<PAGE>
 
================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON DC   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 26, 1998

                                      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 Number)
      


                      21300 VICTORY BOULEVARD, SUITE 1200
                           WOODLAND HILLS, CA 91367
                   (Address of principal executive offices)

      Registrant's telephone number, including area code: (818) 227-1400


 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 4, 1998 there were 26,520,930 shares of common stock outstanding.

================================================================================
<PAGE>
 
                        PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS

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

<TABLE> 
<CAPTION> 
                                                                                  SEPTEMBER 26,         DECEMBER 27,
                                                                                      1998                  1997
                                                                                      ----                  ----
                                                                                   (unaudited)
<S>                                                                               <C>                   <C> 
Current assets:
  Cash and short-term investments (Note 2)..................................        $  7,306             $  6,252
  Trade accounts receivable (net of allowances of $503 as of                               
      September 26, 1998 and $452 as of December 27, 1997)..................           4,987                4,941
  Trade accounts receivable, related party..................................              99                   --
  Prepaid expenses and other current assets.................................             969                  925
                                                                                    --------             --------
                                                                                           
Total current assets........................................................          13,361               12,118
                                                                                           
Property and equipment, net.................................................             987                  766
Investments (Note 3)........................................................           3,819                   --
Other assets................................................................             372                  566
                                                                                    --------             --------
                                                                                    $ 18,539             $ 13,450
                                                                                    ========             ========
                     LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................................        $    140             $    733
  Accrued wages and related liabilities.....................................             700                  660
  Accrued restructuring expenses............................................             224                1,487
  Other accrued liabilities.................................................           3,456                2,100
  Deferred revenue..........................................................             973                  531
  Net liabilities of discontinued operations................................              --                  196
                                                                                    --------             --------
                                                                                           
Total current liabilities...................................................           5,493                5,707
                                                                                           
Deferred rent...............................................................              --                   10
                                                                                    --------             --------
                                                                                           
      Total liabilities.....................................................           5,493                5,717
                                                                                    --------             --------
 
Shareholders' equity:
  Preferred stock, par value $.01, 2,000,000 shares authorized;
      none issued and outstanding
  Common stock, par value $.01, 50,000,000 shares authorized;
      shares issued and outstanding 1998, 24,517,255;
      1997, 24,146,518......................................................             245                  227
  Additional paid-in capital (Note 3).......................................          80,934               78,661
  Accumulated deficit.......................................................         (63,619)             (64,760)
  Accumulated comprehensive deficit.........................................            (147)              (2,003)
                                                                                    --------             --------
      Total.................................................................          17,413               12,125
  Less notes receivable from issuance of common stock.......................          (4,367)              (4,392)
                                                                                    --------             --------
                                                                                              
      Total shareholders' equity............................................          13,046                7,733
                                                                                    --------             --------
 
                                                                                    $ 18,539             $ 13,450
                                                                                    ========             ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       2
<PAGE>
 
                              VERTEL CORPORATION
     CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                   (in thousands, except per share amounts)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                        THREE MONTH PERIOD ENDED      NINE MONTH PERIOD ENDED       
                                                                        ------------------------      -----------------------       
                                                                         SEPT. 26,     SEPT. 27,       SEPT. 26,    SEPT. 27,       
                                                                           1998          1997            1998         1997          
                                                                           ----          ----            ----         ----          
<S>                                                                     <C>            <C>            <C>           <C>             
Revenues:                                                                                                                           
  License........................................................        $3,551        $ 2,040        $10,199       $ 9,052         
  License - related party........................................            --             --            737            --         
  Service and other..............................................         1,357          1,654          3,893         4,286         
                                                                         ------        -------        -------       -------         
     Net revenues................................................         4,908          3,694         14,829        13,338         
                                                                                                                                    
Cost of revenues:                                                                                                                   
  License........................................................           165            113            695           637         
  Service and other..............................................           895            987          2,789         2,551         
                                                                         ------        -------        -------       -------         
     Total cost of revenues......................................         1,060          1,100          3,484         3,188         
                                                                         ------        -------        -------       -------         
                                                                                                                                    
Gross profit.....................................................         3,848          2,594         11,345        10,150         
                                                                                                                                    
Operating expenses:                                                                                                                 
  Research and development.......................................         1,677          1,094          4,724         4,290
  Sales and marketing............................................         1,900          1,590          5,315         6,066
  General and administrative.....................................           724            776          2,058         2,964
                                                                         ------        -------        -------       -------         
     Total.......................................................         4,301          3,460         12,097        13,320         
                                                                         ------        -------        -------       -------         
Operating loss from continuing operations........................          (453)          (866)          (752)       (3,170)        
Other income, net................................................         1,526             40          2,189            76         
                                                                         ------        -------        -------       -------         
Income (loss) from continuing operations before                                                                                     
     provision for income taxes..................................         1,073           (826)         1,437        (3,094)        
Provision for income taxes.......................................           100             --            296            --         
                                                                         ------        -------        -------       -------         
Income (loss) from continuing operations.........................           973           (826)         1,141        (3,094)        
Loss from discontinued operations................................            --         (1,878)            --        (4,938)        
                                                                         ------        -------        -------       -------         
Net income (loss)................................................           973         (2,704)         1,141        (8,032)        
                                                                                                                                    
