SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   ----------

                                    FORM 10-Q

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

                For the quarterly period ended September 30, 1998
                           Commission File No. 0-23611

                                DSET Corporation
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

        New Jersey                                        22-3000022
-------------------------------             ------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)

1011 US Highway 22, Bridgewater, New Jersey                              08807
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                            (Zip Code)

                                 (908) 526-7500
                           ---------------------------
                         (Registrant's Telephone Number,
                              Including Area Code)

      Indicate by check mark whether the  registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

              Yes:   X                                 No:
                  -------                                 -------

      Indicate  the  number of shares  outstanding  of each of the  Registrant's
classes of common stock, as of October 30, 1998:

           Class                                          Number of Shares
           -----                                          ----------------

 Common Stock, no par value                                   9,749,555



<PAGE>


                                DSET CORPORATION

                                TABLE OF CONTENTS
                                -----------------


                                                                         Page
                                                                         ----

PART I.  FINANCIAL INFORMATION........................................     1

     Item 1. Financial Statements.....................................     1

           Consolidated Balance Sheets as of September 30,1998
             (unaudited) and December 31, 1997........................     2

           Consolidated Statements of Income for the Three Months
             Ended September 30, 1998 and 1997 (unaudited)............     3

           Consolidated Statements of Income for the Nine Months
             Ended September 30, 1998 and 1997 (unaudited)............     4

           Consolidated  Statements  of Cash Flows for the Nine
             Months Ended September 30, 1998 and 1997 (unaudited).....     5

           Notes to Consolidated Financial Statements (unaudited).....     6

      Item 2. Management's Discussion and Analysis of Financial
              Condition and Results of Operations.....................     10

           Results of Operations......................................     11

           Liquidity and Capital Resources............................     14

PART II. OTHER INFORMATION............................................     17

     Item 2.Changes in Securities and Use of Proceeds.................     17

     Item 6.Exhibits and Reports on Form 8-K..........................     18

SIGNATURES............................................................     19


                                      -i-

<PAGE>










                          PART I. FINANCIAL INFORMATION
                          -----------------------------

                          Item 1. Financial Statements










                                      -1-

<PAGE>


<TABLE>
<CAPTION>
                                              DSET Corporation
                                        Consolidated Balance Sheets


                                                                        September 30, 1998   December 31, 1997
                                                                        ------------------   -----------------
                     Assets                                                (unaudited)
<S>                                                                       <C>                 <C>         
 Current assets:
   Cash and cash equivalents .....................................        $  4,533,340        $  2,081,846
   Marketable securities .........................................          40,381,469           1,123,795
   Accounts receivable, net of allowance for doubtful accounts
     of $122,130 and $125,504 ....................................           6,872,642           7,564,442
   Deferred income taxes .........................................             158,681             158,681
   Prepaid expenses and other current assets .....................              70,229             243,883
                                                                          ------------        ------------
     Total current assets ........................................          52,016,361          11,172,647
Fixed assets, net ................................................           1,684,099           1,560,948
Goodwill, net ....................................................             139,366             167,873
Other assets .....................................................             433,611             413,760
                                                                          ------------        ------------

     Total assets ................................................        $ 54,273,437        $ 13,315,228
                                                                          ============        ============
          Liabilities, Cumulative Redeemable Convertible Preferred
                  Stock and Shareholders' Equity (Deficit)
Current liabilities:
   Accounts payable and accrued expenses .........................        $  3,345,679        $  2,779,954
   Note payable ..................................................             166,657             220,000
   Income taxes payable ..........................................             600,250                --
   Deferred revenues .............................................           1,587,338           1,897,039
                                                                          ------------        ------------
     Total current liabilities ...................................           5,699,924           4,896,993
Deferred income taxes ............................................             103,714             103,714
Note payable .....................................................                --               111,657
                                                                          ------------        ------------

     Total liabilities ...........................................           5,803,638           5,112,364
                                                                          ------------        ------------
Commitments
Series A cumulative redeemable convertible preferred stock, no
   par value; 750,000 shares authorized, no shares issued or
   outstanding at September 30, 1998; 676,361 shares issued
   and outstanding at December 31, 1997; cumulative accrued
   and undeclared dividends of $1,680,859 at Dec. 31, 1997 .......                --            11,603,996
                                                                          ------------        ------------
Shareholders' equity (deficit):
Preferred stock, no par value; 5,000,000 shares authorized,
   none issued or outstanding at September 30, 1998 or
   December 31, 1997 .............................................                --                  --
Common stock, no par value; authorized 40,000,000 shares,
   9,658,534 and 6,775,092 shares issued at September 30,
   1998 and December 31, 1997, respectively ......................          41,190,246           2,537,806
Deferred stock compensation ......................................            (629,633)           (875,835)
Retained earnings ................................................           7,823,568           4,936,894
Unrealized appreciation on investments ...........................              85,618                --
Treasury stock, no shares and 3,043,625 shares of common
   stock at cost at September 30, 1998 and December 31, 1997,
   respectively ..................................................                --            (9,999,997)
                                                                          ------------        ------------
     Total shareholders' equity (deficit) ........................          48,469,799          (3,401,132)
                                                                          ------------        ------------

     Total liabilities, cumulative redeemable convertible
       preferred stock and shareholders' equity (deficit) ........        $ 54,273,437        $ 13,315,228
                                                                          ============        ============

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

                                                    -2-
</TABLE>
<PAGE>


<TABLE>
<CAPTION>
                                  DSET Corporation
                         Consolidated Statements of Income
                                    (unaudited)


