstances involving wrongful acts, such as
the breach of a director's duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. Further, the Restated
Certificate contains provisions to indemnify the Company's directors and
officers to the fullest extent permitted by the General Corporation Law of
Delaware. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors.
 
                                       50
<PAGE>   52
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this offering, there has been no public market for the securities
of the Company. Upon completion of this offering, based upon the number of
shares outstanding at June 25, 1998, there will be                shares of
Common Stock of the Company outstanding (assuming no exercise of the
Underwriters' over-allotment option or outstanding options of the Company). Of
these shares, the                shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act, except that any shares purchased by "affiliates" of the Company, as that
term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), may generally only be sold in compliance with the limitations of
Rule 144 described below.
 
SALES OF RESTRICTED SECURITIES
 
     The remaining 11,061,824 outstanding shares of Common Stock are owned by
existing stockholders and are deemed "Restricted Shares" under Rule 144. These
shares may not be resold, except pursuant to an effective registration statement
or an applicable exemption from registration. Of these remaining shares,
approximately 809,200 shares of Common Stock will be eligible for sale under
Rules 144 and 701 on the ninety-first day after the effectiveness of this
offering. Stockholders of the Company, holding in the aggregate approximately
10,100,000 shares of Common Stock, have agreed to enter into the Lock-up
Agreements. At the end of the 180-day period, approximately 11,551,000 shares of
Common Stock (including approximately 489,000 shares of Common Stock which may
be acquired upon the exercise of outstanding options) will be eligible for sale
under Rules 144 and 701.
 
     In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year from the later of the date such
Restricted Shares were acquired from the Company and (if applicable) the date
they were acquired from an Affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
in the public market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner and
notice of sale and the availability of public information concerning the
Company. All sales of shares of the Company's Common Stock, including Restricted
Shares, held by Affiliates of the Company must be sold under Rule 144, subject
to the foregoing volume limitations and other restrictions. In addition, under
Rule 144(k), if a period of at least two years has elapsed between the later of
the date restricted securities were acquired from the Company or (if applicable)
the date they were acquired from an Affiliate of the Company, a stockholder who
is not an Affiliate of the Company at the time of sale and has not been an
Affiliate with the Company for at least three months prior to the sale is
entitled to sell the shares immediately without compliance with the foregoing
requirements under Rule 144.
 
     The Company's directors and executive officers and certain of its
stockholders have agreed that they will not, without the prior written consent
of the representatives of the Underwriters, offer to sell, sell, contract to
sell, grant any option to sell or otherwise dispose of or require the Company to
file with the Commission a registration statement under the Securities Act to
register any shares of Common Stock or securities convertible or exchangeable
for shares of Common Stock or warrants or other rights to acquire shares of
Common Stock during the 180-day period following the effective date of the
Registration Statement of which this Prospectus is a part.
 
OPTIONS
 
     The Company plans to file registration statements under the Securities Act
to register an aggregate of approximately 1,900,000 shares of Common Stock
issuable under the 1991 Plan and the Director Plan following the 180th day after
the date of the Registration Statement of which this Prospectus is a part. Upon
registration, such shares will be eligible for immediate resale upon
 
                                       51
<PAGE>   53
 
exercise, subject, in the case of Affiliates, to the volume, manner of sale and
notice requirements of Rule 144.
 
REGISTRATION RIGHTS
 
     Pursuant to the Third Amended and Restated Registration Rights Agreement
(the "Registration Rights Agreement"), dated as of February 13, 1998, among the
Company and certain persons and entities (the "Rightsholders"), the
Rightsholders will be entitled, following the offering, to certain rights with
respect to the registration under the Securities Act of a total of approximately
9,400,000 shares of Common Stock (the "Registrable Stock"). The Registration
Rights Agreement generally provides that, in the event the Company proposes to
register (the "Registration") any of its securities under the Securities Act,
the Rightsholders shall be entitled to include Registrable Stock in such
Registration, subject to the right of the managing underwriter of any
underwritten offering to limit for marketing reasons the number of shares of
Registrable Stock included in such "piggyback" registration period.
 
     The Rightsholders may, at any time after one year following the date of the
closing of this offering and upon the request of holders of not less than 35% of
the Registrable Stock then outstanding, require the Company to prepare and file
a registration statement under the Securities Act with respect to their shares
of Registrable Stock. The Company need effect only three such demand
registrations. In addition, at any time after the Company becomes eligible to
file a registration statement on Form S-3 (or any successor form), Rightsholders
may request the Company to effect a registration on Form S-3 of Registrable
Stock having an aggregate offering price of at least $250,000.
 
EFFECT OF SALES OF SHARES
 
     Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market sales
of shares of Common Stock or the availability of shares for sale will have on
the market price of the Common Stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of the Common Stock in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
 
                                       52
<PAGE>   54
 
                                  UNDERWRITING
 
     Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") through their Representatives, BT
Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Piper Jaffray Inc. have severally agreed to purchase from the Company the
following respective numbers of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
 
<TABLE>
<CAPTION>
                                                                 NUMBER
                                                                   OF
UNDERWRITER                                                      SHARES
-----------                                                     --------
<S>                                                             <C>
BT Alex. Brown Incorporated.................................
Merrill Lynch, Pierce, Fenner & Smith
             Incorporated...................................
Piper Jaffray Inc...........................................
                                                                --------
          Total.............................................
                                                                ========
</TABLE>
 
     The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
 
     The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $     per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $     per share to certain other dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Representatives of the Underwriters.
 
     The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to
               additional shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to                ,
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the                shares are being offered.
 
     The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities under the Securities Act.
 
     The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
 
     In connection with this offering, the Underwriters and certain other
persons participating in this offering may purchase and sell the Common Stock in
the open market in accordance with Regulation M under the Securities Exchange
Act of 1934, as amended. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in the offering. The
 
                                       53
<PAGE>   55
 
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the securities sold
in the offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock, and as a result, such price may be higher than
the price that might otherwise prevail in the open market. The Underwriters and
such other persons are not required to engage in these activities, and may end
any of these activities at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
 
     Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined by negotiations among the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations will be prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies which the Company and the Representatives of the
Underwriters believe to be comparable to the Company, estimates of the business
potential of the Company, the present state of the Company's development and
other factors deemed relevant. Application has been made for quotation of the
Common Stock on the Nasdaq National Market under the symbol "ASPM."
 
                                 LEGAL MATTERS
 
     The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston, Massachusetts,
and for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. An investment partnership comprised of certain partners of Hale
and Dorr LLP owns an aggregate of 9,107 shares of Common Stock of the Company.
 
                                    EXPERTS
 
     The audited financial statements as of December 31, 1996 and 1997 and for
the years then ended have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
 
     The Company's financial statements for the year ended December 31, 1995
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all amendments,
exhibits, schedules and supplements thereto) on Form S-1 under the Securities
Act with respect to the shares of Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission, to
which Registration Statement reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street,
                                       54
<PAGE>   56
 
Suite 1400, Chicago, Illinois 60661. In addition, the Company is required to
file electronic versions to these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
 
     The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements. The Company also intends
to make available to its stockholders, within 45 days after the end of each
fiscal quarter, reports for the first three quarters of each fiscal year
containing interim unaudited financial information.
 
                                       55
<PAGE>   57
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                             <C>
Report of Arthur Andersen LLP, Independent Public
  Accountants...............................................    F-2
Report of Price Waterhouse LLP, Independent Accountants.....    F-3
Balance Sheets as of December 31, 1996 and 1997, April 4,
  1998 (Unaudited) and Pro Forma April 4, 1998
  (Unaudited)...............................................    F-4
Statements of Operations for the Years Ended December 31,
  1995, 1996, and 1997 and for the Quarters Ended March 29,
  1997 (Unaudited) and April 4, 1998 (Unaudited)............    F-5
Statements of Stockholders' Equity for the Years Ended
  December 31, 1995, 1996 and 1997 and for the Quarter Ended
  April 4, 1998 (Unaudited).................................    F-6
Statements of Cash Flows for the Years Ended December 31,
  1995, 1996, and 1997 and for the Quarters Ended March 29,
  1997 (Unaudited) and April 4, 1998 (Unaudited)............    F-7
Notes to Financial Statements...............................    F-8
</TABLE>
 
                                       F-1
<PAGE>   58
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Aspect Medical Systems, Inc.:
 
     We have audited the accompanying balance sheets of Aspect Medical Systems,
Inc. (a Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aspect Medical Systems, Inc.
as of December 31, 1996 and 1997, and the results of its operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
 
                                          /s/  Arthur Andersen LLP
 
Boston, Massachusetts
March 27, 1998
 
                                       F-2
<PAGE>   59
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders
of Aspect Medical Systems, Inc.
 
     In our opinion, the accompanying statements of operations, of stockholders'
equity and of cash flows present fairly, in all material respects, the results
of operations and cash flows of Aspect Medical Systems, Inc. for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the financial statements of the Company for any
period subsequent to December 31, 1995.
 
/s/  PRICE WATERHOUSE LLP
 
Boston, Massachusetts
July 3, 1996
 
                                       F-3
<PAGE>   60
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                                     PRO FORMA
                                                   DECEMBER 31,    DECEMBER 31,      APRIL 4,      APRIL 4, 1998
                                                       1996            1997            1998          (NOTE 2)
                                                   ------------    ------------    ------------    -------------
                                                                                   (UNAUDITED)      (UNAUDITED)
<S>                                                <C>             <C>             <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents......................  $  1,353,920    $    368,507    $  6,277,269    $  6,277,269
  Marketable securities..........................       876,741       4,612,462       6,928,438       6,928,438
  Accounts receivable, net of allowance of
    $50,000, $62,400 and $62,400 at December 31,
    1996, 1997 and April 4, 1998, respectively...       152,440         719,172       1,176,311       1,176,311
  Investment in sales-type leases................        44,676         136,392         264,917         264,917
  Inventory......................................     1,099,837         387,479         482,397         482,397
  Other current assets...........................       137,619         245,962         322,140         322,140
                                                   ------------    ------------    ------------    ------------
         Total current assets....................     3,665,233       6,469,974      15,451,472      15,451,472
Property and equipment, net......................       208,984         923,559       1,584,732       1,584,732
Investment in sales-type leases..................        98,864         209,074         420,076         420,076
                                                   ------------    ------------    ------------    ------------
         Total assets............................  $  3,973,081    $  7,602,607    $ 17,456,280    $ 17,456,280
                                                   ============    ============    ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of capital lease obligations...  $    429,871    $    154,906    $    143,987    $    143,987
  Accounts payable...............................       659,277       1,119,055       1,112,924       1,112,924
  Accrued liabilities............................       724,331       1,500,591       1,657,041       1,657,041
  Deferred revenue...............................       823,000         643,000       1,588,621       1,588,621
                                                   ------------    ------------    ------------    ------------
         Total current liabilities...............     2,636,479       3,417,552       4,502,573       4,502,573
                                                   ------------    ------------    ------------    ------------
Long-term capital lease obligations..............       270,273         117,680          80,764          80,764
                                                   ------------    ------------    ------------    ------------
Commitments and contingencies (Note 13)
Stockholders' equity:
  Preferred Stock, $.01 par value; (pro forma --
    5,000,000 shares authorized, no shares issued
    or outstanding)..............................            --              --              --              --
  Convertible Preferred Stock, $.01 par value;
    18,843,224 shares authorized, 4,207,326,
    7,647,275 and 9,313,509 shares issued and
    outstanding at December 31, 1996 and 1997 and
    April 4, 1998, respectively (liquidation
    preference -- $41,425,301 at April 4, 1998)
    (pro forma -- no shares authorized, issued or
    outstanding).................................    25,891,270      38,726,070      50,351,652              --
  Common Stock, $.01 par value; 14,500,000 shares
    authorized, 93,424, 1,548,027 and 1,548,756
    shares issued and outstanding at December 31,
    1996 and 1997, and April 4, 1998,
    respectively (pro forma -- 40,000,000 shares
    authorized, 10,862,265 shares issued and
    outstanding).................................           934          15,480          15,487         108,622
  Additional paid-in capital.....................        31,096         338,970         339,546      50,598,063
  Notes receivable from employees and
    directors....................................            --        (273,579)       (273,579)       (273,579)
  Unrealized gain (loss) on marketable
    securities...................................          (162)          3,098            (605)           (605)
  Accumulated deficit............................   (24,856,809)    (34,742,664)    (37,559,558)    (37,559,558)
                                                   ------------    ------------    ------------    ------------
         Total stockholders' equity..............     1,066,329       4,067,375      12,872,943      12,872,943
                                                   ------------    ------------    ------------    ------------
         Total liabilities and stockholders'
           equity................................  $  3,973,081    $  7,602,607    $ 17,456,280    $ 17,456,280
                                                   ============    ============    ============    ============
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                       F-4
<PAGE>   61
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,                  QUARTER ENDED
                                           ----------------------------------------   -------------------------
                                                                                       MARCH 29,     APRIL 4,
                                              1995          1996           1997          1997          1998
                                           -----------   -----------   ------------   -----------   -----------
                                                                                      (UNAUDITED)   (UNAUDITED)
<S>                                        <C>           <C>           <C>            <C>           <C>
Revenue..................................  $ 1,067,207   $ 1,388,788   $  3,067,573   $   415,481   $ 1,733,121
Costs and expenses:
  Costs of revenue.......................      704,386     1,095,872      3,601,569       581,868     1,211,205
  Research and development...............    2,870,231     2,338,239      2,603,117       677,574       886,520
  Sales and marketing....................    1,284,880     1,560,635      4,813,505       762,169     1,840,185
  General and administrative.............    1,814,850     1,871,071      2,357,695       618,344       736,210
                                           -----------   -----------   ------------   -----------   -----------
         Total costs and expenses........    6,674,347     6,865,817     13,375,886     2,639,955     4,674,120
                                           -----------   -----------   ------------   -----------   -----------
Loss from operations.....................   (5,607,140)   (5,477,029)   (10,308,313)   (2,224,474)   (2,940,999)
Interest income..........................      145,636       143,675        500,485        77,928       132,884
Interest expense.........................      (84,405)      (63,084)       (78,027)      (19,518)       (8,779)
                                           -----------   -----------   ------------   -----------   -----------
Net loss.................................  $(5,545,909)  $(5,396,438)  $ (9,885,855)  $(2,166,064)  $(2,816,894)
                                           ===========   ===========   ============   ===========   ===========
Net loss per share:
  Basic and diluted......................     $(281.65)      $(57.76)       $(16.23)      $(10.38)       $(2.95)
                                           ===========   ===========   ============   ===========   ===========
  Pro forma basic and diluted............                                    $(1.28)                     $(0.30)
                                                                       ============                 ===========
Shares used in computing net loss per
  share:
  Basic and diluted......................       19,691        93,424        609,026       208,721       956,118
  Pro forma basic and diluted............                                 7,707,188                   9,492,051
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                       F-5
<PAGE>   62
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                               COMMON STOCK                        NOTES
                                   CONVERTIBLE PREFERRED    -------------------                 RECEIVABLE       UNREALIZED
                                           STOCK                                  ADDITIONAL       FROM        GAIN (LOSS) ON
                                  -----------------------                 PAR      PAID-IN       EMPLOYEES       MARKETABLE
                                   SHARES       AMOUNT       SHARES      VALUE     CAPITAL     AND DIRECTORS     SECURITIES
                                  ---------   -----------   ---------   -------   ----------   -------------   --------------
<S>                               <C>         <C>           <C>         <C>       <C>          <C>             <C>
Balance, December 31, 1994......     49,137   $18,384,462       5,306   $    53    $ 11,205      $      --        $(21,561)
 Issuance of common stock.......         --            --      87,952       879      16,691             --              --
 Issuance of Series B-1
   convertible preferred stock,
   net of issuance costs of
   approximately $80,000........  2,075,042     4,069,909          --        --          --             --              --
 Issuance of anti-dilution
   shares.......................    357,761            --          --        --          --             --              --
 Issuance of common stock upon
   exercise of common stock
   options......................         --            --         166         2       3,200             --              --
 Change in unrealized gain
   (loss) on marketable
   securities...................         --            --          --        --          --             --          23,905
 Net loss.......................         --            --          --        --          --             --              --
                                  ---------   -----------   ---------   -------    --------      ---------        --------
Balance, December 31, 1995......  2,481,940    22,454,371      93,424       934      31,096             --           2,344
 Issuance of Series B-1
   convertible preferred stock,
   net of issuance costs of
   approximately $14,000........  1,725,386     3,436,899          --        --          --             --              --
 Change in unrealized gain
   (loss) on marketable
   securities...................         --            --          --        --          --             --          (2,506)
 Net loss.......................         --            --          --        --          --             --              --
                                  ---------   -----------   ---------   -------    --------      ---------        --------
Balance, December 31, 1996......  4,207,326    25,891,270      93,424       934      31,096             --            (162)
 Issuance of Series C
   convertible preferred stock,
   net of issuance costs of
   approximately $61,000........  3,439,949    12,834,800          --        --          --             --              --
 Issuance of common stock upon
   exercise of common stock
   options......................         --            --   1,454,603    14,546     307,874       (273,579)             --
 Change in unrealized gain
   (loss) on marketable
   securities...................         --            --          --        --          --             --           3,260
 Net loss.......................         --            --          --        --          --             --              --
                                  ---------   -----------   ---------   -------    --------      ---------        --------
Balance, December 31, 1997......  7,647,275    38,726,070   1,548,027    15,480     338,970       (273,579)          3,098
 Issuance of Series D
   convertible preferred stock,
   net of issuance costs of
   approximately $38,000
   (unaudited)..................  1,666,234    11,625,582          --        --          --             --              --
 Issuance of common stock upon
   exercise of common stock
   options(unaudited)...........         --            --         729         7         576             --              --
 Change in unrealized gain
   (loss) on marketable
   securities(unaudited)........         --            --          --        --          --             --          (3,703)
 Net loss(unaudited)............         --            --          --        --          --             --              --
                                  ---------   -----------   ---------   -------    --------      ---------        --------
Balance, April 4, 1998
 (unaudited)....................  9,313,509   $50,351,652   1,548,756   $15,487    $339,546      $(273,579)       $   (605)
                                  =========   ===========   =========   =======    ========      =========        ========
 
<CAPTION>
 
                                                     TOTAL
                                  ACCUMULATED    STOCKHOLDERS'
                                    DEFICIT         EQUITY
                                  ------------   -------------
<S>                               <C>            <C>
Balance, December 31, 1994......  $(13,914,462)   $ 4,459,697
 Issuance of common stock.......            --         17,570
 Issuance of Series B-1
   convertible preferred stock,
   net of issuance costs of
   approximately $80,000........            --      4,069,909
 Issuance of anti-dilution
   shares.......................            --             --
 Issuance of common stock upon
   exercise of common stock
   options......................            --          3,202
 Change in unrealized gain
   (loss) on marketable
   securities...................            --         23,905
 Net loss.......................    (5,545,909)    (5,545,909)
                                  ------------    -----------
Balance, December 31, 1995......   (19,460,371)     3,028,374
 Issuance of Series B-1
   convertible preferred stock,
   net of issuance costs of
   approximately $14,000........            --      3,436,899
 Change in unrealized gain
   (loss) on marketable
   securities...................            --         (2,506)
 Net loss.......................    (5,396,438)    (5,396,438)
                                  ------------    -----------
Balance, December 31, 1996......   (24,856,809)     1,066,329
 Issuance of Series C
   convertible preferred stock,
   net of issuance costs of
   approximately $61,000........            --     12,834,800
 Issuance of common stock upon
   exercise of common stock
   options......................            --         48,841
 Change in unrealized gain
   (loss) on marketable
   securities...................            --          3,260
 Net loss.......................    (9,885,855)    (9,885,855)
                                  ------------    -----------
Balance, December 31, 1997......   (34,742,664)     4,067,375
 Issuance of Series D
   convertible preferred stock,
   net of issuance costs of
   approximately $38,000
   (unaudited)..................            --     11,625,582
 Issuance of common stock upon
   exercise of common stock
   options(unaudited)...........            --            583
 Change in unrealized gain
   (loss) on marketable
   securities(unaudited)........            --         (3,703)
 Net loss(unaudited)............    (2,816,894)    (2,816,894)
                                  ------------    -----------
Balance, April 4, 1998
 (unaudited)....................  $(37,559,558)   $12,872,943
                                  ============    ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                       F-6
<PAGE>   63
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,                 QUARTER ENDED
                                             ---------------------------------------   -------------------------
                                                                                        MARCH 29,     APRIL 4,
                                                1995          1996          1997          1997          1998
                                             -----------   -----------   -----------   -----------   -----------
                                                                                       (UNAUDITED)   (UNAUDITED)
<S>                                          <C>           <C>           <C>           <C>           <C>
Cash flows from operating activities:
  Net loss.................................  $(5,545,909)  $(5,396,438)  $(9,885,855)  $(2,166,064)  $(2,816,894)
  Adjustments to reconcile net loss to net
    cash used for operating activities --
    Depreciation and amortization..........      575,373       189,378       192,571        59,336        49,195
    Provision for doubtful accounts........           --        43,000        14,333            --            --
    Changes in assets and liabilities --
      Increase in accounts receivable......     (188,004)      (92,990)     (437,525)     (143,780)     (457,139)
      (Increase) decrease in inventory.....         (214)       61,193       763,483       (88,637)      (94,918)
      Decrease (increase) in other current
        assets.............................      121,764       (60,628)     (108,343)      (76,651)      (76,178)
      Increase in investment in sales-type
        leases.............................           --            --      (345,466)      (21,700)     (339,527)
      (Decrease) increase in accounts
        payable............................     (100,281)      493,575       459,778       131,812        (6,131)
      Increase (decrease) in accrued
        liabilities........................      454,407        (4,385)      776,260       247,242       156,450
      (Decrease) increase in deferred
        revenue............................     (121,717)      814,717      (180,000)      (65,000)      945,621
                                             -----------   -----------   -----------   -----------   -----------
        Net cash used for operating
          activities.......................   (4,804,581)   (3,952,578)   (8,750,764)   (2,123,442)   (2,639,521)
                                             -----------   -----------   -----------   -----------   -----------
Cash flows from investing activities:
  Acquisition of property and equipment....     (272,270)     (622,384)     (958,271)      (58,000)     (710,368)
  Purchases of marketable securities.......     (347,820)  (23,953,144)  (65,379,625)  (35,364,584)  (38,945,965)
  Proceeds from sales of marketable
    securities.............................    2,800,052    24,045,377    61,647,164    33,395,455    36,626,286
                                             -----------   -----------   -----------   -----------   -----------
        Net cash provided by (used for)
          investing activities.............    2,179,962      (530,151)   (4,690,732)   (2,027,129)   (3,030,047)
                                             -----------   -----------   -----------   -----------   -----------
Cash flows from financing activities:
  Principal payments on capital lease
    obligations............................     (206,646)     (287,616)     (427,558)     (109,400)      (47,835)
  Proceeds from sale leaseback of property
    and equipment..........................      238,996       330,291            --            --            --
  Proceeds received from issuance of
    convertible notes......................      500,000            --            --            --            --
  Proceeds from issuance of convertible
    preferred stock, net of stock issuance
    costs..................................    3,569,909     3,436,899    12,834,800    12,688,714    11,625,582
  Proceeds from issuance of common stock...       20,772            --        48,841        52,582           583
                                             -----------   -----------   -----------   -----------   -----------
        Net cash provided by financing
          activities.......................    4,123,031     3,479,574    12,456,083    12,631,896    11,578,330
                                             -----------   -----------   -----------   -----------   -----------
Net increase (decrease) in cash and cash
  equivalents..............................    1,498,412    (1,003,155)     (985,413)    8,481,325     5,908,762
Cash and cash equivalents, beginning of
  period...................................      858,663     2,357,075     1,353,920     1,353,920       368,507
                                             -----------   -----------   -----------   -----------   -----------
Cash and cash equivalents, end of period...  $ 2,357,075   $ 1,353,920   $   368,507   $ 9,835,245   $ 6,277,269
                                             ===========   ===========   ===========   ===========   ===========
Supplemental disclosure of cash flow
  information:
  Interest paid............................  $   209,404   $    59,000   $    78,000   $    17,000   $    10,000
                                             ===========   ===========   ===========   ===========   ===========
Supplemental disclosure of noncash
  financing activities:
  Capital lease obligations totaling
    $239,000 and $367,000, including sale
    leaseback transactions, were incurred
    during 1995 and 1996, respectively.
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                       F-7
<PAGE>   64
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
(1)  DESCRIPTION OF OPERATIONS
 
     Aspect Medical Systems, Inc. (the "Company") develops, manufactures and
markets anesthesia monitoring systems that enable anesthesia providers to assess
levels of consciousness and administer the appropriate amount of anesthetics
during surgery. The BIS System incorporates the Company's proprietary disposable
BIS Sensors and the A-2000 BIS Monitor, which was cleared for marketing by the
United States Food and Drug Administration (the "FDA") in February 1998. The BIS
System is based on Aspect's patented core technology, the Bispectral Index (the
"BIS index"), which is the only FDA cleared, commercially available direct
measure of the effects of anesthesia on the brain.
 
     The Company incurred net losses of $5,545,909, $5,396,438 and $9,885,855
for the years ended December 31, 1995, 1996 and 1997, respectively, and at April
4, 1998 had an accumulated deficit of $37,559,558. Principal risks that may
affect the business, results of operations and financial condition of the
Company include market acceptance of the Company's technology and products,
limited sales and marketing experience, the reliance on a single product family,
manufacturing risks, the dependence on single source or limited suppliers,
technological risks and other risks.
 
(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     A summary of the significant accounting policies used by the Company in the
preparation of its financial statements are as follows:
 
  Interim Financial Statements
 
     The accompanying balance sheet as of April 4, 1998, statements of
operations and cash flows for the quarters ended March 29, 1997 and April 4,
1998 and the statement of stockholders' equity for the quarter ended April 4,
1998 are unaudited but, in the opinion of management, include all adjustments
(consisting of normal, recurring adjustments) necessary for a fair presentation
for results of these interim periods. The results of operations for the quarter
ended April 4, 1998 are not necessarily indicative of results to be expected for
the entire year or for any other interim period.
 
  Unaudited Pro Forma Presentation
 
     Under the terms of the Company's agreements with the holders of the
convertible preferred stock, all of such preferred stock will be converted
automatically into shares of common stock upon the closing of the Company's
initial public offering. The unaudited pro forma balance sheet information at
April 4, 1998 reflects the conversion of all series of preferred stock into
9,313,509 shares of common stock as if the conversion occurred on April 4, 1998.
 
  Cash, Cash Equivalents and Marketable Securities
 
     The Company invests its excess cash in money market accounts, U.S. Treasury
bills, high grade commercial paper, and debt obligations of various government
agencies. The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
 
     The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115, the
Company has classified all of its investments as available-for-sale at December
31, 1996 and 1997, respectively. The securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity.
                                       F-8
<PAGE>   65
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
  Revenue Recognition
 
     Revenue from equipment sales, disposable product sales and sales-type
leases are recognized at the time of shipment. Payments received prior to
shipment are recorded as deferred revenue. The Company has entered into certain
licensing and distribution agreements for which payments received in advance are
recorded as deferred revenue. Revenue is recognized as earned per the terms of
the respective agreements. The Company provides for the cost of warranty at the
time of product shipment.
 
  Inventory
 
     Inventory is valued at the lower of cost or estimated market, cost being
determined on a first-in, first-out basis.
 
  Property and Equipment
 
     Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related equipment.
Equipment held under capital leases is stated at the lower of the fair market
value of the equipment or the present value of the minimum lease payments at the
inception of the lease and is amortized on a straight-line basis over the
shorter of the lives of the related assets or the term of the leases.
Maintenance and repair expenditures are charged to expense as incurred.
 
  Income Taxes
 
     The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences, utilizing
currently enacted tax rates, of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Deferred tax assets are
recognized, net of any valuation allowance, for the estimated future tax effects
of deductible temporary differences and tax operating loss and credit
carryforwards.
 
  Concentration of Credit Risk, Significant Customer and Single or Limited
Source Suppliers
 
     Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable, investment in
sales-type lease receivables and investments. To minimize the risk with respect
to accounts receivable and investment in sales-type lease receivables, the
Company maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. The Company maintains
cash, cash equivalents and investments with various financial institutions. The
Company performs periodic evaluations of the relative credit quality of
investments and Company policy is designed to limit exposure to any one
institution or type of investment. The primary objective of the Company's
investment strategy is the safety of the principal invested.
 
     At December 31, 1996 and 1997 and April 4, 1998, accounts receivable from
the Company's international distributor accounted for approximately 8%, 19% and
22%, respectively, of the total amounts due to the Company. For the years ended
December 31, 1995, 1996 and 1997, sales to this customer accounted for
approximately 47%, 49% and 35%, respectively, of the Company's total revenue.
For the quarter ended April 4, 1998, sales to this customer accounted for
approximately 14% of total revenue. Effective July 1, 1998, this customer will
no longer distribute the Company's monitors.
 
                                       F-9
<PAGE>   66
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
     The Company currently obtains certain key components of its products from
single or limited sources. The Company purchases components pursuant to purchase
orders rather than long-term supply agreements. The Company has experienced
shortages and delays in obtaining certain components of its products in the
past. There can be no assurance that the Company will not experience similar
delays or shortages in the future. The disruption or termination of the supply
of components or a significant increase in the costs of these components from
these sources could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
  Comprehensive Income
 
     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 did
not have a material effect on the Company's financial statements, as the only
element of comprehensive income impacting the Company is the unrealized gain
(loss) on marketable securities.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  Fair Value of Financial Instruments
 
     The estimated fair market values of the Company's financial instruments,
which include marketable securities, accounts receivable, investment in
sales-type leases, accounts payable and capital lease obligations, approximate
their carrying values.
 
(3)  CASH EQUIVALENTS AND MARKETABLE SECURITIES
 
     Cash and cash equivalents consist of the following:
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                               ----------------------     APRIL 4,
                                                  1996         1997         1998
                                               ----------    --------    -----------
                                                                         (UNAUDITED)
<S>                                            <C>           <C>         <C>
Cash.........................................  $  369,566    $131,757    $  278,642
U.S. Government debt securities..............     280,036     236,750       368,497
Corporate debt securities....................     704,318          --     5,630,130
                                               ----------    --------    ----------
                                               $1,353,920    $368,507    $6,277,269
                                               ==========    ========    ==========
</TABLE>
 
                                      F-10
<PAGE>   67
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
     Available-for-sale securities included in marketable securities at December
31, 1996 and 1997 and April 4, 1998 consist of the following:
 
<TABLE>
<CAPTION>
                                          AMORTIZED     UNREALIZED    UNREALIZED       FAIR
                                             COST         GAINS         LOSSES        VALUE
                                          ----------    ----------    ----------    ----------
<S>                                       <C>           <C>           <C>           <C>
December 31, 1996 --
  U.S. Government debt securities.......  $  220,929      $   --        $  --       $  220,929
  Corporate debt securities.............     405,974          --         (162)         405,812
  Municipal notes.......................     250,000          --           --          250,000
                                          ----------      ------        -----       ----------
                                          $  876,903      $   --        $(162)      $  876,741
                                          ==========      ======        =====       ==========
December 31, 1997 --
  U.S. Government debt securities.......  $   99,187      $   --        $  --       $   99,187
  Corporate debt securities.............   4,010,177       3,098           --        4,013,275
  Municipal notes.......................     500,000          --           --          500,000
                                          ----------      ------        -----       ----------
                                          $4,609,364      $3,098        $  --       $4,612,462
                                          ==========      ======        =====       ==========
April 4, 1998 -- (unaudited)
  U.S. Government debt securities
     (weighted average maturity of 19
     months)............................  $1,003,960      $   --        $  --       $1,003,960
  Corporate debt securities (weighted
     average maturity of 11 months).....   5,124,758          --         (605)       5,124,153
  Municipal notes (weighted average
     maturity of 11 months).............     800,325          --           --          800,325
                                          ----------      ------        -----       ----------
                                          $6,929,043      $   --        $(605)      $6,928,438
                                          ==========      ======        =====       ==========
</TABLE>
 
     Gross realized gains and losses on the sales of investments have not been
material to the Company's financial statements.
 
(4)  INVESTMENT IN SALES-TYPE LEASES
 
     The Company leases equipment to customers under sales-type leases. The
components of the Company's net investment in sales-type leases are as follows:
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,     APRIL 4,
                                                               1997           1998
                                                           ------------    -----------
                                                                           (UNAUDITED)
<S>                                                        <C>             <C>
Total minimum lease payments receivable..................    $505,474       $939,854
  Less -- unearned interest..............................     160,008        254,861
                                                             --------       --------
Net investment in sales-type leases......................     345,466        684,993
  Less -- current portion................................     136,392        264,917
                                                             --------       --------
                                                             $209,074       $420,076
                                                             ========       ========
</TABLE>
 
                                      F-11
<PAGE>   68
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
     Future minimum lease payments due under noncancelable leases as of December
31, 1997 are as follows:
 
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S>                                                             <C>
1998........................................................    $222,565
1999........................................................     165,443
2000........................................................      79,455
2001........................................................      21,554
2002........................................................      16,457
                                                                --------
                                                                $505,474
                                                                ========
</TABLE>
 
(5)  INVENTORY
 
     Inventory consists of the following:
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                               ----------------------     APRIL 4,
                                                  1996         1997         1998
                                               ----------    --------    -----------
                                                                         (UNAUDITED)
<S>                                            <C>           <C>         <C>
Raw materials................................  $  363,205    $322,636     $140,212
Work-in-progress.............................      59,928          --        2,229
Finished goods...............................     676,704      64,843      339,956
                                               ----------    --------     --------
                                               $1,099,837    $387,479     $482,397
                                               ==========    ========     ========
</TABLE>
 
(6)  PROPERTY AND EQUIPMENT
 
     Property and equipment consist of the following:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                     USEFUL LIFE           ----------------------    APRIL 4,
                                       IN YEARS              1996         1997         1998
                              --------------------------   ---------   ----------   -----------
                                                                                    (UNAUDITED)
<S>                           <C>                          <C>         <C>          <C>
Computer equipment..........              3                $ 454,414   $  707,071   $1,059,604
Construction in progress....              --                      --      490,194      746,200
Machinery and equipment.....              3                       --      152,735      238,934
Furniture and fixtures......              3                  123,039      133,114      148,744
                              Shorter of the life of the
                                lease or the estimated
Leasehold improvements......    remaining useful life             --        1,485        1,485
                                                           ---------   ----------   ----------
                                                             577,453    1,484,599    2,194,967
Accumulated depreciation and
  amortization..............                                (368,469)    (561,040)    (610,235)
                                                           ---------   ----------   ----------
                                                           $ 208,984   $  923,559   $1,584,732
                                                           =========   ==========   ==========
</TABLE>
 
     At December 31, 1996, 1997 and April 4, 1998, property and equipment held
under capital leases totaled approximately $521,651. Accumulated amortization of
these assets totaled approximately $365,515 and $458,988 at December 31, 1996
and 1997, respectively, and $475,052 at April 4, 1998.
 
     During 1995 and 1996, the Company entered into sale-leaseback transactions.
The Company received proceeds of approximately $239,000 and $330,000 during 1995
and 1996, respectively,
 
                                      F-12
<PAGE>   69
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
from the sale of these assets. No gain was recorded during 1995 as the net book
value of the assets sold approximated the proceeds received. A gain of
approximately $99,000 relating to the sale-leaseback transaction was deferred in
1996 and is being amortized over the term of the respective lease.
 
