<PAGE>

________________________________________________________________________________

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                   FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
                         COMMISSION FILE NUMBER 0-23611

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

                                DSET CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

<Table>
<S>                                            <C>
                  NEW JERSEY                                     22-3000022
       (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER IDENTIFICATION NO.)
        INCORPORATION OR ORGANIZATION)

1160 U. S. HIGHWAY 22, BRIDGEWATER, NEW JERSEY                     08807
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</Table>

                                 (908) 526-7500
               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                            -------------------
<S>                                            <C>
                    None
</Table>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                           Common Stock, no par value
                                (Title of Class)

    Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes:__X__  No: ______

    Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]

    State the aggregate market value of the voting common stock held by
non-affiliates of the registrant: $ 2,231,471 at March 1, 2002 based on the last
sales price on that date.

    Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 1, 2002:

<Table>
<Caption>
                    CLASS                                     NUMBER OF SHARES
                    -----                                     ----------------
<S>                                            <C>
          Common Stock, no par value                             5,082,402
</Table>

    The following documents are incorporated by reference into the Annual Report
on Form 10-K: Portions of the registrant's definitive Proxy Statement for its
2002 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Report.

________________________________________________________________________________





<PAGE>

                               TABLE OF CONTENTS

<Table>
<Caption>
          ITEM                                                                PAGE
          ----                                                                ----
<S>       <C>   <C>                                                           <C>
PART I      1.  Business....................................................   3

            2.  Properties..................................................   23

            3.  Legal Proceedings...........................................   23

            4.  Submission of Matters to a Vote of Security Holders.........   23

PART II     5.  Market for the Company's Common Equity and Related
                  Stockholder Matters.......................................   24

            6.  Selected Financial Data.....................................   25

            7.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations.................................   27

           7A.  Quantitative and Qualitative Disclosures About Market
                  Risk......................................................   41

            8.  Financial Statements and Supplementary Data.................   41

            9.  Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure..................................   41

PART III   10.  Directors and Executive Officers of the Company.............   42

           11.  Executive Compensation......................................   42

           12.  Security Ownership of Certain Beneficial Owners and
                  Management................................................   42

           13.  Certain Relationships and Related Transactions..............   42

PART IV    14.  Exhibits, Financial Statement Schedules, and Reports on Form
                  8-K.......................................................   42

SIGNATURES..................................................................   43

EXHIBIT INDEX...............................................................   44

FINANCIAL DATA AND SCHEDULES................................................  F-1
</Table>

                                       2





<PAGE>

                                     PART I

ITEM 1. BUSINESS.

GENERAL

    DSET Corporation develops and markets service-provisioning and
electronic-bonding solutions for use by telecommunications providers around the
world. Our Universal Provisioning eXchange ('UPX') software platform enables any
service provider to provision, activate, and manage services such as Internet
Protocol ('IP') based virtual private networks ('VPNs') in complex multi-vendor
network environments. We also offer a family of software solutions for
competitive service providers that enable them to exchange information with
other telecommunications service providers to reduce the time necessary to
provision new voice and data services for their customers.

    1999 and 2000 were years of unprecedented demand for all types of
communications products and services. Companies in the telecommunications
industry had access to and utilized abundant sources of investment capital. 2001
saw a dramatic decline in the availability of such capital and in turn, the
spending by competitive service providers, which had an equally negative effect
on our financial results. Our sales dropped from $47.0 million in 2000 to $9.9
million in 2001, and our net loss for 2001 was $33.3 million. 2001 can be
characterized as a year of survival and retrenchment for the industry, with the
contraction of the competitive telecommunications sector severely impacting
hardware and software vendors that had previously experienced substantial growth
in revenues and profits. Virtually every company that remained in business,
including DSET, had to reorganize. As a result, we incurred $15.7 million in
restructuring and impairment charges last year.

    Even though the industry's changes have had a negative impact on our
results, the merger with ISPsoft Inc. ('ISPsoft') in January 2002 marked the
beginning of the next phase of a restructuring plan designed to align our
operations and products with the current global telecommunications market.
Recognizing that it is no longer sufficient to focus on competitive
communications providers, we entered the IP provisioning market with products
that can give customers new options for increasing their growth and
profitability. Although we have not yet had any IP provisioning sales, we
believe the worldwide market for IP services, and the technology critical to
implementing those services, offers greater potential in the years ahead as
compared to the electronic-bonding gateway business.

    Since 1998, our electronic-bonding (or interconnection) gateways have helped
competitive communications providers throughout the United States to acquire and
retain customers by automating the ordering of local loops and a variety of
other services that are associated with local phone service. DSET gateways
provide support for 911 service, local number portability, and calling-card and
caller ID services. We continue to be a leading supplier in this field, and we
have established a separate group within us dedicated to the continued
development and maintenance of these gateway products. In recognition of the
telecommunications industry's challenging fiscal environment, we continue to
offer a broad suite of interconnection gateways to our existing customers as
well as to other interested service providers in the United States under three
distinct pricing models: a perpetual license, a monthly rental program and/or a
hosted implementation via BizTelOne's American Clearinghouse Exchange. We
believe that structuring our gateway business along these lines provides the
best chance to achieve sustainable moderate growth for this product line.

    The expansion of our product line resulting from the merger with ISPsoft
places DSET in a worldwide market that is just at the 'early adopter' stage of
customer testing and initial utilization of the products. Today, VPNs are a
flexible and cost-effective alternative to dedicated private networks for
enterprises that need to connect computer systems over distances that can range
from several miles to around the globe. Using various data-transport
technologies, a VPN connects an enterprise's local computer systems over the
public Internet or a private network, as needed for any function, at any time
and for any length of time.

    The capabilities and economics of IP-based VPNs are making this type of
service increasingly attractive to both service providers and enterprise
customers. However, provisioning and activating IP-based VPNs is a very complex
process. When done manually, this can be expensive and time-consuming.

                                       3





<PAGE>

The complexity arises from the need to deploy VPN service over many different
types of network equipment with the necessary degree of security for the data
being transported.

    Our UPX software platform is a unique, multi-service solution that enables
providers to automate the deployment of IP VPNs across the public Internet, or
across their own multi-vendor private network. UPX is a 'service-centric'
product that makes it possible for providers to quickly activate services for
customers at a significantly lower cost compared to manual provisioning. Service
providers deploying UPX can have greater flexibility, scalability, and the rapid
redefinition of services that are required to meet changing needs of their
enterprise customers.

    We were incorporated in New Jersey in 1989. Our executive offices are
located at 1160 US Highway 22, Bridgewater, New Jersey 08807, and our telephone
number is (908) 526-7500. Our main development offices are located in
Shrewsbury, New Jersey and Plano, Texas.

INDUSTRY

    Despite the problems that plagued the telecommunications industry in the
second half of 2000 and 2001, this industry continues to be one of the largest
industries in the world. Meeting the challenges of tightened funding,
consolidation, and reorganization has also led service providers to seek new
products from suppliers that will help them improve operational efficiency,
increase revenues and lay the foundation for future growth.

    The market for electronic-bonding gateways in the United States, although
still important to DSET, has become smaller as service providers continue to use
technology already in place and reserve funds for products they see as more
critical to growth and profitability. The eventual size of the gateway market in
other countries is still unclear, and it is hard to predict how it will evolve
in the years ahead.

    In sharp contrast to the gateway market, the potential in other areas of
operations support system ('OSS') technology is substantial. OSSs span a wide
range of functions -- from billing and ordering to provisioning and network
management -- with the biggest challenge being the need to rapidly turn on and
modify services across increasingly complex multi-vendor networks. However, most
OSSs in place today are legacy systems using outmoded concepts rooted in the
simpler structure of circuit-switched telecommunications technology. These
systems are inadequate to accommodate the fast-evolving data networking paradigm
that is transforming the world of communications. Modern OSSs need to be
relatively inexpensive, easy to deploy and install, and readily adaptable for
use with new network technologies.

    The architecture of today's communications networks has greatly compounded
the complexity of many tasks, particularly provisioning and performance and
fault management. In the past, provisioning, or turning on services, was
dependent on relatively few protocols that defined the necessary interactions
among network systems. These protocols were also slow to change. Today, such
protocols are quickly changing and increasingly diverse, making the process of
provisioning and modifying new services difficult, time-consuming, and costly.
At the same time, OSS capabilities have been slower to evolve to meet the
challenges of multi-protocol networks.

    Provisioning services based on the Internet Protocol are especially
challenging, involve many types of network devices and issues such as the
quality and security of services. This protocol is the set of instructions used
to send data packets to their destinations over the public Internet. With the
explosive use of the Internet for services such as e-mail, the transfer of large
files, and teleconferencing, we believe IP technology has become key to service
providers' plans for growing revenues. Accordingly, the demand is building for
new systems to make the provisioning and management of IP-based services as
rapid, efficient, and cost-effective as possible.

DSET'S PRODUCTS AND SERVICES

THE GATEWAY PRODUCT LINE

    The target market for our gateway products and services is comprised mainly
of competitive service providers, or CSPs. There are various types of CSPs. Some
CSPs offer local and long distance phone

                                       4





<PAGE>

service as well as high-speed data services, Web hosting and Internet access.
Commonly known as competitive local exchange carriers, or CLECs, some of the
providers in this group also call themselves integrated communication providers.
Companies that provide long-distance service are widely referred to as
interexchange carriers, or IXCs, in the industry and they too have offered local
phone service through a separate subsidiary or division. Cable companies that
offer local phone service over their facilities can also be categorized as CSPs.
In addition, there are utility companies that can be included in the CSP
category because they are leveraging their customer bases and communications
facilities to enter the market for local phone service. DSET estimates that
there are approximately 150 CSPs in the United States that have been building
some level of their own network. These CSPs are also known as facilities-based
CSPs. There are many other competitive service providers that simply resell what
the 'incumbents' have to offer, but they normally are not part of our targeted
market.

    In general, all CSPs are competing against the 'incumbents,' an abbreviated
reference to incumbent local exchange carriers, or ILECs. Most ILECs are the
former Regional Bell Operating Companies formed by the breakup of AT&T in 1984.
Another group of phone companies that predates the breakup of AT&T consists of
rural local exchange carriers that provide local phone service in rural and
smaller metropolitan areas.

    In the last year, as the telecommunications industry has experienced a
dramatic downturn, the future of the market for competitive phone services has
been called into question. We believe that there will continue to be a
competitive phone services market, but that it will be substantially smaller
than anticipated in the mid-to-late 1990's. Accordingly, while we also believe
that our eight gateway products and related services are essential to a
competitive provider's success, the number of potential customers will not be as
large as expected.

GATEWAY PRODUCTS

EZPREORDER

    The ezPreOrder gateway automates the initial phase of transitioning
customers to CSPs from trading partners such as Ameritech, BellSouth, Pacific
Bell, Qwest, SBC, and Verizon. ezPreOrder, which substantially reduces order
turn-around intervals and operating costs, automates functions that include the
retrieval of customer service records ('CSRs') from ILECs, address validation,
telephone-number reservation, and xDSL loop qualification.

EZLOCAL

    The ezLocal ordering gateway is the electronic-bonding software most widely
used by CSPs in the United States to submit local service requests ('LSRs') to
trading partners, typically the former Regional Bell Operating Companies.
ezLocal automates the ordering of local loops and related services, including
411 directory service.

EZNUMBERPORT

    The ezNumberPort gateway enables local number portability ('LNP') by
automating interconnection between CSPs and the eight regional Number
Portability Administration Centers ('NPACs') in the United States and Canada.
Mandated by the Telecommunications Act of 1996, LNP allows a customer switching
from an ILEC to a CSP to retain the same telephone number, which requires that
the incumbent carrier and the customer's new provider exchange data with one or
more NPACs. Widely deployed by CSPs in the United States, ezNumberPort helps a
provider automate activation of local service at ported numbers by
electronically interconnecting with the appropriate NPACs, which are managed by
NeuStar, Inc.

EZACCESS

    The ezAccess gateway gives CSPs greater flexibility and ease of
implementation for electronic processing of access service requests ('ASRs').
Service providers must exchange ASRs to order and

                                       5





<PAGE>

subsequently provision network facilities such as high-speed data links. Many
larger providers that offer to lease high-capacity facilities require electronic
submission of ASRs instead of by fax or e-mail, making ezAccess capabilities
especially important for competitive service providers. The full send and
receive capabilities of ezAccess automate the ASR process for ILECs, IXCs,
CLECs, and carriers that wholesale transmission facilities to other providers.

EZTROUBLEADMIN

    The ezTroubleAdmin gateway automates the flow of trouble-ticket data between
competitive carriers and the ILECs or IXCs with which they interconnect,
potentially at much less cost compared to manual trouble-ticket management.
ezTroubleAdmin expedites the resolution of problems that affect a competitive
carrier's customers but which may be caused by some failure in a trading
partner's systems or facilities. In addition to entering new trouble tickets,
the front-end OSS is used for reviewing and updating the status of trouble
tickets, as well as for authorizing billable activities, closures, and
cancellations.

EZ911

    The ez911 gateway automates the transfer of customer information from
competitive carriers to a national service bureau that distributes this
information among the local databases that facilitate 911 service. These
databases provide the name and address associated with a 911 caller's telephone
number for the personnel at the Public Safety Answering Points ('PSAPs') who
respond to 911 calls and then notify fire departments, police departments, or
ambulance services as required.

EZCALLINGCARD

    The ezCallingCard gateway automates updating the databases at Illuminet,
Inc., a national service bureau, to ensure that calling card, collect calls, and
calls billed to third-party numbers operate correctly after customers switch
their telephone service to a CSP.

EZCALLER ID

    The ezCallerID gateway supports updating the databases at Illuminet, Inc., a
network service bureau used to provide enhanced caller ID service.

GATEWAY SERVICES

    As a complement to our gateway solutions, we offer a suite of related
services that can move customers forward in the marketplace quickly and
cost-effectively. These services are provided by us although customers can
choose to have certain of these services performed by a system integrator of
their choice.

1. Implementation Services

    a. Installation.

        Our experienced field engineers are available to install the gateways
    that a customer has purchased in their production environment, helping
    customers to realize the benefits of electronic-bonding as quickly as
    possible.

    b. Configuration.

        We can customize gateway interfaces to assist in ensuring that our
    products operate smoothly in a customer's OSS environment.

    c. Interoperability Testing

        Our field engineers can assist customers with interoperability testing
    to facilitate smooth integration with the customer's order management system
    and the appropriate trading partners' systems.

2. Ongoing Support and Maintenance Services

                                       6





<PAGE>

    a. Technical Support.

        We provide remedial technical support that includes problem
    identification and notification, work-around solutions, temporary software
    patches and bug fixes for our gateway products.

    b. Software Upgrades.

        We provide enhancements and patches for its gateway products that
    address problems reported by customers, as well as new releases that improve
    core functionality. These product upgrades do not include releases that
    contain newly developed components with functionality that did not exist in
    the original product or which address changes dictated by third party
    suppliers (i.e., BEA, Mercator, Oracle, Sun) whose products are used in
    combination with our gateways.

    c. Change Management

        The major responsibility of our change-management team is staying
    abreast of industry developments that have a general impact on our
    electronic-bonding gateways and the resulting implications for our
    customers. We make software modifications in response to changes initiated
    by industry standards groups, or incumbent carriers and respond directly to
    requests from competitive carriers that have deployed our gateways. In
    virtually every instance, our change-management team can help a client
    implement necessary software modifications in a matter of days, whether the
    changes are initiated by an individual trading partner or result from the
    adoption of new industry-wide standards.

THE IP PROVISIONING/ACTIVATION PRODUCT LINE

    For service providers, success in the global market for IP-based services
demands flexible provisioning and activation solutions capable of supporting
multiple services in a multi-vendor operations environment. Such solutions must
also be highly scalable and robust, with the flexibility to meet fast-changing
market needs.

    In today's telecommunications environment, manual IP provisioning is slow,
costly and prone to errors. Even provisioning a small IP-based virtual private
network can be time-consuming. Manual provisioning also requires constant
attention by highly skilled personnel attuned to the numerous difficulties that
can arise from changes in vendor products and industry standards.

THE UPX PLATFORM

    Our Universal Provisioning eXchange ('UPX') software platform (acquired in
the merger with ISPsoft) is a carrier-grade solution carefully designed to
support all of the capabilities indispensable for fast, cost-effective IP
provisioning. UPX is highly scalable, standards-based, robust, and flexible. It
enables rapid, network-wide, and error-free flow through provisioning of
IP-based VPNs for multi-vendor networks. UPX enables seamless integration into
an OSS environment by means of open interfaces into order-entry, billing, and
inventory management systems. UPX architecture provides a rich modeling of
service applications and drivers for communicating with all of the network
elements that have to be provisioned and managed.

UPX-IPSec QoS VPN

    Built on the UPX platform, the UPX-IPSec QoS VPN application enables
carriers to rapidly activate and deploy VPNs with Quality of Service ('QoS')
capability to provide guaranteed levels of IP service over broadband networks.
The product also offers the security ('IPSec') essential for IP-based
communications.

UPX-QoS MPLS VPN

    The UPX-QoS MPLS VPN application automates the deployment of highly secure
VPNs with multiprotocol label switching ('MPLS') technology. Support for MPLS
technology on our UPX platform helps service providers to quickly define
multiple alternatives for deploying Layer 3 VPNs.

                                       7





<PAGE>

NCX-Router Management

    Currently under development as part of our UPX platform suite, the
NCX-Router Management application is an automated IP routing-protocol
configuration tool that provides an innovative approach to the complex task of
router configuration. Rather than taking a 'device-centric' view, NCX-Router
Management sees the router as an intrinsic part of the network to facilitate
determining optimum router configurations. This is a key aspect of achieving
superior quality and economy in network operations to meet technical and
business imperatives.

    Through February 28, 2002, we (or ISPSoft) had not generated any revenues
from the IP Provisioning/Activation product line.

PRODUCT DEVELOPMENT AND TECHNOLOGY

    DSET has been a supplier of leading-edge technology for the
telecommunications industry since the Company was founded in 1989. Our first
products were software development tools that have been employed around the
world to build applications integral to the operation and management of a wide
range of advanced network equipment. Initially built with our own software tools
and proprietary platform, our gateways became the most widely used solutions for
electronically interconnecting competitive service providers and their trading
partners. In the course of our corporate evolution, we have gained extensive
experience with network management products that must operate in multi-protocol
and multi-vendor environments, giving us a core of expertise that we believe
will be of great value as we go forward with our gateway and IP provisioning
products.

    Our gateway product development efforts continued in 2001, even with our
reduced staffing levels. We have also completed our development efforts on our
next generation interconnect platform, which is J2EE and XML based.

    Our UPX solution has a flexible, layered architecture designed to overcome
the many complexities of IP provisioning and service activation. The J2EE/XML
software technology on which UPX is based helps to make the product highly
scalable. CORBA interface support provides open interfaces for easy integration
with existing OSS infrastructures. The UPX provisioning workflow is streamlined
by service mapping that defines the service to be provisioned and initiates all
the required steps down to the network element level.

CUSTOMERS

    We have sold our gateway products and services to a large group of
competitive service providers for implementing in their trading partner
networks. Below is a partial list:

<Table>
<Caption>
CLECS               RURAL LECS            CABLE      UTILITIES            DLEC
-----               ----------            -----      ---------            ----
<S>                 <C>                   <C>        <C>                  <C>
Allegiance Telecom  ALLTEL                Cox Comm.  Cavalier (Conectiv)  Network
Bell Intrigna       CenturyTel                       TXU Comm.            Access Solution
Birch Telecom       Citizens Comm.
Broadview Networks  Iowa Telecom
Business Telecom    Madison River Comm.
Caprock (McLeod)    TDS Metrocom
Choice One Comm.
CoreComm Comm.
CTSI
e.spire
eXpetel
Fairpoint Comm.
Focal Comm.
Mpower Comm.
Network Telephone
New South
NuVox
WinFirst
</Table>

    We anticipate that our ongoing results of operations in any given period
will continue to depend to a significant extent upon sales to a small number of
customers.

                                       8





<PAGE>

    In 2001 we did not concentrate sales efforts in the international market for
our existing or developing gateway products. We believe the addition of the UPX
platform provides us with a suite of products that can be marketed to the
international community, and although to date we have no UPX customers, in North
America or abroad, we are signing on partners, and intend to market both
directly and through these partners, the UPX platform to North American and
international communications service providers.

SALES AND MARKETING

    In response to the significant downturn in revenues that we experienced in
2001, we have implemented sales programs which offer extended payment terms.
Under our 'Pay as You Grow' and Gateway Rental programs, we receive either
guaranteed minimum payments on a monthly cycle or payment prior to the date
services are to be performed. We believe this will lead to predictable cash
flows from customers and less credit risk because we can terminate services for
non-payment.

    A key part of our restructuring effort over the past year has been to
organize two distinct sales and marketing groups, one dedicated to
electronic-bonding gateways and the other to our new IP provisioning software.
The common denominator between these two groups is that each has the task of
establishing us as the low-cost supplier of choice in their respective sectors.
Our sales and sales support group currently consists of five people.

SALES STRATEGIES

KEY STRATEGIES FOR THE GATEWAY PRODUCT LINE

    We strive to be a low cost provider of our gateway products by offering
advantageous terms, including month-to-month rental programs. In October 2001,
we announced our rental program designed to permit CSPs to obtain the use of our
software and related services on a month-to-month rental plan, with a 90-day
cancellation clause. The DSET Gateway Rental Program lowers the perceived risk
of buying software, by encouraging CSPs to use our solutions, as an alternative
to major capital expenditures. This plan started to generate orders from
existing and new customers in December 2001 and continues into 2002.

BizTelOne (Gateway Clearinghouse)

    In December 2001, we entered into a strategic partnership with BizTelOne
Inc. to create a clearinghouse called the American Communications Exchange
('ACX'). The ACX is intended to provide CSPs with an outsourced alternative to
in-house deployment of our gateways for electronically submitting orders to
ILECs.

KEY STRATEGIES FOR THE IP PROVISIONING/ACTIVATION PRODUCT LINE

    In addition to updated versions of our electronic-bonding gateways, we will
offer current and new customers our UPX solutions. We have established a direct
sales organization in the United States and are building alternative
distribution channels and value added resellers to market our suite of IP
provisioning and activation products, internationally. We also continue to
establish alliances with other OSS software vendors in the telecommunications
market under joint selling/marketing arrangements or reseller agreements for the
distribution of our products. Our goal for the first half of 2002 is to secure
trials of these products. UPX solutions are available under a variety of pricing
programs, including our usage-based 'Pay as You Grow' plan.

    Our entire sales and marketing strategy involves substantial risk. There can
be no assurance that we will be successful in implementing our strategy or that
it will lead to achievement of our objectives. Also, we cannot be certain that
some partners will not attempt to partner with our competitors or develop or
acquire products or services that compete with DSET's offerings. Any inability
to maintain our strategic relationships or to enter into additional strategic
relationships may have a material adverse

                                       9





<PAGE>

effect on our business. If we are unable to implement our strategy effectively,
our business will be materially adversely affected. To date, we have not sold
any UPX solutions.