Other comprehensive income, net (Note 4).........................           446             15            425            25         
                                                                         ------        -------        -------       -------         
Comprehensive income (loss)......................................        $1,419        $(2,689)       $ 1,566       $(8,007)        
                                                                         ------        -------        -------       -------         
                                                                                                                                    
Basic net income (loss) per common share: (Note 5)                                                                                  
  Income (loss) from continuing operations.......................        $ 0.04        $ (0.04)       $  0.05       $ (0.15)        
  Loss from discontinued operations..............................            --          (0.09)            --         (0.23)        
  Net income (loss)..............................................          0.04          (0.13)          0.05         (0.38)        
                                                                                                                                    
Fully diluted net income (loss) per common share: (Note 5)                                                                          
  Income (loss) from continuing operations.......................        $ 0.04        $ (0.04)       $  0.05       $ (0.15)        
  Loss from discontinued operations..............................            --          (0.09)            --         (0.23)        
  Net income (loss)..............................................          0.04          (0.13)          0.05         (0.38)        
                                                                                                                                    
Weighted average shares outstanding used in net                                                                                     
  income (loss) per common share calculations:                                                                                      
  Basic..........................................................        22,898         20,995         22,790        20,887        
  Fully diluted..................................................        23,783         22,995         24,329        20,887        
</TABLE> 

         See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
 
                              VERTEL CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                NINE MONTH PERIOD ENDED
                                                                                -----------------------
                                                                              SEPTEMBER 26,   SEPTEMBER 27,
                                                                                  1998            1997
                                                                                  ----            ---- 
<S>                                                                           <C>             <C>
Cash flows from operating activities:
   Income (loss) from continuing operations................................        $ 1,141         $(3,094)
   Adjustments to reconcile net income (loss) to net cash provided by
      (used for) operating activities:
        Depreciation and amortization......................................            763             767
        Reserve for returns and bad debts..................................             49             (18)
        Changes in operating assets and liabilities  (Note 4)..............           (265)           (214)
                                                                                   -------         -------
      Net cash provided by (used for) operating activities.................          1,688          (2,559)
                                                                                   -------         -------
 
Cash flows from investing activities:
   Net sales (purchases) of short-term investments.........................           (978)          3,748
   Additions to property and equipment.....................................           (763)           (361)
   Change in other assets..................................................            (28)            258
                                                                                   -------         -------
      Net cash provided by (used for) investing activities.................         (1,769)          3,645
                                                                                   -------         -------
 
Cash flows from financing activities:
   Proceeds from repayment of notes receivable............................              25             360
   Proceeds from issuance of common stock.................................             322             194
                                                                                   -------         -------
      Net cash provided by financing activities............................            347             554
                                                                                   -------         -------
      Net cash used for discontinued operations............................           (178)         (4,137)
                                                                                   -------         -------
 
Effect of exchange rate changes on cash....................................            (12)            (25)
                                                                                   -------         -------
 
Net increase (decrease) in cash and cash equivalents.......................             76          (2,522)
 
Cash and cash equivalents, beginning of period.............................          6,252           8,219
                                                                                   -------         -------
 
Cash and cash equivalents, end of period...................................        $ 6,328         $ 5,697
                                                                                   =======         =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
 
                              VERTEL COROPORATION
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1.   GENERAL

     The consolidated financial statements include the accounts of Vertel
Corporation (formerly Retix) and its majority-owned subsidiaries (the
"Company").  All significant inter-company balances and transactions have been
eliminated in consolidation.  The interim consolidated financial statements are
unaudited.  As discussed more thoroughly in Note 3, the Company's former
broadband access equipment subsidiary, Sonoma Systems, Inc. ("Sonoma"), is
presented as a discontinued operation for 1997.  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.  The Company
reports its interim financial information on a 13 week basis ending the last
Saturday of each calendar quarter, and reports its annual financial information
on a 52 - 53 week fiscal year which ends on the Saturday nearest to December 31.

     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 27,
1997 included in the Company's Annual Report.  The results of operations for the
three and nine month periods ended September 26, 1998 are not necessarily
indicative of results that may be expected for the full year.

Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.

