SECURITIESTable ANDof EXCHANGE COMMISSION Washington D. C. 20549Contents

~~FORM~~SECURITIES ~~10-Q~~AND EXCHANGE COMMISSION

~~(Mark~~Washington ~~one)~~D.C. 20549

~~x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~FORM 10-Q

~~For~~(Mark ~~the~~one) ~~quarterly period ended September 30, 2002~~

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

oFor ~~TRANSITION~~the ~~REPORT~~quarterly ~~PURSUANT~~period TOended ~~SECTION~~June 1330, ~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~2003

~~For the transition period from to __________ to __________.~~OR

~~Commission~~o ~~File~~TRANSITION ~~Number 0-19640~~REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~VERTEL~~For ~~CORPORATION(Exact~~the ~~name~~transition ofperiod ~~registrant~~from ~~as specified in its charter)~~to

California(State or other jurisdiction of incorporation or organization)		95-3948704(I.R.S. Employer Identification No.)
21300 Victory Boulevard, Suite 700, Woodland Hills, California(Address of principal executive offices)		91367(Zip Code)

Commission File Number 0-19640

~~(818)~~VERTEL ~~227-1400(Registrant’s~~CORPORATION ~~telephone number, including area code)~~

~~Indicate by check mark x whether the registrant~~ (1)Exact ~~has~~name ~~filed all reports required to be filed by Section 13 or 15(d)~~ of ~~the~~Registrant ~~Securities~~as ~~Exchange~~specified ~~Act~~in ofits ~~1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports~~charter), ~~and (2) has been subject to such filing requirements for the past ninety days.~~

~~Yes~~California x(State Noor oother jurisdiction of incorporation or organization) 95-3948704 (I.R.S. Employer Identification No.)

~~Indicate~~21300 byVictory ~~check~~Boulevard, ~~mark~~Suite x700, ~~whether~~Woodland ~~the~~Hills, ~~registrant~~California is91367 ~~an accelerated filer~~ (asAddress ~~defined in Rule 12b-2~~ of ~~the~~principal executive ~~Exchange~~offices) ~~Act~~(zip code).

~~Yes~~(818) o227-1400 No(Registrant’s xtelephone number, including area code)

AsIndicate ofby ~~November~~check ~~18,~~mark ~~2002~~whether ~~there~~the ~~were~~registrant ~~34,683,783~~(1) ~~shares~~has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of ~~common~~1934 ~~stock~~during ~~outstanding~~the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes x No o

~~PART~~Indicate I.by ~~FINANCIAL~~check ~~INFORMATION~~mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

~~ITEM~~As 1of June 30, 2003 there were 38,516,292 common shares outstanding with a par value of $0. ~~FINANCIAL~~01 ~~STATEMENTS~~per share.

~~VERTEL CORPORATION~~1

CONSOLIDATEDTable BALANCEof SHEETS(in thousands, except share amounts)Contents

			September 30, 2002			December 31, 2001
ASSETS
Current assets:
	Cash and cash equivalents		$	755		$	2,851
	Trade accounts receivable (net of allowances of $218 as of September 30, 2002 and $487 as of December 31, 2001)			1,930			2,316
	Prepaid expenses and other current assets			368			221
		Total current assets		3,053			5,388
Property and equipment, net				197			456
Investments				5			75
Goodwill, net				3,751			8,546
Other assets				498			365
			$	7,504		$	14,830
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	238		$	439
	Accrued wages and related liabilities			853			1,024
	Accrued restructuring expenses			—			145
	Accrued taxes payable			363			374
	Other accrued liabilities			907			1,340
	Accrued acquisition liabilities			6			31
	Deferred revenue			674			933
	Warrant obligations			267			—
		Total current liabilities		3,308			4,286
Convertible notes payable, net of unamortized discount of $3,640				1,163			—
		Total liabilities		4,471			4,286
Shareholders’ equity:
	Preferred stock, par value $.01, 2,000,000 shares authorized; none issued and outstanding
	Common stock, par value $.01, 100,000,000 shares authorized; shares issued and outstanding: 2002, 34,415,128; 2001, 32,891,689			344			329
	Additional paid-in capital			97,621			93,105
	Accumulated deficit			(94,563	)		(82,640	)
	Accumulated other comprehensive loss			(369	)		(250	)
		Total shareholders’ equity		3,033			10,544
			$	7,504		$	14,830

VERTEL CORPORATION

See accompanying notes to consolidated financial statements.



Part I	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheet	3

		Consolidated Statement of Operations and Comprehensive Loss	4

		Consolidated Statement of Cash Flows	5

		Notes to Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	14

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	24

Part II	Other Information

	Item 1.	Legal Proceedings	25

	Item 2.	Changes in Securities and Use of Proceeds	25

	Item 3.	Defaults Upon Senior Securities	25

	Item 4.	Submission of Matters to Vote of Security Holders	25

	Item 5.	Other Information	25

	Item 6.	Exhibits and Reports on Form 8-K	25

2Forward-Looking Statements

~~VERTEL~~This ~~CORPORATION~~document includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in global, political, economic, business, competitive, market and regulatory factors.

~~CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except per share amounts)~~2

			Three Month Period Ended						Nine Month Period Ended
			September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
Net revenues:
	License		$	1,489		$	1,668		$	3,738		$	5,083
	Service and other			832			1,666			2,639			4,365
		Net revenues		2,321			3,334			6,377			9,448
Cost of revenues:
	License			109			125			172			349
	Service and other			494			1,740			2,425			5,365
		Total cost of revenues		603			1,865			2,597			5,714
Gross profit				1,718			1,469			3,780			3,734
Operating expenses:
	Research and development			916			1,118			3,505			2,875
	Sales and marketing			1,228			1,568			3,925			4,871
	General and administrative			638			708			2,389			2,426
	Goodwill amortization			—			607			—			1,206
	Goodwill impairment			—			—			4,795			—
		Total operating expenses		2,782			4,001			14,614			11,378
Operating loss				(1,064	)		(2,532	)		(10,834	)		(7,644	)
Other (expense) income, net				(1,125	)		(201	)		(1,026	)		94
Loss before provision for income taxes				(2,189	)		(2,733	)		(11,860	)		(7,550	)
Provision (benefit) for income taxes				19			20			63			(62	)
Net loss				(2,208	)		(2,753	)		(11,923	)		(7,488	)
Other comprehensive income (loss)				(27	)		199			(119	)		(31	)
Comprehensive loss			$	(2,235	)	$	(2,554	)	$	(12,042	)	$	(7,519	)
Basic and diluted net loss per common share			$	(0.06	)	$	(0.08	)	$	(0.35	)	$	(0.25	)
Weighted average shares outstanding used in net loss per common share calculations - basic and diluted				34,232			32,890			33,711			30,385

~~See~~PART ~~accompanying notes to consolidated financial statements~~I. FINANCIAL INFORMATION

3ITEM 1. FINANCIAL STATEMENTS

VERTEL ~~CORPORATION~~CORPORATIONCONSOLIDATED BALANCE SHEET(in thousands, except share amounts)

CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

	June 30, 2003			December 31, 2002


ASSETS

Current Assets:
Cash and cash equivalents	$	233		$	881
Accounts receivable (net of allowances of $1 for 2003 and $461 for 2002		470			1,847
Prepaid expenses and other current assets		179			132

Total current assets	$	882		$	2,860
Fixed and Other Assets:
Property and equipment, net	$	89		$	148
Investments		27			16
Goodwill		754			754
Other assets		378			466

Total Assets	$	2,130		$	4,244


LIABILITIES AND SHAREHOILDERS’ EQUITY (DEFICIT)

Current Liabilities:
Accounts payable	$	166		$	95
Accrued wages and related liabilities		219			680
Accrued taxes payable		358			338
Other accrued liabilities		1,512			1,187
Notes payable		3,782			1,761
Warrant obligation		303			372
Deferred revenues		514			433

Total current liabilities	$	6,854		$	4,866

Commitments (Note 8)

Shareholders’ Equity (Deficit):
Preferred stock, par value $0.01, 2,000,000 shares authorized; none issued and outstanding	$	—		$	—
Common stock, par value $0.01, 100,000,000 shares authorized; shares issued and outstanding: 2003: 38,516,292; 2002: 34,534,253		385			345
Additional paid-in capital		97,102			96,982
Accumlated deficit		(101,896	)		(97,599	)
Accumulated other comprehensive loss		(315	)		(350	)

Total shareholders’ equity (deficit)	$	(4,724	)	$	(622	)

Total liabilities and shareholders’ equity (deficit)	$	2,130		$	4,244

			Nine Month Period Ended
			September 30, 2002			September 30, 2001
Cash flows from operating activities:
	Net loss		$	(11,923	)	$	(7,488	)
	Adjustments to reconcile net loss to net cash used for operating activities:
		Depreciation and amortization		381			2,107
		Goodwill impairment		4,795			—
		Provision for returns and bad debts		(269	)		5
		Loss on marketable securities		—			265
		Change in fair value of warrant obligations		(417	)		—
		Non cash interest		1,498			—
		Changes in operating assets and liabilities		(848	)		(1,577	)
		Net cash used for operating activities		(6,780	)		(6,688	)
Cash flows from investing activities:
	Net sales (purchases) of short-term investments			—			1,096
	Purchases of property and equipment			(122	)		(231	)
	Cash acquired in business acquisition, net of cash paid			—			(226	)
	Change in other assets			(133	)		22
		Net cash (used for) provided by investing activities		(255	)		661
Cash flows from financing activities:
	Proceeds from issuance of common stock			—			116
	Proceeds from sale of convertible promissory notes and warrants			6,435			—
	Payment on convertible promissory note			(1,447	)		—
	Payments on capital lease obligations and short-term debt			—			(400	)
		Net cash provided by (used for) financing activities		4,988			(284	)
Effect of exchange rate changes on cash				(49	)		(31	)
Net decrease in cash and cash equivalents				(2,096	)		(6,342	)
Cash and cash equivalents, beginning of period				2,851			10,827
Cash and cash equivalents, end of period			$	755		$	4,485

See accompanying notes to consolidated financial statements.

~~See accompanying notes to consolidated financial statements.~~ 3

4Table of Contents

VERTEL ~~CORPORATION~~CORPORATIONCONSOLIDATED ~~NOTES~~STATEMENT TOOF ~~CONSOLIDATED~~OPERATIONS ~~FINANCIAL~~AND ~~STATEMENTS~~COMPREHENSIVE LOSS(in thousands, except per share amounts)

1. General

	Three Month Period Ended March 31						Six Month Period Ended June 30

	2003			2002			2003			2002

Net revenues:
Licenses	$	255		$	990		$	766		$	2,249
Service and other		313			1,064			713			1,807

Total net revenues	$	568		$	2,054		$	1,479		$	4,056
Cost of revenues:
Licenses	$	18		$	24		$	43		$	63
Service and other		329			892			675			1,931

Total cost of Revenues	$	347		$	916		$	718		$	1,994

Gross profit	$	221		$	1,138		$	761		$	2,062
Operating expenses:
Research and development	$	531		$	1,300		$	1,206		$	2,589
Sales and marketing		764			1,424			1,659			2,697
General and administrative		875			960			1,535			1,751
Goodwill amortization		—			—			—			—
Goodwill impairment		—			4,795			—			4,795

Total operating expenses	$	2,170		$	8,479		$	4,400		$	11,832

Operating Loss	$	(1,949	)	$	(7,341	)	$	(3,639	)	$	(9,770	)
Other income (expense), net		(440	)		52			(579	)		99

Loss before provision for income taxes	$	(2,389	)	$	(7,289	)	$	(4,218	)	$	(9,671	)
Provision (benefit) for income taxes		(15	)		(21	)		(44	)		(44	)

Net Loss	$	(2,404	)	$	(7,310	)	$	(4,262	)	$	(9,715	)
Other comprehensive income (loss)		31			(54	)		(35	)		(92	)

Comprehensive loss	$	(2,373	)	$	(7,364	)	$	(4,297	)	$	(9,807	)

Basic and diliuted net loss per common share	$	(0.07	)	$	(0.22	)	$	(0.12	)	$	(0.29	)

Weighted average shares outstanding used in net loss per common share calculations - basic and diluted		36,196			35,365			35,365			33,451

~~Our~~See ~~consolidated~~accompanying ~~financial~~notes ~~statements~~to ~~include the accounts of our subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The interim~~ consolidated financial statements ~~are unaudited~~. In the opinion of management, the interim financial statements include all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of our financial position, results of operations and cash flows.

We suggest that our consolidated financial statements and the accompanying notes be read in conjunction with our audited consolidated financial statements and the accompanying notes for the year ended December 31, 2001 included in our Annual Report on Form 10-K. The results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative of results that may be expected for the full year. 4

EffectiveTable Augustof 22, 2002, our common stock was delisted from trading on The Nasdaq SmallCap Market(SM) for failing to comply with the $1.00 minimum bid price requirement. Our common stock is now traded on the OTC Bulletin Board under the stock symbol (OTC BB:VRTL.OB).Contents

~~We have reported~~ ~~operating~~VERTEL ~~losses~~CORPORATIONCONSOLIDATED ~~from~~STATEMENT ~~continuing~~OF ~~operations~~CASH for each of the most recent five fiscal years. For the nine months ended September 30, 2002, we reported operating losses of $10,834,000, which included a goodwill impairment charge of $4,795,000, and negative cash flows from operations of $6,780,000. As of September 30, 2002, we had an accumulated deficit of $94,563,000 and negative working capital of $255,000, which included cash of $755,000. During the first quarter of 2002, we received net proceeds of approximately $3,395,000 from the sale of a convertible promissory note and the issuance of a common stock warrant, and on August 13, 2002, we received net proceeds of approximately $3,040,000 from the sale of a second convertible promissory note and the issuance of another common stock warrant FLOWS(See Note 4). We used $1,500,000 of the proceeds of the second note to partially repay the first note. Substantially all of the remaining proceeds from these transactions were used by us during the nine months ended September 30, 2002. These operating losses and negative cash flows raise substantial doubt about our ability to continue as a going concern and, therefore, we may be unable to realize our assets and discharge our liabilities in ~~the normal course of business. Our plans to overcome these conditions include increasing revenues, further reducing expenses and raising additional debt and equity capital.~~thousands)

In the first half of 2002, we added additional sales personnel with the intention of increasing revenues. Since the beginning of the year, we have reduced the total number of employees by approximately 40% and implemented other cost reduction initiatives. We continue to look for cost reduction opportunities and we expect that our quarterly cash expenses for the fourth quarter of 2002 will approximate $3,000,000. We expect to fund these expenses from operational cash flows. Although we continue to try to increase revenues and reduce expenses, we believe it is likely we may require additional financing in the first quarter of 2003 in order to fund planned operations for 2003. We continue to seek short term financing and a longer term financing solution. We cannot assure that we will be able to increase our revenues, or that additional expense reductions will be forthcoming, or that additional financing will be available to us, or, if available, on terms that will be satisfactory to us. If we are not successful in reducing our expenses or raising sufficient additional capital, or if we do not achieve revenues at levels sufficient to generate operating income, we may not be able to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

	Six Month Period Ended June 30

	2003			2002

Cash flows from operating activities:
Net Loss	$	(4,297	)	$	(9,715	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization	$	75		$	279
Goodwill Impairment		—			4,795
Reserve for returns and bad debts		139			—
Change in fair value of warrant obligation		(69	)		(347	)
Non-cash interest expense		516			326
Changes in operating assets and liabilities		1,227			(637	)

Net cash used for operating activities	$	(2,409	)	$	(5,299	)
Cash flows from investing activities
Purchases of property and equipment	$	(16	)	$	(94	)
Changes in other assets		77			(107	)

Net cash provided by (used for) investing activities	$	61		$	(201	)
Cash flows from financing activities
Proceeds from issuance of convertible promissory note	$	—		$	3,395
Proceeds from issuance of non-convertible promissory note		1,665			—

Net cash provided by (used for) financing activities	$	1,665		$	3,395
Effect of exchange rate changes on cash	$	35		$	(32	)

Net increase (decrease) in cash and cash equivalents	$	(648	)	$	(2,137	)
Cash and cash equivalents, beginning of period		881			2,851

Cash and cash equivalents, end of period	$	233		$	714

~~2. Recent~~See ~~Accounting~~accompanying ~~Pronouncements~~notes to consolidated financial statements.

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that certain acquired intangible assets in a business combination be recognized as assets separate from goodwill. The application of SFAS No. 141 did not affect any of our previously reported amounts included in goodwill. SFAS No. 142 eliminates goodwill amortization and requires an evaluation of goodwill for impairment (at the reporting unit level) upon adoption, as well as subsequent evaluations on an annual basis, and more frequently if circumstances indicate a possible impairment. On an ongoing basis (absent any impairment indicators), we expect to perform our impairment test during our fourth quarter. This impairment test is comprised of two steps. The initial step is designed to identify potential goodwill impairment by comparing an estimate of the fair value of the applicable reporting unit to its carrying value, including goodwill. If the carrying value exceeds fair value, a second step is performed, which compares the implied fair value of the applicable reporting unit’s goodwill with the carrying amount of that goodwill, to measure the amount of goodwill impairment, if any.5

AsTable described in Note 6, we currently operate in one reportable segment, which is also our only reporting unit for purposes of SFAS No. 142. Since we have only one reporting unit, all of our goodwill has been assigned to our enterprise as a whole. We estimated the fair value of our enterprise upon adoption of SFAS No. 142 on January 1, 2002 to be its market capitalization, based on the closing share prices quoted on The Nasdaq National Market. Since our market capitalization of approximately $22,038,000 as of January 1, 2002 exceeded the $10,544,000 carrying value of our enterprise on that date we concluded goodwill did not appear impaired and that the second step of the impairment test prescribed by SFAS No. 142 was not required to be performed. However, our market Contents

5 VERTEL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~VERTEL~~1. ~~CORPORATION~~General ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~capitalization~~These ~~fell below~~consolidated ~~the~~financial ~~carrying~~statements ~~value~~include the accounts of ~~our~~Vertel ~~enterprise~~Corporation inand ~~the~~its ~~second~~subsidiaries. ~~quarter~~All ofsignificant ~~2002~~inter-company balances and transactions have been eliminated in consolidation. AsThe interim consolidated financial statements are unaudited and include all adjustments necessary for a ~~result~~fair presentation of ~~these~~the ~~changed~~Company’s ~~circumstances~~financial position, weresults ~~re-evaluated~~of ~~goodwill~~operations ~~for~~and ~~impairment~~cash flows. These statements and ~~determined~~accompanying notes should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2002 that asare included in Vertel’s Annual Report on Form 10-K. The results of operations for the six-month period ended June 30, ~~2002,~~2003 ~~goodwill~~are ~~was~~not ~~impaired~~necessarily ~~(see~~indicative ~~Note~~of 3)results that may be expected for the full year. The Company recently closed all but its Los Angeles office and ceased sales activities. The Company is expecting to maintain its existing customer base of maintenance contracts while evaluating future operations.

InEffective ~~June~~August ~~2001~~22, ~~the FASB issued SFAS No. 143~~2002, ~~“Accounting~~Vertel’s ~~for~~common ~~Asset~~stock ~~Retirement~~was ~~Obligations~~de-listed “.from ~~SFAS~~trading ~~No.~~on ~~143~~The ~~addresses~~NASDAQ ~~the~~SmallCap ~~financial~~Market(SM) for ~~accounting~~failing ~~and reporting issues related~~ to ~~the~~comply ~~obligations associated~~ with the ~~retirement of tangible long-lived assets and the associated asset retirement costs~~$1.00 ~~SFAS~~minimum ~~No.~~bid ~~143~~price ~~is effective for financial statements issued for fiscal years beginning after June 15, 2002~~requirement. ~~We will adopt SFAS No. 143 effective January 1, 2003.~~ The ~~adoption~~Company’s ofcommon ~~SFAS~~stock ~~No.~~is ~~143~~now istraded ~~not~~on ~~expected~~the toOTC ~~have~~Bulletin aBoard ~~significant~~(OTC ~~impact~~BB) onunder the ~~consolidated~~stock ~~financial~~symbol: ~~position or results of operations~~VRTL. OB.

In ~~August~~conjunction ~~2001,~~with the ~~FASB~~M*Ware ~~issued~~strategy, ~~SFAS~~in ~~No.~~December ~~144, “Accounting~~of ~~for~~2002 the ~~Impairment~~Company orsold ~~Disposal~~its ofe*ORB ~~Long-Lived~~product ~~Assets”.~~line, ~~SFAS~~related ~~No.~~intellectual ~~144~~property ~~addresses~~rights ~~the~~and ~~financial~~customer ~~accounting~~contracts ~~and~~to ~~reporting~~PrismTech ~~issues~~Limited, ~~for~~a ~~the~~United Kingdom ~~impairment~~company. orThe ~~disposal~~agreement ofwas ~~long-lived~~for ~~assets.~~cash ~~This~~and ~~statement~~royalty ~~supersedes~~payments ~~SFAS~~based Noon future e*ORB sales. ~~121~~Cash ~~but~~of ~~retains the~~$600,000 ~~fundamental~~was ~~provisions~~to ~~for~~be (paid over a) ~~recognition/measurement~~180-day ofperiod ~~impairment~~commencing with the closing of ~~long-lived~~the ~~assets~~transaction. toTo date, be$500,000 ~~held~~has ~~and~~been ~~used~~received. ~~and~~PrismTech ~~(b)~~is ~~measurement~~currently ofin ~~long-lived~~default ~~assets~~on tothe befinal ~~disposed~~payment of by$100,000 ~~sales.~~that Wewas ~~adopted~~due ~~SFAS~~in ~~No.~~June ~~144~~and ~~effective~~is ~~January~~also 1,in ~~2002.~~default ~~The~~on ~~adoption~~recent ~~of SFAS~~royalty ~~No.~~payments ~~144~~that ~~did~~were ~~not~~to ~~have~~be areceived ~~significant~~monthly ~~impact~~based on e*ORB sales over the ~~consolidated~~24-month ~~financial~~period ~~position~~commencing orwith ~~results~~the ofclosing ~~operations~~date. These payments were not to exceed an additional $600,000.

InThe ~~April~~Company ~~2002, the FASB issued SFAS No. 145, “Rescission of FASB~~has ~~Statements~~reported ~~No.~~operating 4,losses ~~44,~~for ~~and~~each ~~64, Amendment~~ of ~~FASB~~the ~~Statement~~most ~~No. 13,~~recent ~~and~~five ~~Technical~~fiscal ~~Corrections”~~years. ~~This~~For ~~statement eliminates~~ the ~~current~~six ~~requirement~~months ~~that~~ended ~~gains~~June ~~and~~30, ~~losses~~2003, onVertel ~~debt~~reported ~~extinguishment~~operating ~~must~~losses beof ~~classified as extraordinary items in the income statement. Instead~~$3,639,000 ~~such gains~~ and ~~losses~~negative ~~will~~cash beflows ~~classified~~from asoperations ~~extraordinary~~of ~~items~~$2,559,000. ~~only~~For ifthe ~~they~~twelve-month ~~are~~period ~~deemed~~ended December ~~to be unusual and infrequent~~31, in2002 ~~accordance with~~ the ~~current~~Company ~~GAAP~~reported ~~criteria~~an ~~for~~operating ~~extraordinary~~loss ~~classification.~~of ~~In addition~~$14,429,000 ~~SFAS~~and ~~145 eliminates~~negative ancash ~~inconsistency~~flows infrom ~~lease~~operations ~~accounting by requiring that modifications~~ of ~~capital leases that result in reclassification as operating leases be accounted for consistent with sale-leaseback accounting rules~~$6,607,000. ~~The~~As ~~statement~~of ~~also~~June ~~contains~~30, ~~other nonsubstantive~~2003 ~~corrections~~the toCompany ~~authoritative~~had ~~accounting~~an ~~literature.~~accumulated ~~The~~deficit ~~changes~~of ~~related to debt extinguishment will be effective for fiscal years beginning after May 15~~$101, ~~2002~~896,000 and ~~the~~negative ~~changes~~working ~~related~~capital toof ~~lease~~$5,972,000 including ~~accounting~~cash ~~will~~and becash ~~effective~~equivalents ~~for transactions~~of ~~occurring after May 15~~$233, ~~2002~~000. ~~Adoption~~Such ofresults ~~this~~raise ~~standard~~substantial ~~will~~doubt ~~not~~about ~~have~~Vertel’s ~~any~~ability ~~immediate~~to ~~effect~~continue onas ~~our~~a ~~consolidated~~going ~~financial statements and we will apply this guidance prospectively~~concern.