RESEARCH AND PRODUCT DEVELOPMENT

    In the past we have been an innovator and leader in the development of
telecommunications software, embracing new technologies and evolving industry
standards to meet the rapidly changing demands of customers and the marketplace.
Through the merger with ISPsoft, we acquired certain research and product
development capabilities. While we expect that new applications will be
developed internally, we may, based on timing and cost considerations, continue
to acquire companies or license technologies, products or applications to
enhance or complement our own technologies or product offerings.

    In 2002, our research and product development efforts will focus on: (1)
maintaining and upgrading our core products, (2) refining and continuing to
develop our IP-based products and (3) researching and developing new
applications for new markets as the opportunities arise. We believe this focus
will maximize the features and operability of our existing gateways and continue
to enhance and develop our IP provisioning products while also minimizing time
to market for our products and operational delays for customers. We employ
highly qualified engineers and utilize our development and program capabilities
to efficiently manage design and integration processes that shorten product
introduction lead times. Our main development centers are located in Plano,
Texas, and Shrewsbury, New Jersey. Most of our research and product development
personnel hold engineering and other advanced technical degrees. Our research
and product development expenditures were approximately $9.7 million, $18.5
million and $11.0 million in 2001, 2000 and 1999, respectively. We expect our
research and product development expenditures to decrease in 2002 as we attempt
to conserve cash resources.

EMPLOYEES

    As of December 31, 2001, we had a total of 47 employees, of which 14 were in
engineering and technical support, 10 in professional services, 7 in sales and
marketing and 16 in administration, finance, network support and operations. On
January 31, 2001, as a result of the merger with ISPsoft, we acquired an
additional 47 employees. As of February 28, 2002 we had a total of 92 employees,
of which 46 are in engineering and technical support, 10 in professional
services, 14 in sales and marketing and 22 in administration, finance, network
support and operations. Our future performance depends significantly upon the
continued efforts of our management, key product and application engineers, and
sales and technical sales support personnel. Competition for personnel is
intense and there can be no assurance that we will be successful in attracting
or retaining such personnel in the future. None of our employees are represented
by a labor union or are subject to a collective bargaining agreement. We have
not experienced any work stoppages and consider employee relations to be good.

COMPETITION

    The market for our products and solutions is intensely competitive, subject
to rapid change, and significantly affected by third-party funding to our
potential clients, new product introductions and other market activities of
industry participants. To maintain and improve our competitive position, we must
continue to develop and introduce, on a timely and cost-effective basis,
enhanced products, features and services that keep pace with the evolving needs
of our customers. We believe that the principal competitive factors in the
market for our product solutions include:

     breadth and depth of solutions offered;

     product quality and performance;

     strength of core technology;

     ability to install and implement solutions;

     reliable customer support;

     strong relationships with business partners and alliances;

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     continued building of a base of satisfied and referable customers; and

     product price.

GATEWAY PRODUCT LINE

    While there can be no assurance that we will be able to compete effectively,
we believe that our gateway products and services differentiate us in the
marketplace. Our customers in the gateway market can be divided into two groups:
customers who want to deploy gateways in their own IT departments and those who
prefer to access gateways through an outsourced provider. We have solutions that
meet the needs of both sets of customers.

IN-HOUSE IT SHOPS

    In this space, customers desire direct control of their systems, usually on
premises they own or lease. They do not want to share access to the software
with other service providers and generally have a medium to large volume of
transactions to process through their gateways. Our main competitors in this
area include Nightfire and Quintessent.

OUTSOURCING SOLUTIONS

    Some customers either do not have a large enough volume of transactions to
justify in-house deployment of gateways or perceive other benefits in shared or
service-bureau access to gateway capabilities. These benefits can include lower
cost, especially for in-house resources, and shorter-term commitments for
services. Our clearinghouse solution, which is based on a partnership with
BizTelOne Inc., provides CSPs with such an efficient and cost-effective,
outsourced alternative. Our main competitors in this area include Illuminet
(which uses Quintessent's gateway products), Accenture, Nightfire, Telcordia
Technologies and NeuStar, Inc.

IP PROVISIONING/ACTIVATION PRODUCT LINE

    Potential competition for our UPX products comes from three industry
segments. The first is equipment vendors such as Cisco, Nortel and Lucent. These
vendors typically provide some management tools with their equipment that could
compete with UPX. The second group of competitors is established third-party
vendors of operations support systems such as Orchestream, Syndesis, Dorado and
CPlane. Our competition also comes from in-house systems that various large
service providers have built for internal use.

    Some of our competitors have longer operating histories and greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition and a larger customer base. These competitors could also bundle
existing or new products with other, more established products as a competitive
strategy. Our focus on IP-based operations support system products may be a
disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the automated provisioning market develops, a number of companies
with significantly greater resources than ours could attempt to increase their
presence in this market by acquiring or forming strategic alliances with our
competitors or business partners. Because there are relatively low barriers to
entry into the software market, we expect additional competition from other
established and emerging companies. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any of which
could materially and adversely affect our business, operating results and
financial condition.

    One key differentiator for us is UPX's flexibility for service modeling. A
service model completely defines a particular service and all of the
provisioning actions that must be performed for that service. UPX can thus make
it much easier for providers to activate services for customers at significantly
less cost compared to other provisioning products and technologies.

    In addition, the automated provisioning market is characterized by rapid
technological advances, changes in customer requirements, and evolving industry
standards for computer hardware and software. The introduction of products based
on new technologies and the emergence of new industry standards may render our
existing or planned products obsolete or unmarketable, particularly because

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the targeted market is at an early stage of development. There is no assurance
that we will be able to compete successfully against current and future
competitors, and failure to do so would seriously harm our business, financial
condition and results of operations.

RISK FACTORS

    We operate in a rapidly changing business environment that involves
substantial risk and uncertainty. The following discussion addresses some of the
risks and uncertainties that could cause, or contribute to causing, actual
results to differ materially from expectations. We caution all readers to pay
particular attention to the descriptions of risks and uncertainties described
below and in other sections of this report and our other filings with the
Securities and Exchange Commission.

    We do not presently know of any additional risks and uncertainties that are
currently deemed material and which may also impair our business operations and
financial results. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of our Common Stock could decline and
we may be forced to consider additional alternatives, including bankruptcy.

    This Annual Report on Form 10-K also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of certain
factors, including the risks described below and elsewhere in this Annual Report
on Form 10-K.

WE HAVE INCURRED SUBSTANTIAL LOSSES IN 2001, EXPECT TO CONTINUE TO INCUR
ADDITIONAL LOSSES IN THE FUTURE AND WILL NOT BE SUCCESSFUL UNTIL WE REVERSE THIS
TREND

    DSET recently, and ISPsoft since inception, have incurred substantial
losses. We expect to incur operating losses for the foreseeable future.

    Changes in the telecommunications industry have resulted in significant
decreases in our revenue. For the year ended December 31, 2001, we incurred net
losses of approximately $33.3 million.

    If sufficient funds are available, we expect to increase our spending as we
continue to expand our product offerings and commercialization activities. We
will be dependent, in part, on the return of the market for OSS interconnection
products and services, as well as acceptance of the IP provisioning products and
services. As a result, we will need to generate significant revenues before we
will be able to return to profitability.

    Our IP provisioning products and services have only recently been
commercially available and have only seen limited opportunities to test them in
the marketplace. As a result, we have no basis on which to evaluate whether the
market will embrace these products, nor do we have any basis to evaluate whether
we will be able to effectively develop, market and sell additional products and
services. A lack of customer acceptance of these and any future products would
substantially harm our business.

WE MAY REQUIRE SUBSTANTIAL FINANCING TO CONTINUE OPERATIONS WHICH MAY BE
DIFFICULT TO OBTAIN AND MAY DILUTE OUR EXISTING OWNERS' INTERESTS

    We will need significant financing to grow our business. Historically, we
have operated with cash from our initial public offering and cash flow from
operations. The cash balance has decreased substantially to approximately $13.0
million as of December 31, 2001 from approximately $35.1 million as of
December 31, 2000. Subsequently and in connection with our merger with ISPsoft,
we incurred or expect to incur additional cash expenditures of approximately
$3.7 million through the end of the first quarter of 2002 for acquisition,
legal, accounting and financial advisory fees and other integration costs. In
addition, we may incur other additional unanticipated merger costs that may
require further cash outlays. Some of these nonrecurring costs will increase
cash expenditures and may impact our ability to continue to fund our operations.
The ability of the newly acquired IP provisioning products and services to
contribute to operating revenues is uncertain since there have been no
significant revenues from this product line to date. Based on our plan, we
believe that our existing available cash and cash equivalents may not be
adequate to satisfy current and planned operations for the next 12 months.
Additionally, we expect that we may require additional financing prior to our
return to profitability.

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    If we cannot raise more funds, we could be required to reduce our capital
expenditures, scale back our research and product development plans, reduce our
workforce, license to others products or technologies we would otherwise seek to
commercialize ourselves, sell certain assets, and seek bankruptcy protection.

    We may seek additional funding through collaborative arrangements, borrowing
money and by the sale of additional equity securities. Any sales of additional
equity securities are likely to result in further dilution to our existing
shareholders. Further, if we issue additional equity securities, the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. Alternatively, we may borrow money from
conventional lenders, possibly at high interest rates, which may affect the
value of your holdings. Despite our efforts, funding may not be available to us
at all or only on terms that are unacceptable to us. We also could be required
to seek funds through arrangements with collaborative partners or others that
may require us to relinquish rights to certain of our technologies, product
candidates or products which we would otherwise pursue on our own.

THERE IS A SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN

    Beginning in the fourth quarter of 2000 and continuing through the fourth
quarter of 2001, we experienced negative cash flows from operations and
substantial declines in our revenues. For the year ended December 31, 2001,
revenue was $9.9 million compared to $47.0 million for the year ended December
31, 2000. Additionally, we recognized $15.7 million in restructuring and
impairment charges during 2001 related to certain asset impairments and
severance payments to reduce headcount. As a result of these events, we have
expended $22.1 million of cash and cash equivalents during 2001 to fund our
operations. Our ability to return to profitability and ability to generate
positive cash flows from operations will have a significant impact on the period
through which our existing cash will be sufficient to fund operations. Based on
our plan, which included the merger with ISPsoft and the resulting cash
requirements for operations, we believe that our existing available cash and
marketable securities may not be adequate to satisfy current and planned
operations for the next 12 months. Additionally, we expect that we may require
additional financing prior to our return to profitability. All of these factors
raise a substantial doubt as to our ability to continue as a going concern. If
we cannot sufficiently improve our profitability or raise more funds at
acceptable terms, we could be required to further reduce our capital
expenditures, reduce our workforce and possibly explore additional alternatives
including seeking bankruptcy protection.

THE LIQUIDITY OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED IF WE ARE DELISTED
FROM THE NASDAQ NATIONAL MARKET

    On February 14, 2002, we received notification from the Nasdaq Stock Market,
Inc. ('Nasdaq') that our common stock had not maintained the minimum market
value of publicly held shares for the 30 days prior to the date of notification
and we would have ninety (90) days (until May 15, 2002) to regain compliance.
Additionally, on March 5, 2002, Nasdaq notified us that our common stock had
failed to maintain a minimum bid price of $1.00 per share for the 30 days prior
to the date of notification and we would have ninety (90) days (until June 3,
2002) to regain compliance. We cannot guarantee that we will regain and then,
maintain compliance with the Nasdaq regulations or that our common stock will
not be delisted from the Nasdaq National Market. In the event that we are
delisted from the Nasdaq National Market, we would attempt to trade on either
the Nasdaq SmallCap Market or the OTC Bulletin Board. A delisting from the
Nasdaq National Market may have a material adverse effect on our stock price and
our ability to raise capital through the issuance of additional equity. If our
common stock trades on the OTC Bulletin Board, we will be ineligible to use Form
S-3 to register shares of our common stock with the SEC, therefore, making it
more expensive to register shares of our common stock. In the event our common
stock is traded on the OTC Bulletin Board, it would become subject to certain
securities law restrictions requiring broker/dealers who recommend low-priced
securities to persons (with certain exceptions) to satisfy special sales
practice requirements, including making an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The securities laws also require additional disclosure
in connection with any trades involving low-priced stocks (subject to certain
exceptions), including the delivery, prior to any transaction, of a disclosure
schedule explaining the market for such stocks and the

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associated risks. These requirements could severely limit the market liquidity
of our common stock and your ability to sell the common stock in the secondary
market.

IF OUR COMMON STOCK IS DELISTED FROM THE NASDAQ NATIONAL MARKET, IT MAY BE
SUBJECT TO THE 'PENNY STOCK' REGULATIONS WHICH MAY AFFECT THE ABILITY OF OUR
SHAREHOLDERS TO SELL THEIR SHARES

    If Nasdaq delists our common stock from the National Market System, it could
become subject to Rule 15g-9 under the Exchange Act, which imposes additional
sales practice requirements on broker/dealers that sell such securities to
persons other than established customers and 'accredited investors' (generally,
an individual with a net worth in excess of $1,000,000 or an annual income
exceeding $200,000, or $300,000 together with his or her spouse's income). For
transactions covered by this rule, a broker/dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
consent to the transaction prior to the sale. Consequently, the rule may
adversely affect the ability of the holders of our common stock to sell their
shares in the secondary market.

    Regulations of the SEC define 'penny stock' to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction of penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. The SEC also
requires disclosure about commissions payable to both the broker/dealer and its
registered representative and information regarding current quotations of the
securities. Finally, the SEC requires that monthly statements be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.

    If our common stock were subject to the rules on penny stocks, the market
liquidity for our common stock could be severely and adversely affected.

OUR STOCK PRICE HAS BEEN VOLATILE

    We completed our initial public offering in March 1998. Since then, the
market price of our common stock has been highly volatile and is subject to wide
fluctuations. We expect our stock price to continue to fluctuate:

     in response to quarterly fluctuations in our operating results;

     because of market conditions in our industry;

     in reaction to announcements of technological innovations, new products, or
     significant agreements by us or our competitors;

     in reaction to changes in prices of our products or the products of our
     competitors; and

     in reaction to changes in trading activity and volume.

OUR LACK OF OPERATING HISTORY IN PROVIDING IP PROVISIONING AND MANAGEMENT
APPLICATIONS AND SERVICES MAKES EVALUATING OUR FUTURE PERFORMANCE DIFFICULT

    Historically, we developed and sold software tools, applications,
electronic-bonding gateways and services to telecommunications equipment
suppliers and competitive telecommunications service providers. The IP
provisioning products and services, although software applications, perform
different functions than our historic products, which have been targeted at
large incumbent communications providers and network providers, and, in part,
at our traditional customer base. In addition, the IP provisioning products
have no history of being sold to our historical customer base. Because we
have not previously operated as a provider of IP provisioning and management
applications, we have no basis to evaluate our ability to develop, market and
sell such products. Our ability to commercialize these products and services
and generate operating profits and positive operating cash flow will depend
principally upon our ability to:

     attract and retain an adequate number of customers;

     enter new markets and compete successfully in them;

     manage operating expenses;

     raise additional capital to fund our capital expenditure plans; and

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     attract and retain qualified personnel.

INTEGRATING ISPSOFT'S CORPORATE STRUCTURE AND OPERATIONS WITH DSET'S WILL BE
CHALLENGING AND THE COMBINED COMPANY MAY NOT REALIZE THE EXPECTED BENEFITS OF
THE ANTICIPATED MERGER

    The merger of ISPsoft and DSET in January 2002 involves the integration of
two different companies that have previously operated independently. Integrating
DSET's operations, technologies and personnel with those of ISPsoft will be a
complex process, and it is uncertain whether the integration will be completed
rapidly or that after the integration the combined company will achieve the
expected benefits of the merger. Importantly, ISPsoft personnel have never
operated as a publicly held company, and will now be subject to rigorous
disclosure and reporting obligations. The diversion of the attention of
management and any difficulties encountered in the process of combining our
companies could lead to possible unanticipated liabilities and costs and cause
the disruption of, or a loss of momentum in, the business activities of the
combined company. We will be forced to operate in multiple locations in various
states. Further, the process of combining our companies could create uncertainty
among employees about their future roles with us, thereby negatively affecting
employee morale. This uncertainty may adversely affect the ability of us to
retain some of our key employees after the merger. Furthermore, the management
of the combined company will have to establish a new organizational structure
that is cost efficient and productive. As a consequence, we cannot assure you
that we will successfully integrate ISPsoft or profitably manage the combined
company. In addition, we cannot be certain that, following the transaction, we
will achieve revenues, net income, efficiencies or synergies that justify the
merger or that the merger will result in increased earnings for us in any future
period.

IN OUR COMPETITIVE MARKETS, POTENTIAL CUSTOMERS MAY CHOOSE COMPETITORS BECAUSE
WE ARE SELLING A NEW PRODUCT IN A NEW LINE OF BUSINESS, WHICH WOULD REDUCE OUR
ABILITY TO INCREASE OUR REVENUES

    Our success will depend upon the willingness of IP service providers to
accept us as a new provider of IP provisioning and management applications.
While we believe that our customer marketing efforts, including targeted
customer trials of our products and services, will help us to develop products
and services that are attractive to potential customers, we cannot be assured
that we will be successful in overcoming any such resistance nor can we be
assured that customers will buy our products and services. A lack of customer
acceptance would reduce our ability to increase our revenues and would adversely
affect our business. Potential competition to our business will come from four
categories of industry segments. The first class of competitors is the equipment
vendors, such as Cisco, Nortel and Lucent. These vendors typically provide some
management tools with their equipment that would compete with our multi-vendor
products. The second group of competitors is the third-party established
operations support systems vendors such as Eftia, Vitria and Telcordia
Technologies, each of whom could leverage their existing markets to move into
those markets targeted by us. Additional entrants to the marketplace that we
will target include Orchestream, Dorado, Syndesis and CPlane. Competition will
also come from in-house systems that various large service providers such as MCI
Worldcom and AT&T have built for their internal use.

CUSTOMERS WHO ARE CONCERNED ABOUT OUR VIABILITY OR INTEGRATION MAY DELAY OR
CANCEL ORDERS

    Our customers and potential customers may delay or cancel orders for
products and/or services as a result of their concerns and uncertainty over the
evolution, integration and support of our electronic-bonding gateways and IP
provisioning products and services. A delay or cancellation of orders could have
a material adverse effect on our business.

WE MAY BECOME INVOLVED IN EXPENSIVE PATENT LITIGATION OR OTHER INTELLECTUAL
PROPERTY PROCEEDINGS, WHICH COULD RESULT IN LIABILITY FOR DAMAGES OR STOP OUR
DEVELOPMENT AND COMMERCIALIZATION EFFORTS

    We may become a party to patent litigation or other proceedings regarding
intellectual property rights.

    Other types of situations in which we may become involved in patent
litigation or other intellectual property proceedings include:

     we may initiate litigation or other proceedings against third parties to
     enforce our patent rights;

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     we may initiate litigation or other proceedings against third parties to
     seek to invalidate the patents held by these third parties or to obtain a
     judgment that our products or services do not infringe the patents of these
     third parties;

     if our competitors file patent applications that claim technology also
     claimed by us, we may participate in interference or opposition proceedings
     to determine the priority of invention; and

     if third parties initiate litigation claiming that our processes or
     products infringe their patents or other intellectual property rights, we
     will need to defend against these claims.

    The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. We maintain insurance coverage to
assist in defraying the costs and potential losses associated with defending
actions for intellectual property claims. We do not maintain insurance coverage
for actions commenced by us. Some of our competitors may be able to sustain the
cost of litigation or proceedings more effectively than we can because of their
substantially greater financial resources. If a patent litigation or other
intellectual property proceeding is resolved unfavorably to us, we may be
enjoined from selling our products and services without a license from the other
party and be held liable for significant damages. We may not be able to obtain
any required license on commercially acceptable terms or at all.

    Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse effect on our
ability to compete in the marketplace and, therefore, to become profitable.
Patent litigation and other proceedings may also divert significant management
time away from growing our business.

THERE ARE A NUMBER OF FACTORS, WHICH MAY CAUSE SUBSTANTIAL VARIABILITY IN OUR
QUARTERLY OPERATING RESULTS

    Our revenue, gross profit, operating income and net income may vary
substantially from quarter to quarter due to a number of factors. Many factors,
some of which are not within our control, may contribute to fluctuations in
operating results. These factors include the following:

     market acceptance of our new products;

     market acceptance of the 'Pay As You Grow' and Gateway Rental Program
     plans;

     timing and levels of hardware and software purchases by customers;

     budgetary constraints of our customers;

     consolidation within our target markets, such as with CLECs, via merger,
     acquisition or cessation of business;

     timing, size and stage of application development projects;

     new product and service introductions by our competitors or us;

     seasonal impact on projects for customers;

     our employment patterns;

     costs associated with fixed-price contracts;

     market factors affecting the availability or costs of qualified technical
     personnel;

     timing and customer acceptance of our new product and service offerings;

     length of sales cycle;

     variations in revenues from our distributors and partners;

     costs related to acquisitions of technology or businesses; and

     industry and general economic conditions.

    Historically, our revenue has been higher in the fourth quarter due to
capital budgeting and spending patterns by customers. As with the fourth quarter
of 2000, the fourth quarter of 2001 was again the lowest revenue quarter for the
year at approximately $1.9 million. We anticipate that the business will
continue to be subject to seasonal variations. In addition, depending on the
sales program by which the customer acquires our products and services, a
significant portion of quarterly revenue

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may be recognized in the last few weeks of the last month of each quarter. As a
result, we may not recognize any negative fluctuations in revenue until the end
of a particular quarter.

    Many of our costs, such as personnel and facilities costs, are relatively
fixed in nature. Expense levels are based in part on expectations of future
revenue. As a result, operating results have been and in the future will
continue to be impacted by changes in technical personnel cost and utilization
rates. Technical personnel utilization rates have been and are expected to
continue to be adversely affected during periods of rapid and concentrated
hiring. In addition, during such periods, we are likely to incur greater
technical training costs. Due to these and other factors, if we are successful
in expanding our service offerings and revenue, periods of variability in
utilization are likely to occur. In addition, revenues in any given period are
likely to come from a limited number of customer contracts. Any delay in the
closing of, or the loss of any number of, such contracts would adversely affect
results of operations. Therefore, past operating results and period-to-period
comparisons should not be relied upon as an indication of future operating
performance.

OUR SUCCESS DEPENDS ON THE SUCCESS AND SUSTAINABILITY OF THE MARKET FOR ADVANCED
TELECOMMUNICATIONS PRODUCTS AND SERVICES

    The global telecommunications market is evolving rapidly and it is difficult
to predict its potential size or future growth rate. We cannot assure investors
that the global deregulation and privatization of the worldwide
telecommunication market that has resulted in increased competition and
escalating demand for new technologies and services will continue in a manner
favorable to us or our business strategies.