                                                  Three Months Ended September 30,
                                                  --------------------------------

                                                          1998           1997
                                                       -----------     -----------
<S>                                                    <C>             <C>        
Revenues:
   License revenues ................................   $ 3,706,650     $ 2,654,354
   Service revenues ................................     4,115,359       2,534,572
                                                       -----------     -----------
      Total revenues ...............................     7,822,009       5,188,926
                                                       -----------     -----------

Cost of revenues:
   License revenues ................................       392,599         374,946
   Service revenues ................................     1,220,544       1,116,882
                                                       -----------     -----------
      Total cost of revenues .......................     1,613,143       1,491,828
                                                       -----------     -----------
     Gross profit ..................................     6,208,866       3,697,098
                                                       -----------     -----------

Operating expenses:
   Sales and marketing .............................     2,296,794       1,285,639
   Research and product development ................     1,496,261         754,205
   General and administrative ......................       600,391         706,988
                                                       -----------     -----------
      Total operating expenses .....................     4,393,446       2,746,832
                                                       -----------     -----------

     Operating income ..............................     1,815,420         950,266
Interest income and other income/expenses, net .....       577,902          33,893
                                                       -----------     -----------
Income before income taxes .........................     2,393,322         984,159
Provision for income taxes .........................       849,399         323,909
                                                       -----------     -----------
Net income .........................................     1,543,923         660,250
Less:  accrued preferred stock dividends ...........          --           214,889
                                                       -----------     -----------
Net income applicable to common shares .............   $ 1,543,923     $   445,361
                                                       ===========     ===========

Net income per common share ........................   $      0.16     $      0.12
                                                       ===========     ===========
Weighted average number of common shares ...........     9,556,439       3,611,117
   outstanding .....................................    ==========      ==========

Net income per common share assuming dilution ......   $      0.13     $      0.08
                                                       ===========     ===========
Weighted average number of common shares and
   common equivalent shares outstanding ............    11,451,547       8,358,073
                                                       ===========     ===========

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

                                        -3-
</TABLE>
<PAGE>


<TABLE>
<CAPTION>
                                DSET Corporation
                        Consolidated Statements of Income
                                   (unaudited)


                                                      Nine Months Ended September 30,
                                                      -------------------------------

                                                           1998               1997
                                                       -----------        -----------
<S>                                                    <C>                <C>        
Revenues:
   License revenues ................................   $ 9,923,234        $ 6,659,852
   Service revenues ................................    10,161,077          6,761,345
                                                       -----------        -----------
      Total revenues ...............................    20,084,311         13,421,197
                                                       -----------        -----------

Cost of revenues:
   License revenues ................................     1,147,305            964,259
   Service revenues ................................     2,854,423          2,632,319
                                                       -----------        -----------
      Total cost of revenues .......................     4,001,728          3,596,578
                                                       -----------        -----------
     Gross profit ..................................    16,082,583          9,824,619
                                                       -----------        -----------

Operating expenses:
   Sales and marketing .............................     6,392,672          3,261,130
   Research and product development ................     4,596,538          2,238,868
   General and administrative ......................     1,777,144          1,944,539
                                                       -----------        -----------
      Total operating expenses .....................    12,766,354          7,444,537
                                                       -----------        -----------

     Operating income ..............................     3,316,229          2,380,082
Interest income and other income/expenses, net .....     1,203,301             76,348
                                                       -----------        -----------
Income before income taxes .........................     4,519,530          2,456,430
Provision for income taxes .........................     1,632,856            809,756
                                                       -----------        -----------
Net income .........................................     2,886,674          1,646,674
Less:  accrued preferred stock dividends ...........          --              644,666
                                                       -----------        -----------
Net income applicable to common shares .............   $ 2,886,674        $ 1,002,008
                                                       ===========        ===========

Net income per common share ........................   $      0.33        $      0.28
                                                       ===========        ===========
Weighted average number of common shares
   outstanding .....................................     8,757,044          3,517,993
                                                       ===========        ===========

Net income per common share assuming dilution ......   $      0.26        $      0.20
                                                       ===========        ===========
Weighted average number of common shares and
   common equivalent shares outstanding ............    10,912,984          8,121,713
                                                       ===========        ===========

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

                                       -4-
</TABLE>
<PAGE>


<TABLE>
<CAPTION>
                                        DSET Corporation
                              Consolidated Statements of Cash Flows
                                           (unaudited)


                                                                Nine Months Ended September 30,
                                                                -------------------------------
                                                                       1998             1997
                                                                  ------------     ------------