InDuring ~~June~~the ~~2002~~second quarter of 2003, the ~~FASB~~Company ~~issued~~received ~~SFAS~~net ~~No.~~proceeds ~~146~~of approximately $1,315,000 ~~“Accounting~~from ~~for~~the ~~Costs~~issuance ~~Associated~~of ~~with~~a ~~Exit~~series orof ~~Disposal~~non-convertible ~~Activities”,~~promissory ~~which~~notes ~~addresses~~(See ~~accounting~~Note ~~for~~4). ~~restructuring~~Proceeds ~~and~~from ~~similar~~these ~~costs.~~transactions ~~SFAS~~were Noused as working capital during the quarter. ~~146~~In ~~supersedes~~the ~~previous~~first ~~accounting~~quarter ~~guidance~~of 2003, ~~principally~~the ~~Emerging~~Company ~~Issues~~also ~~Task~~received ~~Force~~$500,000 ~~(EITF)~~in ~~Issue~~net ~~No.~~proceeds 94from non-3convertible promissory notes (See Note 4). WeIn ~~will~~2002 ~~adopt~~in the ~~provisions~~first quarter, the Company received net proceeds of ~~SFAS~~approximately ~~No.~~$3,395,000 ~~146~~from ~~for~~the ~~restructuring~~sale ~~activities~~of ~~initiated~~a ~~after~~convertible secured ~~December~~promissory 31note and the issuance of a common stock warrant, and on August 13, 2002. ~~SFAS~~received ~~No.~~net ~~146~~proceeds ~~requires~~of ~~that~~approximately $3,040,000 from the ~~liability~~sale ~~for~~of ~~costs associated~~a ~~with~~second anconvertible ~~exit~~secured orpromissory ~~disposal~~note ~~activity~~and bethe ~~recognized~~issuance ~~when~~of ~~the~~additional ~~liability~~warrants is(See Note ~~incurred~~5). ~~Under~~The ~~EITF~~Company ~~No.~~used ~~94-3~~$1,500,000 aof ~~liability~~the ~~for~~proceeds anof ~~exit~~the ~~cost~~second ~~was~~note ~~recognized~~to atpartially repay the ~~date~~first note. Substantially all of athe ~~company’s~~remaining ~~commitment~~proceeds tofrom anthese ~~exit~~two ~~plan.~~transactions ~~SFAS~~were ~~No.~~used ~~146~~for ~~also~~operations ~~establishes that~~during the ~~liability~~course ~~should~~of ~~initially~~2002. beAs ~~measured~~of ~~and~~December 31, 2002, the recorded atbalances ~~fair~~remaining ~~value~~on these two Notes totaled $1,761,000. ~~Accordingly~~This amount is net of $3,012,000 ~~SFAS~~in ~~No.~~non-cash ~~146~~charges ~~may~~that ~~affect~~are already reflected in the ~~timing~~accompanying of2002 ~~recognizing~~financial ~~future~~statements. ~~restructuring~~The ~~costs~~sum asof ~~well~~these astwo amounts represents the total cash amount ~~recognized~~that would be necessary to satisfy the debt.

3The inability thus far of the Company to generate sufficient revenues to offset expenses raises substantial doubt about Vertel’s ability to continue as a going concern. ~~Goodwill~~ As a result the Company may be unable to realize assets and discharge liabilities in the normal course of business. The Company expects to continue to incur operating losses during the third quarter of 2003 and currently spends about $2.2 million per quarter in expenses. Since the beginning of the year the Company has reduced the number of employees, from 61 to 31, and is contemplating additional steps to reduce expenses. Nevertheless, the Company cannot assure sales targets will be met or that expense reduction programs will be sufficient to generate operating income. If operating income is not achieved and Vertel is not able to raise additional debt or equity capital, the Company may not be able to continue as a going concern.

~~Goodwill~~Vertel’s ~~represents~~financial ~~the~~statements ~~excess~~do ofnot ~~the~~include ~~cost~~any ofadjustments anrelating ~~acquired entity over the net of the amounts assigned~~ to the ~~assets~~recoverability ~~acquired~~ and classification ~~liabilities assumed. Goodwill~~ of ~~$4,742,000~~recorded ~~and~~asset ~~$7,320,000~~amounts ~~arose~~or ~~from~~ the ~~acquisitions~~classification ~~of Expersoft Corporation in March 1999~~ and ~~the~~amounts ~~acquisition~~ of ~~the~~liabilities ~~assets~~that ~~from~~may ~~Trigon~~become ~~Technology~~necessary ~~Group (“Trigon”)~~ in May 2001. Prior to adoption of SFAS No. 141 and SFAS No. 142 (see Note 2), we accounted for business combinations in accordance with Accounting Principles Board Opinion No. 16, “Business Combinations” and amortized the ~~goodwill~~event ~~arising from these acquisitions using~~ the ~~straight-line~~Company ~~method~~is ~~over~~unable ~~the~~to ~~assets’~~continue ~~estimated~~as ~~useful~~a ~~lives~~going ~~of five years~~concern.

~~As described in Note~~ 6, we currently operate in one reportable segment, which is also our only reporting unit for purposes of SFAS No. 142. Since we have only one reporting unit, all of our goodwill has been assigned to our enterprise as a whole.

6Table of Contents

VERTEL ~~CORPORATION~~CORPORATIONNOTES ~~NOTES~~ TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~SFAS No~~2. ~~142 requires,~~Recent ~~however,~~Accounting that we test goodwill for impairment if circumstances indicate a possible impairment. During the nine months ended September 30, 2002, the telecommunications sector continued to be adversely impacted by the worst economic environment the U.S. economy has experienced in the last decade. The market price of our common stock, and consequently our market capitalization, declined steadily during the quarter ended March 31, 2002. Although our market capitalization approximated our carrying value as of March 31, 2002, during the quarter ended June 30, 2002 it declined further. We believed those circumstances indicated goodwill might be impaired as of June 30, 2002. We completed the first and second steps of the impairment test prescribed by SFAS No. 142 and determined that as of June 30, 2002 goodwill was impaired. As a result, during the quarter ended June 30, 2002 we recorded a goodwill impairment charge of $4,795,000. We engaged a third-party valuation consultant to assist us in determining the amount of the impairment charge. The primary method we used to determine fair values for SFAS No. 142 impairment purposes was the discounted cash flow method. The discounted cash flow method resulted in a fair value of our enterprise that approximated our market capitalization as of June 30, 2002. We will perform our annual impairment test in the fourth quarter of 2002.Pronouncements

~~The~~In ~~changes~~April in2002, the FASB issued SFAS 145, “Rescission of SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections,” effective May 15, 2002.” SFAS 145 prevents gains or losses on the ~~carrying~~extinguishment ~~amount~~of debt that do not meet the criteria of ~~goodwill~~APB 30 to be treated as extraordinary. The pronouncement also amends SFAS 13, “Accounting for Leases,” to eliminate the ~~year~~inconsistency ~~ended~~between ~~December~~the ~~31,~~required ~~2001~~accounting for sale-leaseback translations and the ~~nine~~required ~~months~~accounting ~~ended~~for ~~September~~certain 30lease modifications that have similar economic effects. SFAS 145 also amends other existing pronouncements to clarify meanings, ~~2002~~make ~~were~~technical ascorrections ~~follows~~and ~~(in~~describe ~~thousands):~~applicability under changed conditions. SFAS 145 did not have a material impact on the Company’s financial statements.

Balance, January 1, 2001	$	3,034
Goodwill acquired from Trigon		7,320
Amortization		(1,808	)
Balance, December 31, 2001		8,546
Impairment charge		(4,795	)
Balance, September 30, 2002	$	3,751

In June 2002, the FASB issued SFAS 146, “Accounting For Costs Associated with Exit or Disposal Activities.” This pronouncement addresses the accounting and reporting of costs associated with exit or disposal activities and supercedes Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring.” SFAS 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred as opposed to when the entity commits to an exit plan under EITF No. 94-3. This pronouncement is effective for exit or disposal activities initiated after December 31, 2002. It is not expected to have a material impact on the Company’s financial statements.

~~The~~In ~~following~~December ~~table~~2002, ~~summarizes~~the FASB issued SFAS 148, “Accounting For Stock-Based Compensation-Transition and Disclosure.” This pronouncement amends the ~~impact~~transition onand ~~our~~disclosure ~~statement~~provisions of ~~operations~~SFAS ~~had~~123, we“Accounting for ~~not~~Stock-Based ~~recorded goodwill~~Compensation.” ~~amortization~~The ~~during~~pronouncement provides alternative methods of transition for a voluntary change to the ~~quarter~~fair ~~ended~~value ~~and~~based ~~nine~~method ~~months~~of ~~ended~~accounting ~~September~~for 30stock-based compensation, ~~2001~~amends disclosure requirements and is effective for financial statements for fiscal years ending after December 15, as2002. ~~would~~The ~~have~~Company ~~been~~is currently evaluating this pronouncement to determine if it will use the ~~case~~fair value method to account for employee stock options and, if so, when to begin the transition ~~provisions~~to ofthis ~~SFAS~~new Nomethod of accounting. ~~142~~The ~~had~~disclosures ~~been~~required inby ~~effect~~this ~~(in~~pronouncement ~~thousands,~~are ~~except~~included ~~per~~in ~~share~~Note ~~amounts):~~9 below.

		Three Month Period Ended September 30, 2001			Nine Month Period Ended September 30, 2001
Reported net loss:
	Net loss, as reported	$	(2,753	)	$	(7,488	)
	Add back: goodwill amortization		607			1,206
	Net loss, as adjusted	$	(2,146	)	$	(6,282	)
Basic and diluted earnings per share:
	Net loss per share, as reported	$	(0.08	)	$	(0.25	)
	Goodwill amortization		0.01			0.04
	Net loss per share, as adjusted	$	(0.07	)	$	(0.21	)

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” In the course of business the Company has contractual guarantees in the form of warranties. However, these warranties are limited and do not represent significant commitments or contingent liabilities of the indebtedness of others. This pronouncement is effective for financial statements issued after December 15, 2002 and is not expected to have a material impact on the Company’s financial statements.

4In January 2003, the FASB issued FASB Interpretation No. ~~Financing~~ ~~Transaction~~46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” This pronouncement requires the consolidation of variable interest entities, as defined, and is effective immediately for variable interest entities created after January 31, 2003, and for variable interest entities in which an enterprise obtains an interest after that date. The Company has no variable interest entities and thus this interpretation is not expected to have a material impact on the Company’s financial statements.

OnIn ~~January~~May 32003, ~~2002,~~the inFASB ~~connection~~issued ~~with~~SFAS a150, ~~Note~~“Accounting ~~and~~for ~~Warrant~~Certain ~~Purchase~~Financial ~~Agreement~~Instruments with ~~SDS~~Characteristics ~~Merchant~~of ~~Fund,~~both Liabilities ~~L.P.~~and ~~(“SDS~~Equity.”), weThis ~~received~~pronouncement ~~net~~establishes ~~proceeds~~standards offor ~~approximately~~classification ~~$3,395,000,~~and ~~after~~measurement ~~payment~~ of acertain ~~$105,000 commission,~~financial ~~from~~instruments ~~the~~with ~~sale~~characteristics of aboth ~~$3,500,000~~liabilities ~~three-year,~~and 6%equity. ~~convertible~~In ~~promissory~~accordance ~~note~~with (the ~~“First~~standard, ~~Note”)~~financial toinstruments that ~~SDS~~embody ~~and~~obligations ~~issued~~for ~~SDS a five year Warrant (~~the ~~“First~~issuer ~~Warrant”)~~are ~~initially~~required ~~exercisable~~to ~~into~~be ~~800,000~~classified ~~shares~~as ofliabilities. ~~our~~SFAS ~~common~~150 ~~stock at~~will anbe ~~initial~~effective ~~exercise~~for ~~price~~financial ofinstruments ~~$0.9988~~entered ~~per~~into ~~share.~~or ~~The~~modified ~~total~~after ~~costs~~May ~~incurred~~31, in2003 ~~connection~~and ~~with~~otherwise ~~the~~will ~~financing~~be ~~transaction~~effective ~~amounted~~at ~~to $216,000, excluding~~ the ~~commission~~beginning of ~~$105,000,~~the ~~and~~first interim ~~consisted~~period ofbeginning ~~professional~~after ~~fees~~June ~~and~~15, ~~SEC registration fees~~2003. ~~These costs~~Upon ~~are~~adoption ~~being~~of ~~amortized~~SFAS on150, athe ~~straight-line~~Company ~~basis~~will toreclassify ~~expense~~its ~~over~~redeemable ~~the~~preferred ~~36-month~~stock ~~term~~as ofa ~~the First Note~~liability.

~~On August 13, 2002, in connection with a Note and Warrant Purchase Agreement with SDS we received net proceeds of approximately $~~3,040,000 after payment of a $60,000 commission, from the sale of a $3,100,000, three-year, 8% convertible senior secured promissory note (the “Second Note”) to SDS and issued a five-year Warrant (the “Second Warrant”) initially exercisable into 2,625,000 shares of our common stock at an initial exercise price of $0.20 per share. The security interest also extends to the $3,500,000 First Note with SDS dated January 3, 2002. Proceeds of $1,500,000 from the Second Note were used to reduce the balance outstanding on the First Note and $100,000 was used to repay a bridge loan from SDS. The total costs incurred in connection with the financing transaction amounted to approximately $191,000, excluding the commission of $60,000 andGoodwill

The Company’s goodwill resulted from the acquisition of Expersoft Corporation in March 1999 and Trigon Technology Group (“Trigon”) in May 2001. The initial value of goodwill from these transactions was $4,742,000 and $7,320,000, respectively, or $12,062,000 combined. A summary of changes in goodwill since initial recording is as follows:

VERTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Amount

Goodwill recorded from the acquisition of Expersoft in March 1999	$	4,742,000
Less: Amortization recorded in 1999		(757,000	)
Less: Amortization recorded in 2000		(952,000	)

Balance: December 31, 2000	$	3,033,000
Plus: Goodwill recorded from the acquisition of Trigon in May 2001		7,320,000
Less: Amortization recorded in 2001		(1,807,000	)

Balance: December 31, 2001	$	8,546,000
Less: Goodwill impairment recorded in 2002		(7,792,000	)

Balance: December 31, 2002	$	754,000

~~consisted of professional fees and SEC registration fees. These costs are being amortized on a straight-line basis to expense over the 36-month term of the Second Note.~~7

TheTable conversion price of the First Note fluctuates and is determined by multiplying the applicable discount percentage by the average per share market value for the five trading days having the lowest per share market value during the fifteen trading days immediately prior to the conversion date. The initial discount percentage is 7%. The discount percentage can be adjusted in 2% increments (i.e. to 5%) for every $1,000,000 that the sum of our cash, cash equivalents and short-term investments exceeds $3,008,000 on the date that the discount percentage is being applied. Similarly, the discount percentage can be adjusted (i.e. to 9%) for every $1,000,000 that the sum of our cash, cash equivalents and short-term investments is below $3,008,000. The $3,008,000 target cash amount does not include the proceeds of the First Note or the First Warrant. The conversion price of the First Note is capped at $1.75 per share of common stock. Contents

~~The~~VERTEL ~~conversion~~CORPORATIONNOTES ~~price~~TO ofCONSOLIDATED ~~the~~FINANCIAL ~~Second Note~~STATEMENTS fluctuates and is determined by multiplying the applicable discount percentage by the average per share market value for the three trading days having the lowest per share market value during the twenty-two trading days immediately prior to the conversion date. The initial discount percentage is 18%. The discount percentage shall be adjusted based upon four times our quarterly revenues as disclosed in our most recent public filing (~~the “Annualized Revenue”~~continued). The discount percentage is 7% if the Annualized Revenue is more than $15,000,000; 12% if the Annualized Revenue is more than $12,000,000 but not more than $15,000,000; 15% if the Annualized Revenue is more than $10,000,000 but not more than $12,000,000; 18% if the Annualized Revenue is more than $8,000,000 but not more than $10,000,000; and 21% if the Annualized Revenue is more than $6,000,000 but not more than $8,000,000. The discount percentage cannot be below 7%. If our cash collections do not exceed $1,350,000 on a quarterly basis, the discount percentage is 24%. However, since our common stock was delisted from The Nasdaq SmallCap Market, effective as of August 22, 2002 and, as a result, we are trading on the OTC Bulletin Board, and the discount percentage has increased to 40% until we return to the Nasdaq SmallCap Market. The conversion price of the Second Note is capped at $1.25 per share of common stock.

~~The~~In ~~First Warrant~~accordance ~~exercise~~with ~~price~~SFAS ~~will~~142, bethe ~~adjusted~~company ondid ~~December~~not ~~27,~~amortize ~~2002~~goodwill ~~and~~in ~~June~~2002. 27However, ~~2003~~the toCompany andid ~~amount~~retain ~~equal~~an toindependent ~~120%~~third ofparty ~~the~~valuation ~~per~~consultant ~~share~~to ~~market~~test ~~value~~ for ~~the~~goodwill ~~five~~impairments. ~~trading~~In ~~days~~June 2002, ~~having~~ the ~~lowest~~Company ~~per~~determined ~~share~~that ~~market~~goodwill ~~value~~was ~~during~~impaired ~~the~~due ~~fifteen trading days immediately prior~~ to ~~such~~the ~~adjustment~~continued ~~date,~~deterioration ~~provided~~in ~~that such amounts do not exceed~~ the ~~previous~~telecommunications ~~exercise~~and ~~price.~~technology Onmarkets ~~January~~and ~~3, 2002,~~ the ~~transaction~~decrease ~~commitment~~in ~~date, the~~ fair market value of the ~~First~~company. ~~Warrant,~~Using ~~which~~the ~~expires~~Company’s inbest ~~five~~judgment ~~years,~~and ~~was~~estimates ~~estimated at $505,000~~of ~~using~~fair ~~the~~value ~~Black-Scholes~~based ~~option-pricing~~on ~~model~~discounted ~~and~~cash flows, the ~~following~~valuation ~~assumptions;~~consultant adetermined ~~risk-free~~that ~~interest~~goodwill ~~rate~~was ofimpaired by $4~~.4%~~, ~~expected volatility of 199%~~795,000 ~~and~~in ~~expected~~June ~~dividends of zero~~2002.

~~The~~At ~~Second~~December ~~Warrant exercise~~31, ~~price~~2002, ~~will~~the beCompany ~~adjusted~~retained the ~~every~~same ~~twelve~~third ~~months~~party onvaluation ~~August~~consultant 1 to antest ~~amount~~goodwill ~~equal to 120% of the average of the per share market value~~ for ~~the~~impairment. ~~five~~The ~~trading~~consultant ~~days~~determined ~~having the lowest per share market value during the twenty-two trading days immediately prior to such adjustment dates, provided~~ that ~~such~~goodwill ~~adjusted~~was ~~price~~further isimpaired ~~lower than the previous exercise price. On August 13~~$2, ~~2002~~997,000 ~~the~~by ~~transaction~~using ~~commitment date,~~ the ~~fair~~same ~~value~~method ofdescribed ~~the~~above. ~~Second Warrant~~Thus, ~~which~~total ~~expires~~impairments into ~~five~~goodwill ~~years,~~in ~~was~~2002 ~~estimated~~were at $~~284~~7,792,000 ~~using the Black-Scholes option-pricing model~~ and ~~the~~were ~~following~~reflected ~~assumptions;~~as a ~~risk-free~~separate ~~interest~~line ~~rate~~item ofin ~~3.33%,~~the ~~expected~~statement ~~volatility~~ of ~~219%, and expected dividends of zero~~operations.

In ~~accordance with~~connection ~~Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued~~ with ~~Stock Purchase Warrants,” we allocated~~ the ~~net~~adoption ~~proceeds~~ of ~~$3,395,000~~SFAS ~~to the First Note and the First Warrant based on their relative fair values of $3~~142,~~500,000~~ ~~for~~prior ~~the~~period ~~First~~goodwill ~~Note~~amounts ~~and~~have ~~$505,000~~not ~~for the First Warrant. A discount on the First Note of $533,084 and a discount on the First Warrant of $76,916 resulted from the fair value allocation. On January 3, 2002, the transaction~~been ~~commitment date, the First Note was convertible into 7,777,778 shares of our common stock with a fair value of $5,055,556, or $0~~restated.65 per share, based on the closing market price of our common stock on The Nasdaq National Market. We determined that the conversion feature of the First Note was beneficial to its holder in the amount of $2,088,600, which is equal to the difference between the $5,055,556 fair value of the shares into which the First Note was convertible and the $2,966,916 of net proceeds allocated to the First Note in the manner previously described. The principal amount of the First Note of $3,500,000 was recorded as a long-term liability, net of a $2,621,684 discount, which consisted of the $533,084 discount resulting from the fair value allocation and the $2,088,600 discount resulting from the beneficial conversion feature. We also credited the beneficial conversion feature of $2,088,600 to additional paid-in capital. The total discount on the First Note of $2,621,684, which is being amortized to interest expense over the 36-month term of the First Note using the effective interest method, may be subject to downward adjustments to the extent partial conversions of the First Note occur. These adjustments, if required, would reduce the carrying value of the discount and increase interest expense. For the nine months ended September 30, 2002, $340,000 of the outstanding principal balance of the First Note was converted into 1,272,272 shares of our common stock. As a condition of our second convertible promissory note sale to SDS (see below), we repaid $1,447,188 of principal and interest of $52,812 relating to the First Note. The remaining First Note principal of approximately $1,713,000 is reported in our financial statements as $429,000, which is net of the unamortized discount of approximately $1,284,000.

84. Financing Transactions

~~VERTEL~~On ~~CORPORATION~~January ~~NOTES~~3, TO2002, ~~CONSOLIDATED~~in ~~FINANCIAL~~connection ~~STATEMENTS~~with a Note and Warrant Purchase Agreement with SDS Merchant Fund, L.P. (~~continued~~“SDS”), the Company received net proceeds of approximately $3,395,000, after payment of a $105,000 commission, from the sale of a $3,500,000 three-year, 6% convertible promissory note (“First Note”) to SDS and issued a five year Warrant (the “First Warrant”) initially exercisable into 800,000 shares of Vertel common stock at an initial exercise price of $0.9988 per share. The total costs incurred in connection with the financing transaction amounted to $216,000, excluding the commission of $105,000, and consisted of professional fees and SEC registration fees. These costs are being amortized on a straight-line basis as expense over the 36-month term of the First Note and are reflected as a reduction of the recorded note payable balance on the accompanying balance sheet.

WeOn ~~allocated~~August ~~the~~13, ~~net proceeds of $3~~2002,~~040,000~~ toin ~~the~~connection ~~Second~~with a Note and ~~the~~Warrant Purchase ~~Second~~Agreement ~~Warrant~~with ~~based~~SDS, onthe ~~their~~Company ~~relative~~received ~~fair~~net ~~values~~proceeds of approximately $3,~~100~~040,000 ~~for~~after ~~the~~payment ~~Second~~of ~~Note~~a ~~and~~ $~~284~~60,000 ~~for~~commission, ~~the~~from ~~Second Warrant. A discount on~~ the ~~Second~~sale ~~Note~~ of ~~$315,000 and~~ a ~~discount on the Second Warrant of~~ $293,100,000, ~~resulted~~three-year, ~~from~~8% ~~the~~convertible ~~fair~~senior ~~value~~secured ~~allocation.~~promissory Onnote ~~August~~(the ~~13,~~“Second ~~2002,~~Note”) to ~~the~~SDS ~~transaction~~and ~~commitment~~issued ~~date,~~a ~~the~~five-year Warrant (“Second ~~Note~~Warrant”) ~~was~~initially ~~convertible~~exercisable into 442,~~285~~625,~~714~~000 shares of ~~our~~Vertel common stock ~~with~~at aan ~~fair~~initial ~~value~~exercise price of $~~4,871,429, or $~~0.1120 per share,. ~~based on the closing market price of our common stock on~~ The ~~Nasdaq~~security ~~SmallCap~~interest ~~Market.~~also Weextends ~~determined that the conversion feature of the Second Note was beneficial~~ to ~~its holder in~~ the ~~amount of~~ $23,~~086~~500,~~249,~~000 ~~which~~First isNote with ~~equal~~SDS. toProceeds ~~the~~of ~~difference between the~~ $41,~~871~~500,~~429~~000 ~~fair~~from ~~value of~~ the ~~shares into which the~~ Second Note ~~was~~were ~~convertible~~used ~~and the $2,785,180 of net proceeds allocated~~ to ~~the~~reduce ~~Second Note in~~ the ~~manner~~balance ~~previously~~outstanding ~~described.~~on ~~The principal amount of~~ the ~~Second~~First Note ofand $3,100,000 was ~~recorded~~used ~~as a~~to ~~long-term~~repay ~~liability, net of~~ a ~~$2,401,020~~bridge ~~discount,~~loan ~~which~~from ~~consisted~~SDS. ofThe ~~the~~total ~~$314,820~~costs ~~discount~~incurred ~~resulting~~in ~~from~~connection with the ~~fair~~financing ~~value~~transaction ~~allocation~~amounted to ~~and~~approximately ~~the~~ $2191,~~086~~000,~~249~~ ~~discount~~excluding ~~resulting from~~ the ~~beneficial~~commission ~~conversion feature. We also credited the beneficial conversion feature~~ of $260,~~086~~000,~~249~~ toand ~~additional~~consisted ~~paid-in~~of ~~capital.~~professional ~~The~~fees ~~total~~and ~~discount~~SEC onregistration ~~the~~fees. ~~Second~~These ~~Note~~costs ofare ~~$2,401,020,~~being ~~which~~amortized ison ~~being~~a ~~amortized~~straight-line tobasis ~~interest~~as expense over the 36-month term of the Second Note using the effective interest method, may be subject to downward adjustments to the extent partial conversions of the Second Note occur. These adjustments, if required, would reduce the carrying value of the discount and ~~increase interest expense. For the nine months ended September 30, 2002,~~are ~~$10,000~~reflected ofas ~~the~~a ~~outstanding~~reduction ~~principal balance~~ of the ~~Second~~recorded ~~Note was converted into 251,167 shares of our common stock. As a condition of our second convertible promissory~~ note ~~sale~~payable tobalance ~~SDS,~~on ~~we repaid $1,447,188 of principal and interest of $52,812 relating to~~ the ~~First~~accompanying ~~Note.~~balance ~~The remaining Second Note principal of approximately $3,090,000 is reported net of the unamortized discount of approximately $2,356,000~~sheet.