(7)  INCOME TAXES
 
     Deferred income tax assets consist of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                       ----------------------------
                                                           1996            1997
                                                       ------------    ------------
<S>                                                    <C>             <C>
Net operating loss carryforwards.....................  $  9,009,000    $ 12,254,000
Tax credit carryforwards.............................     1,038,000       1,119,000
Other................................................       315,000         782,000
                                                       ------------    ------------
     Gross deferred tax assets.......................    10,362,000      14,155,000
     Valuation allowance.............................   (10,362,000)    (14,155,000)
                                                       ------------    ------------
     Net deferred tax asset..........................  $         --    $         --
                                                       ============    ============
</TABLE>
 
     The Company has provided a full valuation allowance against its gross
deferred tax assets at December 31, 1996 and 1997 because the future
realizability of such asset is uncertain. Should the Company achieve
profitability in the future, various components of the gross deferred tax assets
would be available to offset future income tax liabilities and expenses.
 
     The Company has net operating loss and research and development tax credit
carryforwards for federal income tax purposes of approximately $30,430,000 and
$1,119,000, respectively, at December 31, 1997 that will expire commencing in
the year 2002 through the year 2012 if not utilized.
 
     The net operating loss and research and development tax credit
carryforwards are subject to review by the Internal Revenue Service. Ownership
changes, as defined in the Internal Revenue Code, may limit the amount of these
tax attributes that can be utilized annually to offset future taxable income or
tax liabilities. The amount of the annual limitation is determined based on the
Company's value immediately prior to the ownership change. Subsequent ownership
changes may further affect the limitation in future years.
 
(8)  STOCKHOLDERS' EQUITY
 
  Authorized Capital Stock
 
     As of December 31, 1997, the Company's authorized capital stock consisted
of 10,600,000 shares of common stock, $.01 par value, and 7,707,326 shares of
preferred stock, $.01 par value. Of the 7,707,326 shares of preferred stock,
406,898 shares are designated Series A-1 convertible preferred stock, 3,800,428
shares are designated Series B-1 convertible preferred stock and 3,500,000
shares are designated Series C convertible preferred stock.
 
     In February 1998, the Company restated its certificate of incorporation. As
a result, the authorized capital stock increased to 14,500,000 shares of common
stock, $.01 par value, and 18,843,224 shares of preferred stock, $.01 par value.
Of the 18,843,224 shares of preferred stock, 406,898 shares are designated
Series A-1 convertible preferred stock, 3,800,428 shares are designated Series
B-1 convertible preferred stock, 3,500,000 shares are designated Series C
convertible preferred stock, 1,714,286 shares are designated Series D
convertible preferred stock, 406,898 shares are designated Series A-2
convertible preferred stock, 3,800,428 shares are designated
 
                                      F-13
<PAGE>   70
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
Series B-2 convertible preferred stock, 3,500,000 shares are designated Series
C-2 convertible preferred stock and 1,714,286 shares are designated Series D-2
convertible preferred stock.
 
     Upon the closing of the Company's initial public offering, the authorized
capital stock of the Company will consist of 40,000,000 shares of common stock
and 5,000,000 shares of preferred stock, the terms of which will not be
designated.
 
  Convertible Preferred Stock
 
     Convertible preferred stock outstanding consists of the following:
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                    -------------------------    APRIL 4,
                                                       1996          1997          1998
                                                    -----------   -----------   -----------
                                                                                (UNAUDITED)
<S>                                                 <C>           <C>           <C>
Series A-1 convertible preferred stock; 406,898
  shares issued and outstanding, at issuance
  price, net of issuance costs....................  $18,384,462   $18,384,462   $18,384,462
Series B-1 convertible preferred stock; 3,800,428
  shares issued and outstanding, at issuance
  price, net of issuance costs....................    7,506,808     7,506,808     7,506,808
Series C convertible preferred stock; 3,439,949
  shares issued and outstanding, at issuance
  price, net of issuance costs....................           --    12,834,800    12,834,800
Series D convertible preferred stock; 1,666,234
  shares issued and outstanding, at issuance
  price, net of issuance costs....................           --            --    11,625,582
                                                    -----------   -----------   -----------
                                                    $25,891,270   $38,726,070   $50,351,652
                                                    ===========   ===========   ===========
</TABLE>
 
     In November 1995 and June 1996, the Company sold 2,075,042 and 1,725,386
shares, respectively, of Series B-1 convertible preferred stock in a private
placement, for total net proceeds of $7,506,808 including the conversion of
$500,000 of notes payable to certain stockholders that were issued in 1995. As a
result of anti-dilution provisions associated with this transaction and an
associated recapitalization of the Company, certain preferred stockholders
received an additional 357,761 shares of Series A-1 convertible preferred stock.
 
     In 1997, the Company issued 3,439,949 shares of Series C convertible
preferred stock for net proceeds of $12,834,800.
 
     In February 1998, the Company issued 1,666,234 shares of Series D
convertible preferred stock for net proceeds of $11,625,582.
 
     The rights and preferences of the Company's convertible preferred stock are
as follows:
 
  Voting Rights
 
     Except as set forth in the Certificate of Incorporation, the holders of the
preferred stock vote together with the holders of common stock as a single class
on all matters. Each preferred stockholder is entitled to the number of votes
equal to the number of whole shares of common stock into which such
stockholder's shares are convertible.
 
                                      F-14
<PAGE>   71
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
  Conversion
 
     Each preferred share is convertible into common stock at the option of the
stockholder or automatically upon the closing of a public offering of the
Company's common stock at a price per common share equal to or exceeding $12.00,
and that results in gross proceeds to the Company of at least $20,000,000. The
number of shares of common stock into which holders of the preferred stock shall
be entitled upon conversion is one-for-one, subject to adjustment for certain
dilutive events.
 
  Liquidation, Dissolution or Winding Up of the Company
 
     In the event of any liquidation, dissolution or winding up of the Company,
the Series A-1 convertible preferred stockholders will receive $22.76 per share,
the Series B-1 convertible preferred stockholders will receive $2.00 per share,
the Series C convertible preferred stockholders will receive $3.75 per share and
the Series D convertible preferred stockholders will receive $7.00 per share. In
the case where the remaining assets of the Company available for distribution
are insufficient to pay the preferred stockholders the full amount they are
entitled to, the preferred stockholders shall share ratably in any distribution
of the assets. Any amounts available after these distributions are to be
distributed to the holders of common stock.
 
  Dividends
 
     The holders of the preferred stock are entitled to dividends when and if
declared by the Board of Directors.
 
  Common Stock
 
     At April 4, 1998, the Company has reserved approximately 9,313,509 shares
of common stock for issuance upon conversion of the preferred stock and
2,098,821 shares of common stock for issuance upon the exercise of stock options
under the Company's stock option plans (see Note 9).
 
(9)  STOCK OPTION PLANS
 
  1991 Restated Stock Option Plan
 
     The Company's 1991 Restated Stock Option Plan provides for the granting, at
the discretion of the Board of Directors, of options for the purchase of up to
3,460,000 shares of common stock to employees, directors and advisors. Option
prices are determined by the Board of Directors. As of April 4, 1998, 873,746
shares of Common Stock remained available for future option grants.
 
                                      F-15
<PAGE>   72
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
     A summary of plan activity is as follows:
 
<TABLE>
<CAPTION>
                                                                                   WEIGHTED
                                                 NUMBER OF     OPTION PRICE     AVERAGE OPTION
                                                   SHARES        PER SHARE      PRICE PER SHARE
                                                 ----------   ---------------   ---------------
<S>                                              <C>          <C>               <C>
Outstanding, December 31, 1994.................      14,151   $16.67 - $45.83       $31.02
  Granted......................................   1,106,532      .20 -  45.83          .22
  Exercised....................................        (166)   16.67 -  45.83        16.91
  Canceled.....................................     (14,507)   16.67 -  45.83        34.78
                                                 ----------   ---------------       ------
Outstanding, December 31, 1995.................   1,106,010      .20 -  45.83          .32
  Granted......................................     451,002               .20          .20
  Exercised....................................          --                --
  Canceled.....................................        (939)              .20          .20
                                                 ----------   ---------------       ------
Outstanding, December 31, 1996.................   1,556,073      .20 -  45.83          .28
  Granted......................................   1,046,532      .20 -    .80          .66
  Exercised....................................  (1,460,450)     .20 -   .375          .22
  Canceled.....................................     (71,529)     .20 -   .375          .20
                                                 ----------   ---------------       ------
Outstanding, December 31, 1997.................   1,070,626      .20 -  45.83          .74
  Granted (unaudited)..........................      65,281               .80          .80
  Exercised (unaudited)........................        (729)              .80          .80
  Canceled (unaudited).........................     (10,103)              .80          .51
                                                 ----------   ---------------       ------
Outstanding, April 4, 1998 (unaudited).........   1,125,075     $.20 - $45.83       $  .74
                                                 ==========   ===============       ======
Exercisable, April 4, 1998 (unaudited).........     382,888     $.20 - $45.83       $  .85
                                                 ==========   ===============       ======
</TABLE>
 
     During 1997, employees and directors exercised stock options to purchase an
aggregate of 1,407,970 shares of restricted common stock. The shares are subject
to repurchase by the Company, at prices ranging from $.20 to $.375 per share.
The payment for the restricted common stock was in the form of cash of $38,735
and full recourse notes of $273,579 payable to the Company.
 
     At April 4, 1998, options for 228,612 shares, of which 153,198 are
exercisable, at an exercise price of $.20 are outstanding; options for 120,500
shares, of which 27,554 are exercisable, at an exercise price of $.375 are
outstanding; options for 771,081 shares, of which 197,254 are exercisable, at an
exercise price of $.80 are outstanding; options for 3,357 shares, all of which
are exercisable, at an exercise price of $16.67 are outstanding; and options for
1,525 shares, all of which are exercisable, at an exercise price of $45.83 are
outstanding. The remaining weighted average maturity of options outstanding is
approximately 9.15 years.
 
     In April 1998, the Company granted options to purchase 163,365 shares of
common stock at an exercise price of $2.80 per share. In June 1998, the Company
granted options to purchase 125,000 and 63,150 shares of common stock at
exercise prices of $7.00 and $11.05 per share, respectively. In connection with
certain of these grants, the Company recorded deferred compensation of
approximately $744,000 which represented the difference between the estimated
fair market value of the common stock and the exercise price of the options.
This deferred compensation will be recognized as compensation expense over the
vesting term of the options.
 
     In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value
 
                                      F-16
<PAGE>   73
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
of stock options or warrants to be included in the statement of income or
disclosed in the notes to financial statements. The Company has determined that
it will continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. The Company has computed the value of options
granted in 1995, 1996 and 1997 using the Black-Scholes option-pricing model
prescribed by SFAS No. 123. The following table shows the weighted average
assumptions used in the applicable periods and the weighted average fair market
value of the options granted in each period.
 
<TABLE>
<CAPTION>
                                                                           QUARTER ENDED
                                      YEAR ENDED DECEMBER 31,         -----------------------
                                -----------------------------------   MARCH 29,     APRIL 4,
                                  1995         1996         1997         1997         1998
                                ---------   ----------   ----------   ----------   ----------
<S>                             <C>         <C>          <C>          <C>          <C>
Risk-free interest rate.......  5.9%-6.2%    6.4%-6.8%   6.5%-6.75%    6.4%-6.8%   6.5%-6.75%
Expected dividend yield.......         --           --           --           --           --
Expected life.................    7 years      7 years      7 years      7 years      7 years
Expected volatility...........         60%          60%          60%          60%          60%
Weighted average fair market
  value of options granted....  $     .16   $      .15   $      .48   $      .15   $      .58
</TABLE>
 
    Had compensation cost for these options been determined consistent with SFAS
No. 123, the Company's net loss and pro forma net loss per common share would
have been increased to the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                                                QUARTER ENDED
                                       YEAR ENDED DECEMBER 31,            -------------------------
                               ----------------------------------------    MARCH 29,     APRIL 4,
                                  1995          1996           1997          1997          1998
                               -----------   -----------   ------------   -----------   -----------
                                                                          (UNAUDITED)   (UNAUDITED)
<S>                            <C>           <C>           <C>            <C>           <C>
Net loss
  As reported................  $(5,545,909)  $(5,396,438)  $ (9,885,855)  $(2,166,064)  $(2,816,894)
                               ===========   ===========   ============   ===========   ===========
  Pro forma..................  $(5,590,110)  $(5,457,382)  $(10,073,236)  $(2,212,909)  $(2,873,309)
                               ===========   ===========   ============   ===========   ===========
Basic and diluted net loss
  per common share
  As reported................     $(281.65)      $(57.76)       $(16.23)      $(10.38)       $(2.95)
                               ===========   ===========   ============   ===========   ===========
  Pro forma..................     $(283.89)      $(58.42)       $(16.54)      $(10.60)       $(3.01)
                               ===========   ===========   ============   ===========   ===========
Pro forma basic and diluted
  net loss per common share
  As reported................                                    $(1.28)                     $(0.30)
                                                           ============                 ===========
  Pro forma..................                                    $(1.31)                     $(0.30)
                                                           ============                 ===========
</TABLE>
 
     The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Also, because options
vest over several years and the Company expects to grant options in future
years, the above pro forma results of applying the provisions of SFAS No. 123
are not necessarily representative of the pro forma results in future years.
 
                                      F-17
<PAGE>   74
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
  1998 Director Stock Option Plan
 
     In February 1998, the Company adopted the 1998 Director Stock Option Plan
("Director Plan"). Under the terms of this plan, directors of the Company who
are not employees of the Company are eligible to receive nonstatutory options to
purchase shares of common stock. A total of 100,000 shares of common stock may
be issued upon exercise of options under this plan. The initial options granted
under the Director Plan are exercisable as to 50% of the option as of the date
of grant and as to one-sixth of the shares on the first, second and third
anniversaries of the date of grant, provided that the optionee continues to
serve as a director. Additional options granted will be exercisable in three
equal annual installments on each of the first, second and third anniversaries
of the date of grant, provided that the optionee continues to serve as a
director. Options granted under the Director Plan terminate on the earlier of
(i) ten years from the date of grant, or (ii) sixty days after the optionee
ceases to serve as a director. In April 1998, options to purchase 40,000 shares
were granted under this plan at an exercise price of $2.80. In connection with
these grants, the Company recorded deferred compensation of approximately
$56,000 which represented the difference between the estimated fair market value
of the common stock and the exercise price of the options. This deferred
compensation will be recognized as compensation expense over the vesting term of
the options.
 
(10)  NET LOSS PER SHARE
 
     The Company follows Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share. Basic net loss per share represents net loss available
to common stockholders divided by the weighted average number of common shares
outstanding. The Company has excluded all shares of restricted common stock that
are subject to repurchase by the Company from the weighted average number of
common shares outstanding. Diluted net loss per share is the same as basic net
loss per share for the Company, because all stock options and convertible
preferred stock have been excluded from the calculation. Inclusion of stock
issuable pursuant to the exercise of stock options and the conversion of
convertible preferred stock would be antidilutive. Pro forma net loss per share
includes the weighted average common shares outstanding and reflects the
automatic conversion of all convertible preferred stock into common stock upon
completion of the Company's initial public offering based on the original
issuance date using the "if-converted" method.
 
(11)  DISTRIBUTION AND LICENSING AGREEMENTS
 
     The Company has entered into various distribution, licensing and royalty
agreements relating to its monitor products with distributors covering the
international market. These agreements have terms ranging from three to ten
years. In connection with these agreements, approximately $823,000 and $643,000
in revenue was deferred as of December 31, 1996 and 1997, respectively, and
approximately $1,543,000 was deferred as of April 4, 1998. The deferred revenue
relates to prepayments for monitoring systems under minimum purchase obligations
and also includes prepaid license and royalty fees. The deferred revenue will be
recognized upon product shipment and as license and royalty fees are earned.
License and royalty fees are related to future technological developments and
will be recognized upon shipment of units incorporating this technology.
 
                                      F-18
<PAGE>   75
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
(12)  401(K) SAVINGS PLAN
 
     The Company has a 401(k) savings plan in which substantially all employees
can participate. Employer contributions are at the discretion of the Board of
Directors and vest ratably over five years. The Company made no contributions to
the plan during the years ended December 31, 1995, 1996 and 1997.
 
(13)  COMMITMENTS AND CONTINGENCIES
 
  Leases
 
     The Company leases office space under an operating lease and certain
equipment under capital leases. Rent expense was approximately $328,000,
$335,000 and $346,000 in 1995, 1996 and 1997, respectively. Future gross minimum
lease commitments as of December 31, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                       OPERATING LEASES    CAPITAL LEASES
                                                       ----------------    --------------
<S>                                                    <C>                 <C>
1998.................................................     $  406,298          $169,016
1999.................................................        397,528           135,960
2000.................................................        331,273                --
                                                          ----------          --------
Total minimum lease payments.........................     $1,135,099           304,976
                                                          ==========
Less -- Amount representing interest.................                           32,390
                                                                              --------
Present value of obligations under capital leases....                          272,586
Less -- Current portion..............................                          154,906
                                                                              --------
                                                                              $117,680
                                                                              ========
</TABLE>
 
  Subleases
 
     During 1995, 1996 and 1997, the Company had a sublease agreement whereby a
portion of existing office space was leased to a third party under an operating
lease. Rental income for 1995, 1996 and 1997 approximated $15,000, $129,000 and
$113,000, respectively. This agreement expired in 1997.
 
(14)  OTHER RELATED PARTY TRANSACTIONS
 
     In addition to the transactions discussed in Note 9, during 1997 the
Company loaned a total of $107,000 to certain employees of the Company. The
loans are evidenced by promissory notes bearing interest with rates ranging from
6.42% to 8% per annum. At December 31, 1997, the outstanding balance on these
notes was approximately $105,000.
 
(15)  ACCRUED LIABILITIES
 
     Accrued liabilities consist of the following:
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                               ----------------------     APRIL 4,
                                                 1996         1997          1998
                                               --------    ----------    -----------
                                                                         (UNAUDITED)
<S>                                            <C>         <C>           <C>
Payroll and payroll-related..................  $ 80,163    $  375,121    $  277,168
Other........................................   644,168     1,125,470     1,379,873
                                               --------    ----------    ----------
                                               $724,331    $1,500,591    $1,657,041
                                               ========    ==========    ==========
</TABLE>
 
                                      F-19
<PAGE>   76
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
(16)  FINANCIAL INFORMATION BY GEOGRAPHIC AREA
 
     Revenues by geographic destination and as a percentage of total revenues
are as follows:
 
<TABLE>
<CAPTION>
                              YEAR ENDED DECEMBER 31,                     QUARTER ENDED
                       --------------------------------------    -------------------------------
                          1995          1996          1997       MARCH 29, 1997    APRIL 4, 1998
                       ----------    ----------    ----------    --------------    -------------
                                                                  (UNAUDITED)       (UNAUDITED)
<S>                    <C>           <C>           <C>           <C>               <C>
GEOGRAPHIC AREA BY
DESTINATION
  Domestic...........  $  563,857    $  699,362    $1,881,409       $273,919        $1,496,358
  International......     503,350       689,426     1,186,164        141,562           236,763
                       ----------    ----------    ----------       --------        ----------
                       $1,067,207    $1,388,788    $3,067,573       $415,481        $1,733,121
                       ==========    ==========    ==========       ========        ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,               QUARTER ENDED
                                      -------------------------     --------------------------------
                                      1995      1996      1997      MARCH 29, 1997     APRIL 4, 1998
                                      -----     -----     -----     --------------     -------------
                                                                     (UNAUDITED)        (UNAUDITED)
<S>                                   <C>       <C>       <C>       <C>                <C>
GEOGRAPHIC AREA BY DESTINATION
  Domestic..........................    53%       51%       61%           66%                86%
  International.....................    47        49        39            34                 14
                                       ---       ---       ---           ---                ---
                                       100%      100%      100%          100%               100%
                                       ===       ===       ===           ===                ===
</TABLE>
 
(17)  VALUATION AND QUALIFYING ACCOUNTS
 
     The following table sets forth activity in the Company's allowance for
doubtful accounts:
 
<TABLE>
<CAPTION>
                                            BALANCE AT                                 BALANCE AT
                                           BEGINNING OF    CHARGES TO                    END OF
                                              PERIOD        EXPENSES     DEDUCTIONS      PERIOD
                                           ------------    ----------    ----------    ----------
<S>                                        <C>             <C>           <C>           <C>
Year Ended --
  December 31, 1995......................    $ 8,000        $    --        $1,000       $ 7,000
  December 31, 1996......................      7,000         43,000            --        50,000
  December 31, 1997......................     50,000         14,333         1,933        62,400
</TABLE>
 
(18)  LOAN AGREEMENT
 
     In June 1998, the Company entered into a loan agreement with a commercial
bank. Under the terms of this loan agreement, the Company may borrow up to $5.0
million for working capital and equipment. The amount available to the Company
under the working capital portion of the loan agreement is based upon a
percentage of the Company's outstanding accounts receivable. The outstanding
principal under the working capital portion of the loan agreement is due and
payable in December 1999. Interest on the working capital portion of the loan
agreement is at the prime rate plus .5% until September 30, 1998 whereby it
becomes the prime rate plus .25%.
 
     The principal amount outstanding under the equipment portion of the loan
agreement is due in 36 equal monthly installments commencing in January 1999.
Interest on the equipment loan portion of the loan agreement is at the prime
rate plus 1.0% up to and including the closing date of the Company's initial
public offering. After the closing of the Company's initial public offering, the
interest rate becomes the prime rate.
 
     There are no outstanding balances under either the working capital portion
or the equipment portion of the loan agreement.
 
                                      F-20
<PAGE>   77
 
======================================================
 
  NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES, OR AN OFFER TO SELL TO, OR SOLICITATION OF, ANY
PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
 
                             ---------------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                        PAGE
                                        ----
<S>                                     <C>
Prospectus Summary....................    3
Risk Factors..........................    5
Use of Proceeds.......................   12
Dividend Policy.......................   13
Capitalization........................   14
Dilution..............................   15
Selected Financial Information........   16
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................   17
Business..............................   22
Management............................   37
Certain Transactions..................   44
Principal Stockholders................   46
Description of Capital Stock..........   49
Shares Eligible for Future Sale.......   51
Underwriting..........................   53
Legal Matters.........................   54
Experts...............................   54
Additional Information................   54
Index to Financial Statements.........  F-1
</TABLE>
 
                            ------------------------
  UNTIL                , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
 
======================================================
======================================================
                                                 Shares
 
                                      LOGO
                                  Common Stock
                              -------------------
 
                                   PROSPECTUS
                              -------------------
 
                                 BT Alex. Brown
 
                              Merrill Lynch & Co.
 
                               Piper Jaffray Inc.
                                          , 1998
======================================================
<PAGE>   78
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
 
<TABLE>
<S>                                                             <C>
SEC registration fee........................................    $15,776
NASD filing fee.............................................      5,848
Nasdaq National Market listing fee..........................     95,000
Blue Sky fees and expenses..................................     10,000
Transfer Agent and Registrar fees...........................
Accounting fees and expenses................................
Legal fees and expenses.....................................
Printing and mailing expenses...............................
Miscellaneous...............................................
                                                                -------
          Total.............................................    $
                                                                =======
</TABLE>
 
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Article EIGHTH of the Registrant's Restated Certificate of Incorporation
(the "Restated Certificate of Incorporation") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director, except to the extent that the Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
 
     Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
 
     Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination
 
                                      II-1
<PAGE>   79
 
by the Registrant that the director or officer did not meet the applicable
standard of conduct required for indemnification, or if the Registrant fails to
make an indemnification payment within 60 days after such payment is claimed by
such person, such person is permitted to petition the court to make an
independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of indemnification, the
director or officer must give the Registrant notice of the action for which
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.
 
     Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
 
     Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
 
     Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act.
 
ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES
 
     Set forth in chronological order is information regarding shares of Common
Stock and Preferred Stock issued and options granted by the Company since April
1, 1995. Further included is the consideration, if any, received by the Company
for such shares and options and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), or rule of the
Securities and Exchange Commission under which exemption from registration was
claimed.
 
     Certain of the transactions described below involved directors, officers
and 5% Stockholders of the Company. See "Certain Transactions."
 
     The Company's Amended and Restated 1991 Stock Option Plan was adopted by
the Board of Directors and approved by the stockholders of the Company in April
1991. As of April 4, 1998, options to purchase 1,461,752 of Common Stock had
been exercised for an aggregate consideration of $335,569 and options to
purchase 1,125,075 of Common Stock, at a weighted average exercise price of
$0.74 per share, were outstanding under such plan.
 
     In November 1995, the Company issued and sold 104 shares of its Common
Stock to LTI Ventures Leasing Corp. at a purchase price of $2.00 per share in
connection with the execution of a Master Lease Agreement.
 
     On November 2, 1995 and June 28, 1996, the Company issued and sold an
aggregate of 3,800,428 shares of its Series B-1 Convertible Preferred Stock to a
group of investors at a purchase price of $2.00 per share.
 
                                      II-2
<PAGE>   80
 
     On February 26, 1997, August 8, 1997 and October 7, 1997, the Company
issued and sold an aggregate of 3,439,949 shares of its Series C Convertible
Preferred Stock to a group of investors at a purchase price of $3.75 per share.
 
     On February 13, 1998, the Company issued and sold an aggregate of 1,666,234
shares of its Series D Convertible Preferred Stock to a group of investors at a
purchase price of $7.00 per share.
 
     The securities issued in the foregoing transactions were either (i) offered
and sold in reliance upon exemptions from Securities Act registration set forth
in Sections 3(b) and 4(2) of the Securities Act, or any regulations promulgated
thereunder, relating to sales by an issuer not involving any public offering, or
(ii) in the case of certain options to purchase shares of Common Stock and
shares of Common Stock issued upon the exercise of such options, such offers and
sales were made in reliance upon an exemption from registration under Rule 701
of the Securities Act. No underwriters were involved in the foregoing sales of
securities.
 
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (a) Exhibits
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
 1*        Form of Underwriting Agreement.
 3.1       Third Restated Certificate of Incorporation of the Company.
 3.2*      Form of Certificate of Amendment to Third Restated
           Certificate of Incorporation of the Company (to be filed
           immediately prior to the effectiveness of this Registration
           Statement).
 3.3*      Form of Restated Certificate of Incorporation of the Company
           (to be filed upon the closing of the offering to which this
           Registration Statement relates).
 3.4       By-Laws of the Company, as amended.
 3.5       Form of Amended and Restated By-Laws of the Company (to be
           effective upon the closing of the offering to which this
           Registration Statement relates).
 4.1*      Specimen certificate for shares of Common Stock, $.01 par
           value, of the Company.
 5*        Opinion of Hale and Dorr LLP.
10.1       1998 Director Stock Option Plan.
10.2       [Intentionally left blank.]
10.3+      International Distribution Agreement, dated as of January
           21, 1998, by and between the Company and Nihon Kohden
           Corporation.
10.4+      International License Agreement, dated as of January 21,
           1998, by and between the Company and Nihon Kohden
           Corporation.
10.5       Trademark License Agreement, dated May 25, 1994, between
           Aspect Electronics, Inc. and the Company.
10.6+      License Agreement, dated as of October 31, 1995, between
           Siemens Medical Systems, Inc. and the Company.
10.7       Property Lease at 2 Vision Drive between the Company and
           Vision Drive, Inc., successor in interest to Natick
           Executive Park Trust No. 2, dated September 8, 1994, as
           amended, together with Subordination, Non-Disturbance and
           Attornment Agreement between the Company and Teachers
           Insurance Association of America, dated June 15, 1995.
10.8       Lease Extension Agreement, dated as of August 7, 1997,
           between Vision Drive, Inc. and the Company.
</TABLE>
 
                                      II-3
<PAGE>   81
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
10.9       Loan Agreement, dated as of June 22, 1998, between the
           Company and Imperial Bank, together with Revolving Loans
           Promissory Note, dated June 22, 1998, made in favor of
           Imperial Bank by the Company, Equipment Loans Promissory
           Note, dated June 22, 1998, made in favor of Imperial Bank by
           the Company, Security Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Trademark Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Patent Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank and Agreement to
           Provide Insurance, dated June 22, 1998, between the Company
           and Imperial Bank.
10.10      Promissory Note, dated February 18, 1997, as amended on
           April 14, 1997, made in favor of the Company by Nassib G.
           Chamoun, together with Pledge Agreement, dated as of
           February 18, 1997, as amended on April 14, 1997, between
           Nassib G. Chamoun and the Company.
10.11      Promissory Note, dated May 1, 1997, made in favor of the
           Company by Nassib G. Chamoun, together with Pledge
           Agreement, dated as of May 1, 1997, between Nassib G.
           Chamoun and the Company.
10.12      Promissory Note, dated May 1, 1997, made in favor of the
           Company by Nassib G. Chamoun, together with Pledge
           Agreement, dated as of May 1, 1997, between Nassib G.
           Chamoun and the Company.
10.13      Form of Promissory Note made in favor of the Company by
           certain directors and executive officers, together with Form
           of Pledge Agreement between the Company and certain
           directors and executive officers.
10.14      Promissory Note, dated September 24, 1997, made in favor of
           the Company by Jeffrey Barrett.
10.15      Promissory Note, dated April 10, 1998, made in favor of the
           Company by Jeffrey Barrett, together with Pledge Agreement,
           dated as of April 10, 1998, between Jeffrey Barrett and the
           Company.
10.16      Series D Convertible Preferred Stock Purchase Agreement
           dated February 13, 1998 by and among the Company and the
           several purchasers named on Schedule I thereto.
10.17      Third Amended and Restated Right of First Refusal and
           Co-Sale Agreement dated February 13, 1998 by and among the
           Company and the several parties named on Schedules I and II
           thereto.
10.18      Third Amended and Restated Registration Rights Agreement
           dated February 13, 1998 by and among the Company and the
           parties named on the signature pages thereto.
10.19      Third Amended and Restated Voting Agreement dated February
           13, 1998 by and among the Company and the several parties
           named on Schedule I thereto.
23.1       Consent of Arthur Andersen LLP.
23.2       Consent of Price Waterhouse LLP.
23.3*      Consent of Hale and Dorr LLP (included in Exhibit 5).
24         Power of Attorney (included on page II-7).
27.1       Financial Data Schedule for fiscal year ended December 31,
           1997.
27.2       Financial Data Schedule for quarter ended April 4, 1998.
</TABLE>
 
---------------
* To be filed by amendment.
 
+ Confidential treatment requested as to certain portions, which portions have
  been omitted and filed separately with the Securities and Exchange Commission.
 
     (b) Financial Statement Schedules
 
     All schedules have been omitted because they are not required or because
the required information is given in the Company's Financial Statements or Notes
thereto.
 
                                      II-4
<PAGE>   82
 
ITEM 17.  UNDERTAKINGS
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions contained in the Amended and Restated Certificate of
Incorporation of the Company and the laws of the State of Delaware, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
 
     The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
 
     The undersigned Company hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
     Act, the information omitted form the form of prospectus filed as part of
     this Registration Statement in reliance upon Rule 430A and contained in a
     form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
     or 497(h) under the Securities Act shall be deemed to be part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
                                      II-5
<PAGE>   83
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Natick, Massachusetts on this 23rd
day of June, 1998.
 
                                          ASPECT MEDICAL SYSTEMS, INC.
 
                                          By:     /s/ NASSIB G. CHAMOUN
                                            ------------------------------------
                                            Nassib G. Chamoun
                                            Chief Executive Office and President
 
                        POWER OF ATTORNEY AND SIGNATURES
 
     We, the undersigned officers and directors of Aspect Medical Systems, Inc.,
hereby severally constitute and appoint Nassib G. Chamoun, J. Breckenridge Eagle
and J. Neal Armstrong 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 Registration Statement on Form S-1
filed herewith and any and all pre-effective and post-effective amendments to
said Registration Statement, and any subsequent Registration Statement for the
same offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable Aspect Medical Systems, Inc. to comply with the provisions
of the Securities Act of 1933, as amended, 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
Registration Statement and any and all amendments thereto or to any subsequent
Registration Statement for the same offering which may be filed under Rule
462(b). Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                   SIGNATURE                                      TITLE                       DATE
                   ---------                                      -----                       ----
<C>                                                 <S>                                   <C>
 
             /s/ NASSIB G. CHAMOUN                  Chief Executive Officer and           June 23, 1998
------------------------------------------------      President (Principal Executive
               Nassib G. Chamoun                      Officer)
 
           /s/ J. BRECKENRIDGE EAGLE                Chairman of the Board of Directors    June 23, 1998
------------------------------------------------
             J. Breckenridge Eagle
 
             /s/ J. NEAL ARMSTRONG                  Vice President and Chief Financial    June 23, 1998
------------------------------------------------      Officer (Principal Financial and
               J. Neal Armstrong                      Accounting Officer)
 
              /s/ STEPHEN E. COIT                   Director                              June 23, 1998
------------------------------------------------
                Stephen E. Coit
 
            /s/ EDWIN M. KANIA, JR.                 Director                              June 23, 1998
------------------------------------------------
              Edwin M. Kania, Jr.
</TABLE>
 
                                      II-6
<PAGE>   84
 
<TABLE>
<CAPTION>
                   SIGNATURE                                      TITLE                       DATE
                   ---------                                      -----                       ----
<C>                                                 <S>                                   <C>
              /s/ LESTER J. LLOYD                   Director                              June 23, 1998
------------------------------------------------
                Lester J. Lloyd
 
              /s/ TERRANCE MCGUIRE                  Director                              June 23, 1998
------------------------------------------------
                Terrance McGuire
 
               /s/ DONALD STANSKI                   Director                              June 23, 1998
------------------------------------------------
                 Donald Stanski
</TABLE>
 
                                      II-7
<PAGE>   85
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
 1*        Form of Underwriting Agreement.
 3.1       Third Restated Certificate of Incorporation of the Company.
 3.2*      Form of Certificate of Amendment to Third Restated
           Certificate of Incorporation of the Company (to be filed
           immediately prior to the effectiveness of this Registration
           Statement).
 3.3*      Form of Restated Certificate of Incorporation of the Company
           (to be filed upon the closing of the offering to which this
           Registration Statement relates).
 3.4       By-Laws of the Company, as amended.
 3.5       Form of Amended and Restated By-Laws of the Company (to be
           effective upon the closing of the offering to which this
           Registration Statement relates).
 4.1*      Specimen certificate for shares of Common Stock, $.01 par
           value, of the Company.
 5*        Opinion of Hale and Dorr LLP.
10.1       1998 Director Stock Option Plan.
10.2       [Intentionally left blank.]
10.3+      International Distribution Agreement, dated as of January
           21, 1998, by and between the Company and Nihon Kohden
           Corporation.
10.4+      International License Agreement, dated as of January 21,
           1998, by and between the Company and Nihon Kohden
           Corporation.
10.5       Trademark License Agreement, dated May 25, 1994, between
           Aspect Electronics, Inc. and the Company.
10.6+      License Agreement, dated as of October 31, 1995, between
           Siemens Medical Systems, Inc. and the Company.
10.7       Property Lease at 2 Vision Drive between the Company and
           Vision Drive, Inc., successor in interest to Natick
           Executive Park Trust No. 2, dated September 8, 1994, as
           amended, together with Subordination, Non-Disturbance and
           Attornment Agreement between the Company and Teachers
           Insurance Association of America, dated June 15, 1995.
10.8       Lease Extension Agreement, dated as of August 7, 1997,
           between Vision Drive, Inc. and the Company.
10.9       Loan Agreement, dated as of June 22, 1998, between the
           Company and Imperial Bank, together with Revolving Loans
           Promissory Note, dated June 22, 1998, made in favor of
           Imperial Bank by the Company, Equipment Loans Promissory
           Note, dated June 22, 1998, made in favor of Imperial Bank by
           the Company, Security Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Trademark Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Trademark Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Patent Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank and Agreement to
           Provide Insurance, dated June 22, 1998, between the Company
           and Imperial Bank.
10.10      Promissory Note, dated February 18, 1997, as amended on
           April 14, 1997, made in favor of the Company by Nassib G.
           Chamoun, together with Pledge Agreement, dated as of
           February 18, 1997, as amended on April 14, 1997, between
           Nassib G. Chamoun and the Company.
10.11      Promissory Note, dated May 1, 1997, made in favor of the
           Company by Nassib G. Chamoun, together with Pledge
           Agreement, dated as of May 1, 1997, between Nassib G.
           Chamoun and the Company.
10.12      Promissory Note, dated May 1, 1997, made in favor of the
           Company by Nassib G. Chamoun, together with Pledge
           Agreement, dated as of May 1, 1997, between Nassib G.
           Chamoun and the Company.
10.13      Form of Promissory Note made in favor of the Company by
           certain directors and executive officers, together with Form
           of Pledge Agreement between the Company and certain
           directors and executive officers.
</TABLE>
<PAGE>   86
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
10.14      Promissory Note, dated September 24, 1997, made in favor of
           the Company by Jeffrey Barrett.
10.15      Promissory Note, dated April 10, 1998, made in favor of the
           Company by Jeffrey Barrett, together with Pledge Agreement,
           dated as of April 10, 1998, between Jeffrey Barrett and the
           Company.
10.16      Series D Convertible Preferred Stock Purchase Agreement
           dated February 13, 1998 by and among the Company and the
           several purchasers named on Schedule I thereto.
10.17      Third Amended and Restated Right of First Refusal and
           Co-Sale Agreement dated February 13, 1998 by and among the
           Company and the several parties named on Schedules I and II
           thereto.
10.18      Third Amended and Restated Registration Rights Agreement
           dated February 13, 1998 by and among the Company and the
           parties named on the signature pages thereto.
10.19      Third Amended and Restated Voting Agreement dated February
           13, 1998 by and among the Company and the several parties
           named on Schedule I thereto.
23.1       Consent of Arthur Andersen LLP.
23.2       Consent of Price Waterhouse LLP.
23.3*      Consent of Hale and Dorr LLP (included in Exhibit 5).
24         Power of Attorney (included on page II-7).
27.1       Financial Data Schedule for fiscal year ended December 31,
           1997.
27.2       Financial Data Schedule for quarter ended April 4, 1998.
</TABLE>
 
---------------
* To be filed by amendment.
 