<S>                                                               <C>              <C>         
Cash flows from operating activities:
   Net income .................................................   $  2,886,674     $  1,646,674
   Adjustments to reconcile net income to net
     cash provided by operating activities:
      Tax benefit from exercise of stock options ..............        525,285           93,569
      Depreciation ............................................        350,062          289,944
      Amortization ............................................         28,507          112,274
      Gain (loss) on disposal of assets .......................         (1,716)            --
      Deferred stock compensation .............................        246,202             --
      Loss from joint venture .................................         18,892             --
      Changes in assets and liabilities:
        Accounts receivable ...................................        691,800       (2,263,149)
        Other assets ..........................................        (38,401)         (86,079)
        Accounts payable and accrued expenses .................        565,724        1,552,204
        Income taxes payable ..................................        673,565          (36,679)
        Deferred revenues .....................................       (309,702)          (8,222)
                                                                  ------------     ------------
         Net cash provided by operating activities ............      5,636,892        1,300,536
                                                                  ------------     ------------
Cash flows from investing activities:
   Loan repayment by officers and shareholders ................        100,000         (150,000)
   Purchases of marketable securities .........................    (82,323,988)      (1,080,768)
   Redemption of marketable securities ........................     43,151,932          716,267
   Acquisition of fixed assets ................................       (474,556)        (588,456)
       Proceeds from disposition of fixed assets ..............          3,059             --
   Note repayments ............................................       (165,000)         (55,000)
   Investment in joint venture ................................           --           (243,266)
                                                                  ------------     ------------
         Net cash used in investing activities ................    (39,708,553)      (1,401,223)
Cash flows from financing activities:
   Proceeds from the issuance of common stock, net ............     36,082,626             --
   Proceeds from exercise of stock options ....................        440,529          214,542
                                                                  ------------     ------------
         Net cash provided by financing activities.............     36,523,155          214,542
                                                                  ------------     ------------
         Net increase in cash and cash equivalents ............      2,451,494          113,855
Cash and cash equivalents, beginning of period ................      2,081,846          784,086
                                                                  ------------     ------------
Cash and cash equivalents, end of period ......................   $  4,533,340     $    897,941
                                                                  ============     ============
Supplemental disclosure of cash flow information:
   Cash paid during the period for income taxes ...............   $    499,394     $    752,868
   Cash paid during the period for interest ...................         10,378            7,604
Non-cash activities:
   Accrued dividends on Series A preferred stock ..............   $       --       $    644,666
   Conversion of Series A preferred stock to
     common stock .............................................     11,603,996             --
   Note issued for purchase of net assets of
     Marben Products, Inc. ....................................           --            441,657

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

                                               -5-
</TABLE>
<PAGE>


                                DSET CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 1 -- Basis of Presentation:

      The  information  presented as of September 30, 1998 and 1997, and for the
three-month and nine-month periods then ended, is unaudited, but, in the opinion
of DSET Corporation's  (the "Company")  management,  the accompanying  unaudited
financial  statements  contain  all  adjustments   (consisting  only  of  normal
recurring  adjustments)  which  the  Company  considers  necessary  for the fair
presentation  of the Company's  financial  position as of September 30, 1998 and
the  results  of its  operations  and its cash  flows  for the  three-month  and
nine-month  periods ended September 30, 1998 and 1997. The financial  statements
included  herein  have been  prepared  in  accordance  with  generally  accepted
accounting  principles  and the  instructions  to Form  10-Q and  Rule  10-01 of
Regulation  S-X.  Accordingly,  certain  information  and  footnote  disclosures
normally included in financial  statements prepared in accordance with generally
accepted accounting  principles have been condensed or omitted.  These financial
statements  should be read in conjunction with the Company's  audited  financial
statements for the year ended December 31, 1997,  which were included as part of
the Company's  Registration  Statement on Form S-1 (Registration No. 333-43827),
as  declared   effective  by  the  Securities  and  Exchange   Commission   (the
"Commission") on March 12, 1998.

      Results for the interim period are not  necessarily  indicative of results
that may be expected for the entire year. Certain prior period amounts have been
reclassified for comparative purposes.


Note 2 -- Summary of Significant Accounting Policies:

      Cash and Cash Equivalents

      The Company  considers  all highly  liquid  investments  purchased  with a
maturity of three months or less to be cash equivalents.

      Marketable Securities

      The marketable securities portfolio held by the Company consists primarily
of short-term  securities of grade A2 or better with  maturities of two years or
less which are  considered to be available for sale  securities and are reported
at cost.  Unrealized  appreciation  on investments  was $85,618 at September 30,
1998 and none for 1997.

      Capitalized Software Development Costs

      Capitalization   of  costs  begins  on   establishment   of  technological
feasibility.  Costs incurred prior to establishment of technological feasibility
are charged to research and product 

                                      -6-

<PAGE>


development  expense.  The ongoing  assessment of  recoverability of capitalized
costs  requires  considerable  judgment by  management  with  respect to certain
factors including the anticipated future gross revenue,  estimated economic life
and changes in technology.  These factors are considered on a product-by-product
basis.

      Amortization  of  capitalized   software  costs  is  calculated   using  a
straight-line  method over the estimated  useful life of the respective  product
(five years).  Amortization  expense  related to capitalized  software costs was
approximately $-0- and $104,637 for the nine months ended September 30, 1998 and
1997,  respectively.  Amortization expense for the three months ending September
30, 1998 and 1997 was approximately $-0- and $30,057, respectively.

      Revenue Recognition

      License  revenues are recorded when the software has been delivered to the
Company's  licensees  and  all  significant  obligations  have  been  satisfied.
Revenues from run-time  licenses are recognized as equipment using the Company's
software is deployed by the Company's customers. Service revenues are recognized
over the period in which the service is  performed  based on the  percentage  of
direct  labor  costs  incurred  to the  total  costs  estimated.  Revenues  from
maintenance  contracts  are  deferred  and  recognized  over  the  term  of  the
respective contracts (typically twelve months).

      Income Taxes

      The  Company  utilizes  an  asset  and  liability  approach  to  financial
reporting  for income  taxes.  Deferred  income tax assets and  liabilities  are
computed annually for differences  between the financial statement and tax basis
of assets and liabilities  that will result in taxable or deductible  amounts in
the  future,  based on enacted  tax laws and rates  applicable  to the period in
which  the  differences  are  expected  to  affect  taxable  income.   Valuation
allowances are established, when necessary, to reduce the deferred tax assets to
the amount expected to be realized.