~~Emerging~~The ~~Issues~~conversion ~~Task~~price ~~Force (EITF)~~of ~~No.~~the ~~00-19,~~First ~~“Accounting~~Note ~~for~~fluctuates ~~Derivative Financial Instruments Indexed to,~~ and ~~Potentially~~is ~~Settled~~determined ~~in,~~by multiplying ~~a Company’s Own Stock”, requires that we initially classify~~ the ~~Warrants~~applicable asdiscount apercentage ~~liability~~by ~~since~~ the ~~foregoing~~average ~~provisions~~per ofshare ~~our agreements~~market ~~with~~value ~~the~~for ~~holder of~~ the ~~First~~five ~~and~~trading ~~Second~~days ~~Notes~~having ~~and~~ the ~~First~~lowest ~~and~~per ~~Second~~share ~~Warrants~~market ~~could require us to pay cash to settle the warrant contracts. Accordingly, we recorded the fair~~ value ofduring the ~~First~~fifteen ~~Warrant~~trading ofdays ~~$428,084,~~immediately ~~net~~prior ~~of the $76,916 discount arising from the allocation of the net proceeds~~ to the ~~First~~conversion ~~Note~~date. ~~and~~The ~~First~~initial ~~Warrant~~discount percentage asis ~~previously~~7%. ~~described,~~The asdiscount apercentage ~~warrant~~can ~~obligation~~be onadjusted ~~January~~in 3,2% ~~2002,~~increments ~~the transaction commitment date~~(i.e. Weto ~~recorded~~5%) ~~the~~for ~~fair~~every ~~value of the Second Warrant of~~ $~~254~~1,~~820~~000,000 ~~net~~that of the ~~$28,803~~sum ~~discount arising from the allocation~~ of ~~the~~cash, ~~net~~cash ~~proceeds~~equivalents ~~to the Second Note~~ and ~~Second~~short-term ~~Warrant~~investments asexceeds ~~previously described~~$3,008,000 ~~as a warrant obligation~~ on ~~August 13, 2002,~~ the ~~transaction commitment~~ date. ~~EITF No. 00-19 requires~~ that ~~we adjust~~ the ~~carrying~~discount ~~value~~percentage ofis ~~the warrant obligations to their fair value on each reporting date~~being applied. ~~As of September 30~~Similarly, ~~2002,~~ the ~~fair~~discount ~~value~~percentage ofcan ~~the~~be ~~First~~adjusted ~~Warrant~~(i.e. ~~was~~to ~~estimated~~9%) atfor every $611,000,000 ~~and~~that the ~~Second~~sum ~~Warrant~~of ~~was estimated at $206~~cash,~~000~~ ~~using the~~cash ~~Black-Scholes~~equivalents ~~option-pricing model~~ and ~~the following assumptions; a risk~~short-~~free~~term ~~interest~~investments ~~rate~~is ofbelow ~~2.68%~~$3, ~~expected volatility of 219%~~008, ~~and expected dividends of zero~~000. The ~~decrease in the First Warrant fair value from January~~ $3, ~~2002 to September 30~~008, ~~2002~~000 oftarget ~~approximately~~cash ~~$367,000~~amount ~~was~~does ~~reflected~~not asinclude ~~other~~the ~~income.~~proceeds ~~The~~of the ~~decrease~~First inNote or the ~~Second~~First Warrant. ~~fair~~The ~~value~~conversion ~~from~~price ~~August~~of ~~13,~~the ~~2002~~First toNote ~~September~~is ~~30,~~capped ~~2002~~at ~~of approximately~~ $~~48,000~~1.75 ~~was~~per ~~also~~share ~~reflected~~of ascommon ~~other income~~stock.

AThe ~~significant~~conversion ~~component~~price of the ~~Black-Scholes~~Second ~~model~~Note fluctuates and is ~~the~~determined ~~fair~~by ~~market~~multiplying ~~value~~the ~~per~~applicable ~~share~~discount ofpercentage ~~our~~by ~~common~~the ~~stock.~~average Ifper ~~the~~share ~~fair~~ market value offor ~~our~~the ~~common~~three ~~stock~~trading ~~increases,~~days having the ~~fair~~lowest ~~value~~per ofshare ~~the~~market ~~warrant~~value ~~obligations~~during ~~would~~the ~~likely increase,~~twenty-two ~~resulting~~trading indays aimmediately ~~charge~~prior to ~~other~~the ~~expense~~conversion date. The Ifinitial ~~the~~discount ~~fair~~percentage ~~market~~is ~~value~~18%. ofThe ~~our~~discount ~~common~~percentage ~~stock~~is ~~decreases,~~adjusted ~~the~~based ~~fair~~on ~~value~~four oftimes the ~~warrant~~Company’s ~~obligations~~quarterly ~~would~~revenues ~~likely~~as ~~decrease,~~disclosed ~~resulting~~ in ~~other~~its ~~income,~~most asrecent ~~was~~public filing (the ~~case~~“Annualized ~~for~~Revenue”). ~~the~~The ~~first,~~discount ~~second~~percentage ~~and~~is ~~third~~7% ~~quarters~~if ofthe ~~2002.~~Annualized ~~For~~Revenue ~~example,~~is ifmore ~~the~~than ~~fair~~$15,000,000; ~~market~~12% ~~value~~if ofthe ~~our~~Annualized ~~common~~Revenue ~~stock~~is onmore ~~September~~than 30$12,000,000, ~~2002~~but ~~was~~not ~~$1.00~~more ~~per~~than ~~share~~$15,000,000; ~~the~~15% ~~fair~~if ~~value of~~ the ~~First~~Annualized ~~and~~Revenue ~~Second~~is ~~Warrant~~more ~~obligations~~than ~~determined~~$10,000,000, ~~using~~but ~~the~~not ~~Black-Scholes~~more ~~model~~than $12,000,000; ~~assuming~~18% ~~all~~if ~~other~~the ~~variables~~Annualized ~~remain~~Revenue ~~constant,~~is ~~would~~more ~~hypothetically~~than ~~have been approximately~~ $~~789~~8,000 ~~and $2~~,~~610,~~000, ~~respectively~~but ~~resulting~~not inmore athan ~~charge of approximately~~ $310,~~062~~000,000; toand ~~other~~21% ~~expense~~if ~~for~~ the ~~third~~Annualized ~~quarter~~Revenue ofis ~~2002.~~more ~~Conversely~~than $6,000,000, ifbut ~~the~~not ~~fair~~more ~~market~~than ~~value~~$8,000,000. ofThe ~~our~~discount ~~common stock~~percentage oncannot ~~September~~be ~~30,~~below ~~2002 was $0~~7%.05 ~~per~~If ~~share,~~Vertel’s ~~the~~cash ~~fair~~collections ~~value~~do ofnot ~~the~~exceed $1,350,000 ~~Warrant~~on ~~obligation~~a ~~determined~~quarterly ~~using~~basis, the ~~Black-Scholes~~discount ~~Model,~~percentage ~~assuming~~is ~~all~~24%. ~~other variables remain constant~~However, ~~would~~since ~~hypothetically~~Vertel’s ~~have~~common ~~been~~stock ~~approximately~~was ~~$38,000~~de-listed ~~and~~from ~~$128,000, respectively~~The ~~resulting~~NASDAQ inSmallCap ~~other~~Market ~~income~~effective as of ~~approximately~~August ~~$171~~22,~~000~~ ~~for~~2002 ~~the~~and, ~~third~~as ~~quarter~~a ofresult ~~2002.~~is ~~Given~~trading on the ~~volatility~~OTC ofBulletin ~~our~~Board, ~~stock~~the discount ~~price,~~percentage weincreased ~~cannot~~to ~~predict~~40% ~~the~~until ~~impact~~trading ~~fluctuations~~returns into the ~~fair~~NASDAQ ~~market~~SmallCap ~~value~~Market. ofThe ~~our~~conversion ~~stock~~ price ~~may~~of ~~have~~the onSecond ~~our consolidated~~Note ~~statement~~is ofcapped ~~operations~~at ~~for~~$1.25 ~~any~~per ~~future~~share ~~period.~~of common stock.

EITF No. 00-19 requires that we evaluate the classification of the Warrant as a liability as of each reporting date. To the extent the potential for us to be required to pay cash to settle the Warrant contract no longer exists, we may be required to reclassify the carrying value of the Warrant liability to equity. 8

9Table of Contents

VERTEL ~~CORPORATION~~CORPORATIONNOTES ~~NOTES~~ TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5The First Warrant exercise price is subject to an adjustment equal to 120% of the per share market value for the five trading days having the lowest per share market value during the fifteen trading days immediately prior to such adjustment date, provided that such amounts do not exceed the previous exercise price. ~~Statement~~ On January 3, 2002, the transaction commitment date, the fair value of ~~Cash~~the ~~Flows~~First Warrant that expires in five years, was estimated at $505,000 using the Black-Scholes option-pricing model and the following assumptions: a risk-free interest rate of 4.4%, expected volatility of 199% and no expected dividends.

~~Decreases~~The Second Warrant exercise price will be adjusted every twelve months on August 1 to an amount equal to 120% of the average of the per share market value for the five trading days having the lowest per share market value during the intwenty-two ~~operating~~trading ~~cash~~days ~~flows~~immediately ~~arising~~prior ~~from~~to ~~changes~~such inadjustment ~~assets~~dates, ~~and~~provided ~~liabilities~~that ~~consist~~such adjusted price is lower than the previous exercise price. On August 13, 2002, the transaction commitment date, the fair value of the ~~following~~Second (Warrant that expires in ~~thousands)~~five years, was estimated at $284,000 using the Black-Scholes option-pricing model and the following assumptions: a risk-free interest rate of 3.33%, expected volatility of 219% and no expected dividends.

	Nine Month Period Ended
	September 30, 2002			September 30, 2001
Trade accounts receivable	$	655		$	(528	)
Prepaid expenses and other current assets		(147	)		(183	)
Accounts payable		(201	)		(212	)
Accrued wages and related liabilities		(171	)		(326	)
Cash payments for restructuring expenses		(145	)		—
Accrued taxes payable		(11	)		(115	)
Other accrued liabilities		(569	)		111
Deferred revenue		(259	)		(324	)
	$	(848	)	$	(1,577	)

The reconciliation between face values of the two SDS notes and actual balances recorded in the balance sheet is as follows:

6. Segment Reporting

	First Note			Second Note			Total

Original Value of Note	$	3,500,000		$	3,100,000		$	6,600,000
Less: Conversions in 2002		(340,000	)		(40,000	)		(380,000	)
Less: Repayments in 2002		(1,447,000	)		—			(1,447,000	)

Gross Value of Notes at December 31, 2002	$	1,713,000		$	3,060,000		$	4,773,000
Other Adjustments
Less: Conversion during half year ended June 30, 2003	$	0		$	(160,000	)	$	(160,000	)
Less: Discount due to beneficial conversion feature at June 30, 2003	$	(131,000	)	$	(243,000	)	$	(374,000	)
Less: Discount due to Warrant at June 30, 2003		(514,000	)		(1,608,000	)		(2,122,000	)

Balance of Notes Payable at March 31, 2003	$	(1,067,000	)	$	(1,049,000	)	$	(2,117,000	)

~~Our~~The ~~chief~~Company ~~operating~~allocated ~~decision~~the ~~maker,~~net asproceeds ~~defined~~of by$3,395,000 ~~SFAS~~to ~~No.~~the ~~131,~~First ~~“Disclosures~~Note ~~about~~and ~~Segments~~the ofFirst anWarrant ~~Enterprise~~based ~~and~~on a ~~Related~~method ~~Information,”~~that isapproximates ~~our~~the ~~chief~~residual ~~executive~~method ~~officer.~~using Onfair ~~October~~values ~~11,~~of ~~2001~~$3,500,000 ~~we announced~~for the ~~hiring~~First ofNote aand ~~new~~$505,000 ~~chief~~for ~~executive~~the ~~officer~~First Warrant. ~~Our~~A ~~new~~discount ~~chief~~on ~~executive~~the ~~officer~~First ~~makes~~Note ~~decisions~~of ~~about~~$533,000 ~~resource~~and ~~allocation~~a ~~based~~discount on the ~~organization~~First asWarrant aof ~~whole. Accordingly~~$77,000 weresulted ~~now~~from ~~operate~~the infair value ~~one reporting segment~~allocation. ~~Prior~~On toJanuary ~~the~~3, ~~first quarter of~~ 2002, ~~decisions~~the ~~made~~transaction bycommitment ~~our~~date, ~~chief~~the ~~executive~~First ~~officer~~Note ~~about~~was ~~allocating~~convertible ~~resources,~~into ~~which~~approximately ~~consist primarily of personnel~~7,778,000 ~~and~~shares ~~compensation~~ of ~~key~~common ~~employees~~stock ~~were~~with ~~made~~a ~~based~~fair onvalue ~~the operating results~~ of ~~two principal segments~~$5,056,000, ~~license~~or ~~and service~~$0.65 ~~Since we~~per ~~now~~share, ~~operate~~based inon ~~one~~the ~~reportable~~closing ~~segment,~~market ~~restatement~~price of common ~~prior~~stock ~~period~~on ~~information~~The isNASDAQ ~~not~~National ~~necessary~~Market.

10The Company determined that the conversion feature of the First Note was beneficial to the holder in the amount of $2,089,000, the difference between the $5,056,000 fair value of the shares into which the First Note was convertible and the $2,967,000 of net proceeds allocated to the First Note as previously described. The principal amount of the First Note of $3,500,000 was recorded as a long-term liability, net of a $2,622,000 discount, that consisted of a $533,000 discount resulting from the fair value allocation and the $2,089,000 discount resulting from the beneficial conversion feature. The Company also credited the beneficial conversion feature of $2,088,900 to additional paid-in capital. The total discount on the First Note of $2,622,000, that is being amortized to interest expense over the 36-month term of the First Note using the effective interest method, is subject to downward adjustments to the extent partial conversions of the First Note occur. These adjustments would reduce the carrying value of the discount and increase interest expense. For the year ended December 31, 2002, $340,000 of the outstanding principal balance and $4,300 of accrued interest on the First Note was converted into 1,272,000 shares of common stock. During the second quarter of 2003 SDS converted $160,000 of debt to approximately 4.0 million shares of common stock.

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~ 9

FORWARD-LOOKINGTable INFORMATIONof AND SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Contents

~~This~~VERTEL ~~report~~CORPORATIONNOTES ~~contains~~TO ~~forward-looking~~CONSOLIDATED ~~statements within~~FINANCIAL ~~the~~STATEMENTS meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, forward-looking statements may be made orally or in press releases, conferences, reports, on our web site or otherwise, in the future by us or on our behalf. Statements that are not historical are forward-looking. When used by or on our behalf, the words “expect,” “anticipate,” “estimate,” “believe,” “intend” and similar expressions generally identify forward-looking statements. (continued)

~~Forward-looking~~As ~~statements involve risks and uncertainties. These uncertainties include factors that affect all businesses operating in~~ a ~~global~~condition ~~market,~~of asthe ~~well~~sale asof ~~matters~~the ~~specific~~Second toNote ~~us and~~ the ~~markets~~Company werepaid ~~serve.~~$1,447,000 ~~Particular~~of ~~risks~~principal and ~~uncertainties facing us at the present include our ability to raise additional capital~~$53,000 inof ~~particular~~interest ~~the~~relating ~~ability~~ to ~~secure~~ ~~additional financing to fund our operations for 2003;~~ the ~~financial~~First ~~uncertainties~~Note. ~~associated~~For ~~with~~accounting ~~continuing losses; our ability~~purposes, ~~including the financial ability, to continue to invest~~ in ~~research~~repaying ~~and~~a ~~development~~portion ~~necessary~~of ~~for~~ the ~~development~~First ofNote ~~new~~principal, ~~and existing products that are required to increase revenues;~~ the ~~timely~~Company ~~and~~also ~~successful~~acquired ~~development~~a portion of ~~existing and new markets;~~ the ~~severe~~beneficial ~~impact~~conversion ~~that~~feature ~~the~~originally ~~slowdown~~issued inwith the UFirst Note.S. ~~economy~~The ~~has~~Company ~~had~~measured on the ~~telecommunications~~value ~~industry, forcing a number~~ of ~~service providers to cease operations, which has adversely impacted~~ the ~~revenues~~beneficial ofconversion ~~our~~feature ~~equipment~~acquired ~~manufacturer~~on ~~customers and, therefore, our revenues;~~ the ~~fact~~date ~~that some~~ of ~~our~~repayment ~~products~~as ~~are relatively new and~~$670,000. ~~although we see developing~~For ~~market~~accounting ~~interest~~purposes, itthe isCompany ~~difficult~~allocated toa ~~predict~~portion ~~sales~~ of ~~our newer products and~~ the ~~market~~value ~~may~~of ~~or may not ultimately adopt these technologies;~~ the ~~fact~~cash ~~that~~repayment ~~our sales cycle is long for our products, making initial license sales and future royalties difficult~~ to ~~forecast;~~the ~~additional~~portion ~~difficulty in predicting royalty revenue because that revenue is dependent on successful development and deployment by our customers~~ of ~~their~~the ~~products~~beneficial ~~containing~~conversion ~~our~~feature ~~software;~~acquired ~~fluctuation from quarter to quarter~~ in ~~revenue~~ ~~from~~the ~~our~~repayment ~~professional~~transaction. ~~service~~As ~~unit as~~ a result of athis ~~limited~~allocation ~~number~~ of ~~large consulting contracts; loss of key customer~~value, ~~partner or alliance relationships and~~ the ~~possibility~~Company ~~that~~recorded ~~we may not be able to replace the loss of~~ a ~~significant~~gain ~~customer;~~on the ~~dependence~~repayment ontransaction ~~a limited number~~ of ~~customers~~$513,000. ~~for~~The aremaining ~~significant~~First ~~portion~~Note ofprincipal ~~our quarterly license revenues; size and timing~~ of ~~license~~approximately ~~fees~~$1,713,000 ~~closed~~is ~~during~~reported ~~the quarter which may result~~ in ~~large swings in quarterly operating results and~~ the ~~likely~~ ~~continued~~Company’s ~~significant~~financial ~~percentage~~statements ofas ~~quarterly~~$911,000, ~~revenues~~net ~~recorded in the last month~~ of the ~~quarter,~~unamortized ~~frequently~~discount ~~in the last weeks or even days~~ of aapproximately ~~quarter~~$802,000 ~~which~~at ~~further~~December ~~adds to the difficulty of forecasting~~31, ~~and our ability to control~~ ~~expenditures at a level consistent with revenues~~2002.

~~Additionally,~~The ~~more~~Company ~~general~~allocated ~~risk factors include~~ the ~~possible~~net ~~development~~proceeds ~~and introduction~~ of ~~competitive~~$3,040,000 ~~products~~to ~~and new and alternative technologies by our competitors;~~ the ~~increasing~~Second ~~sales~~Note and ~~marketing~~the ~~costs~~Second ofWarrant ~~attracting~~based ~~new~~on ~~and~~a ~~retaining~~method ~~existing~~that ~~customers;~~approximates ~~pricing,~~the ~~currency~~residual ~~and~~method ~~exchange~~using ~~risks;~~fair ~~governmental~~values ~~and~~of $3,100,000 ~~regulatory~~for ~~developments~~the ~~affecting~~Second usNote and ~~our~~$284,000 ~~customers;~~for the ~~ability to~~Second ~~identify,~~Warrant. ~~conclude,~~A ~~and~~discount ~~integrate acquisitions~~ on ~~a timely basis;~~ the ~~ability~~Second toNote ~~attract~~of ~~and/or~~$315,000 ~~retain essential technical or other personnel; political~~ and ~~economic uncertainties associated with conducting business on~~ a ~~worldwide~~discount ~~basis. Readers are cautioned not to place undue reliance~~ on ~~any forward-looking statement and to recognize that~~ the ~~statements~~Second ~~are~~Warrant ~~not predictions~~ of ~~actual~~$29,000 ~~future~~resulted ~~results. Actual results could differ materially~~ from ~~those~~the ~~anticipated~~fair invalue ~~the~~allocation. ~~forward-looking statements~~On ~~and~~August ~~from~~13, ~~historical results~~2002, ~~due to~~ the ~~risks~~transaction ~~and uncertainties referred to above~~commitment date, asthe ~~well~~Second asNote ~~others~~was ~~not~~convertible ~~now~~into ~~anticipated.~~approximately ~~Further~~44,286,000 ~~risks~~shares ~~inherent~~of incommon ~~our~~stock ~~business~~with ~~are~~a ~~listed~~fair ~~under~~value ~~“Risk~~of ~~Factors” in Part I~~$4,871,000, ~~Item~~or I$0.11 ofper ~~our~~share, ~~Annual Report~~based on ~~Form 10-K for~~ the ~~fiscal~~closing ~~year~~market ~~ended~~price ~~December 31, 2001 and Item 3~~ of ~~our~~common ~~Registration~~stock ~~Statement~~ on ~~Form~~The ~~S-3~~NASDAQ ~~SEC~~SmallCap ~~File No~~Market. ~~333-96639.~~

The ~~foregoing~~Company ~~statements~~determined ~~and~~that ~~risk~~the ~~factors~~conversion ~~are~~feature ~~not~~of the Second Note was beneficial to the holder in the amount of $2,086,000, the difference between the $4,871,000 fair value of the shares into ~~exclusive~~which ~~and~~the ~~further~~Second ~~information~~Note ~~concerning~~was usconvertible and ~~our~~the ~~business~~$2,785,000 ~~including~~of ~~factors~~net proceeds allocated to the Second Note as previously described. The principal amount of the Second Note of $3,100,000 was recorded as a long-term liability, net of a $2,401,000 discount, that ~~potentially~~consisted ~~materially~~of ~~affect~~the ~~our~~$315,000 ~~financial~~discount ~~results~~resulting from the fair value allocation and the $2,086,000 ~~may~~discount ~~emerge~~resulting from ~~time~~the beneficial conversion feature. The Company also credited the beneficial conversion feature of $2,086,000 to ~~time~~additional paid-in capital. ItThe istotal ~~not~~discount ~~possible~~on ~~for~~the ~~management~~Second Note of $2,401,000 that is being amortized to ~~predict~~interest ~~all~~expense ~~risk~~over ~~factors~~the or36-month term of the Second Note using the effective interest method, is subject to ~~assess~~downward adjustments to the extent partial conversions of the ~~impact~~Second Note occur. These adjustments would reduce the carrying value of ~~such~~the ~~risk~~discount ~~factors~~and onincrease ~~our~~interest ~~business~~expense. WeFor ~~undertake~~the noyear ~~obligation~~ended toDecember ~~revise~~31, or2002, ~~publicly~~$40,000 ~~release~~of the ~~results~~outstanding principal balance and $1,000 of ~~any~~accrued ~~revision~~interest on the Second Note was converted into 1,045,000 shares of common stock. As a condition of the Second Note, the Company repaid $1,447,000 of principal and interest of $53,000 relating to the ~~forward-looking~~First ~~statements~~Note. The remaining Second Note principal of approximately $3,060,000 is reported net of the unamortized discount of approximately $2,210,000 at December 31, 2002.