    Since our customers are concentrated in the competitive telecommunications
industry in the United States, our future success is dependent upon increased
utilization of OSS interconnection and related applications by
telecommunications providers, the financial health and buying patterns of CLECs,
which in late 2000 was significantly impaired, and the continued demand for
integration, support and maintenance services. We cannot guarantee that current
or future products or services will achieve acceptance among telecommunications
carriers, network equipment vendors and other potential customers or that these
customers will not adopt alternative architectures or technologies that are
incompatible with our technologies.

    In addition, it is predicted that the telecommunications industry may
experience significant consolidation in the near future. This may cause there to
be fewer potential customers for our products and services, increasing the level
of competition in the industry. Also, due to the predicted continued cash
shortage for the small to medium telecommunications providers, larger or
consolidated telecommunications providers may have stronger purchasing power,
which could put pressure on prices and result in lower operating margins.

OUR INABILITY TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE COULD LEAD TO
DECLINES IN SALES AND OPERATING MARGINS

    Over the last decade, and especially in the last year, the market for
telecommunications products and related services has been characterized by rapid
technological developments, evolving industry standards, changes in end-user
requirements and frequent new product and service introductions. Continued
changes such as these may render our existing product and service offerings
obsolete. As a result, our position in this market could be negatively impacted
due to unforeseen changes in product features and functions of competing
products. Our future results of operations will depend in part on our ability to
respond to these changes by enhancing existing products and services and by
developing and introducing, on a timely and cost-effective basis, new products,
features and related services to meet or exceed technological advances
introduced by competitors. However, we cannot guarantee success in identifying,
developing and marketing new products, product enhancements and related services
necessary to keep pace with technological change, which could lead to declines
in sales and operating margins.

IF WE DO NOT MANAGE OUR CORPORATE CONSOLIDATION AND POTENTIAL GROWTH ON A
COST-EFFECTIVE AND TIMELY BASIS, OUR BUSINESS COULD SUFFER

    Our downsizing throughout 2001 has placed, and is expected to continue to
place, a significant strain on our managerial, operational and technical
resources. Our ability to manage this consolidation

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or, when able, to grow effectively, will require continued improvement of
operational, financial and other internal systems, as well as business
development and strategic alliance capabilities. Additionally, we must continue
to attract, hire, train, retain, motivate and manage our employees. We must
allocate sufficient engineering resources to improve the quality and depth of
our current offerings and develop new products. The failure to manage the
reduced employee base, improve operating systems or integrate resources when
needed on a cost-effective and timely basis could have a material adverse effect
on our business.

INTENSE COMPETITION IN OUR TARGET MARKETS COULD DECREASE OUR PROFITABILITY

    We compete in rapidly changing markets that are intensely competitive and
involve changing technologies, evolving industry standards, frequent new product
introductions, regulatory issues and rapid changes in customer requirements. We
compete with other interconnection software providers, order management system
providers, system integrators, IP provisioning providers and in-house
development staffs of telecommunications providers and network equipment vendors
via partnerships with our direct product competitors or through development by
them of competing products. Many of our current and potential competitors have
longer operating histories, greater name recognition, larger or captive customer
bases and significantly greater financial, technical, sales, customer support,
marketing and other resources.

    We believe the principal competitive factors affecting the market for our
products are:

     pricing of our products and services;

     breadth and depth of solutions offered;

     product quality and performance;

     strength of core technology and product features such as adaptability,
     scalability, ability to integrate with other products, functionality and
     ease of use;

     ability to install and implement solutions;

     customer support and service;

     relationships with business partners and alliances; and

     continued building of a base of satisfied and referable customers.

BECAUSE WE RELY HEAVILY ON SALES TO A LIMITED NUMBER OF CUSTOMERS FOR A
SIGNIFICANT PORTION OF REVENUE, THE LOSS OF ANY ONE SUCH CUSTOMER COULD CAUSE
OUR REVENUES TO DECLINE

    We currently derive, and expect to continue to derive, a significant portion
of our revenues from a limited number of customers including CSPs. For the year
ended December 31, 2001, we had one customer who accounted for approximately 19%
of total revenues. For the quarter ended March 31, 2001, we had one customer,
which accounted for 37% of revenues for such quarter. For the quarter ended June
30, 2001, we had two customers, which accounted for 14% and 10% of revenues,
respectively, for such quarter. For the quarter ended September 30, 2001, we had
three customers, which accounted for 12%, 11%, and 10% of revenues,
respectively, for such quarter. For the quarter ended December 31, 2001, we had
one customer, which accounted for 15% of revenues for such quarter. The amount
of revenue derived from a specific customer for any one product varies from
period to period, and a major customer in one period may not produce significant
additional revenue in a subsequent period. Other than certain agreements that
provide for on-going maintenance revenues or minimum royalties for run-time
licenses, none of our customers have entered into agreements requiring on-going
minimum purchases. Due to a continued decrease in the number of existing and
prospective CSPs as a result of continued economic uncertainties, to the extent
that we are not able to capture new major customers or to maintain relations
with existing major customers, our revenues may be subject to further
substantial period-to-period fluctuations and could decline significantly.

A FAILURE TO PROTECT OUR PROPRIETARY RIGHTS OR TO ENFORCE OUR LICENSING RIGHTS
MAY ADVERSELY AFFECT OUR BUSINESS

    Our success and ability to compete effectively is dependent, in part, upon
our proprietary rights. We rely primarily on a combination of copyright,
trademark, patent and trade secret laws, as well as confidentiality procedures
and contractual restrictions, to establish and protect these proprietary rights.

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Our practice is to enter into non-competition, non-disclosure and invention
assignment agreements with our employees and consultants, and into
non-disclosure agreements with customers, partners and distributors. We cannot
assure investors that these measures will be adequate to protect our proprietary
rights.

    We may also be subject to further risks as we enter into transactions in
countries where intellectual property laws are not well developed or are
difficult to enforce. Legal protections of proprietary rights may be ineffective
in other countries. Litigation may be necessary to defend and enforce those
proprietary rights, which could result in substantial costs and diversion of
management resources and could have a material adverse effect on our business,
financial condition and results of operations, regardless of the final outcome
of such litigation. Despite efforts to safeguard and maintain proprietary rights
both in the United States and abroad, there is no guarantee that we will be
successful in doing so. Furthermore, we cannot assure investors that the steps
taken by us will be adequate to deter misappropriation or independent
third-party development of our technology or to prevent an unauthorized third
party from copying or otherwise obtaining and using our products or technology.
Any of these events could have a material adverse effect on our business,
financial condition and results of operations.

    DSET, or our employees, may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. In addition, in
our licenses and software development and distribution agreements, we agree to
indemnify customers and distributors for any expenses and liabilities resulting
from claimed infringements of patents, trademarks, copyrights or other
proprietary rights of third parties. The amount of indemnity obligations may be
greater than the revenue that may have been received under these agreements. We
cannot assure investors that third parties will not assert infringement or
misappropriation claims against us, our customers, partners or distributors in
the future with respect to our employees or current or future products or
services. Any claims or litigation, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing arrangements. Royalty or licensing
arrangements, if necessary, may not be available on terms acceptable to us, if
at all, which could have a material adverse effect on our business, financial
condition and results of operations.

IF OUR PRODUCTS CONTAIN DEFECTS, WE COULD EXPERIENCE A DECLINE IN REVENUES AND
DAMAGES

    Applications developed, licensed and sold by us may contain errors or
failures. We cannot guarantee that errors or failures will not be found in our
products or applications or, if discovered, that we will be able to successfully
correct any errors or failures in a timely manner or at all. The occurrence of
errors or failures in our products and applications could result in loss of or
delay in market acceptance, increased service and warranty costs or payment of
compensatory or other damages. In addition, errors or failures may result in
delays in recognition of revenue and diversion of engineering resources during
the period in which we are required to correct any defects. In 2000 and 2001, we
obtained errors and omissions insurance to cover liability associated with our
software development and license agreements. There is no assurance that we will
be able to maintain this coverage in the future. Although agreements with
customers typically contain provisions intended to limit exposure to potential
claims as well as any liabilities arising from such claims, our contracts with
customers may not effectively protect us against the liabilities and expenses
associated with software errors or failures. Accordingly, errors or failures in
our products, solutions or applications could have a material adverse effect
upon our business, financial condition and results of operations.

WE RELY ON THIRD-PARTY SOFTWARE THAT MAY BE DIFFICULT TO REPLACE

    Some of the software we license from third parties and utilize in
conjunction with our products may be difficult to replace. This software may not
continue to be available on commercially reasonable terms, if at all. In many
cases we have identified potential replacements or may have procured source code
rights for certain third-party software. However, replacement software may not
have the same functionality or integration within our products. Additionally, of
the third-party software that is not at least in some form immediately
replaceable, we would need to internally develop alternatives or increased
functionality, which could take substantial time and resources. The loss or
inability to maintain any of these technology licenses could result in delays in
the sale of our products and services

                                       19





<PAGE>

until equivalent technology, if available, is identified, licensed, and
integrated, which could harm our business.

THE REVENUE FROM LICENSING AND MAINTENANCE OF OUR TOOLS PRODUCTS MAY DECLINE

    In 2001, we transitioned primary responsibility for licensing, support and
development services of our application development toolkits and certain of our
gateway products to a distributor for which we receive a percentage of their
revenue. We cannot guarantee any revenue from this arrangement and historical
projections may be inaccurate in producing forecasts for these products.

    Portions of the revenue from this arrangement are generated from direct
licensing, royalties for run-time licenses, maintenance and additional fees
relative to development projects. Run-time royalties generally become due upon
the deployment by equipment vendors to telecommunications carriers of network
devices, which have embedded applications built with our software. Many
customers are contractually required to periodically report the sales of these
network devices to our distributor or us. Although we both generally have the
right to periodic audits in these contracts which provide for run-time
royalties, we cannot assure investors that customers will accurately report
their sales or that we will be able to effectively monitor and enforce our
contractual rights with respect to run-time royalty fees.

THE COMPETITIVE MARKET FOR TECHNICAL PERSONNEL MAY MAKE IT DIFFICULT FOR US TO
MEET OUR CURRENT AND FUTURE DEMANDS

    Our future success depends to a significant extent on our ability to
attract, hire, train, retain and motivate qualified technical and sales
personnel, with appropriate levels of managerial and technical capabilities. Our
complex technology generally requires a significant level of expertise to
effectively develop and market our products and services and to perform custom
application development and installation services. We believe that there remains
significant competition for professionals with the advanced skills required. We
have at times experienced, and continue to experience, difficulty in recruiting
and at times retaining, qualified personnel. We compete for personnel with
software companies, system integrators and telecommunications companies, many of
which have greater resources. Market conditions also may affect our ability to
attract and retain qualified personnel. This makes it difficult for us to hire
the quality and number of highly skilled technical and sales personnel required
to meet current and expected future demand. In addition, it may make it more
expensive to hire those personnel in general. Due to this competition, and
market conditions we have experienced, and expect to continue to experience,
turnover in technical and sales personnel is high. There is no guarantee that we
will be successful in attracting and retaining the technical or sales personnel
required to conduct and successfully expand operations. Our business, financial
condition and results of operations could be materially adversely affected if we
are unable to attract, hire, train, retain and motivate qualified technical and
sales personnel.

IF OUR DIRECT SALES PROCESS IS INEFFECTIVE, OUR REVENUES WILL DECLINE

    Although we are aggressively striving to enhance and expand our strategic
alliances programs, we continue to sell our products primarily through our
direct sales force. We believe that there is significant competition for sales
personnel with the advanced skills and technical knowledge we desire. Our
inability to hire and train competent sales and sales support personnel, or our
failure to retain them, would harm our business. Additionally, by relying
primarily on a direct sales model, we may miss opportunities available through
other channels. We plan to expand our sales efforts to include additional
resellers and partners and the failure to expand indirect channels may place us
at a competitive disadvantage.

    Our entire sales and marketing strategy involves substantial risk. There can
be no assurance that we will be successful in implementing our strategy, that it
will lead to achievement of our objectives, or that some resellers or partners
will not attempt to partner with our competitors, or develop or acquire
products, or services that compete with our products or services. Any inability
to maintain our strategic relationships or to enter into any additional
strategic relationships may have a material adverse affect on our business. If
we are unable to implement our strategy effectively, our business will be
materially adversely affected.

THE UNCERTAIN LENGTH AND VARIABILITY OF OUR PRODUCT SALES CYCLE MAKES OUR
REVENUE STREAM LESS PREDICTABLE

                                       20





<PAGE>

    Our products are often used by our customers to deploy mission-critical
solutions for their businesses. Additionally, the cost of our products and
suites of products can be significant to a customer's overall financial
position. As such, customers generally consider a wide range of issues before
committing to purchase products, including product benefits, ability to operate
with existing or planned computer systems, scalability, reliability and
competitive price. Many customers are still in the early stages of developing
their businesses and need to be educated about the use and benefits of our
products and services. Additionally, the purchase of our products generally
involves a significant commitment of capital and other resources by the
customer. This can mean additional technical reviews, assessment of competitive
products and approval at several levels within the customer's management and
executive structure.

    The period of time between initial customer contact and execution of a
license agreement or contract for services with telecommunications service
providers typically ranges from three to nine months. The variability of these
sales cycles could have a material adverse effect on our business, financial
condition and results of operations.

DEPENDENCE ON SOFTWARE LICENSE REVENUES MAKES OUR OPERATING RESULTS DIFFICULT TO
PREDICT

    License revenues in any quarter are difficult to forecast because they
depend on relatively few orders booked and shipped in that quarter. Moreover, we
have historically recognized a substantial percentage of revenues in the last
month of the quarter, frequently in the last week or even the last days of the
quarter, and we expect this trend to continue for as long as our licensed
software products represent a substantial part of our overall business. Since
our expenses are relatively fixed in the near term, any shortfall from
anticipated revenues or any delay in the recognition of revenues could result in
significant variations in operating results from quarter to quarter. We find it
difficult to forecast quarterly license revenues because our sales cycles, from
initial evaluation to delivery of software, is lengthy and varies substantially
from customer to customer. If revenues fall below our expectations in a
particular quarter, our business could be harmed. In the first quarters of
fiscal 2001, our revenues did, in fact, fall below our own and consensus
securities analysts' estimates for those quarters and, as a result, the price of
our stock declined significantly during those periods. Specifically, license
revenues decreased by 92% to $2.6 million for the year ended December 31, 2001
from $32.9 million for the year ended December 31, 2000. Although we have
introduced both 'Pay As You Grow' and Gateway Rental Program pricing models
providing pricing alternatives to CSPs, if our revenues fall below our own
estimates or below the consensus securities analysts' estimate in an upcoming
quarter, our stock price could decline further, harming our business
significantly in terms of, among other things, diminished employee morale and
public image.

WE DEPEND ON SERVICE REVENUES TO INCREASE OUR OVERALL REVENUES; SERVICES MAY NOT
ACHIEVE PROFITABILITY

    Since the introduction of our interconnection gateway products in 1998, most
of our customers have installed and are operating our products. Many of these
have entered into service agreements, which make up a portion of our revenue.
Service revenues represented 73.5%, 30.2% and 46.0% of total revenues for fiscal
2001, 2000 and 1999, respectively. The level of service revenues depends largely
upon our implementation services and ongoing renewals of customer support
contracts by our installed customer base. Our implementation revenues could
decline if third-party organizations such as systems integrators compete for the
installation or servicing of our products. In addition, our customer support
contracts might not be renewed in the future. Due to the increasing costs of
operating a professional services organization, we may not be able to sustain
profitability in this part of our business in the near future, or ever.

WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR STOCK PRICE
VOLATILITY

    In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation, either due
to stock price declines associated with our failure to meet consensus securities
analysts' estimates for revenues or earnings for prior fiscal periods or due to
future volatility in our stock price. This litigation could result in
substantial costs and divert management's attention and resources. We are not
aware of any litigation due to stock price volatility at this time.

GOVERNMENT REGULATION AND RELATED LITIGATION MAY ADVERSELY AFFECT OUR CUSTOMERS
AND US

                                       21





<PAGE>

    While our operations are not directly regulated, existing and potential
customers are subject to a variety of United States and foreign governmental
regulations. These regulations and future changes to them may negatively impact
the telecommunications industry, limit the number of potential customers for our
products and services or otherwise have a material adverse effect on our
business, financial condition and results of operations. Recently enacted
legislation, including the Telecommunications Act of 1996, deregulating the
telecommunications industry has caused and may continue to cause changes in the
telecommunications industry, including the entrance of new competitors and
possible industry consolidation. These events could reduce our potential
customer base, increase pricing pressures, decrease demand for our products,
increase the cost of doing business or otherwise have a material adverse effect
on our business, financial condition and results of operations. Currently the
Federal Communications Commission and state authorities are implementing the
provisions of the Telecommunications Act of 1996 and several of the decisions by
the Federal Communications Commission and state authorities are being challenged
in court. In addition, Congress is exploring potential additional changes. We
cannot predict the extent to which such legislation and related litigation will
affect our current and potential customers or ultimately affect our business,
results of operations and financial condition.

POTENTIAL ACQUISITIONS OF OR BY US COULD BE COSTLY OR UNSUCCESSFUL

    As part of our strategy, we intend to continue to pursue acquisitions of
businesses or technologies to broaden our product and service offerings, add
technical or sales personnel, increase our presence in existing markets, expand
into new geographic markets, establish strategic relationships and obtain
desirable customer relationships. If we buy another company or selected assets
or technologies, we could have difficulty assimilating acquired personnel,
operations, customers or vendors. In addition, one or more of such personnel,
customers or vendors may decide not to work for or continue to do business with
us. These difficulties could disrupt our ongoing business, distract management
and employees and increase expenses. Although we conduct due diligence reviews
with respect to all acquisition candidates, all material liabilities or risks
related to potential acquisitions may not be successfully identified.
Furthermore, we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to existing
shareholders. In addition, certain of our key personnel have executed change of
control agreements detailing circumstances governing their removal and severance
rights in any acquisition or change in our management structure.

ANTI-TAKEOVER PROVISIONS OF SHAREHOLDER RIGHTS PLAN, CHARTER, BY-LAWS AND
CERTAIN PROVISIONS UNDER NEW JERSEY LAW COULD REDUCE OUR STOCK PRICE

    On July 20, 2001, our board of directors adopted a shareholder rights plan.
Under the rights plan, each of our shareholders of record on July 31, 2001
received a distribution of one right for each share of our common stock.
Initially, the rights are represented by our common stock certificates, are
not traded separately from our common stock, and are not exercisable. The
rights become exercisable only if a person acquires, or announces a tender
offer, that would result in ownership of 15% or more of our common stock, at
which time each right would enable the holder to buy one one-thousandth of a
share of our Series A preferred stock at an exercise price of $20, subject to
adjustment. The actual number of shares acquirable by the holder equals $20
divided by one-half of the then current market price of our common stock.
Additionally, the rights plan provides that in the event of a subsequent merger
or other acquisition of us, the holders of rights will be entitled to buy shares
of common stock of the acquiring entity at one-half of the market price of the
acquiring company's shares.

    In addition, anti-takeover provisions of New Jersey law, our Certificate of
Incorporation and By-Laws could make it more difficult for a third party to
acquire control of us, even if such change would be beneficial to our
shareholders. Our Certificate of Incorporation provides that the board of
directors may issue preferred stock with superior rights and preferences without
common shareholder approval.

    Each of these anti-takeover measures could have the effect of delaying,
deterring or preventing a change in control. This could be harmful to
shareholders because it could prevent them from realizing a premium for their
stock.

                                       22





<PAGE>

ITEM 2. PROPERTIES.

BRIDGEWATER, NEW JERSEY

    Our principal sales, marketing, executive and administrative offices are
currently located in Bridgewater, New Jersey where we presently rent
approximately 46,679 square feet. The average annual base rent for this facility
is approximately $1,172,000 per year. This lease commenced in May 1999 and will
expire in August 2009. In August 2001, we sublet 31,057 square feet of our
Bridgewater space to Ortho-McNeil Pharmaceutical, Inc. through August 31, 2004.
The annual sublet rent is approximately $807,000.

SHREWSBURY, NEW JERSEY

    At January 31, 2002, in connection with the merger with ISPSoft, we assumed
a commercial office lease which expires on August 31, 2005. The space is used
for research and product development. The lease provides for an extension option
of five years, subject to certain conditions. The annual rent for this facility
is approximately $259,700 per year, and we are also responsible for payment of
certain operating expenses under the lease.

PLANO, TEXAS

    We also lease 25,859 square feet of office space for research and
development and professional services in Plano, Texas. The annual rent for this
facility is approximately $535,700 per year, subject to normal escalation
clauses, for the remaining five years. This lease commenced in August 1999 and
will expire in August 2005. We are currently attempting to sublet this space.

CALIFORNIA

    We lease two facilities in California, one in Freemont and one in San Ramon
occupying 3,275, and 2,217 square feet, respectively. These leases will be
terminated in December 2002, but we previously sublet all of the Fremont
property.

TORONTO, CANADA

    In connection with our DSET Canada Subsidiary, we leased 9,430 square feet
of office space in Toronto, Canada. The annual base rent is approximately
$151,000 plus certain additional proportionate operating costs. In November of
2001 DSET sublet all 9,430 square feet of the Toronto space to NexInnovations
Inc. through the end of the lease term. The annual sublet rent is approximately
$119,000 plus certain additional proportionate operating costs.

CONSOLIDATION OF OFFICES

    Operations previously occupying the now sublet space in Canada and New
Jersey have been consolidated to our remaining space in other facilities. Our
Bridgewater, New Jersey facility will remain our corporate headquarters,
servicing the sales, finance, operations and general administration functions,
while the Shrewsbury, New Jersey and Plano, Texas facilities house our primary
product research, development, support and maintenance operations for the IP
provisioning and the electronic-bonding gateway products, respectively.

ITEM 3. LEGAL PROCEEDINGS.

    We are not a party to any material legal proceedings.

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

    Not applicable.

                                       23





<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

    Our common stock has traded on the Nasdaq National Market ('NNM') under the
symbol 'DSET' since March 13, 1998.

    In August 2001, we announced the approval of a reverse one-for-four stock
split effective as of the close of business on August 21, 2001, pursuant to
which one new share of DSET common stock would be issued in exchange for every
four shares of our common stock then outstanding. In connection with such
reverse stock split recapitalization, we reduced our authorized common stock
from 40 million shares to 10 million shares. After the one-for-four reverse
split, we had approximately 2.9 million shares of common stock outstanding.

    We received a notice from Nasdaq, dated February 14, 2002 whereby Nasdaq
notified us that we were not in compliance with the minimum market value of
publicly held shares and had ninety (90) days (until May 15, 2002) to regain
compliance.

