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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-Q



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(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, 2003
| |  | -------------------------------------------------



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



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VERTEL CORPORATION

(Exact name of Registrant as specified in its charter)



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|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)



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Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.    Yes  x    No ̈



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



As of September 30, 2003 there were 38,516,292 common shares outstanding with a par value of $0.01 per share.



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##### Table of Contents

VERTEL CORPORATION



|Part I  Financial Information |  |                                                                                     
|------------------------------ |  | ------------------------------------------------------------------------------------
|                               |  |                                                                                     
|Item 1.                        |  | Financial Statements                                                                
|                               |  | Consolidated Balance Sheet                                                          
|                               |  | Consolidated Statement of Operations and Comprehensive Loss                         
|                               |  | Consolidated Statement of Cash Flows                                                
|                               |  | Notes to Financial Statements                                                       
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operation
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                          
|Item 4.                        |  | Controls and Procedures                                                             
|                               | 
|Part II  Other Information    |  |                                                                                     
|                               |  |                                                                                     
|Item 1.                        |  | Legal Proceedings                                                                   
|Item 2.                        |  | Changes in Securities and Use of Proceeds                                           
|Item 3.                        |  | Defaults Upon Senior Securities                                                     
|Item 4.                        |  | Submission of Matters to Vote of Security Holders                                   
|Item 5.                        |  | Other Information                                                                   
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                    



Forward-Looking Statements



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



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



VERTEL CORPORATION

CONSOLIDATED BALANCE SHEET

(in thousands, except share amounts)



|                                                                                                                                |  | September 30, 2003 |          |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | -
|ASSETS                                                                                                                          |  |                    |          |   |                   |  
|                                                                                                                                |  |                   
|Current Assets:                                                                                                                 |  |                    |          |   |                   |  
|Cash and cash equivalents                                                                                                       |  | $                  | 30       |   |                   | $
|Accounts receivable (net of allowances of $1 for 2003 and $461 for 2002                                                         |  |                    | 404      |   |                   |  
|Prepaid expenses and other current assets                                                                                       |  |                    | 96       |   |                   |  
|                                                                                                                                |  |                    |          |   |                   |  
|Total current assets                                                                                                            |  | $                  | 530      |   |                   | $
|Fixed and Other Assets:                                                                                                         |  |                    |          |   |                   |  
|Property and equipment, net                                                                                                     |  | $                  | 44       |   |                   | $
|Investments                                                                                                                     |  |                    | 41       |   |                   |  
|Goodwill                                                                                                                        |  |                    | 754      |   |                   |  
|Other assets                                                                                                                    |  |                    | 274      |   |                   |  
|                                                                                                                                |  |                    |          |   |                   |  
|Total Assets                                                                                                                    |  | $                  | 1,643    |   |                   | $
|                                                                                                                                |  |                    |          |   |                   |  
|LIABILITIES AND SHAREHOILDERS EQUITY (DEFICIT)                                                                                 |  |                    |          |   |                   |  
|                                                                                                                                |  |                   
|Current Liabilities:                                                                                                            |  |                    |          |   |                   |  
|Accounts payable                                                                                                                |  | $                  | 190      |   |                   | $
|Accrued wages and related liabilities                                                                                           |  |                    | 129      |   |                   |  
|Accrued taxes payable                                                                                                           |  |                    | 362      |   |                   |  
|Other accrued liabilities                                                                                                       |  |                    | 1,831    |   |                   |  
|Notes payable                                                                                                                   |  |                    | 4,155    |   |                   |  
|Warrant obligation                                                                                                              |  |                    | 133      |   |                   |  
|Deferred revenues                                                                                                               |  |                    | 369      |   |                   |  
|                                                                                                                                |  |                    |          |   |                   |  
|Total current liabilities                                                                                                       |  | $                  | 7,169    |   |                   | $
|                                                                                                                                |  |                   
|Commitments (Note 8)                                                                                                            |  |                    |          |   |                   |  
|                                                                                                                                |  |                   
|Shareholders Equity (Deficit):                                                                                                 |  |                    |          |   |                   |  
|Preferred stock, par value $0.01, 2,000,000 shares authorized; none issued and outstanding                                      |  | $                  |         |   |                   | $
|Common stock, par value $0.01, 100,000,000 shares authorized; shares issued and outstanding: 2003: 38,516,292; 2002:
34,534,253 |  |                    | 385      |   |                   |  
|Additional paid-in capital                                                                                                      |  |                    | 97,102   |   |                   |  
|Accumlated deficit                                                                                                              |  |                    | (102,712 | ) |                   |  
|Accumulated other comprehensive loss                                                                                            |  |                    | (301     | ) |                   |  
|                                                                                                                                |  |                    |          |   |                   |  
|Total shareholders equity (deficit)                                                                                            |  | $                  | (5,526   | ) |                   | $
|                                                                                                                                |  |                    |          |   |                   |  
|Total liabilities and shareholders equity (deficit)                                                                            |  | $                  | 1,643    |   |                   | $
|                                                                                                                                |  |                    |          |   |                   |  



See accompanying notes
to consolidated financial statements.



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VERTEL CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)



|                                                                                                       |  | Three Month Period Ended September 30 |        |   | Nine Month Period Ended September 30 |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------------------- | ------ | - | ------------------------------------ | -
|                                                                                                       |  | 2003                                  |        |   | 2002                                 |  
|Net revenues:                                                                                          |  |                                       |        |   |                                      |  
|Licenses                                                                                               |  | $                                     | 215    |   |                                      | $
|Service and other                                                                                      |  |                                       | 246    |   |                                      |  
|                                                                                                       |  |                                       |        |   |                                      |  
|Total net revenues                                                                                     |  | $                                     | 461    |   |                                      | $
|                                                                                                       |  |                                       |        |  
|Cost of revenues:                                                                                      |  |                                       |        |   |                                      |  
|Licenses                                                                                               |  | $                                     | 22     |   |                                      | $
|Service and other                                                                                      |  |                                       | 123    |   |                                      |  
|                                                                                                       |  |                                       |        |   |                                      |  
|Total cost of Revenues                                                                                 |  | $                                     | 145    |   |                                      | $
|                                                                                                       |  |                                       |        |   |                                      |  
|Gross profit                                                                                           |  | $                                     | 316    |   |                                      | $
|                                                                                                       |  |                                       |        |  
|Operating expenses:                                                                                    |  |                                       |        |   |                                      |  
|Research and development                                                                               |  | $                                     | 194    |   |                                      | $
|Sales and marketing                                                                                    |  |                                       | 228    |   |                                      |  
|General and administrative                                                                             |  |                                       | 506    |   |                                      |  
|Goodwill amortization                                                                                  |  |                                       |       |   |                                      |  
|Goodwill impairment                                                                                    |  |                                       |       |   |                                      |  
|                                                                                                       |  |                                       |        |   |                                      |  
|Total operating expenses                                                                               |  | $                                     | 928    |   |                                      | $
|                                                                                                       |  |                                       |        |   |                                      |  
|Operating Loss                                                                                         |  | $                                     | (612   | ) |                                      | $
|Other income (expense), net                                                                            |  |                                       | (214   | ) |                                      |  
|                                                                                                       |  |                                       |        |   |                                      |  
|Loss before provision for income taxes                                                                 |  | $                                     | (826   | ) |                                      | $
|Benefit/(provision) for income taxes                                                                   |  |                                       | (4     | ) |                                      |  
|                                                                                                       |  |                                       |        |   |                                      |  
|Net Loss                                                                                               |  | $                                     | (830   | ) |                                      | $
|Other comprehensive income (loss)                                                                      |  |                                       | 18     |   |                                      |  
|                                                                                                       |  |                                       |        |   |                                      |  
|Comprehensive loss                                                                                     |  | $                                     | (812   | ) |                                      | $
|                                                                                                       |  |                                       |        |   |                                      |  
|Basic and diliuted net loss per common share                                                           |  | $                                     | (0.02  | ) |                                      | $
|                                                                                                       |  |                                       |        |   |                                      |  
|Weighted average shares outstanding used in net loss per common share calculations - basic and diluted |  |                                       | 38,516 |   |                                      |  



See accompanying notes
to consolidated financial statements.