~~Background~~During the three month period ended June 30, 2003, the balance due on the notes was increased $205,000 for interest accretion arising out of the original discount taken on the notes to reflect the beneficial conversion features. During the first quarter the balance was increased $187,000.

WeEmerging ~~are~~Issues aTask ~~telecommunications~~Force ~~software~~(EITF) ~~and~~No. ~~services~~00-19, ~~solutions~~“Accounting ~~company.~~for ~~From~~Derivative ~~1995~~Financial ~~through~~Instruments ~~2001~~Indexed to, ~~most~~and ofPotentially ~~our~~Settled ~~software~~in, ~~license~~a ~~revenue~~Company’s ~~was~~Own ~~derived~~Stock,” ~~from~~requires ~~telecommunications~~that ~~network~~the Company ~~management~~initially ~~products~~classify ~~based~~the onWarrants as a liability since the ~~Telecommunications~~ ~~Management~~provisions ~~Network~~of ~~(TMN)~~the ~~standard~~agreements ~~that~~with ~~were~~the ~~targeted~~holder atof ~~telecom~~the ~~equipment~~First ~~manufacturers~~and Second Notes and ~~telecom~~the ~~network~~First ~~operators.~~and InSecond ~~1999,~~Warrants wecould ~~acquired~~require ~~Expersoft~~the ~~Corporation~~Company to pay cash to settle the warrant contracts. Accordingly, athe ~~developer~~Company ~~and~~recorded ~~marketer~~the fair value of ~~standards-based~~the ~~Common~~First ~~Object~~Warrant ~~Request Broker~~of ~~Architecture~~$428,000, ~~(CORBA)~~net ~~software~~of ~~technology~~the ~~and~~$77,000 wediscount ~~targeted~~arising ~~our~~from ~~CORBA~~the ~~product~~allocation ~~primarily~~of atthe net proceeds to the ~~telecom~~First ~~equipment~~Note ~~manufacturers~~and toFirst beWarrant ~~embedded~~as ~~inside~~previously ~~communications~~described, ~~devices~~as a warrant obligation on January 3, 2002, the transaction commitment date. InThe ~~2000~~Company ~~and~~recorded ~~2001~~the wefair ~~developed~~value of the ~~Vertel~~Second ~~Mediation~~Warrant ~~Framework~~of ~~(VMF)~~$255,000 ~~and our~~net ~~TicketExchange~~of ~~(formerly~~the ~~called~~$29,000 ~~WebResolve)~~discount ~~product~~arising ~~that~~from ~~utilizes~~the ~~VMF.~~allocation ~~VMF~~of ~~was~~the ~~designed~~net proceeds to ~~enable~~the ~~communication~~Second ~~among~~Note and ~~between~~Second ~~networks~~Warrant oras ~~network~~previously described, ~~components~~as ~~that~~a ~~were~~warrant ~~not~~obligation ~~originally~~on ~~designed~~August to13, ~~work~~2002, ~~together~~the transaction commitment date. ~~TicketExchange~~EITF ~~was~~No. ~~designed~~00-19 requires that the carrying value of the warrant obligations be adjusted to ~~send~~ ~~automated~~their ~~trouble~~fair ~~tickets~~value ~~between~~on ~~different~~each ~~business~~reporting ~~partners~~date. ~~Both~~As of ~~these~~December ~~products~~31, ~~were~~2002, ~~targeted~~the fair ~~primarily~~value of the First Warrant was estimated at ~~communication~~$87,000 ~~providers~~and the Second Warrant was estimated at $285,000 ~~but~~using ~~also~~the ~~had~~Black-Scholes ~~applicability~~option-pricing ~~for~~model ~~equipment~~and ~~manufacturers~~the following assumptions: a risk-free interest rate of 2.76%, Inexpected ~~2001~~volatility of 225%, and weno ~~purchased~~expected dividends. The decrease in the ~~assets~~First Warrant fair value from January 3, 2002 to December 31, 2002 of ~~Trigon Technology~~approximately ~~Group~~$418,000 ~~Inc~~was reflected as other income., ~~which~~The ~~enhanced~~increase ~~our~~in ~~ability~~the Second Warrant fair value from August 13, 2002 to ~~offer~~December 31, ~~easily~~2002 ~~configurable~~of ~~element~~approximately $1,000 ~~network~~was ~~and~~reflected ~~service~~as ~~management~~other ~~systems~~expense.

11Pursuant to the Note and Warrant Purchase Agreement, the Company may be required to pay substantial penalties to the note holder under specified circumstances, including, among others, the following: failure to pay principal or interest on the convertible promissory note when due; failure to deliver shares of common stock upon conversion of the convertible promissory note and exercise of the warrants; failure to maintain the Company’s common stock listing on The NASDAQ National Market for a period of five consecutive trading days; failure to comply with a request for conversion of the convertible promissory note or exercise of the warrant; failure to maintain the effectiveness of the registration statement covering the shares of common stock issuable on conversion of the convertible promissory note and on exercise of the warrant; failure to perform or observe any material covenant, condition or agreement under the agreement with the note holder; making a false material misrepresentation or warranty under the agreement with the note holder; failure to timely obtain shareholder approval for the issuance of shares of

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~10

InTable 2002, we adopted a new strategy to combine the strengths of all of these technologies and our experience into an integrated mediation and management platform environment. We call this product suite MWare™, and it is a full family of product and solutions that enable efficient convergence by rapid, resuable and easily maintainable integration of networks and support systems. MWare™ also offers a very advanced configurable environment for convergent management systems (multi technology element, network, service and umbrella management).Contents

WeVERTEL ~~derive~~CORPORATIONNOTES ~~revenue~~TO ~~primarily~~CONSOLIDATED ~~from~~FINANCIAL ~~software~~STATEMENTS license fees, royalties and services, including professional services, technical support and maintenance. Software license fees consist primarily of licenses of our software products. Our software license agreements generally do not provide for a right of return. We maintain reserves for potential credit losses, which have not had a material effect on our results of operations or financial condition through September 30, 2002. (continued)

~~Pursuant~~common tostock ~~our~~issuable ~~license~~upon ~~agreements~~conversion of the convertible promissory note and exercise of the warrant, ~~licensees~~if ~~may~~such ~~distribute~~approval ~~their products~~is ~~with~~required; ~~binary~~a ordefault ~~embedded~~on ~~versions~~the payment of ~~our~~any ~~software.~~indebtedness ~~Royalty~~in ~~revenues~~excess ~~become~~of ~~due~~$100,000 or ~~upon~~in ~~shipment~~the byperformance of any other agreement or condition relating to the ~~licensee~~indebtedness ofthat ~~their~~causes ~~products~~or ~~containing~~permits ~~our~~or ~~software~~requires the acceleration or ~~when~~early werepayment ~~grant~~of ~~run-time~~the ~~licenses~~indebtedness; tofiling ~~our~~for ~~licensees.~~or ~~Due~~consent to the ~~development~~filing ~~times~~of ~~required~~bankruptcy or making or permitting a general assignment for ~~licensees~~the tobenefit ~~design~~of ~~and~~creditors ~~ship~~or ~~products~~appointing ~~containing~~a ~~our~~trustee, ~~software~~receiver, wecustodian ~~generally~~or doliquidator ~~not~~for ~~receive~~a ~~royalties~~substantial part of the Company’s property or ~~run-time~~assets, ~~revenues~~or; ~~from~~the ~~licensees~~commencement ~~shipments~~of a proceeding or case against the Company seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or (iii) dissolution. The Company would generally have to pay such ~~products~~penalties ~~for~~in atthe ~~least~~form ~~three~~of ~~quarters~~an ~~from~~increased interest rate during the ~~date~~time weof ~~initially~~the ~~ship~~default ~~our~~and ~~software.~~money damages based on the note holder’s lost stock sales opportunities during the time of a default as well as other indeterminate costs and expenses.

WeIn ~~separately~~connection ~~offer~~with ~~professional~~the ~~services~~First Note, ~~including~~on ~~program~~October ~~management~~3, ~~system~~2001 ~~design~~the ~~and~~Company ~~engineering,~~filed ~~custom~~a ~~application~~Form ~~development,~~S-3 ~~source~~registration ~~code~~statement ~~portation,~~for ~~conformance~~an ~~testing~~estimated ~~and~~200% ~~certification~~of the number of shares of common stock ~~and~~issuable ~~application~~upon ~~development.~~conversion ~~These~~of ~~services~~the ~~are~~convertible ~~typically~~promissory ~~based~~note onand aexercise ~~detailed~~of ~~statement~~the warrant as of ~~work~~the filing of the registration statement. ~~Professional~~The ~~services~~SEC ~~revenue~~declared ~~varies~~Form ~~according~~S-3 toeffective ~~the~~on ~~size~~December 27, ~~timing~~2001 and ~~complexity~~on January 3, 2002, SDS purchased the note. Under terms of the ~~project~~Second ~~and~~Note isthe ~~typically~~Company ~~billed~~must ~~based~~file ona ~~satisfaction~~registration statement for an estimated 200% of ~~certain~~ ~~milestones~~the ornumber onof ashares ~~per~~of ~~day~~common ~~fee~~stock issuable upon conversion of the convertible promissory note and exercise of the warrant as of the filing of the registration statement. InAs ~~certain~~of ~~cases~~December 31, ~~customers~~2002 ~~reimburse~~the usCompany ~~for~~has ~~non-recurring~~not ~~engineering~~made ~~efforts.~~such a filing.

~~Our~~As ~~technical~~of the date of this Form 10-Q filing, the Company’s common stock has been de-listed as detailed above and the Company has failed to maintain sufficient authorized shares and to register the necessary shares to support ~~services~~the ~~consist~~underlying convertible promissory notes and warrants as agreed. Although the holders of ~~product~~the ~~support~~notes and warrants ~~maintenance~~could demand repayment of the notes at the prepayment price (115% of the principal outstanding), demand an increased interest rate during the period of default, seek money damages for lost stock sales opportunities during the period of ~~training~~default, ~~and~~convert the remaining principal on~~-site~~ ~~consulting.~~the ~~Product~~notes ~~support~~(significantly ~~and~~diluting ~~maintenance~~current ~~fees~~shareholders), or exercise or otherwise enforce any one or more rights under the applicable agreements, the note holders have ~~constituted~~not advised the ~~majority~~Company that it is in default or taken any other remedial action. The impact of ~~technical~~enforcing ~~support~~any combination of these rights could substantially alter the Company’s ability to conduct business, severely impact liquidity, and ~~service~~may ~~revenue~~materially affect future business operations. The Company has reflected the notes payable as current on the accompanying balance sheet.

WeOn ~~sell~~March ~~products~~26, ~~and~~2003 ~~services~~the ~~primarily~~Company ~~through~~received ~~a direct~~proceeds ~~sales~~of ~~force~~$500,000 infrom the issuance ~~United~~of ~~States~~six-month, ~~and~~non-convertible, ~~abroad~~secured ~~and,~~promissory innotes ~~certain~~to ~~sales~~North ~~territories~~Sound Legacy Fund, ~~through~~North ~~third~~Sound ~~party~~Legacy ~~agents.~~Institutional ~~Our~~Fund ~~customers~~and ~~include~~North ~~telecommunications~~Sound ~~service~~Legacy ~~providers~~International ~~and~~Ltd. ~~their~~(formerly ~~customers~~DMG Legacy Fund, ~~network~~DMG ~~equipment~~Legacy ~~manufacturers,~~Institutional ~~independent~~Fund ~~software~~and DMG Legacy ~~developers~~International Ltd.), ~~systems~~collectively ~~integrators~~referred ~~and~~to ~~software~~as ~~platform~~North ~~vendors~~Sound. Terms of the notes were for interest to accrue at a rate of 12.0% per annum to be paid together with the original principal on September 26, 2003. Proceeds from the note were used to cover near-term operating expenses.

~~Starting~~On inApril ~~2000~~16, ~~and~~2003 ~~continuing through~~ the ~~third~~Company ~~quarter~~received proceeds of ~~2002~~$100,000 ~~the~~from ~~economic environment in~~ the ~~U.S.~~issuance ~~significantly~~of ~~deteriorated and has remained weak. The telecommunications sector has declined more significantly than the overall U.S. economy. Telecommunications companies in Europe~~six-month, ~~and to a lesser extent in Asia~~non-convertible, ~~have~~secured ~~also~~promissory ~~experienced~~notes ~~downturns.~~to ~~These conditions adversely~~North ~~impacted~~Sound us. ~~starting~~Terms inof the ~~second~~notes ~~half~~were offor ~~2000~~interest ~~and continues~~ to ~~date.~~accrue ~~During~~at ~~this period~~ a ~~number~~rate of ~~telecommunications~~12.0% ~~service~~per ~~providers~~annum ~~ceased~~to ~~operations~~be orpaid ~~sought~~together ~~bankruptcy~~with ~~protection,~~the ~~which~~original inprincipal ~~turn~~on ~~impacted~~October ~~telecommunication equipment manufacturers~~16, ~~and their revenues generally declined~~2003. ~~Equipment~~Proceeds ~~manufacturers~~from ~~have historically comprised a significant portion of our customer base, and many of our customers experienced significant revenue declines in~~ the ~~second~~note ~~half~~were ofused ~~2000~~to ~~that have~~cover ~~continued.~~near-term Asoperating a result, in 2000, 2001 and 2002, many of our major customers have announced multiple staff layoffs, closed or sold business units, and reduced purchases of development software and consulting servicesexpenses.

~~Although~~On ~~our~~April ~~quarterly~~20, ~~revenues~~2003 ~~have~~the ~~improved~~Company inreceived ~~each~~proceeds of ~~the last three quarters~~$110,000 ~~there~~from ~~is no industry consensus as to when~~ the ~~equipment~~issuance ~~manufacturers~~of ~~will see an economic recovery and~~six-month, ~~therefore~~non-convertible, ~~when~~secured ~~they~~promissory ~~will acquire~~notes ~~new~~to ~~development software, deploy products that include our software or need additional consulting services~~SDS. ~~However,~~Terms weof ~~believe~~the ~~that~~notes ~~both~~were ~~license~~for ~~and~~interest ~~service~~to ~~revenues~~accrue ~~will~~at ~~increase~~a ~~as the economic conditions affecting the telecommunications~~rate ~~sector~~of ~~improve,~~12.0% ~~and~~per asannum ~~revenues~~ to ~~equipment~~be ~~manufacturers~~paid ~~improve.~~together Inwith ~~addition,~~the weoriginal ~~believe~~principal ~~that~~on ~~our~~October ~~M*Ware product offerings~~20, ~~combined~~2003. ~~with~~Proceeds ~~our~~from ~~professional~~the ~~service~~note ~~competencies,~~were ~~will~~used ~~allow us~~ to ~~expand~~cover ~~our~~near-term ~~customer~~operating ~~base worldwide~~expenses.

AsOn aMay ~~consequence~~7, of2003 the Company ~~downturn~~received inproceeds ~~the~~of ~~telecommunications sector~~$280,000 ~~our revenues, including revenues~~ from ~~royalties~~the ~~based~~issuance ~~on shipments by our customers~~ of ~~their~~six-month, ~~products containing our software~~non-convertible, ~~have~~secured ~~declined significantly~~promissory ~~when~~notes ~~compared~~ to ~~1999~~SDS. ~~These~~Terms ~~reduced~~of ~~revenues~~the ~~increased~~notes ~~both~~were ~~our~~for ~~losses~~interest ~~and~~to ~~our~~accrue ~~negative~~at ~~cash~~a ~~flow~~rate of 12.0% Asper aannum ~~consequence,~~to webe ~~must~~paid ~~continue~~together towith ~~increase~~the ~~our~~original ~~revenues,~~principal ~~reduce~~on November ~~costs~~7, ~~and/or~~2003. ~~secure~~Proceeds ~~additional~~from ~~funding~~the innote ~~order~~were used to ~~continue operating~~cover asnear-term aoperating ~~going concern through 2003~~expenses.

~~Critical~~On ~~Accounting~~May ~~Policies~~23, ~~and~~2003 ~~Estimates~~the Company received proceeds of $75,000 from the issuance of six-month, non-convertible, secured promissory notes to SDS. Terms of the notes were for interest to accrue at a rate of 12.0% per annum to be paid together with the original principal on November 23, 2003. Proceeds from the note were used to cover near-term operating expenses.

~~The~~On ~~Securities~~June ~~and~~4, ~~Exchange~~2003 ~~Commission (“SEC”)~~the ~~has~~Company ~~issued~~received ~~disclosure~~proceeds ~~guidance~~of ~~for~~$250,000 ~~“critical~~from ~~accounting~~the ~~policies.”~~issuance ~~The~~of ~~SEC~~six-month, ~~defines~~non-convertible, ~~“critical~~secured ~~accounting~~promissory ~~policies”~~notes asto ~~those~~SDS. ~~that~~Terms ~~require application~~ of ~~management’s~~the ~~most~~notes were ~~difficult,~~for ~~subjective~~interest orto ~~complex judgments,~~accrue ~~often~~at as a ~~result~~rate of ~~the~~12.0% ~~need~~per annum to ~~make~~be ~~estimates~~paid ~~about~~together with the ~~effect~~original ofprincipal ~~matters~~on ~~that~~December ~~are~~4, ~~inherently~~2003. ~~uncertain~~Proceeds ~~and~~from ~~may~~the ~~change~~note inwere ~~subsequent~~used ~~periods~~to cover near-term operating expenses.

On June 12, 2003 the Company received proceeds of $200,000 from the issuance of six-month, non-convertible, secured promissory notes to North Sound. Terms of the notes were for interest to accrue at a rate of 12.0% per annum to be paid together with the original principal on December 12, 2003. Proceeds from the note were used to cover near-term operating expenses.

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~11

OurTable significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, we believe the following accounting policies, which affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, could be deemed to be critical within the SEC definition. Contents

~~Allowance~~VERTEL ~~for~~CORPORATIONNOTES ~~doubtful~~TO ~~accounts~~CONSOLIDATED ~~receivable.~~FINANCIAL WeSTATEMENTS maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. (continued)

~~Goodwill.~~On ~~Goodwill~~June ~~represents~~26, ~~the~~2003 ~~excess of~~ the ~~cost~~Company ofreceived anproceeds ~~acquired entity over the net~~ of ~~the amounts assigned to the assets acquired and liabilities assumed. Goodwill of~~ $4150,~~742,~~000 ~~and $7,320,000 arose~~ from the ~~acquisitions~~issuance of ~~Expersoft Corporation in March 1999 and the acquisition of the assets from Trigon Technology Group in May 2001. Effective January 1~~six-month, ~~2002~~non-convertible, wesecured ~~adopted~~promissory ~~Statement~~notes of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which eliminates goodwill amortization and requires an evaluation of goodwill for impairment (at the reporting unit level) upon adoption, as well as subsequent evaluations on an annual basis, and more frequently if circumstances indicate a possible impairment. The impairment test required by SFAS No. 142 is comprised of two steps. The initial step is designed to ~~identify potential goodwill impairment by comparing an estimate of the fair value of the applicable reporting unit to its carrying value, including goodwill~~SDS. IfTerms ~~the carrying value exceeds fair value, a second step is performed, which compares the implied fair value~~ of the ~~applicable~~notes ~~reporting unit’s~~were goodwill with the carrying amount of that goodwill, to measure the amount of goodwill impairment, if any. As described in Note 6 of our Notes to Consolidated Financial Statements included in this quarterly report, we currently operate in one reportable segment, which is also our only reporting unit for ~~purposes~~interest ~~of SFAS No. 142. Since we have only one reporting unit, all of our goodwill has been assigned~~ to ~~our~~accrue ~~enterprise~~at as a ~~whole.~~rate ~~We estimated the fair value~~ of ~~our enterprise upon~~ ~~adoption of SFAS No~~12.0% ~~142~~per onannum ~~January 1, 2002~~ to be ~~its~~paid ~~market~~together ~~capitalization,~~with ~~based on~~ the ~~closing~~original ~~share~~principal ~~price quoted~~ on ~~The~~December ~~Nasdaq~~26, ~~National Market~~2003. ~~Since~~Proceeds ~~our~~from ~~market capitalization of approximately $22,038,000 as of January 1, 2002 exceeded~~ the ~~$10,544,000~~ ~~carrying~~note ~~value~~were ofused ~~our~~to ~~enterprise~~cover onnear-term ~~that~~operating ~~date, we concluded goodwill did not appear impaired and that the second step of the impairment test prescribed by SFAS No~~expenses. ~~142 was not required to be performed.~~

~~SFAS No~~5. Statement 142 requires, however, we test goodwill for impairment if circumstances indicate a possible impairment. During the six months ended June 30, 2002, the telecommunications sector continued to be adversely impacted by the worst economic environment the U.S. economy has experienced in the last decade. The market price of ~~our~~Cash common stock, and consequently our market capitalization, declined steadily during the quarter ended March 31, 2002. Although our market capitalization approximated our carrying value as of March 31, 2002, during the quarter ended June 30, 2002 it declined further. We believed these circumstances indicated goodwill might be impaired as of June 30, 2002. We completed the first and second steps of the impairment test prescribed by SFAS No. 142 and determined that as of June 30, 2002 goodwill was impaired. As a result, during the quarter ended June 30, 2002 we recorded a goodwill impairment charge of $4,795,000. We engaged a third-party valuation consultant to assist us in determining the amount of the impairment charge. The primary method used to determine fair values for SFAS No. 142 impairment purposes was the discounted cash flow method. The discounted cash flow method resulted in a fair value of our enterprise that approximated our market capitalization. Flows

~~Warrant~~Increases ~~Obligations.~~(decreases) ~~On January 3, 2002,~~ in ~~connection~~operating ~~with~~cash ~~the~~flows ~~first~~arising ~~Note~~from ~~and~~changes the first Warrant Purchase Agreement with SDS, we issued SDS a warrant initially exercisable into 800,000 shares of our common stock at an initial exercise price of $0.9988 per share. On August 13, 2002, in ~~connection~~assets ~~with the second Note~~ and ~~the second Warrant~~ ~~Purchase~~liabilities ~~Agreement~~consist ~~with SDS, we issued SDS a warrant initially exercisable into 2,625,000 shares~~ of our common stock at an initial exercise price of $0.20 per share. These financing transactions are more fully described in Note 4 of our Notes to Consolidated Financial Statements included in this quarterly report. EITF No. 00-19, “Accounting for Derivative Financial Instruments Index to, and Potentially Settled in, a Company’s Own Stock”, requires that we initially classify the ~~warrants~~following as a liability, since our agreements with SDS could require us to net-cash settle the warrants, and that we adjust the carrying value of the warrant obligations to their fair values on any given reporting date. The First Warrant obligation was recorded on January 3, 2002, the financing transaction commitment date, at its estimated fair value of $428,084, net of a $76,916 discount. The Second Warrant obligation was recorded on August 13, 2002, the financing transaction commitment date, at its estimated fair value of $254,820, net of a $28,803 discount. As of September 30, 2002, the fair values of the warrants were estimated at $61,000 and $206,000, respectively. The decrease (in the First Warrant fair value from January 3, 2002 to September 30, 2002 of approximately $367,000 was reflected as other income. The decrease in the Second Warrant fair value from August 13, 2002 to September 30, 2002 of approximately $48,000 was also reflected as other income.thousands):

The fair value of the warrants has been determined using the Black-Scholes option-pricing model. A significant component of the Black-Scholes model is the fair market value per share of our common stock. If the fair market value of our common stock increases the fair value of the warrant obligation would likely increase, resulting in a charge to other expense. If the fair market value of our

	Six Month Period Ended:

	June 30 2003			June 30 2002

Trade accounts receivable	$	1,238		$	161
Prepaid expenses and other current assets		(47	)		(356	)
Accounts payable		71			(112	)
Accrued wages and related liabilities		(461	)		(172	)
Cash payments and restructuring expense		—			(124	)
Accrued taxes payable		20			23
Other accrued liabilities		325			(238	)
Deferred revenue		81			181

Net change in assets and liabilities	$	1,227		$	(637	)

136. Segment Reporting

~~MANAGEMENT~~Vertel operates and reports activities as a single business unit. The Company’Ss ~~DISCUSSION~~chief ~~AND~~operating ~~ANALYSIS~~decision OFmaker, ~~FINANCIAL~~as ~~CONDITION~~defined ~~AND~~by ~~RESULTS~~SFAS OFNo. ~~OPERATIONS~~131, “Disclosures about Segments of an Enterprise and Related Information,” is Vertel’s chief executive officer. On October 11, 2001, the Company announced the hiring of a new chief executive officer who makes decisions about resource allocations based on the organization as a whole. Prior to 2002, decisions about allocating resources (~~continued~~consisting primarily of personnel and compensation of key employees) were made by the chief executive officer based on the operating results of two principal segments: license and service. Since the Company now operates in one reportable segment, restatement of prior period information is not necessary.