2.   CASH AND SHORT-TERM INVESTMENTS

     Cash and short-term investments consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                               September 26,   December 27,  
                                                                    1998           1997      
                                                                    ----           ----      
       <S>                                                     <C>             <C>         
       Cash and cash equivalents...........................        $6,328         $6,252     
       Short-term investments..............................           978             --     
                                                                   ------         ------     
                                                                   $7,306         $6,252     
                                                                   ======         ======      
</TABLE>

     Cash equivalents consist of short-term investments with original maturities
of three months or less.

3.   INVESTMENT

     In December 1997, in order to focus exclusively on the telecommunications
network management software business, the Company's Board of Directors adopted a
formal plan to reduce the Company's investment in Sonoma through direct
investment in that entity by independent venture capital firms.  The plan, as
adopted by the Board of Directors, called for the Company to reduce its
ownership interest in Sonoma to that of a passive investor with no significant
influence over the former subsidiary's operations.  Sonoma raised an aggregate
of approximately $9 million by issuing preferred stock at two closings, which
occurred in January and March of 1998, thereby reducing the Company's voting
ownership in Sonoma to 19.9%.  In connection with this transaction, the Company
recorded a $3.4 million increase in its net investment in Sonoma to reflect the
Company's proportionate share of Sonoma's post transaction equity and a
corresponding credit to additional paid-in capital.  In addition, the $1.4
million cumulative translation loss related to a foreign subsidiary of Sonoma
was charged to additional paid-in capital.  Subsequent to the transaction the
Company is accounting for its investment in Sonoma using the cost method.

     As a result of the foregoing, the Company's consolidated financial
statements and related notes to financial statements for 1997 reflect the
results of operations and net liabilities of Sonoma as a discontinued operation.

                                       5
<PAGE>
 
                              VERTEL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

4.   STATEMENTS OF CASH FLOWS

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

<TABLE>
<CAPTION>
                                                                                          Nine Month Period Ended    
                                                                                        ------------------------------
                                                                                        September 26,   September 27,
                                                                                             1998            1997    
                                                                                             ----            ----     
     <S>                                                                                <C>             <C>          
     Trade accounts receivable.....................................................        $  (196)          $ 722
     Prepaid expenses and other current assets.....................................            (44)            260
     Accounts payable..............................................................           (590)            (78)
     Accrued wages and related liabilities.........................................             40            (107)
     Cash payments for restructuring expenses......................................         (1,263)           (316)
     Other accrued liabilities.....................................................          1,356            (357)
     Deferred rent.................................................................            (10)            (75)
     Deferred revenue..............................................................            442            (263)
                                                                                           -------           -----
        Decrease in operating assets and liabilities...............................        $  (265)          $(214)
                                                                                           =======           ===== 
</TABLE>

     In June 1998, the Company entered into a semi-exclusive royalty bearing
licensing contract with Symbol Software Limited ("Symbol"), a subsidiary of
Airtel ATN plc ("Airtel"), for Vertel's Aeronautical Telecommunications Network
("ATN") Router software as well as nonexclusive royalty bearing licenses of
various other TMN software products, for $1,000,000 (the "ATN Licensing").
During July 1998, the Company assigned substantially all of the assets (except
cash) and liabilities of its Irish operations, and sold the copyright and all
other intellectual property rights in a software library to Symbol in exchange
for 10% of Airtel's common stock (the "Irish Transaction"). The Irish
Transaction substantially liquidated the Company's investment in its Irish
operation. The Company's 10% ownership interest in Airtel, valued at
approximately $437,000, reflects certain restrictions including a requirement
prohibiting the Company from disposing of the Airtel shares for a period of one
year. The book value of the software library, and the net assets and liabilities
assigned to Symbol approximated zero and, as a result, the Company recognized a
gain of approximately $437,000 related to the Irish Transaction during the
quarter ended September 26, 1998. The gain of approximately $437,000 is included
in other income in the accompanying statement of operations and the value of
Company's ownership in Airtel is included in investments in the accompanying
balance sheet at September 26, 1998. As a result of the substantial liquidation
of its Irish operation, the Company recorded a $436,000 charge to other income
representing the realization of foreign currency exchange losses previously
included as cumulative translation losses in a separate component of
shareholders' equity reported on the accompanying consolidated balance sheets.
Since cumulative foreign currency translation adjustments represent the
Company's sole source of other comprehensive income, a $436,000 reclassification
adjustment, as required by the provisions of SFAS No. 130 (see Note 6), was
reflected as an increase in other comprehensive income on the accompanying
consolidated statement of operations and comprehensive income (loss) and a
reduction in the accumulated comprehensive deficit on the accompanying
consolidated balance sheets.

     In January 1998, the Company recorded an increase in its net investment in
Sonoma of $3.4 million as result of the financing transaction completed
(described in Note 3).  In addition, $1,431,000 in related cumulative
translation loss was charged to additional paid-in capital.  Other financing and
investing activities during the nine months ended September 26, 1998 which
affected recognized assets or liabilities but that did not result in cash
receipts or cash payments were not significant.