    We received a notice from Nasdaq, dated March 5, 2002 whereby Nasdaq
notified us that we were not in compliance with the minimum bid price
requirement and had ninety (90) days (until June 3, 2002) to regain compliance.
We are currently contemplating submitting an application to the Nasdaq SmallCap
Market for the listing of our common stock.

    As of March 1, 2002, the approximate number of holders of record of our
common stock was 81 and the approximate number of beneficial holders of our
common stock was 4,000.

    We have never declared or paid any cash dividends on our capital stock. We
intend to retain any earnings to fund future growth and the operation of our
business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future.

    The following table sets forth the high and low sales price information for
our common stock for each of the quarters in the period beginning January 1,
1999 as reported on the NNM, but adjusted for our one-for-four reverse stock
split effective August 21, 2001. Unless otherwise indicated, each of the per
share amounts for our common stock set forth in this Annual Report on Form 10-K
have been revised to reflect such one-for-four reverse stock split
recapitalization.

<Table>
<Caption>
                       QUARTER ENDED                            HIGH       LOW
                       -------------                            ----       ---
<S>                                                           <C>        <C>
March 31, 1999..............................................  $ 75.500   $38.252
June 30, 1999...............................................  $ 60.000   $38.500
September 30, 1999..........................................  $ 60.500   $35.500
December 31, 1999...........................................  $162.000   $51.720
March 31, 2000..............................................  $194.500   $64.064
June 30, 2000...............................................  $124.752   $53.000
September 30, 2000..........................................  $132.500   $76.000
December 31, 2000...........................................  $ 81.752   $ 6.500
March 31, 2001..............................................  $ 16.752   $ 3.752
June 30, 2001...............................................  $  5.760   $ 2.040
September 30, 2001..........................................  $  2.960   $ 1.060
December 31, 2001...........................................  $  1.450   $ 0.700
</Table>


    DSET's board of directors approved a Stock Repurchase Plan on August 15,
2001 whereby we may repurchase up to 200,000 shares of common stock (on a post
reverse stock split basis). Several factors were considered by the board of
directors prior to approving the repurchase plan, including the potential
dilution of current shareholders from the issuance of shares of our common
stock pursuant to our Employee Stock Purchase Plan. The Stock Repurchase Plan
is funded using our working capital and funds provided by employees in
connection with the Employee Stock Purchase Plan. The Stock Repurchase Plan
program may be suspended or discontinued at any time.

                                       24





<PAGE>

    As of December 31, 2001, we had repurchased 150,200 shares of common
stock. All shares repurchased were held as treasury shares, not deemed to be
outstanding but are available for reissuance. At December 31, 2001, 44,059
shares had been re-issued pursuant to the Employee Stock Purchase Plan,
leaving a balance of 106,141 shares.

RECENT SALES OF UNREGISTERED SECURITIES

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

During 2001, employees purchased shares of our common stock pursuant to our 2001
Employee Stock Purchase Plan (at a 15% discount) which were not registered under
the Securities Act of 1933, as amended. The following table sets forth certain
information regarding such purchases during the year:

<Table>
<Caption>
 NUMBER                                                     PURCHASE
OF SHARES                                                     PRICE
---------                                                     -----
<S>                                                          <C>
44,059.....................................................  $0.9775
</Table>

We did not employ an underwriter in connection with the issuance of the
securities described above. We believe that the issuance of the foregoing
securities was exempt from registration under either (i) section 4(2) of the
Securities Act of 1933 as transactions not involving any public offering and
such securities having been acquired for investment and not with a view to
distribution, or (ii) Rule 701 under the Securities Act of 1933 as transactions
made pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation. All recipients had adequate access to
information about DSET.

USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING

    On March 12, 1998, the Securities and Exchange Commission declared
effective our Registration Statement on Form S-1 (Registration Statement No.
333-43827) as filed with the Commission in connection with our initial public
offering of Common Stock, which was managed by BT Alex Brown Incorporated,
BancAmerica Robertson Stephens and SoundView Financial Group, Inc. Pursuant to
such Registration Statement, we registered and sold an aggregate of 2,500,000
shares of our Common Stock, for a gross aggregate offering price of $40.0
million. We incurred underwriting discounts and commissions of approximately
$2.8 million. In connection with such offering, we incurred total expenses of
approximately $1.1 million.

    On January 25, 1999, DSET Acquisition Corp., a wholly-owned subsidiary of
DSET, consummated the acquisition of certain assets of Network Programs LLC, a
Delaware limited liability company ('NPL'). The purchase price was $2.7 million.
NPL provided specialized software to CLECs. In 2001, we decided to discontinue
the sale of certain products. As a result, we recognized an asset impairment of
$2.2 million for the remaining unamortized balance of the intangible assets
related to this acquisition.

    On September 30, 1999, we completed the purchase of Konark Inc. ('Konark')
and related technologies for approximately $3.4 million financed through cash at
closing and certain deferred payments to the sellers of Konark. On or about
March 6, 2002 we completed our installment payments for all deferred payments to
the sellers of Konark and the escrow previously in force to secure certain
obligations of Konark was released to the sellers of Konark. In 2001, we decided
to discontinue the sale of certain products. As a result, we recognized an asset
impairment of $450,000 for the remaining unamortized balance of the intangible
assets related to this acquisition.

    In June 2000 we purchased an exclusive worldwide license for various
products from Daleen Technologies, Inc. for $2.5 million payable in cash. A
royalty will also be due based on future sales. Subsequently, in March 2001,
due to changing and unpredictable conditions in the marketplace and in an
effort to conserve cash we decided to abandon this product line, and recorded
an impairment charge of approximately $2.2 million for the remaining unamortized
balance of the intangible assets in 2001.

ITEM 6. SELECTED FINANCIAL DATA.

    The selected financial data set forth below with respect to our statement of
income (loss) data for each of the years in the three-year period ended
December 31, 2001, and with respect to the balance sheet data at December 31,
2001 and 2000 are derived from our audited consolidated financial statements and
the related notes thereto found at 'Item 14. Exhibits, Financial Statement
Schedules,

                                       25





<PAGE>

and Reports on Form 8-K.' The statement of income (loss) data for the years
ended December 31, 1998 and December 31, 1997 and the balance sheet data as of
December 31, 1999, 1998, and 1997 are derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K. The
selected financial data set forth below should be read in conjunction with and
is qualified in its entirety by our audited consolidated financial statements
and related notes thereto found at 'Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K' and 'Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations' which are included
elsewhere in this Annual Report on Form 10-K.

<Table>
<Caption>
                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                -------------------------------------------------
                                                  2001       2000      1999      1998      1997
                                                  ----       ----      ----      ----      ----
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                             <C>        <C>        <C>       <C>       <C>
STATEMENT OF INCOME (LOSS) DATA:
    Revenues:
      License revenues........................  $  2,629   $ 32,851   $24,084   $16,338   $10,850
      Service revenues........................     7,286     14,191    20,545    12,952     8,515
                                                --------   --------   -------   -------   -------
        Total revenues........................     9,915     47,042    44,629    29,290    19,365
                                                --------   --------   -------   -------   -------
    Cost of revenues:
      License revenues........................     1,179      3,991     1,823     1,775     1,274
      Service revenues........................     5,264     11,131     7,063     3,692     3,405
                                                --------   --------   -------   -------   -------
        Total cost of revenues................     6,443     15,122     8,886     5,467     4,679
                                                --------   --------   -------   -------   -------
    Gross profit..............................     3,472     31,920    35,743    23,823    14,686
                                                --------   --------   -------   -------   -------
    Operating expenses:
      Sales and marketing.....................     6,431     12,130    11,972     9,143     4,872
      Research and product development........     9,675     18,467    11,046     6,237     3,299
      General and administrative..............     5,617      6,925     4,121     2,708     2,881
      Bad debt expense and other charges......       276     13,378       665        50       114
      Amortization of goodwill and other
        intangibles...........................       283        419       200        38        22
      Restructuring and impairment charges....    15,711      2,248        --        --        --
                                                --------   --------   -------   -------   -------
        Total operating expenses..............    37,993     53,567    28,004    18,176    11,188
                                                --------   --------   -------   -------   -------
    Operating income (loss)...................   (34,521)   (21,647)    7,739     5,647     3,498
                                                --------   --------   -------   -------   -------
Net income (loss).............................  $(33,273)  $(18,812)  $ 6,517   $ 4,794   $ 2,469
                                                --------   --------   -------   -------   -------
                                                --------   --------   -------   -------   -------
Net income (loss) per common share............  $ (11.61)  $  (6.61)  $  2.50   $  2.13   $  1.80
Weighted average number of common shares
  outstanding.................................     2,866      2,847     2,606     2,253       892
Net income (loss) per common share assuming
  dilution....................................  $ (11.61)  $  (6.61)  $  2.36   $  1.74   $  1.18
Weighted average number of common shares and
  common equivalent shares outstanding........     2,866      2,847     2,767     2,761     2,087

<Caption>
                                                  2001       2000      1999      1998      1997
                                                  ----       ----      ----      ----      ----
                                                                 (IN THOUSANDS)
BALANCE SHEET DATA:
<S>                                             <C>        <C>        <C>       <C>       <C>
    Cash, cash equivalents and marketable
      securities..............................  $ 12,958   $ 35,075   $40,158   $45,023   $ 3,206
    Working capital...........................     8,493     35,293    53,878    49,037     6,276
    Total assets..............................    22,558     61,183    73,495    56,854    13,315
    Long-term debt, including capital
      leases..................................     1,875        833     1,872       112       332
    Series A preferred stock..................        --         --        --        --    11,604
    Retained earnings (deficit)...............   (35,837)    (2,565)   16,248     9,731     4,937
    Total shareholders' equity (deficit)......  $ 14,121   $ 47,717   $61,523   $51,189   $(3,401)
</Table>

    In March 1998, we completed our initial public offering and received
proceeds of $37.2 million. At that time all preferred stock was converted to
common stock.

    In August 2001, our Board of Directors declared a one-for-four reverse stock
split to holders of record as of the close of trading August 21, 2001. All
references to number of shares and per share information in this Form 10-K have
been adjusted to reflect the stock split on a retroactive basis.

                                       26





<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

    The following discussion and analysis should be read in conjunction with
'Selected Consolidated Financial Data' and our consolidated financial statements
and notes thereto included elsewhere in this report on Form 10-K.

FORWARD-LOOKING STATEMENTS

    Statements contained or incorporated by reference in this Form 10-K that are
not statements of historical fact may be forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements may be identified by the use of forward-looking
terminology such as 'may,' 'will,' 'continue,' 'believes,' 'expects,'
'anticipates,' 'intends,' 'estimates,' 'should' and similar terms, variations of
such terms or the negative of those terms. There are a number of important
factors that could cause our results to differ materially from those indicated
by such forward-looking statements. These factors include those set forth in the
section entitled 'Risk Factors' and elsewhere in this Form 10-K. In particular,
the development and marketing of software solutions and related services to
telecommunications services providers by us is subject to a number of
significant risks and uncertainties, including, but not limited to: (i) our
ability to continue as a going concern; (ii) risks associated with the
integration of ISPsoft with us following our recent acquisition of ISPsoft and
the potential acquisition of other businesses by us, including risks relating to
unanticipated liabilities or expenses, lower than expected revenues and the
commercialization of acquired technology or products; (iii) the need for
substantial financing to continue operations; (iv) the risk that our common
stock may be delisted from the Nasdaq National Market; (v) our dependence on the
market for advanced telecommunications products and services; (vi) rapid
technological change in our industry; (vii) our lack of an operating history in
providing Internet Protocol (IP) based provisioning and management applications
and services; (viii) the failure to protect proprietary rights or enforce
licensing rights; and (ix) the loss of third-party software we utilize in our
products. As a result of such risks and others expressed from time to time in
our filings with the Securities and Exchange Commission, our actual results may
differ materially from the results discussed in or implied by the
forward-looking statements contained herein.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

    Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to bad debts, investments, recoverability of long-lived assets,
income taxes, restructuring charges, post-contract customer support agreements,
and contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

    As more fully described in Note 3 to our consolidated financial statements,
we believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

     We recognize both product and service revenue.

         We do not recognize revenue if, in our judgment, the revenue does not
         meet the requirements of AICPA Statement of Position ('SOP') 97-2,
         'Software Revenue Recognition' (i.e., persuasive evidence that an
         arrangement exists, delivery has occurred, the customer's fee is fixed
         and determinable and collectibility is probable).

         On long-term, fixed price contracts, we recognize revenue using the
         percentage-of-completion method in accordance with SOP 81-1,
         'Accounting for Performance of Construction -- Type and Certain
         Production -- Type Contracts.' As work progresses, we rely

                                       27





<PAGE>

         on estimates of total expected contract revenue and costs. We follow
         this method since reasonably dependable estimates of the revenue and
         costs applicable to various stages of a contract can be made.
         Recognized revenues and profit are subject to revisions as the contract
         progresses to completion. Revisions in profit estimates are credited to
         income in the period in which the facts that give rise to the revision
         become known.

     We maintain allowances for doubtful accounts for estimated losses resulting
     from the inability of our customers to make required payments. If the
     financial condition of our customers deteriorates, resulting in an
     impairment of their ability to make payments, additional allowances may be
     required.

     We provide for the impairment of certain intangible and tangible long-lived
     assets based upon the estimated future cash flows from these assets. In the
     event that these intangible and tangible assets actually have more or less
     value in the future than currently estimated, they would require further
     impairment or provide a benefit to us without an associated cost.

     Contraction of the telecommunications industry commencing in the latter
     half of 2000 and continuing through the fourth quarter of 2001 has led us
     to re-examine all facets of our business. In the face of declining revenues
     and certain customers' unwillingness or inability to honor their
     commitments, it became necessary for us to take steps to reorganize to a
     level commensurate with the expected reduced revenue levels. These steps
     included recognizing asset impairments on many of our long-lived intangible
     and tangible assets, closing facilities, reducing and consolidating the
     workforce, seeking sublet tenants for portions of facilities covered by
     long term operating leases, and recognizing charges against earnings in the
     current period for future fixed asset and facility lease payments that will
     not benefit future periods. Considerable management judgment is necessary
     to estimate the charges for asset impairments and restructuring.
     Restructuring charges derived from our plans of closing facilities and
     discontinuing certain product lines are recognized pursuant to Emerging
     Issues Task Force ('EITF') No. 94-3, 'Liability Recognition for Certain
     Employee Termination Benefits and Other Costs to Exit an Activity
     (Including Certain Costs Incurred in a Restructuring)' and Staff
     Accounting Bulletin ('SAB') 100, 'Restructuring and Impairment Charges'.

     We record a valuation allowance to reduce our deferred tax assets to the
     amount that is more likely than not to be realized. While we have
     considered future taxable income and ongoing prudent and feasible tax
     planning strategies in assessing the need for the valuation allowance, in
     the event we were to determine that we would be able to realize our
     deferred tax assets in the future in excess of our net recorded amount
     (zero at December 31, 2001), an adjustment to the deferred tax asset would
     increase income in the period such determination was made.

GENERAL

    We develop and market service-provisioning and electronic-bonding solutions
for use by telecommunications providers around the world. Our Universal
Provisioning eXchange ('UPX') software platform, acquired in our merger with
ISPsoft in January 2002, enables a service provider to provision, activate, and
manage services such as Internet Protocol ('IP') based virtual private networks
('VPNs') in complex multi-vendor network environments. We also offer a family of
software solutions for competitive service providers ('CSPs') that enables them
to exchange information with other telecommunications service providers to
reduce the time necessary to provision new voice and data services for their
customers.

    In the mid to late 1990's, we focused on providing software that enabled the
creation of applications that could be distributed among many processors in
order to solve highly complex problems in the network management arena. This
software was known as application development toolkits and was predominantly
sold to network equipment vendors, both domestically and internationally. Until
1999, substantially all of our revenues had been derived from these application
development toolkits and related applications or services. These software
solutions were optimized to support the technologies recommended under the
Telecommunications Management Network ('TMN') standards established in the early
1990's. At the end of 2000, it was clear that the telecommunications industry
had turned away from supporting certain technology defined in the TMN
guidelines. We decided to discontinue directly selling application development
toolkits and related applications due to the costs and the shrinking revenue
base associated with them. Both the toolkits and the related applications are
still sold and supported by a partner of ours, NE Technologies, Inc.

                                       28





<PAGE>

    1999 and 2000 were years of unprecedented demand for all types of
communications products and services. Companies in the telecommunications
industry had access to and utilized abundant sources of investment capital.
However, the downturn in the industry, which began in the second half of 2000,
reduced our revenues significantly beginning in the third quarter of 2000 and
continued through 2001. This downturn was brought about by the sudden withdrawal
of available financing from almost all of the traditional financing sources
(vendors, lenders, private equity/venture capital sources, public equity markets
and large corporate partners) to our current and potential customers. Prior to
this downturn, the new CSPs were successfully and regularly obtaining large
capital commitments allowing them to increase the size and the pace of their
infrastructure spending. This funding crisis also affected our collection
efforts since many customers either declared bankruptcy or concluded that they
did not have sufficient available cash to pay their obligations to DSET. We
believe that we have adequately reserved for doubtful accounts, although no
assurance can be made that additional customers will not go bankrupt or have
financial difficulties.

    Our policy to assess the probability of collection consists of reviewing
public and private sources of financial information for all potential customers
(e.g., financial statements, periodic filings and press releases), inquiring of
management of the potential customer how they intend to pay for their purchase,
reviewing available information from credit rating agencies, and if available,
contacting funding sources, reviewing recent announcements regarding completed
and proposed financing and discussing the potential customer's credit worthiness
with other suppliers.

    Prior to the third quarter of 2000, our experience with the necessity for
creating allowances for bad debt had been good. Our ongoing credit assessment
procedures include maintaining contact with the customer regarding the status of
the receivable, reviewing all overdue outstanding balances and continuing to
review available public and private information regarding the customer's ability
to pay. The sudden market change beginning in the third quarter of 2000 resulted
in certain customers declaring bankruptcy as they had overextended their
available financing, or reducing their capital expenditures, or stating their
intention not to pay their outstanding obligations.

    In the second half of 2000 and in the year 2001 the business models of many
service providers came into doubt and the industry continued to see a dramatic
decline in the availability of capital and spending by service providers. 2001
can be characterized as a year of survival and retrenchment for the industry,
with the contraction of the CSPs severely impacting hardware and software
vendors that had previously experienced substantial growth in revenues and
profits. Virtually every company that remained in business, including DSET, had
to reorganize. In 2001, we incurred substantial losses, and accordingly reduced
headcount and expenses in an effort to conserve cash and ultimately return to
profitability. We have utilized cash previously invested in marketable
securities to finance the losses brought about by the downturn. In the first
quarter of 2002, we continue to see turmoil in the industry as additional
customers have either commenced or declared their intent to commence formal
reorganization proceedings.

    We currently offer two additional sales models, in addition to the
traditional perpetual license and services arrangement, to our customers to
acquire our products and services: a transaction based payment plan ('Pay as You
Grow') and a rental program with little cash due up front ('Gateway Rental
Program'). Prior to the inclusion of these alternative programs, our license
revenues were derived from the sale of electronic-bonding gateways to CSPs under
contracts that provided for perpetual licenses and corresponding fees, with the
total price of a license sale to a customer depending on the number of licensed
products, the number of trading partners and amount of additional services
acquired.

    In the second quarter of 2001 we began marketing a 'Pay as You Grow' pricing
option to provide an alternative to CSPs that are constrained by lack of
funding. The 'Pay As You Grow' model is a run time royalty model with a minimum
monthly payment requirement. The contractual minimum payment amounts are
determined based on estimated monthly usage by the customer at the beginning of
the contract. The customer is charged monthly based on the actual usage of the
software or the minimum contract amount, whichever is greater. Usage is defined
as completed transactions for provisioning services between a CSP and a trading
partner. Therefore, revenue will be recognized on a periodic basis as it becomes
due in accordance with SOP 97-2. The pricing model has the effect of spreading
our

                                       29





<PAGE>

normal license revenue over two to three years depending on customer usage. This
program has been offered to certain potential customers beginning in the second
quarter of 2001. Although no contracts have yet to be consummated with this
pricing model and no revenue has been recognized to date on this basis, it is
this model, together with the traditional long-term license that we intend to
use in marketing our UPX platform and solutions.

    In the fourth quarter of 2001, again in an effort to find the right
financial model to encourage CSPs to once again start buying electronic-bonding
gateways, we announced our Gateway Rental Program, which provides existing and
prospective customers the ability to rent electronic-bonding gateways on a
month-to-month basis, with a 90-day cancellation provision. The program includes
the use of the software, technical support, software upgrades and change
management services for a monthly charge that is roughly equivalent to what they
had been paying for the maintenance services only. Revenue is recognized in the
month in which customers use our software and services. The Gateway Rental
Program is our newest offering to CSPs, with two contracts executed by
December 31, 2001 but no revenues recognized in 2001.

    In 2000, we entered into an agreement with NE Technologies, Inc. pursuant to
which NE Technologies, Inc. performs as a subcontractor for us with respect to
substantially all of the post contract customer support for network solutions to
which we were obligated through December 31, 2000. In connection with such
agreement, we receive a royalty of between ten and thirty percent for all new
business generated by NE Technologies, Inc. Such royalties amounted to $663,000
for the year ended December 31, 2001. Commencing in 2001, we receive and
recognize royalty revenues from NE Technologies, Inc. relating to their revenues
from their business operations including application development product suites
licenses, maintenance, projects and other related services.

    Our service revenues are comprised of fees derived from custom program
development, implementation, installation, training fees and maintenance. Our
custom program development services are generally individually negotiated and
contracted for on a fixed price basis. Prices for such projects vary depending
upon the size and scope of the project and estimated time and effort to
completion. Revenues from custom program development services are generally
recognized on a percentage of completion basis calculated as direct labor costs
are incurred in relation to estimated total direct labor costs at completion for
each project. The impact of revisions in percentage of completion estimates is
reflected in the period in which the revisions are made. Maintenance services,
for which we typically charge annually between 15% and 30% of the price of the
products licensed by the customer annually, may be purchased at the customer's
option. Maintenance fees are recognized as service revenue over the term of the
maintenance period.

    Our cost of license revenues consists primarily of royalties paid to third
party software companies and the amortization of acquired technology and
capitalized software development costs. We generally are not contractually
obligated to make minimum royalty payments. Costs of service revenues include,
primarily, payroll, related benefit costs, personnel and other operating
expenses. Sales and marketing expenses consist of salaries, commissions and
bonuses paid to sales and marketing personnel, as well as travel and promotional
expenses. Research and product development expenses encompass primarily software
engineering personnel costs, costs of third-party equipment, costs associated
with customer satisfaction and quality and software utilized for development
purposes. Research and product development expenses are charged to operations as
such costs are incurred. Our research and development projects are evaluated for
technological feasibility in order to determine whether they meet capitalization
requirements. General and administrative expenses are comprised of personnel
costs and occupancy costs for administrative, executive and finance personnel.