+ Confidential treatment requested as to certain portions, which portions have
  been omitted and filed separately with the Securities and Exchange Commission.
[{"type": "S-1", "sequence": "1", "description": "ASPECT MEDICAL SYSTEMS, INC.", "secsgml_size_bytes": 334346}]
{"company-data": {"conformed-name": "ASPECT MEDICAL SYSTEMS INC", "cik": "0000886235", "assigned-sic": "", "irs-number": "042985553", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-57739", "film-number": "98654382"}, "business-address": {"street1": "TWO VISION DRIVE", "city": "NATICK", "state": "MA", "zip": "01760", "phone": "5086530603"}, "mail-address": {"street1": "TWO VISION DRIVE", "city": "NATICK", "state": "MA", "zip": "01760"}}
1
 
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1998
 
                                                 REGISTRATION NO. 333-
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

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

                            ------------------------
DELAWARE                             3845                            04-2985553
 (STATE OR OTHER JURISDICTION OF      (PRIMARY STANDARD INDUSTRIAL             (I.R.S. EMPLOYER
  INCORPORATION OR ORGANIZATION)      CLASSIFICATION CODE NUMBER)           IDENTIFICATION NUMBER)
------------------------
 
                                TWO VISION DRIVE
                          NATICK, MASSACHUSETTS 01760
                                 (508) 653-0603
    (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                  OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                            ------------------------
 
                               NASSIB G. CHAMOUN
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                          ASPECT MEDICAL SYSTEMS, INC.
                                TWO VISION DRIVE
                          NATICK, MASSACHUSETTS 01760
                                 (508) 653-0603
               (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
               NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
                            ------------------------
 
                                   COPIES TO:
SUSAN W. MURLEY, ESQ.                               LESLIE E. DAVIS, ESQ.
                 HALE AND DORR LLP                            TESTA, HURWITZ & THIBEAULT, LLP
                  60 STATE STREET                                    HIGH STREET TOWER
            BOSTON, MASSACHUSETTS 02109                               125 HIGH STREET
             TELEPHONE: (617) 526-6000                          BOSTON, MASSACHUSETTS 02110
             TELECOPY: (617) 526-5000                            TELEPHONE: (617) 248-7000
                                                                 TELECOPY: (617) 248-7100
------------------------
 
    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:  As soon as
practicable after the effective date hereof.
 
    If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
 
    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ------------
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------
 
    If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
                            ------------------------
 
                        CALCULATION OF REGISTRATION FEE
========================================================================================================================
                                                               PROPOSED MAXIMUM
          TITLE OF EACH CLASS OF SECURITIES                   AGGREGATE OFFERING                    AMOUNT OF
                   TO BE REGISTERED                                PRICE(1)                     REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share................            $53,475,000                        $15,776
========================================================================================================================
(1) Estimated solely for the purpose of calculating the amount of the
    registration fee pursuant to Rule 457(a) under the Securities Act of 1933,
    as amended.

                            ------------------------
 
    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
 
================================================================================
2
 
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
 
                                                           SUBJECT TO COMPLETION
                                                                   JUNE 25, 1998
                                             Shares
 
                               [Corporate Logo]
 
                                  Common Stock
                               ------------------
 
     All the           shares of Common Stock offered hereby will be sold by
Aspect Medical Systems, Inc. ("Aspect" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is presently estimated that the initial public offering price will be between
$       and $       per share. See "Underwriting" for the factors to be
considered in determining the initial public offering price. Application has
been made for the quotation of the Common Stock on the Nasdaq National Market
under the symbol "ASPM."
                               ------------------
 
        THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
                    SEE "RISK FACTORS" BEGINNING ON PAGE 5.
                               ------------------
 
  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
 EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
   AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
                               CRIMINAL OFFENSE.
===============================================================================================================
                                            PRICE                  UNDERWRITING                PROCEEDS
                                              TO                  DISCOUNTS AND                   TO
                                            PUBLIC                 COMMISSIONS                COMPANY(1)
---------------------------------------------------------------------------------------------------------------
Per Share........................             $                         $                         $
---------------------------------------------------------------------------------------------------------------
Total(2).........................             $                         $                         $
===============================================================================================================
(1) Before deducting expenses estimated at $       , payable by the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
              additional shares of Common Stock solely to cover over-allotments,
    if any. To the extent the option is exercised, the Underwriters will offer
    the additional shares at the Price to Public shown above. If the option is
    exercised in full, the total Price to Public, Underwriting Discounts and
    Commissions and Proceeds to Company will be $       , $       and $       ,
    respectively. See "Underwriting."

                               ------------------
 
     The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made through the
facilities of the Depository Trust Company in New York, New York, on or about
            , 1998 against payment therefor in immediately available funds.
 
BT Alex. Brown
 
                              Merrill Lynch & Co.
 
                                                              Piper Jaffray Inc.
 
               THE DATE OF THIS PROSPECTUS IS             , 1998.
3
 
[Photograph depicting the Company's A-2000 BIS Monitor product with BIS Sensor
affixed to model's forehead]
 
[Photograph depicting the Company's BIS Sensor, BIS Module Kit and Digital
Signal Converter products]
 
                            ------------------------
 
     CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SYNDICATE SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."

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

                                        2
4
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
 
                                  THE COMPANY
 
     Aspect develops, manufactures and markets anesthesia monitoring systems
that enable anesthesia providers to assess levels of consciousness and
administer the appropriate amount of anesthetics during surgery. The BIS System
incorporates the Company's proprietary disposable BIS Sensors and the A-2000 BIS
Monitor, which was cleared for marketing by the United States Food and Drug
Administration (the "FDA") in February 1998. The BIS System is based on Aspect's
patented core technology, the Bispectral Index (the "BIS index"), which is the
only FDA-cleared, commercially available direct measure of the effects of
anesthesics on the brain. The BIS System was developed over a ten-year period
and is the subject of eight issued and five pending United States patents.
Aspect markets the BIS System through a direct sales organization in the United
States. As of April 4, 1998, more than 600 BIS monitors have been sold to
approximately 100 sites in the United States, and the Company believes that over
100,000 patients have been monitored using the BIS index during surgery.
 
     Each year, more than 29 million patients in the United States and 47
million patients in Europe and Japan receive anesthesia in surgical procedures.
Of these 76 million patients, more than 60% receive general anesthesia or deep
sedation monitored by an anesthesia provider. Historically, anesthesia providers
have had no direct means of assessing levels of consciousness during surgery and
have generally relied on recommended drug dosages and indirect indicators of
consciousness, including blood pressure and heart rate. Changes in these
indirect measures, however, are not reliable indicators of changes in a
patient's levels of consciousness. Using existing monitoring devices, anesthesia
providers are sometimes unable to detect surgical awareness, or the
unintentional regaining of consciousness during surgery. The Company believes
the desire to prevent surgical awareness, as well as the difficulty of
accounting for variability in patient tolerances to anesthetic drugs, leads
anesthesia providers to administer more anesthetic than is required by many of
their patients. Overmedication results in increased drug costs, prolonged and
unpredictable wake-ups from anesthesia and prolonged recovery in the Post
Anesthesia Care Unit (the "PACU"). These factors, in turn, lead to
inefficiencies in operating room (the "OR") and PACU scheduling and increased
personnel costs.
 
     Aspect's BIS index is designed to allow anesthesia providers to measure
directly the effects of anesthetics on the brain in order to assess levels of
consciousness and to administer the appropriate amount of anesthetics for
surgical procedures, while avoiding unintentional overmedication or
undermedication. The BIS index ranges from 100, indicating the patient is awake,
to zero, indicating an absence of electrical brain activity. The Company has
demonstrated in a 302-patient prospective, randomized controlled utility trial
that BIS monitoring provides more controlled and cost-effective dosing of
anesthetic drugs, faster and more predictable recovery from anesthesia and
improved quality of recovery.
 
     Aspect's objective is to become a major multinational anesthesia-monitoring
company by establishing BIS monitoring as the standard of practice in anesthesia
and sedation monitoring in the OR, in the intensive care unit and for procedures
requiring sedation outside the OR. Key elements of the Company's strategy to
accomplish its objective include: (i) a direct sales force for rapid
commercialization, (ii) clinical specialists to educate and to promote the use
of Aspect's BIS System, (iii) OEM relationships to broaden distribution
channels, (iv) technological leadership and (v) new product development.
 
     The Company was organized in Delaware in 1987. The Company's principal
executive offices are located at Two Vision Drive, Natick, Massachusetts 01760,
and its telephone number is (508) 653-0603.
 
                                        3
5
 
                                  THE OFFERING
 
Common Stock offered by the
  Company.....................             shares
 
Common Stock to be outstanding
  after the offering..........             shares(1)
 
Use of proceeds...............   To fund sales and marketing, research and
                                 development, the sales-type lease program,
                                 possible acquisitions and working capital and
                                 other corporate purposes
 
Proposed Nasdaq National
Market symbol.................   ASPM
 
                         SUMMARY FINANCIAL INFORMATION
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,                   QUARTER ENDED
                                    ------------------------------------------------   --------------------
                                                                                       MARCH 29,   APRIL 4,
                                     1993      1994      1995      1996       1997       1997        1998
                                    -------   -------   -------   -------   --------   ---------   --------
                                                                                           (UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
  Revenue.........................  $   155   $   852   $ 1,067   $ 1,389   $  3,068   $     415   $ 1,733
  Loss from operations............   (3,885)   (4,491)   (5,607)   (5,477)   (10,308)     (2,224)   (2,941)
  Net loss........................   (3,657)   (4,260)   (5,546)   (5,396)    (9,886)     (2,166)   (2,817)
  Pro forma basic and diluted net
    loss per share(2).............                                             (1.28)                (0.30)
  Weighted average shares used to
    compute pro forma net loss per
    share(2)......................                                             7,707                 9,492
APRIL 4, 1998
                                                              -------------------------
                                                              ACTUAL     AS ADJUSTED(3)
                                                              -------    --------------
                                                                     (UNAUDITED)
BALANCE SHEET DATA:
  Cash, cash equivalents and marketable securities..........  $13,206          $
  Working capital...........................................   10,949
  Total assets..............................................   17,456
  Long-term capital lease obligations.......................       81          81
  Total stockholders' equity................................   12,873
---------------
(1) Based on the number of shares of Common Stock outstanding on June 25, 1998.
    Excludes an aggregate of 1,317,031 shares of Common Stock reserved for
    issuance pursuant to exercise of currently outstanding options at a weighted
    average exercise price of $1.13 per share. See "Management -- Executive
    Compensation" and Note 9 of Notes to Financial Statements.
 
(2) See Note 10 of Notes to Financial Statements.
 
(3) Adjusted to give effect to the estimated net proceeds based upon an assumed
    public offering price of $     per share.
 
     Unless otherwise indicated, all information contained in this Prospectus
(i) reflects the conversion of all outstanding shares of the Company's Series
A-1, Series B-1, Series C, and Series D Convertible Preferred Stock (the
"Convertible Preferred Stock") into an aggregate of 9,313,509 shares of Common
Stock at the closing of this offering and (ii) assumes no exercise of the
Underwriters' over-allotment option. The Company follows a system of fiscal
months as opposed to calendar months. Under this system, the first eleven months
of each fiscal year end on a Saturday and the last month of the fiscal year
always ends on December 31.
 
                                        4
6
 
                                  RISK FACTORS
 
     In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.
 
UNCERTAINTY OF MARKET ACCEPTANCE OF TECHNOLOGY AND PRODUCTS
 
     Commercial introduction of the Company's BIS monitor, BIS Sensor and
related products (collectively, the "BIS System") commenced in late 1996, and to
date sales of BIS Systems have been limited. The commercial success of the BIS
System will depend on its acceptance by hospitals and anesthesia providers as an
accurate, reliable and cost-effective method of monitoring the effects of
anesthetics on the brain in order to assess levels of consciousness. There can
be no assurance that anesthesia providers will modify their current practice
methods and support the BIS System as a complement to current anesthesia
monitoring. In addition, market acceptance of the BIS System will depend in part
on the Company demonstrating that the cost of a BIS System would be offset by a
reduction in costs associated with administering anesthesia, including the costs
of drugs and post-operative recovery time. Even if the Company is successful in
marketing and selling BIS monitors, there can be no assurance that customers
will continue to use such monitors or that the Company will be successful in
generating sales of BIS Sensors. Failure of the Company's BIS System to provide
an accurate and reliable measure of the effects of anesthetics on the brain in
order to assess levels of consciousness, whether because of misuse, malfunction
or otherwise, could have a material adverse effect on market acceptance of BIS
Systems. For example, cases of surgical awareness, or the unintentional
regaining of consciousness during surgery, undetected by Bispectral Index (the
"BIS index") monitoring may occur, and the resulting adverse publicity could
result in the failure of anesthesia providers and hospitals to adopt BIS
Systems, which would have a material adverse effect on the business, financial
condition and results of operations of the Company. In addition, market
acceptance of the Company's BIS System could be adversely affected by events
outside its control, including the introduction of superior competitive products
or the failure of competitive products to perform in accordance with customers'
expectations.
 
LIMITED MARKETING AND SALES EXPERIENCE
 
     The Company has only limited sales and marketing experience in the United
States and no direct sales experience outside the United States. No assurance
can be given that the Company's direct sales force and clinical specialist group
will be successful in promoting BIS Systems. The sales effort is typically
lengthy, in part because the Company generally must educate potential customers
about the clinical benefits and cost effectiveness of BIS Systems. There can be
no assurance that the Company's education or other sales strategies are properly
developed or that they will be successfully implemented. The Company is also
evaluating international and other domestic marketing and sales channels,
including contract sales organizations, distributors and marketing partners. The
Company's failure to develop and implement successfully its sales and marketing
strategy would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Sales, Marketing
and Customers."
 
RELIANCE ON SINGLE PRODUCT FAMILY
 
     The BIS System is the Company's only product. To date, the BIS System has
not achieved widespread market acceptance and sales have been limited. The
failure of the Company to gain widespread market acceptance of BIS Systems would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, sales of BIS Sensors are dependent upon
continued use by customers of the BIS monitors. There can be no assurance that
customers will continue to use BIS monitors or purchase BIS Sensors. Moreover,
there can be no assurance the Company will further enhance its products for use
outside of the operating room (the "OR"), including in the intensive care unit
("ICU"), for conscious sedation or for other applica-
                                        5
7
 
tions. The Company's failure to develop its products for use outside of the OR
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Uncertainty of Market Acceptance of
Technology and Products" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
LIMITED MANUFACTURING EXPERIENCE; MANUFACTURING EXPANSION
 
     Aspect relies on third-party manufacturers to assemble and manufacture the
components of its BIS monitors. The Company performs final assembly and testing
of the BIS monitors. The Company has historically outsourced the manufacturing
of its BIS Sensor, but in the first quarter of 1998, the Company began
manufacturing a portion of the BIS Sensors in its own manufacturing facility.
The failure of the Company or any contract manufacturer to produce enough
components or products on time, cost-effectively and in compliance with
applicable licensing or regulatory requirements, such as the Good Manufacturing
Practices ("GMPs") of the United States Food & Drug Administration (the "FDA"),
including the FDA's Quality Systems Regulations, would have a material adverse
effect on the Company's business, results of operations and financial condition.
Any termination or modification of any manufacturing arrangement with a
third-party could result in a business interruption for the Company. The Company
may require additional manufacturing capacity within the next two years. There
can be no assurance that the Company will be successful in expanding its
manufacturing facility or relocating its facility to meet demand in a timely
manner or within budget. The Company has only one manufacturing facility and any
loss of, damage to or interruption of production at its facility could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."
 
DEPENDENCE ON SINGLE OR LIMITED SOURCE SUPPLIERS
 
     The Company currently obtains certain key components of its BIS Systems,
including certain components used in the BIS Sensors, from single or limited
sources. The Company purchases components pursuant to purchase orders rather
than long-term supply agreements. The Company has experienced shortages and
delays in obtaining certain components of its BIS Systems in the past. There can
be no assurance that the Company will not experience similar delays or shortages
in the future. The disruption or termination of the supply of components or a
significant increase in the costs of these components from these sources could
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, if the Company is required to change the
manufacturer of a key component of the BIS System, the Company may be required
to verify that the new manufacturer maintains facilities and procedures that
comply with all applicable regulations and guidelines. The delays associated
with verification could delay the manufacture and sale of the Company's BIS
Systems and any delay could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Manufacturing."
 
TECHNOLOGICAL RISKS
 
     The medical industry is characterized by rapid product development and
technological advances. There can be no assurance that new monitoring products,
alternative techniques for evaluating the effects of anesthesia, significant
changes in the methods of delivering anesthesia or new anesthetic agents will
not be developed that will render the Company's current or planned products
obsolete or inferior. New products or technologies used on patients or in the OR
during surgery, or electrical or mechanical interference from new or existing
products or technologies, could also adversely affect the performance of the BIS
index. The effect of technological changes on the Company's business cannot be
predicted and could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     Additional studies, sponsored in part by the Company, are ongoing to assess
the performance of the BIS index in the presence of certain anesthetics, such as
ketamine, and patient populations, such
                                        6
8
 
as children, not included in the clinical development of the BIS algorithms.
There can be no assurance that the BIS technology will be effective in
monitoring these or other anesthetic agents and patient populations or when
other anesthetic techniques are used. Furthermore, there can be no assurance
that the Company will be successful in developing any product enhancements or
extensions or new products, including products for use in the ICU, for conscious
sedation or for other applications. The failure of the Company to develop
product enhancements or extensions or new products could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
 
     The Company's success is substantially dependent on the ability, experience
and performance of its senior management and other key personnel. The Company
needs to hire, train, retain and motivate additional personnel, particularly
sales representatives and clinical specialists who are responsible for customer
education and training and post-installation customer support. The Company
continues to experience difficulty in recruiting and retaining qualified
personnel because the pool of experienced persons is small and the Company
competes for such personnel with other companies, many of which have greater
resources than the Company. The failure of the Company to hire and retain
required personnel, including sales representatives and clinical specialists,
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Sales, Marketing and
Customers," "Business -- Employees" and "Management."
 
COMPETITION
 
     Although products incorporating the BIS index are currently the only
devices cleared by the FDA to measure the effects of anesthetics on the brain,
the Company expects to face substantial competition. The Company believes that
competition will initially come from companies, including patient monitoring
companies, currently marketing conventional EEG monitors utilizing standard
signal-processing techniques such as the Spectral Edge Frequency and Median
Frequency or from companies that market EEG monitors utilizing novel
signal-processing technologies, including at least two companies that are
currently conducting clinical trials on products under development.
Additionally, a number of academic researchers worldwide are studying the
potential use of other techniques to measure the effects of anesthetics,
including the use of auditory evoked potentials, heart rate variability,
pupillary reflexes and skin blood flow measurement techniques. Competitors that
develop a product that is substantially equivalent to an FDA-cleared product
developed by the Company may use the Company's product as a predicate device to
obtain more quickly FDA clearance under the 510(k) process. Accordingly, there
can be no assurance that competitors will not develop and market products that
compete with any of the Company's products in less time than it took the Company
to develop its products. Further, the Company may face substantial competition
from companies developing sensor products that compete with the Company's
proprietary BIS Sensors for use with the Company's BIS monitors. Competitors in
some jurisdictions outside the United States may enter the market without delays
caused by regulatory barriers that exist in the United States. Many of the
Company's potential competitors have substantially greater financial, marketing,
technical, manufacturing and distribution resources than those of the Company
and the Company expects to compete in areas in which the Company has limited
experience, including manufacturing, marketing and sales and customer service
and support. There can be no assurance that the Company will be able to compete
successfully or that competition, including the development and
commercialization of new products and technology, will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Competition."
 
                                        7
9
 
DEPENDENCE ON PATENTS, TRADEMARKS, LICENSES AND PROPRIETARY RIGHTS
 
     Aspect believes that its success depends, in part, on obtaining patent
protection for its products, defending patents once obtained, preserving its
trade secrets and operating without infringing upon patents and proprietary
rights held by third parties, both in the United States and in foreign
countries. There can be no assurance that the Company has or will develop or
obtain additional rights to products or processes that are patentable, that
patents will issue from any of the pending patent applications filed by the
Company or that claims allowed will be sufficient to protect the Company's
technology or technology that is licensed to the Company. In addition, no
assurances can be given that any patents issued to or licensed by the Company
will not be challenged, invalidated, infringed or circumvented or that the
rights granted thereunder will provide competitive advantages for the Company's
business or products. The Company may be subject to further risks as it expands
its operations in countries where intellectual property laws are not well
developed or are difficult to enforce. Legal protections of the Company's
proprietary rights may be ineffective in those countries. In such event, the
business, results of operations and financial condition of the Company could be
materially adversely affected.
 
     There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. The Company has in
the past been involved in patent litigation and future litigation may be
necessary to protect patents, trade secrets, copyrights or "know-how" owned by
or licensed to the Company or to defend the Company against claimed infringement
of the rights of others and to determine the scope and validity of the
proprietary rights of the Company and others. The validity and breadth of claims
covered in medical technology patents involve complex legal and factual
questions for which important legal principles are unresolved. Any intellectual
property litigation could result in substantial cost to and diversion of effort
by the Company. Adverse determinations in any litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties with unfavorable terms, if at all, and could
prevent the Company from manufacturing, selling or using certain of its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
     The Company also relies on trade secrets and proprietary technology that it
seeks to protect, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, that others will not independently develop substantially equivalent
proprietary information or that third parties will not otherwise gain access to
the Company's trade secrets.
 
     The Company also relies upon trademarks and trade names for the development
and protection of brand loyalty and associated goodwill in connection with its
products. There can be no assurance that any registered or unregistered
trademarks or trade names owned by or licensed to the Company will not be
challenged, cancelled, infringed, circumvented, or be declared generic or
infringing of other third-party marks or provide any competitive advantage to
the Company. The Company also is a party to a license agreement with a third
party pursuant to which it has obtained the nonexclusive right to make, use
and/or sell products under the name "Aspect." The licensor of the Aspect name
markets products for use in the health care industry. There can be no assurance
that there will not be confusion in the market between the Company and such
licensor or that any such confusion would compromise the competitive advantage,
if any, the Company derives from its name. See "Business -- Patents and
Proprietary Rights."
 
HISTORY OF LOSSES; UNCERTAINTY OF PROFITABILITY
 
     The Company has incurred losses since inception. The Company incurred net
losses of $5.5 million, $5.4 million, $9.9 million and $2.8 million during 1995,
1996, 1997 and the quarter ended April 4, 1998, respectively. The Company
expects to continue to incur operating losses in
 
                                        8
10
 
future periods, and there can be no assurance that the Company will ever achieve
or sustain profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
 
     The Company's results of operations have varied significantly from quarter
to quarter. Quarterly operating results will depend upon several factors, many
of which are not in the Company's control, including commercial acceptance of
the Company's products, both in the United States and internationally, timing
and cancellation of customer orders, cost of product upgrades, continued use by
customers of BIS monitors and, accordingly, sales of BIS Sensors, the
introduction of new products by the Company or competitors, the mix between
pilot production of new products and full scale manufacturing of existing
products, the timing and amount of expenses, the timing and results of clinical
trials, the timing of regulatory approvals and variations in foreign exchange
rates. The Company does not have a significant backlog of customer orders, so
revenues in any quarter depend on orders received in that quarter. The Company's
expenses are relatively fixed and difficult to adjust in response to fluctuating
revenues. In addition, depending on the timing of new product introductions,
competitive factors, warranty claims and product returns, the Company may need
to reserve amounts in excess of those currently reserved for product
obsolescence, excess inventory, warranty claims and product returns. There can
be no assurance that such reserves will be adequate to cover all costs
associated with such items. In addition, quarterly results of operations may be
affected by foreign government controls, export license requirements, political
and economic instability, trade restrictions, changes in tariffs, employee
strikes or disruptions arising under foreign labor laws, standards or
guidelines, or difficulties in staffing and managing international operations.
As a result of these and other factors, the Company expects to continue to
experience significant fluctuations in quarterly operating results, and there
can be no assurance that the Company will be able to achieve or maintain
profitability in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
GOVERNMENT REGULATION
 
     The Company's products and operations are subject to extensive regulation
by numerous governmental authorities. In particular, the Company must obtain
specific clearance from the FDA before it can market new products or certain
modified products in the United States. The FDA administers the Federal Food,
Drug, and Cosmetic Act (the "FDC Act"). The Company has made certain
enhancements to its currently marketed products which it believes do not
necessitate the filing of a new 510(k) notification. However, there can be no
assurance that the FDA would agree with the Company's determination that these
modifications do not require a 510(k) notification. If the FDA requires the
Company to file a new 510(k) notification for any past or future modification to
a cleared device, the Company may be prohibited from marketing the device as
modified until it obtains clearance from the FDA. There can be no assurance that
the Company will obtain 510(k) clearance on a timely basis, if at all, for any
device modification. Furthermore, there can be no assurance that the Company's
future products, if any, will receive 510(k) clearance.
 
     FDA regulations also require companies to adhere to GMPs, which include
production design controls, testing, quality control, storage and documentation
procedures. Compliance with device GMP regulations is difficult, costly and
uncertain. The FDA may at any time inspect the Company's facilities to determine
whether adequate compliance has been achieved. There can be no assurance that
adequate compliance will be achieved or that the FDA will not withdraw marketing
clearance, require product recall or permit marketing if there is inadequate
compliance. In addition, when any change or modification is made to a device or
its intended use, the manufacturer may be required to reassess compliance with
device GMP regulations, which may cause interruptions or delays in the marketing
and sale of the Company's products. Any such interruptions or delays could have
a material adverse effect on the Company's business, financial condition and
results of operations.
 
                                        9
11
 
     Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements.
 
     Failure to comply with applicable federal, state or foreign laws or
regulations could subject the Company to enforcement actions, including, but not
limited to, product seizures, recalls, withdrawal of clearances or approvals and
civil and criminal penalties against the Company or its responsible officials,
any one or more of which could have a material adverse effect on the Company's
business, results of operations and financial condition. Federal, state and
foreign laws and regulations regarding the manufacture and sale of medical
devices are subject to future changes, as are administrative interpretations of
regulatory agencies. No assurance can be given that such changes will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."
 
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF AVAILABILITY OF ADDITIONAL FINANCING
 
     The Company believes that the anticipated net proceeds from this offering
together with interest thereon and the Company's existing capital resources will
be sufficient to fund its operations at least through 1999. However, the
Company's future liquidity and capital requirements will depend upon numerous
factors, including the resources required to further develop its marketing and
sales organization domestically and internationally, expand manufacturing
capacity, finance the Company's sales-type lease program, and meet market demand
for the Company's products. The Company's capital requirements will also depend
upon the progress of the Company's research and development programs, including
clinical trials, the receipt of and the time required to obtain regulatory
clearances and approvals, the resources the Company devotes to developing,
manufacturing and marketing its products, and the resources, if any, the Company
may devote to the expansion of its business, including through the possible
acquisition of businesses, technologies or other intellectual property rights.
There can be no assurance that the Company will not require additional financing
or will not in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital. Additional
funding may not be available when needed or on terms acceptable to the Company,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
 
POTENTIAL PRODUCT LIABILITY OR RECALL
 
     The manufacture and sale of the Company's products expose it to product
liability claims and product recalls, including those which may arise from
misuse, malfunction or design flaws. There can be no assurance that the
Company's existing insurance coverage will cover the costs of any product
liability claims made against the Company or that the Company will be able to
obtain insurance in the future at satisfactory rates or in adequate amounts.
Product liability claims or product recalls, regardless of their ultimate
outcome, could result in costly litigation and could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Insurance."
 
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
 
     The Company expects that anesthesia providers will not be reimbursed
separately for patient monitoring activities utilizing the Company's BIS
monitor. For hospitals and independent ambulatory surgical centers ("ASCs"),
when reimbursement is based on charges or costs, BIS monitoring may reduce
reimbursements for surgical procedures, because charges or costs may decline as
a result of BIS monitoring. Any reduction in the reimbursement by third-party
payors to hospitals and other users as a result of using the BIS System could
limit market acceptance of the BIS System and
                                       10
12
 
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
POTENTIAL ADVERSE EFFECTS OF YEAR 2000 PROBLEM
 
     The Company has conducted a software review to identify functions that need
corrections to be "Year 2000" compliant. The Year 2000 problem is the result of
computer programs being written to recognize two digits rather than four to
define the applicable year causing computer programs to interpret a date using
"00" as the year 1900 rather than the year 2000, which could result in product
failures or miscalculations. The Company is undertaking certain corrective
actions in an effort to ensure that software systems incorporated in its
products or used to manage its business will continue to function properly in
the year 2000. However, there can be no assurance that Year 2000 problems will
not be encountered or that the costs incurred to resolve such problems will not
be material. Additionally, there can be no assurance that the Year 2000 problem
will not affect the Company by causing disruptions in the business operations of
persons with whom the Company does business, such as customers or suppliers.
Year 2000 problems could have a material adverse effect on the Company.
 
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
 
     Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or continue after this offering. The initial public
offering price will be determined by negotiations among the Company and the
representatives of the Underwriters, and may not be indicative of the market
price for the Common Stock after this offering. From time to time after this
offering, there may be significant volatility in the market price of the Common
Stock. Quarterly operating results of the Company, deviations in results of
operations from estimates of securities analysts, changes in general conditions
in the economy or the medical equipment industry or other developments affecting
the Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of these companies. Any fluctuations in the equity market
that occur following completion of this offering may adversely affect the market
price of the Common Stock. See "Underwriting."
 
SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE
 
     Sales of substantial amounts of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon completion of this offering, the Company will have outstanding
               shares of Common Stock, assuming no exercise of outstanding
options. On the date of this Prospectus, in addition to the
shares offered hereby, approximately 472,500 shares of Common Stock, which are
not subject to 180-day lock-up agreements (the "Lock-up Agreements") with the
representatives of the Underwriters, will be eligible for immediate sale in the
public market pursuant to Rule 144(k) under the Securities Act of 1933, as
amended (the "Securities Act"). Approximately 336,800 additional shares of
Common Stock which are not subject to the Lock-up Agreements will be eligible
for sale in the public market in accordance with Rule 144 or Rule 701 under the
Securities Act beginning on the 91st day after the date of this Prospectus. Upon
expiration of the Lock-up Agreements 180 days after the date of this Prospectus,
approximately 11,551,000 shares of Common Stock (including approximately 489,000
shares of Common Stock which may be acquired upon the exercise of outstanding
options) will be available for sale in the public market, subject to the
provisions of Rule 144 under the Securities Act. BT Alex. Brown Incorporated may
release any or all shares subject to Lock-up Agreements at any time or from time
to time without notice. Approximately 180 days after the date of this
Prospectus, the Company intends to register an aggregate of approximately
1,900,000 shares of
 
                                       11
13
 
Common Stock subject to present or future options under its Amended and Restated
1991 Stock Option Plan and 1998 Director Stock Option Plan, as amended. Holders
of approximately 10,138,000 shares of Common Stock have agreed, pursuant to the
Lock-up Agreements, not to offer to sell, contract to sell, transfer, engage in
any hedging transaction with respect to or otherwise dispose of such shares for
180 days after the date of this Prospectus. The Company is unable to predict the
effect that sales made under Rule 144, or otherwise, may have on the then
prevailing market price of the Common Stock. The holders of approximately
9,400,000 shares of Common Stock are entitled to certain incidental and demand
registration rights with respect to such shares. By exercising their
registration rights, such holders could cause a large number of shares to be
registered and sold in the public market at any given time. Sales pursuant to
Rule 144 or other exemptions from registration, or pursuant to registration
rights, may have an adverse effect on the market price for the Common Stock and
could impair the Company's ability to raise capital through offerings of its
equity securities. See "Management -- Executive Compensation -- Stock Plans,"
"Shares Eligible for Future Sale" and "Underwriting."
 
CONTROL BY DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS
 
     Upon completion of this offering, the Company's directors, executive
officers and principal stockholders, together with their affiliates, will
beneficially own approximately      % of the Company's outstanding Common Stock
(approximately      % if the underwriters exercise their overallotment option in
full). As a result, these stockholders, if acting together, would have the
ability to influence or determine the outcome of corporate actions requiring
stockholder approval, including the election of directors and the approval of
certain mergers and other significant corporate transactions, such as a sale of
substantially all of the Company's assets, irrespective of how other
stockholders of the Company may vote. This concentration of ownership may have
the effect of delaying or preventing a change in control of the Company, which
could adversely affect the market price of the Company's Common Stock. See
"Management" and "Principal Stockholders."
 
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS
 
     Certain provisions of the Company's Certificate of Incorporation (the
"Restated Certificate") and Bylaws, as they are each proposed to be amended and
restated concurrently with the closing of the offering, and the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law statute, could
have the effect of delaying, deterring or preventing changes of control or
management of the Company, which could adversely affect the market price of the
Company's Common Stock. See "Description of Capital Stock."
 
IMMEDIATE AND SUBSTANTIAL DILUTION
 
     The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $     per share (after giving effect to
estimated underwriting discounts and commissions and offering expenses). See
"Dilution." In the event the Company offers additional Common Stock in the
future, including shares that may be issued upon exercise of stock options,
purchasers of Common Stock in this offering may experience further dilution in
the net tangible book value per share of the Common Stock of the Company.
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be $          ($          if the Underwriters'
over-allotment option is exercised in full) after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company and assuming an initial public offering price of $     per share.
 
                                       12
14
 
     The Company expects to use the net proceeds from this offering to fund
sales and marketing, research and development efforts, the sales-type lease
program and working capital and other corporate purposes. A portion of the
proceeds of this offering may be used to acquire businesses, technologies and
other intellectual property rights and products that complement the Company's
business, although the Company has no agreements or understandings with respect
to any such potential transactions. Pending use of the net proceeds, the Company
intends to invest the net proceeds from this offering in short-term, investment
grade, interest-bearing instruments.
 
                                DIVIDEND POLICY
 
     The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and, therefore, does not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion. The Company's credit
agreement restricts the Company from declaring and paying any cash dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 18 of Notes to Financial
Statements.
 