5.   PER SHARE INFORMATION

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. The
Company has reflected the provisions of SFAS 128 in the accompanying financial
statements for all periods presented. SFAS 128 replaces the presentation of
primary Earnings Per Share ("EPS") with a presentation of basic EPS, which
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. The Statement also requires the dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures.

                                       6
<PAGE>
 
                              VERTEL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

     Diluted EPS is computed similarly to fully diluted EPS pursuant to
Accounting Principles Board Opinion No. 15. Due to the losses from continuing
operations reported by the Company in the three and the nine month periods ended
September 27, 1997, any potential common shares to be included in diluted
earnings per share as a result of common stock options and warrants are anti-
dilutive and thus diluted earnings per share and basic earnings per share are
equal. Potentially dilutive securities included in the computation of fully
diluted earnings per share, for the three and nine months ended September 26,
1998, consisted of stock options outstanding and shares represented by notes
receivable as of September 26, 1998.

6.   NEWLY ADOPTED ACCOUNTING STANDARD

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
which is effective for fiscal years beginning after December 15, 1997.  SFAS 130
defines comprehensive income as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from non-
owner sources. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements.  SFAS 130 requires that
an enterprise (i) classify items of other comprehensive income by their nature
in a financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet.  The Company has reflected
the provisions of SFAS 130 in the accompanying financial statements for all
periods presented.  The accumulated comprehensive deficit and other
comprehensive income as reflected on the accompanying consolidated balance
sheets and statements of operations and comprehensive income (loss), 
respectively, consist of foreign currency translation adjustments.

7.   TERMINATION OF NON-U.S. PENSION PLAN

     During the nine months ended September 26, 1998 the Company finalized the
termination of a non-U.S. pension plan, which previously covered the Company's
Irish employees. This action resulted in a return of excess plan assets to the
Company. The Company recorded $400,000 as other income in the first quarter of
1998 and an additional $263,000 in the second quarter of 1998 upon final
determination of the amount of excess plan assets. The Company recorded income
taxes related to the return of the pension assets of $132,000 and $64,000 in the
first and second quarters, respectively.

8.   SALE OF CDPD AND PACT TECHNOLOGIES

     On July 27, 1998, the Company entered into agreements with AMP Incorporated
("AMP") whereby AMP agreed to purchase Vertel's CDPD and pACT ("Wireless")
products and technologies as well as other telecom management software. The
agreements consisted of a License and Purchase Agreement (the "Sale Agreement")
valued at $2.5 million for the sale Vertel's Wireless technology and a non-
exclusive license to certain other related technology sold in the ordinary
course of business (the "Background Technology"), and an agreement (the
"Assignment Agreement) valued at $1.0 million for the assignment of certain
contracts related to Vertel's Wireless technology.  Under the terms of the Sale
Agreement, AMP was required to pay the Company $750,000 upon the execution of
the Sale Agreement, $750,000 upon the delivery of code to AMP and $1.0 million
upon the later of January 27, 1999 or the Company's completion of certain
deliverables consisting primarily of the transfer of certain reseller agreements
and the Company's support of the Background Technology for a period of six
months.  As of September 26, 1998, the Company had received payments totaling
$1.5 million under the Sale Agreement.  Approximately $800,000 of the Sale
Agreement, representing the value of the Background Technology licensed to AMP,
was accounted for as license revenue and approximately $1.5 million (net of
approximately $200,000 of certain deferrals) was included in other income in the
accompanying statement of operations for the quarter ended September 26, 1998.
The balance owed by AMP under the Sale Agreement at September 26, 1998 ($1.0
million) is included in trade accounts receivable in the accompanying balance
sheet. Under the terms of the Assignment Agreement, AMP is required to pay the
Company $1.0 million within five days of the Company obtaining the written
consent of a certain customer to the assignment of its license and maintenance
agreement with the Company to AMP.  In October 1998, the Assignment Agreement
was amended whereby the Company agreed to provide certain deliverables including
minor product modifications, maintenance, and training (to be delivered by the
Company during the quarters ending December 31, 1998 and March 31, 1999) in
exchange for a payment of $500,000 during October 1998 and the balance, less
approximately $169,000 related to deferrals, payable during the quarter ended
March 31, 1999.  Additionally, the Company anticipates the recognition of the
value of the Assignment Agreement ($1.0 million) as other income during the
quarter ending December 31, 1998.

                                       7
<PAGE>
 
                              VERTEL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)
                                        
9.   SUBSEQUENT EVENT

     On September 29, 1998, the Company sold 2,000,000 shares of Common Stock
for $1.50 per share ($3,000,000 in gross proceeds). The price per share was
determined as the greater of (a) the average closing price of the Common Stock
for the five days preceding the closing date and (b) $1.50. In connection with
the transaction, the Company has agreed to file a registration statement within
90 days of the closing date covering the shares issued and has agreed to bear
all expenses in connection therewith.