~~common stock decreases the fair value of the warrant obligation would likely decrease, resulting in other income, as was the case for the first, second and third quarters of 2002~~7. ~~For example, if the fair market value of our~~ Stock common stock on September 30, 2002 was $1.00 per share, the fair value of the First and Second Warrant obligations determined using the Black-Scholes model, assuming all other variables remain constant, would hypothetically have been approximately $789,000 and $2,610,000, respectively resulting in a charge of approximately $3,062,000 to other expense for the third quarter of 2002. Conversely, if the fair market value of our common stock on September 30, 2002 was $0.05 per share, the fair value of the Warrant obligation determined using the Black-Scholes Model, assuming all other variables remain constant, would hypothetically have been approximately $38,000 and $128,000, respectively resulting in other income of approximately $171,000 for the third quarter of 2002. Given the volatility of our stock price, we cannot predict the impact fluctuations in the fair market value of our stock price may have on our consolidated statement of operations for any future period. Options

~~Income~~In ~~taxes~~December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. We148, “Accounting ~~have~~for ~~recorded~~Stock-Based Compensation - Transition and Disclosure, an Amendment of FAS 123” (“FAS 148”). This statement provides alternative methods of transition for a ~~valuation~~voluntary ~~allowance~~change to ~~reduce~~the ~~our~~fair ~~deferred~~value ~~tax~~based ~~assets~~method toof accounting ~~zero~~for stock-based employee compensation. IfIn weaddition, ~~are~~FAS ~~able~~148 amends the disclosure requirements of FAS 123 to ~~realize~~require ~~our~~more ~~deferred~~prominent ~~tax~~and ~~assets~~more frequent disclosures in financial statements about the ~~future,~~effects anof ~~adjustment~~stock-based tocompensation. The provisions of FAS 148 are effective for fiscal years ending after December 15, 2002 and the ~~deferred~~interim ~~tax~~disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The ~~asset~~Company ~~would~~adopted ~~increase~~FAS ~~income~~148 induring the ~~period~~fourth ~~such~~quarter ~~determination~~ended ~~was~~December ~~made~~31, 2002. The adoption of FAS 148 did not have a material impact on the Company’s results of operations or financial position and the additional required disclosures are provided below.

~~Fixed~~The ~~price~~Company ~~service~~applies ~~contracts.~~Accounting ~~Professional~~Principles ~~service~~Board ~~contracts~~Opinion ~~are typically fixed price contracts that are completed in six months or less~~No. We25, ~~recognize~~“Accounting ~~revenue~~for asStock ~~work~~Issued ~~progresses~~to ~~using~~Employees,” ~~the~~and ~~percentage~~related ~~of completion method~~interpretations, ~~which~~in ~~relies~~accounting onfor ~~estimates~~its stock-based ofcompensation ~~total expected contract revenue and costs~~plans. WeAccordingly, ~~utilize~~no ~~this~~compensation ~~method~~cost ~~since~~has ~~reasonably~~been ~~dependable~~recognized ~~estimates~~for ofits ~~the~~stock ~~revenue and~~option ~~costs applicable to various stages of a contract can be made~~plan. ~~Recognized~~Had ~~revenues~~compensation ~~and~~cost ~~profit~~for ~~are subject to revisions as~~ the ~~contract~~Company’s ~~progresses~~stock-based tocompensation ~~completion.~~plan ~~Revisions~~been indetermined ~~profit~~based ~~estimates~~on ~~are charged to income in~~ the ~~period~~fair invalue ~~which~~at the ~~facts~~grant dates ~~that~~for ~~give~~awards ~~rise~~under tothose ~~the~~plans ~~revision~~consistent ~~become~~with ~~known.~~FAS ~~Revenues~~123, ~~from~~the ~~non-recurring~~Company’s ~~engineering~~net ~~projects~~loss ~~are~~and ~~also~~loss ~~typically~~per ~~recognized~~share onwould ahave ~~percentage~~been ofadjusted ~~completion~~to ~~basis and follow~~ the ~~same~~pro ~~principles~~forma asamounts ~~fixed~~indicated ~~price service contracts.~~ below:

~~Results of Operations~~ 12

NetTable Revenues. Net revenues decreased 30% to $2,321,000 for the three months ended September 30, 2002 (the “third quarter of 2002”) compared to $3,334,000 for the three months ended September 30, 2001 (the “third quarter of 2001”), and decreased 33% to $6,377,000 for the nine months ended September 30, 2002 (the “first nine months of 2002”) compared to $9,448,000 for the nine months ended September 30, 2001 (the “first nine months of 2001”). The decrease in both periods was due to lower license and service revenues. Sequentially, however, net revenues increased 13% from $2,054,000 for the three months ended June 30, 2002 (the “second quarter of 2002”). Contents

~~Sales~~VERTEL toCORPORATIONNOTES ~~customers~~TO ~~outside~~CONSOLIDATED ~~the~~FINANCIAL ~~United~~STATEMENTS States comprised approximately 37% and 40% of net revenues in the third quarter of 2002 and 2001, respectively and 40% and 37% for the first nine months of 2002 and 2001, respectively. We have historically reported a high percentage of sales to such customers and expect international sales to continue to be significant to our business. If the U.S. dollar strengthens significantly, we may have to reduce our prices in international markets. In addition, competition and price pressure have increased both domestically and internationally for professional services projects as our competitors and customers have increasingly subcontracted for engineering services from lower cost countries such as China and India. As with domestic sales, our sales cycle is usually lengthy and results in quarterly fluctuations between geographic markets. Any political or economic turmoil in our major Asian markets (~~China, Japan and Korea~~continued) ~~could impact future sales in the affected area.~~

For both the third quarter and first nine months of 2002, sales to Nokia Corporation comprised approximately 12% of our net revenues. No other single customer accounted for more than 10% of net revenues for the third quarter and nine months of 2002. For the third quarter of 2001, sales to Alcatel and Tekview Co., Ltd. comprised approximately 16% and 12% of our net revenues, respectively. Sales to Alcatel comprised approximately 16% of net revenues for the first nine months of 2001. At September 30, 2002, Nokia Corporation and Verizon Data Services Inc. comprised 22% and 11% of accounts receivable, respectively. At September 30, 2001, Tekview Co., Ltd., and Alcatel comprised 20% and 19% of accounts receivable, respectively.

	Three-month Period ended June 30, 2003		Six-month Period ended June 30, 2003

Net loss – as reported	$	2,404,000	$	4,262,000
Adjustment to net loss for pro forma stock-based compensation expense		936,000		1,872,000

Net loss – pro forma	$	3,340,000	$	6,134,000

Basic and diluted net loss per common share – as reported	$	0.07	$	0.12

Basic and diluted net loss per common share – pro forma	$	0.09	$	0.17

License. License revenues consist primarily of license fees and royalties derived from software products. We recognize revenue from the licensing of software when persuasive evidence of an arrangement exists and the underlying software products have been delivered. Most of our customer contracts contain multiple software products or other elements, such as maintenance and to a lesser extent, professional services. We typically deliver all software products included in a multiple element contract shortly after the contract is executed, with any service elements, such as maintenance or professional services being provided to our customers over a period of time, generally twelve months for maintenance and six months or less for professional services. We sell maintenance, in the form of maintenance renewals, and professional services separately and have vendor specific objective evidence (VSOE) of their fair values. Therefore, most of our customer contracts are accounted for using the residual method, which requires us to defer the fair value of undelivered elements (e.g. maintenance or professional services) and recognize as revenue the residual value of the customer contract. If a multiple element contract includes an undelivered element for which we do not have VSOE of fair value, we defer the entire contract value until 13

14 Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF ~~FINANCIAL CONDITION AND~~ RESULTS OF OPERATIONS ~~(continued)~~AND FINANCIAL CONDITION

either the element is delivered or VSOE of its fair value is determined. If the undelivered element of a multiple element contract is a service element, such as maintenance or professional services, and we do not have VSOE of its fair value, we recognize the entire contract value as revenue ratably over the term of the service element. We recognize royalty revenues when reported by the customer for nonFORWARD-~~license~~LOOKING ~~key~~INFORMATION ~~controlled~~AND ~~agreements,~~SAFE ~~when the run-time license is~~HARBOR ~~shipped~~STATEMENT ~~for~~UNDER ~~license~~THE ~~key~~PRIVATE ~~controlled~~SECURITIES ~~agreements,~~LITIGATION orREFORM ~~when~~ACT aOF ~~customer pays royalties in advance on a non-refundable, non-cancelable basis~~1995.

~~Historically~~Except ~~license revenues have accounted~~ for ~~a substantial~~historical ~~portion of total revenue. License revenues decreased 11% to $1~~information,~~489,000~~ ~~during~~ the ~~third~~matters ~~quarter~~discussed ofin ~~2002~~this ~~from~~document ~~$1,668,000~~are ~~during the third quarter of 2001, primarily due to lower Telecommunications Management Network (TMN) royalty~~“forward-looking ~~revenues.~~statements” ~~License~~within ~~revenues decreased 27% to $3,738,000 during~~ the ~~first~~meaning ~~nine months~~ of ~~2002~~Section ~~from~~27A ~~$5,083,000~~of ~~during~~ the ~~first~~Securities ~~nine~~Act ~~months~~ of ~~2001,~~1933 ~~primarily due to lower TMN licensing~~ and ~~royalty~~Section ~~revenues.~~21E ~~While~~of ~~we expect TMN royalty revenues to increase as~~ the ~~economy~~Securities ~~improves~~Exchange ~~for~~Act ~~telecommunication equipment manufacturers, we expect that TMN revenues will continue to decline as a percentage~~ of ~~our license revenues~~1934. ~~However~~In addition, weforward-looking ~~expect~~statements ~~that~~may ~~many~~be ofmade ~~our~~orally ~~TMN~~or ~~software products will be utilized~~ in ~~conjunction~~press ~~with~~releases, ~~our~~conferences, ~~M*Ware~~reports, ~~solutions.~~on ~~Although~~the Company’s ~~TMN~~web-site isor ~~an international standard~~otherwise, ~~it has not been widely adopted~~ in the ~~United~~future ~~States~~by ~~and~~the ~~our~~Company ~~TMN~~or ~~sales~~on ~~are~~the ~~primarily~~Company’s ~~in Asia~~behalf.

~~Service~~In ~~and~~some ~~Other. Service~~cases ~~and~~“forward-looking ~~other~~statements” ~~revenues~~can ~~consist~~be ~~primarily~~identified by the use of ~~professional~~terminology ~~services~~such as “may”, ~~maintenance~~“will”, ~~technical~~“expects”, ~~support~~“plans”, ~~non-recurring~~“anticipates”, ~~engineering~~“believes”, ~~projects~~“estimates”, ~~training~~“potential” ~~and~~or ~~other~~“continue” ~~revenues.~~or ~~Professional~~the ~~service~~corresponding ~~revenues typically result from fixed price contracts to~~negatives ~~fulfill~~thereof aor ~~statement~~other ofcomparable ~~work~~terminology. ~~for~~Although athe ~~customer~~Company ~~project,~~believes ~~and~~that ~~are~~the ~~usually~~expectations ~~completed~~reflected in ~~six~~the ~~months~~“forward-looking orstatements” ~~less.~~contained ~~These~~herein ~~revenues~~ are ~~recognized~~reasonable, ~~based~~there oncan ~~the~~be ~~percentage~~no ofassurance ~~completion~~that ~~method.~~such ~~Maintenance~~expectations ~~revenues~~or ~~are~~any ~~recognized ratably over the term~~ of the ~~maintenance contract. Revenues from non~~“forward-~~recurring~~looking ~~engineering~~statements” ~~projects~~will ~~are~~prove ~~also~~to ~~typically~~be ~~recognized~~correct onand aactual ~~percentage~~results ofcould ~~completion~~differ ~~basis.~~materially ~~Revenues~~ from ~~technical~~those ~~support,~~projected ~~consulting~~or ~~and~~assumed ~~other~~in ~~categories are usually recognized when~~ the ~~service~~“forward-looking ~~is performed and no obligations remain~~statements. ”

~~Service~~The Company’s future financial condition and ~~other~~results ~~revenues~~of ~~decreased~~operations, ~~50%~~as well as any “forward-looking statements” are subject to ~~$832,000~~inherent ~~during~~risks ~~the~~and ~~third~~uncertainties. ~~quarter~~These ofuncertainties ~~2002~~include ~~from~~factors $1that affect all businesses operating in a global market,~~666,000~~ ~~during~~as well as matters specific to Vertel and the ~~third~~markets ~~quarter~~the ofCompany ~~2001~~serves. ~~The~~Particular ~~decrease~~risks ~~was~~and uncertainties at present include the ability to raise additional capital, in particular the ability to secure additional ~~primarily~~financing to fund operations for the ~~result~~remainder of ~~lower~~2003; ~~professional~~the ~~service~~financial ~~revenues~~uncertainties ~~($702,000)~~associated ~~due~~with continuing losses; the ability to ~~fewer~~continue to invest in the research and ~~smaller~~development ~~projects~~necessary for the development of new and ~~lower~~existing ~~maintenance~~products to increase revenues; ~~due~~the totimely ~~non-renewal~~and successful development of ~~maintenance~~existing ~~agreements,~~and ~~primarily~~new markets; the severe impact that the slowdown in the U.S. economy has had on ~~legacy~~the ~~products~~telecommunications ~~($132~~industry,~~000).~~ ~~Service~~forcing ~~and~~a ~~other~~number ~~revenues decreased~~of ~~40%~~service providers to $2cease operations,~~639~~ which has adversely impacted the revenues of equipment manufacturer customers and,~~000~~ ~~during~~therefore, the ~~first~~Company’s ~~nine~~revenues; ~~months~~the fact that some of ~~2002~~the ~~from~~Company’s $4products are relatively new and,~~365~~ although they are developing market interest,~~000~~ ~~during~~it ~~the~~is difficult ~~first~~to ~~nine~~predict ~~months~~sales of ~~2001.~~new ~~The~~products ~~decrease~~and ~~was~~the ~~also~~market ~~primarily~~may or may not ultimately adopt such technologies; the ~~result~~fact that the Company’s sales cycle is long thereby making initial license sales and future royalties difficult to forecast; additional difficulty in predicting royalty revenue because such revenue is dependent on successful development and deployment by customers of ~~lower~~their products containing Vertel’s software; fluctuations from quarter to quarter in revenue from the professional service ~~revenues~~unit ~~($1~~as a result of a limited number of large consulting contracts; loss of key customer,~~331,000)~~ ~~due~~partner toor ~~fewer~~alliance relationships and ~~smaller~~the ~~projects~~possibility that the Company may not be able to replace the loss of a significant customer; the dependence on a limited number of customers for a significant portion of quarterly license revenues; size and ~~lower~~timing ~~maintenance~~of license fees closed during the quarter which may result in large swings in quarterly operating results and the likely continued significant percentage of quarterly revenues ~~due~~recorded toin ~~non-renewal~~the last month of ~~maintenance~~the ~~agreements~~quarter, ~~primarily~~frequently onin ~~legacy~~the ~~products~~last ~~($433~~weeks or even days of a quarter,~~000).~~ which further adds to the difficulty of forecasting, and the Company’s ability to control expenditures at a level consistent with revenues.

~~Historically~~Additionally, ~~our~~more ~~professional~~general ~~services~~risk ~~revenues~~factors ~~have~~include ~~been~~the ~~dependent~~possible ondevelopment ~~a limited~~and ~~number~~introduction of ~~higher~~competitive ~~value~~products ~~consulting~~and ~~contracts~~new ~~from~~and alternative ~~both~~technologies ~~new~~by ~~and~~competitors; ~~existing~~the ~~customers.~~increasing ~~While~~sales ~~there~~and ismarketing ~~price~~costs ~~pressure~~of ~~due~~attracting tonew ~~the~~and ~~lower~~retaining ~~volume~~existing ofcustomers; ~~available~~pricing, ~~work~~currency and ~~increased~~exchange ~~competition~~risks; ~~from~~governmental ~~lower~~and ~~cost~~regulatory ~~countries,~~developments weaffecting ~~believe~~the ~~that~~Company ~~our~~and ~~core~~it’s ~~competencies~~customers; ~~can~~the beability ~~leveraged~~ to ~~increase~~identify, ~~our~~conclude, ~~revenues~~and inintegrate acquisitions on a timely basis; the ~~remainder~~ability ofto ~~2002.~~attract ~~Maintenance~~and/or ~~revenues~~retain ~~should~~essential ~~continue~~technical ator ~~approximately~~other ~~the~~personnel; ~~same~~political ~~level~~and ~~for~~economic ~~the~~uncertainties ~~remainder~~associated ofwith ~~2002.~~conducting business on a worldwide basis.

~~Cost~~Readers ~~of Revenues--License.~~are ~~Cost~~cautioned ofnot ~~license~~to ~~revenues~~place ~~consists~~undue ~~primarily~~reliance ofon ~~royalty~~any ~~fees~~forward-looking ~~paid~~statement ~~for~~and ~~third~~to ~~party~~recognize ~~software~~that ~~incorporated~~the instatements ~~our~~are ~~products,~~not ~~the~~predictions ~~cost~~ of ~~reproduction~~actual offuture results. ~~our~~Actual ~~software~~results ~~and~~could ~~the~~differ ~~user~~materially ~~documentation,~~from ~~and~~those ~~delivery~~anticipated ~~of software. Cost of license revenues decreased 13%~~ in the ~~third~~forward-looking ~~quarter~~statements ofand ~~2002~~from tohistorical ~~$109~~results,~~000,~~ ~~or 7% of license revenue. The decrease was~~ due ~~primarily~~ to ~~lower~~the ~~license~~risks ~~revenues~~and ~~from~~uncertainties ~~software~~referred ~~products~~to ~~that~~above, ~~included~~as ~~royalty-bearing~~well ~~third~~as ~~party~~others ~~software~~not ~~components~~now ~~for~~anticipated. ~~which~~Further werisks ininherent ~~turn would owe a royalty as well as a reduction~~ in ~~staff in~~ our ~~manufacturing~~business ~~department.~~are ~~The~~listed ~~third~~under ~~quarter~~“Risk ofFactors” ~~2001~~in ~~cost~~Part ~~of license revenues was $125~~I,~~000~~ orItem 7%I of ~~license~~our ~~revenues.~~Annual ~~Cost~~Report ofon ~~license~~Form ~~revenues~~10-K ~~was $172,000 and $349,000~~ for the ~~first nine~~fiscal ~~months~~year ofended ~~2002~~December ~~and 2001~~31, ~~respectively,~~2002 ~~representing 5%~~ and 7%Item 3 of ~~license~~our ~~revenues,~~Registration ~~respectively.~~Statement ~~For~~on ~~the~~Form ~~remainder~~S-3 ~~of 2002~~SEC, ~~third~~File ~~party software fees could fluctuate if the product sales mix changes for existing products and could increase if we sell products that incorporate third party software~~No. 333-96639.

~~Cost~~The offoregoing ~~Revenues--Service~~statements and ~~other.~~risk ~~Cost~~factors ofare ~~service~~not ~~and~~exclusive ~~other revenues consists primarily of costs associated with performing professional consulting services, software maintenance~~ and ~~customer~~further ~~technical~~information ~~support~~concerning ~~such~~the asCompany ~~telephone support, training services~~ and ~~non-recurring~~its ~~engineering services. In the third quarter of 2001~~business, ~~these~~including ~~costs~~factors ~~included~~that ~~approximately~~potentially ~~$399,000~~materially ~~related~~affect tofinancial ~~TicketExchange~~results, ~~which~~may ~~was~~emerge ~~formerly~~from ~~known~~time asto ~~WebResolve~~time. ~~Cost~~It ofis ~~service~~not ~~revenues~~possible ~~was $494,000 and $1,740,000~~ for ~~the~~management ~~third~~to ~~quarters~~predict ofall ~~2002~~risk ~~and~~factors ~~2001,~~or ~~respectively,~~to ~~representing~~assess ~~59%~~the ~~and~~impact ~~104 %~~ of ~~service~~such ~~revenues,~~risk ~~respectively.~~factors ~~For~~on the ~~first nine months of 2002 and 2001, cost of services was $2,425,000 and $5,365,000, respectively, representing 92% and 123% of cost of service revenues respectively~~business. The ~~decrease~~Company inundertakes ~~cost~~no ofobligation ~~service revenues in 2002 was the result of staff reductions in our professional services organization, the repositioning of TicketExchange from a hosted service~~ to arevise ~~product~~or ~~license,~~publicly asrelease ~~well as~~ the ~~redeployment~~results of ~~certain engineering personnel from our professional service organization to research and development.~~any Werevision ~~anticipate that our cost of service revenues for the remainder of 2002 will continue at approximately the same rate as the third quarter of 2002. However,~~ to ~~the~~forward-looking ~~extent that new consulting service contracts do not materialize, our future profit margins from services would be adversely impacted~~statements.

15 14

MANAGEMENT’STable DISCUSSIONof AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)Contents

~~Research~~MANAGEMENT’S ~~and~~DISCUSSION ~~Development.~~AND ~~The~~ANALYSIS ~~major~~OF ~~components~~FINANCIAL ofCONDITIONAND ~~research~~RESULTS ~~and~~OF ~~development~~ OPERATIONS (~~R&D~~continued) expenses are engineering salaries, employee benefits and associated overhead, fees to outside contractors, cost of facilities and depreciation of capital equipment, which consists primarily of computer and test equipment. In some cases, customers reimburse R&D costs for non-recurring engineering projects.

We have historically made significant investments in research and development. Our R&D expenditures are now concentrated in mediation software, which is designed for the integration of telecom Operation Support Systems and the underlying network equipment management systems, and in related applications. Total R&D expenses decreased 18% to $916,000 in the third quarter of 2002 from $1,118,000 in the third quarter of 2001. Total R&D expenses increased 22% to $3,505,000 in the first nine months of 2002 from $2,875,000 in the first nine months of 2001. The decrease in R&D expenses for the quarter was primarily the result of lower payroll and related facilities costs ($248,000) due to reductions in R&D personnel in May and August 2002. The increase in R&D expenses for the first nine months was primarily the result of higher payroll and related facilities costs ($544,000) and travel expenses ($56,000) due to the addition of the R&D organization from Trigon Technology Group on May 30, 2001 and the redeployment of certain engineering personnel from our professional services organization to R&D in the first quarter of 2002. We expect our R&D costs to be lower for the remainder of 2002 due to reductions in personnel in August 2002, which will be fully reflected in the fourth quarter. Lower net revenues in future quarters could force us to reduce expenditures in future periods, which could result in delays in development of new products and/or product enhancements, which could further reduce net revenues. Background

~~Sales~~Vertel ~~and~~Corporation ~~Marketing.~~is ~~Sales~~a ~~and~~telecommunications ~~marketing~~software ~~expenses consist primarily of personnel~~ and ~~associated costs related to selling and~~professional ~~marketing our products and~~ services, ~~including~~company ~~trade shows~~ and ~~other~~a ~~promotional~~provider costs. We believe that substantial sales and marketing expenditures are essential to developing opportunities for revenue growth and sustaining our competitive position. Sales and marketing expenses in the third quarter of ~~2002~~mediation ~~were~~software ~~$1,228,000,~~solutions ~~or 22% lower than the $1,568,000 incurred in the third quarter of 2001, primarily due~~ to ~~lower~~communications ~~third party commissions ($209~~companies,~~000),~~ ~~lower~~global ~~travel~~enterprise ~~expenses~~businesses ~~($57,000)~~ and ~~reduced~~their ~~marketing~~network and ~~public~~software ~~relations activity in the form of trade shows, advertising and consultants ($43,000)~~vendors. Sales and marketing expenses in the first nine months of 2002 were $3,925,000, or 19% lower than the $4,871,000 incurred in the first nine months of 2001. The decrease was primarily due to lower third party commissions ($444,000), lower payroll, commission and related facility costs ($342,000), reduced marketing and public relations activity in the form of trade shows and advertising ($128,000), and lower recruiting expenses ($55,000). As a percentage of revenues, sales and marketing expenses increased in the third quarter of 2002 to 53% from 47% in the third quarter of 2001 and increased to 62% in the first nine months of 2002 as compared to 52% in the first nine months of 2001, primarily due to the lower revenues.