    We primarily market and sell our products and services through a direct
sales force in North America. We derive a portion of our revenues from
international sales, which constituted approximately 1% and 6% of our total
revenues in the years 2001 and 2000, respectively. International sales are
derived from Europe (primarily Italy and Germany), and Asia (primarily Korea,
China and Japan). Our international sales currently are United States
dollar-denominated. As a result, an increase in the value of the United States
dollar relative to foreign currencies could make our products and services less
competitive in international markets.

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<PAGE>

    For the years ended December 31, 2001 and 2000, we derived approximately
26.5% and 69.8%, respectively, of our total revenues from license revenues and
approximately 73.5% and 30.2%, respectively, of our total revenues from service
revenues. During 2001, revenues generated from CSPs were approximately $7.9
million and revenues generated from network equipment vendors for LNP solutions,
application development tools and related services were approximately $2.0
million. During 2000, revenues generated from CSPs were $32.1 million and
revenues generated from network equipment vendors were approximately $14.9
million.

    We had one customer accounting for 19% of revenues for the year ended
December 31, 2001 and no customers, which accounted for more than 10% of
revenues for the year ended December 31, 2000. We anticipate that our results of
operations in any given period will continue to depend to a significant extent
upon sales to a small number of customers. In addition, we anticipate that our
results of operations in any given period will also continue to depend on our
customers' cash flow and ability to obtain external financing. As a result of
this customer concentration and the uncertainty in the customer's financing, our
revenues, financial condition and results of operations may be subject to
substantial period-to-period fluctuations.

RESTRUCTURING AND IMPAIRMENT CHARGES

    During 2001, we deemed it necessary to reduce and consolidate our workforce
in the United States and Canada by 178 employees and close our Canadian facility
due to changes and deterioration of conditions in the marketplace, and
discontinue certain product lines in an effort to conserve cash.

    The approximate restructuring and impairment charges recorded in 2001 are
summarized as follows:

<Table>
<S>                                                           <C>
Work force reductions.......................................  $ 2,141,000
Fixed assets impairments and future non-refundable fixed
  asset lease payments......................................    3,888,000
Software and acquired technology asset impairments..........    6,675,000
Goodwill asset impairment...................................      731,000
Covenant not to compete asset impairment....................      417,000
Future rent payments for Plano, Texas facility..............    1,256,000
Prepaid software license impairment.........................      185,000
Capitalized software impairment.............................      371,000
Other.......................................................       47,000
                                                              -----------
Total 2001 restructuring and impairment charges.............  $15,711,000
                                                              -----------
                                                              -----------
</Table>

    For the year ended December 31, 2001, the amount of termination benefits
paid to employees due to the above restructurings was approximately $1.9
million.

MERGER

    On June 26, 2001, we announced an agreement to merge with ISPsoft which was
completed on January 31, 2002. Headquartered in New Jersey, ISPsoft has
developed what we believe to be is a more technically advanced version of the IP
provisioning software that is available today. The market for next generation
software-based provisioning systems is expected to grow from approximately $800
million in 2001 to almost $1.6 billion in 2004, according to a report by the
research and consulting firm IDC. ISPsoft security holders received (i) an
aggregate of 2,281,143 registered shares of DSET common stock; (ii) $1,000,000
in cash; (iii) an aggregate of $800,000 of notes payable and payment of $544,519
in cash in exchange for certain debts payable by ISPsoft to certain ISPsoft
security holders and/or affiliates; and (iv) the potential for milestone
payments aggregating up to $500,000 in cash and/or unregistered shares of our
common stock in exchange for their ISPsoft securities in the merger. We also
granted 241,483 options to purchase shares of our common stock upon the
assumption of 2,781,010 issued and outstanding options to purchase shares of
ISPsoft common stock. The merger will be accounted for under Statement of
Financial Accounting Standard ('SFAS') No. 141. During 2001, in connection with
the merger, we loaned ISPsoft $3,850,000 to fund its operations.

                                       31





<PAGE>

RIGHTS PLAN

    We announced on July 23, 2001 that our Board of Directors had adopted a
shareholder rights plan (the 'Rights Plan'). Under the Rights Plan, each
shareholder of record on July 31, 2001 received a distribution of one right for
each share of DSET common stock held. Initially the Rights are represented by
our common stock certificates, are not traded separately from our common stock,
and are not exercisable. The Rights become exercisable only if an entity
acquires, or announces a tender offer, that would result in ownership of 15% or
more of our common stock, at which time each Right would enable the holder to
buy one one-thousandth of a share of our Series A Junior Participating Preferred
Stock at an exercise price of $20, subject to adjustment. The actual number of
shares acquirable by the holder equals $20 divided by one-half of the then
current market price of our common stock. Additionally, the Rights Plan provides
that in the event of a subsequent merger or other acquisition of us, the holders
of the Rights will be entitled to buy shares of common stock of the acquiring
entity at one-half of the market price of the acquiring company's shares.

NASDAQ NOTICES

    On February 14, 2002, we received notice from the Nasdaq Stock Market, Inc.
('Nasdaq') that for the preceding 30 consecutive trading days, our common stock
had not maintained the minimum Market Value of Publicly Held Shares ('MVPHS') of
$5,000,000 as required for continued inclusion by Marketplace Rule 4450(a)(2)
(the 'Rule') on the Nasdaq National Market. MVPHS equals the closing bid price
multiplied by that portion of a company's outstanding shares which is in the
hands of public investors (i.e., shares not held by company officers, directors,
or investors who hold a controlling interest in the company). Therefore, in
accordance with Marketplace Rule 4450(e)(1), we have 90 calendar days, or until
May 15, 2002, to regain compliance. If compliance with the Rule cannot be
demonstrated by May 15, 2002, our securities will be delisted from the Nasdaq
National Market.

    On March 5, 2002, we received notice from the Nasdaq that for the previous
30 consecutive trading days, the price of our common stock had closed below the
minimum $1.00 per share requirement for continued inclusion under Marketplace
Rule 4450(a)(5) (the '$1.00 Rule'). Therefore, in accordance with Marketplace
Rule 4450(e)(2), we have 90 calendar days, or until June 3, 2002, to regain
compliance. If compliance with the $1.00 Rule cannot be demonstrated by June 3,
2002, our securities will be delisted from the Nasdaq National Market.

    We are currently exploring our options and responses to both of these
notices, including a possible move to the Nasdaq SmallCap Market, which under
the current Nasdaq rules will permit us additional time to address both issues.
We currently maintain a sufficient minimum MVPHS to remain on the Nasdaq
SmallCap Market. However, if we cannot regain compliance with the $1.00 minimum
bid requirement of both the Nasdaq National Market and the Nasdaq SmallCap
Market, we will no longer be eligible to remain on the Nasdaq SmallCap market.
We would, however, be eligible for trading on the Nasdaq OTC Bulletin Board.

    If Nasdaq delists our common stock from the National Market System, it could
become subject to Rule 15g-9 under the Exchange Act, which imposes additional
sales practice requirements on broker/dealers that sell such securities to
persons other than established customers and 'accredited investor' (generally,
an individual with a net worth in excess of $1,000,000 or an annual income
exceeding $200,000, or $300,00 together with his or her spouse's income). For
transactions covered by this rule, a broker/dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
consent to the transaction prior to the sale. Consequently, the rule may
adversely affect the ability of the holders of our common stock to sell their
shares in the secondary market.

    Regulations of the SEC define 'penny stock' to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction of penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. The SEC also
requires disclosure about commissions payable to both the broker/dealer and its
registered representative and information regarding current quotations

                                       32





<PAGE>

of the securities. Finally, the SEC requires that monthly statements be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.

    If our common stock were subject to the rules on penny stocks, the market
liquidity for our common stock could be severely and adversely affected.

TAX REFUND

    On March 9, 2002, President George W. Bush signed into law the 'Job Creation
and Worker Assistance Act' (H.R. 3090) which should allow us to collect an
estimated $1.1 million federal tax refund pursuant to the temporary extension of
the general NOL carry back period to five years (from two years under present
law) for Net Operating Losses ('NOLs') arising in taxable years ending in 2001
and 2002.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000

    Revenues. Total revenues decreased by 78.9% to $9.9 million in the year
ended December 31, 2001 from $47.0 million in the year ended December 31, 2000.
License revenues decreased by 92.0% to $2.6 million in the year ended
December 31, 2001 from $32.9 million in the year ended December 31, 2000. This
decrease was attributable to a downturn in the telecommunications industry,
especially in our market niche, resulting in a reduction in orders by
prospective customers due to poor operating results of the CSPs and the absence
of available funding from capital markets to these prospective customers.
Service revenues decreased 48.7% to $7.3 million in the year ended December 31,
2001 from $14.2 million in the year ended December 31, 2000. This decrease was
attributable to a $3.3 million decrease in Local Number Portability ('LNP')
custom projects and maintenance, a $2.9 million decrease in network solutions
revenue and a $689,000 decrease in carrier solutions service revenue. The large
decrease is due to the transition from network solutions and LNP business to
carrier solutions in 2001. Revenues recorded using the percentage of completion
method of contract accounting amounted to $165,000 in the year ended
December 31, 2001 as compared to $6.3 million in the year ended December 31,
2000 ($3.5 million for carrier solutions; $2.6 million for LSMS/LNP; and
$200,000 for network solutions; ). Trading partner network implementation
service revenue increased to $1.5 million in the year ended December 31, 2001 as
compared to $1.3 million in the year ended December 31, 2000. Maintenance
revenues for gateways increased to $4.2 million in the year ended December 31,
2001 as compared to $1.8 million in the year ended December 31, 2000.

    Gross profit. Our gross profit decreased 89.1% to $3.5 million in the year
ended December 31, 2001 from $31.9 million in the year ended December 31, 2000.
Gross profit percentage for license revenues decreased to 55.2% in the year
ended December 31, 2001 from 87.9% in the year ended December 31, 2000 due to
lower sales volume, offset by less amortization of acquired technology and
capitalized software development costs. Gross profit percentage for service
revenues increased to 27.8% in the year ended December 31, 2001 from 21.6% in
the year ended December 31, 2000. The increase in gross profit percentages was
attributable to staff reductions and other cost-saving measures in professional
services.

    Sales and marketing expenses. Sales and marketing expenses decreased 47.0%
to $6.4 million in the year ended December 31, 2001 from $12.1 million in the
year ended December 31, 2000. The decrease in sales and marketing expenses was
attributable to a $2.3 million reduction in commission expense due to the
reduction in sales activity, a $1.1 million decrease in travel expenses, a $1.5
million decrease in personnel related costs, a $500,000 decrease in contract
labor, a $150,000 increase in depreciation and occupancy costs, a $100,000
decrease in sales meeting costs and a $350,000 net decrease in other
miscellaneous costs.

    Research and product development expenses. Research and product development
expenses decreased 47.6% to $9.7 million in the year ended December 31, 2001
from $18.5 million in the year ended December 31, 2000. The decrease is mainly
attributable to a $4.7 million decrease in personnel

                                       33





<PAGE>

related expenses, a $2.1 million decrease in contract labor, a $1.3 million
decrease in occupancy and depreciation costs, a $400,000 decrease in travel
expenses, a $100,000 decrease in equipment rental, and a $200,000 net decrease
in other expenses.

    General and administrative expenses. General and administrative expenses
decreased 18.9% to $5.6 million in the year ended December 31, 2001 from $6.9
million in the year ended December 31, 2000. The decrease in general and
administrative expenses was due to a $1.4 million decrease in recruiting
expenses, a $800,000 decrease in legal and accounting expenses, a decrease of
$350,000 due to setting up an officer loan reserve in 2000, offset by a $700,000
increase in personnel related expenses, and a $500,000 increase in depreciation
and occupancy costs. Due to the relative reduction of non-administrative
personnel, administrative departments have absorbed a larger portion of the
facilities costs of the Bridgewater, New Jersey facility.

    Bad debt expense and other charges. Bad debt expense decreased to
approximately $275,000 in the year ended December 31, 2001 from approximately
$13.4 million in the year ended December 31, 2000. The decrease was due to the
high volume of allowances in 2000, and the relatively low volume of sales and
receivables in 2001. The bad debt expenses recognized in the year ended
December 31, 2001 consisted of the following components: recognition of bad debt
expense due to customers that discontinued projects or stated their intention
not to pay ($497,000), a customer that did not fulfill its payment program after
resolving outstanding disputes ($252,000), the declaration of bankruptcy by two
customers ($236,000), the resolution of a $400,000 customer credit recorded as a
liability and a $311,000 resolution of royalties on accounts receivable that
have been written-off. Bad debt expense as a percentage of sales was 2.8% in the
year ended December 31, 2001 as compared to 28.4% in the year ended
December 31, 2000. The $13.4 million bad debt expense of 2000 was composed of
the uncertainty of funding for the CSPs ($10.6 million), a major customer
declaring bankruptcy ($1.6 million) and settlement of a dispute with a customer
with a reserve for future credits that may be granted to that customer
($1.2 million).

    Set forth below is a schedule comparing our bad debt expenses recorded with
the periods in which the corresponding revenue was recognized:

<Table>
<Caption>
                                            BAD DEBT EXPENSE RELATED TO QUARTER REVENUE RECOGNIZED
                         ---------------------------------------------------------------------------------------------
                          1999     Q1 '00    Q2 '00    Q3 '00    Q4 '00   Q1 '01   Q2 '01   Q3 '01   Q4 '01     TOTAL
                          ----     ------    ------    ------    ------   ------   ------   ------   ------    -------
                                                            (DOLLARS IN THOUSANDS)
<S>                      <C>       <C>       <C>       <C>       <C>      <C>      <C>      <C>      <C>      <C>
Total revenue..........  $44,629   $11,598   $16,234   $13,867   $5,343   $3,415   $2,616   $2,015   $1,869   $101,586
Total Q1 '01 bad debt
  expense..............  $   302   $ --      $   134   $     4   $ --     $ --     $ --     $ --     $ --     $    440
Total Q2 '01 bad debt
  expense..............  $   307   $     4   $    95   $    96   $   23   $   20   $ --     $ --     $ --     $    545
Total Q3 '01 bad debt
  expense..............  $ --      $ --      $ --      $ --      $ --     $    1   $ --     $ --     $ --     $      1
Total Q4 '01 bad debt
  expense..............  $ --      $   (77)  $  (107)  $  (492)  $  (35)  $ --     $ --     $ --     $ --     $   (711)
</Table>

    Amortization of goodwill and other intangibles. Amortization expense
decreased to approximately $283,000 in the year ended December 31, 2001 as
compared to $419,000 in the year ended December 31, 2000. The reduction is due
to the asset impairments for goodwill and other intangible assets recorded
during 2001.

    Restructuring and impairment charges. Restructuring and impairment charges
in the year ended December 31, 2001 were $15.7 million. These charges were
comprised of asset impairments of $8.3 million for the carrying value of certain
software licenses related to acquired technology and goodwill (net), $5.2
million for fixed asset impairment and non-refundable future lease payments, and
$2.2 million in severance charges related to the March, June and October 2001
staffing reductions. Restructuring and impairment charges totaled $2.2 million
in 2000 and were comprised of employee severance and related personnel expenses
of $602,000 as the result of consolidation of our three development centers into
two centers, a charge of $1.3 million for the write-down of certain intangible
assets associated with products no longer being offered for sale or technology
that will not be used in

                                       34





<PAGE>

our products going forward and a charge of $278,000 for the disposition of our
subsidiary in China (Chengdu DSET Science and Technology Co.).

    Interest expense and other income (expense). Interest expense and other
income (expense) decreased to $46,000 for the year ended December 31, 2001 from
$183,000 for the year ended December 31, 2000 due to sublet rental income of
$65,000 for the third floor of the Bridgewater, New Jersey office in 2001 for
which we had accrued for in prior quarters.

    Interest income and realized gains and losses on marketable securities.
Interest income and realized gains and losses on marketable securities decreased
to approximately $1.5 million in the year ended December 31, 2001 as compared to
approximately $2.1 million in the year ended December 31, 2000. This decrease
was due to lower marketable security balances in 2001 due to the funding of
operations and reduced interest rates due to the economic climate offset by
increased realized gains from redemptions of marketable securities. The realized
gain on marketable securities was $529,000 and $121,000 in 2001 and 2000,
respectively.

    Provision (benefit) for income taxes. Our effective tax rate was
approximately a provision of 0.8% and a benefit of 4.6% for the years ended
December 31, 2001 and 2000, respectively. The provision recorded in 2001 is the
result of a change in estimate of the income tax receivable as compared to when
the return was actually prepared and to the realized gains from redemptions of
marketable securities. In the year ended December 31, 2000, the tax benefit
reflected research and development and foreign tax credits offset by state
income taxes. The 2001 and 2000 rates differ substantially from the statutory
rate due to a valuation allowance of approximately $18.6 million and $6.9
million, respectively, against the net operating loss carry-forwards.

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999

    Revenues. Total revenues increased 5.4% to $47.0 million in 2000 from $44.6
million in 1999. License revenues increased by 36.4% to $32.9 million in 2000
from $24.1 million in 1999. This increase was attributable to a $13.1 million
increase in the sales of carrier products, a $4.4 million decrease in network
solutions and a $100,000 increase in LSMS/LNP solutions. Service revenues
decreased 30.9% to $14.2 million in 2000 from $20.5 million in 1999. This
decrease was attributable to lower percentage of completion revenue and a
reduction in the number of service orders from certain installed customers due
to financing issues at these customers. Revenues recorded using the percentage
of completion method of contract accounting amounted to $6.3 million or 13.4% of
total revenue in 2000 versus $14.3 million, or 32.1% of total revenue, in 1999.
This decrease was attributable to a $6.8 million decrease in network solutions
custom projects, a $2.6 million increase in LSMS/LNP solutions custom projects
and a $3.8 million decrease in carrier projects. In 1999 there were two major
gateways in development accounted for under the percentage of completion method
of accounting. Additionally, in 2000 there were less custom application projects
associated with the legacy business as compared to 1999.

    Gross profit. Our gross profit decreased 10.7% to $31.9 million in 2000 from
$35.7 million in 1999. Gross profit percentage decreased to 67.8% of total
revenues in 2000 from 80.1% in 1999. Gross profit percentage for license
revenues decreased to 87.8% in 2000 from 92.4% in 1999 due to amortization of
acquired technology and increased royalty expenses. Gross profit percentage for
service revenues decreased to 21.6% in 2000 from 65.6% in 1999. This decrease
was attributable to a $2.8 million increase in personnel and related costs and a
$1.5 million increase in the use of system integrators to complete installation
services and lower sales volume. Implementations were much more costly due to
many orders coming at the same time and paying for the learning curves of new
employees, borrowed employees from other areas of the business and outside
contractors.

    Sales and marketing expenses. Sales and marketing expenses increased 1.3% to
$12.1 million in 2000 from $12.0 million in 1999 but decreased to 25.8% from
26.8% of total revenues. The small increase was attributable to a $900,000
increase in personnel costs (employees and outside consultants), offset by a
decrease in commission expenses of $800,000.

                                       35





<PAGE>

    Research and product development expenses. Research and product development
expenses increased 67.2% to $18.5 million in 2000 from $11.0 million in 1999,
and increased from 24.8% to 39.3% of total revenues, respectively. The increase
in research and product development expenses was attributable to increased
personnel (employees and outside consultants) and related costs as well as the
expansion in a number of new products under development. Personnel related costs
increased by $3.5 million, outside consultant expenses increased by $1.9
million, other expense categories increased by $1.0 million and there was a $1.1
million increase in office space and related expenses due to the higher head
count.

    General and administrative expenses. General and administrative expenses
increased 68.1% to $6.9 million in 2000 from $4.1 million in 1999, and increased
from 9.2% to 14.7% of total revenues. The increase in general and administrative
expenses was due to recruiting, personnel and related costs, and professional
fees. Personnel related costs increased by $400,000, legal and accounting
expenses increased by $800,000, recruiting expenses increased by $1.1 million,
and other expenses increased by $500,000.

    Bad debt expense and other charges. Bad debt expense and other charges
increased to approximately $13.4 million in 2000 from $665,000 in 1999.

    An abrupt and significant downturn in the CSP market occurred in the second
half of 2000 due to the sudden withdrawal of additional financing to the CSPs.
The withdrawal of additional funding had an immediate and detrimental impact on
the CSPs as they have highly capital-intensive business models. Additionally,
many existing customers decided to reduce their expenses and preserve cash and
as a result informed us that they would not honor their obligations. For these
reasons, bad debt expense as a percentage of sales was 28.4% for the year ended
December 31, 2000 as compared to 1.5% for the same period of the preceding year.
Based upon our credit analysis at the time of contract signing, we believed that
for these customers collection was probable in accordance with SOP 97-2 and
therefore we recognized revenue. Our history of write-offs was minimal prior to
the third quarter of 2000. The changes in the availability of financing in the
second half of 2000 contrasted with the environment of the first half of 2000
and all of 1999 when these same companies were successfully and regularly
obtaining large capital commitments to complete and expand their business plans.
Our collection process, in place since 1999, continues from the credit
assessment we conduct prior to contract signing through the
delivery/installation of the software and concludes upon the collection or
ultimate disposition of the receivable. A key element of the process includes
ongoing participation by sales, project management and accounting. As invoices
approach their due date, we increase participation by accounting, sales and
project management as necessary. The collection process is an ongoing activity
where senior management is kept regularly updated on account status and issues
and participates in regular communication with top level management of our
customers.

    Set forth below is a schedule comparing our bad debts recorded in the year
ended December 31, 2000 with the periods in which the corresponding revenue was
recognized:

<Table>
<Caption>
                                                BAD DEBT EXPENSE RELATED TO QUARTER REVENUE RECOGNIZED
                                 ------------------------------------------------------------------------------------
                                 Q1 '99   Q2 '99   Q3 '99    Q4 '99    Q1 '00    Q2 '00    Q3 '00    Q4 '00    TOTAL
                                 ------   ------   ------    ------    ------    ------    ------    ------    -----
                                                                (DOLLARS IN THOUSANDS)
<S>                              <C>      <C>      <C>       <C>       <C>       <C>       <C>       <C>      <C>
Total revenue..................  $7,476   $9,118   $12,909   $15,126   $11,598   $16,234   $13,867   $5,343   $91,671
Total Q1 '00 bad debt
  expense......................  $   42   $   52   $    73   $    86   $    --   $    --   $    --   $   --   $   253
Total Q2 '00 bad debt
  expense......................  $   82   $   99   $   141   $   165   $   126   $    --   $    --   $   --   $   613
Total Q3 '00 bad debt
  expense......................  $   96   $  255   $    67   $   189   $ 2,585   $ 1,734   $    --   $   --   $ 4,926
Total Q4 '00 bad debt
  expense......................  $  216   $  277   $   833   $     7   $   456   $ 3,253   $ 2,544   $   --   $ 7,586
</Table>

    As noted in the chart above, the accounts receivable related to these bad
debt charges were the result of revenue recognized in earlier periods from 1999
through the third quarter of 2000, prior to the sudden major downturn in market
conditions in the telecommunications industry. At the time that the revenue was
recognized, we believed that collection of the receivables was probable based on
the financial status of the customer at that time. Revenue was invoiced within
standard credit terms, 30 to 90 days. We did not have any significant bad debt
experience prior to the third quarter of 2000.