                                       13
15
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of the Company (i) as of
April 4, 1998, and (ii) as adjusted to give effect to the conversion of all
outstanding shares of the Company's Convertible Preferred Stock into an
aggregate of 9,313,509 shares of Common Stock; the filing of the Company's
Restated Certificate to increase the number of authorized shares of Common Stock
and authorize 5,000,000 shares of authorized but undesignated preferred stock;
and to reflect the issuance and sale of                shares of Common Stock
offered hereby at an assumed initial public offering price of $     per share,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company. The capitalization information set
forth in the table below is qualified by the Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
APRIL 4, 1998
                                                              -----------------------
                                                               ACTUAL     AS ADJUSTED
                                                              --------    -----------
                                                                  (IN THOUSANDS)
Long-term capital lease obligations.........................  $     81     $     81
                                                              --------     --------
Stockholders' equity:
Preferred stock, $.01 par value; no shares authorized,
  issued or outstanding (actual); 5,000,000 shares
  authorized, no shares issued or outstanding (as
  adjusted).................................................        --           --
Convertible preferred stock, $.01 par value; 18,843,224
  shares authorized (actual); 9,313,509 issued and
  outstanding (actual); (liquidation
  preference -- $41,425,301 (actual)); no shares authorized,
  issued or outstanding (as adjusted); (liquidation
  preference -- $0 (as adjusted))...........................    50,352           --
Common stock, $.01 par value; 14,500,000 shares authorized
  (actual); 1,548,756 shares issued and outstanding
  (actual); 40,000,000 shares authorized (as adjusted);
  10,862,265 shares issued and outstanding (as
  adjusted)(1)..............................................        15
  Additional paid-in-capital................................       340
  Accumulated deficit.......................................   (37,559)     (37,559)
  Less notes receivable from employees and directors........      (274)        (274)
  Less unrealized loss on marketable securities.............        (1)          (1)
  Total stockholders' equity................................    12,873
                                                              --------     --------
          Total capitalization..............................  $ 12,954     $
                                                              ========     ========
---------------
(1) Excludes an aggregate of 1,125,075 shares of Common Stock reserved for
    issuance pursuant to exercise of options outstanding as of April 4, 1998 at
    a weighted average exercise price of $0.74 per share. See "Management --
    Executive Compensation" and Note 9 of Notes to Financial Statements.
 
                                       14
16
 
                                    DILUTION
 
     The pro forma net tangible book value of the Company as of April 4, 1998
was approximately $12.9 million or $1.19 per share of Common Stock. Pro forma
net tangible book value per share is determined by dividing the Company's
tangible net worth (tangible assets less liabilities) by the number of shares of
Common Stock outstanding, after giving effect to the conversion of the Company's
Convertible Preferred Stock into Common Stock upon the completion of this
offering. After giving effect to the sale of the shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $     per
share and after deducting the estimated underwriting discounts and commissions
and offering expenses payable by the Company, the pro forma net tangible book
value of the Company as of April 4, 1998 would have been $     per share. This
represents an immediate increase in such pro forma net tangible book value of
$     per share to existing stockholders and an immediate dilution of $     per
share to new investors purchasing shares in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively. The following table illustrates the per share
dilution:
Assumed initial public offering price per share.............           $
  Pro forma net tangible book value per share as of April 4,
     1998...................................................  $1.19
  Increase per share attributable to new investors..........
Pro forma net tangible book value per share after this
  offering..................................................
Dilution per share to new investors.........................           $
The following table summarizes, on a pro forma basis as of April 4, 1998
(after giving effect to the conversion of the Company's Convertible Preferred
Stock upon the completion of this offering) the total number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
consideration paid per share by the existing stockholders and by the new
investors based upon an assumed initial public offering price of $     per share
(before deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company):
SHARES PURCHASED        TOTAL CONSIDERATION       AVERAGE
                           ---------------------    ----------------------    PRICE PER
                             NUMBER      PERCENT      AMOUNT       PERCENT      SHARE
                           ----------    -------    -----------    -------    ---------
Existing stockholders....  10,862,265          %    $51,048,830          %      $4.70
New investors............                                                       $
                           ----------     -----     -----------     -----
          Total..........                 100.0%                    100.0%
                           ==========     =====     ===========     =====
The above information excludes an aggregate of 1,125,075 shares of Common
Stock issuable upon the exercise of options outstanding as of April 4, 1998 with
a weighted average price of $0.74 per share. To the extent that such options are
exercised there will be further dilution to new investors.
 
                                       15
17
 
                         SELECTED FINANCIAL INFORMATION
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The selected financial information set forth below for the years ended
December 31, 1995, 1996 and 1997, and as of December 31, 1996 and 1997, are
derived from the Company's audited financial statements, which appear elsewhere
in this Prospectus and which have been audited, with respect to the years ended
December 31, 1996 and 1997 and as of December 31, 1996 and 1997, by Arthur
Andersen LLP, independent accountants, and with respect to the year ended
December 31, 1995, by Price Waterhouse LLP, independent accountants. The
selected financial information set forth below as of December 31, 1993, 1994 and
1995 and for the years ended December 31, 1993 and 1994 are derived from audited
financial statements, which are not included in this Prospectus. The selected
financial information for the quarters ended March 29, 1997 and April 4, 1998
and as of April 4, 1998 are derived from the unaudited financial statements
which appear elsewhere in this Prospectus. In the opinion of management, the
unaudited financial statements have been prepared on a basis consistent with the
Company's audited Financial Statements which appear elsewhere in this Prospectus
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the financial position and results of
operations for these unaudited periods. The operating results for the quarter
ended April 4, 1998 are not necessarily indicative of the results to be expected
for the full year ending December 31, 1998. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto, appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31,                    QUARTER ENDED
                                ---------------------------------------------------   --------------------
                                                                                      MARCH 29,   APRIL 4,
                                  1993       1994       1995      1996       1997       1997        1998
                                --------   --------   --------   -------   --------   ---------   --------
                                                                                          (UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
  Revenue.....................  $    155   $    852   $  1,067   $ 1,389   $  3,068    $   415    $ 1,733
  Costs and expenses:
    Costs of revenue..........        80        525        704     1,096      3,602        582      1,211
    Research and development..     2,371      2,311      2,870     2,338      2,603        677        887
    Sales and marketing.......       663      1,291      1,285     1,561      4,813        762      1,840
    General and
      administrative..........       926      1,216      1,815     1,871      2,358        618        736
                                --------   --------   --------   -------   --------    -------    -------
      Total costs and
        expenses..............     4,040      5,343      6,674     6,866     13,376      2,639      4,674
  Loss from operations........    (3,885)    (4,491)    (5,607)   (5,477)   (10,308)    (2,224)    (2,941)
  Interest income.............       233        286        146       144        500         78        133
  Interest expense............        (5)       (55)       (85)      (63)       (78)       (20)        (9)
                                --------   --------   --------   -------   --------    -------    -------
  Net loss....................  $ (3,657)  $ (4,260)  $ (5,546)  $(5,396)  $ (9,886)   $(2,166)   $(2,817)
                                ========   ========   ========   =======   ========    =======    =======
  Net loss per share(1):
    Basic and diluted.........  $(721.36)  $(822.34)  $(281.65)  $(57.76)  $ (16.23)   $(10.38)   $ (2.95)
                                ========   ========   ========   =======   ========    =======    =======
    Pro forma basic and
      diluted.................                                             $  (1.28)              $ (0.30)
                                                                           ========               =======
  Shares used in computing net
    loss per share(1):
    Basic and diluted.........         5          5         20        93        609        209        956
    Pro forma basic and
      diluted.................                                                7,707                 9,492
DECEMBER 31,
                                                  ------------------------------------------    APRIL 4,
                                                   1993     1994     1995     1996     1997       1998
                                                  ------   ------   ------   ------   ------   -----------
                                                                                               (UNAUDITED)
BALANCE SHEET DATA:
  Cash, cash equivalents and marketable
    securities..................................  $8,134   $4,258   $3,329   $2,231   $4,981     $13,206
  Working capital...............................   8,215    4,273    3,054    1,029    3,052      10,949
  Total assets..................................   8,948    5,719    4,552    3,973    7,603      17,456
  Long-term capital lease obligations...........      --      423      333      270      118          81
  Total stockholders' equity....................   8,736    4,460    3,028    1,066    4,067      12,873
---------------
(1) See Note 10 of Notes to Financial Statements.
 
                                       16
18
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     This prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus which could cause actual results to differ
materially from those indicated by such forward-looking statements, including
the matters set forth under the caption "Risk Factors."
 
OVERVIEW
 
     Aspect develops, manufactures and markets anesthesia monitoring systems
that enable anesthesia providers to assess levels of consciousness and
administer the appropriate amount of anesthetics during surgery. The BIS System
incorporates the Company's proprietary disposable BIS Sensors and the A-2000 BIS
Monitor, which was cleared for marketing by the FDA in February 1998. The BIS
System is based on Aspect's patented core technology, the BIS index, which is
the only FDA-cleared, commercially available direct measure of the effects of
anesthetics on the brain. In addition to the
A-2000, the Company's other monitor products are the A-1000 monitor and the
A-1050 BIS monitor. After the introduction of the A-2000 monitor, the Company
ceased active marketing of the A-1050 monitor in the United States. In addition
to the Company's disposable BIS Sensor, the Company offers the ZipPrep EEG
electrode.
 
     The Company follows a system of fiscal months as opposed to calendar
months. Under this system, the first eleven months of each fiscal year end on a
Saturday and the last month of the fiscal year always ends on December 31. All
references to the first quarter of 1997 relate to the period from January 1,
1997 to March 29, 1997, and all references to the first quarter of 1998 relate
to the period from January 1, 1998 to April 4, 1998.
 
     The Company offers customers the option either to purchase the BIS monitors
outright or to acquire the BIS monitors pursuant to a sales-type lease agreement
whereby the customer contractually commits to purchase a minimum number of BIS
Sensors per BIS monitor per year. Under this agreement, customers purchase BIS
Sensors and the BIS monitor for the purchase price of the BIS Sensors plus an
additional charge per BIS Sensor to pay for the purchase price of the BIS
monitor and related financing costs over the term of the agreement. The customer
is granted an option to purchase the BIS monitor at the end of the term of the
agreement, which is typically three to five years. Revenue related to BIS
monitors sold pursuant to sales-type leases is recognized at the time of
shipment of the BIS monitors. Sales-type leases accounted for approximately 0%,
11% and 10% of revenue in 1995, 1996 and 1997, respectively, and for
approximately 5% and 26% of revenue in the first quarter of 1997 and the first
quarter of 1998, respectively.
 
     In 1995, 1996 and 1997, revenue from the sale of monitors and related
accessories represented approximately 94%, 87% and 80%, respectively, of the
Company's revenue, and revenue from the sale of disposables represented
approximately 6%, 13% and 20%, respectively, of the Company's revenue. In the
first quarter of 1997 and the first quarter of 1998, revenue from the sale of
monitors and related accessories represented approximately 80% and 74%,
respectively, of the Company's revenue, and revenue from the sale of disposables
represented approximately 20% and 26%, respectively, of the Company's revenue.
The Company expects that revenue from the sale of disposables will continue to
increase as a percentage of total revenue.
 
RESULTS OF OPERATIONS
 
     The following table presents, for the periods indicated, information
expressed as a percentage of revenue. Such information has been derived from the
Statements of Operations included
 
                                       17
19
 
eleswhere in this Prospectus. The Company's past operating results are not
necessarily indicative of future operating results.
PERCENTAGE OF REVENUE
                                              --------------------------------------------------
                                               YEAR ENDED DECEMBER 31,         QUARTER ENDED
                                              -------------------------    ---------------------
                                                                           MARCH 29,    APRIL 4,
                                              1995      1996      1997       1997         1998
                                              -----     -----     -----    ---------    --------
Revenue.....................................   100%      100%      100%       100%         100%
Costs and expenses:
  Costs of revenue..........................    66        79       117        140           70
  Research and development..................   269       168        85        163           51
  Sales and marketing.......................   120       112       157        183          106
  General and administrative................   170       135        77        149           43
                                              ----      ----      ----       ----         ----
          Total costs and expenses..........   625       494       436        635          270
Loss from operations........................  (525)     (394)     (336)     (535)        (170)
Interest income.............................    13        10        16         19            8
Interest expense............................    (8)       (5)       (2)        (5)          (1)
                                              ----      ----      ----       ----         ----
Net loss....................................  (520)%    (389)%    (322)%     (521)%       (163)%
                                              ====      ====      ====       ====         ====
First Quarter of 1998 Compared to First Quarter of 1997
 
     The Company's revenue increased to $1.7 million in the first quarter of
1998 from $415,000 in the first quarter of 1997. Revenue from the sale of
monitors and related accessories increased to $1.3 million in the first quarter
of 1998 from $331,000 in the first quarter of 1997, and revenue from the sale of
disposables increased to $443,000 in the first quarter of 1998 from $84,000 in
the first quarter of 1997. The growth in sales of monitors and related
accessories was primarily related to an increase in the number of units sold as
a result of the introduction in the United States of the A-2000 monitor and the
growth of the direct sales force. The increase in sales of disposables was
primarily related to growth in the installed base of monitors.
 
     The Company's gross profit was 30% of revenue in the first quarter of 1998
as compared to a negative gross profit of 40% of revenue in the first quarter of
1997. The negative gross profit in the first quarter of 1997 resulted primarily
from under-absorbed overhead costs and provisions for excess and obsolete
inventory. The increase in gross profit in the first quarter of 1998 as compared
to the first quarter of 1997 was primarily due to lower per-unit monitor costs
and improved manufacturing efficiencies.
 
     Research and development expenses increased to $887,000 in the first
quarter of 1998 from $677,000 in the first quarter of 1997, but decreased as a
percentage of revenue. The absolute dollar increase in the first quarter of 1998
was primarily attributable to continued product development efforts related to
the A-2000 monitor and development of products for use outside the OR and an
increase in expenses related to clinical studies.
 
     Sales and marketing expenses increased to $1.8 million in the first quarter
of 1998 from $762,000 in the first quarter of 1997, but decreased as a
percentage of revenue. The increase in absolute dollars was due to an increase
in sales and marketing personnel and an increase in advertising and market
development expenses associated with a promotion program for the BIS monitor
initiated by the Company in the first quarter of 1998.
 
     General and administrative expenses increased to $736,000 in the first
quarter of 1998 from $618,000 in the first quarter of 1997, but decreased as a
percentage of revenue. The absolute dollar increase was primarily attributable
to an increase in general and administrative personnel to support the Company's
growth.
 
     Interest income increased to $133,000 in the first quarter of 1998 from
$78,000 in the first quarter of 1997. The increase in interest income was due to
a higher average outstanding cash and investments balance resulting from sales
of the Company's Convertible Preferred Stock in February 1997 and February 1998.
Interest expense decreased to $9,000 in the first quarter of 1998 from
 
                                       18
20
 
$20,000 in the first quarter of 1997 as a result of lower average outstanding
capital lease obligations in the first quarter of 1998.
 
  Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
     The Company's revenue increased to $3.1 million in 1997 from $1.4 million
in 1996. Revenue from the sale of monitors and related accessories increased to
$2.5 million in 1997 from $1.2 million in 1996 and revenue from the sale of
disposables increased to $606,000 in 1997 from $181,000 in 1996. The increase in
revenue from the sale of monitors and related accessories was primarily
attributable to the commercial introduction of the A-1050 monitor in 1996 and
the increase in the growth of the direct sales force in 1997. The increase in
revenue from the sale of disposables was primarily attributable to the
commercial introduction of the BIS Sensor in 1997 and growth in the installed
base of monitors. In 1996, the ZipPrep electrode was the Company's only
disposable product.
 
     In 1997, the Company had a negative gross profit percentage of 17% as
compared to a gross profit percentage of 21% in 1996. The negative gross profit
in 1997 and the decrease in gross profit as compared to 1996 resulted primarily
from under-absorbed overhead costs and provisions for excess and obsolete
inventory.
 
     Research and development expenses increased to $2.6 million in 1997 from
$2.3 million in 1996, but decreased as a percentage of revenue in 1997 as
compared to 1996. The absolute dollar increase in 1997 was primarily due to the
new product development efforts related to the A-2000 monitor and the BIS Module
Kit.
 
     Sales and marketing expenses increased to $4.8 million in 1997 from $1.6
million in 1996. This increase was primarily due to an increase in sales and
marketing personnel, including the establishment of the clinical specialist
group, and the related costs of compensation, benefits and travel expenses.
 
     General and administrative expenses increased to $2.4 million in 1997 from
$1.9 million in 1996, but decreased as a percentage of revenue in 1997 as
compared to 1996. The absolute dollar increase was primarily attributable to an
increase in general and administrative personnel to support the Company's
growth.
 
     Interest income increased to $500,000 in 1997 from $144,000 in 1996 due to
an increase in the average outstanding cash and investments balance resulting
from the sale of the Company's Convertible Preferred Stock in February 1997.
Interest expense increased to $78,000 in 1997 from $63,000 in 1996 as a result
of higher average outstanding capital lease obligations in 1997.
 
  Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
     The Company's revenue increased to $1.4 million in 1996 from $1.1 million
in 1995. Revenue from the sale of monitors and related accessories increased to
$1.2 million in 1996 from $1.0 million in 1995, and revenue from the sale of
disposables increased to $181,000 in 1996 from $67,000 in 1995. The increase in
revenue from the sale of monitors and related accessories was primarily
attributable to the commercial introduction of the A-1050 monitor in 1996. The
increase in revenue from the sale of disposables was primarily attributable to
growth in the installed base of monitors.
 
     The Company's gross profit was 21% of revenue in 1996 as compared to 34% of
revenue in 1995. The decrease from 1995 to 1996 was primarily attributable to a
lower average selling price on the A-1050 monitor introduced in 1996 compared to
the A-1000 monitor.
 
     Research and development expenses decreased to $2.3 million in 1996 from
$2.9 million in 1995. This decrease resulted from a reduction in research and
development personnel in the second half of 1995.
 
                                       19
21
 
     Sales and marketing expenses increased to $1.6 million in 1996 from $1.3
million in 1995, but decreased as a percentage of revenue. The absolute dollar
increase was primarily due to an increase in advertising and marketing expenses
related to the introduction of the A-1050 monitor.
 
     General and administrative expenses increased to $1.9 million in 1996 from
$1.8 million in 1995, but decreased as a percentage of revenue in 1996 as
compared to 1995. The absolute dollar increase was primarily attributable to an
increase in general and administrative personnel to support the Company's
growth.
 
     Interest income remained relatively constant between 1995 and 1996.
Interest expense decreased from $85,000 in 1995 to $63,000 in 1996. The lower
interest expense in 1996 was primarily due to lower average outstanding capital
lease obligations.
 
QUARTERLY RESULTS OF OPERATIONS
 
     The following table sets forth unaudited selected operating results for
each of the five fiscal quarters in the period ended April 4, 1998. The Company
believes that the following selected quarterly information includes all
adjustments (consisting only of normal, recurring adjustments) that the Company
considers necessary to present this information fairly. This financial
information should be read in conjunction with the Company's Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. These
operating results are not necessarily indicative of results for any future
period.
QUARTER ENDED
                               ------------------------------------------------------------------
                               MARCH 29,    JUNE 28,    SEPTEMBER 27,    DECEMBER 31,    APRIL 4,
                                 1997         1997          1997             1997          1998
                               ---------    --------    -------------    ------------    --------
                                                         (IN THOUSANDS)
Revenue......................   $   415     $   661        $   845         $ 1,147       $ 1,733
Net loss.....................    (2,166)     (2,281)        (2,409)         (3,030)       (2,817)
LIQUIDITY AND CAPITAL RESOURCES
 
     Since its inception, the Company has financed operations primarily from the
sale of its Convertible Preferred Stock. Through April 4, 1998, the Company had
raised approximately $50.4 million from equity financings and had received $1.2
million in equipment lease financing. At April 4, 1998, the Company had
approximately $300,000 committed to the purchase of equipment related to the
automation of the BIS Sensor production line.
 
     Working capital at April 4, 1998 was approximately $10.9 million compared
to approximately $3.1 million and approximately $1.0 million at December 31,
1997 and 1996, respectively. The increases in working capital from 1996 to 1997
and from December 31, 1997 to April 4, 1998 were primarily due to the sale of
the Company's Convertible Preferred Stock in February 1997 and 1998, and
increases in accounts receivable and investment in sales-type leases, offset by
an increase in deferred revenue.
 
     The Company used approximately $2.7 million of cash for operations in the
first quarter of 1998. Cash used for operations during this period was primarily
driven by operating losses, increases in accounts receivable and investment in
sales-type leases, which were partially offset by an increase in deferred
revenue. The Company used approximately $17.5 million for operations during the
three years ended December 31, 1997. Cash used for operations during this period
was also primarily driven by operating losses, increases in accounts receivable
and investment in sales-type leases, offset by increases in accounts payable,
accrued liabilities and deferred revenue.
 
     The Company used approximately $3.0 million of cash for investing
activities in the first quarter of 1998. The Company invested approximately $2.3
million, net, in marketable securities and approximately $710,000 in
manufacturing equipment, leasehold improvements and new information systems. The
Company used approximately $3.0 million for investing activities during the
three
 
                                       20
22
 
years ended December 31, 1997. The Company invested approximately $1.2 million,
net, in marketable securities and approximately $1.8 million in manufacturing
equipment, leasehold improvements and new information systems.
 
     The Company received approximately $11.6 million of cash from financing
activities in the first quarter of 1998 primarily as a result of the sale by the
Company of its Convertible Preferred Stock in February 1998. The Company
received approximately $20.1 million of cash from financing activities during
the three years ended December 31, 1997. Cash provided by financing activities
during this period was primarily the result of the sale by the Company of its
Convertible Preferred Stock in each of the three years.
 
     In June 1998, the Company entered into a loan agreement with a commercial
bank. Under the terms of this loan agreement, the Company may borrow up to $5.0
million for working capital and equipment. The amount available to the Company
under the working capital portion of the loan agreement is based upon a
percentage of the Company's outstanding accounts receivable. The outstanding
principal under the working capital portion of the loan agreement is due and
payable in December 1999. The principal amount outstanding under the equipment
portion of the loan agreement is due in 36 equal monthly installments commencing
January 1999.
 
     The Company has conducted a software review to identify functions that need
corrections to be "Year 2000" compliant. The Year 2000 problem is the result of
computer programs being written to recognize two digits rather than four to
define the applicable year causing computer programs to interpret a date using
"00" as the year 1900 rather than the year 2000, which could result in product
failures or miscalculations. The Company is undertaking certain corrective
actions in an effort to ensure that software systems incorporated in its
products or used to manage its business will continue to function properly in
the year 2000. However, there can be no assurance that Year 2000 problems will
not be encountered or that the costs incurred to resolve such problems will not
be material. Additionally, there can be no assurance that the Year 2000 problem
will not affect the Company by causing disruptions in the business operations of
persons with whom the Company does business, such as customers or suppliers.
Year 2000 problems could have a material adverse effect on the Company.
 
     The Company believes that the financial resources available to it,
including its current working capital and loan agreement, together with the net
proceeds of this offering, will be sufficient to finance its planned operations
and capital expenditures at least through 1999. However, the Company's future
liquidity and capital requirements will depend upon numerous factors, including
the resources required to further develop its marketing and sales organization
domestically and internationally, to expand manufacturing capacity, to finance
the Company's sales-type lease program and to meet market demand for the
Company's products.
 
                                       21
23
 
                                    BUSINESS
 
THE COMPANY
 
     Aspect develops, manufactures and markets anesthesia monitoring systems
that enable anesthesia providers to assess levels of consciousness and
administer the appropriate amount of anesthetics during surgery. The BIS System
incorporates the Company's proprietary disposable BIS Sensors and the A-2000 BIS
Monitor, which was cleared for marketing by the FDA in February 1998. The BIS
System is based on Aspect's patented core technology, the BIS index, which is
the only FDA-cleared, commercially available direct measure of the effects of
anesthetics on the brain. The BIS System was developed over a ten-year period
and is the subject of eight issued and five pending United States patents.
Aspect markets the BIS System through a direct sales organization in the United
States. As of April 4, 1998, more than 600 BIS monitors have been sold to
approximately 100 sites in the United States, and the Company believes that over
100,000 patients have been monitored using the BIS index during surgery.
 
MARKET OPPORTUNITY
 
     The three basic objectives of general anesthesia are to render the patient
unconscious, to prevent response to painful stimuli and to ensure the patient
will not move during the surgical procedure. A combination of drugs is typically
used to accomplish these goals, including drugs to induce unconsciousness,
analgesics to provide pain relief and muscle relaxants to immobilize the
patient. Historically, anesthesia providers have had no direct means of
assessing a patient's level of consciousness during surgery and have generally
relied on recommended drug dosages and on indirect indicators of consciousness,
including blood pressure and heart rate. Changes in these indirect measures,
however, are not reliable indicators of changes in a patient's level of
consciousness. Although anesthesia providers can adjust recommended anesthetic
dosages based on individual patient characteristics, these adjustments cannot
always account for variability in patient responses to anesthesia or changes in
anesthetic requirements during the course of surgery.
 
     Each year, approximately 29 million patients in the United States and 47
million patients in Europe and Japan receive anesthesia for surgical procedures,
of whom more than 60% receive general anesthesia or deep sedation monitored by
an anesthesia provider. In the United States, there are approximately 34,000 ORs
in hospitals and 5,000 in independent ambulatory ASCs. In Europe and Japan,
there are approximately 48,000 ORs in hospitals.
 
     Third-party payors and managed care organizations are increasingly
scrutinizing the high cost of surgical care. As a result, hospitals are
implementing programs to control surgical costs, including the cost of
anesthetic drugs and anesthesia recovery, while seeking to improve quality of
care and safety. Programs to accelerate the anesthesia recovery process include
reducing the amount of time patients remain in the OR following the completion
of surgery, reducing the amount of time patients are required to remain in the
Post Anesthesia Care Unit ("PACU") after surgery, and allowing a higher
percentage of patients to bypass the PACU following ambulatory surgery and
proceed immediately to less costly step-down recovery areas.
 
     The Company believes that providing an effective tool for monitoring a
patient's level of consciousness during surgery will contribute to improving the
quality, safety and efficiency of anesthesia care. Using existing monitoring
devices, anesthesia providers are sometimes unable to identify surgical
awareness, or the unintentional regaining of consciousness during surgery,
because anesthetized patients who have received muscle relaxants are unable to
communicate and because changes in vital signs are not reliable indicators of
changes in levels of consciousness. It is estimated that, in the United States,
surgical awareness occurs in approximately 0.2% of surgeries requiring general
anesthesia, or approximately 35,000 procedures per year.
 
     Because of variations in the amount of anesthetic drugs administered for
any given surgery, variations in patient tolerances to anesthetic drugs and the
desire to prevent surgical awareness, the
                                       22
24
 
Company believes that anesthesia providers tend to administer more anesthetic
than is required by many of their patients. Overmedication contributes to the
high cost of surgical care as a result of increased drug costs, prolonged and
unpredictable wake-ups from anesthesia and prolonged post-anesthesia recovery in
the PACU. These factors, in turn, lead to inefficiencies in OR and PACU
scheduling and increased personnel costs.
 
     In addition to the OR, anesthesia is administered to sedate patients in
ICUs and for diagnostic and therapeutic procedures outside the OR. Many patients
admitted to the ICU receive sedation during their stay. There are approximately
80,000 beds in hospitals in the United States for critical care patients and
over 22 million patient days per year are spent in the ICU. The assessment of a
patient's level of sedation in the ICU is subjective, relies on indirect
measures, and is usually carried out by several different individuals in a
24-hour period, many of whom are not trained in anesthesia. The Company believes
that this may result in overmedication that may extend the patient's length of
stay in the ICU.
 
     Advances in pharmacology and the development of less-invasive diagnostic
and therapeutic procedures have enabled physicians to perform more procedures
outside the OR under conscious sedation rather than general anesthesia. Aspect
estimates that in the United States there are approximately 42,000 rooms in
hospitals, ASCs and doctors' offices where these procedures are performed.
During conscious-sedation procedures, a trained anesthesia provider may or may
not be present depending on the institution's policies and the attending
physician's judgment. One of the risks of conscious sedation is that
overmedication may cause a patient to lose consciousness and fall into a state
of general anesthesia resulting in the loss of protective reflexes, including
the ability to breath without mechanical assistance.
 
THE ASPECT SOLUTION: PATIENT MONITORING WITH THE BIS INDEX
 
     The Company has developed the only FDA-cleared, commercially available
product for use as a direct measure of anesthetic effect on the brain. Aspect's
clinically validated BIS index assists the anesthesia provider in assessing
levels of consciousness and administering appropriate amounts of anesthesia
required for the surgical procedure while avoiding unintentional overmedication
or undermedication. Company-sponsored clinical trials have shown that
administering appropriate levels of anesthetics results in less drug use, and
therefore, lower drug costs, faster wake-up from anesthesia, less patient time
in the OR and the PACU following surgery and improvement in the quality of
recovery. Other studies have shown that when appropriate levels of anesthesia
are administered, patients are more likely to meet criteria for bypassing the
PACU following ambulatory surgery and proceeding immediately to the less costly
step-down recovery area. The Company also believes that the BIS index can be
used to assess the risk of surgical awareness.
 
     The BIS index is a numerical index derived from the combination of several
processed EEG variables that correlate with loss of consciousness and changes in
levels of sedation. The BIS System, which incorporates the BIS index, is
comprised of the Company's anesthesia monitor and single-use, disposable BIS
Sensors. The FDA cleared for marketing the BIS index for use as a direct measure
of anesthetic effect on the brain in October 1996 and cleared the A-2000 BIS
monitor in February 1998.
 
     The following are examples of the benefits of BIS monitoring demonstrated
by the Company in a 302-patient prospective, randomized, controlled clinical
utility trial:
 
     - More controlled and cost-effective dosing of anesthetic drugs:  Patients
       monitored with the BIS index during surgery received 23% less anesthetic
       than patients who were not BIS monitored. Based upon the current average
       cost of the anesthetic drugs used in this utility trial, the Company
       believes that the use of the BIS index could result in drug cost savings
       of up to $18.00 per case.
 
     - Faster and more predictable recovery from anesthesia:  Patients receiving
       BIS monitoring during surgery emerged from unconsciousness 35% to 40%
       faster than patients who did not
 
                                       23
25
 
       receive BIS monitoring. In addition, only 5% of BIS-monitored patients
       required more than 15 minutes to emerge from anesthesia compared with 16%
       of patients who did not receive BIS monitoring. Moreover, patients who
       received BIS monitoring were eligible for discharge from the PACU 16%
       faster than patients who did not receive BIS monitoring.
 
     - Improved quality of recovery:  Patients received better clinical
       assessments of their recovery by PACU nurses when the BIS index was used.
       In addition, 43% of patients monitored with the BIS index were alert and
       oriented when admitted to the PACU, as compared to 23% of patients not
       monitored with the BIS index during surgery.
 
     The Company believes that the BIS index also provides an effective
indication of the risk of surgical awareness. The Company demonstrated the
correlation of BIS index values with the loss of and return to consciousness in
two clinical efficacy studies, one involving approximately 100 volunteers and
one involving 40 patients. The Company estimates that more than 100,000 patients
have been monitored with the BIS index during surgery. Four cases of surgical
awareness with BIS monitoring have been reported to the Company. In each case,
high BIS index values were noted, indicating that the BIS index correctly
identified the potential risk of awareness in these patients. The Company has
not undertaken the clinical studies necessary to confirm that BIS monitoring
reduces the incidence of surgical awareness because the Company estimates that
surgical awareness typically occurs in only one patient per 500 and, therefore,
the required studies are not practicable.
 
STRATEGY
 
     The BIS index is the only FDA-cleared and commercially available measure of
the effects of anesthetics on the brain. Aspect's objective is to become a major
multinational anesthesia-monitoring company by establishing BIS monitoring as
the standard of practice in anesthesia and sedation monitoring. Key elements of
the Company's strategy to accomplish its objective include the following:
 
     Direct Sales Force for Rapid Commercialization.  Aspect intends to
capitalize on its first-to-the-market position by pursuing a rapid
commercialization strategy that emphasizes use of a direct sales force. The
Company believes that a direct sales force is best able to convey to anesthesia
providers and administrators the clinical benefits and potential cost savings
achievable with BIS monitoring. Flexible sales options allow hospitals to either
purchase BIS monitors outright or acquire BIS monitors by committing to purchase
a minimum number of BIS Sensors per monitor per year. As of April 4, 1998, the
Company has sold more than 600 BIS monitors to approximately 100 sites in the
United States and the Company believes that over 100,000 patients have been
monitored with the BIS Sensor.
 
     Clinical Specialists to Educate and to Promote the Use of Aspect's BIS
System.  Aspect intends to establish a ratio of 1.5 clinical specialists for
each of the Company's sales representatives. The principal responsibilities of
these clinical specialists are to provide education, training and support for
the Company's installed base and to promote appropriate use of BIS Systems.
These activities are designed to increase the use of BIS Sensors in the OR. The
Company expects that clinical specialists will also play a key role in expanding
the use of BIS monitoring to markets outside the OR, including the ICU and
conscious sedation.
 
     OEM Relationships to Broaden Distribution Channels.  The Company believes
that original equipment manufacturer ("OEM") relationships will accelerate
market penetration of the BIS technology. OEM relationships will result in
integration of the BIS index into third-party patient-monitoring systems. The
Company currently is a party to two OEM agreements and expects to enter into
additional OEM relationships with patient-monitoring or medical device companies
over the next several years to expand the channels for distribution of the BIS
System, particularly in international markets.
 
                                       24
26
 
     Technological Leadership.  Aspect's priority is to improve current
applications of BIS technology and to develop further its signal-processing
technology. In addition, the Company intends to continue to sponsor and support
research of leading clinicians to further document the clinical utility of the
BIS index. The Company intends to protect its intellectual property and
technology leadership position through product innovation, patents and other
proprietary means.
 
     New Product Development.  The Company is continuing to focus both on
product extensions, such as the application of the BIS index for the ICU and
conscious-sedation markets, and on new product development, such as the
application of bispectral analysis to the electrocardiogram (the "ECG"). Each of
these initiatives builds on the Company's core expertise and innovations in
signal-processing technology. Continued innovation and commercialization of new
proprietary products is an essential element in the Company's long-term growth
strategy and the source of potential competitive advantages.
 
PRODUCTS
 
     The following chart summarizes Aspect's product offerings, all of which
have received 510(k) clearance from the FDA:
INITIAL
                                          COMMERCIAL
                PRODUCT                    SHIPMENT                     DESCRIPTION
                -------                  ------------                   -----------
A-2000 BIS Monitor                       March 1998      Small, lightweight third-generation BIS
                                                         monitor for the OR
BIS Sensor                               1997            Single-piece, single-use disposable
                                                         product for use with A-2000, A-1050 and
                                                         BIS Module Kit
BIS Module Kit(1)                        --              Components of BIS monitoring technology to
                                                         be integrated into OEM monitors
A-1050 EEG Monitor with BIS              1996            Second-generation monitor with BIS index
                                                         and simplified user interface
A-1000 EEG Monitor                       1993            Aspect's first commercial EEG monitor with
                                                         BIS index
ZipPrep EEG Electrode                    1995            EEG electrode with Aspect's ZipPrep
                                                         technology used with A-1000 monitor
---------------
(1) The Company has commenced commercial shipment of the BIS Module Kit. The
    Company does not believe any OEM has commenced commercial shipment of its
    BIS Module product. Each OEM will be required to obtain FDA clearance of its
    BIS Module product.
 
