<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington D. C. 20549

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

                                    FORM 10-Q

(Mark one)

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

                For the quarterly period ended September 30, 2001

                                       OR

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

                       For the transition period from ___ to ___.

                         Commission File Number 0-19640

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

                               VERTEL CORPORATION
             (Exact name of Registrant as specified in its charter)

          California                                         95-3948704
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                          Identification No.)

21300 Victory Boulevard, Suite 700, Woodland Hills, California         91367
(Address of principal executive offices)                             (Zip code)

                                 (818) 227-1400
              (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 as 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 |_|.

As of November 12, 2001 there were 32,891,689 shares of common stock
outstanding.

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<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                               VERTEL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                      September 30,    December 31,
                                          ASSETS                                          2001             2000
                                                                                          ----             ----
<S>                                                                                   <C>              <C>
Current assets:
    Cash and cash equivalents .....................................................   $       4,485    $      10,827
    Short term investments ........................................................              --            1,096
    Trade accounts receivable (net of allowances of $541 as of
         September 30, 2001 and $536 as of December 31, 2000) .....................           4,335            3,453
    Prepaid expenses and other current assets .....................................             406              215
                                                                                      -------------    -------------
       Total current assets .......................................................           9,226           15,591

    Property and equipment, net ...................................................             540            1,111
    Investments ...................................................................             494              759
    Goodwill, net .................................................................           9,202            3,034
    Other assets ..................................................................             308              314
                                                                                      -------------    -------------
                                                                                      $      19,770    $      20,809
                                                                                      =============    =============

                            LIABILITIES AND SHAREHOLDERS EQUITY

Current liabilities:
    Accounts payable ..............................................................   $         662    $         669
    Accrued wages and related liabilities .........................................           1,079            1,149
    Accrued restructuring expenses ................................................              48               48
    Accrued taxes payable .........................................................             365              480
    Other accrued expenses ........................................................           1,641            1,530
    Accrued acquisition liabilities ...............................................             158               --
    Deferred revenue ..............................................................             853            1,091
                                                                                      -------------    -------------
       Total liabilities ..........................................................           4,806            4,967
                                                                                      -------------    -------------

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; 2001, 32,891,689;
                2000, 28,326,285 ..................................................             329              283
    Additional paid-in capital ....................................................          93,105           86,510
    Accumulated deficit ...........................................................         (77,990)         (70,502)
    Accumulated comprehensive loss ................................................            (480)            (449)
                                                                                      -------------    -------------
       Total shareholders' equity .................................................          14,964           15,842
                                                                                      -------------    -------------
                                                                                      $      19,770    $      20,809
                                                                                      =============    =============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       2
<PAGE>

                               VERTEL CORPORATION

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

<TABLE>
<CAPTION>
                                                                    Three Month Period Ended           Nine Month Period Ended
                                                                    ------------------------           -----------------------
                                                                  September 30,    September 30,    September 30,    September 30,
                                                                       2001             2000             2001             2000
                                                                       ----             ----             ----             ----
<S>                                                               <C>              <C>              <C>              <C>
Net revenues:
    License ...................................................   $       1,668    $       1,735    $       5,083    $       8,170
    Service and other .........................................           1,666            1,629            4,365            5,486
                                                                  -------------    -------------    -------------    -------------
          Net revenues ........................................           3,334            3,364            9,448           13,656
                                                                  -------------    -------------    -------------    -------------

Cost of revenues:
    License ...................................................             125              235              349              713
    Service and other .........................................           1,740            1,294            5,365            4,069
                                                                  -------------    -------------    -------------    -------------
         Total cost of revenues ...............................           1,865            1,529            5,714            4,782
                                                                  -------------    -------------    -------------    -------------

Gross profit ..................................................           1,469            1,835            3,734            8,874
                                                                  -------------    -------------    -------------    -------------

Operating expenses:
    Research and development ..................................           1,118            1,216            2,875            4,058
    Sales and marketing .......................................           1,568            1,887            4,871            5,357
    General and administrative ................................             708              830            2,426            2,883
    General and administrative - non-cash
         stock compensation ...................................              --               35               --              553
    Goodwill amortization .....................................             607              238            1,206              714
                                                                  -------------    -------------    -------------    -------------
         Total operating expenses .............................           4,001            4,206           11,378           13,565
                                                                  -------------    -------------    -------------    -------------

Operating loss ................................................          (2,532)          (2,371)          (7,644)          (4,691)
Other income (expense), net ...................................            (201)             227               94            1,650
                                                                  -------------    -------------    -------------    -------------
Loss before provision for income taxes ........................          (2,733)          (2,144)          (7,550)          (3,041)
Provision (benefit) for income taxes ..........................              20               35              (62)             115
                                                                  -------------    -------------    -------------    -------------
Net loss ......................................................          (2,753)          (2,179)          (7,488)          (3,156)
Other comprehensive income (loss) .............................             199                5              (31)             (42)
                                                                  -------------    -------------    -------------    -------------
Comprehensive loss ............................................   $      (2,554)   $      (2,174)   $      (7,519)   $      (3,198)
                                                                  =============    =============    =============    =============

Basic and diluted net loss per common share ...................   $       (0.08)   $       (0.08)   $       (0.25)   $       (0.11)
                                                                  =============    =============    =============    =============

Weighted average shares outstanding used in
    net loss per common share calculations - basic and
    diluted: ..................................................          32,890           28,165           30,385           27,670
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>

                               VERTEL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                      Nine Month Period Ended
                                                                      -----------------------
                                                                    September 30,    September 30,
                                                                        2001             2000
                                                                        ----             ----
<S>                                                                 <C>              <C>
Cash flows from operating activities:
      Net loss ..................................................   $      (7,488)   $      (3,156)
      Adjustments to reconcile net loss to net cash used for
         operating activities:
          Depreciation and amortization .........................           2,107            1,766
          Provision for returns and bad debts ...................               5               50
          Loss on marketable securities .........................             265               --
          Non-cash stock compensation ...........................              --              553
          Changes in operating assets and liabilities ...........          (1,577)              34
                                                                    -------------    -------------

          Net cash used for operating activities ................          (6,688)            (753)
                                                                    -------------    -------------

Cash flows from investing activities:
      Net sales of short-term investments .......................           1,096            4,689
      Purchases of property and equipment .......................            (231)            (501)
      Cash acquired in business acquisition, net of cash paid ...            (226)              --
      Change in other assets ....................................              22               --
                                                                    -------------    -------------

          Net cash provided by investing activities .............             661            4,188
                                                                    -------------    -------------

Cash flows from financing activities:
      Proceeds from exercise of stock options ...................             116            3,889
      Payments on capital lease obligations and short-term debt .            (400)             (26)
                                                                    -------------    -------------

          Net cash (used for) provided by financing activities ..            (284)           3,863
                                                                    -------------    -------------

Effect of exchange rate changes on cash .........................             (31)             (42)
                                                                    -------------    -------------

Net (decrease) increase in cash and cash equivalents ............          (6,342)           7,256

Cash and cash equivalents, beginning of period ..................          10,827            3,974
                                                                    -------------    -------------

Cash and cash equivalents, end of period ........................   $       4,485    $      11,230
                                                                    =============    =============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>

                               VERTEL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. General

      The consolidated financial statements include the accounts of Vertel
Corporation and its subsidiaries (the "Company"). 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 the Company's
financial position, results of operations and cash flows.