      Fair Value of Financial Instruments

      The  carrying  amounts  in the  financial  statements  for  cash  and cash
equivalents,  marketable securities,  accounts receivable,  and accounts payable
and  accrued  expenses  approximate  their  market  value  because  of the short
maturity of those instruments.

      Recently Issued Accounting Standards

      In June 1997, the Financial  Accounting Standards Board issued Statement
No. 130,  "Reporting  Comprehensive  Income"  ("SFAS No.  130").  SFAS No. 130
applies to all  companies and is effective  for fiscal years  beginning  after
December 15, 1997.  SFAS No. 130  establishes  standards for the reporting and
display  of   comprehensive   income  in  a  set  of   financial   statements.
Comprehensive  income is  defined  as the  change in net  assets of a business
enterprise  during  a  period  from  transactions   generated  from  non-owner
sources.  It  includes  all  changes in equity  

                                      -7-

<PAGE>

during  a  period  except  those  resulting  from   investments  by  owners  and
distributions to owners.  Management  believes that the adoption of SFAS No. 130
has not had a material impact on the financial statements.

      In June 1997, the Financial  Accounting  Standards Board issued  Statement
No. 131  "Disclosures  about Segments of an Enterprise and Related  Information"
("SFAS No. 131").  SFAS No. 131 applies to all public companies and is effective
for fiscal years  beginning  after December 15, 1997. SFAS No. 131 requires that
business segment financial  information be reported in the financial  statements
utilizing the management  approach.  The  management  approach is defined as the
manner in which  management  organizes the segments  within the  enterprise  for
making operating decisions and assessing  performance.  The Company has only one
operating   segment  -  providing   software   products   and  services  to  the
telecommunications  industry.  Management  believes the adoption of SFAS No. 131
has not had a material impact on the financial statements.

      On  June  15,  1998,  the  Financial  Accounting  Standards  Board  issued
Statement of Financial  Accounting Standards No. 133 "Accounting for Derivatives
and Hedging  Activities"  ("SFAS No.  133").  SFAS No. 133 is effective  for all
fiscal  quarters of all fiscal years  beginning  after June 15, 1999 (January 1,
2000 for the Company).  SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value.  Changes in the fair value of
derivatives are recorded each period in current earnings or other  comprehensive
income,  depending  on whether a  derivative  is  designated  as part of a hedge
transaction  and,  if it is, the type of hedge  transaction.  Management  of the
Company anticipates that, due to its limited use of derivative instruments,  the
adoption  of SFAS No. 133 will not have a  significant  effect on the  Company's
results of operations or its financial position.

      In October 1997, the American  Institute of Certified  Public  Accountants
issued  Statement of Position 97-2,  "Software  Revenue  Recognition,"  which is
effective for transactions entered into in fiscal years beginning after December
15,  1997.  The  Statement  of Position  governs the  recognition  of revenue by
enterprises that license, sell, lease or otherwise market software, except where
software is  incidental  to the products or services  being  offered as a whole.
Application of this  Statement of Position has not had a material  impact on the
financial statements.


Note 3 -- Initial Public Offering:

      On March 18, 1998, the Company  consummated an initial public  offering of
3,500,000  shares of its  Common  Stock at a price to the  public of $16.00  per
share,  of which  2,500,000  shares  were  issued  and sold by the  Company  and
1,000,000 shares were sold by certain  shareholders of the Company (the "Selling
Shareholders").  The  net  proceeds  to  the  Company  from  the  offering  were
approximately $36.1 million. On April 7, 1998, certain Selling Shareholders sold
an additional  525,000  shares of the  Company's  Common Stock at a price to the
public  of  $16.00  per  share  upon the  consummation  of the  exercise  of the
Underwriters'  over-allotment  option.  The  Company  did not receive any of the
proceeds from the sale of shares by the Selling Shareholders.

                                      -8-

<PAGE>


      The net proceeds  received by the Company upon the  consummation of such
offering,   pending   specific   application,   are  invested  in  short-term,
investment-grade,  interest-bearing  instruments.  See  "Item 2.  Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations
-- Liquidity and Capital Resources."


Note 4 -- Cumulative Redeemable Convertible Preferred Stock:

      In  December  1995,  the  Company  issued  676,361  shares of  cumulative,
convertible Series A Preferred Stock. Upon consummation of the Company's initial
public  offering,  the  shares of Series A  Preferred  Stock  converted  into an
aggregate of 3,043,625 shares of the Company's Common Stock.


Note 5 -- Earnings Per Share

      In February  1997,  the FASB issued  SFAS No.  128,  "Earnings  Per Share"
(EPS), which specifies the computation, presentation and disclosure requirements
for earnings per share of entities with publicly held company stock or potential
common stock. The statement defines two earnings per share  calculations,  basic
and  diluted.  The  objective of basic EPS is to measure the  performance  of an
entity over the reporting period by dividing income available to common stock by
the  weighted  average  shares  outstanding.  The  objective  of diluted  EPS is
consistent  with that of basic EPS,  that is to measure  the  performance  of an
entity over the reporting period,  while giving effect to all dilutive potential
common  shares that were  outstanding  during the  period.  The  calculation  of
diluted EPS is similar to basic EPS except both the  numerator  and  denominator
are increased for the conversion of potential common shares. The following table
is a reconciliation of the numerator and denominator under each method:

                                                 For the three months ended
                                                     September 30, 1998
                                             -----------------------------------
                                                                       Per Share
                                                Income       Shares     Amount
                                             -----------    ---------  ---------
Basic EPS:
Net income applicable to common shares ....  $ 1,543,923    9,556,439     $0.16

Assuming dilution:
Net income applicable to common shares:
    Warrants ..............................         --        154,634
    Stock options .........................         --      1,740,474
                                             -----------  -----------
                                             $ 1,543,923   11,451,547     $0.13
                                             ===========  ===========


                                                 For the nine months ended
                                                     September 30, 1998
                                             -----------------------------------
                                                                       Per Share
                                                Income       Shares     Amount
                                             -----------    ---------  ---------
Basic EPS:
Net income applicable to common shares ....  $ 2,886,674    8,757,044     $0.33

Assuming dilution:
Net income applicable to common shares:
    Warrants ..............................         --        157,484
    Stock options .........................         --      1,998,456
                                             -----------  -----------
                                             $ 2,886,674   10,912,984     $0.26
                                             ===========  ===========

                                      -9-

<PAGE>


Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations.