  A-2000 BIS Monitor
 
     Aspect began commercial distribution of the A-2000 BIS Monitor ("A-2000"),
the Company's third-generation monitoring product, in March 1998. The A-2000 is
a compact, portable system designed to accommodate the space limitations and
positioning requirements of surgical settings. The A-2000 displays the BIS index
and supporting information on a high-contrast electro-luminescent display and
includes Aspect's proprietary Digital Signal Converter. The Digital Signal
Converter is a palm-sized module that performs the analog-to-digital conversion
of the EEG and provides the interface between the monitor and the BIS Sensor,
which adheres to the patient's forehead. The A-2000 is compact (7 inches by 6.8
inches by 4 inches) and lightweight (3.1 pounds). The hardware architecture of
the A-2000 employs a 50 megaflops floating-point processor to perform the BIS
index computation and a 25 MIPS RISC processor to perform the user-interface
functions. The list price for the A-2000 is $8,900.
 
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27
 
  BIS Sensor
 
     The BIS Sensor is a single-piece, single-use disposable product for use
with the A-2000, the A-1050 and the BIS Module Kit. Aspect's BIS monitors and
BIS Module Kits require the use of the BIS Sensor to generate the BIS index. The
BIS Sensor provides a reliable and simple means of acquiring the high-resolution
EEG signal needed to generate the BIS index. The one-piece design allows quick
and accurate placement on the patient's forehead. The BIS Sensor connects to the
monitor by a single-point proprietary connector. The Company commenced
commercial shipment of the BIS Sensor in January 1997. The list price for the
BIS Sensor is $15.00.
 
     Aspect's ZipPrep self-prepping technology is a key feature of the BIS
Sensor because it minimizes patient set-up time and enables consistent, accurate
readings of the EEG signal. Prior to Aspect's development of the ZipPrep
technology, to obtain an EEG signal the user prepared a patient's skin by
rubbing an abrasive cream over the area 10 to 20 times in order to remove the
top layer of skin. The ZipPrep technology contains a non-conductive polymer disk
with multiple, small, flexible tines that are embedded in a standard electrode
hydrogel. As a function of their design, the ZipPrep tines come in contact with
and part the outer layer of dead cells on the skin. This allows the electrode's
hydrogel to quickly penetrate the skin and establish an effective electrical
contact to the patient.
 
  BIS Module Kit
 
     In 1996, Aspect introduced the BIS Module Kit, which requires the use of
the BIS Sensor in order to calculate the BIS index. The BIS Module Kit is
designed to facilitate the integration of the Company's BIS index into
monitoring products marketed by third parties that enter into OEM arrangements
with the Company. The Company is currently a party to two OEM agreements.
 
     The BIS Module Kit consists of two pieces, the Company's proprietary
Digital Signal Converter and a small circuit board that resides in the OEM
equipment. The Digital Signal Converter acquires the EEG signal from the BIS
Sensor, performs the analog-to-digital conversion, and transmits the digitized
EEG signal to the circuit board. The circuit board then processes the EEG signal
and outputs the BIS index to the OEM system.
 
     The Company expects that all OEM licensees of the BIS index technology will
use the common architecture of the BIS Module Kit, which will facilitate
integration of the BIS index into the OEM's system and will simplify any future
software updates of the BIS index technology.
 
TECHNOLOGY
 
     Aspect's BIS System was developed over a ten-year period and combines the
computational power of bispectral analysis with proprietary signal-processing
algorithms. The BIS index is a numerical index derived from the combination of
several processed EEG variables that correlate with loss of consciousness and
changes in levels of sedation. The EEG, the electrical signal generated in the
cortex of the brain, changes in response to anesthetic drugs. In general, the
EEG changes from a low-amplitude, high-frequency signal while a person is awake
to a large-amplitude, low-frequency signal while a person is deeply
anesthetized. Mathematical algorithms based on this observation, such as the
Spectral Edge Frequency and Median Frequency, attempt to track the effects of
anesthetics on the brain. However, these processed EEG parameters have not been
widely adopted because studies have indicated that they generally do not provide
sufficient clinically useful information to assess levels of consciousness with
commonly used anesthetic agents and doses.
 
     In developing the BIS index, the Company sought to improve these early EEG
analyses in two ways. First, by using bispectral analysis, a mathematical tool
that examines non-linear signals such as the EEG, new information is extracted
from the EEG signal. The second improvement involves the development of
proprietary processing algorithms that extract information from bispectral
analysis, power spectral analysis and time domain analysis. Bispectral analysis
was originally used in the early
 
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28
 
1960s by geophysicists to study ocean wave motion, atmospheric pressure changes
and seismic activity. Bispectral analysis can now be utilized for other
applications with the advent of high-speed, low-cost digital signal processors.
This technology is based on the non-linear expansion of Fourier analysis, which
provides the means to analyze the frequency, amplitude and phase relationships
within a signal. As a result, a distinctive "fingerprint" of the underlying
process that generates the signal can be obtained. Bispectral analysis extracts
this unique fingerprint and represents it as a three-dimensional mathematical
model of the signal's structure.
 
     The Company created the BIS index to describe changes in the EEG that
relate to the effects of anesthetics on the brain in order to assess levels of
consciousness. Over a number of years, a large database of high-fidelity EEG
recordings and clinical assessments were collected by the Company and third
parties from patients and volunteers receiving a wide variety of anesthetic
agents. The clinical assessments used to define levels of consciousness included
a sedation-rating scale, picture or word recall memory tests, and response to
stimuli. Using statistical methods, Aspect identified features within the EEG
that correlated with sedation and loss of consciousness. The Company used
proprietary multivariate statistical methods to combine these features to
generate an interpretive numerical index, which the Company refers to as the BIS
index. The BIS index ranges from 100, indicating that the patent is awake, to
zero, indicating an absence of electrical brain activity.
 
CLINICAL DEVELOPMENT
 
     The Company's clinical and regulatory affairs research group (i)
establishes collaborative relationships with leading clinical researchers; (ii)
encourages publications related to the BIS index in the scientific literature;
(iii) is responsible for clinical research with the goal of extending the
application of BIS monitoring to other settings and clinical uses; and (iv)
collects data for new product development. The Company has a clinical database
of over 5,000 cases for use in algorithm development and product validation
based on trials conducted or sponsored by the Company or undertaken by third
parties.
 
     In 1996, the FDA cleared for marketing the Company's BIS index as a measure
of anesthetic effect on the brain. The regulatory process involved studies
conducted by the Company on over 900 subjects. These studies characterized the
relationships between the BIS index value and various clinical endpoints,
including movement response to incision, response to verbal command as a measure
of consciousness in volunteers and patients, memory function, drug utilization
and speed of patient recovery following surgery.
 
     The Company evaluated the use of BIS monitoring as a measure of sedation,
consciousness and memory function in two clinical trials. In a multicenter study
involving approximately 100 volunteers, the Company demonstrated that the BIS
index correlated with the level of responsiveness and tracked the loss of
consciousness. In a second trial involving 40 patients, the BIS index reliably
correlated with the return to consciousness after a single injection of either
propofol or thiopental, two anesthetics often used to induce unconsciousness.
Several studies conducted by third parties, some of which were partially funded
by the Company, have generally confirmed these results.
 
     The Company's multicenter, prospective, randomized, clinical utility trial
of 302 patients demonstrated the outcome benefits of BIS monitoring. This trial
compared clinical outcomes of a group of BIS-monitored patients to a similar
group of patients who were monitored under standard clinical practice without
BIS monitoring. The principal efficacy endpoints were the amounts of anesthetic
given and the speed of recovery following surgery. BIS-monitored patients
received 23% less propofol, woke up earlier in the operating room, were more
likely (43% versus 23%) to arrive at the PACU fully alert and oriented, were
judged by PACU nurses to have had better recovery and met criteria for discharge
from the PACU sooner.
 
     Following FDA clearance of the BIS index, there have been five additional
prospective, randomized, clinical studies of BIS monitoring. The studies, one of
which was conducted by the Company, evaluated the effectiveness of BIS
monitoring in conjunction with various commonly used
                                       27
29
 
anesthetic agents on a total of nearly 300 patients. Each of the five studies
indicated that BIS monitoring led to a statistically significant reduction,
ranging from 15% to 38%, in the amount of anesthetic used per patient.
 
     One of the third-party studies, which was partially funded by the Company,
evaluated whether patients monitored with the BIS index were more likely to
bypass the PACU and proceed directly to the step-down recovery unit following
surgery. In this 60-patient study, approximately 90% of the BIS-monitored
patients were considered eligible to bypass the PACU as compared to 63% of
patients who were not BIS-monitored.
 
     In 1997, the Company's outcome study of 1,552 patients documented the
clinical impact and cost-effectiveness of routine BIS monitoring in all
operating rooms of Grady Hospital, a high-acuity, urban hospital located in
Atlanta, Georgia and affiliated with Emory University. Patients received a wide
variety of anesthetic agents typically used in general practice. Comprehensive
data were collected on all patients who received general anesthesia for at least
one hour. Results demonstrated that maintaining BIS index values within a
recommended target range during anesthetic maintenance was associated with
improved outcomes in terms of drug utilization, OR and PACU recovery and
associated costs.
 
     There are more than 175 scientific articles and abstracts reporting the
results of BIS index performance in studies conducted by the Company and third
parties. In addition, Aspect currently maintains collaborations with over 50
clinical research sites.
 
SALES, MARKETING AND CUSTOMERS
 
     The Company markets its BIS Systems in the United States through a direct
sales force. As of April 4, 1998, the Company's domestic sales force was
comprised of 14 sales professionals and 8 clinical specialists. Aspect has
developed a financial model for use by sales representatives to assist
administrators in evaluating the economic impact of BIS monitoring at their
hospital. Aspect believes that its clinical specialists play a key role in the
ongoing process of developing support for the BIS technology both before and
after the sale of BIS Systems. The principal responsibilities of clinical
specialists are clinical training and education at the time the equipment is
installed. Clinical specialists also make follow-up visits at each customer site
at regularly scheduled intervals. These visits allow clinical specialists to
monitor customer satisfaction and provide continuing feedback to the Company's
marketing and research and development staffs. The Company also believes that
these visits may help to establish BIS monitoring as the standard of practice in
anesthesia monitoring and to extend BIS monitoring into other settings in the
hospital, such as the ICU and conscious-sedation procedure rooms. Clinical
specialists generally have nursing backgrounds and have experience in
anesthesia, perioperative care or critical care. The Company currently plans to
hire several additional sales representatives and clinical specialists prior to
the end of 1998. The Company intends to establish a ratio of 1.5 clinical
specialists for each of the Company's sales representatives.
 
     The Company offers customers the option either to purchase the BIS monitors
outright or to acquire the BIS monitors pursuant to a sales-type lease agreement
whereby the customer contractually commits to purchase a minimum number of BIS
Sensors per BIS monitor per year. Under this agreement, customers purchase the
BIS Sensors and the BIS monitor for the purchase price of the BIS Sensors plus
an additional charge per BIS Sensor to pay for the purchase price of the BIS
monitor and related financing costs over the term of the agreement. The customer
is granted an option to purchase the BIS monitor at the end of the term of the
agreement, which is typically three to five years. The Company believes that the
sale-type lease arrangement in some cases reduces the time required for
customers to adopt the BIS System because it provides them with an option to
utilize their operating budget to fund the purchase.
 
     The Company's customers include anesthesia providers, hospitals, ASCs and
individual practitioners in office-based practice. The key customers that the
Company has targeted initially include
                                       28
30
 
the larger hospitals and ASCs, at or near capacity, with a high ratio of
outpatient surgical procedures to total surgical procedures. Through April 4,
1998, over approximately 100 sites in the United States have acquired the BIS
System.
 
     The Company conducts several activities for the different constituencies
that may be involved in the decision-making process. For clinical audiences, the
Company exhibits at tradeshows, sponsors speakers at professional meetings and
develops articles for publication in conjunction with industry experts. To
educate consumers and hospital administrators, the Company is conducting a
public-relations campaign to highlight the benefits of BIS monitoring for
hospitals and patients. In addition, the Company works with hospitals to
publicize their adoption of BIS monitoring in an effort to assist them in
communicating their commitment to improving the quality and efficiency of
patient care. The Company believes that such publicity in the local media allows
hospitals to compete more effectively in their service areas and has allowed
Aspect to expand its business in those markets.
 
     In January 1998, the Company entered into a three-year distribution
agreement with Nihon Kohden pursuant to which the Company granted to Nihon
Kohden Corporation ("Nihon Kohden") exclusive rights to distribute the Company's
BIS monitors in Japan. The import and sale of the Company's BIS monitors by
Nihon Kohden is subject to approval by the Japanese Ministry of Health and
Welfare. Nihon Kohden applied for this approval in early 1998.
 
     The Company has hired a president of its newly-developed International
Division and is evaluating several options for international distribution of its
products, including the development of a field organization that includes sales
representatives and clinical specialists in selected countries and international
regions. The Company is also evaluating entering into distribution agreements
with dealers, distributors and anesthesia monitoring companies outside the
United States.
 
RESEARCH AND DEVELOPMENT
 
     The Company's research and development efforts focus primarily on
continuing to improve the function and features of the BIS System and enhancing
the Company's technical leadership in signal-processing technology for use in
patient care. The Company intends to leverage the BIS technology for the
development of new monitoring products and proprietary disposables for new
applications.
 
     During the fiscal years ended December 31, 1995, 1996 and 1997, and the
quarter ended April 4, 1998, the Company expended $2.9 million, $2.4 million,
$2.6 million and $887,000, respectively, in its research and development
efforts, including clinical and regulatory expenses. The Company expects
research and development expenses to increase in the future as it seeks to
enhance its existing products and develop additional products. As of April 4,
1998, the Company employed 15 persons in its research and development group and
six persons in its clinical and regulatory group. For a further discussion of
the Company's clinical and regulatory group, see "-- Clinical Development."
 
     The Company conducts research and development in five areas: algorithm
research, product development, disposable-product development, pre-production
quality assurance and clinical engineering. Algorithm research involves
developing signal-processing techniques to analyze the EEG and other
biopotentials. Product-development activities include developing the hardware
and software, including signal-processing software employed in the Company's BIS
Systems, and coordinating with external resources, particularly with respect to
mechanical engineering and industrial design. Disposable-product research and
development combines expertise in materials science, disposable-products design,
electrode technology and design for manufacturing to develop the Company's
disposable products, including the BIS Sensor products. Pre-production quality-
assurance activities include testing the Company's products to ensure that they
meet FDA guide-
 
                                       29
31
 
lines, other applicable regulatory and international quality standards and
internal verification and validation protocols.
 
     The Company is currently seeking to improve the BIS index technology for
ICU applications. Sedative agents are frequently used on ICU patients to reduce
anxiety, to enhance patient compliance to various interventional treatments and
to improve patient comfort. The current methods of assessing levels of sedation
in the ICU rely on a variety of indirect, often subjective, assessments
performed by observing physical signs and patient responsiveness to voice or
touch. These assessments are typically carried out by a number of different
health care providers in a 24-hour period, many of whom are not trained in
anesthesia. Patients in the ICU often have a critical illness or injury that
affects one or more organ systems simultaneously resulting in high degrees of
variability in patient responses to drug doses. Another complicating problem in
assessing a patient's level of sedation in the ICU is the effect of muscle
relaxants. These drugs may render the assessment extremely difficult because the
patient's ability to respond to the observer is eliminated due to drug-induced
paralysis. There are reports of patients who do not receive adequate levels of
sedation when these agents are used. In these cases, patients are paralyzed and
subjected to painful and traumatic therapies while the clinician is unaware of
the patient's discomfort. The Company is currently evaluating monitoring
products intended to measure the effects of sedation in the ICU setting.
 
     The Company is also enhancing the BIS index for use in procedures requiring
sedation that are performed outside the OR. In these procedures, the level of
conscious sedation required ranges from light to deep sedation. The types of
procedures where conscious sedation is used include diagnostic endoscopy for
upper gastrointestinal exams, colonoscopy, bronchoscopy, and cystoscopy;
diagnostic and therapeutic radiological procedures, oral surgery, plastic
surgery, interventional cardiac procedures, and some emergency-room procedures.
During these procedures, a trained anesthetist may not be present depending upon
the local institution's policies and the attending physician's judgment. One of
the risks of conscious sedation is that overmedication may cause a patient to
lose consciousness and fall into a state of general anesthesia resulting in the
loss of protective reflexes, including the ability to breath without mechanical
assistance.
 
     The Company is exploring the development of a BIS Sensor with improved
signal-processing systems for detection and filtration of noise in settings
outside the OR and other BIS Sensors which offer advantages in cases where
patients may require extended BIS monitoring, such as in the ICU.
 
     The Company is also conducting preliminary research on the application of
its BIS index technology to ECG signals to diagnose cardiovascular disease. The
Company believes that bispectral analysis may provide a means for extracting and
quantifying subtle physiological information contained in the ECG and thus has
the potential to enhance the diagnostic accuracy of many ECG applications,
including the early diagnosis and assessment of coronary artery disease, a more
rapid assessment of acute myocardial infarctions and advanced perioperative
ischemia monitoring for patients at risk for heart attacks during or after
surgery.
 
     Additional studies, sponsored in part by the Company, are ongoing to assess
the performance of the BIS index in the presence of certain anesthetics, such as
ketamine, and patient populations, such as children, not included in the
clinical development of the BIS algorithms. There can be no assurance that the
BIS technology will be effective in monitoring these or other anesthetic agents
and patient populations or when other anesthetic techniques are used.
Furthermore, there can be no assurance that the Company will be successful in
developing any product enhancements or extensions or new products, including
products for use in the ICU, for conscious sedation or for other applications.
The failure of the Company to develop product enhancements or extensions or new
products on a timely basis or at all could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Technological Risks."
 
                                       30
32
 
MANUFACTURING
 
     The Company assembles all of its BIS monitors in a 7,000 square foot
manufacturing facility located within its Natick, Massachusetts headquarters.
The Company has historically outsourced the manufacturing of its BIS Sensors. In
the first quarter of 1998, the Company transitioned a portion of its production
of BIS Sensors to its manufacturing facility. The Company currently outsources
to third parties the production of some of its BIS Sensors and all of its
ZipPrep electrodes. The Company is currently building a custom-designed,
semi-automated production line for the high-volume manufacture of its BIS
Sensors that it expects to be operational by late 1998. The Company may require
additional manufacturing capacity within the next two years. The Company will
seek to obtain additional manufacturing facilities as needed. While the Company
believes that additional space on reasonable commercial terms will be available
to meet its future manufacturing needs, there can be no assurance that the
Company will be successful in expanding its manufacturing facility or relocating
its facility to meet demand in a timely manner or within budget.
 
     The Company's production process for its BIS monitors consists of final
assembly, integration and testing of standard and custom components. The
Company's production process for its BIS Sensors consists of several
manufacturing and assembly processes using custom components. Qualified
sub-contractors, who have met the Company's supplier certification process and
are placed on an approved vendors list, produce certain custom components.
 
     The Company maintains a quality-assurance program covering its
manufacturing operations. Suppliers of purchased components are required to meet
stated specifications. The Company certifies suppliers prior to use by
conducting audits and product inspections. The Company engages in ongoing
evaluations of the performance of its suppliers by evaluating the results of
inspections and tests as well as the timeliness of product deliveries. The
Company employs numerous quality-assurance procedures during its in-house
manufacturing processes to ensure finished products meet specification.
Quality-assurance procedures include operator training, process validation,
equipment calibration, inspection and testing. All manufacturing procedures and
processes are formally approved and updated using established revision-control
procedures. Documentation of in-process and final-testing results is maintained
in device history records for every unit. The Company maintains an ongoing
post-sale performance-monitoring program.
 
     Although most of the standard components utilized by the Company in
manufacturing its products are available from more than one vendor, certain key
components of the Company's BIS Systems, including certain components used in
the BIS Sensor, are currently provided to the Company by single or limited
sources. A significant unplanned event at a supplier, including shortages of raw
materials or components, could have a material adverse effect on the Company's
operations. In addition, any termination or modification of any manufacturing
arrangement with a third party could result in a business interruption for the
Company. The Company has only one manufacturing facility, and any loss of,
damage to, or interruption of production at its facility could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Limited Manufacturing Experience; Manufacturing
Expansion."
 
COMPETITION
 
     The medical device market is highly competitive and characterized by rapid
product development and technological advances. The future success of the
Company will depend in part upon its ability to anticipate and keep pace with
advancing technology and competitive innovations. However, there can be no
assurance that the Company will be successful in identifying, developing and
marketing new products or enhancing its existing products. In addition, there
can be no assurance that new monitoring products or alternative techniques for
evaluating the effects of anesthesia or other significant changes in the methods
of delivering anesthesia will not be developed that will render the Company's
current or planned products obsolete or inferior. Rapid technological
development by competitors may result in the Company's products becoming obso-
 
                                       31
33
 
lete before the Company recovers a significant portion of the research,
development and commercialization expenses incurred with respect to such
products.
 
     Although the BIS monitor is currently the only device to be cleared by the
FDA for use in the United States as a direct measure of anesthetic effect on the
brain, the Company expects to face significant competition in the future. The
Company believes that competition will initially come from companies, including
patient monitoring companies, currently marketing conventional EEG monitors
utilizing standard signal-processing techniques such as the Spectral Edge
Frequency and Median Frequency, or companies that market EEG monitors utilizing
novel signal-processing technologies, including at least two companies that are
currently conducting clinical trials on products under development.
Additionally, a number of academic researchers worldwide are studying the
potential use of other techniques to measure the effects of anesthesia,
including the use of auditory evoked potentials, heart rate variability,
pupillary reflexes and skin blood flow measurement techniques. In addition, the
Company may face substantial competition from companies developing sensor
products that are competitive with the Company's proprietary BIS Sensors for use
with the Company's BIS monitors. Competitors in some jurisdictions outside the
United States may enter the market without the delay caused by regulatory
barriers that exist in the United States. Many potential competitors have
substantially greater financial, marketing, technical, manufacturing and
distribution resources than those of the Company. In addition, the Company will
compete on the basis of a number of factors in areas in which the Company has
limited experience, including manufacturing efficiencies, marketing and sales
capabilities and customer service. There can be no assurance that the Company
will be able to compete successfully against competitors or that competition,
including the development and commercialization of new products and technology,
will not have a material adverse effect on the Company's business, financial
condition or results of operations. See "Risk Factors -- Competition."
 
PATENTS AND PROPRIETARY RIGHTS
 
     The Company's policy is to prosecute and enforce its patents and
proprietary technology. The Company intends to continue to file United States
and foreign patent applications to protect technology, inventions and
improvements that are considered important to the development of its business.
The Company also relies upon trade secrets, know how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position. As of June 25, 1998, the Company held eight United States patents and
several foreign patents and had filed five additional United States patent
applications and numerous patent applications in certain major industrial
countries, including Canada, the major European market countries, Australia and
Japan.
 
     The Company has established a substantial proprietary position with respect
to its core signal-processing technology, bispectral analysis, and its
application to biological signals. A series of four issued United States patents
covers the application of bispectral and higher order analysis to EEG signals,
along with various statistical-modeling techniques. Two United States patent
applications cover innovative methods of ensuring the reliability of the
computed values; of these, one has been allowed but has not yet issued and the
other is pending. The Company also holds two issued United States patents
covering the application of its core technology to ECG applications. The Company
holds one United States patent and three United States patent applications
covering its proprietary electrode and sensor technology. The issued patent
covers the Company's ZipPrep self-prepping disposable electrode technology, a
patent application covers the Company's proprietary sensor interconnection
technology, and two other patent applications cover the Company's proprietary
disposable BIS Sensor technology. The Company owns a United States patent that
covers signal acquisition technology for the Company's Digital Signal Converter
and has been granted a perpetual, royalty-free, non-exclusive license to a
second United States patent covering this technology by a third party.
 
                                       32
34
 
     The Company believes that its competitive position and success has depended
on, in part, and will continue to depend on the ability of the Company to obtain
patent protection for its products, to defend patents once obtained, to preserve
its trade secrets and to operate without infringing upon patents and proprietary
rights held by third parties, both in the United States and in foreign
countries. There can be no assurance that the Company has or will develop or
obtain additional rights to products or processes that are patentable, that
patents will issue from any of the pending patent applications filed by the
Company or that claims allowed will be sufficient to protect the Company's
technology or technology that is licensed to the Company. In addition, no
assurances can be given that any patents issued to the Company will not be
challenged, invalidated, infringed or circumvented or that the rights granted
thereunder will provide competitive advantages for the Company's business or
products. Protection of patent rights outside the United States could be more
costly and result in a greater diversion of effort and resources of management
than protection of patent rights inside the United States. In such event, the
business, results of operations and financial condition of the Company could be
materially adversely affected.
 
     There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. The Company has in
the past been involved in patent litigation and future litigation may be
necessary to protect patents, trade secrets, copyrights or "know-how" owned by
the Company or to defend the Company against claimed infringement of the rights
of others and to determine the scope and validity of the proprietary rights of
the Company and others. The validity and breadth of claims covered in medical
technology patents involve complex legal and factual questions for which
important legal principles are unresolved. Any such litigation could result in
substantial cost to and diversion of effort by the Company. Adverse
determinations in any such litigation could subject the Company to significant
liabilities to third parties, could require the Company to seek licenses from
third parties with unfavorable terms, if at all, and could prevent the Company
from manufacturing, selling or using certain of its products, any of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
 
     The Company also relies on copyrights, trade secrets and proprietary
technology that it seeks to protect, in part, through confidentiality agreements
with employees, consultants and other parties. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, that others will not independently develop
substantially equivalent proprietary information or that third parties will not
otherwise gain access to the Company's trade secrets.
 
     The Company also relies upon trademarks and trade names for the development
and protection of brand loyalty and associated goodwill in connection with its
products. The Company's policy is to protect its trademarks, trade names and
associated goodwill by, among other methods, filing United States and foreign
trademark applications relating to its products and business. The Company owns
numerous United States and foreign trademark registrations and applications. The
Company's registered and unregistered trademark rights relate to the majority of
the Company's products. There can be no assurance that any registered or
unregistered trademarks or trade names owned by or licensed to the Company or
licensed to the Company will not be challenged, cancelled, infringed,
circumvented, be declared generic or infringing of other third-party marks or
provide any competitive advantage to the Company. The Company also is a party to
a license agreement with a third party pursuant to which it has obtained the
nonexclusive right to make, use and/or sell products under the name "Aspect."
The licensor of the Aspect name markets monitors for use in the healthcare
industry. There can be no assurance that there will not be confusion in the
market between the Company and such licensor. In addition, there can be no
assurance that other companies in the medical device industry will not emerge
with the same or a similar name and thereby create confusion in the market or
that any such confusion would compromise the competitive advantage, if any, the
Company derives from its name.
 
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GOVERNMENT REGULATION
 
     The manufacture and sale of medical diagnostic devices intended for
commercial distribution and use are subject to extensive government regulation
in the United States and in other countries. The Company's existing products are
regulated in the United States as medical devices by the FDA under the Federal
Food, Drug, and Cosmetic Act ("FDC Act"). Pursuant to the FDC Act, the FDA
regulates the research, testing, manufacturing, safety, labeling, storage,
record keeping, advertising, distribution and production of medical devices.
Noncompliance with applicable regulations can result in failure of the
government to grant clearance for devices, withdrawal of prior clearances or
approvals, total or partial suspension of production, fines, injunctions, civil
penalties, recall or seizure of products and criminal prosecution.
 
     Generally, before the Company can introduce a new product in the United
States, the Company must obtain FDA clearance of a premarket notification under
Section 510(k) of the FDA Act ("510(k)") or approval of a PMA application under
Section 515 of the FDC Act. To date, the Company has received 510(k) clearance
from the FDA with respect to the following products: A-1000 (December 1992);
ZipPrep EEG Electrodes (June 1994); A-1050 (January 1996); BIS Sensor (October
1996); BIS Clinical Utility Indication (October 1996) and A-2000 (February
1998). While the Company has been successful to date in obtaining regulatory
approval of its products through the 510(k) notification process, there can be
no assurance that any of the Company's future products will meet the
requirements for 510(k) clearance. If the FDA concludes that any product does
not meet such requirements, then a PMA would be required and the process for
obtaining regulatory approval would be significantly delayed.
 
     Once 510(k) clearance has been received, any products manufactured or
distributed by the Company are subject to extensive and continuing regulation by
the FDA, including compliance with GMP regulations, recordkeeping requirements,
reporting of adverse experience with the use of the device, post-market
surveillance, and other actions deemed necessary by the FDA. A new 510(k)
notification is also required when a medical device manufacturer makes a change
or modification to a legally marketed device that could significantly affect the
safety or effectiveness of the device, or where there is a major change or
modification in the intended use of the device. When any change or modification
is made to a device or its intended use, the manufacturer must make the initial
determination whether the change or modification is of a kind that would
necessitate the filing of a new 510(k) notification. The FDA's regulations
provide only limited guidance for making this determination. The Company has
made certain enhancements to its currently marketed products which it believes
do not necessitate the filing of a new 510(k) notification. There can be no
assurance that the FDA would agree with the Company's determinations that these
modifications do not require 510(k) notification. If the FDA requires the
Company to file a new 510(k) notification for any past or future modification to
a cleared device, the Company may be prohibited from marketing the device as
modified until it obtains clearance from the FDA. There can be no assurances
that the Company will obtain 510(k) clearance on a timely basis, if at all, for
any device modification.
 
     The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company to demonstrate and maintain compliance with
GMPs, including Quality Systems Regulations, as specified by the FDA. This
regulation requires, among other things, that (i) the product development and
manufacturing process be controlled by the use of written procedures and (ii)
the ability to produce devices which meet the manufacturer's specifications be
validated by extensive and detailed testing of every aspect of the process. The
regulation also requires investigation of any deficiencies in the manufacturing
process or in the products produced and detailed record keeping. The GMP
regulations are applicable to manufacturers that produce components specifically
for use in a medical device, and require design controls and maintenance of
service records.
 
                                       34
36
 
     The FDA monitors compliance with GMP by conducting periodic inspections of
manufacturing facilities. If violations of applicable regulations are noted
during FDA inspections of the Company's manufacturing facilities, the continued
marketing of the Company's products may be adversely affected.
 
     The GMP regulations are subject to change and depend heavily on
administrative interpretations. There can be no assurance that future changes in
regulations or interpretations made by the FDA or other regulatory bodies, with
possible retroactive effect, will not adversely affect the Company. In August
1996, the FDA conducted a routine inspection of the Company's manufacturing
facility to ensure compliance with GMP regulations. The FDA noted no adverse
observations during this inspection. The Company believes that it has continued
to maintain manufacturing facilities and procedures that are fully compliant
with all applicable government quality systems regulations and guidelines.
However, adverse findings during future FDA facility inspections could have
material adverse effects on the Company's business, financial condition, and
result of operations.
 
     Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Failure to comply with foreign regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     In June 1998, the Company obtained ISO 9001/EN46001 international quality
systems registration, a certification showing that the Company's procedures and
manufacturing facilities comply with standards for quality assurance and
manufacturing process control. The ISO 9001 certification, along with the
EN46001, the European Medical Device Directive ("MDD") certification, signifies
compliance with the requirements enabling the Company to affix the CE Mark to
its current products. The CE Mark denotes conformity with European standards for
safety and allows certified devices to be placed on the market in all European
Union countries. After June 1998, medical devices may not be sold in European
Union countries unless they display the CE Mark. However, there can be no
assurance that the Company will be able to maintain regulatory approvals or
clearances for its products in foreign countries. See "Risk
Factors -- Government Regulation."
 
     The Company has established a dedicated regulatory and quality assurance
group to maintain regulatory compliance and manage all quality-assurance
activities for the Company. This group is responsible for all regulatory
submissions and communications, scheduling and performing company-wide audits,
coordinating product update procedures and corrective actions, and maintaining
document control activities. Other quality-related responsibilities include
complaint handling, adhering to appropriate procedures and applicable
requirements related to the FDA's quality systems regulations, and coordinating
appropriate documentation for FDA and ISO 9001/EN 46001 review and audits.
 
THIRD-PARTY REIMBURSEMENT
 
     Third-party payors such as Medicare, Medicaid, private health insurance
carriers, managed care organizations, health care administration authorities in
foreign countries and other organizations may affect the pricing or demand for
the Company's products by regulating the maximum amount of reimbursement
provided for by such payors to the anesthesia providers, hospitals, ASCs or
physician's offices where surgical procedures are performed.
 
     The Company does not expect that anesthesia providers will be separately
reimbursed for patient monitoring activities utilizing the Company's BIS
monitor. When providers, such as hospitals or ASCs, are reimbursed a fixed fee
calculated on a per case, per stay, or per capita basis, which is typical for
inpatient hospital procedures and procedures performed in ASCs, the cost of BIS
monitoring will not be recovered by these providers unless the incremental costs
of BIS monitoring are offset by savings in other costs, such as the costs of
anesthetic drugs or costs of the OR or PACU.
                                       35
37
 
There can be no assurance that BIS monitoring will result in sufficient savings
to offset these costs. When reimbursement is based on charges or costs, BIS
monitoring may have the effect of reducing reimbursement because the charges or
costs for surgical procedures, including OR and PACU charges and costs, may
decline as a result of BIS monitoring. Failure by hospitals and other users of
the BIS Systems to obtain sufficient reimbursement from third-party payors, or
any reduction in the reimbursement by third-party payors to hospitals and other
users as a result of using the BIS System, could limit market acceptance of the
BIS System and have a material adverse effect on the Company's business, results
of operations and financial condition. See "Risk Factors -- Limitations on
Third-Party Reimbursement."
 
EMPLOYEES
 
     As of April 4, 1998, the Company had 77 full-time employees. Approximately
15 persons were engaged in research and development activities, 17 persons were
engaged in manufacturing and engineering, six persons were engaged in clinical
and regulatory affairs, 28 persons were engaged in sales and marketing and
clinical support and 11 persons were engaged in general and administrative
functions. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers relations with its employees to be good.
 
SCIENTIFIC ADVISORS
 
     The Company utilizes a number of scientists and physicians to advise it on
scientific and medical matters, including experts in EEG monitoring,
pharmacology and anesthesia management. These individuals advise the Company
concerning its research and development programs, the design and implementation
of the Company's clinical research program, the Company's publication
strategies, the identification of market opportunities from the clinical
perspective and specific scientific and technical issues.
 
FACILITIES
 
     The Company currently leases approximately 23,000 square feet of
development, production, and administrative space in Natick, Massachusetts
pursuant to a lease which expires on October 31, 2000. The Company believes its
current facilities will be sufficient to meet the Company's needs through the
first half of 1999 and that additional space will be available at a reasonable
cost to meet the Company's space needs thereafter.
 
INSURANCE
 
     The business of the Company entails the risk of product liability and
product recall claims and any such claims could have an adverse impact on the
Company. The Company has taken and will continue to take what it believes are
appropriate precautions, including maintaining general liability and commercial
liability insurance policies which include adequate coverage for product
liability and product recall claims. The Company evaluates its insurance
requirements on an ongoing basis to enable it to maintain adequate levels of
coverage. However, there can be no assurance that product liability or product
recall claims will not exceed such insurance coverage limits or that such
insurance will be available on commercially reasonable terms or at all.
 
LITIGATION
 
     The Company is not a party to any material threatened or pending legal
proceedings.
 
                                       36
38
 
                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The executive officers and directors of the Company, their respective ages
as of June 15, 1998 and their positions with the Company are as follows:
NAME                    AGE                         POSITION
                 ----                    ---                         --------
Nassib G. Chamoun......................  36     Chief Executive Officer, President and Director
J. Breckenridge Eagle..................  48     Chairman of the Board of Directors
J. Neal Armstrong......................  60     Vice President, Chief Financial Officer and
                                                Secretary
Jeffrey Barrett........................  35     Vice President of Manufacturing and Operations
Boudewijn L.P.M. Bollen................  51     President - International
Philip Devlin..........................  41     Vice President of Research and Development
Steven H. Kane.........................  45     Vice President of Sales and Field Operations
Paul J. Manberg, Ph.D. ................  43     Vice President of Clinical, Regulatory and Quality
                                                  Assurance
Jean Nelson............................  39     Vice President of Marketing
Stephen E. Coit(1).....................  50     Director
Edwin M. Kania, Jr. (2)................  40     Director
Lester John Lloyd(2)...................  62     Director
Terrance McGuire.......................  42     Director
Donald Stanski, M.D.(1)................  48     Director
---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
 
     Mr. Chamoun is a founder of the Company and has served as a director of the
Company since 1987. Mr. Chamoun has served as President of the Company since
1996 and Chief Executive Officer since 1995. Mr. Chamoun served as Chairman of
the Board of Directors, from 1987 to 1996, and as Chief Scientific Officer from
1991 to 1995. Mr. Chamoun also served as President and Chief Executive Officer
prior to 1995 at various times since founding the Company in 1987. From 1984 to
1987, Mr. Chamoun was a fellow in cardiovascular physiology at the Lown
Cardiovascular Laboratory of the Harvard School of Public Health. Mr. Chamoun
earned a bachelors degree in Electrical Engineering from Northeastern University
and a masters degree in Computer Engineering from Boston University.
 