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VERTEL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)



|                                                                                           |  | Nine Month Period Ended September 30 |       
|------------------------------------------------------------------------------------------ |  | ------------------------------------ | ------
|                                                                                           |  | 2003                                 |       
|Cash flows from operating activities:                                                      |  |                                      |       
|Net Loss                                                                                   |  | $                                    | (5,097
|Adjustments to reconcile net loss to net cash provided by (used for) operating activities: |  |                                      |       
|Depreciation and amortization                                                              |  | $                                    | 103   
|Goodwill Impairment                                                                        |  |                                      |      
|Reserve for returns and bad debts                                                          |  |                                      | 155   
|Change in fair value of warrant obligation                                                 |  |                                      | (239  
|Non-cash interest expense                                                                  |  |                                      | 589   
|Changes in operating assets and liabilities                                                |  |                                      | 1,472 
|                                                                                           |  |                                      |       
|Net cash used for operating activities                                                     |  | $                                    | (3,017
|                                                                                           |  |                                     
|Cash flows from investing activities                                                       |  |                                      |       
|Purchases of property and equipment                                                        |  | $                                    | 1     
|Changes in other assets                                                                    |  |                                      | 167   
|                                                                                           |  |                                      |       
|Net cash provided by (used for) investing activities                                       |  | $                                    | 168   
|                                                                                           |  |                                     
|Cash flows from financing activities                                                       |  |                                      |       
|Proceeds from issuance of convertible promissory note                                      |  | $                                    |      
|Payment of convertible promisory note                                                      |  |                                      |      
|Proceeds from issuance of non-convertible promissory note                                  |  |                                      | 1,965 
|                                                                                           |  |                                      |       
|Net cash provided by (used for) financing activities                                       |  | $                                    | 1,965 
|                                                                                           |  |                                     
|Effect of exchange rate changes on cash                                                    |  | $                                    | 33    
|                                                                                           |  |                                      |       
|Net increase (decrease) in cash and cash equivalents                                       |  | $                                    | (851  
|Cash and cash equivalents, beginning of period                                             |  |                                      | 881   
|                                                                                           |  |                                      |       
|Cash and cash equivalents, end of period                                                   |  | $                                    | 30    
|                                                                                           |  |                                      |       



See accompanying notes
to consolidated financial statements.



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VERTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. General



These consolidated financial statements include the accounts of Vertel Corporation and its subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation. The interim consolidated financial statements are unaudited and include all adjustments necessary for a fair presentation of the Companys financial position, results of
operations and cash flows. These statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2002 that are included in Vertels
Annual Report on Form 10-K. The results of operations for the nine-month period ended September 30, 2003 are not necessarily indicative of results that may be expected for the full year.



Effective August 22, 2002, Vertels common stock was de-listed from trading on The NASDAQ SmallCap Market(SM) for failing to comply
with the $1.00 minimum bid price requirement. The Companys common stock is now traded on the OTC Bulletin Board (OTC BB) under the stock symbol: VRTL.OB.



In conjunction with the M*Ware strategy, in December of 2002 the Company sold its e*ORB product line, related intellectual property rights and customer
contracts to PrismTech Limited, a United Kingdom company. The agreement was for cash and royalty payments based on future e*ORB sales. Cash of $600,000 was to be paid over a 180-day period commencing with the closing of the transaction.
Royalty payments were to be paid over the 24-month period commencing with the closing date and were not to exceed an additional $600,000. Hence, the maximum value of the sale was $1.2 million.



As of this filing, Vertel has received $510,000 of the $600,000 that was due to be paid in
full by June 30. PrismTech is also in default on monthly royalty payments now totaling over $68,000. Although PrismTech has acknowledged these obligations a satisfactory resolution has not been offered and the Company has proceeded with arbitration
as provided for under the agreement. In a filing made in late October 2003, the Company requested summary judgment.



The Company has reported operating losses for each of the most recent five fiscal years. For the nine months ended September 30, 2003, Vertel reported operating losses of
$4,256,000 and negative cash flows from operations of $3,033,000. For the twelve-month period ended December 31, 2002 the Company reported an operating loss of $14,429,000 and negative cash flows from operations of $6,607,000. As of September 30,
2003, Vertel had an accumulated deficit of $102,712,000 and negative working capital of $6,639,000 including cash and cash equivalents of $30,000. Such results raise substantial doubts about the Companys ability to continue as a going concern.



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



During the third quarter of 2003, the Company received net proceeds of $150,000 from the issuance of a series of non-convertible promissory notes (See Note 4). The
Company also received net proceeds of $500,000 and $1,315,000 in the first and second quarters of 2003, respectively, also from the issuance of a series of non-convertible promissory notes (See Note 4). Proceeds from these transactions were used as
working capital during this period. The company has not received any proceeds since July 25 and has relied on sales and related accounts receivable collections to fund operations.



In August 2003, the Company closed all but its Los Angeles office and suspended most sales activities. Since that time the Company has
maintained its existing base of customer maintenance contracts and has sold a modest amount of additional products to existing customers. The Company is presently evaluating alternatives anticipating the need to eventually satisfy its senior,
secured debt holder.



The inability of the Company to generate sufficient
revenues to offset expenses led to the elimination of all but essential staff to maintain existing customer support contracts. Since the beginning of the year the Company has reduced the number of employees, from 61 to 7. The Company also
subcontracts certain programming efforts. Following the last round of layoffs in July, the Company has pared expenses to a level commensurate with revenues and expects to breakeven during the fourth quarter of 2003. Nevertheless, the timing of
billings, certain expenses and cash collections raise substantial doubt about Vertels ability to continue as a going concern. As such, the Company may be unable to realize assets and discharge liabilities in the normal



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VERTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



course of business. Even if successful, the Company cannot assure it will continue to generate sufficient contract renewals to offset expenses and generate
operating income. If operating income is not achieved and Vertel is not able to raise additional debt or equity capital, the Company may not be able to continue as a going concern.



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



2. Recent Accounting Pronouncements



In April 2002, the FASB issued SFAS 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections, effective May 15,
2002. SFAS 145 prevents gains or losses on the extinguishment of debt that do not meet the criteria of APB 30 to be treated as extraordinary. The pronouncement also amends SFAS 13, Accounting for Leases, to eliminate the
inconsistency between the required accounting for sale-leaseback translations and the required accounting for certain lease modifications that have similar economic effects. SFAS 145 also amends other existing pronouncements to clarify meanings,
make technical corrections and describe applicability under changed conditions. SFAS 145 did not have a material impact on the Companys financial statements.



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



In December 2002, the FASB issued SFAS 148, Accounting For Stock-Based
Compensation-Transition and Disclosure. This pronouncement amends the transition and disclosure provisions of SFAS 123, Accounting for Stock-Based Compensation. The pronouncement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based compensation, amends disclosure requirements and is effective for financial statements for fiscal years ending after December 15, 2002. The Company is currently evaluating
this pronouncement to determine if it will use the fair value method to account for employee stock options and, if so, when to begin the transition to this new method of accounting. The disclosures required by this pronouncement are included in Note
9 below.



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



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



In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This pronouncement
establishes standards for classification and measurement of certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required
to be classified as liabilities. SFAS 150 will be effective for financial instruments entered into or modified after May 31, 2003 and otherwise will be effective at the beginning of the first interim period beginning after June 15, 2003. Upon
adoption of SFAS 150, the Company will reclassify its redeemable preferred stock as a liability.



3. Goodwill



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



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VERTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



|                                                                   |  | Amount |           
|------------------------------------------------------------------ |  | ------ | ----------
|Goodwill recorded from the acquisition of Expersoft in March 1999  |  | $      | 4,742,000 
|Less: Amortization recorded in 1999                                |  |        | (757,000  
|Less: Amortization recorded in 2000                                |  |        | (952,000  
|                                                                   |  |        |           
|Balance: December 31, 2000                                         |  | $      | 3,033,000 
|Plus: Goodwill recorded from the acquisition of Trigon in May 2001 |  |        | 7,320,000 
|Less: Amortization recorded in 2001                                |  |        | (1,807,000
|                                                                   |  |        |           
|Balance: December 31, 2001                                         |  | $      | 8,546,000 
|Less: Goodwill impairment recorded in 2002                         |  |        | (7,792,000
|                                                                   |  |        |           
|Balance: December 31, 2002                                         |  | $      | 754,000   
|                                                                   |  |        |           



In accordance with SFAS 142, the
company did not amortize goodwill in 2002. However, the Company did retain an independent third party valuation consultant to test for goodwill impairments. In June 2002, the Company determined that goodwill was impaired due to the continued
deterioration in the telecommunications and technology markets and the decrease in fair market value of the company. Using the Companys best judgment and estimates of fair value based on discounted cash flows, the valuation consultant
determined that goodwill was impaired by $4,795,000 in June 2002.



At December
31, 2002, the Company retained the same third party valuation consultant to test goodwill for impairment. The consultant determined that goodwill was further impaired $2,997,000 by using the same method described above. Thus, total impairments to
goodwill in 2002 were $7,792,000 and were reflected as a separate line item in the statement of operations.



In connection with the adoption of SFAS 142, prior period goodwill amounts have not been restated.



4. Financing Transactions



On January 3, 2002, in connection with a Note and Warrant Purchase Agreement with SDS Merchant Fund, L.P. (SDS), the Company received net proceeds of
approximately $3,395,000, after payment of a $105,000 commission, from the sale of a $3,500,000 three-year, 6% convertible promissory note (First Note) to SDS and issued a five year Warrant (the First Warrant) initially
exercisable into 800,000 shares of Vertel common stock at an initial exercise price of $0.9988 per share. The total costs incurred in connection with the financing transaction amounted to $216,000, excluding the commission of $105,000, and consisted
of professional fees and SEC registration fees. These costs are being amortized on a straight-line basis as expense over the 36-month term of the First Note and are reflected as a reduction of the recorded note payable balance on the accompanying
balance sheet.