     Of the total shares issued, 1,000,000 shares were purchased by Sierra
Ventures, a venture capital firm.  Jeffrey M. Drazan, a General Partner of
Sierra Ventures, is a member of the Company's Board of Directors.

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

     "Safe Harbor" Statements under the Private Securities Litigation Reform Act
of 1995: Except for the historical information presented, the matters discussed
in this Quarterly Report on Form 10-Q are forward looking statements that
involve risks and uncertainties, including the risks of timely development,
deployment and success of new and enhanced TMN products, loss of key customer
relationships, the impact of competitive products and the dependence on key
partners and alliances, the length of the Company's sales cycle, size and timing
of license fees closed during the quarter, the likely continued significant
percentage of quarterly revenues recorded in the last month of the quarter which
makes forecasting difficult and subject to a financial risk of variance with
actual results, economic uncertainties associated with conducting business on a
worldwide basis, the Company's ability to control expenditures at a level
consistent with revenues, a likely decline in the Company's ownership position
in Sonoma Systems, Inc. and Airtel ATN plc if additional funding is required and
or obtained and the Company is unable or unwilling to participate. The risks
related to the year 2000, as the dates on which the Company believes the Year
2000 readiness program will be completed are based on Management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Year 2000 readiness
program. Specific factors that might cause differences between the estimates and
actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer code, timely responses to and corrections by third-parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-parties and the interconnection
of global businesses, the Company cannot ensure its ability to timely and cost-
effectively resolve problems associated with the Year 2000 issue that may affect
its operations and business, or expose it to third-party liability, and the
other risks detailed from time to time in the Company's public disclosure
filings with the U.S. Securities and Exchange Commission (SEC). Copies of the
most recent Forms 10-K and 10-Q are available upon request from Vertel's
Investor Relations Department.

     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 and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 27,
1997 contained in the Company's Annual Report.

RESULTS OF OPERATIONS

     Net revenues.  Net revenues increased $1,214,000, or 33%, to $4,908,000 for
     ------------                                                               
the quarter ended September 26, 1998 (the "third quarter of 1998") as compared
to $3,694,000 for the quarter ended September 27, 1997 (the "third quarter of
1997"), and increased $1,491,000, or 11%, to $14,829,000 for the three quarters
ended September 26, 1998 (the "first three quarters of 1998") as compared to
$13,338,000 for the three quarters ended September 27, 1997 (the "first three
quarters of 1997").

                                       8
<PAGE>
 
ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     License revenues for the third quarter of 1998 ($3,551,000) increased
$1,511,000, or 74%, over the third quarter of 1997 ($2,040,000) and was due
primarily to increased license fees and royalties of telecore and access
products (including joint HP/Vertel products which were introduced in 1998) as
well as the licensing of certain Background Technology (approximately $800,000)
in connection with the Company's sale of its CDPD and pACT technologies to AMP
during the third quarter of 1998. These increases were partially offset by the
discontinuation of revenues associated with the Company's CDPD / pACT
technologies which were sold during the third quarter of 1998. License revenues
for the first three quarters of 1998 ($10,936,000) increased $1,884,000 or 21%,
compared to the first three quarters of 1997 ($9,052,000). The increase was due
primarily to a $1,000,000 semi-exclusive licensing contract during the second
quarter of 1998 of the Company's Aeronautical Telecommunications Network (ATN)
Router software; the licensing of certain Background Technology (approximately
$800,000) in connection with the Company's sale of its CDPD and pACT
technologies to AMP during the third quarter of 1998; and increases in licensing
telecore and access products (including joint HP/Vertel telecore products
which were introduced in 1998). These increases were partially offset by the one
time final billing of $1.9 million related to the discontinuance of the pACT-
based two-way paging messaging products in the corresponding period in 1997.
License revenues consist primarily of license fees and royalties derived from
the Company's TMN-based software solutions and development platforms.

     Service and other revenues, which consist primarily of fees from
professional service projects, software maintenance, and custom software
engineering, decreased $297,000, or 18%, during the third quarter of 1998
compared to the third quarter of 1997. The decrease during the third quarter of 
1998 was primarily the result of lower custom software engineering services
compared to the corresponding period in 1997. Service and other revenues for the
first three quarters of 1998 decreased $393,000, or 9%, compared to the first
three quarters of 1997 and was due primarily to lower revenues from professional
service contracts.

     Sales to customers outside of North America comprised approximately 36% and
40%, respectively, of net revenues for the third quarter of 1998 and the first
three quarters of 1998 as compared to 39% and 36%, respectively, for the same
periods in 1997.  The Company has historically reported a high percentage of
sales to customers outside of the United States which the Company believes is
suggestive of a high degree of investment by non-U.S. companies in new
infrastructure, compared to their U.S. counterparts.  Continued economic turmoil
in Asia and other parts of the world could impact future sales in those regions.