     Mr. Eagle has served as a director of the Company from 1988 to 1991 and
from 1996 to the present. Mr. Eagle has served as Chairman of the Board of
Directors since November 1996. He served as President and Chief Operating
Officer of the Company in 1996 and served as a consultant to the Company in
1995. From 1989 to 1995, he served as President of ECS, Inc., a medical practice
management company which he founded in 1989. From 1981 to 1988, he served as
Chief Financial Officer, Vice President and General Manager of The Health Data
Institute, Inc., a health care services company, which he co-founded. Mr. Eagle
earned a bachelors degree in Psychology and a masters degree in Public Health
from Yale University and received a masters degree in Business Administration
from Harvard Business School.
 
     Mr. Armstrong has served as Vice President and Chief Financial Officer of
the Company since 1996. From 1990 to 1996, he served as Vice President of
Finance, Chief Financial Officer and a director of Haemonetics, Inc., a
manufacturer of blood processing systems ("Haemonetics"). From 1985 to 1990, he
served as Vice President of Finance and Administration, Treasurer and Chief
Financial Officer at BTU International, a manufacturer of thermal processing
systems. He previously served for 14 years in senior operating and financial
positions at Texas Instruments, Inc., an
 
                                       37
39
 
electronics company. Mr. Armstrong holds a bachelors degree in Business
Administration from the University of Texas and is a certified public
accountant.
 
     Mr. Barrett has served as Vice President of Manufacturing and Operations of
the Company since 1997. From 1996 to 1997, he served as Vice President of
Manufacturing at Aksys, Ltd., a developer of dialysis equipment. From 1989 to
1996, Mr. Barrett served in a variety of manufacturing and operating positions
at Haemonetics, serving most recently as its Vice President of Operations. Mr.
Barrett received a bachelors degree in Economics and Industrial Engineering from
Rutgers University and a masters degree in Business Administration from Boston
University.
 
     Mr. Bollen has served as President - International of the Company since
June 1998. From 1986 to 1997, Mr. Bollen held several positions at Nellcor
Puritan Bennett, Inc., a medical device company, including Executive Vice
President for Worldwide Sales, Service and Distribution, Vice President of
European Sales and Marketing, and Vice President and Managing Director for
Europe. From 1981 to 1986, Mr. Bollen served as Vice President of Marketing and
Sales in Europe for Bentley Laboratories, Inc., a manufacturer of specialized
monitoring and medical equipment. Mr. Bollen holds the equivalent of a bachelors
degree in Hotel Business Management from the Hotel Business School in
Maastricht, Holland.
 
     Mr. Devlin has served as Vice President of Research and Development of the
Company since 1994 and served as Director of Product Development of the Company
from 1990 to 1994. From 1984 to 1985 and 1986 to 1990, he served as Software
Engineer and Manager of Software Engineering at Lifeline Systems, Inc., a
medical products and communications company. From 1980 to 1984, he served as
Chief Biomedical Engineer at Beth Israel Hospital in Boston, Massachusetts and
from 1985 to 1986, he served as Technical Marketing Engineer in the Medical
Product Group of Hewlett-Packard Company, a manufacturer of computers and
medical devices. Mr. Devlin holds a bachelors and masters degree in Electrical
Engineering from Northeastern University.
 
     Mr. Kane has served as Vice President of Sales and Field Operations of the
Company since 1997. From 1990 to 1997, he served as Area Vice President, Sales
and Operations, Northeastern United States at Pyxis Corp., a medical technology
company. From 1988 to 1990, he served as Regional Manager, Eastern United
States, at IVAC Corp., an intravenous infusion therapy systems company.
 
     Dr. Manberg has served as Vice President of Clinical, Regulatory and
Quality Assurance of the Company since 1991. From 1984 to 1990, he served in a
variety of clinical research positions at Serono Laboratories, a pharmaceutical
company, most recently as Vice President, Research and Development. From 1979 to
1984, he served as a Clinical Research Scientist at Burroughs-Wellcome Company,
a pharmaceutical company, and served as an Adjunct Research Scientist at the
University of North Carolina. Dr. Manberg received a bachelors degree in
Biological Sciences from the State University of New York at Binghamton and a
doctorate in Pharmacology from the University of North Carolina at Chapel Hill.
 
     Ms. Nelson has served as Vice President of Marketing of the Company since
1992. From 1988 to 1992, she was employed by Nellcor, Inc., a medical device
company, serving from 1990 to 1992 as Manager of Advanced Technologies, from
1989 to 1990 as Multi-Function Monitor Group Manager and from 1988 to 1989 as
New Products Manager. From 1984 to 1988, Ms. Nelson served as a consultant with
Bain and Company, Inc., a strategic management consulting firm. Ms. Nelson
earned a bachelors degree in Metallurgy and Materials Engineering from Lehigh
University and a masters degree in Business Administration from the University
of Chicago Graduate School of Business.
 
     Mr. Coit has served as a director of the Company since 1987. He has been a
self-employed artist since 1997. From 1995 to 1997, Mr. Coit served as a general
partner of Charles River Ventures, a venture capital firm. From 1984 to 1994,
Mr. Coit served as a general partner of Merrill, Pickard, Anderson & Eyre, a
venture capital firm. Since 1989, Mr. Coit has also served as a director of
International Data Group, a provider of media research and conferences to the
information technology industry.
 
                                       38
40
 
     Mr. Kania has served as a director of the Company since 1995. Mr. Kania is
a founding general partner of OneLiberty Ventures, a venture capital firm.
Previously, he was a general partner at a predecessor firm, Morgan Holland
Ventures, which he joined in 1985. Mr. Kania is also a director of Anesta
Corporation.
 
     Mr. Lloyd has served as a director of the Company from 1991 to April 1995
and from November 1995 to the present. He served as President and Chairman of
Aradigm, Inc., a medical device company, from 1992 to 1997. From 1995 to the
present, Mr. Lloyd has also served as Chairman of the Board of Alere Medical,
Inc., a chronic disease monitoring company. Mr. Lloyd is also a director of
Molecular Dynamics, Inc.
 
     Mr. McGuire has served as a director of the Company since 1997. He has been
a general partner of Polaris Venture Partners, a venture capital firm, since
1996. From 1992 to the present, Mr. McGuire has served as general partner of
Burr, Egan, Deleage & Co., a venture capital firm, and from 1988 to the present,
he has served as general partner of Beta Partners, a venture capital firm. Mr.
McGuire is also a director of Ascent Pediatrics, Inc., Cubist Pharmaceuticals,
Inc. and Integ Incorporated.
 
     Dr. Stanski has served as a director of the Company since 1996. Dr. Stanski
has been a professor of anesthesia and medicine (Clinical Pharmacology) at
Stanford University since 1979 and is an anesthesiologist/clinical
pharmocologist. He served as Chair of the Department of Anesthesia at Stanford
University from 1992 to 1997. Dr. Stanski received his medical degree from the
University of Calgary, Canada, and his anesthesiology training at the
Massachusetts General Hospital.
 
     Pursuant to a Third Amended and Restated Voting Agreement dated February
13, 1998 among the Company and certain stockholders of the Company, certain
stockholders have the right to nominate persons as their representatives on the
Company's Board of Directors. Each of the current directors has been nominated
to serve as a director pursuant to this agreement. This agreement will terminate
concurrently with the closing of this offering.
 
     The Company's Restated Certificate, to be filed concurrently with the
closing of this offering, provides that the Board of Directors of the Company
will be divided into three classes, each of whose members will serve for a
staggered three-year term. The Board will consist of two Class I Directors, two
Class II Directors and three Class III Directors. At each annual meeting of
stockholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring. The terms
of the Class I Directors, Class II Directors and Class III Directors expire upon
the election and qualification of successor directors at the annual meeting of
stockholders held during the calendar years 1999, 2000 and 2001, respectively.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has a Compensation Committee comprised of Mr. Coit
and Dr. Stanski, which makes recommendations concerning salaries and incentive
compensation for employees of and consultants to the Company and administers and
grants stock options pursuant to the Company's stock option plans. The Board of
Directors has an Audit Committee comprised of Messrs. Lloyd and Kania, which
reviews the results and scope of the annual audit, other services provided by
the Company's independent public accountant and other matters relating to
internal control systems.
 
DIRECTOR COMPENSATION
 
     All of the directors are reimbursed for expenses incurred in connection
with their attendance at Board of Directors and committee meetings. In addition,
non-employee directors of the Company are eligible to receive stock options
under the Company's 1998 Director Stock Option Plan.
 
     1998 Director Stock Option Plan.  The Company's 1998 Director Stock Option
Plan, as amended (the "Director Plan"), was adopted by the Board of Directors
and stockholders of the Company in February 1998. Under the terms of the
Director Plan, directors of the Company who are not employees of the Company or
any subsidiary of the Company ("Outside Directors") are eligible
                                       39
41
 
to receive nonstatutory options to purchase shares of Common Stock. A total of
100,000 shares of Common Stock may be issued upon exercise of options granted
under the Director Plan.
 
     Pursuant to the Director Plan, on April 14, 1998 (the "Initial Grant
Date"), each Outside Director (other than Mr. Lloyd and Dr. Stanski) received an
option to purchase 10,000 shares of Common Stock, and each person who first
becomes an Outside Director after the Initial Grant Date will be granted an
option to purchase 10,000 shares of Common Stock on the date of his or her
initial election to the Board (the "Initial Options"). In addition, each Outside
Director shall be granted an additional option to purchase 5,000 shares of
Common Stock (the "Additional Options") on the date of each Annual Meeting of
Stockholders, commencing with the 1999 Annual Meeting of Stockholders. Each
Outside Director will be eligible to receive an Additional Option if he or she
is serving as a director immediately prior to the Annual Meeting of Stockholders
and continues to serve immediately following such Annual Meeting of
Stockholders, and, if the grant date of such Additional Option is at least six
months after the Outside Director receives an Initial Option.
 
     The exercise price per share of Initial Options granted on the Initial
Grant Date was $2.80. The exercise price of Initial Options granted after the
Initial Grant Date and of any Additional Options will be the closing price per
share of Common Stock on the date of grant. Initial Options are exercisable as
to one-half of the shares as of the date of grant and as to one-sixth ( 1/6th)
of the shares on the first, second and third anniversaries of the date of grant,
provided that the optionee continues to serve as a director. Additional Options
are exercisable in three equal annual installments on each of the first, second
and third anniversaries of the date of grant, provided that the optionee
continues to serve as a director. Options granted under the Director Plan
terminate on the earlier of (i) ten years from the date of grant or (ii) sixty
days after the optionee ceases to serve as a director (180 days after the
optionee ceases to serve as a director if due to death or disability).
 
EXECUTIVE COMPENSATION
 
     The following table sets forth the annual and long-term compensation for
the year ended December 31, 1997 by its Chief Executive Officer and President
and its four other most highly compensated executive officers in 1997 who were
serving as executive officers on December 31, 1997 (the Chief Executive Officer
and such other executive officers are hereinafter referred to as the "Named
Executive Officers"):
 
                           SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
                                                ANNUAL COMPENSATION      ----------------------
                  NAME AND                    -----------------------     NUMBER OF SECURITIES
             PRINCIPAL POSITION               SALARY ($)    BONUS ($)    UNDERLYING OPTIONS(1)
             ------------------               ----------    ---------    ----------------------
Nassib G. Chamoun...........................   $170,000      $40,000            200,000
  Chief Executive Officer and President
J. Breckenridge Eagle.......................    157,500       27,565                 --
  Chairman of the Board of Directors
J. Neal Armstrong...........................    153,750       26,910             70,000
  Vice President, Chief Financial Officer
  and Secretary
Steven H. Kane(2)...........................    127,153       58,648            180,000
  Vice President of Sales and Field
  Operations
Paul J. Manberg.............................    137,500       24,065             50,000
  Vice President of Clinical, Regulatory and
  Quality Assurance
---------------
(1) Represents the number of shares covered by options to purchase shares of the
    Company's Common Stock granted during the year ended December 31, 1997.
 
                                       40
42
 
(2) Mr. Kane commenced employment with the Company on April 1, 1997 and received
    a salary for only nine months of the year ended December 31, 1997. His
    current annual base salary is $165,000.
 
  Option Grants During 1997
 
     The following table sets forth grants of stock options to each of the Named
Executive Officers during the year ended December 31, 1997.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS                     POTENTIAL REALIZABLE VALUE
                           -----------------------------------------------------        AT ASSUMED ANNUAL
                           NUMBER OF    PERCENT OF TOTAL   EXERCISE                   RATES OF STOCK PRICE
                           SECURITIES       OPTIONS        OR BASE                      APPRECIATION FOR
                           UNDERLYING       GRANTED         PRICE                        OPTION TERM(2)
                            OPTIONS     TO EMPLOYEES IN      PER      EXPIRATION   ---------------------------
          NAME             GRANTED(1)     FISCAL YEAR       SHARE        DATE           5%            10%
          ----             ----------   ----------------   --------   ----------   ------------   ------------
Nassib G. Chamoun........   200,000          19.21%         $ .80      11/4/07       $100,623       $254,999
J. Breckenridge Eagle....        --             --             --           --             --             --
J. Neal Armstrong........    70,000            6.7%           .80       9/8/07         35,218         89,250
Steven H. Kane...........   180,000           17.3%          .375      4/14/07         42,450        107,578
Paul J. Manberg..........    50,000            4.8%           .80       9/8/07         25,156         63,750
---------------
(1) The dates of exercisability of the options are determined in accordance with
    their respective vesting schedules.
 
(2) Amounts reported in these columns represent amounts that may be realized
    upon exercise of the options immediately prior to the expiration of their
    term assuming the specified compound rates of appreciation (5% and 10%) on
    the market value of the Common Stock on the date of option grant over the
    term of the options. These numbers are calculated based on rules promulgated
    by the Securities and Exchange Commission and do not reflect the Company's
    estimate of future stock price growth. Actual gains, if any, on stock option
    exercises and Common Stock holdings are dependent on the timing of such
    exercise and the future performance of the Common Stock. There can be no
    assurance that the rates of appreciation assumed in this table can be
    achieved or that the amounts reflected will be received by the individuals.
 
  Option Exercises and Year-End Option Values
 
     The following table sets forth certain information regarding the aggregate
number of shares of Common Stock acquired upon option exercises by the Named
Executive Officers and the value
 
                                       41
43
 
realized upon such exercises during the year ended December 31, 1997 and the
number and value of unexercised options held by each of the Named Executive
Officers on December 31, 1997.
 
                         FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES
                                                       UNDERLYING UNEXERCISED       VALUE OF UNEXERCISED
                            NUMBER OF                          OPTIONS              IN-THE-MONEY OPTIONS
                              SHARES                     AT FISCAL YEAR-END         AT FISCAL YEAR-END(2)
                             ACQUIRED       VALUE     -------------------------   -------------------------
NAME                      ON EXERCISE(1)   REALIZED   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
----                      --------------   --------   -------------------------   -------------------------
Nassib G. Chamoun.......     378,964       $227,378          --/200,000                      --
J. Breckenridge Eagle...     189,482        113,689           2,625/--                   $1,575 / --
J. Neal Armstrong.......     120,000         72,000           0/70,000                       --
Steven H. Kane..........     180,000         76,500              --                          --
Paul J. Manberg.........      81,207         48,724           --/50,000                      --
---------------
 
(1) Represents shares acquired upon exercise of stock options that are subject
    to repurchase by the Company. See Note 9 to Notes to Financial Statements.
 
(2) Represents the difference between the exercise price and the fair market
    value of the Common Stock at fiscal year end ($0.80) as determined by the
    Board of Directors of the Company.
 
  Stock Plans
 
     Amended and Restated 1991 Stock Option Plan.  The Company's Amended and
Restated 1991 Stock Option Plan (the "1991 Plan") was initially adopted by the
Board of Directors and approved by the stockholders of the Company in April
1991. As of April 4, 1998, 3,460,000 shares were authorized for issuance upon
exercise of outstanding options under the 1991 Plan and options to purchase an
aggregate of 1,125,075 shares of Common Stock at a weighted average exercise
price of $0.74 per share were outstanding under the 1991 Plan.
 
     The 1991 Plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonstatutory stock options, restricted stock and other stock-based
awards (collectively, "Awards").
 
     Officers, employees, directors, consultants and advisors of the Company are
eligible to receive Awards under the 1991 Plan. Under present law, however,
incentive stock options may only be granted to employees. The maximum number of
shares with respect to which an Award may be granted to any participant under
the 1991 Plan may not exceed 200,000 shares per calendar year.
 
     Optionees receive the right to purchase a specified number of shares of
Common Stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. Options may be
granted at an exercise price which may be less than, equal to or greater than
the fair market value of the Common Stock on the date of grant. Under present
law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Code may not be
granted at an exercise price less than the fair market value of the Common Stock
on the date of grant (or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of the voting
power of the Company). The 1991 Plan permits the Board of Directors to determine
the manner of payment of the exercise price of options, including through
payment by cash, check or in connection with a "cashless exercise" through a
broker, by surrender to the Company of shares of Common Stock, by delivery to
the Company of a promissory note, or by any combination of the permitted forms
of payment.
 
                                       42
44
 
     The 1991 Plan is administered by the Board of Directors. The Board of
Directors has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the 1991 Plan and to interpret the
provisions thereof. Pursuant to the terms of the 1991 Plan, the Board of
Directors may delegate authority under the 1991 Plan to one or more committees
of the Board of Directors and, subject to certain limitations, to one or more
executive officers of the Company. The Board of Directors has authorized the
Compensation Committee to administer the 1991 Plan, including the granting of
options to executive officers. Subject to any applicable limitations contained
in the 1991 Plan, the Board of Directors, the Compensation Committee or any
other committee or executive officer to whom the Board of Directors delegates
authority, as the case may be, selects the recipients of Awards and determines
(i) the number of shares of Common Stock covered by options and the dates upon
which such options become exercisable, (ii) the exercise price of options, (iii)
the duration of options, and (iv) the number of shares of Common Stock subject
to any restricted stock or other stock-based Awards and the terms and conditions
of such Awards, including the conditions for repurchase, issue price and
repurchase price.
 
     No Award may be granted under the 1991 Plan after April 1, 2001, but the
vesting and effectiveness of Awards previously granted may extend beyond that
date. The Board of Directors may at any time amend, suspend or terminate the
1991 Plan, except that no Award granted after an amendment of the 1991 Plan and
designated as subject to Section 162(m) of the Code by the Board of Directors
will become exercisable, realizable or vested (to the extent such amendment was
required to grant such Award) unless and until such amendment is approved by the
Company's stockholders.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The current members of the Compensation Committee of the Board of Directors
are Mr. Coit and Dr. Stanski. No executive officer of the Company has served as
a director or member of the compensation committee (or other committee serving
an equivalent function) of any other entity, whose executive officers served as
a director of or member of the Compensation Committee of the Board of Directors.
 
                                       43
45
 
                              CERTAIN TRANSACTIONS
 
     In October 1995, certain investors, including One Liberty Fund III, L.P.
("Liberty III"), Charles River Partnership VII, Limited Partnership ("CRL VII"),
New Enterprise Associates IV, Limited Partnership ("NEA") and Catalyst Ventures,
Limited Partnership ("Catalyst"), made bridge loans to the Company in the
aggregate amount of $500,000 in exchange for promissory notes (the "October 1995
Notes"). In November 1995 and June 1996, the Company sold an aggregate of
3,800,428 shares of its Series B-1 Convertible Preferred Stock to a group of
existing and new investors, including Messrs. J. Breckenridge Eagle, the
Chairman of the Board of Directors, and J. Neal Armstrong, Vice President, Chief
Financial Officer and Secretary of the Company, Liberty III, CRL VII, NEA and
Catalyst, at a purchase price of $2.00 per share for an aggregate purchase price
of approximately $7.6 million. The purchase price was paid, in part, by the
cancellation and conversion of the October 1995 Notes. Mr. Kania, a director of
the Company, is a general partner of One Liberty Partners III, L.P., which is
the general partner of Liberty III. Mr. Coit, a director of the Company, served
as a general partner of CRL VII at the time that CRL VII purchased these
securities from the Company.
 
     In February 1997, August 1997 and October 1997, the Company sold an
aggregate of 3,439,949 shares of its Series C Convertible Preferred Stock to a
group of existing and new investors, including Messrs. Eagle and Armstrong,
Jeffrey Barrett, Vice President of Manufacturing of the Company, and Stephen H.
Kane, Vice President of Sales and Field Operations of the Company, Liberty III,
CRL VII, NEA, Orchid & Co., nominee for T. Rowe Price Threshold Fund III, L.P.
("T. Rowe Price"), Merrill, Pickard, Anderson & Eyre IV Limited Partnership
("MPAE"), Polaris Venture Partners, L.P. ("Polaris V.P.") and Polaris Venture
Partners Founders' Fund, L.P. ("Polaris F.F."), at a purchase price of $3.75 per
share for an aggregate purchase price of approximately $12.9 million. Mr.
Jordan, who served as a director of the Company until June 1998, is a Vice
President of T. Rowe Price Threshold Fund Associates, Inc., the general partner
of T. Rowe Price. Mr. McGuire, a director of the Company, is a member of Polaris
Venture Management Co., LLC, which is a general partner of Polaris V.P. and
Polaris F.F. Mr. McGuire is also a general partner of Polaris Venture Partners.
 
     In February 1998, the Company issued and sold an aggregate of 1,666,234
shares of its Series D Convertible Preferred Stock to a group of existing and
new investors, including Messrs. Armstrong, Kane and Coit and Lester John Lloyd,
a director of the Company, CRL VII, Liberty III, Orchid & Co., Polaris V.P.,
Polaris F.F. and MPAE, at a purchase price of $7.00 per share for an aggregate
purchase price of approximately $11.7 million.
 
     In February 1997, the Company entered into a Pledge Agreement with Mr.
Nassib Chamoun, the Company's Chief Executive Officer and President, pursuant to
which the Company loaned to Mr. Chamoun, on a full recourse basis, $68,214,
representing 90% of the aggregate exercise price of certain options exercised by
Mr. Chamoun. Mr. Chamoun pledged the shares of Common Stock issued upon exercise
of such options as collateral for the loan. The loan bears interest at 8% per
annum. As of April 4, 1998, the entire principal amount of the loan plus accrued
interest was outstanding.
 
     In May 1997, the Company loaned $80,000 to Mr. Chamoun. The loan is
represented by two promissory notes and is secured by a security interest in
certain securities of the Company owned by Mr. Chamoun. The loan bears interest
at 6.42% per annum. As of April 4, 1998, the entire principal amount of the loan
plus accrued interest was outstanding.
 
     In May 1997, the Company entered into a Pledge Agreement with Mr. Kane,
pursuant to which the Company loaned Mr. Kane, on a full recourse basis,
$60,750, representing 90% of the aggregate exercise price of certain options
exercised by Mr. Kane. Mr. Kane pledged the shares of Common Stock issued upon
exercise of such options as collateral for the loan. The loan bears interest at
8% per annum. As of April 4, 1998, the entire principal amount of the loan plus
accrued interest was outstanding.
 
                                       44
46
 
     In September 1997, the Company loaned $27,000 to Mr. Barrett. The loan is
evidenced by a promissory note and bears interest at 8% per annum. Pursuant to
the terms of the promissory note, in the event that Mr. Barrett is employed by
the Company on each of September 24, 1998, 1999, 2000 and 2001, respectively,
the Company will forgive the payment by Mr. Barrett of $8,152 on each of such
dates and such amounts will be considered and treated as compensation to Mr.
Barrett by the Company.
 
     In April 1998, the Company entered into a Pledge Agreement with Mr.
Barrett, pursuant to which the Company loaned to Mr. Barrett, on a full recourse
basis, $63,000, representing 90% of the aggregate exercise price of certain
options exercised by Mr. Barrett. Mr. Barrett pledged the shares of Common Stock
issued upon exercise of such options as collateral for the loan. The loan bears
interest at 8% per annum. As of April 4, 1998, the entire principal amount of
the loan plus accrued interest was outstanding.
 
     The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
 
                                       45
47
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 25, 1998, and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered hereby, by
(i) each person (or group of affiliated persons) who is known to the Company to
own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's directors and Named Executive Officers, and (iii) all
directors and executive officers of the Company as a group:
PERCENTAGE
                                                           NUMBER OF            OWNED(1)(2)
                                                             SHARES       -----------------------
                                                          BENEFICIALLY    BEFORE THE    AFTER THE
BENEFICIAL OWNERS                                           OWNED(1)       OFFERING     OFFERING
-----------------                                         ------------    ----------    ---------
5% STOCKHOLDERS
Charles River Partnership VII, Limited Partnership......   1,580,953         14.3%             %
  1000 Winter Street, Suite 3300
  Waltham, MA 02154
One Liberty Fund III, L.P.(3)...........................   1,528,096         13.8%             %
  One Liberty Ventures
  One Liberty Square
  Boston, MA 02109
Polaris Venture Partners, L.P.(4).......................   1,007,143          9.1%             %
  Bay Colony Corporate Center
  1000 Winter Street, Suite 3350
  Waltham, MA 02154
New Enterprise Associates IV, Limited Partnership(5)....     654,493          5.9%             %
  1119 St. Paul Street
  Baltimore, MD 21202
Orchid & Co., Nominee for T. Rowe Price
  Threshold Fund III, L.P...............................     618,382          5.6%             %
  T. Rowe Price Assoc. Inc.
  100 East Pratt
  Baltimore, MD 21202
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Nassib G. Chamoun(6)....................................     387,990          3.5%             %
J. Breckenridge Eagle(7)................................     210,447          1.9%             %
Lester John Lloyd(8)....................................      50,030            *             *
Stephen E. Coit(9)......................................       5,000            *              %
Edwin M. Kania, Jr.(10).................................   1,533,096         13.9%             %
Donald Stanski(11)......................................      39,354            *             *
Terrance McGuire(12)....................................   1,012,143          9.2%             %
J. Neal Armstrong(13)...................................     177,530          1.6%             %
Steven H. Kane(14)......................................     212,062          1.9%             %
Paul J. Manberg(15).....................................      91,178            *             *
All current executive officers and directors as a group
  (14 persons)(16)......................................   3,985,595         35.8%             %
---------------
    * Indicates less than 1%
 
 (1) Reflects the conversion, simultaneously with the closing of this offering,
     of all outstanding shares of preferred stock of the Company into an
     aggregate of 9,313,509 shares of Common Stock. The number of shares of
     Common Stock deemed outstanding after this offering includes the
                    shares of Common Stock of the Company being offered for sale
     in
 
                                       46
48
 
     this offering. The persons and entities named in the table have sole voting
     and investment power with respect to the shares beneficially owned by them,
     except as noted below. Share numbers include shares of Common Stock
     issuable pursuant to outstanding options that may be exercised within the
     60-day period following June 25, 1998.
 
 (2) Assumes no exercise of the Underwriters' over-allotment option.
 
 (3) Mr. Kania, a director of the Company, is a General Partner of One Liberty
     Partners III, L.P., a General Partner of Liberty III. Mr. Kania disclaims
     beneficial ownership of the shares held by Liberty III, except to the
     extent of his pecuniary interest therein.
 
 (4) Includes 54,829 shares held by Polaris F.F. North Star Ventures directly or
     indirectly provides investment advisory services to various venture capital
     funds, including Polaris V.P. and Polaris F.F. The respective general
     partners of these funds exercise sole voting and investment power with
     respect to the shares held by such funds. The principals of North Star
     Ventures are members of Polaris Venture Management Co., L.L.C. (the General
     Partner of both Polaris V.P. and Polaris F.F.). As members of these funds,
     they may be deemed to share voting and investment powers for the shares
     held by the funds. These principals disclaim beneficial ownership of all
     such shares held by all of the aforementioned funds except to the extent of
     their proportionate pecuniary interests therein. Mr. McGuire, a director of
     the Company, is a member of Polaris Venture Management Co., L.L.C. (which
     is the general partner of both Polaris V.P. and Polaris F.F.). As a member
     of these funds, he may be deemed to share voting and investment power with
     respect to the shares held by the funds. Mr. McGuire disclaims beneficial
     ownership of all the shares held by these funds except to the extent of his
     proportionate pecuniary interest therein.
 
 (5) Includes 154,203 shares held by Catalyst. New Enterprise Associates IV,
     Limited Partnership is a General Partner of Catalyst and may be deemed to
     share voting and investment power with respect to the shares held by
     Catalyst.
 
 (6) Includes an aggregate of 12,500 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998. Also includes
     50,000 shares of Common Stock held by The Nassib G. Chamoun 1998
     Irrevocable Trust, of which Mr. Chamoun disclaims beneficial ownership, and
     87,235 shares of Common Stock subject to repurchase by the Company under
     certain circumstances. Does not include 145,833 shares which will not
     become exercisable within 60 days of June 25, 1998.
 
 (7) Includes 35,000 shares of Common Stock held by Jeanne Warren Eagle as
     Trustee for the Trust for John Warren Eagle, of which Mr. Eagle disclaims
     beneficial ownership, and 75,003 shares of Common Stock subject to
     repurchase by the Company under certain circumstances. Does not include
     37,000 shares which will not become exercisable within 60 days of June 25,
     1998.
 
 (8) Includes an aggregate of 2,708 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998 and 9,699 shares
     of Common Stock subject to repurchase by the Company under certain
     circumstances. Does not include 7,292 shares which will not become
     exercisable within 60 days of June 25, 1998.
 
 (9) Includes 5,000 shares of Common Stock subject to options which are
     exercisable within 60 days after June 25, 1998. Does not include 5,000
     shares which will not become exercisable within 60 days of June 25, 1998.
 
(10) Includes 1,528,096 shares held by Liberty III. See Note 4 above. Also
     includes 5,000 shares of Common Stock subject to options which are
     exercisable within 60 days after June 25, 1998. Does not include 5,000
     shares which will not become exercisable within 60 days of June 25, 1998.
 
(11) Includes an aggregate of 19,354 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998. Does not include
     25,646 shares which will not become exercisable within 60 days of June 25,
     1998.
 
                                       47
49
 
(12) Includes 952,314 shares held by Polaris V.P. and 54,829 shares held by
     Polaris F.F. See Note 5 above. Also includes 5,000 shares of Common Stock
     subject to options which are exercisable within 60 days after June 25,
     1998. Does not include 5,000 shares which will not become exercisable
     within 60 days of June 25, 1998.
 
(13) Includes an aggregate of 4,375 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998 and 62,500 shares
     of Common Stock subject to repurchase by the Company under certain
     circumstances. Does not include 55,417 shares which will not become
     exercisable within 60 days of June 25, 1998.
 
(14) Includes an aggregate of 1,823 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998 and 131,250 shares
     of Common Stock subject to repurchase by the Company under certain
     circumstances. Does not include 16,927 shares which will not become
     exercisable within 60 days of June 25, 1998.
 
(15) Includes an aggregate of 13,542 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998. Also includes
     3,571 shares of Common Stock held by Paul Manberg, as Custodian under the
     Uniform Transfer to Minors Act, for Shawn Joseph Manberg, 3,571 shares of
     Common Stock held by Paul Manberg, as Custodian under the Uniform Transfer
     to Minors Act, for Kate Michelle Manberg and 20,384 shares of Common Stock
     subject to repurchase by the Company under certain circumstances. Does not
     include 36,458 shares which will not become exercisable within 60 days of
     June 25, 1998.
 
(16) Includes an aggregate of 74,458 shares of Common Stock subject to options
     which are exercisable within 60 days after June 25, 1998 and 492,733 shares
     of Common Stock subject to repurchase by the Company under certain
     circumstances. Does not include 207,335 shares which will not become
     exercisable within 60 days of June 25, 1998.
 
                                       48
50
 
                          DESCRIPTION OF CAPITAL STOCK
 
     As of June 25, 1998, there were outstanding an aggregate of 11,061,824
shares of Common Stock, assuming the conversion of all of the Company's
Convertible Preferred Stock, held of record by 145 stockholders.
 
     Upon closing of this offering, the authorized capital stock of the Company
will consist of 40,000,000 shares of Common Stock and 5,000,000 shares of
undesignated preferred stock, $.01 par value per share (the "Preferred Stock").
Immediately after the sale of the                shares of Common Stock offered
hereby, there will be                shares of Common Stock outstanding and no
shares of Preferred Stock outstanding.
 
     The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, (i) the provisions of the Company's Restated Certificate and
amended By-Laws (to be filed and effected, respectively, on or before the
closing of this offering) and (ii) the provisions of applicable law.
 
COMMON STOCK
 
     Holders of Common Stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of Common Stock are entitled to receive dividends if, as and when declared by
the Board of Directors out of funds legally available therefor. See "Dividend
Policy." Upon the liquidation, dissolution or winding up of the Company, holders
of Common Stock are entitled to share ratably in the assets of the Company
available for distribution to its stockholders, subject to the preferential
rights of any then outstanding shares of Preferred Stock. No shares of Preferred
Stock will be outstanding immediately following the closing of this offering.
The Common Stock outstanding upon the effective date of the Registration
Statement, and the shares offered by the Company hereby, upon issuance and sale,
will be fully paid and nonassessable.
 
PREFERRED STOCK
 
     Upon closing of this offering, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the relative rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders. The Company believes that the power to issue
Preferred Stock will provide flexibility in connection with possible corporate
transactions. The issuance of Preferred Stock could adversely affect the voting
power of the holders of Common Stock and restrict their rights to receive
payment upon liquidation and could have the effect of delaying, deferring or
preventing a change-in-control of the Company. See "-- Delaware Law and Certain
Charter and By-Law Provisions." The Company has no present plans to issue any
shares of Preferred Stock.
 
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
 
     The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder' for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
 
                                       49
51
 
     The Restated Certificate, which will become effective concurrently with the
closing of this offering, provides for the division of the Board of Directors
into three classes as nearly equal in size as possible with staggered three-year
terms. See "Management." The Restated Certificate also provides that, after the
closing of this offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The Restated
Certificate further provides that special meetings of the stockholders may only
be called by the Chairman of the Board, the President or the Board of Directors.
Under the Company's Bylaws, in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with certain requirements
regarding advance notice to the Company. The foregoing provisions could have the
effect of delaying until the next stockholders' meeting stockholder actions
which are favored by the holders of a majority of the outstanding voting
securities of the Company. These provisions may also discourage another person
or entity from making a tender offer for the Common Stock, because such person
or entity, even if it acquired a majority of the outstanding voting securities
of the Company, would be able to take action as a stockholder (such as electing
new directors or approving a merger) only at a duly called stockholders'
meeting, and not by written consent.
 
     The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or bylaws, as the case may
be, requires a greater percentage. The Restated Certificate and the Bylaws
require the affirmative vote of the holders of at least 75% of the shares of
capital stock of the Company issued and outstanding and entitled to vote to
amend or repeal any of the provisions described in the prior two paragraphs.
 
     The Restated Certificate contains certain provisions permitted under the
General Corporation Law of Delaware relating to the liability of directors. The
provisions eliminate a director's liability for monetary damages for a breach of
fiduciary duty, except in certain circumstances involving wrongful acts, such as
the breach of a director's duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. Further, the Restated
Certificate contains provisions to indemnify the Company's directors and
officers to the fullest extent permitted by the General Corporation Law of
Delaware. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors.
 