On August 13, 2002, in connection with a Note and Warrant
Purchase Agreement with SDS, the Company received net proceeds of approximately $3,040,000 after payment of a $60,000 commission, from the sale of a $3,100,000, three-year, 8% convertible senior secured promissory note (the Second Note)
to SDS and issued a five-year Warrant (Second Warrant) initially exercisable into 2,625,000 shares of Vertel common stock at an initial exercise price of $0.20 per share. The security interest also extends to the $3,500,000 First Note
with SDS. Proceeds of $1,500,000 from the Second Note were used to reduce the balance outstanding on the First Note and $100,000 was used to repay a bridge loan from SDS. The total costs incurred in connection with the financing transaction amounted
to approximately $191,000, excluding the commission of $60,000, and consisted of professional fees and SEC registration fees. These costs are being amortized on a straight-line basis as expense over the 36-month term of the Second Note and are
reflected as a reduction of the recorded note payable balance on the accompanying balance sheet.



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



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VERTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



The conversion price of the Second Note fluctuates and is determined by multiplying the applicable discount
percentage by the average per share market value for the three trading days having the lowest per share market value during the twenty-two trading days immediately prior to the conversion date. The initial discount percentage is 18%. The discount
percentage is adjusted based on four times the Companys quarterly revenues as disclosed in its most recent public filing (the Annualized Revenue). The discount percentage is 7% if the Annualized Revenue is more than $15,000,000;
12% if the Annualized Revenue is more than $12,000,000, but not more than $15,000,000; 15% if the Annualized Revenue is more than $10,000,000, but not more than $12,000,000; 18% if the Annualized Revenue is more than $8,000,000, but not more than
$10,000,000; and 21% if the Annualized Revenue is more than $6,000,000, but not more than $8,000,000. The discount percentage cannot be below 7%. If Vertels cash collections do not exceed $1,350,000 on a quarterly basis, the discount
percentage is 24%. However, since Vertels common stock was de-listed from The NASDAQ SmallCap Market effective as of August 22, 2002 and, as a result is trading on the OTC Bulletin Board, the discount percentage increased to 40% until trading
returns to the NASDAQ SmallCap Market. The conversion price of the Second Note is capped at $1.25 per share of common stock.



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



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



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



|                                                                          |  | First Note |            |   | Second Note |   |            | Total | 
|------------------------------------------------------------------------- |  | ---------- | ---------- | - | ----------- | - | ---------- | ----- | 
|Original Value of Note                                                    |  | $          | 3,500,000  |   |             | $ | 3,100,000  |       | 
|Less: Conversions in 2002                                                 |  |            | (340,000   | ) |             |   | (40,000    | )     | 
|Less: Repayments in 2002                                                  |  |            | (1,447,000 | ) |             |   |           |       | 
|                                                                          |  |            |            |   |             |   |            |       | 
|Gross Value of Notes at December 31, 2002                                 |  | $          | 1,713,000  |   |             | $ | 3,060,000  |       | 
|                                                                          |  |            |           
|Other Adjustments                                                         |  |            |            |   |             |   |            |       | 
|Less: Conversions since December 31, 2002                                 |  | $          |           |   |             | $ | (160,000   | )     | 
|Less: Discount due to beneficial conversion feature at September 30, 2003 |  |            | (114,000   | ) |             |   | (225,000   | )     | 
|Less: Discount due to Warrant at September 30, 2003                       |  |            | (445,000   | ) |             |   | (1,489,000 | )     | 
|                                                                          |  |            |            |   |             |   |            |       | 
|Balance of Notes Payable at September 30, 2003                            |  | $          | 1,154,000  |   |             | $ | 1,186,000  |       | 
|                                                                          |  |            |            |   |             |   |            |       | 



The Company allocated the net proceeds
of $3,395,000 to the First Note and the First Warrant based on a method that approximates the residual method using fair values of $3,500,000 for the First Note and $505,000 for the First Warrant. A discount on the First Note of $533,000 and a
discount on the First Warrant of $77,000 resulted from the fair value allocation. On January 3, 2002, the transaction commitment date, the First Note was convertible into approximately 7,778,000 shares of common stock with a fair value of
$5,056,000, or $0.65 per share, based on the closing market price of common stock on The NASDAQ National Market.



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



2003 SDS converted $160,000 of debt to approximately 4.0 million shares of common stock. There were no conversions in the third quarter.



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VERTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



As a condition of the sale of the Second Note the Company repaid $1,447,000 of principal and $53,000 of interest
relating to the First Note. For accounting purposes, in repaying a portion of the First Note principal, the Company also acquired a portion of the beneficial conversion feature originally issued with the First Note. The Company measured the value of
the beneficial conversion feature acquired on the date of repayment as $670,000. For accounting purposes, the Company allocated a portion of the value of the cash repayment to the portion of the beneficial conversion feature acquired in the
repayment transaction. As a result of this allocation of value, the Company recorded a gain on the repayment transaction of $513,000. The remaining First Note principal of approximately $1,713,000 is reported in the Companys financial
statements as $911,000, net of the unamortized discount of approximately $802,000 at December 31, 2002.



The Company allocated the net proceeds of $3,040,000 to the Second Note and the Second Warrant based on a method that approximates the residual method using fair values of $3,100,000 for the Second Note and $284,000
for the Second Warrant. A discount on the Second Note of $315,000 and a discount on the Second Warrant of $29,000 resulted from the fair value allocation. On August 13, 2002, the transaction commitment date, the Second Note was convertible into
approximately 44,286,000 shares of common stock with a fair value of $4,871,000, or $0.11 per share, based on the closing market price of common stock on The NASDAQ SmallCap Market.



The Company determined that the conversion feature of the Second Note was beneficial to the holder in the amount of $2,086,000, the
difference between the $4,871,000 fair value of the shares into which the Second Note was convertible and the $2,785,000 of net proceeds allocated to the Second Note as previously described. The principal amount of the Second Note of $3,100,000 was
recorded as a long-term liability, net of a $2,401,000 discount, that consisted of the $315,000 discount resulting from the fair value allocation and the $2,086,000 discount resulting from the beneficial conversion feature. The Company also credited
the beneficial conversion feature of $2,086,000 to additional paid-in capital. The total discount on the Second Note of $2,401,000 that is being amortized to interest expense over the 36-month term of the Second Note using the effective interest
method, is subject to downward adjustments to the extent partial conversions of the Second Note occur. These adjustments would reduce the carrying value of the discount and increase interest expense. For the year ended December 31, 2002, $40,000 of
the outstanding principal balance and $1,000 of accrued interest on the Second Note was converted into 1,045,000 shares of common stock. As a condition of the Second Note, the Company repaid $1,447,000 of principal and interest of $53,000 relating
to the First Note. The remaining Second Note principal of approximately $3,060,000 is reported net of the unamortized discount of approximately $2,210,000 at December 31, 2002.



During the three month period ended September 30, 2003, the balance due on the notes was increased $224,000 for interest accretion arising
out of the original discount taken on the notes to reflect the beneficial conversion features. During the first and second quarter of 2003, the balance was increased $187,000 and $205,00, respectively.



Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, requires that the Company initially classify the Warrants as a liability since the provisions of the agreements with the holder of the First and Second Notes and
the First and Second Warrants could require the Company to pay cash to settle the warrant contracts. Accordingly, the Company recorded the fair value of the First Warrant of $428,000, net of the $77,000 discount arising from the allocation of the
net proceeds to the First Note and First Warrant as previously described, as a warrant obligation on January 3, 2002, the transaction commitment date. The Company recorded the fair value of the Second Warrant of $255,000 net of the $29,000 discount
arising from the allocation of the net proceeds to the Second Note and Second Warrant as previously described, as a warrant obligation on August 13, 2002, the transaction commitment date. EITF No. 00-19 requires that the carrying value of the
warrant obligations be adjusted to their fair value on each reporting date. As of December 31, 2002, the fair value of the First Warrant was estimated at $87,000 and the Second Warrant was estimated at $285,000 using the Black-Scholes option-pricing
model and the following assumptions: a risk-free interest rate of 2.76%, expected volatility of 225%, and no expected dividends. The decrease in the First Warrant fair value from January 3, 2002 to December 31, 2002 of approximately $418,000 was
reflected as other income. The increase in the Second Warrant fair value from August 13, 2002 to December 31, 2002 of approximately $1,000 was reflected as other expense.