      It is suggested that these consolidated financial statements and the
accompanying notes be read in conjunction with the audited consolidated
financial statements and the accompanying notes for the year ended December 31,
2000 included in the Company's Annual Report on Form 10-K. The results of
operations for the three and nine month periods ended September 30, 2001 are not
necessarily indicative of results that may be expected for the full year.

      Revenues are generated primarily from software licenses, royalty
agreements, professional services and maintenance contracts. Sales to Alcatel
and Tekview comprised approximately 16% and 12% of net revenues, respectively,
in the third quarter of 2001. Sales to Alcatel comprised approximately 16% of
net revenues for the first three quarters of 2001. Sales to Lucent Technologies
comprised approximately 14% of net revenues in the third quarter of 2000. Sales
to Alcatel and the U.S. Department of Defense comprised approximately 19% and
13% of net revenues respectively, in the first three quarters of 2000. Tekview
and Alcatel represented approximately 20% and 19%, respectively, of accounts
receivable at September 30, 2001.

      The Company has reported operating losses from continuing operations for
each of the most recent five fiscal years. During the nine months ended
September 30, 2001 the Company reported operating losses of $7,644,000 and
negative cash flows from operations of $6,688,000. As of September 30, 2001 the
Company had an accumulated deficit of $77,900,000 and working capital of
$4,420,000, which includes cash and cash equivalents amounting to $4,485,000.
These conditions raise substantial doubt about the ability of the Company to
continue as a going concern for a reasonable period of time. Management's plans
to overcome these conditions include raising additional equity capital and
reducing expenses. On August 31, 2001, the Company entered into a Note and
Warrant Purchase Agreement with SDS Merchant Fund, L.P. ("SDS"), an
institutional investor. Pursuant to that agreement, SDS agreed to purchase from
the Company a $3,500,000 convertible promissory note, bearing interest at 6% per
annum (see note 6). SDS' obligation to purchase the note is contingent upon
certain closing conditions. Assuming the satisfaction of the closing conditions,
the purchase of the convertible promissory note by SDS would occur within five
business days after the registration statement filed by the Company on October
3, 2001 is declared effective by the Securities and Exchange Commission ("SEC").
In November 2001 the Company reduced its headcount by approximately 15% and
implemented several cost reduction initiatives. The Company anticipates that
these steps will reduce cash expenditures by approximately $600,000 per quarter
commencing in the first quarter of 2002. In addition to the SDS financing and
expense reduction program described above, management believes the Company will
need to raise additional equity capital to fund operations and implement
additional cost reduction initiatives until the Company's revenues increase to
levels sufficient to generate operating income. There can be no assurance that
the closing conditions for the SDS financing will be satisfied, that
management's expense reduction programs will be successful or that additional
financing will be available to the Company, or, if available, that the terms
will be satisfactory to the Company. If the Company is not successful in closing
the SDS transaction, reducing its expenses or raising additional equity capital,
or if revenues at levels sufficient to generate operating income do not
transpire, the Company may not be able to continue as a going concern for a
reasonable period of time.

2. Statement of Cash Flows

      Increases (decreases) in operating cash flows arising from changes in
assets and liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                      Nine Month Period Ended
                                                      -----------------------
                                                    September 30,    September 30,
                                                         2001             2000
                                                         ----             ----
<S>                                                 <C>              <C>
    Trade accounts receivable ...................   $        (528)   $       1,186
    Prepaid expenses and other current assets ...            (183)             157
    Accounts payable ............................            (212)            (335)
    Accrued wages and related liabilities .......            (326)             (33)
    Cash payments for restructuring expenses ....              --             (391)
    Other accrued liabilities ...................             111              (26)
    Accrued taxes payable .......................            (115)              25
    Deferred revenue ............................            (324)            (549)
                                                    -------------    -------------
                                                    $      (1,577)   $          34
                                                    =============    =============
</TABLE>

      No cash payments were made for restructuring expenses in the nine months
ended September 30, 2001.


                                       5
<PAGE>

                               VERTEL CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Segment Reporting

      The Company operates and reports its activities through two principal
segments, license and service. The following schedule reflects revenues and
gross profit for the two segments for the three and nine month periods ending
September 30, 2001 and September 30, 2000 (in thousands):

<TABLE>
<CAPTION>
                                Three Month Period Ended                Nine Month Period Ended
                                ------------------------                -----------------------
                                       September 30,                          September 30,
                                       -------------                          -------------
                            License      Service         Total      License      Service         Total
                            -------      -------         -----      -------      -------         -----
<S>                         <C>          <C>           <C>          <C>          <C>           <C>
2001
  Revenues ...........      $ 1,668      $ 1,666       $ 3,334      $ 5,083      $ 4,365       $ 9,448
  Gross profit .......        1,543          (74)        1,469        4,734       (1,000)        3,734

2000
  Revenues ...........        1,735        1,629         3,364        8,170        5,486        13,656
  Gross profit .......        1,500          335         1,835        7,457        1,417         8,874
</TABLE>

      All of our revenues were earned from external customers. Gross profit is
used as the measure of profit and loss for segment reporting purposes as it is
viewed by key decision-makers as the principal operating indicator in measuring
segment profitability.

      The Company has not recorded or managed its balance sheet accounts by
segment and does not record depreciation and amortization by segment.

4. Recent Accounting Pronouncements

      In June 1998, June 1999, and June 2000, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133", and SFAS No. 138 "Accounting for
Derivative Instruments and Hedging Activities - An Amendment to SFAS No. 133".
SFAS 133, as amended, requires the recognition of all derivatives as either
assets or liabilities in the balance sheet and the measurement of those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the planned use of the derivative and the resulting
designation. The Company does not currently participate in hedging activities or
own derivative instruments. The Company's adoption of SFAS No. 133, as amended,
in the first quarter of 2001 did not have any impact on its consolidated
financial statements.

      In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe the adoption of SFAS No. 141 will have a
significant impact on its financial statements.

      In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS No. 142 requires, among other
things, the discontinuance of goodwill amortization. The Company amortized
$1,206,000 of goodwill in the first nine months of 2001. SFAS No. 142 also
requires the Company to complete a transitional goodwill impairment test six
months from the date of adoption. The Company is currently assessing but has not
yet determined the impact of SFAS No. 142 on its financial position and results
of operations.

     In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
recognition of impairment losses on long-lived assets to be held and used or to
be disposed of by sale. This statement supersedes FASB SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", and the accounting and reporting provisions of Accounting Principals Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". The Company is currently evaluating the
impact that the adoption of this statement will have on its consolidated
financial statements. The statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001.

                                       6
<PAGE>

                               VERTEL CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Purchase of Assets and Assumption of Liabilities of Trigon Technology Group,
Inc.

      On May 30, 2001, the Company acquired all of the material assets and
assumed certain liabilities of Trigon Technology Group, Inc ("Trigon").