                                       50
52
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this offering, there has been no public market for the securities
of the Company. Upon completion of this offering, based upon the number of
shares outstanding at June 25, 1998, there will be                shares of
Common Stock of the Company outstanding (assuming no exercise of the
Underwriters' over-allotment option or outstanding options of the Company). Of
these shares, the                shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act, except that any shares purchased by "affiliates" of the Company, as that
term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), may generally only be sold in compliance with the limitations of
Rule 144 described below.
 
SALES OF RESTRICTED SECURITIES
 
     The remaining 11,061,824 outstanding shares of Common Stock are owned by
existing stockholders and are deemed "Restricted Shares" under Rule 144. These
shares may not be resold, except pursuant to an effective registration statement
or an applicable exemption from registration. Of these remaining shares,
approximately 809,200 shares of Common Stock will be eligible for sale under
Rules 144 and 701 on the ninety-first day after the effectiveness of this
offering. Stockholders of the Company, holding in the aggregate approximately
10,100,000 shares of Common Stock, have agreed to enter into the Lock-up
Agreements. At the end of the 180-day period, approximately 11,551,000 shares of
Common Stock (including approximately 489,000 shares of Common Stock which may
be acquired upon the exercise of outstanding options) will be eligible for sale
under Rules 144 and 701.
 
     In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year from the later of the date such
Restricted Shares were acquired from the Company and (if applicable) the date
they were acquired from an Affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
in the public market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner and
notice of sale and the availability of public information concerning the
Company. All sales of shares of the Company's Common Stock, including Restricted
Shares, held by Affiliates of the Company must be sold under Rule 144, subject
to the foregoing volume limitations and other restrictions. In addition, under
Rule 144(k), if a period of at least two years has elapsed between the later of
the date restricted securities were acquired from the Company or (if applicable)
the date they were acquired from an Affiliate of the Company, a stockholder who
is not an Affiliate of the Company at the time of sale and has not been an
Affiliate with the Company for at least three months prior to the sale is
entitled to sell the shares immediately without compliance with the foregoing
requirements under Rule 144.
 
     The Company's directors and executive officers and certain of its
stockholders have agreed that they will not, without the prior written consent
of the representatives of the Underwriters, offer to sell, sell, contract to
sell, grant any option to sell or otherwise dispose of or require the Company to
file with the Commission a registration statement under the Securities Act to
register any shares of Common Stock or securities convertible or exchangeable
for shares of Common Stock or warrants or other rights to acquire shares of
Common Stock during the 180-day period following the effective date of the
Registration Statement of which this Prospectus is a part.
 
OPTIONS
 
     The Company plans to file registration statements under the Securities Act
to register an aggregate of approximately 1,900,000 shares of Common Stock
issuable under the 1991 Plan and the Director Plan following the 180th day after
the date of the Registration Statement of which this Prospectus is a part. Upon
registration, such shares will be eligible for immediate resale upon
 
                                       51
53
 
exercise, subject, in the case of Affiliates, to the volume, manner of sale and
notice requirements of Rule 144.
 
REGISTRATION RIGHTS
 
     Pursuant to the Third Amended and Restated Registration Rights Agreement
(the "Registration Rights Agreement"), dated as of February 13, 1998, among the
Company and certain persons and entities (the "Rightsholders"), the
Rightsholders will be entitled, following the offering, to certain rights with
respect to the registration under the Securities Act of a total of approximately
9,400,000 shares of Common Stock (the "Registrable Stock"). The Registration
Rights Agreement generally provides that, in the event the Company proposes to
register (the "Registration") any of its securities under the Securities Act,
the Rightsholders shall be entitled to include Registrable Stock in such
Registration, subject to the right of the managing underwriter of any
underwritten offering to limit for marketing reasons the number of shares of
Registrable Stock included in such "piggyback" registration period.
 
     The Rightsholders may, at any time after one year following the date of the
closing of this offering and upon the request of holders of not less than 35% of
the Registrable Stock then outstanding, require the Company to prepare and file
a registration statement under the Securities Act with respect to their shares
of Registrable Stock. The Company need effect only three such demand
registrations. In addition, at any time after the Company becomes eligible to
file a registration statement on Form S-3 (or any successor form), Rightsholders
may request the Company to effect a registration on Form S-3 of Registrable
Stock having an aggregate offering price of at least $250,000.
 
EFFECT OF SALES OF SHARES
 
     Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market sales
of shares of Common Stock or the availability of shares for sale will have on
the market price of the Common Stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of the Common Stock in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
 
                                       52
54
 
                                  UNDERWRITING
 
     Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") through their Representatives, BT
Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Piper Jaffray Inc. have severally agreed to purchase from the Company the
following respective numbers of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
NUMBER
                                                                   OF
UNDERWRITER                                                      SHARES
-----------                                                     --------
BT Alex. Brown Incorporated.................................
Merrill Lynch, Pierce, Fenner & Smith
             Incorporated...................................
Piper Jaffray Inc...........................................
                                                                --------
          Total.............................................
                                                                ========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
 
     The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $     per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $     per share to certain other dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Representatives of the Underwriters.
 
     The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to
               additional shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to                ,
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the                shares are being offered.
 
     The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities under the Securities Act.
 
     The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
 
     In connection with this offering, the Underwriters and certain other
persons participating in this offering may purchase and sell the Common Stock in
the open market in accordance with Regulation M under the Securities Exchange
Act of 1934, as amended. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in the offering. The
 
                                       53
55
 
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the securities sold
in the offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock, and as a result, such price may be higher than
the price that might otherwise prevail in the open market. The Underwriters and
such other persons are not required to engage in these activities, and may end
any of these activities at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
 
     Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined by negotiations among the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations will be prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies which the Company and the Representatives of the
Underwriters believe to be comparable to the Company, estimates of the business
potential of the Company, the present state of the Company's development and
other factors deemed relevant. Application has been made for quotation of the
Common Stock on the Nasdaq National Market under the symbol "ASPM."
 
                                 LEGAL MATTERS
 
     The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston, Massachusetts,
and for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. An investment partnership comprised of certain partners of Hale
and Dorr LLP owns an aggregate of 9,107 shares of Common Stock of the Company.
 
                                    EXPERTS
 
     The audited financial statements as of December 31, 1996 and 1997 and for
the years then ended have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
 
     The Company's financial statements for the year ended December 31, 1995
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all amendments,
exhibits, schedules and supplements thereto) on Form S-1 under the Securities
Act with respect to the shares of Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission, to
which Registration Statement reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street,
                                       54
56
 
Suite 1400, Chicago, Illinois 60661. In addition, the Company is required to
file electronic versions to these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
 
     The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements. The Company also intends
to make available to its stockholders, within 45 days after the end of each
fiscal quarter, reports for the first three quarters of each fiscal year
containing interim unaudited financial information.
 
                                       55
57
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                         INDEX TO FINANCIAL STATEMENTS
Report of Arthur Andersen LLP, Independent Public
  Accountants...............................................    F-2
Report of Price Waterhouse LLP, Independent Accountants.....    F-3
Balance Sheets as of December 31, 1996 and 1997, April 4,
  1998 (Unaudited) and Pro Forma April 4, 1998
  (Unaudited)...............................................    F-4
Statements of Operations for the Years Ended December 31,
  1995, 1996, and 1997 and for the Quarters Ended March 29,
  1997 (Unaudited) and April 4, 1998 (Unaudited)............    F-5
Statements of Stockholders' Equity for the Years Ended
  December 31, 1995, 1996 and 1997 and for the Quarter Ended
  April 4, 1998 (Unaudited).................................    F-6
Statements of Cash Flows for the Years Ended December 31,
  1995, 1996, and 1997 and for the Quarters Ended March 29,
  1997 (Unaudited) and April 4, 1998 (Unaudited)............    F-7
Notes to Financial Statements...............................    F-8
F-1
58
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Aspect Medical Systems, Inc.:
 
     We have audited the accompanying balance sheets of Aspect Medical Systems,
Inc. (a Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aspect Medical Systems, Inc.
as of December 31, 1996 and 1997, and the results of its operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
 
                                          /s/  Arthur Andersen LLP
 
Boston, Massachusetts
March 27, 1998
 
                                       F-2
59
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders
of Aspect Medical Systems, Inc.
 
     In our opinion, the accompanying statements of operations, of stockholders'
equity and of cash flows present fairly, in all material respects, the results
of operations and cash flows of Aspect Medical Systems, Inc. for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the financial statements of the Company for any
period subsequent to December 31, 1995.
 
/s/  PRICE WATERHOUSE LLP
 
Boston, Massachusetts
July 3, 1996
 
                                       F-3
60
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                                 BALANCE SHEETS
PRO FORMA
                                                   DECEMBER 31,    DECEMBER 31,      APRIL 4,      APRIL 4, 1998
                                                       1996            1997            1998          (NOTE 2)
                                                   ------------    ------------    ------------    -------------
                                                                                   (UNAUDITED)      (UNAUDITED)
ASSETS
Current assets:
  Cash and cash equivalents......................  $  1,353,920    $    368,507    $  6,277,269    $  6,277,269
  Marketable securities..........................       876,741       4,612,462       6,928,438       6,928,438
  Accounts receivable, net of allowance of
    $50,000, $62,400 and $62,400 at December 31,
    1996, 1997 and April 4, 1998, respectively...       152,440         719,172       1,176,311       1,176,311
  Investment in sales-type leases................        44,676         136,392         264,917         264,917
  Inventory......................................     1,099,837         387,479         482,397         482,397
  Other current assets...........................       137,619         245,962         322,140         322,140
                                                   ------------    ------------    ------------    ------------
         Total current assets....................     3,665,233       6,469,974      15,451,472      15,451,472
Property and equipment, net......................       208,984         923,559       1,584,732       1,584,732
Investment in sales-type leases..................        98,864         209,074         420,076         420,076
                                                   ------------    ------------    ------------    ------------
         Total assets............................  $  3,973,081    $  7,602,607    $ 17,456,280    $ 17,456,280
                                                   ============    ============    ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of capital lease obligations...  $    429,871    $    154,906    $    143,987    $    143,987
  Accounts payable...............................       659,277       1,119,055       1,112,924       1,112,924
  Accrued liabilities............................       724,331       1,500,591       1,657,041       1,657,041
  Deferred revenue...............................       823,000         643,000       1,588,621       1,588,621
                                                   ------------    ------------    ------------    ------------
         Total current liabilities...............     2,636,479       3,417,552       4,502,573       4,502,573
                                                   ------------    ------------    ------------    ------------
Long-term capital lease obligations..............       270,273         117,680          80,764          80,764
                                                   ------------    ------------    ------------    ------------
Commitments and contingencies (Note 13)
Stockholders' equity:
  Preferred Stock, $.01 par value; (pro forma --
    5,000,000 shares authorized, no shares issued
    or outstanding)..............................            --              --              --              --
  Convertible Preferred Stock, $.01 par value;
    18,843,224 shares authorized, 4,207,326,
    7,647,275 and 9,313,509 shares issued and
    outstanding at December 31, 1996 and 1997 and
    April 4, 1998, respectively (liquidation
    preference -- $41,425,301 at April 4, 1998)
    (pro forma -- no shares authorized, issued or
    outstanding).................................    25,891,270      38,726,070      50,351,652              --
  Common Stock, $.01 par value; 14,500,000 shares
    authorized, 93,424, 1,548,027 and 1,548,756
    shares issued and outstanding at December 31,
    1996 and 1997, and April 4, 1998,
    respectively (pro forma -- 40,000,000 shares
    authorized, 10,862,265 shares issued and
    outstanding).................................           934          15,480          15,487         108,622
  Additional paid-in capital.....................        31,096         338,970         339,546      50,598,063
  Notes receivable from employees and
    directors....................................            --        (273,579)       (273,579)       (273,579)
  Unrealized gain (loss) on marketable
    securities...................................          (162)          3,098            (605)           (605)
  Accumulated deficit............................   (24,856,809)    (34,742,664)    (37,559,558)    (37,559,558)
                                                   ------------    ------------    ------------    ------------
         Total stockholders' equity..............     1,066,329       4,067,375      12,872,943      12,872,943
                                                   ------------    ------------    ------------    ------------
         Total liabilities and stockholders'
           equity................................  $  3,973,081    $  7,602,607    $ 17,456,280    $ 17,456,280
                                                   ============    ============    ============    ============
The accompanying notes are an integral part of these financial statements.
                                       F-4
61
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                            STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,                  QUARTER ENDED
                                           ----------------------------------------   -------------------------
                                                                                       MARCH 29,     APRIL 4,
                                              1995          1996           1997          1997          1998
                                           -----------   -----------   ------------   -----------   -----------
                                                                                      (UNAUDITED)   (UNAUDITED)
Revenue..................................  $ 1,067,207   $ 1,388,788   $  3,067,573   $   415,481   $ 1,733,121
Costs and expenses:
  Costs of revenue.......................      704,386     1,095,872      3,601,569       581,868     1,211,205
  Research and development...............    2,870,231     2,338,239      2,603,117       677,574       886,520
  Sales and marketing....................    1,284,880     1,560,635      4,813,505       762,169     1,840,185
  General and administrative.............    1,814,850     1,871,071      2,357,695       618,344       736,210
                                           -----------   -----------   ------------   -----------   -----------
         Total costs and expenses........    6,674,347     6,865,817     13,375,886     2,639,955     4,674,120
                                           -----------   -----------   ------------   -----------   -----------
Loss from operations.....................   (5,607,140)   (5,477,029)   (10,308,313)   (2,224,474)   (2,940,999)
Interest income..........................      145,636       143,675        500,485        77,928       132,884
Interest expense.........................      (84,405)      (63,084)       (78,027)      (19,518)       (8,779)
                                           -----------   -----------   ------------   -----------   -----------
Net loss.................................  $(5,545,909)  $(5,396,438)  $ (9,885,855)  $(2,166,064)  $(2,816,894)
                                           ===========   ===========   ============   ===========   ===========
Net loss per share:
  Basic and diluted......................     $(281.65)      $(57.76)       $(16.23)      $(10.38)       $(2.95)
                                           ===========   ===========   ============   ===========   ===========
  Pro forma basic and diluted............                                    $(1.28)                     $(0.30)
                                                                       ============                 ===========
Shares used in computing net loss per
  share:
  Basic and diluted......................       19,691        93,424        609,026       208,721       956,118
  Pro forma basic and diluted............                                 7,707,188                   9,492,051
The accompanying notes are an integral part of these financial statements.
                                       F-5
62
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK                        NOTES
                                   CONVERTIBLE PREFERRED    -------------------                 RECEIVABLE       UNREALIZED
                                           STOCK                                  ADDITIONAL       FROM        GAIN (LOSS) ON
                                  -----------------------                 PAR      PAID-IN       EMPLOYEES       MARKETABLE
                                   SHARES       AMOUNT       SHARES      VALUE     CAPITAL     AND DIRECTORS     SECURITIES
                                  ---------   -----------   ---------   -------   ----------   -------------   --------------
Balance, December 31, 1994......     49,137   $18,384,462       5,306   $    53    $ 11,205      $      --        $(21,561)
 Issuance of common stock.......         --            --      87,952       879      16,691             --              --
 Issuance of Series B-1
   convertible preferred stock,
   net of issuance costs of
   approximately $80,000........  2,075,042     4,069,909          --        --          --             --              --
 Issuance of anti-dilution
   shares.......................    357,761            --          --        --          --             --              --
 Issuance of common stock upon
   exercise of common stock
   options......................         --            --         166         2       3,200             --              --
 Change in unrealized gain
   (loss) on marketable
   securities...................         --            --          --        --          --             --          23,905
 Net loss.......................         --            --          --        --          --             --              --
                                  ---------   -----------   ---------   -------    --------      ---------        --------
Balance, December 31, 1995......  2,481,940    22,454,371      93,424       934      31,096             --           2,344
 Issuance of Series B-1
   convertible preferred stock,
   net of issuance costs of
   approximately $14,000........  1,725,386     3,436,899          --        --          --             --              --
 Change in unrealized gain
   (loss) on marketable
   securities...................         --            --          --        --          --             --          (2,506)
 Net loss.......................         --            --          --        --          --             --              --
                                  ---------   -----------   ---------   -------    --------      ---------        --------
Balance, December 31, 1996......  4,207,326    25,891,270      93,424       934      31,096             --            (162)
 Issuance of Series C
   convertible preferred stock,
   net of issuance costs of
   approximately $61,000........  3,439,949    12,834,800          --        --          --             --              --
 Issuance of common stock upon
   exercise of common stock
   options......................         --            --   1,454,603    14,546     307,874       (273,579)             --
 Change in unrealized gain
   (loss) on marketable
   securities...................         --            --          --        --          --             --           3,260
 Net loss.......................         --            --          --        --          --             --              --
                                  ---------   -----------   ---------   -------    --------      ---------        --------
Balance, December 31, 1997......  7,647,275    38,726,070   1,548,027    15,480     338,970       (273,579)          3,098
 Issuance of Series D
   convertible preferred stock,
   net of issuance costs of
   approximately $38,000
   (unaudited)..................  1,666,234    11,625,582          --        --          --             --              --
 Issuance of common stock upon
   exercise of common stock
   options(unaudited)...........         --            --         729         7         576             --              --
 Change in unrealized gain
   (loss) on marketable
   securities(unaudited)........         --            --          --        --          --             --          (3,703)
 Net loss(unaudited)............         --            --          --        --          --             --              --
                                  ---------   -----------   ---------   -------    --------      ---------        --------
Balance, April 4, 1998
 (unaudited)....................  9,313,509   $50,351,652   1,548,756   $15,487    $339,546      $(273,579)       $   (605)
                                  =========   ===========   =========   =======    ========      =========        ========
TOTAL
                                  ACCUMULATED    STOCKHOLDERS'
                                    DEFICIT         EQUITY
                                  ------------   -------------
Balance, December 31, 1994......  $(13,914,462)   $ 4,459,697
 Issuance of common stock.......            --         17,570
 Issuance of Series B-1
   convertible preferred stock,
   net of issuance costs of
   approximately $80,000........            --      4,069,909
 Issuance of anti-dilution
   shares.......................            --             --
 Issuance of common stock upon
   exercise of common stock
   options......................            --          3,202
 Change in unrealized gain
   (loss) on marketable
   securities...................            --         23,905
 Net loss.......................    (5,545,909)    (5,545,909)
                                  ------------    -----------
Balance, December 31, 1995......   (19,460,371)     3,028,374
 Issuance of Series B-1
   convertible preferred stock,
   net of issuance costs of
   approximately $14,000........            --      3,436,899
 Change in unrealized gain
   (loss) on marketable
   securities...................            --         (2,506)
 Net loss.......................    (5,396,438)    (5,396,438)
                                  ------------    -----------
Balance, December 31, 1996......   (24,856,809)     1,066,329
 Issuance of Series C
   convertible preferred stock,
   net of issuance costs of
   approximately $61,000........            --     12,834,800
 Issuance of common stock upon
   exercise of common stock
   options......................            --         48,841
 Change in unrealized gain
   (loss) on marketable
   securities...................            --          3,260
 Net loss.......................    (9,885,855)    (9,885,855)
                                  ------------    -----------
Balance, December 31, 1997......   (34,742,664)     4,067,375
 Issuance of Series D
   convertible preferred stock,
   net of issuance costs of
   approximately $38,000
   (unaudited)..................            --     11,625,582
 Issuance of common stock upon
   exercise of common stock
   options(unaudited)...........            --            583
 Change in unrealized gain
   (loss) on marketable
   securities(unaudited)........            --         (3,703)
 Net loss(unaudited)............    (2,816,894)    (2,816,894)
                                  ------------    -----------
Balance, April 4, 1998
 (unaudited)....................  $(37,559,558)   $12,872,943
                                  ============    ===========
The accompanying notes are an integral part of these financial statements.
                                       F-6
63
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                            STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,                 QUARTER ENDED
                                             ---------------------------------------   -------------------------
                                                                                        MARCH 29,     APRIL 4,
                                                1995          1996          1997          1997          1998
                                             -----------   -----------   -----------   -----------   -----------
                                                                                       (UNAUDITED)   (UNAUDITED)
Cash flows from operating activities:
  Net loss.................................  $(5,545,909)  $(5,396,438)  $(9,885,855)  $(2,166,064)  $(2,816,894)
  Adjustments to reconcile net loss to net
    cash used for operating activities --
    Depreciation and amortization..........      575,373       189,378       192,571        59,336        49,195
    Provision for doubtful accounts........           --        43,000        14,333            --            --
    Changes in assets and liabilities --
      Increase in accounts receivable......     (188,004)      (92,990)     (437,525)     (143,780)     (457,139)
      (Increase) decrease in inventory.....         (214)       61,193       763,483       (88,637)      (94,918)
      Decrease (increase) in other current
        assets.............................      121,764       (60,628)     (108,343)      (76,651)      (76,178)
      Increase in investment in sales-type
        leases.............................           --            --      (345,466)      (21,700)     (339,527)
      (Decrease) increase in accounts
        payable............................     (100,281)      493,575       459,778       131,812        (6,131)
      Increase (decrease) in accrued
        liabilities........................      454,407        (4,385)      776,260       247,242       156,450
      (Decrease) increase in deferred
        revenue............................     (121,717)      814,717      (180,000)      (65,000)      945,621
                                             -----------   -----------   -----------   -----------   -----------
        Net cash used for operating
          activities.......................   (4,804,581)   (3,952,578)   (8,750,764)   (2,123,442)   (2,639,521)
                                             -----------   -----------   -----------   -----------   -----------
Cash flows from investing activities:
  Acquisition of property and equipment....     (272,270)     (622,384)     (958,271)      (58,000)     (710,368)
  Purchases of marketable securities.......     (347,820)  (23,953,144)  (65,379,625)  (35,364,584)  (38,945,965)
  Proceeds from sales of marketable
    securities.............................    2,800,052    24,045,377    61,647,164    33,395,455    36,626,286
                                             -----------   -----------   -----------   -----------   -----------
        Net cash provided by (used for)
          investing activities.............    2,179,962      (530,151)   (4,690,732)   (2,027,129)   (3,030,047)
                                             -----------   -----------   -----------   -----------   -----------
Cash flows from financing activities:
  Principal payments on capital lease
    obligations............................     (206,646)     (287,616)     (427,558)     (109,400)      (47,835)
  Proceeds from sale leaseback of property
    and equipment..........................      238,996       330,291            --            --            --
  Proceeds received from issuance of
    convertible notes......................      500,000            --            --            --            --
  Proceeds from issuance of convertible
    preferred stock, net of stock issuance
    costs..................................    3,569,909     3,436,899    12,834,800    12,688,714    11,625,582
  Proceeds from issuance of common stock...       20,772            --        48,841        52,582           583
                                             -----------   -----------   -----------   -----------   -----------
        Net cash provided by financing
          activities.......................    4,123,031     3,479,574    12,456,083    12,631,896    11,578,330
                                             -----------   -----------   -----------   -----------   -----------
Net increase (decrease) in cash and cash
  equivalents..............................    1,498,412    (1,003,155)     (985,413)    8,481,325     5,908,762
Cash and cash equivalents, beginning of
  period...................................      858,663     2,357,075     1,353,920     1,353,920       368,507
                                             -----------   -----------   -----------   -----------   -----------
Cash and cash equivalents, end of period...  $ 2,357,075   $ 1,353,920   $   368,507   $ 9,835,245   $ 6,277,269
                                             ===========   ===========   ===========   ===========   ===========
Supplemental disclosure of cash flow
  information:
  Interest paid............................  $   209,404   $    59,000   $    78,000   $    17,000   $    10,000
                                             ===========   ===========   ===========   ===========   ===========
Supplemental disclosure of noncash
  financing activities:
  Capital lease obligations totaling
    $239,000 and $367,000, including sale
    leaseback transactions, were incurred
    during 1995 and 1996, respectively.
The accompanying notes are an integral part of these financial statements.
                                       F-7
64
 
                          ASPECT MEDICAL SYSTEMS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
(1)  DESCRIPTION OF OPERATIONS
 
     Aspect Medical Systems, Inc. (the "Company") develops, manufactures and
markets anesthesia monitoring systems that enable anesthesia providers to assess
levels of consciousness and administer the appropriate amount of anesthetics
during surgery. The BIS System incorporates the Company's proprietary disposable
BIS Sensors and the A-2000 BIS Monitor, which was cleared for marketing by the
United States Food and Drug Administration (the "FDA") in February 1998. The BIS
System is based on Aspect's patented core technology, the Bispectral Index (the
"BIS index"), which is the only FDA cleared, commercially available direct
measure of the effects of anesthesia on the brain.
 
     The Company incurred net losses of $5,545,909, $5,396,438 and $9,885,855
for the years ended December 31, 1995, 1996 and 1997, respectively, and at April
4, 1998 had an accumulated deficit of $37,559,558. Principal risks that may
affect the business, results of operations and financial condition of the
Company include market acceptance of the Company's technology and products,
limited sales and marketing experience, the reliance on a single product family,
manufacturing risks, the dependence on single source or limited suppliers,
technological risks and other risks.
 
(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     A summary of the significant accounting policies used by the Company in the
preparation of its financial statements are as follows:
 
  Interim Financial Statements
 
     The accompanying balance sheet as of April 4, 1998, statements of
operations and cash flows for the quarters ended March 29, 1997 and April 4,
1998 and the statement of stockholders' equity for the quarter ended April 4,
1998 are unaudited but, in the opinion of management, include all adjustments
(consisting of normal, recurring adjustments) necessary for a fair presentation
for results of these interim periods. The results of operations for the quarter
ended April 4, 1998 are not necessarily indicative of results to be expected for
the entire year or for any other interim period.
 
  Unaudited Pro Forma Presentation
 
     Under the terms of the Company's agreements with the holders of the
convertible preferred stock, all of such preferred stock will be converted
automatically into shares of common stock upon the closing of the Company's
initial public offering. The unaudited pro forma balance sheet information at
April 4, 1998 reflects the conversion of all series of preferred stock into
9,313,509 shares of common stock as if the conversion occurred on April 4, 1998.
 
  Cash, Cash Equivalents and Marketable Securities
 
     The Company invests its excess cash in money market accounts, U.S. Treasury
bills, high grade commercial paper, and debt obligations of various government
agencies. The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
 
     The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115, the
Company has classified all of its investments as available-for-sale at December
31, 1996 and 1997, respectively. The securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity.
                                       F-8
65
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
  Revenue Recognition
 
     Revenue from equipment sales, disposable product sales and sales-type
leases are recognized at the time of shipment. Payments received prior to
shipment are recorded as deferred revenue. The Company has entered into certain
licensing and distribution agreements for which payments received in advance are
recorded as deferred revenue. Revenue is recognized as earned per the terms of
the respective agreements. The Company provides for the cost of warranty at the
time of product shipment.
 
  Inventory
 
     Inventory is valued at the lower of cost or estimated market, cost being
determined on a first-in, first-out basis.
 
  Property and Equipment
 
     Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related equipment.
Equipment held under capital leases is stated at the lower of the fair market
value of the equipment or the present value of the minimum lease payments at the
inception of the lease and is amortized on a straight-line basis over the
shorter of the lives of the related assets or the term of the leases.
Maintenance and repair expenditures are charged to expense as incurred.
 
  Income Taxes
 
     The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences, utilizing
currently enacted tax rates, of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Deferred tax assets are
recognized, net of any valuation allowance, for the estimated future tax effects
of deductible temporary differences and tax operating loss and credit
carryforwards.
 
  Concentration of Credit Risk, Significant Customer and Single or Limited
Source Suppliers
 
     Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable, investment in
sales-type lease receivables and investments. To minimize the risk with respect
to accounts receivable and investment in sales-type lease receivables, the
Company maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. The Company maintains
cash, cash equivalents and investments with various financial institutions. The
Company performs periodic evaluations of the relative credit quality of
investments and Company policy is designed to limit exposure to any one
institution or type of investment. The primary objective of the Company's
investment strategy is the safety of the principal invested.
 
     At December 31, 1996 and 1997 and April 4, 1998, accounts receivable from
the Company's international distributor accounted for approximately 8%, 19% and
22%, respectively, of the total amounts due to the Company. For the years ended
December 31, 1995, 1996 and 1997, sales to this customer accounted for
approximately 47%, 49% and 35%, respectively, of the Company's total revenue.
For the quarter ended April 4, 1998, sales to this customer accounted for
approximately 14% of total revenue. Effective July 1, 1998, this customer will
no longer distribute the Company's monitors.
 
                                       F-9
66
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
     The Company currently obtains certain key components of its products from
single or limited sources. The Company purchases components pursuant to purchase
orders rather than long-term supply agreements. The Company has experienced
shortages and delays in obtaining certain components of its products in the
past. There can be no assurance that the Company will not experience similar
delays or shortages in the future. The disruption or termination of the supply
of components or a significant increase in the costs of these components from
these sources could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
  Comprehensive Income
 
     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 did
not have a material effect on the Company's financial statements, as the only
element of comprehensive income impacting the Company is the unrealized gain
(loss) on marketable securities.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  Fair Value of Financial Instruments
 
     The estimated fair market values of the Company's financial instruments,
which include marketable securities, accounts receivable, investment in
sales-type leases, accounts payable and capital lease obligations, approximate
their carrying values.
 
(3)  CASH EQUIVALENTS AND MARKETABLE SECURITIES
 
     Cash and cash equivalents consist of the following:
DECEMBER 31,
                                               ----------------------     APRIL 4,
                                                  1996         1997         1998
                                               ----------    --------    -----------
                                                                         (UNAUDITED)
Cash.........................................  $  369,566    $131,757    $  278,642
U.S. Government debt securities..............     280,036     236,750       368,497
Corporate debt securities....................     704,318          --     5,630,130
                                               ----------    --------    ----------
                                               $1,353,920    $368,507    $6,277,269
                                               ==========    ========    ==========
F-10
67
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
     Available-for-sale securities included in marketable securities at December
31, 1996 and 1997 and April 4, 1998 consist of the following:
AMORTIZED     UNREALIZED    UNREALIZED       FAIR
                                             COST         GAINS         LOSSES        VALUE
                                          ----------    ----------    ----------    ----------
December 31, 1996 --
  U.S. Government debt securities.......  $  220,929      $   --        $  --       $  220,929
  Corporate debt securities.............     405,974          --         (162)         405,812
  Municipal notes.......................     250,000          --           --          250,000
                                          ----------      ------        -----       ----------
                                          $  876,903      $   --        $(162)      $  876,741
                                          ==========      ======        =====       ==========
December 31, 1997 --
  U.S. Government debt securities.......  $   99,187      $   --        $  --       $   99,187
  Corporate debt securities.............   4,010,177       3,098           --        4,013,275
  Municipal notes.......................     500,000          --           --          500,000
                                          ----------      ------        -----       ----------
                                          $4,609,364      $3,098        $  --       $4,612,462
                                          ==========      ======        =====       ==========
April 4, 1998 -- (unaudited)
  U.S. Government debt securities
     (weighted average maturity of 19
     months)............................  $1,003,960      $   --        $  --       $1,003,960
  Corporate debt securities (weighted
     average maturity of 11 months).....   5,124,758          --         (605)       5,124,153
  Municipal notes (weighted average
     maturity of 11 months).............     800,325          --           --          800,325
                                          ----------      ------        -----       ----------
                                          $6,929,043      $   --        $(605)      $6,928,438
                                          ==========      ======        =====       ==========
Gross realized gains and losses on the sales of investments have not been
material to the Company's financial statements.
 
(4)  INVESTMENT IN SALES-TYPE LEASES
 
     The Company leases equipment to customers under sales-type leases. The
components of the Company's net investment in sales-type leases are as follows:
DECEMBER 31,     APRIL 4,
                                                               1997           1998
                                                           ------------    -----------
                                                                           (UNAUDITED)
Total minimum lease payments receivable..................    $505,474       $939,854
  Less -- unearned interest..............................     160,008        254,861
                                                             --------       --------
Net investment in sales-type leases......................     345,466        684,993
  Less -- current portion................................     136,392        264,917
                                                             --------       --------
                                                             $209,074       $420,076
                                                             ========       ========
F-11
68
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
     Future minimum lease payments due under noncancelable leases as of December
31, 1997 are as follows:
YEAR ENDING
-----------
1998........................................................    $222,565
1999........................................................     165,443
2000........................................................      79,455
2001........................................................      21,554
2002........................................................      16,457
                                                                --------
                                                                $505,474
                                                                ========
(5)  INVENTORY
 
     Inventory consists of the following:
DECEMBER 31,
                                               ----------------------     APRIL 4,
                                                  1996         1997         1998
                                               ----------    --------    -----------
                                                                         (UNAUDITED)
Raw materials................................  $  363,205    $322,636     $140,212
Work-in-progress.............................      59,928          --        2,229
Finished goods...............................     676,704      64,843      339,956
                                               ----------    --------     --------
                                               $1,099,837    $387,479     $482,397
                                               ==========    ========     ========
(6)  PROPERTY AND EQUIPMENT
 
     Property and equipment consist of the following:
DECEMBER 31,
                                     USEFUL LIFE           ----------------------    APRIL 4,
                                       IN YEARS              1996         1997         1998
                              --------------------------   ---------   ----------   -----------
                                                                                    (UNAUDITED)
Computer equipment..........              3                $ 454,414   $  707,071   $1,059,604
Construction in progress....              --                      --      490,194      746,200
Machinery and equipment.....              3                       --      152,735      238,934
Furniture and fixtures......              3                  123,039      133,114      148,744
                              Shorter of the life of the
                                lease or the estimated
Leasehold improvements......    remaining useful life             --        1,485        1,485
                                                           ---------   ----------   ----------
                                                             577,453    1,484,599    2,194,967
Accumulated depreciation and
  amortization..............                                (368,469)    (561,040)    (610,235)
                                                           ---------   ----------   ----------
                                                           $ 208,984   $  923,559   $1,584,732
                                                           =========   ==========   ==========
At December 31, 1996, 1997 and April 4, 1998, property and equipment held
under capital leases totaled approximately $521,651. Accumulated amortization of
these assets totaled approximately $365,515 and $458,988 at December 31, 1996
and 1997, respectively, and $475,052 at April 4, 1998.
 
     During 1995 and 1996, the Company entered into sale-leaseback transactions.
The Company received proceeds of approximately $239,000 and $330,000 during 1995
and 1996, respectively,
 
                                      F-12
69
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
from the sale of these assets. No gain was recorded during 1995 as the net book
value of the assets sold approximated the proceeds received. A gain of
approximately $99,000 relating to the sale-leaseback transaction was deferred in
1996 and is being amortized over the term of the respective lease.
 
(7)  INCOME TAXES
 
     Deferred income tax assets consist of the following:
DECEMBER 31,
                                                       ----------------------------
                                                           1996            1997
                                                       ------------    ------------
Net operating loss carryforwards.....................  $  9,009,000    $ 12,254,000
Tax credit carryforwards.............................     1,038,000       1,119,000
Other................................................       315,000         782,000
                                                       ------------    ------------
     Gross deferred tax assets.......................    10,362,000      14,155,000
     Valuation allowance.............................   (10,362,000)    (14,155,000)
                                                       ------------    ------------
     Net deferred tax asset..........................  $         --    $         --
                                                       ============    ============
The Company has provided a full valuation allowance against its gross
deferred tax assets at December 31, 1996 and 1997 because the future
realizability of such asset is uncertain. Should the Company achieve
profitability in the future, various components of the gross deferred tax assets
would be available to offset future income tax liabilities and expenses.
 
     The Company has net operating loss and research and development tax credit
carryforwards for federal income tax purposes of approximately $30,430,000 and
$1,119,000, respectively, at December 31, 1997 that will expire commencing in
the year 2002 through the year 2012 if not utilized.
 