     Gross margin. Cost of revenues consists primarily of professional
     ------------
engineering services, warranty and maintenance costs, and royalties paid under
software licensing agreements. Gross margin increased to 78% and 77% of net
revenues for the third quarter of 1998 and the first three quarters of 1998
respectively, as compared to 70% and 76% for the same periods in 1997. The
increase in gross margin for the third quarter of 1998 and the first three
quarters of 1998 compared to the corresponding periods for 1997 was due
primarily to the increase in license revenues in 1998, which yield significantly
higher margins than service revenues.

     Research and development.  The Company has invested heavily in research and
     ------------------------                                                   
development ("R&D") to expand its expertise in TMN-based software solutions and
applications technologies and to continue sustaining support of its product
offerings.  The major components of R&D expenses are engineering salaries,
employee benefits and associated overhead, fees to outside contractors, and the
cost of facilities and depreciation of capital equipment.  Costs related to R&D
in certain cases are offset by customer reimbursement of non-recurring
engineering services.

     Total R&D expenses during the third quarter of 1998 increased by $583,000,
or 53%, compared to the third quarter of 1997. As a percentage of revenue, R&D
expenses increased to 34% for the third quarter of 1998, as compared to 30% for
the same period in 1997. The increase in R&D expenses during the third quarter
of 1998 was primarily the result of additional salaries and related expenses due
to additional personnel and an increase in the average level of compensation, as
well as a reduction in the amount of expenses being reimbursed by customers as a
result of lower non-recurring engineering services during the third quarter of
1998 compared to the third quarter of 1997. R&D expenses for the first three
quarters of 1998 increased $434,000, or 10%, over the first three quarters of
1997 primarily as a result of increased personnel and an increase in the average
level of compensation.

     The Company expects to continue to make significant investments in the
development of new products and feature enhancements to existing product lines,
although such expenses may fluctuate from quarter to quarter both in absolute
dollars and as a percentage of revenue, depending on the status of various
development projects and the level of non-recurring engineering services.

                                       9
<PAGE>
 
ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     Sales and marketing.  Sales and marketing expenses consist primarily of
     -------------------                                                    
personnel and associated costs related to selling, support and marketing
activities, including marketing programs such as trade shows and other
promotional costs. The Company expects these expenses will continue to comprise
a significant percentage of the Company's total expenses because of costs
associated with supporting the worldwide sales and service functions necessary
to meet the needs of the Company's customer base and respond to the
opportunities in the TMN marketplace.

     Sales and marketing expenses during the third quarter of 1998 increased
$310,000, or 20%, as compared to the third quarter of 1997. The increase in
sales and marketing expenses was due primarily to increased third party
commission payments ($104,000) as a result of greater sales occurring outside of
the U.S. and Europe during the third quarter of 1998 (as compared to the third
quarter of 1997) where the Company distributes its products primarily through
distributors, as well as increased expenses related to trade shows and
additional marketing personnel. Sales and marketing expenses during the first
three quarters of 1998 decreased $751,000, or 12%, compared to the first three
quarters of 1997. The decrease in sales and marketing expenses for the first
three quarters of 1998 was due primarily to higher promotional expenses during
the 1997 period primarily associated with the first annual TMN Summit in January
1997, lower sales salaries, commissions, and related expenses in the 1998 period
as a result of certain staff reductions which occurred during 1997, and
decreased technical support expenses as a result of the Company's disposition of
its Irish operations in July 1998 (the Company's Irish operations had previously
been devoted primarily to the development and support of the Company's ATN
software products).

     The Company has developed a strategy to capitalize on the emerging TMN
market through the establishment and growth of offices and sales personnel
around the world. In conjunction with this strategy, the Company intends to
expand its sales and marketing functions further during 1999 to support
anticipated broader market adoption of TMN and anticipates those dollar
expenditures on sales and marketing will be higher in 1999 as a result thereof.

     General and administrative. General and administrative (G&A) expenses
     --------------------------
consist primarily of salaries, rent and other related expenses of
administrative, executive and financial personnel as well as professional fees,
investor relations costs and insurance premiums. G&A expenses during the third
quarter of 1998 decreased $52,000, or 7%, compared to the third quarter of 1997
and decreased $906,000, or 31%, during the first three quarters of 1998 compared
to the first three quarters of 1997. The decrease in 1998 was due primarily to
the elimination of certain corporate overhead expenses previously allocated to
Vertel when its operations were co-mingled with Sonoma Systems during 1997.