Pursuant to the Note and Warrant Purchase Agreement, the Company may be required to pay substantial penalties to the note holder under
specified circumstances, including, among others, the following: failure to pay principal or interest on the convertible promissory note when due; failure to deliver shares of common stock upon conversion of the convertible promissory



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##### Table of Contents

VERTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



note and exercise of the warrants; failure to maintain the Companys common stock listing on The NASDAQ National Market for a period of five consecutive
trading days; failure to comply with a request for conversion of the convertible promissory note or exercise of the warrant; failure to maintain the effectiveness of the registration statement covering the shares of common stock issuable on
conversion of the convertible promissory note and on exercise of the warrant; failure to perform or observe any material covenant, condition or agreement under the agreement with the note holder; making a false material misrepresentation or warranty
under the agreement with the note holder; failure to timely obtain shareholder approval for the issuance of shares of common stock issuable upon conversion of the convertible promissory note and exercise of the warrant, if such approval is required;
a default on the payment of any indebtedness in excess of $100,000 or in the performance of any other agreement or condition relating to the indebtedness that causes or permits or requires the acceleration or early repayment of the indebtedness;
filing for or consent to the filing of bankruptcy or making or permitting a general assignment for the benefit of creditors or appointing a trustee, receiver, custodian or liquidator for a substantial part of the Companys property or assets,
or; the commencement of a proceeding or case against the Company seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of debts, (ii) the appointment of a trustee, receiver, custodian,
liquidator or (iii) dissolution. The Company would generally have to pay such penalties in the form of an increased interest rate during the time of the default and money damages based on the note holders lost stock sales opportunities during
the time of a default as well as other indeterminate costs and expenses.



In
connection with the First Note, on October 3, 2001 the Company filed a Form S-3 registration statement for an estimated 200% of the number of shares of common stock issuable upon conversion of the convertible promissory note and exercise of the
warrant as of the filing of the registration statement. The SEC declared Form S-3 effective on December 27, 2001 and on January 3, 2002, SDS purchased the note. Under terms of the Second Note the Company must file a registration statement for an
estimated 200% of the number of shares of common stock issuable upon conversion of the convertible promissory note and exercise of the warrant as of the filing of the registration statement. As of December 31, 2002 the Company has not made such a
filing.



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



On March 26, 2003 the Company received proceeds of $500,000 from the issuance of six-month, non-convertible, secured promissory notes to North Sound Legacy Fund, North Sound Legacy Institutional Fund and North Sound
Legacy International Ltd. (formerly DMG Legacy Fund, DMG Legacy Institutional Fund and DMG Legacy International Ltd.), collectively referred to as North Sound. Terms of the notes were for interest to accrue at a rate of 12.0% per annum to be paid
together with the original principal on September 26, 2003. Proceeds from the note were used to cover near-term operating expenses. As of this Form 10Q filing, the Company is in default on the payment of principal and interest on these notes.



On April 16, 2003 the Company received proceeds of $100,000 from the issuance
of six-month, non-convertible, secured promissory notes to North Sound. Terms of the notes were for interest to accrue at a rate of 12.0% per annum to be paid together with the original principal on October 16, 2003. Proceeds from the note were used
to cover near-term operating expenses. As of this Form 10Q filing, the Company is in default on the payment of principal and interest on these notes.



On April 20, 2003 the Company received proceeds of $110,000 from the issuance of six-month, non-convertible, secured promissory notes to SDS. Terms of the notes were for
interest to accrue at a rate of 12.0% per annum to be paid together with the original principal on October 20, 2003. Proceeds from the note were used to cover near-term operating expenses. As of this Form 10Q filing, the Company is in default on the
payment of principal and interest on these notes.



On May 7, 2003 the Company
received proceeds of $280,000 from the issuance of six-month, non-convertible, secured promissory notes to SDS. Terms of the notes were for interest to accrue at a rate of 12.0% per annum to be paid together with the original principal on November
7, 2003. Proceeds from the note were used to cover near-term operating expenses. As of this Form 10Q filing, the Company is in default on the payment of principal and interest on these notes.



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##### Table of Contents

VERTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



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



On June 4, 2003 the Company received proceeds of $250,000 from the issuance of
six-month, non-convertible, secured promissory notes to SDS. Terms of the notes were for interest to accrue at a rate of 12.0% per annum to be paid together with the original principal on December 4, 2003. Proceeds from the note were used to cover
near-term operating expenses.



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



On
June 26, 2003 the Company received proceeds of $150,000 from the issuance of six-month, non-convertible, secured promissory notes to SDS. Terms of the notes were for interest to accrue at a rate of 12.0% per annum to be paid together with the
original principal on December 26, 2003. Proceeds from the note were used to cover near-term operating expenses.



On July 25, 2003 the Company received proceeds of $150,000 from the issuance of six-month, non-convertible, secured promissory notes to North Sound. Terms of the notes
were for interest to accrue at a rate of 12.0% per annum to be paid together with the original principal on January 25, 2004. Proceeds from the note were used to cover near-term operating expenses.



5. Statement of Cash Flows



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



|                                          |  | Nine Month Period Ended: |      
|----------------------------------------- |  | ------------------------ | -----
|                                          |  | Sep 30 2003              |      
|Trade accounts receivable                 |  | $                        | 1,288
|Prepaid expenses and other current assets |  |                          | 36   
|Accounts payable                          |  |                          | 95   
|Accrued wages and related liabilities     |  |                          | (551 
|Cash payments and restructuring expense   |  |                          |     
|Accrued taxes payable                     |  |                          | 24   
|Other accrued liabilities                 |  |                          | 644  
|Deferred revenue                          |  |                          | (64  
|                                          |  |                          |      
|Net change in assets and liabilities      |  | $                        | 1,472
|                                          |  |                          |      



6. Segment Reporting



Vertel operates and reports activities as a single business unit. The
Companys chief operating decision maker, as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, is Vertels chief executive officer. On October 11, 2001, the Company announced the
hiring of a new chief executive officer who makes decisions about resource allocations based on the organization as a whole. Prior to 2002, decisions about allocating resources (consisting primarily of personnel and compensation of key employees)
were made by the chief executive officer based on the operating results of two principal segments: license and service. Since the Company now operates in one reportable segment, restatement of prior period information is not necessary.



7. Stock Options



In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(FAS) No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FAS 123 (FAS 148). This statement provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of
stock-based compensation. The



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##### Table of Contents

VERTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



provisions of FAS 148 are effective for fiscal years ending after December 15, 2002 and the interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15, 2002. The Company adopted FAS 148 during the fourth quarter ended December 31, 2002. The adoption of FAS 148 did not have a material impact on the Companys
results of operations or financial position and the additional required disclosures are provided below.



The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for its stock option plan. Had compensation cost for the Companys stock-based compensation plan been determined based on the fair value at the grant dates for awards under those plans consistent with FAS
123, the Companys net loss and loss per share would have been adjusted to the pro forma amounts indicated below:



|                                                                      |  | Three-month Period ended September 30, 2003 |           | Nine-month Period ended September 30, 2003
|--------------------------------------------------------------------- |  | ------------------------------------------- | --------- | ------------------------------------------
|Net loss - as reported                                                |  | $                                           | 830,000   |                                           
|Adjustment to net loss for pro forma stock-based compensation expense |  |                                             | 936,000   |                                           
|                                                                      |  |                                             |           |                                           
|Net loss - pro forma                                                  |  | $                                           | 1,766,000 |                                           
|                                                                      |  |                                             |           |                                           
|Basic and diluted net loss per common share - as reported             |  | $                                           | 0.02      |                                           
|                                                                      |  |                                             |           |                                           
|Basic and diluted net loss per common share - pro forma               |  | $                                           | 0.05      |                                           
|                                                                      |  |                                             |           |                                           



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##### Table of Contents

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



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



Except for historical information, the matters discussed in this document are
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 the Companys web-site or otherwise, in the future by the Company or on the Companys behalf.



In some cases forward-looking statements can be identified by the use of terminology such as may, will, expects,
plans, anticipates, believes, estimates, potential or continue or the corresponding negatives thereof or other comparable terminology. Although the Company believes that the
expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct and actual results
could differ materially from those projected or assumed in the forward-looking statements.



The Companys future financial condition and results of operations, as well as any forward-looking statements are subject to inherent risks and uncertainties. These uncertainties include factors that
affect all businesses operating in a global market, as well as matters specific to Vertel and the markets the Company serves. Particular risks and uncertainties at present include the ability to raise additional capital, in particular the ability to
secure additional financing to fund operations for the remainder of 2003; the financial uncertainties associated with continuing losses; the ability to continue to invest in the research and development necessary for the development of new and
existing products to increase 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, which has adversely impacted the revenues of equipment manufacturer customers and, therefore, the Companys revenues; the fact that some of the Companys products are relatively new and, although they are developing
market interest, it is difficult to predict sales of new products and the market may or may not ultimately adopt such technologies; the fact that the Companys sales cycle is long thereby making initial license sales and future royalties
difficult to forecast; additional difficulty in predicting royalty revenue because such revenue is dependent on successful development and deployment by customers of their products containing Vertels software; fluctuations from quarter to
quarter in revenue from the 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 the Company may not be able to replace the loss of
a significant customer; the dependence on a limited number of customers for a significant portion of quarterly license revenues; size and 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 the
Companys ability to control expenditures at a level consistent with revenues.