WeThe ~~expect~~Company ~~our~~has two ~~sales~~sources of revenues: license and ~~marketing~~royalty ~~expenses~~revenues tofrom ~~continue~~software atproducts ~~approximately~~and ~~the~~professional ~~same~~services ~~level~~revenues ~~for the~~from ~~remainder~~custom ofnetwork ~~2002~~management assolutions weand ~~have~~product ~~largely~~maintenance ~~completed~~contracts. ~~our~~The ~~restructuring~~Company’s ofproduct ~~our~~offerings ~~sales~~are ~~staff~~primarily totargeted at ~~take~~the ~~advantage~~wireline, ofwireless ~~additional~~and broadband market ~~opportunities,~~segments ~~such~~within asthe ~~new~~telecommunications ~~geographical~~industry. ~~regions~~Vertel’s ~~where~~software weproducts ~~have~~are ~~not~~sold ~~previously~~under ~~done~~the ~~business~~M*Ware™ brand name and ~~new~~provide ~~sales~~complete ~~channels. However,~~integration ~~lower~~and ~~net~~management ~~revenues~~solutions inacross ~~future~~the ~~quarters~~entire Telecommunications ~~could~~Management ~~force~~Network us(TMN) tostandard ~~reduce~~hierarchy. ~~expenditures~~This insoftware ~~future~~is ~~periods,~~typically ~~which~~used ~~could~~to ~~limit~~enhance ~~our~~connectivity ~~ability~~for toa ~~capitalize~~variety onof ~~market~~telecommunications ~~opportunities.~~hardware and software solutions.

~~General~~The ~~and Administrative.~~Company ~~General~~believes ~~and~~the ~~administrative~~demand ~~expenses~~for ~~consist~~mediation ~~primarily of salaries, employee benefits~~ and ~~other~~management ~~related~~solutions ~~expenses~~will ofbe ~~administrative,~~fueled ~~executive~~by ~~and~~continued ~~financial~~economic ~~personnel~~pressure ason ~~well~~telecommunication asservice ~~professional~~providers ~~fees~~ and ~~investor~~enterprise ~~relations~~network ~~costs~~operators. ~~General and~~In ~~administrative expenses decreased by 7% to $656~~addition,~~000~~ inas ~~the~~restrained growth ~~third quarter of 2002 from $708,000~~ in ~~the~~new ~~third~~network ~~quarter~~investments ~~of 2001 primarily due to lower payroll expenses ($40~~occur,~~000)~~ ~~and~~these ~~lower~~same ~~shareholder~~mediation ~~expenses ($104,000), which were partially offset by increased consulting expenses~~ and ~~professional~~management ~~fees~~solutions ~~related~~will toneed ~~strategic initiatives ($31,000) and increased bad debt expense ($56,000). General and administrative expenses decreased by 1%~~ to ~~$2,407,000~~deliver ina ~~the~~more ~~first~~cost ~~nine~~effective ~~months~~path offor ~~2002~~integrating ~~from $2,426,000~~new intechnologies ~~the~~as ~~first~~they ~~nine months of 2001~~arise. ~~The~~Service ~~decrease~~providers ~~in the nine months is primarily due to lower payroll expenses~~ and ~~related~~enterprise ~~facility~~network ~~costs~~operators ~~($110,000),~~will ~~lower shareholder-related expenses ($151,000), lower board of directors fees ($54,000) and~~demand ~~lower~~that ~~travel~~these ~~expenses~~systems ~~($41,000)~~allow ~~which~~for ~~were~~incremental ~~partially~~new ~~offset~~investments bywhile ~~increased~~also ~~consulting~~continuing ~~expenses and professional fees related~~ to ~~strategic~~support ~~initiatives ($241,000) and increased bad debt expense ($56,000). We anticipate that general and administrative expenses will continue at approximately~~ the ~~same~~consolidation ~~rate as the third quarter~~ of ~~2002~~existing ~~for the remainder of 2002~~investments.

~~Goodwill~~M*Ware ~~Amortization.~~products ~~Goodwill~~and ~~amortization~~solutions ~~was~~satisfy ~~discontinued~~these market indemands. ~~2002~~Vertel asbelieves athat ~~result~~by ~~of our~~being ~~required~~a ~~adoption~~bridge onbetween ~~January 1~~networks, ~~2002~~customers ofand ~~SFAS~~service ~~No.~~providers, ~~142~~M*Ware ~~(See~~mediation ~~Note~~and 2management tosolutions ~~the~~provide ~~Notes~~greater toefficiencies ~~Consolidated~~and ~~Financial~~are ~~Statements~~cost ~~included in this quarterly report)~~effective. ~~However,~~In ~~we recognized $607~~addition,~~000~~ ofM*Ware ~~goodwill~~enables ~~amortization during~~ the ~~third~~Company ~~quarter of 2001 and~~to ~~$1,206,000~~expand inbeyond ~~the~~traditional ~~first~~network ~~nine~~management ~~months~~into oftwo ~~2001.~~new ~~Had~~market wesegments: ~~not~~telecommunications ~~recorded~~service ~~goodwill~~providers ~~amortization~~and ~~during~~enterprise ~~the~~network ~~third~~operators. ~~quarter~~This ofwill ~~2001~~provide ~~and~~Vertel ~~first~~with ~~nine~~greater ~~months~~growth ofopportunities ~~2001,~~than asit otherwise would have ~~been~~attained ~~the~~with previous ~~case~~product ~~if the provisions of SFAS No~~offerings. ~~142~~In ~~had been in effect~~addition, ~~pro~~M*Ware ~~forma~~will ~~net loss~~reduce ~~would~~the ~~have~~Company’s ~~been~~dependency ~~$2,146,000~~on ~~and~~a ~~$6,282,000,~~single ~~respectively~~market ~~and~~segment ~~pro~~that ~~forma~~likely ~~basic~~faces ~~and~~its ~~diluted~~own ~~net~~business ~~loss per common share would have been $0.07~~ and ~~$0.21,~~financial ~~respectively~~challenges.

16As 2003 continues to develop and 2004 approaches, many analysts believe investments in new network technologies will begin to approach the rate of growth experienced in the early to mid-1990s. When that occurs, the Company believes its customers are well positioned to cost effectively integrate those new investments into their existing network infrastructure. As a result, Vertel expects its growth will track closely to the growth in spending on OSS solutions.

~~MANAGEMENT’S~~The ~~DISCUSSION~~addition ~~AND~~of ~~ANALYSIS~~two OFnew ~~FINANCIAL~~market ~~CONDITION~~segments ~~AND~~will ~~RESULTS~~also OFenable ~~OPERATIONS~~Vertel ~~(continued)~~to grow at a rate greater than it would have experienced without the M*Ware strategy. This multiple market strategy will also reduce the dependency and associated business challenges Vertel has faced when its primary market segment faced business and financial challenges.

~~Goodwill~~Critical ~~Impairment.~~Accounting WePolicies ~~incurred a non-cash charge of $4,795,000 in the second quarter of 2002 related to the impairment of goodwill according to the provisions of SFAS No. 142. (See Note 3 to the Notes to Consolidated~~and ~~Financial~~Estimates ~~Statements included in this quarterly report).~~

~~Operating~~The ~~Loss.~~Securities Weand ~~incurred~~Exchange ~~losses~~Commission ~~from~~(“SEC”) ~~operations~~recently ofissued ~~$1,064,000~~disclosure inguidance ~~the~~for ~~third~~“critical ~~quarter~~accounting ofpolicies.” ~~2002~~The ~~and~~SEC ~~$2,532,000 in the third quarter of 2001.~~defines ~~The~~“critical ~~decreased~~accounting ~~loss~~policies” ~~from~~as ~~operations~~those ~~was~~that ~~primarily~~require ~~due~~application ~~to lower cost~~ of ~~revenues,~~management’s ~~lower~~most ~~research and development~~difficult, ~~sales~~subjective ~~and~~or ~~marketing,~~complex ~~and general and administration expenses~~judgments, ~~and~~often ~~the elimination of goodwill amortization~~ as ~~discussed~~a ~~above,~~result ~~although this~~of ~~was partially offset by lower revenues. Operating loss for~~ the ~~first~~need ~~nine months of 2002 was $10,834,000 as compared~~ to ~~$7,644,000~~make inestimates about the ~~first~~effect ~~nine months~~ of ~~2001.~~matters ~~The~~that ~~increased~~are ~~loss from operations was primarily due to the goodwill~~inherently ~~impairment,~~uncertain ~~lower revenues~~ and ~~increased~~may ~~research~~change ~~and~~in ~~development~~subsequent ~~as discussed above, although this was partially offset by lower cost of revenues, lower sales and marketing and general and administration and the elimination of goodwill amortization~~periods.

~~Other~~Our ~~(Expense)~~significant ~~Income,~~accounting ~~Net.~~policies Inare ~~the~~described ~~third~~in ~~quarter~~Note of2 ~~2002, other (expense) income, net consisted primarily~~ of ~~interest expense related to~~ the ~~convertible~~Notes ~~promissory notes ($252,000) and the accelerated amortization of an imputed discount related~~ to ~~the~~Consolidated ~~First~~Financial ~~Note~~Statements onin ~~partial~~our ~~repayment~~Annual ~~from the proceeds of the Second Note ($976,000), which was partially offset by net sublease income ($25,000) and a non-cash gain ($70,000) based~~Report on ~~the~~Form ~~change~~10-K infor the ~~fair~~fiscal ~~value~~year ofended ~~the~~December ~~warrant~~31, ~~obligations arising from the issuance of the convertible promissory notes and warrants~~2002. ~~For~~Not ~~the~~all ~~first nine months~~ of ~~2002,~~these ~~other~~significant ~~expense,~~accounting ~~net~~policies ~~consisted~~require ~~primarily~~management ~~of interest expense related~~ to ~~the convertible~~make ~~promissory notes ($575~~difficult,~~000)~~ ~~and~~subjective ~~the~~or ~~accelerated~~complex ~~amortization~~judgments ofor anestimates, ~~imputed~~however, ~~discount related to~~ the ~~First~~following ~~Note~~accounting ~~on partial repayment from the proceeds of the Second Note ($976~~policies,~~000),~~ ~~partially~~which ~~offset by net sublease income ($74,000),~~affect ~~interest~~more ~~income~~significant ~~($31,000)~~judgments and aestimates ~~non-cash~~used ~~gain ($417,000) based on the change~~ in the ~~fair~~preparation ~~value~~ of ~~the~~consolidated ~~warrant~~financial ~~obligations arising from the issuance of the convertible promissory notes and warrants. In the third quarter of 2001~~statements, ~~other~~are ~~expense,~~thought ~~net of $201,000 consisted primarily of a loss recorded for an investment in marketable securities related~~ to ~~our~~be ~~Nortel~~critical ~~Networks~~within ~~common stock holdings ($265,000), which was partially offset by interest income ($46,000) and net sublease income ($50,000). For~~ the ~~first~~SEC nine months of 2001, other income, net of $94,000 consisted primarily of interest income ($284,000) and net sub-lease income ($102,000), which was partially offset by the loss recorded for an investment in marketable securities ($265,000) as described abovedefinition.

~~Income~~Allowance ~~Tax~~for doubtful ~~(Provision)~~accounts ~~Benefit~~receivable. WeThe ~~recorded~~Company amaintains ~~provision~~an allowance for ~~income~~doubtful ~~taxes~~accounts offor ~~$19,000~~estimated inlosses ~~the~~resulting ~~third~~from ~~quarter of 2002 compared to a provision of $20,000 in~~ the ~~third quarter~~inability of ~~2001.~~customers ~~The provision in 2002 and 2001 was due primarily~~ to amake ~~provision~~required ~~for foreign taxes~~payments. ~~For~~If the ~~first~~financial condition ~~nine months~~ of ~~2002~~customers wewere ~~recorded a tax provision of $63,000 as compared~~ to adeteriorate ~~benefit~~and ofresult ~~$62,000~~ in ~~the~~an ~~first~~impairment ~~nine months~~ of ~~2001.~~their ~~The benefit~~ability ~~in 2001 was due~~ to ~~the~~make ~~expiration of certain tax contingencies ($113~~payments,~~000).~~ ~~The~~additional ~~income~~allowances ~~tax~~may ~~provisions~~be ~~are primarily for non-U~~required.~~S. taxes as we anticipate utilizing net operating losses to offset any pre-tax income.~~

~~Liquidity~~Goodwill. In June 2001, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards (FAS) No. 141, “Business Combinations” and ~~Capital~~SFAS ~~Resources~~No. 142, “Goodwill and Other Intangible Assets.” SFAS 141 requires that certain acquired intangible assets in a business combination be recognized as assets separate from goodwill. SFAS 142 requires that goodwill and other intangibles with indefinite lives should no longer be amortized, but rather tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. The Company adopted these pronouncements on January 1, 2002.

Cash and cash equivalents at September 30, 2002 decreased to $755,000 from $2,851,000 at December 31, 2001. The decrease in cash was primarily due to cash used in operations for the first nine months of $6,780,000, which was partially offset by net cash proceeds of $4,988,000 from the issuance of two convertible promissory notes and warrants to SDS. 15

NetTable cash used for operating activities during the first nine months of 2002 was $6,780,000 compared to $6,688,000 used for operating activities in the first nine months of 2001. The negative cash flow from operations in the first nine months of 2002 was primarily the result of the net loss ($11,923,000), a decrease in accounts payable ($201,000), an increase in prepaid expenses due to the timing of insurance payments ($147,000), cash payments for restructuring expenses ($145,000), a decrease in deferred revenue ($259,000), a decrease in accrued wages and related liabilities ($171,000) and a decrease in accrued liabilities ($569,000). These amounts were partially offset by a decrease in accounts receivable ($655,000) and the non-cash items of interest ($1,498,000), goodwill impairment ($4,795,000) and depreciation ($381,000), which in turn were partially offset by a decrease in the fair value of the warrant obligations ($417,000) and a decrease in the reserve for returns and bad debts ($269,000). Contents

~~Net~~MANAGEMENT’S ~~cash~~DISCUSSION ~~used~~AND ~~for~~ANALYSIS ~~investing~~OF ~~activities~~FINANCIAL ~~was~~CONDITIONAND ~~$255,000~~RESULTS inOF ~~the first nine months of 2002 compared to $661,000 provided by investing activities in the~~OPERATIONS ~~first nine months of 2001. Net cash used for investing in 2002 resulted from purchases of property and equipment~~ (~~$122,000~~continued) ~~and an increase in other assets ($133,000).~~

~~Net~~In ~~cash~~accordance ~~provided~~with ~~by financing~~these ~~activities~~pronouncements ~~was~~the ~~$4,988,000~~Company inreviewed ~~the~~its ~~first~~goodwill ~~nine~~on ~~months~~January of1, 2002. ~~compared~~At tothat ~~$284~~time,~~000~~ ~~used~~the ~~for~~Company’s ~~financing~~market ~~activities~~capitalization was in ~~the~~excess of ~~first~~$22.0 ~~nine~~million ~~months~~as ofdetermined ~~2001.~~by ~~Net~~the ~~cash~~Company’s ~~provided~~latest byclosing ~~financing~~share ~~was~~price ~~derived~~on ~~from~~NASDAQ. ~~the~~Since ~~proceeds~~this ~~from~~amount exceeded the ~~issuance~~Company’s recorded equity of ~~two convertible~~$10.5 ~~promissory~~million ~~notes~~on ~~and~~that ~~warrants~~date, tothe ~~SDS~~Company inconcluded ~~January~~that ~~2002~~goodwill ~~and~~was ~~August~~not ~~2002~~impaired.

17Throughout much of 2002 the telecommunications market continued to experience an unfavorable economic environment. Vertel experienced similar conditions during the year and the Company’s common stock share price and market capitalization declined significantly. As a result of these declines, the Company reviewed the carrying value of its goodwill at June 30, 2002 and recorded an impairment charge of $3.8 million. At December 31, 2002, the Company conducted its annual review of the carrying value of goodwill and recorded an additional impairment charge of $3.0 million. The Company retained a third-party valuation consultant to assist in determining the extent of goodwill impairment using the discounted cash flow method.

~~MANAGEMENT’S~~On ~~DISCUSSION~~December ~~AND~~31, ~~ANALYSIS~~2002, OFgoodwill ~~FINANCIAL~~amounted ~~CONDITION~~to ~~AND~~$754,000, ~~RESULTS~~or OF18% ~~OPERATIONS~~of ~~(continued)~~total assets of $4.2 million. This goodwill is what remains of the goodwill recorded when the fair value of consideration exchanged in two acquisitions exceeded the fair value of the net assets acquired. Vertel acquired Expersoft in March 1999 and Trigon in May 2001 for primarily cash and shares of common stock. The Company made estimates and used its best judgment when determining the fair value of the assets acquired. The goodwill recorded in these transactions was $4,742,000 and $7,320,000 for Expersoft and Trigon, respectively.

~~Effective~~Warrant ~~August~~Obligations. 22On January 3, 2002, ~~our~~in ~~common~~connection ~~stock~~with ~~was~~the ~~delisted~~first ~~from~~Note ~~trading~~and onthe ~~The~~first ~~Nasdaq~~Warrant ~~SmallCap~~Purchase ~~Market(SM)~~Agreement ~~for~~with ~~failing~~SDS, the toCompany ~~comply~~issued ~~with~~SDS ~~the~~a ~~$1.00~~warrant ~~minimum~~initially ~~bid~~exercisable ~~price~~into ~~requirements.~~800,000 ~~Our~~shares of Vertel common stock isat ~~now~~an ~~traded~~initial onexercise price of $0.9988 per share. On August 13, 2002, in connection with the ~~OTC~~second ~~Bulletin~~Note and the second Warrant Purchase Agreement ~~Board~~with ~~under~~SDS, the Company issued SDS a warrant initially exercisable into 2,625,000 shares of Vertel common stock ~~symbol~~at ~~(OTC~~an ~~BB:VRTL~~initial exercise price of $0.~~OB)~~20 per share. These financing transactions are more fully described in Note 5 of the Notes to Financial Statements included in this Form 10-K.

WeEmerging ~~have~~Issues ~~reported~~Task ~~operating~~Force ~~losses~~(EITF) ~~from~~No. ~~continuing~~00-19, ~~operations~~“Accounting for ~~each~~Derivative ofFinancial ~~the~~Instruments ~~most~~Indexed ~~recent~~to, ~~five~~and ~~fiscal~~Potentially ~~years.~~Settled ~~For~~in, a ~~the~~Company’s ~~nine~~Own ~~months~~Stock,” ~~ended~~requires ~~September~~that ~~30, 2002,~~the weCompany ~~reported~~initially ~~operating~~classify ~~losses~~the ofWarrants ~~$10,834,000,~~as ~~which~~a ~~included~~liability asince ~~goodwill~~the ~~impairment~~foregoing ~~charge~~provisions of ~~$4,795,000,~~the ~~and~~agreements ~~negative~~with ~~cash~~the ~~flows~~holder ~~from operations~~ of ~~$6,780,000.~~the AsFirst ofand ~~September~~Second ~~30,~~Notes ~~2002,~~and wethe ~~had~~First anand ~~accumulated~~Second ~~deficit~~Warrants ofcould ~~$94,563,000~~require the ~~and~~Company ~~negative working~~to ~~capital~~pay ofcash ~~$255,000,~~to ~~which~~settle ~~included~~the ~~cash~~warrant ofcontracts. ~~$755~~Accordingly,~~000.~~ ~~During~~ the ~~first~~Company ~~quarter~~recorded ofthe ~~2002,~~fair wevalue ~~received~~of ~~net~~the ~~proceeds~~First Warrant of ~~approximately~~ $3428,~~395~~084,~~000~~ ~~from~~net of the ~~sale~~$76,916 ofdiscount aarising ~~convertible~~from ~~promissory~~the ~~note~~allocation ~~and~~of the ~~issuance~~net ofproceeds ato ~~common~~the ~~stock~~First ~~warrant,~~Note and onFirst ~~August~~Warrant ~~13,~~as ~~2002~~previously described, weas ~~received~~a ~~net~~warrant ~~proceeds~~obligation ofon ~~approximately~~January $3,~~040~~ 2002,~~000~~ ~~from~~ the ~~sale~~transaction ofcommitment adate. ~~second~~The ~~convertible~~Company ~~promissory~~recorded ~~note and~~ the ~~issuance~~fair value of ~~another~~the ~~common~~Second ~~stock~~Warrant ~~warrant~~of ~~(See Note 4). We used~~ $1255,~~500,~~000, ofnet ~~the proceeds~~ of the ~~second~~$29,000 ~~note~~discount ~~to partially~~arising ~~repay~~from the ~~first~~allocation ~~note. Substantially all~~ of the ~~remaining~~ net proceeds ~~from~~to ~~these transactions were used by us during~~ the ~~nine~~Second ~~months~~Note ~~ended September 30, 2002. These operating losses~~ and ~~negative~~Second ~~cash~~Warrant ~~flows~~as ~~raise~~previously ~~substantial~~described, ~~doubt about our ability to continue~~ as a ~~going~~warrant ~~concern~~obligation ~~and~~on August 13, ~~therefore~~2002, wethe ~~may~~transaction becommitment ~~unable~~date. toEITF ~~realize~~No. ~~our~~00-19 ~~assets~~requires ~~and~~that ~~discharge~~the ~~our~~carrying ~~liabilities~~value inof the ~~normal~~warrant ~~course~~obligations ofbe ~~business.~~adjusted ~~Our plans~~ to ~~overcome~~their ~~these conditions include increasing revenues, further reducing~~fair ~~expenses~~value ~~and~~on ~~raising~~each ~~additional~~reporting ~~debt and equity capital~~date.

As Inof ~~the~~June ~~first~~30, ~~half of 2002~~2003, ~~we added additional sales personnel with~~ the ~~intention~~fair ofvalue ~~increasing revenues. Since the beginning~~ of the ~~year, we~~First ~~have~~Warrant ~~reduced~~was ~~the~~estimated ~~total~~at ~~number~~$71,000 ~~of employees by approximately 40%~~ and ~~implemented other cost reduction initiatives. We continue to look for cost reduction opportunities and we expect that our quarterly cash expenses for~~ the ~~fourth~~Second ~~quarter~~Warrant ofwas ~~2002 will~~estimated ~~approximate~~at $3232,000~~,000.~~ Weusing ~~expect~~the Black-Scholes tooption-pricing ~~fund~~model ~~these expenses from operational cash flows. Although we continue to try to increase revenues~~ and ~~reduce~~the ~~expenses,~~following weassumptions: ~~believe~~a itrisk-free isinterest ~~likely~~rate ~~we may require additional financing in the first quarter~~ of ~~2003 in order to fund planned operations for 2003~~2.06%, Weexpected ~~continue~~volatility toof ~~seek~~247%, ~~short term financing~~ and ano ~~longer~~expected ~~term financing solution~~dividends. WeThe ~~cannot assure that we will be able to~~ increase ~~our~~in ~~revenues,~~the orFirst ~~that~~and ~~additional~~Second ~~expense~~Warrant ~~reductions~~fair ~~will~~value befor ~~forthcoming, or~~the ~~that~~quarter ~~additional~~ended ~~financing~~June ~~will be available to us~~30, ~~or,~~2003 was ifapproximately ~~available~~$8,000 onand ~~terms that will be satisfactory to us. If we are not successful in reducing our expenses or raising sufficient additional capital~~$27,000, ~~or if we do not achieve revenues at levels sufficient to generate operating income~~respectively, ~~we may not be able to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability~~ and ~~classification~~was ofreflected ~~recorded~~in ~~asset~~other ~~amounts nor to amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern~~expense.

AsThe fair value of ~~November~~the ~~18,~~warrants ~~2002,~~has ~~our~~been ~~long~~determined using the Black-~~term~~Scholes ~~liquidity~~option-pricing model. ~~needs~~A ~~consist~~significant component of the Black-Scholes model is the fair market value per share of common stock. If the fair market value of Vertel common stock increases, the fair value of the warrant obligations ~~under~~would likely increase, resulting in a ~~convertible~~charge ~~promissory~~to ~~notes~~other ~~and~~expense. ~~operating~~If ~~lease~~the ~~commitments~~fair ~~related~~market tovalue ~~facilities~~of ~~and~~Vertel ~~office~~common ~~equipment.~~stock Asdecreases, the fair value of ~~September~~the 30warrant obligations would likely decrease, ~~2002~~resulting in other income, weas ~~had~~was $4the case for the first,~~803,000~~ second and third quarters of ~~debt~~2002. ~~outstanding~~For example, inif the ~~form~~fair market value of ~~two~~common ~~convertible~~stock ~~promissory~~on ~~notes~~December ~~payable~~31, ~~(See~~2002 ~~Note~~was 4$1.00 toper share, the ~~Notes~~fair value of the First and Second Warrant obligations determined using the Black-Scholes model, assuming all other variables remain constant, would tohypothetically ~~Consolidated~~have ~~Financial~~been ~~Statements~~approximately ~~included~~$798,000 and $2,613,000, respectively, resulting in ~~this~~a ~~quarterly~~charge ~~report.~~of approximately $3,144,000 to other expense for the fourth quarter of 2002.