                                       36





<PAGE>

However, we regularly reviewed individual overdue customer accounts and pursued
collection as appropriate.

    We also settled a dispute with a customer related to network products and
wrote off certain accounts receivable in 2000 amounting to $1.2 million
inclusive of a reserve of $400,000 for product credits that were granted to that
customer in 2001.

    Restructuring and impairment charges. Restructuring and impairment charges
totaled $2.2 million in 2000 as compared to none in 1999. These charges in 2000
are for employee severance and related personnel expenses of $602,000 as the
result of consolidation of our three development centers into two centers, a
charge of $1.3 million for the write-down of certain intangible assets
associated with products no longer being offered for sale or technology that
will not be used in our products going forward and a charge of $278,000 for the
disposition of our subsidiary in China (Chengdu DSET Science and Technology
Co.).

    Amortization of goodwill. Amortization expense increased to approximately
$419,000 in 2000 as compared to $200,000 in 1999. This increase was due to
amortization of goodwill from the Konark acquisition, which occurred in
September 1999.

    Interest expense and other income (expense). Interest expense and other
income (expense) was $183,000 in 2000 and $179,000 in 1999.

    Interest income and realized gains and losses on marketable securities.
Interest income decreased to $2.1 million in 2000 as compared to $2.2 million
for 1999. This decrease was due to slightly lower cash balances during the year.

    Provision (benefit) for income taxes. In 2000, due to the net loss, there is
a 4.6% effective tax rate benefit while in 1999 there was an effective tax rate
of 33.3%. The 2000 rate differs substantially from the statutory rate due to a
valuation allowance of $6.9 million against the deferred tax assets. In making
this assessment, we considered, in particular, the unpredictability of both the
customers' funding and our revenues. In 1999, the effective tax rate was lower
than the statutory tax rates due to the utilization of research and development
tax credits.

LIQUIDITY AND CAPITAL RESOURCES

    Our consolidated financial statements have been prepared on the basis that
we will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities and commitments in the normal course of
business. At December 31, 2001 and 2000, respectively, we had accumulated
deficits of $35.8 million and $2.6 million and working capital of $8.5 million
and $35.3 million, respectively. We also realized net losses of $33.3 million
for the year ended December 31, 2001 and $18.8 million for the year ended
December 31, 2000. Revenue decreased from $47.0 million in 2000 to $9.9 million
in 2001. This raises substantial doubt about our ability to continue as a going
concern. The losses and deficits resulted principally from the lack of demand
for our products due to a major downturn in the telecommunications industry
which began in the second half of the year 2000 (and continues to present),
having its most acute impact on CSPs, our primary targeted customers. This
downturn was brought about by the sudden withdrawal of available financing to
the CSPs from traditional sources, to our customers and future customers. Many
of our customers have declared bankruptcy, refused to pay us or delayed
additional purchases. This has resulted in the significant impairment of
tangible and intangible assets, excess capacities and bad debts. We have taken
action to mitigate these circumstances by reducing headcount, subletting
facilities and searching for additional financing to return to positive cash
flow and profitability.

    In addition, we have received two non-compliance notifications from the
Nasdaq Stock Market, Inc. ('Nasdaq').

    On February 14, 2002, we received notice from Nasdaq that for the preceding
30 consecutive trading days, our common stock had not maintained the minimum
Market Value of Publicly Held Shares ('MVPHS') of $5,000,000 as required for
continued inclusion by Marketplace Rule 4450(a)(2) (the 'Rule') on the Nasdaq
National Market. MVPHS equals the closing bid price multiplied by that portion
of a company's outstanding shares which is in the hands of public investors
(i.e., shares not held

                                       37





<PAGE>

by company officers, directors, or investors who hold a controlling interest in
the company). Therefore, in accordance with Marketplace Rule 4450(e)(1), we have
90 calendar days, or until May 15, 2002, to regain compliance. If compliance
with the Rule cannot be demonstrated by May 15, 2002, we will receive
notification that our securities will be delisted from the Nasdaq National
Market.

    On March 5, 2002, we received notice from the Nasdaq that for the previous
30 consecutive trading days, the price of our common stock had closed below the
minimum $1.00 per share requirement for continued inclusion under Marketplace
Rule 4450(a)(5) (the '$1.00 Rule'). Therefore, in accordance with Marketplace
Rule 4450(e)(2), we have 90 calendar days, or until June 3, 2002, to regain
compliance. If compliance with the $1.00 Rule cannot be demonstrated by June 3,
2002, we will receive notification that our securities will be delisted from the
Nasdaq National Market.

    Our failure to meet Nasdaq's maintenance criteria in the future may result
in the delisting of our common stock from the Nasdaq National Market. In such
event, trading, if any, of our common stock may then continue to be conducted in
the over-the-counter market, in what is commonly referred to as the electronic
bulletin board or 'pink sheets'. As a result, an investor may find it more
difficult to dispose of or obtain accurate quotations as to the market value of
our common stock. In addition, in the event our common stock is delisted,
broker-dealers would have certain regulatory burdens imposed upon them, which
may discourage them from effecting transactions in our common stock, further
limiting the liquidity thereof. This may have the effect of limiting our ability
to raise additional financing.

    If Nasdaq delists our common stock from the National Market System, it could
become subject to Rule 15g-9 under the Exchange Act, which imposes additional
sales practice requirements on broker/dealers that sell such securities to
persons other than established customers and 'accredited investor' (generally,
an individual with a net worth in excess of $1,000,000 or an annual income
exceeding $200,000, or $300,00 together with his or her spouse's income). For
transactions covered by this rule, a broker/dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
consent to the transaction prior to the sale. Consequently, the rule may
adversely affect the ability of the holders of our common stock to sell their
shares in the secondary market.

    Regulations of the SEC define 'penny stock' to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction of penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. The SEC also
requires disclosure about commissions payable to both the broker/dealer and its
registered representative and information regarding current quotations of the
securities. Finally, the SEC requires that monthly statements be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.

    If our common stock were subject to the rules on penny stocks, the market
liquidity for our common stock could be severely and adversely affected.

    Our ability to continue as a going concern is dependent upon our ability to
generate sufficient cash flows to meet our obligations as they come due. We
believe that the recent cost restructurings (including work force reductions)
and the merger with ISPsoft will enhance our cash flows from operations.
Additional financing may still be required for us to fund our operating and
capital requirements through 2002. If cash flows are insufficient, there would
be a material adverse effect on our financial position and operations and our
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments relating to the recoverability of the carrying
amount of the recorded assets or the amount of liabilities that might result
from the outcome of these uncertainties. We cannot be certain that additional
debt or equity financing will be available when required or, if available,
that it can secure it on terms satisfactory to us.

    Since our inception in 1989, we financed our operations primarily through
cash generated by operations and cash raised through our March 1998 initial
public offering.

    At December 31, 2001, our principal source of liquidity was our cash and
cash equivalents which totalled $13.0 million.

                                       38





<PAGE>

    Our operating activities provided (used) cash of ($15.3) million, $1.1
million and ($150,000) for the years ended December 31, 2001, 2000 and 1999,
respectively. Cash used by operations in 2001 was primarily attributable to a
net loss adjusted for the non-cash charges for amortization of goodwill and
other intangibles, depreciation and restructuring, as well as a decrease in
accounts receivable, prepaid expenses and income taxes receivable, offset by
decreases in accounts payable, accruals and deferred revenues.

    Cash provided (used) in investing activities in the years ended
December 31, 2001, 2000 and 1999 was $22.2 million, $3.4 million and ($9.1)
million, respectively. Investing activities in 2001 included the net redemption
of $28.1 million of marketable securities, the loan of $3.8 million to ISPsoft
to fund their operations as part of the agreement and plan of merger between us,
the advance payment of $400,000 of funds for expenses in connection with such
merger which was finalized on January 31, 2002, the purchase of approximately
$900,000 of capital equipment and leasehold improvement expenditures and the
purchase of $700,000 of acquired technology.

    We expect minimal capital equipment and leasehold improvement expenditures
to be made in 2002. We have made approximately $600,000 in additional loans to
ISPsoft to finance their operations in January 2002 as part of the agreement and
plan of merger and expect approximately $3.1 million of additional monies to be
paid out associated with such merger in 2002 for merger expenses and cash
portion of the purchase price.

    We generated (used) approximately ($1.3) million, $610,000 and $2.3 million
in cash from financing activities in the years ended December 31, 2001, 2000 and
1999, respectively. During 2001, we paid $1.0 million in note obligations in
connection with previously acquired technology. An additional $500,000 was paid
in March 2002.

    Accounts receivable, net, decreased to $824,000 at December 31, 2001 from
$6.2 million at December 31, 2000, primarily as a result of decreased sales and
the collection of outstanding receivables. Included in accounts receivable at
December 31, 2001 was $7.4 million for trade receivables and $1.1 million for
unbilled project revenue as compared to $16.1 million for trade receivables and
$2.9 million for unbilled project revenue at December 31, 2000. Four customers
accounted for 17%, 15%, 15%, and 13% of gross accounts receivable, respectively,
at December 31, 2001. The allowance for doubtful accounts was $7.7 million at
December 31, 2001 as compared to $12.3 million at December 31, 2000. Unbilled
project revenue is the excess amount of revenue recognized through percentage of
completion that has not been billed to the customer. Payment terms to customers
are generally net zero to net ninety days. We bill our foreign customers in U.S.
dollars at agreed-upon contractual terms. Accounts receivable includes
approximately $31,000 and $628,000 from foreign customers at December 31, 2001
and December 31, 2000, respectively.

    In June 1999, we entered into a five-year capital lease agreement at an
annual interest rate of 8.21% for equipment, furniture and fixtures at our new
office facilities. Assets recorded under this lease are included in fixed
assets. Annual lease payments approximate $180,000.

    In August 2000, we renewed an unsecured revolving credit facility with a
bank totaling $5 million. Borrowings under this line of credit bear interest
at the bank's prime rate less 0.25% on amounts outstanding of less than $1
million and at the bank's prime rate for aggregate principal amounts exceeding
$1 million. No borrowings under this line were outstanding at December 31, 2001
or 2000. On August 14, 2001, we received notice that the line of credit
was terminated due to non-compliance with the covenants of the loan.

    Although we have historically incurred several million dollars per year in
research and development related expenses, we currently are not, and do not
anticipate undertaking any significant research and development projects in the
immediate future. Based upon market demand for our products and demand, if any,
for modifications thereof, we may undertake research and development initiatives
in future years of significant scope and magnitude.

    Based on our plan which included the merger with ISPsoft and our search for
additional financing, we believe that the existing and expected cash and cash
equivalent balances net of the expected cash outflow from the expected loss
from operations should be sufficient to meet our liquidity and capital spending
requirements through the end of December 31, 2002. However, a further downturn
in the telecommunications industry, acquisitions of complementary businesses,
products or technologies may require us to seek

                                       39





<PAGE>

additional financing prior to that time. We cannot be certain that additional
debt or equity financing will be available when required or, if available, that
we can secure it on terms satisfactory to us.

    Contractual obligations including interest on these obligations are as
follows:

<Table>
<Caption>
                                                            PAYMENTS DUE BY PERIOD
                                      ------------------------------------------------------------------
      CONTRACTUAL OBLIGATIONS            TOTAL         2002       2003 & 2004   2005 &2006    AFTER 2006
      -----------------------            -----         ----       -----------   ----------    ----------
<S>                                   <C>           <C>           <C>           <C>           <C>
Long-term debt......................  $   500,000   $   500,000   $   --        $   --        $   --
Capitalized lease obligations.......      466,395       180,540       285,855       --            --
Operating leases (equipment)*.......    1,703,660     1,116,357       522,497       64,806        --
Rental lease obligations*'D'........   13,474,458     2,350,079     4,659,986    3,073,737     3,390,656
NJTC Venture Fund commitment........      900,000       300,000       600,000       --            --
                                      -----------   -----------   -----------   ----------    ----------
    Total contractual cash
      obligations...................  $17,044,513   $ 4,446,976   $ 6,068,338   $3,138,543    $3,390,656

Sublessor agreements*...............   (2,955,155)   (1,074,772)   (1,880,383)      --            --
                                      -----------   -----------   -----------   ----------    ----------
Net.................................  $14,089,358   $ 3,372,204   $ 4,187,955   $3,138,543    $3,390,656
                                      -----------   -----------   -----------   ----------    ----------
                                      -----------   -----------   -----------   ----------    ----------
</Table>

---------

*   $1.9 million is included in accrued restructuring in the consolidated
    financial statements for the period which we assume that these obligations
    will not be recoverable.

'D' Includes rent obligation for ISPsoft in Shrewsbury, New Jersey

    We may seek additional funding through collaborative arrangements, borrowing
money and by the sale of additional equity securities. Any sales of additional
equity securities are likely to result in further dilution to our then existing
shareholders. Further, if we issue additional equity securities, the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. Alternatively, we may borrow money from
conventional lenders, possibly at high interest rates, which may affect the
value of your holdings. Despite our efforts, funding may not be available to us
at all or only on terms that are unacceptable to us. We also could be required
to seek funds through arrangements with collaborative partners or others that
may require us to relinquish rights to certain of our technologies, product
candidates or products which we would otherwise pursue on our own.

RECENTLY ISSUED ACCOUNTING STANDARDS

    In July 2001, the FASB issued Statements of Financial Accounting Standard
No. 141, ('SFAS 141') 'Business Combinations' and No. 142, ('SFAS 142')
'Goodwill and Other Intangible Assets.' SFAS 141 supersedes Accounting
Principles Board ('APB')  Opinion No. 16, 'Business Combinations' and SFAS 38,
'Accounting for Preacquisition Contingencies of Purchased Enterprises' and
requires that all business combinations be accounted for only by the purchase
method and eliminating the pooling-of-interests method. SFAS 141 is effective
for all business combinations completed after July 1, 2001. SFAS 142 supersedes
APB Opinion No. 17, 'Intangible Assets' and prohibits amortization of goodwill
and other intangible assets that have an indefinite life over a period of time.
SFAS 142 is effective for all fiscal years beginning after December 15, 2001.
However, all goodwill and intangible assets that are acquired after June 30,
2001 are immediately subject to the SFAS 142. DSET will account for the
acquisition of ISPsoft in accordance with SFAS 141 and SFAS 142.

    Upon DSET's adoption of SFAS 141 and SFAS 142, DSET does not expect to
amortize goodwill and other intangibles acquired after June 30, 2001, unless
such goodwill or other intangibles possesses a finite life. The amortization of
goodwill acquired before June 30, 2001 will be discontinued at January 1, 2002.

    In August 2001, the FASB issued SFAS 143, 'Accounting for Asset Retirement
Obligations,' which addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development, and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. The effective date for SFAS 143 is
for financial statements issued for fiscal years beginning after

                                       40





<PAGE>

June 15, 2002. We do not expect that the adoption of the provisions of SFAS 143
will have a material impact on our results of operations or financial position.

    In August 2001, SFAS 144, 'Accounting for the Impairment or Disposal of
Long-Lived Assets,' was issued, replacing SFAS 121, 'Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of' and
portions of APB Opinion 30, 'Reporting the Results of Operations.' SFAS 144
provides a single accounting model for long-lived assets to be disposed of and
changes the criteria to be met to classify an asset as held-for-sale. SFAS 144
retains the requirement of APB Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of or is classified as held-for-
sale. SFAS 144 is effective January 1, 2002. Weis currently evaluating the
impact of this Statement.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

    We believe that it is not subject to a material impact to our financial
position or results of operations relating to market risk associated with
foreign currency rates or derivative securities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

    The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at 'Item 14, Exhibits, Financial Statement Schedules and
Reports on Form 8-K'. Quarterly financial data is found at Note 17 of the Notes
to the Consolidated Financial Statements.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE.

    Not applicable.

                                       41





<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

    We refer the reader to the discussion under the headings 'Election of
Directors' and 'Executive Officers' in DSET's definitive proxy statement for the
2002 Annual Meeting of Shareholders, which is incorporated herein by reference
to such proxy statement.

ITEM 11. EXECUTIVE COMPENSATION.

    We refer the reader to the discussion under the heading 'Executive
Compensation' in DSET's definitive proxy statement for the 2002 Annual Meeting
of Shareholders, which is incorporated herein by reference to such proxy
statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    We refer the reader to the discussion under the heading 'Security Ownership
of Certain Beneficial Owners and Management' in DSET's definitive proxy
statement for the 2002 Annual Meeting of Shareholders, which is incorporated
herein by reference to such proxy statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    We refer the reader to the discussion under the heading 'Certain
Relationships and Related Transactions' in the Company's definitive proxy
statement for the 2002 Annual Meeting of Shareholders, which is incorporated
herein by reference to such proxy statement.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

<Table>
<S>     <C>
(a)(1)  Financial Statements.
        Reference is made to the Index to Consolidated Financial
        Statements and Schedules on page F-1.
  (2)   Financial Statement Schedule.
        Reference is made to the Index to Consolidated Financial
        Statements and Financial Statement Schedule on page F-1.
  (3)   Exhibits.
        Reference is made to the Index to Exhibits on page 44.
        Reports on Form 8-K.
(b)     No Reports on Form 8-K were filed during the quarter ended
        December 31, 2001.
</Table>

                                       42





<PAGE>

                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) 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 this 1st day of April
2002.

                                                      DSET CORPORATION


                                          By:     /S/ WILLIAM P. MCHALE, JR.
                                              ..................................
                                                   WILLIAM P. MCHALE, JR.
                                                   CHIEF EXECUTIVE OFFICER

    Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<Table>
<Caption>
                SIGNATURE                                    TITLE                        DATE
                ---------                                    -----                        ----
<S>                                         <C>                                      <C>
        /S/ WILLIAM P. MCHALE, JR.          Chief Executive Officer and Chairman of
 .........................................    the Board of Directors (Principal
         (WILLIAM P. MCHALE, JR.)             Executive Officer)                      April 1, 2002

             /S/ BINAY SUGLA                President and Member of the Board of
 .........................................    Directors
              (BINAY SUGLA)                                                           April 1, 2002

           /S/ BRUCE M. CROWELL             Chief Financial Officer (Principal
 .........................................    Financial and Accounting Officer)
            (BRUCE M. CROWELL)                                                        April 1, 2002

          /S/ JACOB J. GOLDBERG             Director
 .........................................
           (JACOB J. GOLDBERG)                                                        April 1, 2002

              /S/ ARUN INAM                 Director
 .........................................
               (ARUN INAM)                                                            April 1, 2002

           /S/ ANDREW D. LIPMAN             Director
 .........................................
            (ANDREW D. LIPMAN)                                                        April 1, 2002

            /S/ CARL PAVARINI               Director
 .........................................
             (CARL PAVARINI)                                                          April 1, 2002

            /S/ C. DANIEL YOST              Director
 .........................................
             (C. DANIEL YOST)                                                         April 1, 2002
</Table>

                                       43





<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT NO.                         DESCRIPTION
-----------                         -----------
<S>          <C>
    *2.1    -- Agreement and Plan of Merger, dated as of June 26, 2001,
               as amended each of September 26, 2001, October 30, 2001
               and November 6, 2001, by and among DSET and ISPsoft Inc.,
               together with form of escrow agreement by and among DSET,
               Commerce Bank and Binay Sugla, as Indemnification
               Representative.(1)
     3.1    -- Amended and Restated Certificate of Incorporation of
               DSET.(2)
     3.2    -- Amended and Restated By-laws of DSET.(2)
     4.1    -- 1993 Stock Option Plan of DSET, as amended.(2)
     4.2    -- 1998 Stock Plan of DSET.(2)
     4.3    -- 2000 Stock Plan of ISPsoft.(1)
     4.4    -- Shareholder Rights Plan of DSET.(3)
     4.5    -- 1998 Stock Plan of DSET, as amended(1)
    10.1    -- Corporate Revolving and Term Loan Agreement between
               Manufacturers and Traders Trust Company and DSET dated
               August 5, 1997.(2)
  **10.2    -- Form of Indemnification Agreement executed by each of
               DSET's directors and executive officers.(2)
  **10.3    -- Employment Agreement dated January 1, 1998 between DSET
               and William P. McHale, Jr.(2)
    10.4    -- DSET Corporation 401(k) Plan.(2)
    10.5    -- Lease Agreement dated December 31, 1998 between
               Advance/GLBI L.L.C. and DSET.(4)
  **10.6    -- Form of Severance Agreement executed with each of DSET's
               executive officers.(5)
  **10.7    -- Form of Senior Executive Change in Control Agreement
               executed with each of DSET's executive officers.(5)
    10.8    -- 2001 Employee Stock Purchase Plan of DSET.(6)
    10.9    -- Secured Promissory Note issued by ISPsoft to DSET dated
               as of May 9, 2001.(1)
    10.10   -- Security Agreement dated May 7, 2001 by and between
               ISPsoft and DSET.(1)
    10.11   -- Secured Promissory Note issued by ISPsoft to DSET dated
               as of June 26, 2001.(1)
    10.12   -- Amended and Restated Security Agreement dated June 26,
               2001 by and between ISPsoft and DSET.(1)
    10.13   -- Amendment dated September 26, 2001 to Secured Promissory
               Note issued by ISPsoft to DSET dated as of June 26, 2001
               and the Amended and Restated Security Agreement dated
               June 26, 2001 by and between ISPsoft and DSET.(1)
    10.14   -- Secured Promissory Note issued by ISPsoft to DSET dated
               as of September 26, 2001.(1)
    10.15   -- Amendment dated November 5, 2001 to Secured Promissory
               Notes issued by ISPsoft to DSET dated as of June 26, 2001
               and September 26, 2001 and the Amended and Restated
               Security Agreement dated June 26, 2001 by and between
               ISPsoft and DSET.(1)
    10.16   -- Secured Promissory Note issued by ISPsoft to DSET dated
               as of November 5, 2001.(1)
    10.17   -- Secured Promissory Note issued by ISPsoft to DSET dated
               as of December 19, 2001.(1)
    10.18   -- Amendment dated December 19, 2001 to Secured Promissory
               Notes issued by ISPsoft to DSET dated as of June 26, 2001,
               September 26, 2001 and November 5, 2001 and the Amended
               and Restated Security Agreement dated June 26, 2001 by and
               between ISPsoft and DSET.(1)
</Table>

                                       44





<PAGE>

    21      -- List of Subsidiaries of DSET.
    23      -- Consent of Independent Auditors.