      The acquisition price was approximately $7,145,000 and consisted of
4,500,000 shares of the Company's common stock valued at $6,525,000 and
acquisition costs of $620,000. The value of the Company's common stock was
determined based on the closing market price of the Company's common stock as
quoted by the NASDAQ on the closing date of the acquisition (May 30, 2001).

      The total purchase price of $7,145,000 has been allocated to the assets
and liabilities of Trigon based on management's preliminary estimates of their
fair value, with the excess costs over the net liabilities assumed being
allocated to goodwill amounting to $7,375,000.  The goodwill is being amortized
over its estimated useful life of five years.

      The operating results of Trigon are included in the Company's consolidated
financial statements from the date of acquisition. The unaudited pro forma
consolidated information set forth below presents the consolidated results of
operations as if the acquisition had taken place at the beginning of the period
presented.

      These pro forma consolidated results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred if
the acquisition had taken place at the beginning of the period presented or the
results that may occur in the future.

      Pro forma consolidated results for the periods ended September 30, 2001
and September 30, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                   Three Month Period Ended      Nine Month Period Ended
                                                 ----------------------------  ----------------------------
                                                 September 30,  September 30,  September 30,  September 30,
                                                     2001           2000           2001           2000
                                                 -------------  -------------  -------------  -------------
<S>                                              <C>            <C>            <C>            <C>
Revenues ..................................      $       3,334  $       3,623  $      10,155  $      14,551
Net loss ..................................             (2,753)        (2,964)        (8,893)        (8,893)
Basic and diluted net loss per
    common share ..........................      $       (0.08) $       (0.09) $       (0.27) $       (0.29)
Weighted average shares outstanding used in
    net loss per common share calculations -
    Basic and diluted .....................             32,890         32,665         32,890         32,170
</TABLE>

6. Note and Warrant Purchase Agreement with SDS Merchant Fund L.P.

     The Company entered into a Note and Warrant Purchase Agreement with SDS
Merchant Fund L.P. ("SDS"), dated August 31, 2001, pursuant to which SDS agreed
to purchase a $3,500,000 aggregate principal amount 6% per annum convertible
promissory note due three years from the date that SDS purchases such note. SDS'
obligation to purchase the note is contingent upon certain closing conditions.
Such conditions relate to the Note and Warrant Purchase Agreement and include:
(i) that the Company's representations and warranties are true and correct as of
the funding date, (ii) that the Company has performed all of its covenants,
agreements and conditions required to be performed by the Company,(iii) that
trading of the Company's common stock has not been suspended, (iv) that no
statute, rule, regulation, executive order, decree, ruling or injunction is in
force against the transactions contemplated in the Note and Warrant Purchase
Agreement, (v) that no pending or threatened litigation exists, and(vi) that the
SEC has declared effective a registration statement covering the shares to be
issued (1) upon conversion of the convertible promissory note, and (2) upon
exercise of the warrant, each held by SDS.

     The conversion price of the convertible promissory 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%.  Such discount percentage can be adjusted
in 2% increments (i.e. to 5%) for every $1,000,000 that the sum of the Company's
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 the
Company's 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
convertible promissory note or the warrant.   The conversion price of the
convertible promissory note is subject to a minimum floor of $0.681, provided
however, that if the per share market value of the Company's common stock is
below the closing date price of the Company's common stock for a period of any
twenty-two consecutive trading days, the minimum floor no longer applies.  The
conversion price of the convertible promissory note is capped at $1.75 per share
of common stock.

     The warrant is initially exercisable into 800,000 shares of the Company's
common stock at an initial exercise price of $0.9988 per share.  Such warrant
exercise price may be adjusted on the dates that are twelve months and eighteen
months following the effective date of the registration statement covering the
warrant shares to an amount 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 initial exercise price.

     On October 3, 2001, the Company filed a Form S-3 registration statement in
connection with the Note and Warrant Purchase Agreement.  Pursuant to the Note
and Warrant Purchase Agreement and the Registration Rights Agreement between the
Company and SDS, the registration statement filed by the Company covers an
estimated 200% of the number of shares of the Company's common stock issuable
upon conversion of the convertible promissory note and exercise of the warrant
as of the filing of the registration statement.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

General

      We provide telecommunications software and middleware products and
services for network management applications and telecommunications devices. We
develop, market and support vertically integrated, object oriented software
solutions for the management of public telecommunications networks. Our
solutions cover the Telecommunications Management Network ("TMN") market and the
Common Object Request Broker Architecture ("CORBA") telecommunications market.
Our TMN products are based on the International Telecommunications Union's TMN
standard and support network operation and management over diverse transmission
media and protocols. We believe that we offer the only commercially available,
fully interoperable suite of products and tools that span the network element,
element management,

                                       7
<PAGE>

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

network management and service management layers of the TMN model. Our CORBA
software products ("e*ORB") are designed to enable Operations Support Systems
("OSS") and network infrastructure to integrate in ways which will accelerate
network and service deployment and provide for the transition from TMN managed
networks to CORBA solutions. Our CORBA software also provides command and
control software infrastructure for telecommunications hardware and systems. The
Vertel Mediation Framework ("Mediation Framework") software product is used to
simplify and accelerate the integration of network infrastructure with telecom
OSS infrastructure. We offer embedded software for network equipment and
software solutions to allow telecommunications service providers to integrate
proprietary, Simple Network Management Protocol ("SNMP"), TMN and CORBA based
network management systems with standards-based solutions. In addition, we offer
object oriented software platforms that facilitate the rapid development of
network and service management applications and features such as fault detection
and automatic response, remote improvement of network configuration, automation
of accounting and billing functions and optimization of network traffic and
security.

      On May 30, 2001, we acquired all the material assets and certain
liabilities of Trigon Technology Group, Inc. ("Trigon"). Trigon was founded in
1999 and developed, marketed, and supported vertically integrated, object
oriented software tools and solutions for the management of public
telecommunications networks. The acquired tools and solutions, namely the Object
Management product family, cover multiple communications protocols including
CORBA, CMIP (Common Management Information Protocol) SNMP, TL1 (Bellcore's
Transaction Language 1) and Extensible Markup Language ("XML"). The primary
markets are telecommunications equipment manufacturers, computer systems
original equipment manufacturers ("OEMs") and Internet access providers. The
operating results of Trigon are included in our consolidated financial
statements from the date of acquisition.

      In September 2000, we announced plans to offer a new set of services based
on our Mediation Framework. These web-based hosted services, called
WebResolve(TM), are designed to automate service assurance functions for
telecommunications providers. Included in our consolidated statements of
operations for the third quarter and first three quarters of 2001 are costs of
approximately $602,000 and $1,861,000, respectively, consisting primarily of
payroll and related overhead costs for service and sales and marketing
personnel, and third party services relating to the introduction of WebResolve.
However, we only expect nominal revenues from WebResolve in 2001.

      We also provide professional services, such as turnkey management
solutions, in addition to product integration and product application services.
Our professional services include system analysis and design, source code
portation and interface, custom application development, conformance and
certification testing and technical support services.