Additionally, more general risk factors include the possible development and introduction of competitive products and new and alternative technologies by competitors; the increasing sales and marketing costs of attracting new and retaining
existing customers; pricing, currency and exchange risks; governmental and regulatory developments affecting the Company and its 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 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and Item 3 of our Registration Statement on Form S-3 SEC, File No. 333-96639.



The foregoing statements and risk factors are not exclusive and further information
concerning the Company and its business, including factors that potentially materially affect 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 the business. The Company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements.



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



Background



Vertel Corporation is a telecommunications software and professional services company and a provider of mediation software solutions to communications companies, global
enterprise businesses and their network and software vendors.



The Company has
two sources of revenues: license and royalty revenues from software products and professional services revenues from custom network management solutions and product maintenance contracts. The Companys product offerings are primarily targeted
at the wireline, wireless and broadband market segments within the telecommunications industry. Vertels software products are sold under the M*Ware brand name and provide complete integration and management solutions across the entire Telecommunications Management Network (TMN) standard
hierarchy. This software is typically used to enhance connectivity for a variety of telecommunications hardware and software solutions.



The Company believes the demand for mediation and management solutions will be fueled by continued economic pressure on telecommunication service providers and enterprise
network operators. In addition, as restrained growth in new network investments occur, these same mediation and management solutions will need to deliver a more cost effective path for integrating new technologies as they arise. Service providers
and enterprise network operators will demand that these systems allow for incremental new investments while also continuing to support the consolidation of existing investments.



M*Ware products and solutions satisfy these market demands. Vertel believes that by being a bridge between networks, customers and service
providers, M*Ware mediation and management solutions provide greater efficiencies and are cost effective. In addition, M*Ware enables the Company to expand beyond traditional network management into two new market segments: telecommunications
service providers and enterprise network operators. This will provide Vertel with greater growth opportunities than it otherwise would have attained with previous product offerings. In addition, M*Ware will reduce the Companys dependency on a
single market segment that likely faces its own business and financial challenges.



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



The addition of two new market segments will also enable Vertel to grow at a rate greater
than it would have experienced without the M*Ware strategy. This multiple market strategy will also reduce the dependency and associated business challenges Vertel has faced when its primary market segment faced business and financial challenges.



Critical Accounting Policies and Estimates



The Securities and Exchange Commission (SEC) recently issued disclosure guidance
for critical accounting policies. The SEC defines critical accounting policies as those that require application of managements most difficult, subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.



Our significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. Not all of these significant
accounting policies require management to make difficult, subjective or complex judgments or estimates, however, the following accounting policies, which affect more significant judgments and estimates used in the preparation of consolidated
financial statements, are thought to be critical within the SEC definition.



Allowance for doubtful accounts receivable. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of
customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.



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



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)



In accordance with these pronouncements the Company reviewed its goodwill on January 1, 2002. At that time, the
Companys market capitalization was in excess of $22.0 million as determined by the Companys latest closing share price on NASDAQ. Since this amount exceeded the Companys recorded equity of $10.5 million on that date, the Company
concluded that goodwill was not impaired.



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



On December 31, 2002, goodwill amounted to $754,000, or 18% of total assets of $4.2 million.
This goodwill is what remains of the goodwill recorded when the fair value of consideration exchanged in two acquisitions exceeded the fair value of the net assets acquired. Vertel acquired Expersoft in March 1999 and Trigon in May 2001 for
primarily cash and shares of common stock. The Company made estimates and used its best judgment when determining the fair value of the assets acquired. The goodwill recorded in these transactions was $4,742,000 and $7,320,000 for Expersoft and
Trigon, respectively.



Warrant Obligations. On January 3, 2002,
in connection with the first Note and the first Warrant Purchase Agreement with SDS, the Company issued SDS a warrant initially exercisable into 800,000 shares of Vertel common stock at an initial exercise price of $0.9988 per share. On August 13,
2002, in connection with the second Note and the second Warrant Purchase Agreement with SDS, the Company issued SDS a warrant initially exercisable into 2,625,000 shares of Vertel common stock at an initial exercise price of $0.20 per share. These
financing transactions are more fully described in Note 5 of the Notes to Financial Statements included in this Form 10-K.



Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock, requires that the Company initially classify the Warrants as a liability since the foregoing provisions of the agreements with the holder of the First and Second Notes and the First and Second Warrants could require the Company to pay
cash to settle the warrant contracts. Accordingly, the Company recorded the fair value of the First Warrant of $428,084, net of the $76,916 discount arising from the allocation of the net proceeds to the First Note and First Warrant as previously
described, as a warrant obligation on January 3, 2002, the transaction commitment date. The Company recorded the fair value of the Second Warrant of $255,000, net of the $29,000 discount arising from the allocation of the net proceeds to the Second
Note and Second Warrant as previously described, as a warrant obligation on August 13, 2002, the transaction commitment date. EITF No. 00-19 requires that the carrying value of the warrant obligations be adjusted to their fair value on each
reporting date.



As of September 30, 2003, the fair value of the First Warrant
was estimated at $31,000 and the Second Warrant was estimated at $102,000 using the Black-Scholes option-pricing model and the following assumptions: a risk-free interest rate of 2.41%, expected volatility of 247%, and no expected dividends. The
decrease in the First and Second Warrant fair value for the quarter ended September 30, 2003 was approximately $40,000 and $130,000, respectively, and was reflected in other income.



The fair value of the warrants has been determined using the Black-Scholes option-pricing model. A significant component of the
Black-Scholes model is the fair market value per share of common stock. If the fair market value of Vertel common stock increases, the fair value of the warrant obligations would likely increase, resulting in a charge to other expense. If the fair
market value of Vertel common stock decreases, the fair value of the warrant obligations would likely decrease, resulting in other income, as was the case for the first, second and third quarters of 2002. For example, if the fair market value of
common stock on December 31, 2002 was $1.00 per share, the fair value of the First and Second Warrant obligations determined using the Black-Scholes model, assuming all other variables remain constant, would hypothetically have been approximately
$798,000 and $2,613,000, respectively, resulting in a charge of approximately $3,144,000 to other expense for the fourth quarter of 2002.



Conversely, if the fair market value of common stock on December 31, 2002 was $0.05 per share, the fair value of the Warrant obligation determined using the Black-Scholes
Model, assuming all other variables remain constant, would hypothetically have been approximately $38,000 and $128,000, respectively, resulting in other income of approximately $338,000 for the year 2002. Given the volatility of the common stock
price, the Company cannot predict the impact



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)



fluctuations may have on consolidated statement of operations for any future period. Furthermore, EITF No. 00-19 requires the Company to evaluate the
classification of the Warrants as a liability as of each reporting date. To the extent there no longer exists a potential for the Company to be required to pay cash to settle the Warrant contract, the Company may be required to reclassify the
carrying value of the Warrant liability to equity.



If the fair market value of
the Companys common stock increases the fair value of the warrant obligation would likely increase, resulting in a charge to other expense. If the fair market value of the Companys common stock decreases the fair value of the warrant
obligation would likely decrease, resulting in other income.



Income
taxes.Deferred income taxes are provided for temporary differences between the financial statement and income tax basis of Company assets and liabilities, based on enacted tax rates. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred income tax assets will not be realized. The Company has recorded a valuation allowance to reduce deferred tax assets to zero. If the Company is able to realize deferred tax assets in the
future, an adjustment to deferred tax assets would increase income in the period such determination was made.



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



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)



Results of Operations



Net Revenues. For the three months ended September 30, 2003, net revenues decreased 80%, to $462,000, from $2,321,000 during
the same period a year ago. The decline principally reflected lower revenue from licenses (down $8434,000), professional services ($338,000) and the absence of sales from the e*ORB product line ($623,000) that was sold in late 2002. Revenue
from maintenance contracts and royalties were also down for the quarter by $52,000 and $3,000, respectively.



For the nine-month period ended September 30, 2003, net revenues decreased 70%, to $1,936,000, from $6,377,000 during the same period a year ago. The decline reflected lower sales from licenses ($1,868,000), the
absence of sales from the e*ORB product line ($1547,000) as well as lower sales from professional services and maintenance contracts, down $738,000 and $454,000, respectively. These declines were partially offset by increased revenues from
royalties that were up by $167,000 from the same period a year ago.



Net
revenues from Nations Bank comprised 21% of net revenues in the third quarter of 2003. Nortel and Kyoei Sangyo were 19% and 12%, respectively. Net revenues from Nortel accounted for 12% of net revenues during the first nine months of 2003.
Nokia and Nations Bank comprised 11% each. No other single customer accounted for more than 10% of net revenues in either of these periods. Sales to customers outside the United States were approximately 36% and 37% of net revenues in the
third quarter and first nine months of 2003, respectively.