General

      DSET designs, develops,  markets and supports standards-based  application
development  tools,  custom  application  development  services,   Local  Number
Portability Solutions and OSS Gateway products for the global telecommunications
industry.  From its  founding in 1989,  the  Company has focused on  distributed
concurrent  object  technology  and the creation of  applications  that could be
distributed among many processors. Additionally, the Company developed extensive
knowledge of requirements for multiple protocols and multi-vendor communications
as well as real time operating systems.  In the early 1990's, the Company made a
strategic  decision to focus on  creating  suites of tools that  facilitate  the
development of solutions based upon the  Telecommunications  Management  Network
("TMN") standard.  Substantially all of the Company's revenues to date have been
derived from application  development tools and services based on TMN standards.
The Company's success will depend on continued growth in the market for advanced
telecommunications products and services.

      The Company had one customer which  accounted for 18.3% of revenue for the
three months ended  September  30, 1998 and three  significant  customers  which
accounted  for in the  aggregate  41.9% of total  revenues  for the three months
ended  September 30, 1997.  For the nine months ended  September  30, 1998,  the
Company had one significant customer which accounted for 16.8% of revenues;  and
for the  nine  months  ended  September  30,  1997,  two  significant  customers
accounted for in the aggregate 26.7% of total revenues.  The Company anticipates
that its results of  operations in any given period will continue to depend to a
significant  extent upon sales to a small  number of  customers.  As a result of
this customer concentration,  the Company's revenues from quarter to quarter and
business,  financial  condition  and  results  of  operations  may be subject to
substantial period-to-period fluctuations.

      The  Company   derives  a   significant   portion  of  its  revenues  from
international  sales  which  constituted  approximately  9.5%  and  30.2% of the
Company's  total  revenues in the quarters  ended  September  30, 1998 and 1997,
respectively.  For the nine months ended  September  30, 1998 and 1997,  foreign
sales  accounted  for 19.4% and 29.8% of revenues,  respectively.  The Company's
international sales currently are United States dollar-denominated. As a result,
an  increase  in the value of the  United  States  dollar  relative  to  foreign
currencies  could make the Company's  products and services less  competitive in
international markets.

      Statements  contained  in this Form 10-Q that are not based on  historical
fact are  "forward-looking  statements" within the meaning of Section 21E of the
Securities   Exchange   Act  of  1934,   as  amended   (the   "Exchange   Act").
Forward-looking  statements  may be  identified  by the  use of  forward-looking
terminology  such  as  "may,"  "will,"   "expect,"   "estimate,"   "anticipate,"
"continue," or similar terms,  variations of such terms or the negative of those
terms.  In  particular,  the  Company's  statements  relating  to the Year  2000
compliance of its products and internal  systems are forward looking  statements
intended to qualify  for the safe harbor  provided  

                                      -10-

<PAGE>


by  the  Exchange  Act.  Such  forward-looking   statements  involve  risks  and
uncertainties,  including,  but not limited to: (i) the Company's  dependence on
the rapidly evolving telecommunications  industry, (ii) the Company's dependence
on the TMN industry standard,  (iii) rapid technological change in the Company's
industry,  (iv) risks  associated  with the  development  and  marketing  of new
products, including carrier-to-carrier  applications (e.g., LNP or OSS Gateways)
and (v) risks and variables,  including  engineering costs,  associated with the
remediation  of  certain  of the  Company's  products  which  are not Year  2000
compliant.  The success of the Company  depends to a large degree upon increased
utilization of its application development tools, custom application development
services and  carrier-to-carrier  applications  (e.g.,  LNP or OSS  Gateways) by
telecommunications  carriers and network equipment vendors.  As a result of such
risks and others  expressed from time to time in the Company's  filings with the
Commission,  the Company's actual results may differ materially from the results
discussed in or implied by the forward-looking statements contained herein.


Results of Operations

Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997

      Revenues.  Total  revenues  increased  50.7% to $7.8  million in the third
quarter of 1998 from $5.2 million in the third quarter of 1997. License revenues
increased  39.6% to $3.7 million in the third  quarter of 1998 from $2.7 million
in the third quarter of 1997.  This increase was  primarily  attributable  to an
increased  demand  for the  Company's  TMN-based  agent  tools,  recognition  of
run-time royalties, and to a lesser extent, licenses associated with OSS Gateway
products.  Service revenues increased 62.4% to $4.1 million in the third quarter
of 1998 from $2.5  million  in the third  quarter  of 1997.  This  increase  was
primarily  attributable to custom application  development  projects,  fees from
consulting  services and training  courses,  and new  customers  purchasing  the
Company's new GR-303  solution,  which includes custom  application  development
work. In the quarters  ended  September 30, 1998 and 1997,  the Company  derived
approximately 47.4% and 51.2%, respectively,  of its total revenues from license
revenues and approximately 52.6% and 48.8%, respectively,  of its total revenues
from service revenues.