      We recognize software license revenue based on the American Institute of
Certified Public Accountants Statement of Position No. 97-2, as amended. Our
software license agreements generally do not provide for a right of return. We
maintain reserves for returns and potential credit losses, neither of which has
had a material effect on our results of operations or financial condition to
date.

      Pursuant to our license agreements, licensees may distribute binary or
embedded versions of our software in their products. Royalties or runtime
revenues are due upon shipment of products containing the binary or embedded
code. Generally, software license royalty revenue is recognized upon
notification by our licensee that products incorporating our software have been
shipped by them. Because of the development times required for licensees to
design and ship products containing binary or embedded software, we generally do
not receive royalties from shipments of such products for at least three
quarters from the date we initially ship product.

      We separately offer professional services, including system design and
engineering, custom application development, source code portation, conformance
testing and certification and application development. Many of our customers
contract for professional services. These services are typically based on a
detailed statement of work. Professional services revenue varies according to
the size, timing and complexity of the project and is typically billed based on
satisfaction of certain milestones or on a per day fee. Revenue from
professional services is recognized using the percentage of completion method,
or on a time and materials basis. In certain cases, customers reimburse us for
non-recurring engineering efforts. Such reimbursements are recognized as revenue
and associated costs are reflected as cost of revenues.

      Our technical support services consist of product support and maintenance,
training and on-site consulting. Product support and maintenance fees have
constituted the majority of technical support revenue. Product support and
maintenance fees are


                                       8
<PAGE>

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

recognized on a straight-line basis over the term of the contract, which is
generally twelve months. Other revenue from training and on-site consulting is
recognized as performed.

       Most of our revenues depend on products complying with the CORBA or TMN
standards and must be evaluated in light of the risks and uncertainties
frequently encountered by companies dependent upon such standards and products.
In addition, some of our markets are new and rapidly evolving which heightens
these risks and uncertainties. To address these risks, we must, among other
things, successfully implement our marketing strategy, respond to competitive
developments, continue to develop and upgrade our products and technologies more
rapidly than our competitors and commercialize our products and services
incorporating these enhanced technologies. There can be no assurance that we
will succeed in addressing any or all of these risks.

FORWARD-LOOKING INFORMATION AND SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.

      This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. 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 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.

      Forward-looking statements involve risks and uncertainties. These
uncertainties include factors that affect all businesses operating in a global
market, as well as matters specific to us and the markets we serve. Particular
risks and uncertainties facing us at the present include our ability, including
financial ability, to continue to invest in research and development necessary
for the development of new and existing products (including WebResolve) that are
required to offset the continuing decline in TMN revenues; the timely and
successful development of existing and new markets; the severe impact that the
slowdown in the U.S. economy has had on the telecommunications industry, forcing
a number of service providers to cease operations and resulting in the
cancellation or postponement of several transactions we had in progress; the
maturing nature of the TMN product marketplace and the financial uncertainties
associated with an anticipated decline in TMN revenues; the fact that some of
our products are relatively new and, although we see developing market interest,
it is difficult to predict sales for new products such as e*ORB, Mediation
Framework, Object Management Framework and WebResolve and the market may or may
not ultimately adopt these technologies; the fact that our sales cycle is long
for most of our products, including e*ORB, Mediation Framework and Object
Management Framework, making initial license sales and future royalties
difficult to forecast; additional difficulty in predicting royalty revenue
because that revenue is dependent on successful development and deployment by
our customers of our products; fluctuation from quarter to quarter in revenue
from our professional service unit as a result of a limited number of large
consulting contracts; loss of key customer, partner or alliance relationships
and the possibility that we 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 our quarterly license revenues; size and timing 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 recorded in the last month of the quarter, frequently in the last weeks
or even days of a quarter, which further adds to the difficulty of forecasting
and leads to a substantial risk of variance from actual results; and our ability
to control expenditures at a level consistent with revenues.

      We also consider the recent terrorist attacks on the World Trade Center in
New York City and the Pentagon in Washington D.C., as having had a significantly
adverse impact on the world securities markets as well as the United States
economy in general. The extent of the impact on us cannot be quantified at this
time. Although we did not have any offices in any of the effected areas, the
current United States concerns over domestic security and the state of the
economy may cause customers to delay or cancel orders with us. Such delays and
cancelations could materially adversely impact our revenue and results of
operations.

      Additionally, more general risk factors include the possible development
and introduction of competitive products and new and alternative technologies by
our competitors; the increasing sales and marketing costs of attracting new and
retaining existing customers; pricing, currency and exchange risks; governmental
and regulatory developments affecting us and our customers; the ability to
identify, conclude, and integrate acquisitions on a timely basis; the ability to
attract and/or retain essential technical or other personnel; political and
economic uncertainties associated with conducting business on a worldwide basis.
Readers are


                                       9
<PAGE>

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

cautioned not to place undue reliance on any forward-looking statement and to
recognize that the statements are not predictions of actual future results.
Actual results could differ materially from those anticipated in the
forward-looking statements and from historical results, due to the risks and
uncertainties referred to above, as well as others not now anticipated. Further
risks inherent in our business are listed under "Risk Factors" in Part I, Item I
of Vertel's Annual Report on Form 10-K for the fiscal year ended December 31,
2000.

      The foregoing statements and risk factors are not exclusive and further
information concerning us and our business, including factors that potentially
could materially affect our financial results, may emerge from time to time. It
is not possible for management to predict all risk factors or to assess the
impact of such risk factors on our business. We undertake no obligation to
revise or publicly release the results of any revision to our forward-looking
statements.

      The following discussion should be read in conjunction with the unaudited
consolidated financial statements and accompanying notes, included in Part I -
Item 1 of this Quarterly Report, and the audited consolidated financial
statements and accompanying notes for the year ended December 31, 2000 contained
in our Annual Report on Form 10-K.

Results of Operations

      Net Revenues. Net revenues decreased 1% to $3,334,000 for the three months
ended September 30, 2001 (the "third quarter of 2001") compared to $3,364,000
for the three months ended September 30, 2000 (the "third quarter of 2000"), and
decreased 31% to $9,448,000 for the nine months ended September 30, 2001 (the
"first three quarters of 2001") compared to $13,656,000 for the nine months
ended September 30,2000 (the "first three quarters of 2000").

      License revenues, which consist primarily of license fees and royalties
derived from our software solutions and development platforms, decreased 4% to
$1,668,000 during the third quarter of 2001 from $1,735,000 during the third
quarter of 2000, primarily as a result of lower sales from our TMN and e*ORB
product lines ($221,000). This decrease was partially offset by license revenues
from Trigon products ($79,000) and an increase in license revenues from our
Mediation products ($75,000). License revenues for the first three quarters of
2001 decreased 38% to $5,083,000 compared to $8,170,000 for the first three
quarters of 2000. The decrease resulted primarily from a second quarter of 2000
transaction with the U.S. Department of Defense ($1,775,000) as well as lower
TMN product revenues ($2,128,000) and lower revenues from legacy CORBA products
($156,000), both of which are exclusive of the transaction with the U.S.
Department of Defense. These decreases were partially offset by increased
license revenues from newer products, including the Vertel Mediation Framework
($528,000), e*ORB ($125,000) and Object Management Framework products
($319,000), which are all also exclusive of the transaction with the U.S.
Department of Defense. While we expect to continue to sell TMN-based software in
the near term, particularly in Asia and the Pacific Rim, we expect that these
products will be phased out over time as new technologies such as e*ORB, Object
Management Framework and Mediation Framework take their place.