---------

*   DSET agrees to furnish supplementally a copy of any omitted schedules to
    this agreement to the Securities and Exchange Commission upon its request.

**  A management contract or compensatory plan or arrangement required to be
    filed as an exhibit pursuant to Item 14(c) of Form 10-K.

(1) Incorporated by reference to DSET's Registration Statement on Form S-4 (File
    Number 333-65898) which became effective on December 20, 2001.

(2) Incorporated by reference to DSET's Registration Statement on Form S-1 (File
    Number 333-43827) which became effective on March 12, 1998.

(3) Incorporated by reference to DSET's Current Report on Form 8-K dated
    July 25, 2001.

(4) Incorporated by reference to DSET's Quarterly Report on Form 10-Q for the
    quarter ended March 31, 1999.

(5) Incorporated by reference to DSET's Annual Report on Form 10-K for the year
    ended December 31, 2000, as amended by DSET's Form 10-K/A for such fiscal
    year.

(6) Incorporated by reference to DSET's Definitive Proxy Materials filed with
    the Securities and Exchange Commission on April 30, 2001.

                                       45





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................  F-2
Consolidated Balance Sheets as of December 31, 2001 and
  2000......................................................  F-3
Consolidated Statements of Income (Loss) and Comprehensive
  Income (Loss) for the Years Ended December 31, 2001, 2000
  and 1999..................................................  F-4
Consolidated Statements of Changes in Shareholders' Equity
  for the Years Ended December 31, 2001, 2000 and 1999......  F-5
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2001, 2000 and 1999..........................  F-6
Notes to Consolidated Financial Statements..................  F-7
Schedule II -- Valuation and Qualifying Accounts............  S-1
</Table>

                                      F-1





<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
DSET Corporation:

    In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income (loss) and comprehensive income (loss),
changes in shareholders' equity and cash flows present fairly, in all material
respects, the financial position of DSET Corporation and its subsidiaries (the
'Company') as of December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

    The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred substantial
operating losses and expects to incur additional operating losses in the future.
The Company has also suffered significant declines in its revenues and used
significant amounts of its cash to fund its operations during the year ended
December 31, 2001. Additionally, the Company recently received notification from
the Nasdaq Stock Market, Inc. ('Nasdaq') that it was not in compliance with
Nasdaq requirements and therefore may be delisted from the Nasdaq National
Market, which may limit the Company's ability to raise additional capital. These
and other factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regards to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.

                                          /s/ PricewaterhouseCoopers LLP

New York, New York
March 29, 2002

                                      F-2





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                    DECEMBER 31,
                                                              -------------------------
                                                                 2001          2000
                                                                 ----          ----
<S>                                                           <C>           <C>
                           ASSETS
Current assets:
    Cash and cash equivalents...............................  $12,958,074   $ 7,314,254
    Marketable securities...................................      --         27,760,494
    Accounts receivable, net of allowance for doubtful
      accounts of $7,697,383 and $12,285,676 at
      December 31, 2001 and 2000, respectively..............      823,793     6,248,635
    Income taxes receivable.................................        8,416     3,561,201
    Prepaid licenses........................................      935,000       766,071
    Prepaid expenses and other current assets, net..........      329,864     1,768,709
                                                              -----------   -----------
        Total current assets................................   15,055,147    47,419,364
Acquired technology, net....................................      --          4,380,141
Software licenses, net......................................      --          2,257,101
Software development costs, net.............................      --            435,746
Fixed assets, net...........................................    2,173,139     4,999,684
Goodwill, net...............................................       19,004       928,141
Loans to ISPsoft, Inc.......................................    3,850,000       --
Merger and acquisition costs................................    1,042,985       --
Other assets, net...........................................      417,289       762,381
                                                              -----------   -----------
        Total assets........................................  $22,557,564   $61,182,558
                                                              -----------   -----------
                                                              -----------   -----------
            LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable and accrued expenses...................  $ 2,459,972   $ 7,380,267
    Deferred revenues.......................................    2,293,214     3,088,086
    Accrued restructuring expenses..........................    1,177,154       647,779
    Current portion of notes payable........................      493,786       872,129
    Current portion of capital lease obligation.............      138,367       138,367
                                                              -----------   -----------
        Total current liabilities...........................    6,562,493    12,126,628
Long term notes payable.....................................      --            409,901
Long term accrued restructuring expenses....................    1,021,344       --
Deferred rent...............................................      549,566       505,264
Capital lease obligation....................................      282,494       423,304
Other liabilities...........................................       21,000       --
                                                              -----------   -----------
        Total liabilities...................................    8,436,897    13,465,097
                                                              -----------   -----------
    Commitments and contingencies (Notes 7 and 13)
Shareholders' equity:
    Preferred stock, no par value; 5,000,000 shares
      authorized, no shares issued or outstanding at
      December 31, 2001 and 2000............................      --            --
    Common stock, no par value; 10,000,000 shares
      authorized, 2,907,400 and 2,906,931 shares issued at
      December 31, 2001 and 2000, respectively; 2,801,259
      and 2,906,931 shares outstanding at December 31, 2001
      and 2000, respectively................................   50,138,022    50,169,404
    Deferred stock compensation.............................      --            (59,371)
    Accumulated deficit.....................................  (35,837,420)   (2,564,554)
    Other comprehensive (loss) income.......................      (21,875)      171,982
    Treasury stock, at cost (106,141 shares)................     (158,060)      --
                                                              -----------   -----------
        Total shareholders' equity..........................   14,120,667    47,717,461
                                                              -----------   -----------
        Total liabilities and shareholders' equity..........  $22,557,564   $61,182,558
                                                              -----------   -----------
                                                              -----------   -----------
</Table>

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

                                      F-3





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
                        AND COMPREHENSIVE INCOME (LOSS)

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                       -----------------------------------------
                                                           2001           2000          1999
                                                           ----           ----          ----
<S>                                                    <C>            <C>            <C>
Revenues:
    License revenues.................................  $  2,629,155   $ 32,850,731   $24,083,661
    Service revenues.................................     7,285,744     14,191,535    20,545,290
                                                       ------------   ------------   -----------
        Total revenues...............................     9,914,899     47,042,266    44,628,951
                                                       ------------   ------------   -----------
Cost of revenues:
    License revenues.................................     1,179,173      3,990,728     1,823,375
    Service revenues.................................     5,263,423     11,131,206     7,062,653
                                                       ------------   ------------   -----------
        Total cost of revenues.......................     6,442,596     15,121,934     8,886,028
                                                       ------------   ------------   -----------
        Gross profit.................................     3,472,303     31,920,332    35,742,923
                                                       ------------   ------------   -----------
Operating expenses:
    Sales and marketing..............................     6,431,243     12,128,855    11,971,515
    Research and product development.................     9,675,211     18,467,309    11,046,335
    General and administrative.......................     5,616,816      6,925,389     4,120,601
    Bad debt expense and other charges...............       275,446     13,378,237       665,116
    Amortization of goodwill and other intangibles...       283,083        418,736       199,629
    Restructuring and impairment charges.............    15,711,535      2,248,100       --
                                                       ------------   ------------   -----------
        Total operating expenses.....................    37,993,334     53,566,626    28,003,196
                                                       ------------   ------------   -----------
        Operating income (loss)......................   (34,521,031)   (21,646,294)    7,739,727
    Interest expense and other income (expense)......       (45,677)      (182,857)     (179,096)
    Interest income and realized gains and losses on
      marketable securities..........................     1,547,422      2,114,159     2,206,006
                                                       ------------   ------------   -----------
    Income (loss) before income taxes................   (33,019,286)   (19,714,992)    9,766,637
    Provision (benefit) for income taxes.............       253,580       (902,631)    3,249,907
                                                       ------------   ------------   -----------
    Net income (loss)................................  $(33,272,866)  $(18,812,361)  $ 6,516,730
                                                       ------------   ------------   -----------
Other comprehensive income (loss), net of tax
    Unrealized appreciation/(depreciation) on
      investments....................................      (179,824)       343,940      (204,239)
    Cumulative translation adjustment................       (14,033)        (7,129)          (69)
                                                       ------------   ------------   -----------
        Comprehensive income (loss)..................  $(33,466,723)  $(18,475,550)  $ 6,312,422
                                                       ------------   ------------   -----------
                                                       ------------   ------------   -----------
    Net income (loss) applicable to common shares....  $(33,272,866)  $(18,812,361)  $ 6,516,730
                                                       ------------   ------------   -----------
                                                       ------------   ------------   -----------
    Net income (loss) per common share...............  $     (11.61)  $      (6.61)  $      2.50
                                                       ------------   ------------   -----------
                                                       ------------   ------------   -----------
    Weighted average number of common shares
      outstanding....................................     2,866,462      2,846,959     2,606,313
                                                       ------------   ------------   -----------
                                                       ------------   ------------   -----------
    Net income (loss) per common share assuming
      dilution.......................................  $     (11.61)  $      (6.61)  $      2.36
                                                       ------------   ------------   -----------
                                                       ------------   ------------   -----------
    Weighted average number of common shares and
      common equivalent shares outstanding...........     2,866,462      2,846,959     2,766,682
                                                       ------------   ------------   -----------
                                                       ------------   ------------   -----------
</Table>

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

                                      F-4





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                       COMMON STOCK                        RETAINED     ACCUMULATED
                                 -----------------------     DEFERRED      EARNINGS        OTHER
                                  NUMBER                      STOCK      (ACCUMULATED  COMPREHENSIVE  TREASURY
                                 OF SHARES     AMOUNT      COMPENSATION    DEFICIT)    INCOME (LOSS)    STOCK      TOTAL
                                 ---------     ------      ------------    --------    -------------    -----      -----
<S>                              <C>         <C>           <C>           <C>           <C>            <C>         <C>
Balance at December 31, 1998...  2,454,435   $41,912,361    $(494,306)   $ 9,731,077     $  40,123    $  --      $ 51,189,255
   Exercise of stock options...    230,058     2,135,508       --            --             --           --         2,135,508
   Conversion of warrants,
    net........................    30,570        --            --            --             --           --           --
   Tax benefit from exercise of
    stock options..............     --         1,642,532       --            --             --           --         1,642,532
   Amortization of deferred
    stock compensation.........     --           --           243,196        --             --           --           243,196
   Forfeitures of 22,663 shares
    of stock options...........     --           (54,373)      54,373        --             --           --           --
   Unrealized depreciation on
    investments, net...........     --           --            --            --           (204,239)      --          (204,239)
   Cumulative translation
    adjustment.................     --               644       --            --               (713)      --               (69)
   Net income..................     --           --            --          6,516,730        --           --         6,516,730
                                 ---------   -----------    ---------    ------------    ---------    --------   ------------
Balance at December 31, 1999...  2,715,063   $45,636,672    $(196,737)   $16,247,807     $(164,829)   $  --      $ 61,522,913
                                 ---------   -----------    ---------    ------------    ---------    --------   ------------
   Exercise of stock options...   181,336      2,115,130       --            --             --           --         2,115,130
   Conversion of warrants,
    net........................    10,532        --            --            --             --           --           --
   Tax benefit from exercise of
    stock options..............     --         2,534,565       --            --             --           --         2,534,565
   Amortization of deferred
    stock compensation.........     --           --            20,403        --             --           --            20,403
   Forfeitures of 6,564 shares
    of stock options...........     --          (116,963)     116,963        --             --           --           --
   Unrealized appreciation on
    investments, net...........     --           --            --            --            343,940       --           343,940
   Cumulative translation
    adjustment.................     --           --            --            --             (7,129)      --            (7,129)
   Net (loss)..................     --           --            --        (18,812,361)       --           --       (18,812,361)
                                 ---------   -----------    ---------    ------------    ---------    --------   ------------
Balance at December 31, 2000...  2,906,931   $50,169,404    $ (59,371)   $(2,564,554)    $ 171,982    $  --      $ 47,717,461
                                 ---------   -----------    ---------    ------------    ---------    --------   ------------
   Exercise of stock options...       469          4,538       --            --             --           --             4,538
   Amortization of deferred
    stock compensation.........     --           --            31,669        --             --           --            31,669
   Forfeitures of 5,109 shares
    of stock options...........     --           (27,702)      27,702        --             --           --           --
   Unrealized depreciation on
    investments, net...........     --           --            --            --           (179,824)      --          (179,824)
   Cumulative translation
    adjustment.................     --           --            --            --            (14,033)      --           (14,033)
   Purchase of treasury
    stock......................  (150,200)       --            --            --             --         (216,946)     (216,946)
   Reissuance of treasury
    stock......................    44,059         (8,218)      --            --             --           58,886        50,668
   Net (loss)..................     --           --            --        (33,272,866)       --           --       (33,272,866)
                                 ---------   -----------    ---------    ------------    ---------    ---------  -------------
Balance at December 31, 2001...  2,801,259   $50,138,022    $  --        $(35,837,420)   $ (21,875)   $(158,060) $ 14,120,667
                                 ---------   -----------    ---------    ------------    ---------    ---------  -------------
                                 ---------   -----------    ---------    ------------    ---------    ---------  -------------
</Table>

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

                                      F-5





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                   FOR THE YEARS ENDED DECEMBER 31,
                                                              ------------------------------------------
                                                                  2001           2000           1999
                                                                  ----           ----           ----
<S>                                                           <C>            <C>            <C>
Cash flows from operating activities:
   Net income (loss)........................................  $(33,272,866)  $(18,812,361)  $  6,516,730
   Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Deferred income taxes...................................       113,180       (208,564)      (308,254)
    Stock based compensation charges........................        39,270      2,554,968      1,885,728
    Realized (gain) on marketable securities................      (529,023)       (11,807)      (121,651)
    Depreciation............................................     1,213,490      1,233,870        815,372
    Loss from joint venture.................................       --             --              36,238
    Loss on disposal of assets..............................         9,308            413         41,391
    Amortization............................................       880,684      1,750,413        562,683
    Bad debt expense and other charges......................       275,446     13,378,237        665,116
    Asset impairments.......................................    10,657,021      2,248,100        --
    Reserve for officers loan receivable....................       --             350,000        --
    Changes in operating assets and liabilities:
      Accounts receivable...................................     4,438,124        505,532    (11,689,461)
      Income taxes..........................................     3,552,785     (3,955,407)       248,533
      Prepaid licenses......................................      (528,929)      (991,071)       (25,000)
      Prepaid expenses and other current assets.............     1,172,653        220,235     (1,670,526)
      Other assets..........................................        87,521        (16,193)       288,167
      Accounts payable and accrued expenses.................    (4,182,536)       656,162      2,283,000
      Deferred revenues.....................................      (794,872)     1,290,411         70,769
      Accrued restructuring expenses........................     1,550,719        647,779        --
      Deferred rent.........................................        44,302        253,552        251,712
      Other liabilities.....................................        21,000        --             --
                                                              ------------   ------------   ------------
         Net cash provided by (used in) operating
           activities.......................................   (15,252,723)     1,094,269       (149,453)
                                                              ------------   ------------   ------------
Cash flows from investing activities:
   Purchases of marketable securities.......................       --         (29,763,313)   (22,870,103)
   Redemption of marketable securities......................    27,996,513     40,537,736     20,564,672
   Acquisitions of businesses...............................       --             --          (3,778,416)
   Purchase of acquired technology..........................      (667,035)    (1,806,195)       (39,660)
   Software development costs...............................       --             --            (634,788)
   Merger and acquisition costs.............................      (440,929)       --             --
   Acquisition of software licenses.........................       --          (2,757,890)       --
   Acquisition of fixed assets..............................      (894,874)    (2,807,223)    (2,352,287)
   Loans to ISPsoft.........................................    (3,850,000)       --             --
   Proceeds on disposition of fixed assets..................        58,392          1,524        --
                                                              ------------   ------------   ------------
         Net cash provided by (used in) investing
           activities.......................................    22,202,067      3,404,639     (9,110,582)
                                                              ------------   ------------   ------------
Cash flows from financing activities:
   Purchases of treasury stock..............................      (216,946)       --             --
   Reissuance of treasury stock.............................        43,068        --             --
   Proceeds from capital sale/leaseback.....................       --             --             402,761
   Repayments of notes payable..............................    (1,000,000)    (1,000,000)      (111,657)
   Repayments of capital lease obligation...................      (140,810)      (130,414)       (51,375)
   Loans to officers and shareholders.......................       --            (902,728)      (250,000)
   Repayment from officers and shareholders.................        17,452        527,728        150,000
   Proceeds from the exercise of stock options and
    warrants................................................         4,538      2,115,130      2,135,508
                                                              ------------   ------------   ------------
         Net cash provided by (used in) financing
           activities.......................................    (1,292,698)       609,716      2,275,237
                                                              ------------   ------------   ------------
   Effect of foreign exchange rate changes on cash..........       (12,826)        (7,129)          (713)
                                                              ------------   ------------   ------------
         Net increase (decrease) in cash and cash
           equivalents......................................     5,643,820      5,101,495     (6,985,511)
   Cash and cash equivalents, beginning of period...........     7,314,254      2,212,759      9,198,270
                                                              ------------   ------------   ------------
   Cash and cash equivalents, end of period.................  $ 12,958,074   $  7,314,254   $  2,212,759
                                                              ------------   ------------   ------------
                                                              ------------   ------------   ------------
Supplemental disclosure of cash flow information:
   Cash (received) paid during the period for income
    taxes...................................................  $ (3,412,385)  $    732,437   $  1,657,601
   Cash paid during the period for interest.................       108,522        141,568        127,426
Non-cash activities:
   Lease of fixed assets....................................  $    --        $    --        $    340,702
   Issuance of note payable in acquisition..................       --             --           2,282,029
   Deferred taxes on purchased intangibles..................       --             --             525,000
   Forfeiture of stock options with deferred compensation...       --             116,963         54,373
   Accrued merger and acquisition costs.....................       602,056        --             --
</Table>

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

                                      F-6





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 2001

1. NATURE OF BUSINESS

    DSET Corporation and its subsidiaries ('DSET' or the 'Company') develops and
markets service-provisioning and electronic-bonding solutions for use by
telecommunications providers around the world. Our Universal Provisioning
eXchange ('UPX') software platform enables any service provider to provision,
activate, and manage services such as Internet Protocol ('IP') based virtual
private networks ('VPNs') in complex multi-vendor network environments. In June
2001, DSET and ISPsoft, Inc. announced their intention to merge. On January 31,
2002, the shareholders of the two companies approved the merger between the
Company and ISPsoft, Inc. ('ISPsoft') and the merger was completed. It is
through this merger that the Company acquired the UPX software platform.

    DSET also offers a family of software solutions for competitive service
providers ('CSPs') that enable them to exchange information with other
telecommunications service providers to reduce the time necessary to provision
new voice and data services for their customers. The DSET suite of
electronic-bonding gateways interconnects the operational support systems
('OSSs') of CSPs, such as Competitive Local Exchange Carriers ('CLECs') and
Incumbent Local Exchange Carriers ('ILECs') that must trade information and
share network capabilities to serve customers. With DSET electronic-bonding
gateway solutions, CSPs can build trading partner networks that assist
'provisioning' or 'service-fulfillment' of phone service for new customers in
days rather than weeks. In addition, DSET solutions help CSPs maintain a higher
level of quality of service for their existing customers.

    The Company is headquartered in Bridgewater, New Jersey.

STOCK SPLIT

    On August 14, 2001 the Company announced the approval of a reverse stock
split effective on the close of business on August 21, 2001, pursuant to which
one new share of common stock of the Company would be issued in exchange for
each four outstanding shares of common stock and authorized the reduction of the
Company's authorized common stock four-fold from 40,000,000 to 10,000,000. The
Company's common stock commenced trading at the post-split price on August 22,
2001. The number of shares outstanding and corresponding per share information
have been restated to reflect the one-to-four stock split in August 2001.

2. GOING CONCERN

    The consolidated financial statements of DSET have been prepared on the
basis that DSET will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities and commitments in the
normal course of business. At December 31, 2001 and 2000, respectively, DSET had
accumulated deficits of $35.8 million and $2.6 million and working capital of
$8.5 million and $35.3 million, respectively. DSET also realized net losses of
$33.3 million for the year ended December 31, 2001 and $18.8 million for the
year ended December 31, 2000. Revenue decreased from $47.0 million in 2000 to
$9.9 million in 2001. These factors raise substantial doubt about DSET's ability
to continue as a going concern. The losses and deficits resulted principally
from the lack of demand for its products due to a major downturn in the
telecommunications industry which began in the second half of the year 2000 (and
continues to present), having its most acute impact on CSPs, the Company's
primary targeted customers. This downturn was brought about by the sudden
withdrawal of available financing to the CSPs from traditional sources. Many of
the Company's customers have declared bankruptcy, refused to pay or delayed
additional purchases. This has resulted in the impairment of tangible and
intangible assets, excess capacities and bad debts. The Company has taken action
to mitigate these circumstances by reducing headcount, subletting facilities and
searching for additional financing to return itself to positive cash flow and
profitability.

                                      F-7





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

    In addition, in 2002 DSET has received two non-compliance notifications from
the Nasdaq Stock Market, Inc. ('Nasdaq').

    On February 14, 2002, the Company received notice from the Nasdaq Stock
Market, Inc. ('Nasdaq') that for the preceding 30 consecutive trading days, the
Company's common stock had not maintained the minimum Market Value of Publicly
Held Shares ('MVPHS') of $5,000,000 as required for continued inclusion by
Marketplace Rule 4450(a)(2) (the 'Rule') on the Nasdaq National Market. MVPHS
equals the closing bid price multiplied by that portion of a company's
outstanding shares which is in the hands of public investors (i.e., -- shares
not held company officers, directors, or investors who hold a controlling
interest in the company.) Therefore, in accordance with Marketplace Rule
4450(e)(1), the Company has 90 calendar days, or until May 15, 2002, to regain
compliance. If compliance with the Rule cannot be demonstrated by May 15, 2002,
the Company's securities will be delisted from the Nasdaq National Market.

    On March 5, 2002, the Company received notice from Nasdaq that for the
previous 30 consecutive trading days, the price of the Company's common stock
had closed below the minimum $1.00 per share requirement for continued inclusion
under Marketplace Rule 4450(a)(5) (the '$1.00 Rule'). Therefore, in accordance
with Marketplace Rule 4450(e)(2), the Company has 90 calendar days, or until
June 3, 2002, to regain compliance. If compliance with the $1.00 Rule cannot be
demonstrated by June 3, 2002, the Company's securities will be delisted from the
Nasdaq National Market.

    DSET's failure to meet the Nasdaq's maintenance criteria in the future may
result in the delisting of its common stock from the Nasdaq National Market. In
such event, trading, if any, of DSET's common stock may then continue to be
conducted in the Nasdaq SmallCap market, if DSET meets its criteria or the
over-the-counter market, in what is commonly referred to as the electronic
bulletin board or the 'pink sheets'. As a result, an investor may find it more
difficult to dispose of or obtain accurate quotations as to the market value of
DSET's common stock. In addition, in the event DSET's common stock is delisted,
broker-dealers would have certain regulatory burdens imposed upon them, which
may discourage them from effecting transactions in DSET's common stock, further
limiting the liquidity thereof. This may have the effect of limiting DSET's
ability to raise additional financing.