     Operating income (loss) from continuing operations. The Company generated a
     --------------------------------------------------
loss from continuing operations of $453,000, or 9%, of net revenues in the third
quarter of 1998, as compared to a loss from continuing operations of $866,000,
or 23%, of net revenues in the third quarter of 1997. The decrease in the
percentage of operating loss to net revenues in the 1998 period was due
primarily to increased gross margins (as a result of increased license revenue)
and the decrease in sales and marketing and G&A expenses as a percentage of
sales, as described above. Loss from continuing operations for the first three
quarters of 1998 was $752,000, or 5%, of net revenues as compared to a loss of
$3,170,000, or 24%, of net revenues for the corresponding period in 1997. The
decrease in the percentage of operating loss to net revenues in the 1998 period
was due primarily to the decrease in sales and marketing and G&A expenses (both
in total dollars and as a percentage of sales), as described above. 

     Other income, net.  Other income, net for the third quarter of 1998
     -----------------                                                  
($1,526,000), consisted primarily of the sale of the Company's CDPD and pACT
technologies to AMP (valued at $1,500,000, net of certain adjustments) and a
$437,000 gain on the sale of a software library and the assignment of certain
assets and liabilities of the Company's ATN operations in Ireland to a
subsidiary of Airtel ATN plc.  These amounts were partially offset by the
realization of a cumulative exchange loss of approximately $436,000 related to
the disposition of the Company's Irish operations.  Other income for the first
three quarters of 1998 ($2,189,000) consisted primarily of the sale of
the CDPD and pACT technologies to AMP ($1,500,000); a gain on the sale of a
software library and the assignment of certain assets and liabilities of the
Company's ATN operations ($437,000); and a gain of $663,000 from the curtailment
of a non-U.S. pension plan that previously covered the Company's Irish
employees. These amounts were partially offset by the realization of the
$436,000 cumulative exchange loss previously described.

                                       10
<PAGE>
 
ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

     Provision for income taxes. The Company recorded a provision for income
     --------------------------
taxes in the amount of $100,000 for the third quarter of 1998 for certain U.S.
and foreign income taxes. For the first three quarters of 1998, the
Company recorded a provision for income taxes of $296,000, which included U.S.
and foreign income taxes as well as an estimate for non-U.S. taxes associated
with the surplus assets refunded upon curtailment of a non-U.S. pension plan. No
income tax provisions were made for the comparable periods in 1997. The Company
anticipates utilizing net operating losses to offset the balance of pre-tax
income in the first three quarters of 1998.

     The Company has a net deferred tax asset approximating $25 million,
primarily as a result of cumulative losses, which has been substantially offset
by a valuation allowance. Benefit from the net deferred tax assets will be 
realized to the extent that the Company operates profitably in the future.


LIQUIDITY AND CAPITAL RESOURCES

     Net cash generated from operating activities during the first three
quarters of 1998 was $1,688,000. The positive cash flow from operations was
comprised primarily of net income ($1,141,000), non-cash depreciation and
amortization ($763,000), and an increase in other accrued liabilities
($1,356,000). These amounts were, partially offset by decreases in accrued
restructuring expenses ($1,263,000) and accounts payable ($590,000).

     Net cash used for investing activities during the first three quarters of
1998 was $1,769,000 and was primarily the result of purchases of short-term
investments ($978,000) and purchases of property and equipment ($763,000).

     Net cash from financing activities during the first three quarters was
$347,000, primarily the result of the exercise of stock options ($322,000).

     On September 29, 1998, the Company sold 2,000,000 shares of Common Stock
for $1.50 per share ($3,000,000 in gross proceeds) through a private placement.

     The Company believes that cash generated from operations and the Company's
ability to generate cash from other sources which, when combined with the
Company's cash and short-term investment balances ($7,306,000 at September 26,
1998) and the proceeds from the private placement on September 29, 1998
($3,000,000 in gross proceeds), will be sufficient to meet the Company's
liquidity requirements for the next twelve months.  From time to time, the
Company may also consider the acquisitions of, or evaluate investments in,
certain products and businesses complementary to the Company's business.  Any
such acquisitions or investments may require additional capital resources.

YEAR 2000 ISSUES

     General.  The Company is currently conducting a company-wide Year 2000
     --------                                                              
readiness program ("Y2K Program").  The Y2K Program is addressing the issue of
computer programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000. Therefore, some computer hardware and
software will need to be modified prior to the Year 2000 in order to remain
functional.  The Company anticipates that Year 2000 compliance will be
substantially complete by March 1999.

     Y2000 Program. The Company's Y2K Program is divided into four major
     -------------
sections: (1) Company developed products, (2) internal information ("IP")
system, (3) non-IP system, and (4) third-party suppliers and customers. The
general phases common to all sections are: (1) inventorying Year 2000 items; (2)
assessing the Year 2000 compliance of items determined to be material to the
Company; and (3) repairing or replacing material items that are determined not
to be Year 2000 compliant.