      Service revenues, which consist primarily of fees from professional
service unit ("PSU") projects, software maintenance, training and non-recurring
engineering services, increased 2% to $1,666,000 during the third quarter of
2001 from $1,629,000 during the third quarter of 2000. The increase was the
result of service revenues from Trigon ($338,000), which were partially offset
by lower software maintenance ($68,000), which was primarily due to non-renewals
of maintenance contracts on certain older or discontinued products, and lower
PSU revenue due to fewer and smaller projects ($238,000) as a result of the
economic slowdown in the telecom segment. Service revenues for the first three
quarters of 2001 decreased 20% to $4,365,000 from $5,486,000 for the first three
quarters of 2000. The revenue decrease was primarily due to lower PSU revenue
($1,316,000), and lower software maintenance revenue ($251,000) for the reasons
described above. These decreases were partially offset by service revenues from
Trigon ($441,000).

      Sales to customers outside of the U.S. comprised approximately 40% of net
revenues in the third quarter of 2001 compared to approximately 43% in the same
period of 2000. For the first three quarters of 2001, sales to customers outside
the U.S. comprised approximately 37% of net revenues compared to approximately
29% in the same period of 2000. We have historically reported a high percentage
of sales to customers outside of the United States and we expect that
international sales will continue to be significant. However, our sales cycle is
usually lengthy and results in quarterly fluctuations between geographic
markets. In addition, a decline in foreign currencies versus the United States
Dollar may reduce our competitiveness in international markets and any political
or economic turmoil in our major Asian markets (China, Japan and Korea) could
impact future sales in the affected regions.


                                       10
<PAGE>

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

      Sales to Alcatel and Tekview comprised approximately 16% and 12% of net
revenues, respectively, in the third quarter of 2001. Sales to Alcatel comprised
approximately 16% of net revenues for the first three quarters of 2001. Sales to
Lucent Technologies comprised approximately 14% of net revenues in the third
quarter of 2000. Sales to Alcatel and the U.S. Department of Defense comprised
approximately 19% and 13% of net revenues respectively, in the first three
quarters of 2000. No other single customer accounted for more than 10% of our
revenues in either the third quarter or first three quarters of 2001 or 2000.

      The telecom segment has experienced an economic slow down, dating back to
the third quarter of 2000. As with many other companies in our industry we have
shown lower than anticipated revenues for the past several quarters. There is no
industry consensus that the telecom segment economic slowdown has ended or will
end in 2001 and management anticipates that revenues in both licensing and
service segments will be adversely impacted until the sector recovers. Our sales
cycle for our products is long, often requiring six to nine months from initial
contact to completion of a sale and recording of revenue. Once a prospect
becomes a customer, additional future revenues remain difficult to predict and
are dependent on the customer's timing and success in developing and deploying
products containing our software. Several of our important products are new and
we do not yet have a sales history on which to base predictions for future
revenues. If we have a customer that contributes a large percentage of revenues
during one period, it may be difficult to replace those revenues in a future
period. Additionally, we cannot estimate the timing or extent of the continuing
decrease in revenues for TMN-based products, or whether we will be able to
develop WebResolve so that it will receive market acceptance and generate
anticipated revenues.

      Cost of Revenues - License. Cost of license revenues consists primarily of
royalty fees associated with third party software, the cost of user
documentation and the cost of reproduction and delivery of software. Cost of
license revenues was $125,000 and $235,000 for the third quarters of 2001 and
2000, respectively, representing 7% and 14% of license revenues, respectively.
Cost of license revenues was $349,000 and $713,000 for the first three quarters
of 2001 and 2000, respectively, representing 7% and 9% of license revenues,
respectively. The lower cost of license revenues for the third quarter and the
first three quarters of 2001 compared to the same periods in 2000 is due to the
product mix. Royalty fees are primarily associated with some of our older TMN
products and those sales are lower in 2001 compared to 2000. We have recently
entered into agreements to sell several COBRA-based third party products. There
were limited sales of these products in the third quarter and first three
quarters of 2001. If sales of these products become more significant in future
quarters, our cost of license revenues will increase as a percentage of license
revenues.

      Cost of Revenues - Service. Cost of service revenues consists primarily of
costs associated with performing professional consulting services, software
maintenance and technical support to customers such as telephone support and
costs associated with training services, non-recurring engineering services and
our WebResolve service assurance organization. Cost of service revenues was
$1,740,000 and $1,294,000 for the third quarters of 2001 and 2000, respectively,
representing 104% and 79% of service revenues, respectively. The increase in
cost of service revenues in 2001 was the result of increased expenses relating
to WebResolve ($206,000), and the addition of Trigon's service organization
($260,000). Cost of service revenues was $5,365,000 and $4,069,000 for the first
three quarters of 2001 and 2000, respectively, representing 123% and 74% of
service revenue, respectively. The increase in cost of service revenues during
the first three quarters of 2001 was primarily due to increased expenses
relating to WebResolve ($992,000), and the addition of Trigon's service
organization ($371,000). The negative margin for cost of services revenues is
due to costs associated with WebResolve, which has not had material revenues to
date, as well as underutilization of PSU resources. We expect to hire additional
personnel to staff WebResolve. To the extent that revenues from WebResolve do
not materialize, our future profit margins from services would be adversely
impacted.

      Research and Development. We have historically made significant
investments in research and development. Our R&D expenditures are concentrated
in the areas of CORBA product development (primarily e*ORB and the Object
Management Framework products) and related application services, and in our
Mediation Framework which is designed for the integration of telecom Operation
Support Systems and the underlying network equipment management systems. The
major components of R&D expenses are engineering salaries, employee benefits and
associated overhead, fees to outside contractors, the cost of facilities and
depreciation of capital equipment, which consists primarily of computer and test
equipment. Costs related to R&D in certain cases are offset by customer
reimbursement of non-recurring engineering efforts.


                                       11
<PAGE>

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

      Total R&D expenses decreased 8% to $1,118,000 in the third quarter of 2001
from $1,216,000 in the third quarter of 2000. The decrease in R&D expenses was
primarily the result of lower payroll and related facilities costs ($383,000)
and travel expenses ($33,000) due to the redeployment of engineering personnel
to marketing and PSU functions in the first quarter of 2001. These decreases
were partially offset by the addition of Trigon's R&D organization ($339,000).
R&D expenses for the first three quarters of 2001 decreased 29% to $2,875,000
compared to $4,058,000 for the first three quarters of 2000, primarily the
result of lower incentive compensation ($156,000), travel expenses ($127,000),
and payroll and related facilities costs ($1,354,000) due to the redeployment of
engineering personnel to marketing and PSU functions in the first quarter of
2001. These decreases were partially offset by the addition of Trigon's R&D
organization ($459,000).

      Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and associated costs and selling and marketing programs such as trade
shows and other promotional costs. We believe that substantial sales and
marketing expenditures are essential to develop opportunities for revenue growth
and to sustain our competitive position. Sales and marketing expenses are
expected to continue to comprise a significant percentage of our total expenses
because of costs associated with supporting the worldwide sales and marketing
functions necessary to meet the needs of our customer base and respond to
opportunities in the marketplace.

      Sales and marketing expenses decreased 17% to $1,568,000 in the third
quarter of 2001 from $1,887,000 in the third quarter of 2000. The decrease in
the third quarter of 2001 was primarily due to lower payroll and related benefit
costs, sales commissions, consulting expenses and bonus compensation ($295,000),
lower recruiting and relocation costs ($37,000) and lower travel costs
($74,000), which were partially offset by additional costs relating to the
Trigon sales and marketing organization ($104,000). Sales and marketing expenses
for the first three quarters of 2001 decreased 9% to $4,871,000 from $5,357,000
for the first three quarters of 2000 primarily due to lower sales commissions
resulting from lower revenues in the first three quarters of 2001 as compared to
the first three quarters of 2000 ($206,000), lower incentive compensation
($125,000), lower trade show expenses ($94,000), lower recruiting and relocation
costs ($93,000) and lower travel costs ($160,000), which were partially offset
by additional costs relating to the Trigon sales and marketing organization
($224,000).

      General and Administrative. General and administrative expenses consist
primarily of salaries, facilities costs and other related expenses for
administrative, executive and financial personnel as well as professional fees
and investor relations costs. General and administrative expenses decreased 15%
to $708,000 in the third quarter of 2001 compared to $830,000 in the third
quarter of 2000. The decrease in the third quarter of 2001 was primarily the
result of lower payroll, bonus compensation and related facility and benefit
costs ($172,000), which was partially offset by the addition of Trigon's general
and administrative organization ($58,000). General and administrative expenses
for the first three quarters of 2001 decreased 16% to $2,426,000 from $2,883,000
for the first three quarters of 2000. The decrease for the first three quarters
of 2001 was primarily due to lower payroll and related benefit costs, bonus
compensation, lower consulting and temporary help expenses ($356,000), a lower
allowance for bad debts ($95,000), and lower professional fees related to merger
and acquisition activities ($103,000). These decreases were partially offset by
an increase in shareholder expenses ($108,000) primarily due to higher costs
associated with our Proxy and Annual Report on Form 10-K and the addition of
Trigon's general and administrative organization ($81,000).

      General and Administrative - Non-Cash Stock Compensation. We had no
non-cash stock compensation in the third quarter or first three quarters of
2001. We had non-cash stock compensation of $35,000 and $553,000 for the third
quarter and first three quarters of 2000, respectively. The charges in both
periods in 2000 relate to the value of stock options held by non-employee
directors that vested during the periods.

      Goodwill Amortization. Goodwill amortization for the third quarter of 2001
was $607,000, compared to $238,000 in the third quarter of 2000. Goodwill
amortization for the first three quarters of 2001 was $1,206,000 compared to
$714,000 for the first three quarters of 2000. The goodwill results from the
purchase of Expersoft in March of 1999 which is being amortized over five years
at approximately $238,000 per quarter and from the purchase of assets from
Trigon Technology Group in May of 2001, which is being amortized over five years
at approximately $369,000 per quarter. In July 2001, the FASB issued SFAS No.
142, "Goodwill and Other Intangible Assets", which, effective January 1, 2002,
will require, among other things, that we discontinue goodwill amortization and
complete a transitional goodwill impairment test six months from the date of
adoption. We are currently assessing but have not yet determined the full impact
of SFAS No. 142 on our financial position and results of operations.


                                       12
<PAGE>

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

      Operating Loss. Our operating loss increased 7% to $2,532,000 in the third
quarter of 2001 from $2,371,000 in the third quarter of 2000, due primarily to
costs related to WebResolve and additional expenses, including goodwill
amortization, stemming from the purchase of assets from Trigon. The loss was
partially offset by lower operating expenses as described above. The operating
loss for the first three quarters of 2001 increased 63% to $7,644,000 compared
to an operating loss of $4,691,000 for the corresponding period in 2000, due
primarily to lower license and service revenues and costs related to WebResolve
as well as additional costs related to the Trigon purchase of assets, as
described above. The loss was partially offset by lower research and
development, sales and marketing and general and administrative costs, as
discussed above.

      Other Income (Expense), Net. Other expense, net increased $428,000 to
$201,000 in the third quarter of 2001 compared to other income, net of $227,000
for the third quarter of 2000. Other expense, net for the third quarter of 2001
consists primarily of a loss recorded for an investment in marketable securities
related to our Nortel Networks common stock holdings ($265,000), which was
partially offset by interest income ($46,000) and net sub-lease income
($50,000). For the first three quarters of 2001, other income, net decreased
$1,556,000 to $94,000 compared to $1,650,000 for the first three quarters of
2000. Other income, net for the first three quarters of 2001 consists 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 above. Other income, net for the third quarter of 2000
consisted primarily of interest income ($189,000) and net sub-lease income
($32,000). Other income, net for the first three quarters of 2000 consisted
primarily of a non-recurring gain on the sale of our remaining equity interest
in Systems Wizards ($961,000), interest income ($521,000), net sub-lease income
($100,000) and a gain on the early termination of a capital lease ($55,000).

      Provision for Income Taxes. We recorded a provision for income taxes of
$20,000 in the third quarter of 2001 compared to $35,000 in the third quarter of
2000. For the first three quarters of 2001, we have recorded a benefit for
income taxes of $62,000 compared to a provision of $115,000 for the first three
quarters of 2000. The benefit in 2001 was due primarily to the expiration of
certain tax contingencies ($113,000) but was partially offset by a foreign tax
provision for the current period. The income tax provisions are primarily for
non-U.S. taxes as we anticipate utilizing net operating losses to offset any
pre-tax income.

Liquidity and Capital Resources

      Net cash used for operating activities during the first three quarters of
2001 was $6,688,000 compared to $753,000 used by operating activities in the
first three quarters of 2000. The negative cash flow from operations in the
first three quarters of 2001 was primarily the result of the net loss
($7,488,000), an increase in accounts receivable ($528,000), a decrease in
accrued payroll ($326,000), a decrease in deferred revenue ($324,000), a
decrease in accounts payable ($212,000), and an increase in prepaid expenses
($183,000). The amounts were partially offset by non-cash depreciation and
amortization ($2,105,000) and a charge for a loss on marketable securities
($265,000).

      Net cash provided by investing activities during the first three quarters
of 2001 was $661,000 compared to net cash provided by investing activities of
$4,188,000 in the first three quarters of 2000. The net cash provided by
investing activities in the first three quarters of 2001 resulted from net sales
of short-term investments ($1,096,000), which were partially offset by purchases
of property and equipment ($231,000), and cash acquired in the Trigon
acquisition, net of cash paid ($226,000).