      Gross profit.  The Company's gross profit  increased 67.9% to $6.2 million
in the third  quarter of 1998 from $3.7  million  in the third  quarter of 1997.
Gross  profit  percentage  increased  to 79.4% of total  revenues  in the  third
quarter of 1998 from 71.2% in the third quarter of 1997. Gross profit percentage
for license revenues increased to 89.4% for the third quarter of 1998 from 85.9%
for the  comparable  1997 period due to less third party software as a component
of sales.  Gross profit percentage for service revenue increased to 70.3% in the
third quarter of 1998 from 55.9% in the third quarter of 1997. This increase was
attributable to higher margins  associated with  consulting  services,  training
revenues,  an  increase in the  average  billing  rate,  higher  utilization  of
personnel  resources and the new GR-303 solutions purchased by network equipment
vendors.

      Sales and marketing expenses. Sales and marketing expenses increased 78.6%
to $2.3  million  in the third  quarter  of 1998 from $1.3  million in the third
quarter of 1997,  and 

                                      -11-

<PAGE>


increased to 29.3% of total  revenues in the third quarter of 1998 from 24.8% of
total  revenue  inthe third  quarter of 1997.  This  increase as a percentage of
sales is  primarily  attributable  to  increased  personnel  and  related  costs
resulting  from the  increase  in the  Company's  sales  force  and an  expanded
marketing  department as well as higher  variable  expenses such as  commissions
related to higher sales.

      Research   and  product   development   expenses.   Research  and  product
development  expenses  increased  98.4% to $1.5 million in the third  quarter of
1998 from  $754,000 in the third  quarter of 1997,  and  increased to 19.1% from
14.5% of total revenues over the respective  periods.  This increase in research
and product development expenses both in absolute dollars and as a percentage of
revenues was due primarily to additional  personnel expenses  attributable to an
increase  in  staffing  and  an  expansion  in  the  number  of  projects  under
development.

      General and administrative  expenses.  General and administrative expenses
decreased  15.1% to $600,000 in the third  quarter of 1998 from  $707,000 in the
third quarter of 1997,  and  decreased to 7.7% from 13.6% of total  revenues for
the respective periods.  The decrease of general and administrative  expenses in
the third quarter of 1998 as compared to the corresponding period in 1997 is due
to the transition of the Company's Chief Technical  Officer from  administrative
functions to technical functions, and significantly lower recruiting costs.

      Interest  income and other  income/expenses,  net. Net interest income and
other  income/expenses  increased  to  $578,000  for the third  quarter  of 1998
compared to $34,000 for the third  quarter of 1997.  This increase was primarily
due to higher  balances in cash and  short-term  investments  as a result of the
Company's initial public offering of its Common Stock in March 1998.

      Income  taxes.  The  Company's  effective tax rate was 35.5% and 32.9% for
each of the  quarters  ended  September  30, 1998 and 1997,  respectively.  Such
effective  tax rates were lower than the  statutory  tax rates due  primarily to
research and development  tax credits.  The increase in 1998 is partially due to
the  non-deductible  nature of deferred stock  compensation  associated with the
issuance  of stock  options  and the  effect on tax rate  associated  with doing
business in Chengdu, China.

Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997

      Revenues.  Total  revenues  increased  49.6% to $20.1 million for the nine
months ending  September 30, 1998 from $13.4 million in the first nine months of
1997.  License  revenues  increased  49.0% to $9.9  million  for the nine months
ending  September  30, 1998 from $6.7  million in the first nine months of 1997.
This  increase  was  primarily  attributable  to an  increased  demand  for  the
Company's  TMN-based  agent  tools and  increased  run-time  royalties.  Service
revenues  increased 50.3% to $10.2 million for the nine months ending  September
30, 1998 from $6.8  million in the first nine months  1997.  This  increase  was
primarily attributable to professional services projects and an increase in fees
from  consulting  services  and  training  courses.  In the  nine  months  ended
September 30, 1998 and 1997, the Company derived

                                      -12-

<PAGE>

approximately 49.4% and 49.6%, respectively,  of its total revenues from license
revenues and approximately 50.6% and 50.4%, respectively,  of its total revenues
from service revenues.

      Gross profit.  The Company's gross profit increased 63.7% to $16.1 million
for the nine months  ending  September  30, 1998 from $9.8  million in the first
nine  months  of  1997.  Gross  profit  percentage  increased  to 80.1% of total
revenues for the nine months  ending  September 30, 1998 from 73.2% in the first
nine months of 1997. Gross profit  percentage for license revenues  increased to
88.4% for the first  nine  months of 1998  from  85.5% for the  comparable  1997
period.  This increase was  attributable  to the slightly  better margins on the
sale of tools due to less third party  software as a component  of sales.  Gross
profit  percentage  for service  revenue  increased to 71.9% for the nine months
ended  September  30,  1998 from  61.1% in the first nine  months of 1997.  This
increase  was  attributable  to higher  margins  and  utilization  of  personnel
associated with consulting services, training revenues and maintenance.

      Sales and marketing expenses. Sales and marketing expenses increased 96.0%
to $6.4 million for the nine months ending  September 30, 1998 from $3.3 million
in the first nine months of 1997,  and increased to 31.8% of total  revenues for
the nine months  ending  September  30, 1998 from 24.3% of total  revenue in the
first nine months of 1997. This increase was primarily attributable to increased
personnel and related costs  resulting from the increase in the Company's  sales
force and an expanded  marketing  department as well as higher  variable  costs,
such as commissions, associated with higher sales.