In both the third
quarter and the first nine months of 2002, net revenues from Nokia were approximately 12%. No other single customer accounted for more than 10% of net revenues in either period. Sales to customers outside the United States comprised approximately
37% and 40% of net revenues in the third quarter and first nine months of 2002, respectively.



The Company expects the percentage of sales outside the United States to continue to decline for the balance of 2003 since the Company is not actively pursuing sales in foreign markets other than from its existing
customer base. Furthermore, if the U.S. dollar strengthens significantly, the Company will become even less competitive in international markets unless it reduces prices. The Company is also not pursuing sales from professional services or
maintenance contracts other than from existing customers. Competition and price pressures for professional services have increased both domestically and internationally as competitors and customers continue to seek engineering services from lower
cost providers in countries such as China and India. The Companys sales cycle is typically lengthy resulting in significant fluctuations from one quarter to the next as well as between geographic markets.



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



Historically license revenues have accounted for a substantial portion of total revenues. In the third quarter of 2003, license revenues declined 86%, to $215,000, from $1,489,000, a year ago. The decline reflected
lower sales of licenses and royalties related to TMN products (down $846,000, year-over-year) and the absence of sales from the e*ORB product line ($427,000). For the nine-month period ended September 30, 2003, license revenues declined 74%,
to $981,000, from $3,736,000, a year ago. The decline reflected lower sales of licenses and royalties related to TMN products ($1,701,000) and the absence of sales from the e*ORB product line ($1,054,000).



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



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)



Service and other revenues declined 70% in the third quarter of 2003, to $246,000, from $832,000 a year ago. The
decline reflected a significantly lower number of professional services projects (down $338,000, year-over-year) and lower maintenance revenues due to the absence of the e*ORB product line ($196,000) and the expiration of maintenance
contracts related to older, discontinued products ($52,000).



Service and other
revenues declined 64% during the first nine months of 2003, to $955,000, from $2,640,000 a year ago. The decline reflected a significantly lower number of professional services projects (down $739,000, year-over-year) and lower maintenance revenues
related to the absence of the e*ORB product line ($493,000) and the expiration of maintenance contracts related to older, discontinued products ($454,000).



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



Cost of license revenues decreased 80% in the third quarter of 2003, to $22,000, from $109,000, for the same period in 2002. Despite a
significant decline in expenses related to outside services (down $79,000) and facilities ($9,000), the overall decrease in expenses year over year was simply not as significant as the decline in license revenues. There was also a shift in product
mix to one-time sales and away from products with embedded third-party software that pay royalties over time. The resulting gross margin from license revenues fell, to 90% of sales, from 93% a year ago.



For the first nine months of 2003, the cost of license revenues fell 62%, to $65,000, from
$172,000, for the same period a year ago. The decline in expenses principally reflected a reduction in outside services (down $95,000) and facilities ($16,000), although again, the decline was not sufficient enough to offset the drop in volume.
Gross margins from license revenues fell during the first nine months of 2003, to 93%, from 95% a year earlier.



For the balance of 2003 these margins are expected to fluctuate with product mix and the level of revenues attained. Margins would also be less if the Company sells
third-party products on a revenue-sharing basis.



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



During the third quarter of
2003 service and other costs of sales declined 75%, to $123,000, from $494,000 for the same period a year ago. The most significant factors affecting the $371,000 decline were lower expenses for personnel ($315,000), travel ($33,000) and third party
consulting ($20,000). The resulting gross margin from service and other revenues was a 50% and 41% in 2003 and 2002, respectively.



During the nine-month period ended September 30, 2003, service and other costs of sales were $798,000 and $2,425,000, respectively, a decline of 67%. Compared to the
first nine months of 2002, year over year expenses were down for payroll ($915,000), rent ($274,00), third party consulting ($169,000), travel ($112,000), depreciation ($88,000) and leases ($52,000). The resulting gross margin from service and other
revenues was 16% and 8% in 2003 and 2002, respectively.



The Company
anticipates that cost of service and other revenues for the remainder of 2003 will continue to decline as a percent of revenue due to expense reductions that have not been fully realized. However, to the extent maintenance contracts with existing
customers do not renew, the expected improvement in future margins will not likely be realized.



Research and Development. Historically the Company has made significant investments in research and development. The major components of these expenses are engineering salaries, benefits, fees to outside
contractors, facilities and related overhead charges and depreciation expense primarily for computers and test environments and equipment. In some cases, customers reimburse the Company for development costs related to non-recurring engineering
projects. The Companys recent research and development efforts have been concentrated in mediation software to integrate telecom Operation Support Systems and the underlying network equipment management systems and related applications. In
late 2002, the Company sold its e*ORB product line and discontinued related research and development efforts.



For the three-month period ended September 30, 2003, research and development costs declined 79%, to $194,000, from $916,000. The decrease of $722,000 primarily reflected
lower costs associated with payroll ($577,000) reflecting major staff reductions over the past twelve months and lower related facility costs ($74,000). Outside services, depreciation and equipment costs were also down $30,000, $27,000 and $25,000,
respectively. Although significant, these savings did not keep pace with the decline in revenues and, as a result, research and development costs as a percent of revenues increased to 42% in the third quarter of 2003, compared to 40% during the same
period a year ago.



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)



For the first nine months of 2003, research and development costs declined 60%, to $1,400,000, from $3,505,000. The
decrease of $2,105,000 primarily reflected lower costs associated with payroll ($1,558,000) and related facilities ($339,000) due to major staff reductions over the past twelve months. Depreciation, travel and outside services were also down
$106,000, $89,000 and $83,000, respectively. Business insurance was up $61,000. Although significant, these savings did not keep pace with the decline in revenues and, as a result, research and development costs as a percent of revenues increased to
72% in the first nine months of 2003, compared to 55% during the same period a year ago.



The Company expects research and development costs for the remainder of 2003 will continue to decline as a percent of revenue due to expense reductions that have not been fully realized. However, the Company is not
presently engaged in any product development activities and, at some point, this will adversely impact future revenues.



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



Sales and marketing expenses fell 8%1 in the third quarter of 2003,
to $228,000, from $1,228,000, compared to the same period a year earlier. The decrease of $1,000,000 principally reflected lower expenses for payroll ($661,000), commissions ($158,000), travel ($96,000), outside consulting ($41,000) and telephone
($17,000). Lower expenses were also reported for rent ($14,000) and marketing ($5,000). The decline in expenses slightly outpaced the revenue shortfall and sales and marketing expenses as a percentage of revenues fell in the third quarter of 2003,
to 49%, from 53% in 2002.



In the first nine months of 2003, sales and
marketing expenses fell 52%, to $1,887,000, from $3,925,000, compared to the same period a year earlier. The decrease of $2,038,000 reflected lower expenses for payroll ($967,000), commissions ($410,000), travel ($314,000) and rent ($161,000). Lower
expenses were also reported for consulting ($77,000) and marketing/trade shows ($44,000). Nevertheless, the decline in expenses did not keep pace with the revenue shortfall and sales and marketing expenses as a percentage of revenues increased
during the first nine months of 2003, to 98%, from 62% in 2002.



The Company
expects sales and marketing costs to continue to track lower for the balance of the year due to expense reductions that have yet to be fully realized. However, the Company is now principally engaged in sales activities to existing customers only and
this will limit future revenues and impact the Companys ability to capitalize on market opportunities.



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



For the three month period ended September 30, 2003, general and administrative costs decreased 21%, to $506,000, from $638,00 a year ago. The $132,000 reduction
primarily reflected lower costs for telephone ($59,000), bad debt ($40,000) and payroll ($54,000). Due to the significant decline in revenues, general and administrative expenses as a percent of revenues were 110% and 28% in the third quarter of
2003 and 2002, respectively.



For the nine-month period ended September 30,
2003, general and administrative costs were down 15%, to $2,042,000, from $2,389,000 a year ago. The decreased expenses of $347,000 related to payrolls ($340,000), property and casualty insurance ($359,000), shareholder and public company reports
($176,000), telephones ($177,000) and outside consulting ($55,000) were partially offset by increased expenses for rent ($393,000), accounting fees ($183,000), bad debt ($98,000), supplies ($56,000) and other costs ($36,000). As a percent of
revenues, general and administrative expenses were 106% and 38% in the first nine months of 2003 versus 2002, respectively.



The Company expects general and administrative expenses will continue to decrease in 2003 as additional staff reductions are fully realized along with a number of other
cost savings initiatives.



Goodwill Impairment. In accordance
with FAS 142 the Company reviewed its goodwill on September 30, 2003. At that time, the Companys market capitalization was approximately $1.5 million as determined by the Companys latest closing share price on NASDAQ
Overthe-Counter Bulletin Board. Since this amount exceeded the Companys recorded equity of a negative $5.3 million on that date, the Company concluded that goodwill was not further impaired during the second quarter. In 2002 the Company
incurred a non-cash charge of $4,795,000 related to the impairment of goodwill in accordance with provisions of FAS 142 (see Note 3 in the Notes to Consolidated Financial Statements included in this quarterly report).