~~ITEM~~Conversely, 3if the fair market value of common stock on December 31, 2002 was $0. ~~QUANTITATIVE~~05 ~~AND~~per ~~QUALITATIVE~~share, ~~DISCLOSURES~~the ~~ABOUT~~fair ~~MARKET~~value ~~RISK~~of the Warrant obligation determined using the Black-Scholes Model, assuming all other variables remain constant, would hypothetically have been approximately $38,000 and $128,000, respectively, resulting in other income of approximately $338,000 for the year 2002. Given the volatility of the common stock price, the Company cannot predict the impact

(a) Quantitative Information About Market Risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We maintain an investment policy that ensures the safety and preservation of our invested funds by limiting default risk, market risk and investment risk. As of September 30, 2002, we had $755,000 of cash and cash equivalents with a weighted average variable rate of 1.11%, and no short-term investments. As of September 30, 2001, we had $4,485,000 of cash and cash equivalents and no short-term investments with a weighted average variable rate of 3.18%. At September 30, 2002 we had long-term debt of $4,803,000 (see Note 4 to the Notes to Consolidated Financial Statements included in this quarterly report) related to two convertible promissory notes payable to SDS Merchant Fund L.P. and no short-term debt. At September 30, 2001, we had no short or long-term debt. (b) Qualitative Information About Market Risk While our consolidated financial statements are prepared in United States Dollars, a portion of our worldwide operations have a functional currency other than the United States Dollar. In particular, we maintain operations in Germany, Korea, the Netherlands, and Poland, where the functional currencies are: Euro, Won, Euro, and Zloty, respectively. Most of our revenues are denominated in the United States Dollar. Fluctuations in exchange rates may have a material adverse effect on our results of operations and could also result in exchange losses. The impact of future exchange rate fluctuations cannot be predicted adequately. To date, exchange fluctuations have not had a material impact on our earnings and we have not sought to hedge the risks associated with fluctuations in exchange rates, but may undertake such transactions in the future. We do not have a policy16

18 Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL ~~CONDITION~~CONDITIONAND ~~AND~~ RESULTS OF OPERATIONS (continued)

~~relating~~fluctuations may have on consolidated statement of operations for any future period. Furthermore, EITF No. 00-19 requires the Company to ~~hedging~~evaluate the classification of the Warrants as a liability as of each reporting date. ~~There~~To ~~can~~the beextent there no ~~assurance~~longer ~~that~~exists ~~any~~a ~~hedging~~potential ~~techniques~~for ~~implemented~~the byCompany usto ~~would~~ be ~~successful~~required orto ~~that~~pay ~~our~~cash ~~results~~to ofsettle ~~operations~~the ~~will~~Warrant ~~not~~contract, the Company may be ~~materially~~required ~~adversely~~to ~~affected~~reclassify bythe carrying ~~exchange~~value ~~rate~~of ~~fluctuations~~the Warrant liability to equity.

~~ITEM~~If 4the fair market value of the Company’s common stock increases the fair value of the warrant obligation would likely increase, resulting in a charge to other expense. ~~CONTROLS~~ ~~AND~~If ~~PROCEDURES~~the fair market value of the Company’s common stock decreases the fair value of the warrant obligation would likely decrease, resulting in other income.

~~(a)~~Income ~~Evaluation of Disclosure Controls and Procedures~~taxes. ~~Our~~Deferred ~~Chief~~income ~~Executive~~taxes ~~Officer~~are ~~and~~provided ~~its~~for ~~Chief~~temporary ~~Financial~~differences ~~Officer,~~between ~~after evaluating~~ the ~~effectiveness~~financial ofstatement ~~our disclosure controls~~ and ~~procedures~~income ~~(as~~tax ~~defined~~basis ~~in the Securities Exchange Act~~ of ~~1934~~Company ~~Rules 13a-14(c)~~ assets and ~~15d-14(c)~~liabilities, asbased ofon aenacted ~~date~~tax ~~within~~rates. 90A ~~days~~valuation ofallowance ~~the~~is ~~filing~~provided ~~date~~when ofit ~~this~~is ~~quarterly~~more ~~report~~likely onthan ~~Form~~not ~~10-Q~~that ~~(the~~some ~~“Evaluation~~portion ~~Date”)),~~or ~~have~~all ~~concluded that as~~ of the ~~Evaluation~~deferred ~~Date,~~income ~~our~~tax ~~disclosure~~assets ~~controls~~will ~~and~~not ~~procedures~~be ~~were~~realized. ~~adequate~~The ~~and~~Company ~~effective~~has torecorded ~~ensure~~a ~~that~~valuation ~~material~~allowance ~~information relating~~ to usreduce deferred ~~and~~tax ~~our~~assets ~~consolidated subsidiaries would be made known~~ to ~~them~~zero. byIf ~~others within those entities, particularly during~~ the ~~period~~Company inis ~~which~~able ~~this~~to ~~quarterly~~realize ~~report~~deferred ontax ~~Form~~assets ~~10-Q was being prepared. (b) Changes~~ in ~~Internal~~the ~~Controls.~~future, ~~There~~an ~~were~~adjustment noto ~~significant~~deferred ~~changes~~tax inassets ~~our~~would ~~internal~~increase ~~controls~~income or in ~~other factors that could significantly affect our disclosure controls and procedures subsequent to~~ the ~~Evaluation~~period ~~Date, nor any significant deficiencies or material weaknesses in~~ such ~~disclosure~~determination ~~controls~~was ~~and procedures requiring corrective actions~~made. ~~As a result, no corrective actions were taken.~~

~~PART~~Fixed IIprice service contracts. ~~OTHER~~ ~~INFORMATION~~Professional service contracts are typically fixed price contracts that are completed in six months or less. Revenues are recognized as work progresses using the percentage of completion method, which relies on estimates of total expected contract revenue and costs. The Company uses this method since reasonably dependable estimates can be made of the revenue and costs applicable to various stages of a project. Recognized revenues and profits are subject to revisions as the contract progresses. Revisions in profit and cost estimates are charged to income in the period in which the facts that give rise to the revision are known. Estimated losses are recorded in the period in which the determination of loss is made. Revenues from non-recurring engineering projects are also typically recognized on a percentage-of-completion-basis and follow the same principles as fixed price service contracts.

ITEM 1.		LEGAL PROCEEDINGS
	Neither we nor any of our subsidiaries is a party to, nor is our property the subject of, any material pending legal proceeding. We may, from time to time, become a party to various legal proceedings arising in the normal course of our business.
ITEM 2.		CHANGES IN SECURITIES AND USE OF PROCEEDS
	Note 4 of our Notes to Consolidated Financial Statements included in this quarterly report includes a discussion of the equity securities (described as the Second Note and Second Warrant) we sold to SDS Merchant Fund, L.P. during the quarter.
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES
	Defaults on Convertible Secured Promissory Notes - As a result of our common stock being delisted from The Nasdaq SmallCap Market, effective August 22, 2002, we are in default under the terms of our outstanding convertible securities (defined as the First Note and the Second Note, and the First Warrant and the Second Warrant) identified in Note 4 of our Notes to Consolidated Financial Statements included in this quarterly report. As a consequence of such defaults, the holder of the notes and warrants could demand repayment of the notes at the prepayment price (115% of principal outstanding), could convert the remaining principal on the notes (which would significantly dilute the holdings of our current shareholders), or exercise or otherwise enforce any on or more of their other rights under the applicable agreements.
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
			Not applicable.
ITEM 5.		OTHER INFORMATION
			None.

19 Table of Contents

~~OTHER~~MANAGEMENT’S ~~INFORMATION~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS (continued)

~~ITEM~~Results 6.of ~~EXHIBITS~~Operations ~~AND REPORTS ON FORM 8-K~~

(Net Revenues. For the three months ended June 30, 2003, net revenues decreased 73%, to $563,000, from $2,054,000 during the same period a year ago. The decline principally reflected lower revenue from professional services ($600,000) ~~EXHIBITS~~, licenses ($504,000) and the absence of sales from the e*ORB product line ($340,000) that was sold in late 2002. Revenue from royalties and maintenance contracts were also down for the quarter by$31,000 and $16,000, respectively.

~~The~~For ~~exhibits~~the ~~required~~six-month period ended June 30, 2003, net revenues decreased 64%, to be$1,474,000, ~~furnished~~from ~~are~~$4,055,000 ~~listed~~during inthe same period a year ago. The decline reflected the ~~Exhibit~~absence ~~List~~of ~~following~~sales ~~this~~from ~~Report~~the e*ORB product line ($925,000) and lower revenues from licenses ($913,000) and professional services ($892,000). Revenues from maintenance contracts and royalties were up for the first half by $91,000 and $58,000, respectively.

~~(b) REPORTS~~Net ONrevenues ~~FORM~~from ~~8-K~~Nation’s Bank and Nortel comprised 17% and 11% of net revenues in the second quarter of 2003, respectively. Net revenues from Nation’s Bank and Tekview comprised 13% and 11% of net revenues during the first half of 2003, respectively. No other single customer accounted for more than 10% of net revenues in either period. Sales to customers outside the United States comprised approximately 49% and 48% of net revenues in the second quarter and first half of 2003, respectively.

WeIn ~~filed~~the asecond ~~Current~~quarter of ~~Report on Form 8-K dated July 2~~2002, ~~2002~~sales into ~~connection~~Nokia ~~with~~and ~~our~~NEC ~~announcement~~America ~~that~~comprised weapproximately ~~had~~13% ~~entered into a Note~~ and ~~Warrant~~11% ~~Purchase~~of ~~Agreement~~net ~~with SDS Merchant Fund~~revenues, Lrespectively.P. ~~pursuant~~No toother ~~which~~single ~~SDS~~customer ~~agree~~accounted tofor ~~purchase~~more athan ~~$3,100,000~~10% ~~senior~~of ~~secured~~net ~~convertible promissory note and accompanying warrant from us~~revenues. WeIn ~~filed~~the afirst ~~Current~~half ~~Report~~of ~~on Form 8-K dated September 17~~2002, ~~2002~~no incustomer ~~connection~~accounted ~~with~~for ~~the~~more ~~resignation~~than 10% of net ~~Deloitte~~revenues. &Sales ~~Touche~~to ~~LLP~~customers asoutside ~~our~~the ~~independent~~United ~~public~~States ~~accountants.~~comprised Weapproximately ~~filed~~44% aand ~~Current~~42% ~~Report~~of onnet ~~Form~~revenues ~~8-K\A~~in ~~dated~~the ~~October~~second ~~31,~~quarter ~~2002~~and infirst ~~connection~~half ~~with the engagement~~ of ~~BDO Seidman~~2002, ~~LLP as our independent public accountants~~respectively.

20The Company expects the percentage of sales outside the United States to be a significant part of revenues in 2003. If the U.S. dollar strengthens significantly, the Company may not be able to remain competitive in international markets without reducing prices. In addition, competition and price pressure have increased both domestically and internationally for professional services as competitors and customers continue to seek engineering services from lower cost providers in countries such as China and India. The Company’s sales cycle is typically lengthy resulting in significant fluctuations from one quarter to the next as well as between geographic markets. Finally, any political or economic turmoil in the Company’s major Asian markets (China, Japan and Korea) could also significantly impact future sales.

~~SIGNATURES~~Licenses. License revenues consist primarily of license fees and royalties derived from software products. The Company recognizes revenue from the licensing of software when persuasive evidence of a contractual arrangement exists and the underlying software products have been shipped. Most contracts with customers contain multiple software products or other elements, such as maintenance and professional services. The Company typically delivers all software products included in a multiple element contract shortly after the contract is executed, with any service elements, such as maintenance or professional services being provided to customers over a period of time, generally less than twelve months. Royalty revenues are recognized when a customer purchases license rights in advance on a non-refundable, non-cancelable basis or when run-time licenses are shipped under key controlled license agreements.

~~Pursuant~~Historically tolicense ~~the~~revenues ~~requirements~~have accounted for a substantial portion of total revenues. In the ~~Securities~~second ~~Exchange~~quarter ~~Act~~of 2003, license revenues declined 74%, to $255,000, from $989,000, a year ago. The decline reflected lower sales of ~~1934~~licenses and royalties related to TMN products (down $535,000, year-over-year) and the ~~Registrant~~absence ~~has~~of sales from the e*ORB product line ($199,000). For the six-month period ended June 30, 2003, license revenues declined 66%, to $766,000, from $2,248,000, a ~~duly~~year ~~caused~~ago. ~~this~~The ~~Report~~decline reflected lower sales of licenses and royalties related to beTMN ~~signed~~products on($855,000) ~~its~~and ~~behalf~~the byabsence of sales from the ~~undersigned,~~e*ORB ~~thereunto~~product ~~duly~~line ~~authorized~~($628,000).

~~VERTEL~~The ~~CORPORATION~~Company expects sales of TMN products will increase as the economy improves for telecommunication equipment manufacturers. However, the Company also expects TMN revenues will decline as a percentage of total license revenues as more and more customers adopt the Company’s M*Ware platform.

~~(Registrant)~~Service and Other. Service and other revenues consist primarily of professional services, maintenance, technical support, non-recurring engineering projects, training and other revenues. Professional service revenues typically result from fixed price contracts to fulfill a statement of work for a customer project and are usually completed in six months or less. These revenues are recognized based on the percentage of completion method. Maintenance revenues are recognized ratably over the term of the maintenance contract. Revenues from non-recurring engineering projects are also typically recognized on a percentage of completion basis. Revenues from technical support, training and other categories are usually recognized when the service is performed and no obligations remain.

Date: November 19, 2002 /s/ CRAIG S. SCOTT Craig S. Scott Vice President, Finance and Administration, Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer)18

CertificationTable of Contents

I,MANAGEMENT’S ~~Craig~~DISCUSSION S.AND ~~Scott,~~ANALYSIS ~~certify~~OF ~~that:~~FINANCIAL CONDITIONAND RESULTS OF OPERATIONS (continued)

1.	I have reviewed this quarterly report on Form 10-Q of Vertel Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Service and other revenues declined 71% in the second quarter of 2003, to $308,000, from $1,065,000 a year ago. The decline reflected a significantly lower number of professional services projects (down $600,000, year-over-year) and lower maintenance revenues due to the absence of the e*ORB product line ($141,000) and the expiration of maintenance contracts related to older, discontinued products ($16,000).

~~Date:~~Service ~~November~~and 19other revenues declined 61% during the first six months of 2003, ~~2002~~to ~~/s/~~$709,000, ~~CRAIG~~from S.$1,807,000 ~~SCOTT~~a ~~Craig~~year Sago. ~~Scott~~The decline VPreflected ~~Finance~~a &significantly ~~Administration,~~lower ~~Chief~~number ~~Financial~~of ~~Officer~~professional services projects (down $893,000, year-over-year) and ~~Secretary~~lower maintenance revenues related to the absence of the e*ORB product line ($297,000). These results were partially offset by an increase in the value of maintenance contracts, up $91,000.

21Historically, professional services revenues have been dependent on a limited number of consulting contracts from both new and existing customers. While there are price pressures from the lower volume of available work and increased competition from lower cost providers in foreign countries, the Company believes the core competencies of its professional services organization can be leveraged to increase revenues in 2003. New maintenance contracts are expected to offset any discontinuations from legacy products in the second half of 2003.

~~Certification~~Cost of Revenues - License. Cost of license revenues consists primarily of royalty fees paid to third-party providers of software that is embedded within Vertel’s software products. These costs also include the cost of reproducing and shipping software as well as issuing user documentation.

ICost of license revenues decreased 22% in the second quarter of 2003, ~~Marc~~to E$19,000, or 7.3% ~~Maassen~~of license revenues, ~~certify~~compared to $24,000, or 2.4% of license revenues in 2002. The year-to-year decrease in expense was simply not as significant as the corresponding decline in license revenues. There was also a shift in product mix to one-time sales and away from products with embedded third-party software that: pays royalties over time. The resulting gross margin from license revenues fell, to 92.7% of sales, from 97.6%.

1.	I have reviewed this quarterly report on Form 10-Q of Vertel Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

For the first six months of 2003, the cost of license revenues fell 32%, to $43,000, or 5.6% of license revenues, versus $63,000, or 2.8% of license revenues for the same period a year ago. The decline in expenses principally reflected a reduction in outside services, although again, the decline was not sufficient to offset the drop in volume. Gross margins from license revenues fell in the first half of 2003, to 94.4%, from 97.2% a year earlier.

~~Date:~~For ~~November~~the ~~19,~~balance ~~2002~~of ~~/s/~~2003 ~~MARC~~these E.margins ~~MAASSEN~~will ~~Marc~~fluctuate E.with ~~Maassen~~product ~~President~~mix and ~~Chief~~could ~~Executive~~decline ~~Officer~~if the Company sells third-party products on a revenue-sharing basis.

22Cost of Revenues - Service and other. Cost of service and other revenues consists primarily of expenses associated with performing professional consulting services, software maintenance and customer technical support such as telephone support, training services and non-recurring engineering services.

~~EXHIBIT~~During the ~~INDEX~~second quarter of 2003 service and other costs of sales declined 63%, to $329,000 or 107% of service and other revenues, from $892,000 or 84% of service and other revenues for the same period a year ago. The two most significant factors affecting the $563,000 decline in expenses were lower costs of personnel ($305,000) and rent ($118,000). In addition, expenses were lower for third party consulting ($38m), leases ($13m) and equipment ($7m). The resulting gross margin from service and other revenues was a negative 6.8% and 16.2% in 2003 and 2002, respectively.

Number		Description
2.1		Agreement and Plan of Reorganization and Liquidation, dated May 30, 2001, by and between Vertel Corporation and Trigon Technology Group, Inc. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).
3.1		(and 4.1) Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, Commission File No. 000-19640).
3.2		(and 4.2) Bylaws of the Registrant, as amended to date (incorporated by reference to Exhibit 3.4 of the Registrant’s Annual Report on Form 10-K for the year ended December 27, 1997, Commission File No. 000-19640).
3.3		(and 4.1) Certificate of amendment to Registrant’s Articles of Incorporation, as filed with the California Secretary of State on April 7, 1998, changing the Company’s name to Vertel Corporation (incorporated by reference to Exhibit 3.5 of the Registrant’s Current Report on Form 8-K dated April 7, 1998, Commission File No. 000-19640).
3.4		(and 4.3) Preferred Shares Rights Agreement dated as of April 29, 1997 with Chase Mellon Shareholder Services, LLC (incorporated by reference to Exhibit 1 of the Registrant’s Registration Statement on Form 8-A filed on April 30, 1997, Commission File No. 000-19640).
4.4		Note and Warrant Purchase Agreement dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Fund, L.P. (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K dated August 31, 2001, Commission File No. 000-19640).
4.5		Form of $3,500,000 Convertible Promissory Note dated August 31, 2001 by and between SDS Merchant Fund, LP (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K dated August 31, 2001, Commission File No. 000-19640).
4.6		Warrant dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Fund, LP (incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K dated August 31, 2001, Commission File No. 000-19640).
4.7		Note and Warrant Purchase Agreement dated July 2, 2002 by and between Vertel Corporation and SDS Merchant Fund, LP (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K dated July 2, 2002, Commission File No. 000-19640).
4.8		Form of $3,100,000 Convertible Secured Promissory Note dated July 2, 2002 by and between SDS Merchant Fund, LP Note and Warrant Purchase Agreement dated July 2, 2002 by and between Vertel Corporation and SDS Merchant Fund, LP (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K dated July 2, 2002, Commission File No. 000-19640).
4.9		Warrant dated July 2, 2002 by and between Vertel Corporation and SDS Merchant Fund, LP (incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K dated July 2, 2002, Commission File No. 000-19640).
4.10		Security Agreement dated July 2, 2002 by and between Vertel Corporation and SDS Merchant Fund, LP (re: July 2, 2002 promissory note) (incorporated by reference to Exhibit 4.4 of the Registrant’s Current Report on Form 8-K dated July 2, 2002, Commission File No. 000-19640).
4.11		Security Agreement dated July 2, 2002 by and between Vertel Corporation and SDS Merchant Fund, LP (re: January 3, 2002 promissory note) (incorporated by reference to Exhibit 4.5 of the Registrant’s Current Report on Form 8-K dated July 2, 2002, Commission File No. 000-19640).
4.12		Registration Rights Agreement dated July 2, 2002 by and between Vertel Corporation and SDS Merchant Fund, LP (incorporated by reference to Exhibit 4.7 of the Registrant’s Current Report on Form 8-K dated July 2, 2002, Commission File No. 000-19640).

During the first six months of 2003 service and other costs of sales were $675,000 and $1,931,000, respectively, a decline of 65%. These costs were 95.2% and 106.8% of revenues in each of the respective years. Compared to the first six months of 2002, year over year payroll was down $600,000, rent was down $251,000 and outside consulting was also less ($149,000). Other major savings included travel ($79,000), equipment and leases ($61,000) and other expense ($40,000). The resulting gross margin from service and other revenues was 4.8% and a negative 6.8% in 2003 and 2002, respectively.

23The Company anticipates that cost of service and other revenues for the remainder of 2003 will continue to decline as a percent of revenue due to expense reductions that were not fully realized in the first quarter. However, to the extent new consulting service contracts do not materialize, the expected improvement in future margins may not be as significant.

4.13		Waiver re: requirement of continued listing on The Nasdaq National Market in the Note and Warrant Purchase Agreement dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Capital, L.P. and the $3,500,000 Convertible Promissory Note dated January 3, 2002 (incorporated by reference to Exhibit 4.8 of the Registrant’s Current Report on Form 8-K dated July 2, 2002, Commission File No. 000-19640).
4.14		Waiver re: 200% share reservation requirement in the Note and Warrant Purchase Agreement dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Capital, LP, the $3,500,000 Convertible Promissory Note dated January 3, 2002, the Warrant dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Capital, LP and the Registration Rights Agreement dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Capital, LP (incorporated by reference to Exhibit 4.9 of the Registrant’s Current Report on Form 8-K dated July 2, 2002, Commission File No. 000-19640).
10.1		1991 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 26, 1992, Commission File No. 000-19640).
10.2		Form of subscription agreement under 1991 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 26, 1992, Commission File No. 000-19640).
10.3		Amended 1996 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.75 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).
10.4		Form of Option Agreement under 1996 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.75 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).
10.5		Amended 1998 Stock Option Plan (incorporated by reference to Exhibit 10.76 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).
10.6		Form of Option Agreement under 1998 Stock Option Plan (incorporated by reference to Exhibit 10.76 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).
10.7		Vertel Corporation 2000 Stock Option Plan (incorporated by reference to Exhibit 10.81 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, Commission File No. 000-19640).
10.8		2001 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 5.1 of the Registrant’s Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).
10.9		Form of Notice of Stock Option (incorporated by reference to Exhibit 5.2 of the Registrant’s Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).
10.10		Grant and Form of Stock Option Agreement with attached Notice of Exercise (incorporated by reference to Exhibit 5.3 of the Registrant’s Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).
10.11		Lease Agreement between the Registrant and Moorpark Associates, a California Limited Partnership, dated February 5, 1993 (incorporated by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form 10-K for the year ended January 2, 1993, Commission File No. 000-19640).
10.12		Lease Agreement between the Registrant and Nomura-Warner Center Associates, LP, dated November 26, 1996 (incorporated by reference to Exhibit 10.48 of the Registrant’s Annual Report on Form 10-K for the year ended December 28, 1996, Commission File No. 000-19640).
10.13		Form of Retention Agreement between the Company and each of its officers (incorporated by reference to Exhibit 10.68 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998, Commission File No. 000-19640).
10.14		Employment Agreement between the Company and Tonia G. Graham dated July 5, 2000 (incorporated by reference to Exhibit 10.82 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 000-19640).
10.15		Employment Agreement between the Company and Craig S. Scott dated December 1, 2000 (incorporated by reference to Exhibit 10.83 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 000-19640).