      Net cash used for financing activities during the first three quarters of
2001 was $284,000 compared to net cash provided by financing activities in the
first quarter of 2000 of $3,863,000. The net cash used for financing activities
during the first three quarters of 2001 was due to payments on short term debt
resulting from the Trigon transaction ($400,000) which was partially offset by
the exercise of stock options under our stock option plans ($116,000).

      The Company has reported operating losses from continuing operations for
each of the most recent five fiscal years. During the nine months ended
September 30, 2001 the Company reported operating losses of $7,644,000 and
negative cash flows from operations of $6,688,000. As of September 30, 2001 the
Company had an accumulated deficit of $77,900,000 and working capital of
$4,420,000, which includes cash and cash equivalents amounting to $4,485,000.
These conditions raise substantial doubt about the ability of the Company to
continue as a going concern for a reasonable period of time. Management's plans
to overcome these conditions include raising additional equity capital and
reducing expenses. On August 31, 2001, the Company entered into a Note and
Warrant Purchase Agreement with SDS Merchant Fund, L.P. ("SDS"), an
institutional investor. Pursuant to that agreement, SDS agreed to purchase from
the Company a $3,500,000 convertible promissory note, bearing interest at 6% per
annum (see note 6). SDS' obligation to purchase the note is contingent upon
certain closing conditions. Assuming the satisfaction of the closing conditions,
the purchase of the convertible promissory note by SDS would occur within five
business days after the registration statement filed by the Company on October
3, 2001 is declared effective by the Securities and Exchange Commission ("SEC").
In November 2001 the Company reduced its headcount by approximately 15% and
implemented several cost reduction initiatives. The Company anticipates that
these steps will reduce cash expenditures by approximately $600,000 per quarter
commencing in the first quarter of 2002. In addition to the SDS financing and
expense reduction program described above, management believes the Company will
need to raise additional equity capital to fund operations and implement
additional cost reduction initiatives until the Company's revenues increase to
levels sufficient to generate operating income. There can be no assurance that
the closing conditions for the SDS financing will be satisfied, that
management's expense reduction programs will be successful or that additional
financing will be available to the Company, or, if available, that the terms
will be satisfactory to the Company. If the Company is not successful in closing
the SDS transaction, reducing its expenses or raising additional equity capital,
or if revenues at levels sufficient to generate operating income do not
transpire, the Company may not be able to continue as a going concern for a
reasonable period of time.

                                       13
<PAGE>

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

      At September 30, 2001, our long-term liquidity needs consisted principally
of operating lease commitments related to facilities and office equipment.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      (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, 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%. As of
      September 30, 2000, the Company had $11,230,000 in cash and cash
      equivalents and short-term investments of $988,000 with a weighted average
      variable rate of 5.97% and 6.70%, respectively.

            We mitigate default risk by investing in high credit quality
      securities and by constantly positioning our portfolio to respond
      appropriately to a significant reduction in a credit rating of any
      investment issuer or guarantor and by placing our portfolio under the
      management of professional money managers who invest within specified
      parameters established by the Board of Directors. The portfolio includes
      only marketable securities with active secondary or resale markets to
      ensure portfolio liquidity and maintains a prudent amount of
      diversification.

            We currently have no short or long-term debt. However, we have
      entered into a Note and Warrant Purchase Agreement with SDS, as previously
      discussed in the Liquidity and Capital Resources section.

      (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, Japan, Korea, the Netherlands, Poland and the
      United Kingdom, where the functional currencies are: Deutschemark, Yen,
      Won, Dutch Guilder, Zloty and British Pound, 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 policy relating to hedging. There can be no assurance that any
      hedging techniques implemented by us would be successful or that our
      results of operations will not be materially adversely affected by
      exchange rate fluctuations. Our foreign assets are not material.


                                       14
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

            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.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

            Recent Sales of Unregistered Securities

TRIGON TECHNOLOGY GROUP

            Pursuant to an Agreement and Plan of Reorganization and Liquidation
dated May 30, 2001 (the "Agreement"), Vertel Corporation, a California
corporation ("Vertel"), purchased substantially all of the assets and assumed
substantially all of the liabilities of Trigon Technology Group, Inc., a Texas
corporation ("Trigon"), in exchange for 4,500,000 shares of Vertel's Common
Stock (the "Shares"). The date of the Agreement was also the closing date for
the transaction contemplated in such Agreement. The amount of consideration was
determined based upon arm's-length negotiations between Vertel and Trigon. The
transaction was approved by the unanimous written consent of the holders of the
outstanding shares of capital stock of Trigon.

            As of the closing date, the aggregate market value of the
consideration based upon the $1.45 closing price of a share of Vertel's common
stock as reported on The Nasdaq National Market(R) at 4:00 p.m. Eastern Time was
$6,525,000.

            Of the 4,500,000 shares consideration, 675,000 shares were deposited
into an escrow account to be held for one year as security for Trigon's
indemnification obligations to Vertel.

            Trigon distributed the Shares to its shareholders shortly after the
closing in connection with the dissolution of Trigon. The transaction was
accomplished pursuant to an exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended, and Regulation D - Rule 506, promulgated
thereunder.

            Trigon's shareholders executed a Shareholders Agreement (the
"Shareholders Agreement") with Vertel. Pursuant to the Shareholders Agreement,
the holders of the outstanding shares of preferred stock of Trigon are entitled
to limited resale S-3 registration rights from Vertel. Such resale rights
require Vertel to file a registration statement on Form S-3 to register for
resale, the shares of Vertel's common stock, which will be distributed by Trigon
to its preferred stock holders. Vertel is not obligated to register the shares
of Vertel's common stock distributed to the holders of Trigon common stock and
such shares will remain restricted shares.

SDS MERCHANT FUND, L.P.

            On August 31, 2001, Vertel entered into a Note and Warrant Purchase
Agreement with SDS Merchant Fund, L.P. ("SDS"), pursuant to which SDS agreed to
purchase a $3,500,000 aggregate principal amount 6% per annum convertible
promissory note due three years from the date that SDS purchases such note. This
transaction has not yet closed.

            SDS' obligation to purchase the note is contingent upon certain
closing conditions, some of which have not yet been satisfied. Such conditions
relate to the Note and Warrant Purchase Agreement and include: (i) that Vertel's
representations and warranties are true and correct as of the funding date, (ii)
that Vertel has performed all of its covenants, agreements and conditions
required to be performed by Vertel, (iii) that trading of Vertel's common stock
has not been suspended, (iv) that no statute, rule, regulation, executive order,
decree, ruling or injunction is in force against the transactions contemplated
in the Note and Warrant Purchase Agreement, (v) that no pending or threatened
litigation exists, and (vi) that the SEC has declared effective a registration
statement covering the shares to


                                       15
<PAGE>

                     PART II. OTHER INFORMATION (continued)

be issued pursuant to this prospectus (1) upon conversion of the convertible
promissory note, and (2) upon exercise of the Warrant, each held by SDS.

            The conversion price of the convertible promissory 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%. Such discount percentage
can be adjusted in 2% increments (i.e. to 5%) for every $1,000,000 that the sum
of Vertel's 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 Vertel's 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 convertible promissory note or the Warrant.