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)



Operating Loss. The Company incurred losses from operations of $612,000 in the third quarter of 2003,
versus a loss of $1,064,0000 in 2002. The $452,000 improvement principally reflected lower SG&A expenses ($1,854,000) as described above and lower cost of sales ($458,000) offset by further declines in revenues ($1,860,000). The expense savings
reflected the Companys concerted efforts to reduce expenses in light of revenue shortfalls.



During the nine-month period ended September 30, 2003, losses from operations totaled $4,256,000, an improvement over the $10,834,000 posted for the same period a year earlier. The improvement of $6,578,000 reflected
the absence of goodwill impairment ($4,795,000) and lower expenses principally in research and development ($2,105,000), sales and marketing ($2,038,000) and support ($1,627,000). These improvements reflected the Companys concerted efforts to
reduce expenses in light of revenue shortfalls. However, these savings were substantially offset by the $4,441,000 decline in revenues.



Other Net Income (Expense). In the third quarter of 2003, other net expense consisted primarily of net interest expense of $405,000 and other net
miscellaneous expenses of $19,000. The net interest expense consisted of non-cash interest related to the accelerated amortization of an imputed discount on the warrants and beneficial conversions ($224,000) and non-cash interest related to the
convertible promissory notes ($162,000). These non-cash expenses were partially offset by a non-cash loss of $170,000 from the change in fair market value of the warrant obligations arising from the issuance of the convertible promissory notes and
warrants, net sublet income of $16,000 and a gain on the disposal of an asset amounting to $5,000.



In the third quarter of 2002, other net expense reflected $1,228,000 in expenses offset by $95,000 in income. The expenses were comprised of the amortization of an imputed discount related to the convertible
promissory note ($976,000) as well as non-cash interest expense also related to the notes ($252,000). The income reflected a non-cash gain of $70,000 on the change in fair market value of the warrant obligation arising from the issuance of a
convertible promissory note and warrants (see Note 4 of the Notes to Consolidated Financial Statements included in this quarterly report). In addition, the Company recorded sublet income of $25,000.



For the nine-month period ended September 30, 2003, other net expense consisted primarily of
net interest expense of $1,108,000 offset by $316,000 of other income. The net interest expense consisted of non-cash interest related to the accelerated amortization of an imputed discount on the warrants and beneficial conversions ($740,000),
non-cash interest related to the convertible promissory notes ($349,000) and $19,000 in fixed asset write-offs. These non-cash expenses were partially offset by a non-cash gain of $239,000 from the change in fair market value of the warrant
obligations arising from the issuance of the convertible promissory notes and warrants, net sublet income of $66,000 and the gain on the disposal of an asset amounting to $11,000.



During the same nine-month period in 2002, other net expense consisted primarily of non-cash interest related to the accelerated
amortization of an imputed discount related to the convertible promissory note ($976,000) and non-cash interest expense also related to the convertible promissory notes ($575,000). These non-cash expenses were partially offset by a non-cash gain of
$417,000 on the change in fair market value of the warrant obligation arising from the issuance of a convertible promissory note and warrants. In addition, the Company recorded sublet income ($74,000) and interest income ($31,000) during the period.



Income Tax (Provision) Benefit. Income tax provisions are
primarily for non-U.S. taxes. The Company anticipates utilizing net operating losses to offset any pre-tax income. In the third quarter of 2003 the Company recorded a provision for income taxes of $4,000 due primarily to the expiration of certain
foreign tax contingencies. A year earlier, a similar provision for $19,000 was made for the same reasons. In the first nine months of 2003 and 2002 the Company recorded provision for income taxes of $49,000 and $63,000, respectively due primarily to
the expiration of certain foreign tax contingencies.



The Company recognizes
deferred tax assets and liabilities based on differences between financial statement and tax bases of assets and liabilities using current, enacted rates. A valuation allowance equal to the total amount of net deferred tax assets of approximately
$62.0 million at September 30, 2003 has been established. These net deferred tax assets could be realized to the extent the Company operates profitably in the future during the respective carryforward periods.



Other Comprehensive Loss. The other comprehensive loss reflects the impact of
foreign exchange rates on cash. For the three-month period ended September 30, 2003 the Company recognized comprehensive income of $14,000. During the same period in 2002 there was a comprehensive loss of $27,000. For the first nine months of 2003 a
comprehensive loss of $20,000 was posted versus a loss of $119,000 in 2002.



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)



Liquidity and Capital Resources



Cash and cash equivalents totaled $30,000 on September 30, 2003, a decline of $851,000 from the balance of $881,000 on December 31, 2002.
The decrease in cash was primarily due to $3,033,000 of cash being used in operations offset in part by net cash proceeds of $1,965,000 from the issuance of non-convertible promissory notes during the nine-month period.



Net cash used for operating activities during the first nine months of 2003 was $3,033,000,
compared to $6,780,000 during the same period a year ago. The negative cash flow from operations primarily reflected the net loss of $5,097,000, a decrease in accrued wages and related liabilities ($551,000), a decrease in the fair value of the
Warrant obligations ($239,000) and a decrease deferred revenues ($64,000). These amounts were partially offset by a decrease in accounts receivable ($1,288,000), an increase in other accrued liabilities ($6443,000), non-cash interest ($589,000),
non-cash bad debt ($155,000), non-cash depreciation ($103,000), an increase in prepaid expenses ($36,000), an increase in accounts payable ($95,000) and an increase in accrued taxes ($24,000).



Net cash provided by investing activities was $168,000 in the first nine months of 2003,
compared to $255,000 of funds used during the same period in 2002. Net cash provided in 2003 consisted of a $167,000 decrease in other assets and a $1,000 gain on the sale of equipment. In 2002, the use reflected property and equipment purchases
($122,000) and an increase in other assets ($133,000).



Net cash provided by
financing activities was $1,965,000 in the first nine months of 2003 compared to $4,988,000 provided during the same period a year ago. Net cash in 2003 included $1,015,000 in six-month, non-convertible, secured promissory notes from SDS and
$950,000 in notes with the same terms from North Sound. Proceeds in 2002 were from the issuance of a convertible promissory note and warrants to SDS in January and August of that year.



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



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



The Company has reported operating losses for each of the most recent five fiscal years. For the nine months ended September 30, 2003, Vertel reported operating losses of
$4,256,000 and negative cash flows from operations of $3,033,000. For the twelve-month period ended December 31, 2002 the Company reported an operating loss of $14,429,000 and negative cash flows from operations of $6,607,000. As of September 30,
2003 the Company had an accumulated deficit of $102,712,000 and negative working capital of $6,639,000, including cash and cash equivalents of $30,000. These results raise substantial doubt about Vertels ability to continue as a going concern.



During the third quarter of 2003 the Company received net proceeds of
approximately $150,000 from non-convertible promissory notes (See Note 4). The Company received similar net proceeds of $1,315,000 and $500,000 in the second and first quarters of 2003, respectively. All of these proceeds have been used to fund
operations in 2003. During the first quarter of 2002, the Company received net proceeds of approximately $3,395,000 from the sale of a convertible secured promissory note and the issuance of a common stock warrant, and on August 13, 2002 received
net proceeds of approximately $3,040,000 from the sale of a second convertible secured promissory note and the issuance of additional warrants (See Note 5). The Company used $1,500,000 of the proceeds of the second note to partially repay the first
note. Substantially all of the remaining proceeds from these two transactions were used for operations during the course of 2002. As of December 31, 2002, the recorded balances remaining on these two Notes totaled $1,761,000. This amount is net of
$3,012,000 in non-cash charges that are already reflected in the accompanying 2002 financial statements. The sum of these two amounts represents the total cash amount that would be necessary to satisfy the debt.



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##### Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)



The inability thus far of the Company to generate sufficient revenues to offset expenses raises substantial doubt
about Vertels ability to continue as a going concern and the Company may, therefore, be unable to realize assets and discharge liabilities in the normal course of business. The Company expects to continue to incur operating losses in the
fourth quarter and expects cash disbursements to approximate $600,000 in the fourth quarter. Since the beginning of the year the Company has reduced the number of employees, from 61 to 6, and closed all facilities except the Los Angeles office in
August 2003. Nevertheless, the Company cannot assure sales targets will be met or that expenses will be reduced sufficiently to generate operating income. If operating income is not achieved and Vertel is not able to raise additional debt equity
capital the Company may not be able to continue as a going concern.



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



The Companys long-term
liquidity needs consist of obligations under convertible promissory notes and operating lease commitments related to facilities and office equipment. As of September 30, 2003, the Company had $4,155,000 of debt outstanding in the form of convertible
promissory notes payable (See Note 4 to the Notes to Consolidated Financial Statements included in this quarterly report).