Research and Development. Historically the Company has made significant investments in research and development. The major components of these expenses are engineering salaries, benefits, fees to outside contractors, facilities and related overhead charges and depreciation expense primarily for computers and test environments and equipment. In some cases, customers reimburse the Company for development costs related to non-recurring engineering projects. The Company’s recent research and

24 19

Number		Description
10.16		Non-Competition and Non-Disclosure Agreement between the Company and Alex Kuo dated May 30, 2001 (incorporated by reference to Exhibit 10.87 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Commission File No. 000-19640).
10.17		Form of Indemnification Agreement with the Company’s officers and directors (incorporated by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 000-19640).
10.18		Employment Agreement between the Company and Marc E. Maassen dated October 11, 2001 (incorporated by reference to Exhibit 10.20 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, Commission File No. 000-19640).
10.19		Employment Agreement between the Company and E. Carey Walters dated January 1, 2002 (incorporated by reference to Exhibit 10.20 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, Commission File No. 000-19640).
10.20		Employment Agreement between the Company and David J. Baumgarten dated February 1, 2002 (incorporated by reference to Exhibit 10.20 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, Commission File No. 000-19640).
11.1		Statement re: Computation of per share earnings (filed herewith).
99.1		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002 (filed herewith).
99.2		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (filed herewith).

25MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS (continued)

development efforts have been concentrated in mediation software to integrate telecom Operation Support Systems and the underlying network equipment management systems and related applications. In late 2002, the Company sold its e*ORB product line and discontinued related research and development efforts.

For the three-month period ended June 30, 2003, research and development costs declined 59%, to $533,000, from $1,300,000. The decrease of $767,000 primarily reflected lower costs associated with payroll ($552,000) and related facilities ($122,000) due to major reductions in staff in August of 2002 and February and June of 2003. Outside consulting and travel were also down $50m and $31, respectively. Although significant, these savings did not keep pace with the decline in revenues and, as a result, research and development costs as a percent of revenues increased to 95% in the second quarter of 2003, compared to 63% during the same period a year ago.

For the first half of 2003, research and development costs declined 53%, to $1,207,000, from $2,589,000. The decrease of $1,382,000 primarily reflected lower costs associated with payroll ($980,000) and related facilities ($100,000) due to major reductions in staff in August of 2002 and February and June of 2003. Outside consulting and travel were also down $52m and $71, respectively. Although significant, these savings did not keep pace with the decline in revenues and, as a result, research and development costs as a percent of revenues increased to 82% in the first half of 2003, compared to 64% during the same period a year ago.

The Company expects research and development costs to be lower for the balance of the year and should improve as a percent of sales as revenues increase. However, if future revenues do not improve, further staff reductions may become necessary. Such reductions could cause delays in the development of new products and existing product enhancements, which, in turn, could adversely impact future revenues.

Sales and Marketing. Sales and marketing expenses consist primarily of direct sales and sales support personnel and the associated costs related to selling and marketing the Company’s products and services. These principally include salaries, commissions, benefits, travel, facilities and related overhead charges and other marketing expenses such as trade shows, web-site maintenance and collateral materials.

Sales and marketing expenses fell 46% in the second quarter of 2003, to $764,000, from $1,424,000, compared to the same period a year earlier. The decrease of $661,000 principally reflected lower expenses for payroll ($270,000), commissions ($148,000), travel ($91,000) and rent ($68,000). Lower expenses were also reported for outside consulting ($36,000) and marketing ($29,000). Nevertheless, the decline in expenses did not keep pace with the revenue shortfall and sales and marketing expenses as a percentage of revenues increased in the second quarter of 2003, to 136%, from 69% in 2002.

In the first half of 2003, sales and marketing expenses fell 38%, to $1,659,000, from $2,697,000, compared to the same period a year earlier. The decrease of $1,037,000 reflected lower expenses for payroll ($306,000), commissions ($252,000), travel ($217,000) and rent ($147,000). Lower expenses were also reported for consulting ($34,000) and marketing/trade shows ($30,000). Nevertheless, the decline in expenses did not keep pace with the revenue shortfall and sales and marketing expenses as a percentage of revenues increased in the first half of 2003, to 112%, from 67% in 2002.

The Company expects sales and marketing costs to continue to track lower for the balance of the year and should improve as a percent of sales as revenues increase. However, if future revenues do not improve, the Company may be required to make even further expense reductions that could impact the Company’s ability to capitalize on market opportunities.

General and Administrative. General and administrative expenses consist primarily of salaries, employee benefits and other related expenses of administrative, executive and financial personnel, as well as accounting, legal and other public company related costs including those of directors, shareholders and investor relations.

For the three month period ended June 30, 2003, general and administrative costs decreased 9%, to $875,000, from $960,00 a year ago. Lower expenses related to shareholder and public company reports ($183,000), payroll ($139,000), property/casualty insurance ($121,000), telephones ($70,000) and legal ($32,000) were partially offset by increased costs for bad debt ($139,000), rent ($104,000), accounting fees ($73,000) and supplies ($52,000). As a percent of revenues, general and administrative expenses were 154% and 47% in the second quarter of 2003 and 2002, respectively.

For the first half of 2003, general and administrative costs were down 12%, to $1,535,000, from $1,751,00 a year ago. Decreased expenses related to payrolls ($295,000), property and casualty insurance ($232,000), shareholder and public company reports ($184,000), telephones ($118,000) and outside consulting ($71,000) were partially offset by increased expenses for rent ($271,000), accounting fees ($212,000), bad debt ($139,000) and supplies ($47,000). As a percent of revenues, general and

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)

administrative expenses were 104% and 43% in the first half of 2003 versus 2002, respectively.

The Company expects general and administrative expenses will continue to decrease in 2003, reflecting additional staff reductions in February and May as well as a number of other cost savings initiatives.

Goodwill Impairment. In accordance with FAS 142 the Company reviewed its goodwill on June 30, 2003. At that time, the Company’s market capitalization was approximately $3.5 million as determined by the Company’s latest closing share price on NASDAQ Over–the-Counter Bulletin Board. Since this amount exceeded the Company’s recorded equity of a negative $2.5 million on that date, the Company concluded that goodwill was not further impaired during the second quarter. In 2002 the Company incurred a non-cash charge of $4,795,000 related to the impairment of goodwill in accordance with provisions of FAS 142 (see Note 3 in the Notes to Consolidated Financial Statements included in this quarterly report).

Operating Loss. The Company incurred losses from operations of $1,949,000 in the second quarter of 2003, versus a loss of $7,341,0000 in 2002. The $5,392,000 improvement principally reflected the absence of $4,795,000 in goodwill impairment in 2002 and lower expenses for research and development and sales and marketing. These improvements reflected the Company’s concerted efforts to improve gross profit margins and lower operating expenses through improved efficiencies, headcount reductions and additional cost savings measures. Although cost of revenues was also down, it did not decline as rapidly as revenues and therefore offset some of the savings in operating expenses.

During the six-month period ended June 30, 2003, losses from operations totaled $3,639,000, an improvement over the $9,770,000 posted for the same period a year earlier. The reduction of $6,131,000 reflected good impairment of $4,795,000 and lower expenses for research and development and sales and marketing. These improvements reflected the Company’s concerted efforts to improve gross profit margins and lower operating expenses through improved efficiencies, headcount reductions and additional cost savings measures. Although cost of revenues was also down, the decline in these expenses was only marginally better than the decline in revenues and therefore had minimal impact on the savings in operating expenses.

Other Net Income (Expense). In the second quarter of 2003, other net expense consisted primarily of net interest expense of $428,000 and other net miscellaneous expenses of $10,000. The net interest expense consisted of non-cash interest related to the accelerated amortization of an imputed discount on the warrants and beneficial conversions ($329,000) and non-cash interest related to the convertible promissory notes ($99,000). These non-cash expenses were partially offset by a non-cash loss of $35,000 from the change in fair market value of the warrant obligations arising from the issuance of the convertible promissory notes and warrants and net sublet income of $25,000.

In the second quarter of 2002, other income net consisted primarily of a non-cash gain of $187,000 on the change in fair market value of the warrant obligation arising from the issuance of a convertible promissory note and warrants as described in Note 4 of the Notes to Consolidated Financial Statements included in this quarterly report. In addition, the Company recorded sublet income of $25,000 and interest income of $7,000 during the period. These items were partially offset by the amortization of an imputed discount related to the convertible promissory note ($120,000) and non-cash interest expense also related to the convertible promissory note ($48,000).

In the first half of 2003, other net expense consisted primarily of net interest expense of $703,000 offset by $123,000 of other income. The net interest expense consisted of non-cash interest related to the accelerated amortization of an imputed discount on the warrants and beneficial conversions ($516,000) and non-cash interest related to the convertible promissory notes ($186,000). These non-cash expenses were partially offset by a non-cash gain of $69,000 from the change in fair market value of the warrant obligations arising from the issuance of the convertible promissory notes and warrants, net sublet income of $50,000 and the gain on the disposal of an asset amounting to $5,000.

In the first half of 2002, other income net consisted primarily of a non-cash gain ($347,000) on the change in fair market value of the warrant obligation arising from the issuance of a convertible promissory note and warrants. In addition, the Company recorded sublet income ($50,000) and interest income ($28,000) during the period. These items were partially offset by the amortization of an imputed discount related to the convertible promissory note ($227,000) and non-cash interest expense also related to the convertible promissory note ($97,000).

Income Tax (Provision) Benefit. Income tax provisions are primarily for non-U.S. taxes. The Company anticipates utilizing net operating losses to offset any pre-tax income. In the second quarter of 2003 the Company recorded a provision for income taxes of $15,000 due primarily to the expiration of certain foreign tax contingencies. A year earlier, a similar provision for $21,000 was made for the same reasons.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)

In the first half of 2003 and 2002 the Company recorded a provision for income taxes of $44,000 in each year due primarily to the expiration of certain foreign tax contingencies.

The Company recognizes deferred tax assets and liabilities based on differences between financial statement and tax bases of assets and liabilities using current, enacted rates. A valuation allowance equal to the total amount of net deferred tax assets of approximately $71.0 million at June 30, 2003 has been established. These net deferred tax assets could be realized to the extent the Company operates profitably in the future during the respective carryforward periods.

Other Comprehensive Loss. The other comprehensive loss reflects the impact of foreign exchange rates on cash. For the three-month period ended June 30, 2003 the Company realize comprehensive income of $31,000. During the same period in 2002 there was a comprehensive loss of $54,000. For the first six months of 2003 a comprehensive loss of $35,000 was posted versus a loss of $92,000 in 2002.

Liquidity and Capital Resources

Cash and cash equivalents totaled $233,000 on June 30, 2003, a decline of $648,000 from the balance of $881,000 on December 31, 2002. The decrease in cash was primarily due to $2,559,000 of cash being used in operations offset in part by net cash proceeds of $1,815,000 from the issuance of non-convertible promissory notes during the six-month period.

Net cash used for operating activities during the first half of 2003 was $2,559,000, compared to $5,299,000 during the same period a year ago. The negative cash flow from operations primarily reflected the net loss of $4,297,000, a decrease in accrued wages and related liabilities ($461,000), a decrease in the fair value of the Warrant obligations ($69,000) and increased prepaid expenses ($47,000). These amounts were partially offset by a decrease in accounts receivable ($1,238,000), an increase in other accrued liabilities ($325,000), non-cash interest ($206,000), an increase in deferred revenues ($81,000), non-cash items of depreciation ($75,000) and an increase in accounts payable ($71,000).

Net cash provided by investing activities was $61,000 in the first half of 2003, compared to $201,00 of funds used during the same period in 2002. Net cash provided in 2003 consisted of a $77,000 decrease in other assets offset by $16,000 of equipment purchases. In 2002, the use reflected property and equipment purchases ($94,000) and an increase in other assets ($107,000).

Net cash provided by financing activities was $1,815,000 in the first six months of 2003 compared to $3,395,000 provided during the same period a year ago.. Net cash in 2003 included $1,015,000 in six-month, non-convertible, secured promissory notes from SDS and $800,000 in notes with the same terms from North Sound. Proceeds in 2002 were from the issuance of a convertible promissory note and warrants to SDS in January of that year.

Effective August 22, 2002, the Company’s common stock was de-listed from the NASDAQ Small Cap Market (SM) for failing to comply with the $1.00 minimum bid price requirement. The common stock is now traded on the Over-The-Counter Bulletin Board under the stock symbol (VRTL.OB).

As a result of Vertel’s common stock being de-listed from The NASDAQ SmallCap Market, effective August 22, 2002, and the Company’s failure to maintain sufficient authorized shares and registering the necessary shares underlying the outstanding convertible secured promissory notes and warrants, the Company is in default under the terms of its outstanding convertible securities (First and Second Notes and Warrants) identified in Note 5 of Item 8: Financial Statements and Supplementary Data. As a consequence of such defaults, the holder of the notes and warrants could demand repayment of the notes at the prepayment price (115% of the principal outstanding), could convert the remaining principal on the notes (significantly diluting current shareholders), or exercise or otherwise enforce any one or more rights under the applicable agreements. As of the date of the date filing for this Quarterly Report, the note holders have not advised the Company that it is in default or taken any other remedial action.

The Company has reported operating losses for each of the most recent five fiscal years. For the six months ended June 30, 2003, Vertel reported operating losses of $3,639,000 and negative cash flows from operations of $2,559,000. For the twelve-month period ended December 31, 2002 the Company reported an operating loss of $14,429,000 and negative cash flows from operations of $6,607,000. As of June 30, 2003 the Company had an accumulated deficit of $101,567,000 and negative working capital of $5,803,000, including cash and cash equivalents of $233,000. Such results raise substantial doubt about Vertel’s ability to continue as a going concern.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)

During the second quarter of 2003 the Company received net proceeds of approximately $1,815,000 from non-convertible promissory notes (See Note 4). Proceeds from this transaction were used to fund operations during the second quarter. At the end of the first quarter of 2003, the Company also received net proceeds of $500,000 from non-convertible promissory notes that were reflected in the cash balance of $472,000 on March 31, 2003. During the first quarter of 2002, the Company received net proceeds of approximately $3,395,000 from the sale of a convertible secured promissory note and the issuance of a common stock warrant, and on August 13, 2002 received net proceeds of approximately $3,040,000 from the sale of a second convertible secured promissory note and the issuance of additional warrants (See Note 5). The Company used $1,500,000 of the proceeds of the second note to partially repay the first note. Substantially all of the remaining proceeds from these two transactions were used for operations during the course of 2002. As of December 31, 2002, the recorded balances remaining on these two Notes totaled $1,761,000. This amount is net of $3,012,000 in non-cash charges that are already reflected in the accompanying 2002 financial statements. The sum of these two amounts represents the total cash amount that would be necessary to satisfy the debt.

The inability thus far of the Company to generate sufficient revenues to offset expenses raises substantial doubt about Vertel’s ability to continue as a going concern and the Company may, therefore, be unable to realize assets and discharge liabilities in the normal course of business. The Company expects to continue to incur operating losses in the third quarter and currently spends about $2.3 million per quarter in expenses. Since the beginning of the year the Company has reduced the number of employees, from 61 to 31, and has taken additional steps to reduce expenses, including the closing of all facilities except the Los Angeles office in August, 2003. Nevertheless, the Company cannot assure sales targets will be met or that expense reduction programs will be sufficient to generate operating income. If operating income is not achieved and Vertel is not able to raise additional debt equity capital the Company may not be able to continue as a going concern.

Vertel’s financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the classification and amounts of liabilities that may become necessary in the event the Company is unable to continue as a going concern.

The Company’s long-term liquidity needs consist of obligations under convertible promissory notes and operating lease commitments related to facilities and office equipment. As of June 30, 2003, the Company had $3,782,000 of debt outstanding in the form of convertible promissory notes payable (See Note 4 to the Notes to Consolidated Financial Statements included in this quarterly report).

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Quantitative Information About Market Risk. Vertel’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio. The Company maintains an investment policy that ensures the safety and preservation of invested funds by limiting default risk, market risk and investment risk. As of June 30, 2003, the Company had $233,000 of cash and cash equivalents with a weighted average variable rate of 0.3%. There were no short-term investments. As of June 30, 2002, cash and cash equivalents were $714,000 with a weighted average variable rate of 0.36%. There were no short-term investments in either period.

At June 30, 2003 the Company had no long-term debt and short-term debt of $3,782,000 related to promissory notes payable to SDS Merchant Fund, LP and North Sound. A year earlier, the Company had $3,170,000 in long-term debt in the form of promissory notes payable to SDS and no short-term debt.

Qualitative Information About Market Risk. While consolidated financial statements are prepared in United States Dollars, a portion of Vertel’s worldwide operations have functional currencies other than the United States Dollar. In particular, the Company maintains operations in Germany, Korea, the Netherlands and Poland where the functional currencies are the Euro, Won, Euro and Zloty, respectively. Nevertheless, most revenues are denominated in the United States Dollar.

Fluctuations in exchange rates could result in exchange losses and may have a material adverse effect on Company results of operations. The impact of future exchange rate fluctuations cannot be predicted adequately. To date, exchange fluctuations have not had a material impact on earnings and the Company has not sought to hedge the risks associated with fluctuations in exchange rates, but may undertake such transactions in the future. The Company does not have a policy relating to hedging. There can be no assurance that any hedging techniques implemented by the Company would be successful or that results of operations will not be materially adversely affected by exchange rate fluctuations.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Vertel’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date within 90 days of the filing date of this quarterly report on Form 10-Q (the “Evaluation Date”)), have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this Form 10-Q was being prepared.

These facts notwithstanding, Vertel’s Chief Executive Officer and Chief Financial Officer do not expect the Company’s disclosure controls or internal controls will prevent all error and all fraud. The design of any control system is based partly on certain assumptions about the likelihood of future events and there can be no assurance that all future events have been anticipated. In addition, no matter how well conceived and operated a control system may be, it provide only reasonable, not absolute, assurance that system objectives are being met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur due to simple mistake or error. In addition, controls can be circumvented by individuals; can be subject to the collusion of two or more people; or by management decisions to override controls. Furthermore, the design of control systems must reflect the fact that there are resource constraints and the costs of controls must be considered relative to their respective benefits.

Changes In Internal Controls

There were no significant changes in internal controls or in other factors that could significantly affect disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Vertel is sometimes subject to certain legal proceedings and claims that arise in the normal conduct of business. Currently the Company is not a party to any material, pending legal proceeding nor is it aware of any that may arise that would have a material effect on the Company’s financial condition or results of operations.

Neither the Company nor any of its subsidiaries is a party to, nor is their property the subject of, any material pending legal proceeding. The Company may, from time to time, become a party to various legal proceedings arising in the normal course of its business.

In light of recent developments, the Company may find itself subject to legal proceedings, though none are expected to be material.

ITEM 2.

CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

See the Exhibit Index following this Report

(b) REPORTS ON FORM 8-K

The Company filed a Current Report on Form 8-K dated April 16, 2003 in connection with the raising of $210,000 in gross proceeds from the sale of four six-month term Secured Promissory Notes.

The Company filed a Current Report on Form 8-K dated May 5, 2003 in connection with the engagement of Singer, Lewak, Greenbaum and Goldstein, LLP (SLGG) as the Company’s independent public accountants. Concurrently, the Company announced the termination of its relationship with BDO Seidman, LLP.

The Company filed a Current Report on Form 8-K dated June 18, 2003 in connection with the appointment of Michael A. Sternberg as interim Chief Executive Officer following the resignation of Marc E. Maassen on June 15, 2003. Mr. Sternberg has served as a director of the Company since August 2002.

The Company filed a Current Report on Form 8-K dated August 10, 2003 wherein the Company announced the closing of all offices except Los Angeles and the suspension of sales activities. The Company intends to continue to support its existing installed customer base and will determine future operations in the next several months.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

			VERTEL CORPORATION (Registrant)
Date: August 13, 2003			/s/ T. JAMES RANNEY

			T. James Ranney Vice President, Finance and Administration, Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX

Exhibits included herein, numbered in accordance with Item 601 of Regulation S-K.

Number		Description

2.1		Agreement and Plan of Reorganization and Liquidation, dated May 30, 2001, by and between Vertel Corporation and Trigon Technology Group, Inc. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).

3.1		(and 4.1) Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, Commission File No. 000-19640).

3.2		(and 4.2) Bylaws of the Registrant, as amended to date (incorporated by reference to Exhibit 3.4 of the Registrant’s Annual Report on Form 10-K for the year ended December 27, 1997, Commission File No. 000-19640).

3.3		(and 4.1) Certificate of amendment to Registrant’s Articles of Incorporation, as filed with the California Secretary of State on April 7, 1998, changing the Company’s name to Vertel Corporation (incorporated by reference to Exhibit 3.5 of the Registrant’s Current Report on Form 8-K dated April 7, 1998, Commission File No. 000-19640).

3.4		(and 4.6) Preferred Shares Rights Agreement dated as of April 29, 1997 with Chase Mellon Shareholder Services, LLC (incorporated by reference to Exhibit 1 of the Registrant’s Registration Statement on Form 8-A filed on April 30, 1997, Commission File No. 000-19640).

4.3		Note and Warrant Purchase Agreement dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Fund, L.P. (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K dated August 31, 2001, Commission File No. 000-19640).

4.4		Form of $3,500,000 Convertible Promissory Note dated August 31, 2001 by and between SDS Merchant Fund, L.P. (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K dated August 31, 2001, Commission File No. 000-19640).

4.5		Warrant dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Fund, L.P. (incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K dated August 31, 2001, Commission File No. 000-19640).

10.1		Amended 1996 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.75 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).

10.2		Form of Option Agreement under 1996 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.75 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).

10.3		Amended 1998 Stock Option Plan (incorporated by reference to Exhibit 10.76 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).

10.4		Form of Option Agreement under 1998 Stock Option Plan (incorporated by reference to Exhibit 10.76 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).

10.5		Vertel Corporation 2000 Stock Option Plan (incorporated by reference to Exhibit 10.81 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, Commission File No. 000-19640).

10.6		2001 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 5.1 of the Registrant’s Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).


Number		Description

10.7		Form of Notice of Stock Option (incorporated by reference to Exhibit 5.2 of the Registrant’s Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).


10.8		Grant and Form of Stock Option Agreement with attached Notice of Exercise (incorporated by reference to Exhibit 5.3 of the Registrant’s Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).

10.9		Lease Agreement between the Registrant and Moorpark Associates, a California Limited Partnership, dated February 5, 1993 (incorporated by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form 10-K for the year ended January 2, 1993, Commission File No. 000-19640).

10.10		Lease Agreement between the Registrant and Nomura-Warner Center Associates, L.P., dated November 26, 1996 (incorporated by reference to Exhibit 10.48 of the Registrant’s Annual Report on Form 10-K for the year ended December 28, 1996, Commission File No. 000-19640).

10.11		Amendment dated August 14, 2002 to Lease Agreement between the Registrant and Nomura-Warner Center Associates, L.P., dated November 26, 1996 (incorporated by reference to Exhibit 10.11 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, Commission File No. 000-19640).

10.12		Form of Retention Agreement between the Company and each of its officers (incorporated by reference to Exhibit 10.68 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998, Commission File No. 000-19640).

10.13		Employment Agreement between the Company and Cyrus D. Irani dated January 12, 1999 (incorporated by reference to Exhibit 10.72 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).

10.14		Amendment No. 1, dated December 3, 1999 to the Employment Agreement between the Company and Cyrus D. Irani (incorporated by reference to Exhibit 10.80 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).

10.15		Employment Agreement between the Company and Stephen J. McDaniel dated November 1, 1999 (incorporated by reference to Exhibit 10.77 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).

10.16		Employment Agreement between the Company and Tonia G. Graham dated July 5, 2000 (incorporated by reference to Exhibit 10.82 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 000-19640).

10.17		Employment Agreement between the Company and Craig S. Scott dated December 1, 2000 (incorporated by reference to Exhibit 10.83 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 000-19640).

10.18		Employment Agreement between the Company and Alex Kuo dated May 30, 2001 (incorporated by reference to Exhibit 10.85 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Commission File No. 000-19640).

10.19		Retention and Severance Agreement between the Company and Alex Kuo dated May 30, 2001 (incorporated by reference to Exhibit 10.86 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Commission File No. 000-19640).

10.20		Non-Competition and Non-Disclosure Agreement between the Company and Alex Kuo dated May 30, 2001 (incorporated by reference to Exhibit 10.87 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Commission File No. 000-19640).

10.21		Form of Indemnification Agreement with the Company’s officers and directors (incorporated by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 000-19640).

Number		Description

10.22		Asset Purchase Agreement by and between the Company and PrismTech Limited dated November 27, 2002 (incorporated by reference to Exhibit 10.21 of the Registrant’s Current Report on Form 8-k dated December 31, 2002, Commission File No. 000-19640).

31.1		Certification of Chief Executive Officer of Registrant Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer of Registrant Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.2		Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Filing Compare · VERTEL CORP