            The conversion price of the convertible promissory note is subject
to a minimum floor of $0.681, provided however, that if the per share market
value of Vertel's common stock is below the closing date price of Vertel's
common stock for a period of any twenty-two consecutive trading days, the
minimum floor no longer applies. The conversion price of the convertible
promissory note is capped at $1.75 per share of common stock.

            The Warrant is initially exercisable into 800,000 shares of Vertel's
common stock at an initial exercise price of $0.9988 per share. Such Warrant
exercise price may be adjusted on the dates that are twelve months and eighteen
months following the effective date of the registration statement covering the
Warrant shares to an amount 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 initial exercise price.

            Pursuant to the Note and Warrant Purchase Agreement and the
Registration Rights Agreement between Vertel and SDS, the registration statement
covers an estimated 200% of the number of shares of Vertel's common stock
issuable upon conversion of the convertible promissory note and exercise of the
Warrant as of the filing of the registration statement.

            The transaction was accomplished pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended, and
Regulation D - Rule 506, promulgated thereunder.

            On October 3, 2001, Vertel filed a registration statement on Form S-
3 with the Securities and Exchange Commission covering the shares underlying the
Note and Warrant.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

            Not applicable.

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

ITEM 5. OTHER INFORMATION

            None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)        EXHIBITS

           The exhibits required to be furnished are listed in the Exhibit List
           following this Report.

(b)        REPORTS ON FORM 8-K

           On August 13, 2001, Registrant filed a Current Report on Form 8-K/A
           amending its Current Report on Form 8-K dated June 13, 2001, to
           provide unaudited pro forma condensed combined financial statements.


                                       16
<PAGE>

                     PART II. OTHER INFORMATION (continued)

Registrant also filed a Current Report on Form 8-K dated September 18, 2001 in
connection with its announcement that it had entered into a Note and Warrant
Purchase Agreement with SDS Merchant Fund, L.P. pursuant to which SDS agreed to
purchase a $3,500,000 convertible promissory note and accompanying warrant from
the Registrant.


                                       17
<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.

                                    VERTEL CORPORATION
                                    (Registrant)

Date: November 14, 2001
                                    /s/   CRAIG S. SCOTT
                                    ----------------------------------
                                    Craig S. Scott
                                    Vice President, Finance and Administration,
                                    And Chief Financial Officer
                                    (Principal Financial Officer)


                                       18
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT
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. (14)

3.3 (and 4.1)         Amended and Restated Articles of Incorporation of the
                      Registrant. (11)

3.4 (and 4.2)         Bylaws of the Registrant, as amended to date. (13)

3.5                   Certificate of amendment to Company's articles of
                      incorporation, as filed with the California Secretary of
                      State on April 7, 1998, changing the Company's name to
                      Vertel Corporation. (7)

3.6                   Preferred Shares Rights Agreement dated as of April 29,
                      1997 with Chase Mellon Shareholder Services, LLC. (5)

4.3                   Note and Warrant Purchase Agreement dated August 31, 2001
                      by and between Vertel Corporation and SDS Merchant
                      Capital, L.P. (16)

4.4                   Form of $3,500,000 Convertible Promissory Note dated
                      August 31, 2001 by and between Vertel Corporation and SDS
                      Merchant Capital, L.P. (16)

4.5                   Warrant dated August 31, 2001 by and between Vertel
                      Corporation and SDS Merchant Capital, L.P. (16)

10.5                  1991 Employee Stock Purchase Plan and form of subscription
                      agreement thereunder. (2)

10.6                  Form of Indemnification Agreement. (1)

10.22                 Lease Agreement between the Registrant and Moorpark
                      Associates, a California Limited Partnership, dated
                      February 5, 1993. (3)

10.32                 1996 Directors' Stock Option Plan and forms of option
                      agreement thereunder. (6)

10.48                 Lease Agreement between the Registrant and Nomura-Warner
                      Center Associates, L.P., dated November 26, 1996. (4)

10.68                 Form of Retention Agreement between the Company and each
                      of its officers. (8)

10.72                 Employment Agreement between the Company and Cyrus D.
                      Irani dated January 12, 1999. (9)

10.75                 Amended 1996 Directors' Stock Option Plan and form of
                      option agreement thereunder. (9)

10.76                 Amended 1998 Stock Option Plan and form of option
                      agreement thereunder. (9)

10.77                 Employment Agreement between the Company and Stephen J.
                      McDaniel dated November 1, 1999.(9)

10.80                 Amendment No. 1, dated December 3, 1999 to the Employment
                      Agreement between the Company and Cyrus D. Irani. (9)

10.81                 Vertel Corporation 2000 Stock Option Plan (10)

10.82                 Employment Agreement between the Company and Tonia G.
                      Graham dated July 5, 2000. (12)

10.83                 Employment Agreement between the Company and Craig S.
                      Scott dated December 1, 2000. (12)

10.84                 2001 Nonqualified Stock Option Plan and Form of Notice of
                      Stock Option Grant and Form of Stock Option Agreement with
                      attached Notice of Exercise. (15)


                                       19
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT
NUMBER                              DESCRIPTION
-------                             -----------
10.85                Employment Agreement between the Company and Alex Kuo dated
                     May 30, 2001. (17)

10.86                Retention and Severance Agreement between the Company and
                     Alex Kuo dated May 30, 2001. (17)

10.87                Non-Competition and Non-Disclosure Agreement between the
                     Company and Alex Kuo dated May 30, 2001. (17)

11.1                 Statement re: Computation of per share earnings (17)

(1) Incorporated by reference to identically numbered exhibits filed in response
to Item 16(a), "Exhibits," of the Registrants Registration Statement on Form S-1
and Amendment No. 1 thereto (File No. 33-43544) which became effective on
December 9, 1991.

(2) Incorporated by reference to identically numbered exhibits filed in response
to Item 6(a), "Exhibits," of the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 26, 1992.

(3) Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 2, 1993.

(4) Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 28, 1996.

(5) Incorporated by reference to Exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-A as filed with the
Securities and Exchange Commission on April 30, 1997.

(6) Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 27, 1997.

(7) Incorporated by reference to Exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on April 7, 1998.

(8) Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.

(9) Incorporated by reference to identically numbered exhibits filed in response
to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.

(10) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits," of the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2000.

(11) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits," of the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 2000.

(12) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.

(13) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits," of the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2001.


                                       20
<PAGE>

EXHIBIT INDEX (continued)

(14) Incorporated by reference to Exhibit 2.1 filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report of Form 8-K as filed with the
Securities and Exchange Commission on June 13, 2001.

(15) Incorporated by reference to Exhibits 5.1, 5.2 and 5.3 filed in response to
Item 7(c), "Exhibits," of the Registrant's Current Report of Form 8-K as filed
with the Securities and Exchange Commission on June 13, 2001.

(16) Incorporated by reference to Exhibits 4.1, 4.2 and 4.3 filed in response to
Item 7(c), "Exhibits," of the Registrant's Current Report on Form 8-K as filed
with the Securities and Exchange Commission of September 18, 2001.

(17) Filed herewith.


                                       21