     The Company has completed the review of all Company developed products for
Year 2000 compliance purposes.  The Company believes that most (75%) of the
Company's products are Year 2000 compliant and that those that are not Year 2000
compliant will be upgraded to be Year 2000 compliant by March 1999.  However,
to the extent that others, such as system integrators, make use of the Company's
software in developing solutions for third parties, the Company may have no
knowledge as to the Year 2000 readiness of those third party products.  In
addition it is possible that third parties could assert claims against the
Company or its customers concerning Year 2000 issues and regardless of their
merits or lack thereof, such claims could be material.

                                       11
<PAGE>
 
ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

YEAR 2000 ISSUES (CONTINUED)

     The Company has completed an evaluation of Year 2000 issues associated with
its internal IP computer systems. Most of the Company's computer systems are
already Year 2000 compliant. Other internal computer systems that have been
identified as non-compliant will be upgraded to be Year 2000 compliant by March
1999.

     The Company has completed an evaluation of Year 2000 issues associated with
its non-IP systems.  Most of them are Year 2000 compliant.  Those non-IP systems
that are not Year 2000 compliant will be repaired or replaced by June 1999.

     The Company has completed an evaluation of the possible effects on the
Company's operations of the Year 2000 readiness of its key suppliers.  The
Company relies on third party manufacturers for the proper functioning of its
information systems, software and products.  The failure of those manufacturers
to address Year 2000 issues could have a material impact on the Company's
operations and financial results; however, the potential impact and related
costs are not known at this time.

     Costs. The total cost associated with required modifications to become Year
     -----
2000 compliant is not expected to be material to the Company's financial
position. Through September 26, 1998, the Company has spent less than $50,000 to
implement the Year 2000 compliance program. That amount has been expensed. The
Company estimates that it may spend up to an additional $250,000 for other
replacements or upgrades and for communicating with key suppliers and customers.
Approximately $100,000 of that amount will relate to new computer equipment and
software and will be capitalized, and the remainder will be expensed as
incurred.

     Risks. The failure to correct a material Year 2000 problem could result in
     -----
an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Y2K Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem. The Company believes that, with the implementation of new business
systems and completion of the Y2K Program as scheduled, the possibility of
significant interruptions of normal operations should be reduced.

     The Company does not yet have a contingency plan to address the Y2000
problem, but it is expected to create one by June, 1999 if it appears that the
Company or its key suppliers and customers will not be Year 2000 compliant and
that such non-compliance is expected to have a material adverse impact on the
Company's operations.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       None
                          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 proceedings.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

          Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

          Not applicable.

                                       12
<PAGE>
 
                    PART II. OTHER INFORMATION (CONTINUED)

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

          None.


ITEM 5. OTHER INFORMATION

     On September 29, 1998, the Company sold 2,000,000 shares of Common Stock
for $1.50 per share ($3,000,000 in gross proceeds). The price per share was
determined as the greater of (a) the average closing price of the Common Stock
for the five days preceding the closing date and (b) $1.50. In connection with
the transaction, the Company has agreed to file a registration statement within
90 days of the closing date covering the shares issued and has agreed to bear
all expenses in connection therewith.

     Of the total shares issued, 1,000,000 shares were purchased by Sierra
Ventures, a venture capital firm. Jeffrey M. Drazan, a General Partner of Sierra
Ventures, is a member of the Company's Board of Directors.

     Proposals of stockholders intended to be presented at the Company's 1999 
annual meeting of shareholders must be received at the Company's principal 
executive offices not later than October 30, 1998 in order to be included in the
Company's proxy statement and form of proxy relating to the 1999 annual meeting.
Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of 
1934, as amended, if a shareholder who intends to present a proposal at the 1999
annual meeting of stockholders does not notify the Company of such proposal on 
or prior to March 15, 1999, then management proxies would be allowed to use 
their discretionary voting authority to vote on the proposal when the proposal 
is raised at the annual meeting, even though there is no discussion of the 
proposal in the 1999 proxy statement. The Company currently believes that the 
1999 annual meeting of stockholders will be held during the fourth week of May 
1999.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      EXHIBITS

            10.57+  Sale and License Agreement between the Company and AMP
                    Incorporated, dated July 27, 1998, and an Amendment dated
                    October 9, 1998

            10.58   Common Stock Purchase Agreement between the Company and
                    Pequot Private Equity Fund, L.P. and Pequot Offshore Private
                    Equity Fund, Inc. and Sierra Ventures V, L.P., dated
                    September 29, 1998.
 
 
     27.1  Financial Data Schedule

(b)  REPORTS ON FORM 8-K
 
     None.

-----------
+ Portions of the exhibit have been omitted pursuant to a request for
  confidential treatment and the omitted portions have been separately filed
  with the Commission.

                                       13
<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 4, 1998          /S/  Gordon Almquist
                                 ----------------------------------------
                                 Gordon Almquist
                                 Vice President of Finance and Administration
                                 and Chief Financial Officer
                                 (Principal Financial and Accounting Officer)
 
                                       14