     The net operating loss and research and development tax credit
carryforwards are subject to review by the Internal Revenue Service. Ownership
changes, as defined in the Internal Revenue Code, may limit the amount of these
tax attributes that can be utilized annually to offset future taxable income or
tax liabilities. The amount of the annual limitation is determined based on the
Company's value immediately prior to the ownership change. Subsequent ownership
changes may further affect the limitation in future years.
 
(8)  STOCKHOLDERS' EQUITY
 
  Authorized Capital Stock
 
     As of December 31, 1997, the Company's authorized capital stock consisted
of 10,600,000 shares of common stock, $.01 par value, and 7,707,326 shares of
preferred stock, $.01 par value. Of the 7,707,326 shares of preferred stock,
406,898 shares are designated Series A-1 convertible preferred stock, 3,800,428
shares are designated Series B-1 convertible preferred stock and 3,500,000
shares are designated Series C convertible preferred stock.
 
     In February 1998, the Company restated its certificate of incorporation. As
a result, the authorized capital stock increased to 14,500,000 shares of common
stock, $.01 par value, and 18,843,224 shares of preferred stock, $.01 par value.
Of the 18,843,224 shares of preferred stock, 406,898 shares are designated
Series A-1 convertible preferred stock, 3,800,428 shares are designated Series
B-1 convertible preferred stock, 3,500,000 shares are designated Series C
convertible preferred stock, 1,714,286 shares are designated Series D
convertible preferred stock, 406,898 shares are designated Series A-2
convertible preferred stock, 3,800,428 shares are designated
 
                                      F-13
70
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
Series B-2 convertible preferred stock, 3,500,000 shares are designated Series
C-2 convertible preferred stock and 1,714,286 shares are designated Series D-2
convertible preferred stock.
 
     Upon the closing of the Company's initial public offering, the authorized
capital stock of the Company will consist of 40,000,000 shares of common stock
and 5,000,000 shares of preferred stock, the terms of which will not be
designated.
 
  Convertible Preferred Stock
 
     Convertible preferred stock outstanding consists of the following:
DECEMBER 31,
                                                    -------------------------    APRIL 4,
                                                       1996          1997          1998
                                                    -----------   -----------   -----------
                                                                                (UNAUDITED)
Series A-1 convertible preferred stock; 406,898
  shares issued and outstanding, at issuance
  price, net of issuance costs....................  $18,384,462   $18,384,462   $18,384,462
Series B-1 convertible preferred stock; 3,800,428
  shares issued and outstanding, at issuance
  price, net of issuance costs....................    7,506,808     7,506,808     7,506,808
Series C convertible preferred stock; 3,439,949
  shares issued and outstanding, at issuance
  price, net of issuance costs....................           --    12,834,800    12,834,800
Series D convertible preferred stock; 1,666,234
  shares issued and outstanding, at issuance
  price, net of issuance costs....................           --            --    11,625,582
                                                    -----------   -----------   -----------
                                                    $25,891,270   $38,726,070   $50,351,652
                                                    ===========   ===========   ===========
In November 1995 and June 1996, the Company sold 2,075,042 and 1,725,386
shares, respectively, of Series B-1 convertible preferred stock in a private
placement, for total net proceeds of $7,506,808 including the conversion of
$500,000 of notes payable to certain stockholders that were issued in 1995. As a
result of anti-dilution provisions associated with this transaction and an
associated recapitalization of the Company, certain preferred stockholders
received an additional 357,761 shares of Series A-1 convertible preferred stock.
 
     In 1997, the Company issued 3,439,949 shares of Series C convertible
preferred stock for net proceeds of $12,834,800.
 
     In February 1998, the Company issued 1,666,234 shares of Series D
convertible preferred stock for net proceeds of $11,625,582.
 
     The rights and preferences of the Company's convertible preferred stock are
as follows:
 
  Voting Rights
 
     Except as set forth in the Certificate of Incorporation, the holders of the
preferred stock vote together with the holders of common stock as a single class
on all matters. Each preferred stockholder is entitled to the number of votes
equal to the number of whole shares of common stock into which such
stockholder's shares are convertible.
 
                                      F-14
71
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
  Conversion
 
     Each preferred share is convertible into common stock at the option of the
stockholder or automatically upon the closing of a public offering of the
Company's common stock at a price per common share equal to or exceeding $12.00,
and that results in gross proceeds to the Company of at least $20,000,000. The
number of shares of common stock into which holders of the preferred stock shall
be entitled upon conversion is one-for-one, subject to adjustment for certain
dilutive events.
 
  Liquidation, Dissolution or Winding Up of the Company
 
     In the event of any liquidation, dissolution or winding up of the Company,
the Series A-1 convertible preferred stockholders will receive $22.76 per share,
the Series B-1 convertible preferred stockholders will receive $2.00 per share,
the Series C convertible preferred stockholders will receive $3.75 per share and
the Series D convertible preferred stockholders will receive $7.00 per share. In
the case where the remaining assets of the Company available for distribution
are insufficient to pay the preferred stockholders the full amount they are
entitled to, the preferred stockholders shall share ratably in any distribution
of the assets. Any amounts available after these distributions are to be
distributed to the holders of common stock.
 
  Dividends
 
     The holders of the preferred stock are entitled to dividends when and if
declared by the Board of Directors.
 
  Common Stock
 
     At April 4, 1998, the Company has reserved approximately 9,313,509 shares
of common stock for issuance upon conversion of the preferred stock and
2,098,821 shares of common stock for issuance upon the exercise of stock options
under the Company's stock option plans (see Note 9).
 
(9)  STOCK OPTION PLANS
 
  1991 Restated Stock Option Plan
 
     The Company's 1991 Restated Stock Option Plan provides for the granting, at
the discretion of the Board of Directors, of options for the purchase of up to
3,460,000 shares of common stock to employees, directors and advisors. Option
prices are determined by the Board of Directors. As of April 4, 1998, 873,746
shares of Common Stock remained available for future option grants.
 
                                      F-15
72
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
     A summary of plan activity is as follows:
WEIGHTED
                                                 NUMBER OF     OPTION PRICE     AVERAGE OPTION
                                                   SHARES        PER SHARE      PRICE PER SHARE
                                                 ----------   ---------------   ---------------
Outstanding, December 31, 1994.................      14,151   $16.67 - $45.83       $31.02
  Granted......................................   1,106,532      .20 -  45.83          .22
  Exercised....................................        (166)   16.67 -  45.83        16.91
  Canceled.....................................     (14,507)   16.67 -  45.83        34.78
                                                 ----------   ---------------       ------
Outstanding, December 31, 1995.................   1,106,010      .20 -  45.83          .32
  Granted......................................     451,002               .20          .20
  Exercised....................................          --                --
  Canceled.....................................        (939)              .20          .20
                                                 ----------   ---------------       ------
Outstanding, December 31, 1996.................   1,556,073      .20 -  45.83          .28
  Granted......................................   1,046,532      .20 -    .80          .66
  Exercised....................................  (1,460,450)     .20 -   .375          .22
  Canceled.....................................     (71,529)     .20 -   .375          .20
                                                 ----------   ---------------       ------
Outstanding, December 31, 1997.................   1,070,626      .20 -  45.83          .74
  Granted (unaudited)..........................      65,281               .80          .80
  Exercised (unaudited)........................        (729)              .80          .80
  Canceled (unaudited).........................     (10,103)              .80          .51
                                                 ----------   ---------------       ------
Outstanding, April 4, 1998 (unaudited).........   1,125,075     $.20 - $45.83       $  .74
                                                 ==========   ===============       ======
Exercisable, April 4, 1998 (unaudited).........     382,888     $.20 - $45.83       $  .85
                                                 ==========   ===============       ======
During 1997, employees and directors exercised stock options to purchase an
aggregate of 1,407,970 shares of restricted common stock. The shares are subject
to repurchase by the Company, at prices ranging from $.20 to $.375 per share.
The payment for the restricted common stock was in the form of cash of $38,735
and full recourse notes of $273,579 payable to the Company.
 
     At April 4, 1998, options for 228,612 shares, of which 153,198 are
exercisable, at an exercise price of $.20 are outstanding; options for 120,500
shares, of which 27,554 are exercisable, at an exercise price of $.375 are
outstanding; options for 771,081 shares, of which 197,254 are exercisable, at an
exercise price of $.80 are outstanding; options for 3,357 shares, all of which
are exercisable, at an exercise price of $16.67 are outstanding; and options for
1,525 shares, all of which are exercisable, at an exercise price of $45.83 are
outstanding. The remaining weighted average maturity of options outstanding is
approximately 9.15 years.
 
     In April 1998, the Company granted options to purchase 163,365 shares of
common stock at an exercise price of $2.80 per share. In June 1998, the Company
granted options to purchase 125,000 and 63,150 shares of common stock at
exercise prices of $7.00 and $11.05 per share, respectively. In connection with
certain of these grants, the Company recorded deferred compensation of
approximately $744,000 which represented the difference between the estimated
fair market value of the common stock and the exercise price of the options.
This deferred compensation will be recognized as compensation expense over the
vesting term of the options.
 
     In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value
 
                                      F-16
73
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
of stock options or warrants to be included in the statement of income or
disclosed in the notes to financial statements. The Company has determined that
it will continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. The Company has computed the value of options
granted in 1995, 1996 and 1997 using the Black-Scholes option-pricing model
prescribed by SFAS No. 123. The following table shows the weighted average
assumptions used in the applicable periods and the weighted average fair market
value of the options granted in each period.
QUARTER ENDED
                                      YEAR ENDED DECEMBER 31,         -----------------------
                                -----------------------------------   MARCH 29,     APRIL 4,
                                  1995         1996         1997         1997         1998
                                ---------   ----------   ----------   ----------   ----------
Risk-free interest rate.......  5.9%-6.2%    6.4%-6.8%   6.5%-6.75%    6.4%-6.8%   6.5%-6.75%
Expected dividend yield.......         --           --           --           --           --
Expected life.................    7 years      7 years      7 years      7 years      7 years
Expected volatility...........         60%          60%          60%          60%          60%
Weighted average fair market
  value of options granted....  $     .16   $      .15   $      .48   $      .15   $      .58
Had compensation cost for these options been determined consistent with SFAS
No. 123, the Company's net loss and pro forma net loss per common share would
have been increased to the following pro forma amounts:
QUARTER ENDED
                                       YEAR ENDED DECEMBER 31,            -------------------------
                               ----------------------------------------    MARCH 29,     APRIL 4,
                                  1995          1996           1997          1997          1998
                               -----------   -----------   ------------   -----------   -----------
                                                                          (UNAUDITED)   (UNAUDITED)
Net loss
  As reported................  $(5,545,909)  $(5,396,438)  $ (9,885,855)  $(2,166,064)  $(2,816,894)
                               ===========   ===========   ============   ===========   ===========
  Pro forma..................  $(5,590,110)  $(5,457,382)  $(10,073,236)  $(2,212,909)  $(2,873,309)
                               ===========   ===========   ============   ===========   ===========
Basic and diluted net loss
  per common share
  As reported................     $(281.65)      $(57.76)       $(16.23)      $(10.38)       $(2.95)
                               ===========   ===========   ============   ===========   ===========
  Pro forma..................     $(283.89)      $(58.42)       $(16.54)      $(10.60)       $(3.01)
                               ===========   ===========   ============   ===========   ===========
Pro forma basic and diluted
  net loss per common share
  As reported................                                    $(1.28)                     $(0.30)
                                                           ============                 ===========
  Pro forma..................                                    $(1.31)                     $(0.30)
                                                           ============                 ===========
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Also, because options
vest over several years and the Company expects to grant options in future
years, the above pro forma results of applying the provisions of SFAS No. 123
are not necessarily representative of the pro forma results in future years.
 
                                      F-17
74
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
  1998 Director Stock Option Plan
 
     In February 1998, the Company adopted the 1998 Director Stock Option Plan
("Director Plan"). Under the terms of this plan, directors of the Company who
are not employees of the Company are eligible to receive nonstatutory options to
purchase shares of common stock. A total of 100,000 shares of common stock may
be issued upon exercise of options under this plan. The initial options granted
under the Director Plan are exercisable as to 50% of the option as of the date
of grant and as to one-sixth of the shares on the first, second and third
anniversaries of the date of grant, provided that the optionee continues to
serve as a director. Additional options granted will be exercisable in three
equal annual installments on each of the first, second and third anniversaries
of the date of grant, provided that the optionee continues to serve as a
director. Options granted under the Director Plan terminate on the earlier of
(i) ten years from the date of grant, or (ii) sixty days after the optionee
ceases to serve as a director. In April 1998, options to purchase 40,000 shares
were granted under this plan at an exercise price of $2.80. In connection with
these grants, the Company recorded deferred compensation of approximately
$56,000 which represented the difference between the estimated fair market value
of the common stock and the exercise price of the options. This deferred
compensation will be recognized as compensation expense over the vesting term of
the options.
 
(10)  NET LOSS PER SHARE
 
     The Company follows Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share. Basic net loss per share represents net loss available
to common stockholders divided by the weighted average number of common shares
outstanding. The Company has excluded all shares of restricted common stock that
are subject to repurchase by the Company from the weighted average number of
common shares outstanding. Diluted net loss per share is the same as basic net
loss per share for the Company, because all stock options and convertible
preferred stock have been excluded from the calculation. Inclusion of stock
issuable pursuant to the exercise of stock options and the conversion of
convertible preferred stock would be antidilutive. Pro forma net loss per share
includes the weighted average common shares outstanding and reflects the
automatic conversion of all convertible preferred stock into common stock upon
completion of the Company's initial public offering based on the original
issuance date using the "if-converted" method.
 
(11)  DISTRIBUTION AND LICENSING AGREEMENTS
 
     The Company has entered into various distribution, licensing and royalty
agreements relating to its monitor products with distributors covering the
international market. These agreements have terms ranging from three to ten
years. In connection with these agreements, approximately $823,000 and $643,000
in revenue was deferred as of December 31, 1996 and 1997, respectively, and
approximately $1,543,000 was deferred as of April 4, 1998. The deferred revenue
relates to prepayments for monitoring systems under minimum purchase obligations
and also includes prepaid license and royalty fees. The deferred revenue will be
recognized upon product shipment and as license and royalty fees are earned.
License and royalty fees are related to future technological developments and
will be recognized upon shipment of units incorporating this technology.
 
                                      F-18
75
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
(12)  401(K) SAVINGS PLAN
 
     The Company has a 401(k) savings plan in which substantially all employees
can participate. Employer contributions are at the discretion of the Board of
Directors and vest ratably over five years. The Company made no contributions to
the plan during the years ended December 31, 1995, 1996 and 1997.
 
(13)  COMMITMENTS AND CONTINGENCIES
 
  Leases
 
     The Company leases office space under an operating lease and certain
equipment under capital leases. Rent expense was approximately $328,000,
$335,000 and $346,000 in 1995, 1996 and 1997, respectively. Future gross minimum
lease commitments as of December 31, 1997 are as follows:
OPERATING LEASES    CAPITAL LEASES
                                                       ----------------    --------------
1998.................................................     $  406,298          $169,016
1999.................................................        397,528           135,960
2000.................................................        331,273                --
                                                          ----------          --------
Total minimum lease payments.........................     $1,135,099           304,976
                                                          ==========
Less -- Amount representing interest.................                           32,390
                                                                              --------
Present value of obligations under capital leases....                          272,586
Less -- Current portion..............................                          154,906
                                                                              --------
                                                                              $117,680
                                                                              ========
Subleases
 
     During 1995, 1996 and 1997, the Company had a sublease agreement whereby a
portion of existing office space was leased to a third party under an operating
lease. Rental income for 1995, 1996 and 1997 approximated $15,000, $129,000 and
$113,000, respectively. This agreement expired in 1997.
 
(14)  OTHER RELATED PARTY TRANSACTIONS
 
     In addition to the transactions discussed in Note 9, during 1997 the
Company loaned a total of $107,000 to certain employees of the Company. The
loans are evidenced by promissory notes bearing interest with rates ranging from
6.42% to 8% per annum. At December 31, 1997, the outstanding balance on these
notes was approximately $105,000.
 
(15)  ACCRUED LIABILITIES
 
     Accrued liabilities consist of the following:
DECEMBER 31,
                                               ----------------------     APRIL 4,
                                                 1996         1997          1998
                                               --------    ----------    -----------
                                                                         (UNAUDITED)
Payroll and payroll-related..................  $ 80,163    $  375,121    $  277,168
Other........................................   644,168     1,125,470     1,379,873
                                               --------    ----------    ----------
                                               $724,331    $1,500,591    $1,657,041
                                               ========    ==========    ==========
F-19
76
                          ASPECT MEDICAL SYSTEMS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
 
(16)  FINANCIAL INFORMATION BY GEOGRAPHIC AREA
 
     Revenues by geographic destination and as a percentage of total revenues
are as follows:
YEAR ENDED DECEMBER 31,                     QUARTER ENDED
                       --------------------------------------    -------------------------------
                          1995          1996          1997       MARCH 29, 1997    APRIL 4, 1998
                       ----------    ----------    ----------    --------------    -------------
                                                                  (UNAUDITED)       (UNAUDITED)
GEOGRAPHIC AREA BY
DESTINATION
  Domestic...........  $  563,857    $  699,362    $1,881,409       $273,919        $1,496,358
  International......     503,350       689,426     1,186,164        141,562           236,763
                       ----------    ----------    ----------       --------        ----------
                       $1,067,207    $1,388,788    $3,067,573       $415,481        $1,733,121
                       ==========    ==========    ==========       ========        ==========
YEAR ENDED DECEMBER 31,               QUARTER ENDED
                                      -------------------------     --------------------------------
                                      1995      1996      1997      MARCH 29, 1997     APRIL 4, 1998
                                      -----     -----     -----     --------------     -------------
                                                                     (UNAUDITED)        (UNAUDITED)
GEOGRAPHIC AREA BY DESTINATION
  Domestic..........................    53%       51%       61%           66%                86%
  International.....................    47        49        39            34                 14
                                       ---       ---       ---           ---                ---
                                       100%      100%      100%          100%               100%
                                       ===       ===       ===           ===                ===
(17)  VALUATION AND QUALIFYING ACCOUNTS
 
     The following table sets forth activity in the Company's allowance for
doubtful accounts:
BALANCE AT                                 BALANCE AT
                                           BEGINNING OF    CHARGES TO                    END OF
                                              PERIOD        EXPENSES     DEDUCTIONS      PERIOD
                                           ------------    ----------    ----------    ----------
Year Ended --
  December 31, 1995......................    $ 8,000        $    --        $1,000       $ 7,000
  December 31, 1996......................      7,000         43,000            --        50,000
  December 31, 1997......................     50,000         14,333         1,933        62,400
(18)  LOAN AGREEMENT
 
     In June 1998, the Company entered into a loan agreement with a commercial
bank. Under the terms of this loan agreement, the Company may borrow up to $5.0
million for working capital and equipment. The amount available to the Company
under the working capital portion of the loan agreement is based upon a
percentage of the Company's outstanding accounts receivable. The outstanding
principal under the working capital portion of the loan agreement is due and
payable in December 1999. Interest on the working capital portion of the loan
agreement is at the prime rate plus .5% until September 30, 1998 whereby it
becomes the prime rate plus .25%.
 
     The principal amount outstanding under the equipment portion of the loan
agreement is due in 36 equal monthly installments commencing in January 1999.
Interest on the equipment loan portion of the loan agreement is at the prime
rate plus 1.0% up to and including the closing date of the Company's initial
public offering. After the closing of the Company's initial public offering, the
interest rate becomes the prime rate.
 
     There are no outstanding balances under either the working capital portion
or the equipment portion of the loan agreement.
 
                                      F-20
77
 
======================================================
 
  NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES, OR AN OFFER TO SELL TO, OR SOLICITATION OF, ANY
PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
 
                             ---------------------
 
                               TABLE OF CONTENTS
PAGE
                                        ----
Prospectus Summary....................    3
Risk Factors..........................    5
Use of Proceeds.......................   12
Dividend Policy.......................   13
Capitalization........................   14
Dilution..............................   15
Selected Financial Information........   16
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................   17
Business..............................   22
Management............................   37
Certain Transactions..................   44
Principal Stockholders................   46
Description of Capital Stock..........   49
Shares Eligible for Future Sale.......   51
Underwriting..........................   53
Legal Matters.........................   54
Experts...............................   54
Additional Information................   54
Index to Financial Statements.........  F-1
------------------------
  UNTIL                , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
 
======================================================
======================================================
                                                 Shares
 
                                      LOGO
                                  Common Stock
                              -------------------
 
                                   PROSPECTUS
                              -------------------
 
                                 BT Alex. Brown
 
                              Merrill Lynch & Co.
 
                               Piper Jaffray Inc.
                                          , 1998
======================================================
78
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
SEC registration fee........................................    $15,776
NASD filing fee.............................................      5,848
Nasdaq National Market listing fee..........................     95,000
Blue Sky fees and expenses..................................     10,000
Transfer Agent and Registrar fees...........................
Accounting fees and expenses................................
Legal fees and expenses.....................................
Printing and mailing expenses...............................
Miscellaneous...............................................
                                                                -------
          Total.............................................    $
                                                                =======
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Article EIGHTH of the Registrant's Restated Certificate of Incorporation
(the "Restated Certificate of Incorporation") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director, except to the extent that the Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
 
     Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
 
     Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination
 
                                      II-1
79
 
by the Registrant that the director or officer did not meet the applicable
standard of conduct required for indemnification, or if the Registrant fails to
make an indemnification payment within 60 days after such payment is claimed by
such person, such person is permitted to petition the court to make an
independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of indemnification, the
director or officer must give the Registrant notice of the action for which
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.
 
     Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
 
     Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
 
     Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act.
 
ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES
 
     Set forth in chronological order is information regarding shares of Common
Stock and Preferred Stock issued and options granted by the Company since April
1, 1995. Further included is the consideration, if any, received by the Company
for such shares and options and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), or rule of the
Securities and Exchange Commission under which exemption from registration was
claimed.
 
     Certain of the transactions described below involved directors, officers
and 5% Stockholders of the Company. See "Certain Transactions."
 
     The Company's Amended and Restated 1991 Stock Option Plan was adopted by
the Board of Directors and approved by the stockholders of the Company in April
1991. As of April 4, 1998, options to purchase 1,461,752 of Common Stock had
been exercised for an aggregate consideration of $335,569 and options to
purchase 1,125,075 of Common Stock, at a weighted average exercise price of
$0.74 per share, were outstanding under such plan.
 
     In November 1995, the Company issued and sold 104 shares of its Common
Stock to LTI Ventures Leasing Corp. at a purchase price of $2.00 per share in
connection with the execution of a Master Lease Agreement.
 
     On November 2, 1995 and June 28, 1996, the Company issued and sold an
aggregate of 3,800,428 shares of its Series B-1 Convertible Preferred Stock to a
group of investors at a purchase price of $2.00 per share.
 
                                      II-2
80
 
     On February 26, 1997, August 8, 1997 and October 7, 1997, the Company
issued and sold an aggregate of 3,439,949 shares of its Series C Convertible
Preferred Stock to a group of investors at a purchase price of $3.75 per share.
 
     On February 13, 1998, the Company issued and sold an aggregate of 1,666,234
shares of its Series D Convertible Preferred Stock to a group of investors at a
purchase price of $7.00 per share.
 
     The securities issued in the foregoing transactions were either (i) offered
and sold in reliance upon exemptions from Securities Act registration set forth
in Sections 3(b) and 4(2) of the Securities Act, or any regulations promulgated
thereunder, relating to sales by an issuer not involving any public offering, or
(ii) in the case of certain options to purchase shares of Common Stock and
shares of Common Stock issued upon the exercise of such options, such offers and
sales were made in reliance upon an exemption from registration under Rule 701
of the Securities Act. No underwriters were involved in the foregoing sales of
securities.
 
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (a) Exhibits
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
1*        Form of Underwriting Agreement.
 3.1       Third Restated Certificate of Incorporation of the Company.
 3.2*      Form of Certificate of Amendment to Third Restated
           Certificate of Incorporation of the Company (to be filed
           immediately prior to the effectiveness of this Registration
           Statement).
 3.3*      Form of Restated Certificate of Incorporation of the Company
           (to be filed upon the closing of the offering to which this
           Registration Statement relates).
 3.4       By-Laws of the Company, as amended.
 3.5       Form of Amended and Restated By-Laws of the Company (to be
           effective upon the closing of the offering to which this
           Registration Statement relates).
 4.1*      Specimen certificate for shares of Common Stock, $.01 par
           value, of the Company.
 5*        Opinion of Hale and Dorr LLP.
10.1       1998 Director Stock Option Plan.
10.2       [Intentionally left blank.]
10.3+      International Distribution Agreement, dated as of January
           21, 1998, by and between the Company and Nihon Kohden
           Corporation.
10.4+      International License Agreement, dated as of January 21,
           1998, by and between the Company and Nihon Kohden
           Corporation.
10.5       Trademark License Agreement, dated May 25, 1994, between
           Aspect Electronics, Inc. and the Company.
10.6+      License Agreement, dated as of October 31, 1995, between
           Siemens Medical Systems, Inc. and the Company.
10.7       Property Lease at 2 Vision Drive between the Company and
           Vision Drive, Inc., successor in interest to Natick
           Executive Park Trust No. 2, dated September 8, 1994, as
           amended, together with Subordination, Non-Disturbance and
           Attornment Agreement between the Company and Teachers
           Insurance Association of America, dated June 15, 1995.
10.8       Lease Extension Agreement, dated as of August 7, 1997,
           between Vision Drive, Inc. and the Company.
II-3
81
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
10.9       Loan Agreement, dated as of June 22, 1998, between the
           Company and Imperial Bank, together with Revolving Loans
           Promissory Note, dated June 22, 1998, made in favor of
           Imperial Bank by the Company, Equipment Loans Promissory
           Note, dated June 22, 1998, made in favor of Imperial Bank by
           the Company, Security Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Trademark Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Patent Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank and Agreement to
           Provide Insurance, dated June 22, 1998, between the Company
           and Imperial Bank.
10.10      Promissory Note, dated February 18, 1997, as amended on
           April 14, 1997, made in favor of the Company by Nassib G.
           Chamoun, together with Pledge Agreement, dated as of
           February 18, 1997, as amended on April 14, 1997, between
           Nassib G. Chamoun and the Company.
10.11      Promissory Note, dated May 1, 1997, made in favor of the
           Company by Nassib G. Chamoun, together with Pledge
           Agreement, dated as of May 1, 1997, between Nassib G.
           Chamoun and the Company.
10.12      Promissory Note, dated May 1, 1997, made in favor of the
           Company by Nassib G. Chamoun, together with Pledge
           Agreement, dated as of May 1, 1997, between Nassib G.
           Chamoun and the Company.
10.13      Form of Promissory Note made in favor of the Company by
           certain directors and executive officers, together with Form
           of Pledge Agreement between the Company and certain
           directors and executive officers.
10.14      Promissory Note, dated September 24, 1997, made in favor of
           the Company by Jeffrey Barrett.
10.15      Promissory Note, dated April 10, 1998, made in favor of the
           Company by Jeffrey Barrett, together with Pledge Agreement,
           dated as of April 10, 1998, between Jeffrey Barrett and the
           Company.
10.16      Series D Convertible Preferred Stock Purchase Agreement
           dated February 13, 1998 by and among the Company and the
           several purchasers named on Schedule I thereto.
10.17      Third Amended and Restated Right of First Refusal and
           Co-Sale Agreement dated February 13, 1998 by and among the
           Company and the several parties named on Schedules I and II
           thereto.
10.18      Third Amended and Restated Registration Rights Agreement
           dated February 13, 1998 by and among the Company and the
           parties named on the signature pages thereto.
10.19      Third Amended and Restated Voting Agreement dated February
           13, 1998 by and among the Company and the several parties
           named on Schedule I thereto.
23.1       Consent of Arthur Andersen LLP.
23.2       Consent of Price Waterhouse LLP.
23.3*      Consent of Hale and Dorr LLP (included in Exhibit 5).
24         Power of Attorney (included on page II-7).
27.1       Financial Data Schedule for fiscal year ended December 31,
           1997.
27.2       Financial Data Schedule for quarter ended April 4, 1998.
---------------
* To be filed by amendment.
 
+ Confidential treatment requested as to certain portions, which portions have
  been omitted and filed separately with the Securities and Exchange Commission.
 
     (b) Financial Statement Schedules
 
     All schedules have been omitted because they are not required or because
the required information is given in the Company's Financial Statements or Notes
thereto.
 
                                      II-4
82
 
ITEM 17.  UNDERTAKINGS
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions contained in the Amended and Restated Certificate of
Incorporation of the Company and the laws of the State of Delaware, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
 
     The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
 
     The undersigned Company hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
     Act, the information omitted form the form of prospectus filed as part of
     this Registration Statement in reliance upon Rule 430A and contained in a
     form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
     or 497(h) under the Securities Act shall be deemed to be part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
                                      II-5
83
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Natick, Massachusetts on this 23rd
day of June, 1998.
 
                                          ASPECT MEDICAL SYSTEMS, INC.
 
                                          By:     /s/ NASSIB G. CHAMOUN
                                            ------------------------------------
                                            Nassib G. Chamoun
                                            Chief Executive Office and President
 
                        POWER OF ATTORNEY AND SIGNATURES
 
     We, the undersigned officers and directors of Aspect Medical Systems, Inc.,
hereby severally constitute and appoint Nassib G. Chamoun, J. Breckenridge Eagle
and J. Neal Armstrong 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 Registration Statement on Form S-1
filed herewith and any and all pre-effective and post-effective amendments to
said Registration Statement, and any subsequent Registration Statement for the
same offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable Aspect Medical Systems, Inc. to comply with the provisions
of the Securities Act of 1933, as amended, 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
Registration Statement and any and all amendments thereto or to any subsequent
Registration Statement for the same offering which may be filed under Rule
462(b). Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE                                      TITLE                       DATE
                   ---------                                      -----                       ----
/s/ NASSIB G. CHAMOUN                  Chief Executive Officer and           June 23, 1998
------------------------------------------------      President (Principal Executive
               Nassib G. Chamoun                      Officer)
 
           /s/ J. BRECKENRIDGE EAGLE                Chairman of the Board of Directors    June 23, 1998
------------------------------------------------
             J. Breckenridge Eagle
 
             /s/ J. NEAL ARMSTRONG                  Vice President and Chief Financial    June 23, 1998
------------------------------------------------      Officer (Principal Financial and
               J. Neal Armstrong                      Accounting Officer)
 
              /s/ STEPHEN E. COIT                   Director                              June 23, 1998
------------------------------------------------
                Stephen E. Coit
 
            /s/ EDWIN M. KANIA, JR.                 Director                              June 23, 1998
------------------------------------------------
              Edwin M. Kania, Jr.
II-6
84
SIGNATURE                                      TITLE                       DATE
                   ---------                                      -----                       ----
/s/ LESTER J. LLOYD                   Director                              June 23, 1998
------------------------------------------------
                Lester J. Lloyd
 
              /s/ TERRANCE MCGUIRE                  Director                              June 23, 1998
------------------------------------------------
                Terrance McGuire
 
               /s/ DONALD STANSKI                   Director                              June 23, 1998
------------------------------------------------
                 Donald Stanski
II-7
85
 
                                 EXHIBIT INDEX
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
1*        Form of Underwriting Agreement.
 3.1       Third Restated Certificate of Incorporation of the Company.
 3.2*      Form of Certificate of Amendment to Third Restated
           Certificate of Incorporation of the Company (to be filed
           immediately prior to the effectiveness of this Registration
           Statement).
 3.3*      Form of Restated Certificate of Incorporation of the Company
           (to be filed upon the closing of the offering to which this
           Registration Statement relates).
 3.4       By-Laws of the Company, as amended.
 3.5       Form of Amended and Restated By-Laws of the Company (to be
           effective upon the closing of the offering to which this
           Registration Statement relates).
 4.1*      Specimen certificate for shares of Common Stock, $.01 par
           value, of the Company.
 5*        Opinion of Hale and Dorr LLP.
10.1       1998 Director Stock Option Plan.
10.2       [Intentionally left blank.]
10.3+      International Distribution Agreement, dated as of January
           21, 1998, by and between the Company and Nihon Kohden
           Corporation.
10.4+      International License Agreement, dated as of January 21,
           1998, by and between the Company and Nihon Kohden
           Corporation.
10.5       Trademark License Agreement, dated May 25, 1994, between
           Aspect Electronics, Inc. and the Company.
10.6+      License Agreement, dated as of October 31, 1995, between
           Siemens Medical Systems, Inc. and the Company.
10.7       Property Lease at 2 Vision Drive between the Company and
           Vision Drive, Inc., successor in interest to Natick
           Executive Park Trust No. 2, dated September 8, 1994, as
           amended, together with Subordination, Non-Disturbance and
           Attornment Agreement between the Company and Teachers
           Insurance Association of America, dated June 15, 1995.
10.8       Lease Extension Agreement, dated as of August 7, 1997,
           between Vision Drive, Inc. and the Company.
10.9       Loan Agreement, dated as of June 22, 1998, between the
           Company and Imperial Bank, together with Revolving Loans
           Promissory Note, dated June 22, 1998, made in favor of
           Imperial Bank by the Company, Equipment Loans Promissory
           Note, dated June 22, 1998, made in favor of Imperial Bank by
           the Company, Security Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Trademark Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Trademark Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank, Patent Collateral
           Security and Pledge Agreement, dated as of June 22, 1998,
           between the Company and Imperial Bank and Agreement to
           Provide Insurance, dated June 22, 1998, between the Company
           and Imperial Bank.
10.10      Promissory Note, dated February 18, 1997, as amended on
           April 14, 1997, made in favor of the Company by Nassib G.
           Chamoun, together with Pledge Agreement, dated as of
           February 18, 1997, as amended on April 14, 1997, between
           Nassib G. Chamoun and the Company.
10.11      Promissory Note, dated May 1, 1997, made in favor of the
           Company by Nassib G. Chamoun, together with Pledge
           Agreement, dated as of May 1, 1997, between Nassib G.
           Chamoun and the Company.
10.12      Promissory Note, dated May 1, 1997, made in favor of the
           Company by Nassib G. Chamoun, together with Pledge
           Agreement, dated as of May 1, 1997, between Nassib G.
           Chamoun and the Company.
10.13      Form of Promissory Note made in favor of the Company by
           certain directors and executive officers, together with Form
           of Pledge Agreement between the Company and certain
           directors and executive officers.
86
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
10.14      Promissory Note, dated September 24, 1997, made in favor of
           the Company by Jeffrey Barrett.
10.15      Promissory Note, dated April 10, 1998, made in favor of the
           Company by Jeffrey Barrett, together with Pledge Agreement,
           dated as of April 10, 1998, between Jeffrey Barrett and the
           Company.
10.16      Series D Convertible Preferred Stock Purchase Agreement
           dated February 13, 1998 by and among the Company and the
           several purchasers named on Schedule I thereto.
10.17      Third Amended and Restated Right of First Refusal and
           Co-Sale Agreement dated February 13, 1998 by and among the
           Company and the several parties named on Schedules I and II
           thereto.
10.18      Third Amended and Restated Registration Rights Agreement
           dated February 13, 1998 by and among the Company and the
           parties named on the signature pages thereto.
10.19      Third Amended and Restated Voting Agreement dated February
           13, 1998 by and among the Company and the several parties
           named on Schedule I thereto.
23.1       Consent of Arthur Andersen LLP.
23.2       Consent of Price Waterhouse LLP.
23.3*      Consent of Hale and Dorr LLP (included in Exhibit 5).
24         Power of Attorney (included on page II-7).
27.1       Financial Data Schedule for fiscal year ended December 31,
           1997.
27.2       Financial Data Schedule for quarter ended April 4, 1998.
---------------
* To be filed by amendment.
 
+ Confidential treatment requested as to certain portions, which portions have
  been omitted and filed separately with the Securities and Exchange Commission.