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##### Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



Quantitative Information About Market Risk.Vertels exposure to market risk for changes in interest rates relates primarily to its investment portfolio. The Company maintains an investment policy that
ensures the safety and preservation of invested funds by limiting default risk, market risk and investment risk. As of September 30, 2003, the Company had $30,000 of cash and cash equivalents with a weighted average variable rate of 0.3%. There were
no short-term investments. As of September 30, 2002, cash and cash equivalents were $755,000 with a weighted average variable rate of 1.11%. There were no short-term investments in either period.



At September 30, 2003 the Company had no long-term debt and short-term debt of $4,155,000
related to promissory notes payable to SDS Merchant Fund, LP and North Sound. A year earlier, the Company had $4,803,000 in long-term debt in the form of promissory notes payable to SDS and no short-term debt.



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



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



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of
Disclosure Controls and Procedures



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



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



Changes In Internal Controls



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



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PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



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



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



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



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



Not applicable



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None



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



None.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a) EXHIBITS



See the Exhibit Index following this
Report



(b) REPORTS ON FORM 8-K



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



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



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



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



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##### Table of Contents

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 15, 2003 |  |                   
|                        |  |                   
|                        |  |                   
|                        |  |                   
|                        |  |                   



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##### Table of Contents

EXHIBIT INDEX



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



|Number |  | Description                                                                                                                                                                                                                                                                                                                                    
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|2.1    |  | Agreement and Plan of Reorganization and Liquidation, dated May 30, 2001, by and between Vertel Corporation and Trigon
Technology Group, Inc. (incorporated by reference to Exhibit 2.1 of the Registrants Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).                                                     
|       | 
|3.1    |  | (and 4.1) Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.3 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, Commission File No. 000-19640).                                                                                               
|       | 
|3.2    |  | (and 4.2) Bylaws of the Registrant, as amended to date (incorporated by reference to Exhibit 3.4 of the Registrants
Annual Report on Form 10-K for the year ended December 27, 1997, Commission File No. 000-19640).                                                                                                                          
|       | 
|3.3    |  | (and 4.1) Certificate of amendment to Registrants Articles of Incorporation, as filed with the California Secretary of
State on April 7, 1998, changing the Companys name to Vertel Corporation (incorporated by reference to Exhibit 3.5 of the Registrants Current Report on Form 8-K dated April 7, 1998, Commission File No. 000-19640).
|       | 
|3.4    |  | (and 4.6) Preferred Shares Rights Agreement dated as of April 29, 1997 with Chase Mellon Shareholder Services, LLC
(incorporated by reference to Exhibit 1 of the Registrants Registration Statement on Form 8-A filed on April 30, 1997, Commission File No. 000-19640).                                                                     
|       | 
|4.3    |  | Note and Warrant Purchase Agreement dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Fund, L.P.
(incorporated by reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K dated August 31, 2001, Commission File No. 000-19640).                                                                        
|       | 
|4.4    |  | Form of $3,500,000 Convertible Promissory Note dated August 31, 2001 by and between SDS Merchant Fund, L.P. (incorporated by
reference to Exhibit 4.2 of the Registrants Current Report on Form 8-K dated August 31, 2001, Commission File No. 000-19640).                                                                                    
|       | 
|4.5    |  | Warrant dated August 31, 2001 by and between Vertel Corporation and SDS Merchant Fund, L.P. (incorporated by reference to
Exhibit 4.3 of the Registrants Current Report on Form 8-K dated August 31, 2001, Commission File No. 000-19640).                                                                                                    
|       | 
|10.1   |  | Amended 1996 Directors Stock Option Plan (incorporated by reference to Exhibit 10.75 of the Registrants Annual
Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).                                                                                                                                     
|       | 
|10.2   |  | Form of Option Agreement under 1996 Directors Stock Option Plan (incorporated by reference to Exhibit 10.75 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).                                                                                                              
|       | 
|10.3   |  | Amended 1998 Stock Option Plan (incorporated by reference to Exhibit 10.76 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 1999, Commission File No. 000-19640).                                                                                                                                                
|       | 
|10.4   |  | Form of Option Agreement under 1998 Stock Option Plan (incorporated by reference to Exhibit 10.76 of the Registrants
Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).                                                                                                                         
|       | 
|10.5   |  | Vertel Corporation 2000 Stock Option Plan (incorporated by reference to Exhibit 10.81 of the Registrants Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000, Commission File No. 000-19640).                                                                                                                                   
|       | 
|10.6   |  | 2001 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 5.1 of the Registrants Current Report on Form
8-K dated May 30, 2001, Commission File No. 000-19640).                                                                                                                                                               
|       | 
|10.7   |  | Form of Notice of Stock Option (incorporated by reference to Exhibit 5.2 of the Registrants Current Report on
Form 8-K dated May 30, 2001, Commission File No. 000-19640).                                                                                                                                                                    



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|Number |  | Description                                                                                                                                                                                                                                                                                                  
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.8   |  | Grant and Form of Stock Option Agreement with attached Notice of Exercise (incorporated by reference to Exhibit 5.3 of the
Registrants Current Report on Form 8-K dated May 30, 2001, Commission File No. 000-19640).                                                                                       
|       | 
|10.9   |  | Lease Agreement between the Registrant and Moorpark Associates, a California Limited Partnership, dated February 5, 1993
(incorporated by reference to Exhibit 10.22 of the Registrants Annual Report on Form 10-K for the year ended January 2, 1993, Commission File No. 000-19640).                      
|       | 
|10.10  |  | Lease Agreement between the Registrant and Nomura-Warner Center Associates, L.P., dated November 26, 1996 (incorporated by
reference to Exhibit 10.48 of the Registrants Annual Report on Form 10-K for the year ended December 28, 1996, Commission File No. 000-19640).                                   
|       | 
|10.11  |  | Amendment dated August 14, 2002 to Lease Agreement between the Registrant and Nomura-Warner Center Associates, L.P., dated
November 26, 1996 (incorporated by reference to Exhibit 10.11 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2002, Commission File No. 000-19640).
|       | 
|10.12  |  | Form of Retention Agreement between the Company and each of its officers (incorporated by reference to Exhibit 10.68 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 1998, Commission File No. 000-19640).                                                                    
|       | 
|10.13  |  | Employment Agreement between the Company and Cyrus D. Irani dated January 12, 1999 (incorporated by reference to Exhibit 10.72
of the Registrants Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).                                                          
|       | 
|10.14  |  | Amendment No. 1, dated December 3, 1999 to the Employment Agreement between the Company and Cyrus D. Irani (incorporated by
reference to Exhibit 10.80 of the Registrants Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).                                  
|       | 
|10.15  |  | Employment Agreement between the Company and Stephen J. McDaniel dated November 1, 1999 (incorporated by reference to Exhibit
10.77 of the Registrants Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 000-19640).                                                     
|       | 
|10.16  |  | Employment Agreement between the Company and Tonia G. Graham dated July 5, 2000 (incorporated by reference to Exhibit 10.82 of
the Registrants Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 000-19640).                                                             
|       | 
|10.17  |  | Employment Agreement between the Company and Craig S. Scott dated December 1, 2000 (incorporated by reference to Exhibit 10.83
of the Registrants Annual Report on Form 10-K for the year ended December 31, 2000, Commission File No. 000-19640).                                                          
|       | 
|10.18  |  | Employment Agreement between the Company and Alex Kuo dated May 30, 2001 (incorporated by reference to Exhibit 10.85 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Commission File No. 000-19640).                                                             
|       | 
|10.19  |  | Retention and Severance Agreement between the Company and Alex Kuo dated May 30, 2001 (incorporated by reference to Exhibit
10.86 of the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Commission File No. 000-19640).                                                
|       | 
|10.20  |  | Non-Competition and Non-Disclosure Agreement between the Company and Alex Kuo dated May 30, 2001 (incorporated by reference to
Exhibit 10.87 of the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, Commission File No. 000-19640).                                     
|       | 
|10.21  |  | Form of Indemnification Agreement with the Companys officers and directors (incorporated by reference to Exhibit 10.22 of
the Registrants Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 000-19640).                                                                 
|       | 
|10.22  |  | Asset Purchase Agreement by and between the Company and PrismTech Limited dated November 27, 2002 (incorporated by reference to
Exhibit 10.21 of the Registrants Current Report on Form 8-k dated December 31, 2002, Commission File No. 000-19640).                                                        



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|Number |  | Description                                                                                                                             
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------
|       | 
|31.1   |  | Certification of Chief Executive Officer of Registrant Pursuant to Section 302 of the Sarbannes-Oxley Act of
2002.                      
|       | 
|31.2   |  | Certification of Chief Financial Officer of Registrant Pursuant to Section 302 of the Sarbannes-Oxley Act of
2002.                      
|       | 
|32.1   |  | Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|       | 
|32.2   |  | Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).



29