      Research   and  product   development   expenses.   Research  and  product
development expenses increased 105.3% to $4.6 million for the nine months ending
September  30,  1998 from $2.2  million  in the first nine  months of 1997,  and
increased to 22.9% from 16.7% of total  revenues  over the  respective  periods.
This  increase in research  and product  development  expenses  both in absolute
dollars  and as a  percentage  of  revenues  was  due  primarily  to  additional
personnel  expenses  attributable to an increase in staffing and an expansion in
the number of projects under development.

     General and administrative  expenses.  General and administrative  expenses
decreased  8.6% to $1.8 million for the nine months  ending  September  30, 1998
from $1.9 million in the first nine months of 1997,  and  decreased to 8.8% from
14.5% of total revenues for the respective periods. The reduction of general and
administrative  expenses  for the  nine  months  ending  September  30,  1998 as
compared to the corresponding  period in 1997 was due to the non-recurring  cost
of hiring two executives in 1997.  Further reduction of these expenses is due to
the  transition of the Company's  Chief  Technical  Officer from  administrative
functions to technical functions.

      Interest  income and other  income/expenses,  net. Net interest income and
other income/expenses  increased to $1,203,000 for the first nine months of 1998
compared  to  $76,000  for the first  nine  months of 1997.  This  increase  was
primarily due to higher balances in cash and short-term  investments as a result
of the Company's initial public offering of its Common Stock in March 1998.


                                      -13-

<PAGE>


     Income taxes. The Company's effective tax rate was 36.1% and 33.0% for each
of the nine  months  ended  September  30,  1998 and  1997,  respectively.  Such
effective  tax rates were lower than the  statutory  tax rates due  primarily to
research  and  development  tax  credits.  The rate is higher in 1998 due to the
non-deductibility of deferred stock compensation associated with the issuance of
stock options.

Liquidity and Capital Resources

      Since its  inception  in 1989,  the Company has  financed  its  operations
primarily through cash generated by operations and cash raised through its March
1998 initial public  offering.  At September 30, 1998, the Company's  cash, cash
equivalents and marketable securities aggregated approximately $44.9 million, of
which cash and cash  equivalents  aggregated  approximately  $4.5  million.  The
Company's working capital was $46.3 million at September 30, 1998.

      Accounts  receivable  decreased to $6.9 million at September 30, 1998 from
$7.6 million at December 31, 1997 primarily as a result of increased  collection
efforts on aged accounts and more aggressively  negotiated  progress payments on
services contracts.

      The Company bills its  customers,  several of which are based in Korea and
Japan, in U.S.  dollars at agreed-upon  contractual  terms.  The Company has not
experienced any significant negative effects on its liquidity as a result of the
volatility and devaluation trends that recently have been experienced in certain
Asian  markets,  although no  assurance  can be made that the  Company  will not
experience  difficulty collecting accounts receivable from such customers in the
future.  Accounts  receivable  at  September  30,  1998  includes  approximately
$456,000 from customers in this region.

      The  Company's  capital  expenditures  were  approximately   $475,000  and
$588,000 for the nine months ended  September  30, 1998 and 1997,  respectively.
Although   the   Company    anticipates   higher   levels   of   equipment   and
facilities-related   expenditures  in  the  foreseeable   future,   such  future
expenditures are not anticipated to be  significantly  higher as a percentage of
total revenues as compared to prior periods.

      In August  1997,  the  Company  obtained  an  unsecured  revolving  credit
facility with a bank pursuant to which the Company may borrow up to a maximum of
$3.0 million.  Borrowings  under this line of credit bear interest at the bank's
prime rate less 0.25% on amounts  outstanding  of less than $1.0  million and at
the bank's prime rate for aggregate principal amounts exceeding $1.0 million. No
borrowings  under this line were  outstanding  as of September  30,  1998.  This
credit facility  contains,  among other provisions,  covenants which (i) mandate
the amount of working  capital  the  Company  must  maintain  at the end of each
calendar quarter and (ii) restrict the Company's ability to pay cash dividends.

      On March 18, 1998, the Company  consummated an initial public  offering of
3,500,000  shares of its  Common  Stock at a price to the  public of $16.00  per
share,  of which  2,500,000  shares  were  issued  and sold by the  Company  and
1,000,000 shares were sold by certain Selling Shareholders.  The net proceeds to
the Company from the offering  were  approximately

                                      -14-

<PAGE>


$36.1 million. On April 7, 1998, certain Selling Shareholders sold an additional
525,000 shares of the Company's  Common Stock at a price to the public of $16.00
per  share  upon  the   consummationof   the   exercise  of  the   Underwriters'
over-allotment  option. The Company did not receive any of the proceeds from the
sale of shares by the Selling Shareholders.

      The net  proceeds  received by the Company upon the  consummation  of such
offering,   pending   specific   application,   were  invested  in   short-term,
investment-grade, interest-bearing instruments.

      The Company believes that its existing available cash, credit facility and
the cash flow  expected  to be  generated  from  operations,  together  with the
proceeds  from its  initial  public  offering,  will be  adequate to satisfy its
current and planned operations for at least the next 12 months.  There can be no
assurance, however, that the Company will not require additional financing prior
to such time to fund its operations or possible acquisitions.

Year 2000 Compliance

     The  Company  believes  that it has  sufficiently  assessed  its  state  of
readiness  with  respect  to the Year 2000  compliance  of its tool  suites  and
internal computer and management  information systems. In addition,  the Company
continually reviews and monitors its products and custom application development
deliverables for Year 2000 compliance.  The Company  generally  warrants and has
represented to its customers that its products are free from Year 2000 defects.

      In 1997,  the  Company  conducted  a Year  2000  compliance  review of its
products and  determined  that one component of its tool suites  (version  ASN.C
sold prior to May 1997) was unable to interpret four digits,  including the year
2000 and beyond. The Company notified all of its customers of the problem and in
June 1997 made the  correction  available  on its  website,  free of charge.  In
addition,  the Company provided annual maintenance customers with the correction
as part of a subsequent upgrade of the product. Failure of customers to properly
implement the correction, or problems with the correction, could cause errors in
customers'  products  which may  materially  impact the  functionality  of those
products. The cost associated with such correction was not considered material.

      In November 1998, the Company determined that certain custom  applications
developed  and  delivered to  approximately  ten  customers may not be Year 2000
compliant. All of these customers have been notified of the Year 2000 compliance
status.  The  Company  will bear  certain of the  remediation  expenses  of such
compliance,  pursuant to the warranty  provisions of the applicable  agreements.
The  Company  currently  does  not  consider  the  costs  associated  with  such
remediation  to be material.  The Company is continuing to analyze the extent to
which any of the affected  project  offerings were  integrated by customers into
other  products  which may expose  the  Company  to claims  from its  customers.
Failure of the  Company or the  affected  customers  to properly  implement  the
correction,  or problems with the  correction,  could cause errors in customers'
products which may materially impact the functionality of those products.

                                  -15-

<PAGE>

     Additionally,  there can be no assurance  that the Company's  products will
not be used by other companies,  or its customers,  to build  applications which
might not be Year 2000 compliant, or that the Company's products or applications
built with the  Company's  products will not be integrated by the Company or its
customers or interact with  non-compliant  software or other  products which may
expose the Company to claims from its customers.

      Based upon its internal review and representations  from its vendors,  the
Company believes that its internal computer and management  information  systems
are Year 2000  compliant,  and the Company  does not believe  that there will be
future significant costs related to maintaining such compliance.

                                      -16-

<PAGE>


                           PART II. OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds


Changes in Securities

      The following information relates to all securities of the Company sold by
the  Company  within  the past  quarter  which  were not  registered  under  the
securities laws at the time of grant, issuance and/or sale:

      1.    During the third quarter of 1998, the Company  granted stock options
            pursuant to its 1998 Stock Plan which were not registered  under the
            Securities  Act of 1933,  as amended  (the  "Securities  Act").  The
            following table sets forth certain information regarding such grants
            during the quarter:

                                   Number      Exercise
                                 of shares       Price
                                 ---------     --------

                                   68,750      $ 14.188
                                    1,250      $  8.25
                                    3,750      $ 10.25
                                      750      $  8.50

      2.    During  the third  quarter of 1998,  the  Company  issued  shares of
            Common Stock  pursuant to exercises of stock  options  granted under
            its 1993 Stock Plan which were not  registered  under the Securities
            Act. The following  table sets forth certain  information  regarding
            such issuances during the quarter:

                                               Weighted
                                                Average
                                  Number       Exercise
                                of shares       Price
                                ---------      ---------

                                 206,484       $  0.80

     The Company did not employ an underwriter  in connection  with the issuance
of the securities described above. The Company believes that the issuance of the
foregoing  securities was exempt from registration under either (i) Section 4(2)
of the Securities Act as transactions not involving any public offering and such
securities  having  been  acquired  for  investment  and  not  with  a  view  to
distribution,  or (ii) Rule 701 under the  Securities Act as  transactions  made
pursuant to a written compensatory benefit plan or pursuant to a written

                                      -17-

<PAGE>


contract  relating  to  compensation.  All  recipients  had  adequate  access to
information about the Company.


Use of Proceeds from Initial Public Offering

      On March  12,  1998,  the  Commission  declared  effective  the  Company's
Registration Statement  (Registration Statement No. 333-43827) as filed with the
Commission in connection  with the Company's  initial public  offering of Common
Stock, which was managed by BT Alex. Brown Incorporated,  BancAmerica  Robertson
Stephens and  SoundView  Financial  Group,  Inc.  Pursuant to such  Registration
Statement,  the Company  registered and sold an aggregate of 2,500,000 shares of
its Common Stock,  for a gross  aggregate  offering price of $40.0 million.  The
Company incurred  underwriting  discounts and commissions of approximately  $2.8
million.  In connection with such offering,  the Company incurred total expenses
of  approximately  $1.1  million.  As of September  30,  1998,  all of the $36.1
million in net  proceeds  received  by the  Company  upon  consummation  of such
offering,  pending specific application,  were invested in short-term securities
of grade A2 or better with maturities of two years or less.

      For  working  capital  restrictions  and  limitations  on the payment of
dividends,  see "Item 2.  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."


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

        (a)  Exhibits.

             27  Financial Data Schedule

        (b)  Reports on Form 8-K.

             No reports on Form 8-K were filed during the quarter for which this
             report on Form 10-Q is filed.

                                      -18-

<PAGE>


                                   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.




                                  DSET Corporation




DATE:   November 13, 1998         By: /s/ William P. McHale, Jr.
                                      --------------------------
                                      William P. McHale, Jr.
                                      President and Chief Executive Officer
                                      (Principal Executive Officer)




DATE:   November 13, 1998         By: /s/ Paul A. Lipari
                                      ------------------
                                      Paul A. Lipari
                                      Chief Financial Officer
                                      (Principal Financial and
                                      Accounting Officer)