    DSET's ability to continue as a going concern is dependent upon its ability
to generate sufficient cash flows to meet its obligations as they come due. DSET
believes that the recent cost restructurings (including work force reductions)
and the merger with ISPsoft will enhance its cash flows from operations.
Additional financing may still be required for DSET to fund its operating and
capital requirements through 2002. If cash flows are insufficient, there would
be a material adverse effect on DSET's financial position and operations and its
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments relating to the recoverability of the carrying
amount of the recorded assets or the amount of liabilities that might result
from the outcome of these uncertainties. The Company cannot be certain that
additional debt or equity financing will be available when required or, if
available, that it can secure it on terms satisfactory to the Company.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

    The consolidated financial statements include all wholly-owned subsidiaries
from their respective dates of acquisition or throughout the date of their
disposition. All intercompany transactions and balances have been eliminated in
consolidation.

                                      F-8





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

CASH AND CASH EQUIVALENTS

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

MARKETABLE SECURITIES

    The marketable securities held by the Company were considered to be
available-for-sale securities and reported at fair value. All marketable
securities were liquidated to cash and cash equivalents by December 31, 2001.
Unrealized appreciation was $179,824 (net of deferred tax of $112,572) at
December 31, 2000. Cost was determined on a specific identification basis.

FIXED ASSETS

    Equipment, furniture, leasehold improvements and purchased software are
stated at cost less accumulated depreciation and amortization. Depreciation is
calculated using the straight-line method over estimated useful lives ranging
from three to seven years. Leasehold improvements are amortized over the lesser
of the estimated useful life or the lease term. Gains and losses on the disposal
of fixed assets are recognized in the statement of income (loss) in the period
of disposition.

GOODWILL

    The Company amortizes goodwill using the straight-line method over its
estimated useful life of five years. Accumulated amortization was $171,041 at
December 31, 2001 and $442,030 at December 31, 2000.

SOFTWARE DEVELOPMENT COSTS

    Capitalization of internally developed software development costs begins on
establishment of technological feasibility. Costs incurred prior to
establishment of technological feasibility are charged to research and product
development expense. The ongoing assessment of recoverability of capitalized
costs requires considerable judgement by management with respect to certain
factors including the anticipated future gross revenue, estimated economic life
and changes in technology. These factors are considered on a product-by-product
basis. Amortization of software development costs is the greater of the amounts
computed using (a) the ratio that the current gross revenues for a product bear
to the total of current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated economic life
ranging from three to five years of the product including the period being
reported on. In 2001, the Company decided to discontinue the sale of certain
products. As a result, the Company recognized asset impairments for the
capitalized software development costs related to the discontinued products.
Accordingly, accumulated amortization was zero at December 31, 2001 and $209,801
as of December 31, 2000.

ACQUIRED TECHNOLOGY

    Acquired technology represents the costs of feasible technology acquired
from external sources. At December 31, 2001 and 2000, acquired technology
reflects the purchase of certain assets of Network Programs LLC ('NPL') and
Konark Inc., as well as related costs to acquire such assets. Amortization of
acquired technology is the greater of the amounts computed using (a) the ratio
that the current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life ranging from three to five
years of the product including the period being reported on. In 2001, the
Company decided to discontinue the sale of certain products thus recognizing
asset impairments to the acquired technology.

                                      F-9





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

Accordingly, accumulated amortization was zero at December 31, 2001 and
$1,197,357 as of December 31, 2000.

RESEARCH AND PRODUCT DEVELOPMENT

    Research and product development costs are charged to expense as incurred.
However, the costs incurred for the development of computer software that will
be sold, leased or otherwise marketed are capitalized when technological
feasibility has been established.

LONG-LIVED ASSETS

    The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the estimated future net cash flows expected
to result from the use of the asset. If the carrying amount of the asset exceeds
estimated undiscounted future net cash flows, the Company measures the amount of
the impairment by comparing the carrying amount of the asset to its fair value.
Fair value is generally measured by discounting expected future net cash flows
at the rate the Company utilizes to evaluate potential investments.

STOCK-BASED COMPENSATION

    Employee stock awards under the Company's compensation plans are accounted
for in accordance with Accounting Principles Board Opinion No. 25, 'Accounting
for Stock Issued to Employees' ('APB 25') and its related interpretations. The
Company provides the disclosure requirements of Statement of Financial
Accounting Standards No. 123, 'Accounting for Stock Based Compensation' ('SFAS
123'), and its related interpretations.

TREASURY STOCK

    The Company's purchases of shares of its common stock are recorded as
treasury stock and results in a reduction of stockholders' equity, at cost. When
treasury stock is reissued, the Company uses a first-in, first-out method and
the difference between the repurchase cost and the reissuance price is treated
as an adjustment to common stock.

REVENUE RECOGNITION

    License revenues are comprised of one time license fees for
electronic-bonding gateways, application development tools, Local Number
Portability ('LNP') solutions and repetitive license royalty fees for
application development tools that are sold on a multiple-use basis. Revenue for
the one time license fees is recognized when there is persuasive evidence that
an arrangement exists, delivery has occurred, the fee is fixed and determinable
and collection is probable. Royalty revenue for the multiple-use licenses is
recognized when the customer sells a product within which is embedded libraries
of the application development tools. The contracts for multiple-use licenses do
not call for any minimum royalties.

    Service revenues are comprised of postcontract customer support service
fees, gateway rental fees, professional service fees which include training,
consulting, installation, implementation, and charges for reimbursable expenses
and custom product development fees. Revenues for postcontract customer support
services and gateway rental fees are recognized ratably over the period in which
the services are provided. Revenues for training in the Company's products are
recognized when the training has been completed. Revenues for consulting
services are recognized in the period in which the consulting

                                      F-10





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

services are provided. Revenues for product installation and implementation
services are recognized when contractually agreed upon milestones have been
achieved. It is not necessary for the Company to provide implementation
services. Outside third-parties are available to perform integration of the
Company's software with the customer's systems or the customer can choose to
install the software. Revenues for reimbursable expenses are recognized as the
expenses are incurred. Revenues for custom product development are recognized
under the contract method of accounting in accordance with AICPA Statement of
Position 81-1, 'Accounting for Performance of Construction-Type and Certain
Production-Type Contracts' since they generally require significant production,
modification or customization of the Company's products. Revenue for custom
product development is recognized as a percentage of the contract completed
based upon the ratio of direct labor costs incurred to the estimated total
direct labor costs required for the project. Any revenue for custom product
development that is recognized in excess of amounts invoiced to the customer for
progress billings is recorded as unbilled accounts receivable.

    Some customer contracts provide for multiple elements to be delivered (for
example, electronic-bonding gateway product, postcontract customer support,
training, custom product development, etc.). In those contracts that include
multiple elements, the contract fee is allocated to the various elements based
on vendor-specific objective evidence ('VSOE') of fair value. Vendor-specific
objective evidence of fair value is the price charged when the same element is
sold separately, or for an element not yet being sold separately, the price
established by the Company's product management department.

    In 2001, the Company began a new gateway rental program which provides
existing and prospective customers the ability to rent electronic-bonding
gateways on a month-to-month basis, with a 90-day cancellation provision. The
program includes the use of the software, technical support, software upgrades
and change management services for a monthly fee. Revenue under this program is
recognized pro rata as customers use the Company's software and services.

RESTRUCTURING CHARGES

    Restructuring charges derived from the Company's plans of closing facilities
and discontinuing certain product lines are recognized pursuant to Emerging
Issues Task Force ('EITF') No. 94-3, 'Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)' and Staff Accounting Bulletin ('SAB') 100,
'Restructuring and Impairment Charges'.

INCOME TAXES

    The Company utilizes an asset and liability approach for financial reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the period in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce the deferred tax assets to the amount
more likely than not to be realized.

    For certain stock options, the Company receives a tax deduction for the
difference between the fair value at the date of exercise of the stock option
and the exercise price. To the extent the amount deducted for income taxes
exceeds the amount charged to operations for financial statement purposes, the
related tax benefits are credited to shareholders' equity.

                                      F-11





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for certain items such as the allowance for doubtful
accounts, restructuring charges, depreciation and amortization, impairment of
long-lived assets and intangibles and income taxes, including the valuation of
deferred tax assets. Additionally, the Company evaluates the useful lives of its
long-lived assets based upon changes in technology and industry conditions.

RECLASSIFICATION

    Certain amounts in 2000 and 1999 have been reclassified to conform to the
2001 presentation.

RECENTLY ISSUED ACCOUNTING STANDARDS

    In July 2001, the Financial Accounting Standards Board ('FASB') issued
Statements of Financial Accounting Standards No. 141, ('SFAS 141') 'Business
Combinations' and No. 142, ('SFAS 142') 'Goodwill and Other Intangible Assets.'
SFAS 141 supersedes Accounting Principles Board ('APB') Opinion No. 16,
'Business Combinations' and SFAS 38, 'Accounting for Preacquisition
Contingencies of Purchased Enterprises' and requires that all business
combinations be accounted for only by the purchase method and eliminates the
pooling-of-interests method. SFAS 141 is effective for all business combinations
completed after July 1, 2001. SFAS 142 supersedes APB Opinion No. 17,
'Intangible Assets' and prohibits amortization of goodwill and other intangible
assets that have an indefinite life. Such assets will be subject to periodic
review for potential impairment. SFAS 142 is effective for all fiscal years
beginning after December 15, 2001. However, all goodwill and intangible assets
that are acquired after June 30, 2001 are immediately subject to SFAS 142. DSET
will account for the acquisition of ISPsoft in accordance with SFAS 141 and SFAS
142.

    Upon DSET's adoption of SFAS 141 and 142, DSET does not expect to amortize
goodwill and other intangibles acquired after June 30, 2001, unless such
goodwill or other intangibles have a finite life. The amortization of goodwill
acquired before June 30, 2001 will be discontinued at January 1, 2002. At
December 31, 2001, the unamortized balance of goodwill was $19,004.

    In August 2001, the FASB issued SFAS 143, 'Accounting for Asset Retirement
Obligations,' which addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development, and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. The effective date for SFAS 143 is
for financial statements issued for fiscal years beginning after June 15, 2002.
The Company does not expect that the adoption of the provisions of SFAS 143 will
have a material impact on its results of operations or financial position.

    In August 2001, SFAS 144, 'Accounting for the Impairment or Disposal of
Long-Lived Assets,' was issued, replacing SFAS 121, 'Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of' and
portions of APB Opinion No. 30, 'Reporting the Results of

                                      F-12





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

Operations.' SFAS 144 provides a single accounting model for long-lived assets
to be disposed of and changes the criteria to be met to classify an asset as
held-for-sale. SFAS 144 retains the requirement of APB Opinion No. 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held-for-sale. SFAS 144 is effective January 1, 2002 and the
Company is currently evaluating the impact of this Statement.

4. MARKETABLE SECURITIES

    Marketable securities were comprised as follows:

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2001          2000
                                                                ----          ----
<S>                                                          <C>           <C>
Government fixed income securities.........................  $   --        $20,829,787
Corporate bonds............................................      --          1,431,570
Commercial paper and certificates of deposit...............      --          5,499,137
                                                             -----------   -----------
    Total..................................................  $   --        $27,760,494
                                                             -----------   -----------
                                                             -----------   -----------
</Table>

    The Company's investment policy provides for all short-term securities of
grade A2 or better with maturities of two years or less.

5. LOANS TO ISPSOFT, INC.

    In May 2001, simultaneously with the execution of a letter of intent related
to the merger with ISPsoft, DSET loaned ISPsoft $500,000 pursuant to a
collateralized promissory note.

    In June 2001, simultaneously with the execution of the merger agreement with
ISPsoft, ISPsoft issued to DSET a $2.0 million promissory note, which replaced
the $500,000 note. During the second half of 2001, DSET loaned $1.85 million
to ISPsoft for a total outstanding amount of $3.85 million as of December 31,
2001. Additionally, in January 2002 DSET loaned ISPsoft $550,000 bringing the
total amount loaned to ISPsoft through January 31, 2002 to $4.4 million.

    In connection with the closing of the merger with ISPsoft on January 31,
2002, DSET issued two promissory notes in exchange for certain notes previously
issued by ISPsoft. Each note is in the principal amount of $400,000 bearing
simple interest of 8% per annum. The notes are due at the earlier of: a) one
year (January 31, 2003); b) DSET receiving equity financing of at least
$10 million; or c) the receipt by ISPsoft or successor of an aggregate of
$5 million in cash from sales of ISPsoft's products (provided however that
the sales agreements were executed prior to January 31, 2002).

    During 2001, in connection with the merger, the Company incurred $1,042,985
of merger acquisition costs which were capitalized on the accompanying balance
sheet.

                                      F-13





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

6. FIXED ASSETS

    Fixed assets consist of the following:

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2001          2000
                                                                ----          ----
<S>                                                          <C>           <C>
Computer equipment.........................................  $ 1,630,518   $ 3,971,315
Purchased software.........................................      859,075     1,949,959
Furniture, fixtures and office equipment...................      869,687     1,681,350
Leasehold improvements.....................................      373,585       747,515
Transportation equipment...................................      --             27,156
                                                             -----------   -----------
                                                               3,732,865     8,377,295
Less: accumulated depreciation and amortization............   (1,559,726)   (3,377,611)
                                                             -----------   -----------
                                                             $ 2,173,139   $ 4,999,684
                                                             -----------   -----------
                                                             -----------   -----------
</Table>

7. DEBT OBLIGATIONS

CAPITAL LEASE OBLIGATION

    In June 1999, the Company entered into a five-year capital lease agreement
mainly for office furniture and fixtures in its facilities in Bridgewater, New
Jersey and Plano, Texas at an annual rate of 8.21%. Annual lease payments,
inclusive of interest are $180,540. As a result of the reductions in workforce
throughout the year, the Company recognized an asset impairment for certain
assets under these leases as such assets will not be utilized. Assets recorded
under this lease (adjusted for impairment charges) are included in fixed
assets as follows:

<Table>
<Caption>
                                                            DECEMBER 31,
                                                        ---------------------
                                                          2001        2000
                                                          ----        ----
<S>                                                     <C>         <C>
Furniture and fixtures................................  $ 412,777   $ 743,462
Accumulated amortization..............................   (147,421)   (200,242)
                                                        ---------   ---------
                                                        $ 265,356   $ 543,220
                                                        ---------   ---------
                                                        ---------   ---------
</Table>

    As of December 31, 2001 future payments are as follows:

<Table>
<S>                                                           <C>
2002........................................................  $ 180,540
2003........................................................    180,540
2004........................................................    105,315
                                                              ---------
                                                                466,395
Less: unamortized interest..................................     45,534
                                                              ---------
                                                                420,861
Less: current portion.......................................    138,367
                                                              ---------
Long-term portion...........................................  $ 282,494
                                                              ---------
                                                              ---------
</Table>

LINE OF CREDIT

    In August 2000, the Company renewed an unsecured revolving credit facility
with a bank totaling $5 million. Borrowings under this line of credit bear
interest at the bank's prime rate less 0.25% on amounts outstanding of less than
$1 million and at the bank's prime rate for aggregate principal amounts
exceeding $1 million. No borrowings under this line were outstanding at
December 31, 2001 or 2000. On August 14, 2001, the Company received notice that
the line of credit was terminated due to non-compliance with the covenants of
the loan.

                                      F-14





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

NOTES PAYABLE

    As part of the acquisition of Konark Inc. in 1999, the Company paid $1.0
million in cash and issued a $2.5 million non-interest bearing note payable
which has been discounted at 8.25%. Interest expense is accreted monthly and
totaled $69,106 in 2001 and $85,591 in 2000. As of December 31, 2001, the
Company had one remaining payment of $500,000. This amount was paid in March
2002.

    As of December 31, 2001, future payments under the notes are as follows:

<Table>
<S>                                                           <C>
2002........................................................  $500,000
Less: Unamortized interest..................................     6,214
                                                              --------
Balance.....................................................  $493,786
                                                              --------
                                                              --------
</Table>

8. COMMON STOCK

STOCKHOLDER RIGHTS PLAN

    In July 2001, the Company announced that its Board of Directors had adopted
a shareholder rights plan (the 'Rights Plan'). Under the Rights Plan, each
shareholder of record on July 31, 2001 received a distribution of one right for
each share of DSET common stock (the 'Rights'). Initially the Rights are
represented by DSET's common stock certificates, are not traded separately from
DSET's common stock, and are not exercisable. The Rights become exercisable only
if an entity acquires, or announces a tender offer, that would result in
ownership of 15% or more of DSET's common stock, at which time each Right would
enable the holder to buy one one-thousandth of a share of DSET's Series A Junior
Participating Preferred Stock at an exercise price of $20, subject to
adjustment. The actual number of shares acquirable by the holder equals $20
divided by one-half of the then current market price of DSET's common stock.
Additionally, the Rights Plan provides that in the event of a subsequent merger
or other acquisition of DSET, the holders of the Rights will be entitled to buy
shares of common stock of the acquiring entity at one-half of the market price
of the acquiring company's shares.

EMPLOYEE STOCK PURCHASE PLAN

    In June 2001, the Company adopted an Employee Stock Purchase Plan ('ESPP')
under Section 423 of the Internal Revenue Code. The ESPP was effective July 1,
2001. Under the ESPP, eligible employees are provided an opportunity to purchase
shares of the Company's common stock through regular payroll deductions. The
total number of shares of common stock that are authorized for issuance under
the ESPP is 250,000. Employees are given an opportunity to purchase shares of
common stock during consecutive six month periods, and the right to purchase
shares will expire on the last day of the six month period. The purchase price
for shares offered under the ESPP for the first plan period ended December 31,
2001 was equal to 85% of the lower of the closing price of the Company's common
stock on June 29, 2001 or December 31, 2001 as reported on the Nasdaq National
Market. Thus when the common stock closed on December 31, 2001 at $1.15/share
the employees' purchase price was $0.9775/share. The employees purchased 44,059
shares. For each subsequent six month period, the purchase price for shares
offered under the ESPP will be equal to a percentage designated by the
Compensation Committee of the Board of Directors (not less than 85%) of the
lower of the fair market

                                      F-15





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

value of the Company's common stock at the commencement or termination of the
six month period. The ESPP will expire on July 1, 2005.

9. STOCK OPTIONS

    The Company maintains two stock option plans (the '1993 Plan' and the '1998
Plan') covering officers, employees, directors and consultants, pursuant to
which options may be granted to purchase shares of the Company's common stock.
Options granted under the 1993 Plan were either incentive stock options or
nonqualified stock options, as designated at the time of grant and vest over a
period not to exceed four years. The 1993 Plan provides that the option price
shall not be less than the fair market value of the shares at date of grant (as
determined by the 1993 Plan's administrators), except for a more than 10% voting
shareholder, in which case it will not be less than 110% of the fair market
value at date of grant. Incentive stock options are exercisable for ten years
from the date of grant ('10 Year Options'), except for a more than 10% voting
shareholder, in which case the option is exercisable for five years ('5 Year
Options') from the date of grant. Nonqualified stock options are exercisable for
five years from the date of grant. Upon consummation of the Company's initial
public offering (March 18, 1998) no further grants were issued under the 1993
Plan.

    The 1998 Plan was adopted by the Board of Directors on December 31, 1997.
The 1998 Plan became effective on the date of the consummation of the Company's
initial public offering (March 18, 1998) and terminates ten years from such
date. Upon effectiveness of the 1998 Plan, a total of 450,000 shares were
reserved for issuance upon the exercise of option and/or stock purchase rights
granted thereunder. The 1998 Plan was amended on May 24, 2000 to increase the
maximum aggregate number of shares of common stock to 625,000 and to reserve an
additional 175,000 shares of common stock of the Company for issuance in
connection with awards granted under the 1998 Plan. The 1998 Plan is
administered by the Compensation Committee of the Board of Directors of the
Company.

    At December 31, 2001 and 2000, options to purchase 161,193 and 155,082
shares of common stock were exercisable under the Company's stock option plans
at a weighted average exercise price of $14.84 and $36.16, respectively.
Additionally, there were options to purchase 233,853 and 391,797 shares of the
Company's common stock that have been granted and which were not exercisable as
of December 31, 2001 and 2000, respectively. There were 524,547 and 180,783
options available to be granted at December 31, 2001 and 2000, respectively.

                                      F-16





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

    A summary of option transactions during 1999, 2000 and 2001 is as follows:

<Table>
<Caption>
                                                               WEIGHTED
                                                                AVERAGE        OUTSTANDING
                                                                EXERCISE          SHARE
                                                   NUMBER OF   PRICE PER          PRICE
                                                    SHARES       SHARE            RANGE
                                                    ------       -----            -----
<S>                                                <C>         <C>          <C>
Outstanding December 31, 1998....................   725,057      $19.16        $1.80-77.00
Granted..........................................   261,103      $55.92
Forfeited........................................  (129,692)     $44.68
Exercised........................................  (230,508)     $50.44
                                                   --------
Outstanding December 31, 1999....................   625,960      $35.16       $2.24-149.50
Granted..........................................   220,513      $90.28
Forfeited........................................  (118,258)     $63.16
Exercised........................................  (181,336)     $11.64
                                                   --------
Outstanding December 31, 2000....................   546,879      $59.36       $7.19-149.50
Granted..........................................   215,253      $ 7.12
Forfeited........................................  (366,617)     $49.86
Exercised........................................      (469)     $ 9.68
                                                   --------
Outstanding December 31, 2001....................   395,046      $39.62       $0.51-142.25
</Table>

    The following table summarizes information with respect to stock options
outstanding at December 31, 2001:

<Table>
<Caption>
                                      Options Outstanding                                 Options Exercisable
                   ----------------------------------------------------------   ---------------------------------------
                                          Weighted-Average
     Actual               Number             Remaining                                 Number
    Range of           Outstanding        Contractual Life   Weighted-Average       Exercisable        Weighted-Average
 Exercise Prices   at December 31, 2001       (Years)         Exercise Price    at December 31, 2001    Exercise Price
 ---------------   --------------------       -------         --------------    --------------------    --------------
<S>                <C>                    <C>                <C>                <C>                    <C>
 $ 0.51 -$  0.51           3,000                9.5               $ 0.51                   --                   --
 $ 1.10 -$  1.10           1,250                9.8               $ 1.10                   --                   --
 $ 2.04 -$  2.04           7,500                9.5               $ 2.04                   --                   --
 $ 3.44 -$  4.56          21,250                9.4               $ 3.47                   --                   --
 $ 6.75 -$  8.64         105,969                9.1               $ 7.67                  656              $  8.23
 $11.12 -$ 16.00          44,100                4.9               $14.27               43,474              $ 14.26
 $21.75 -$ 32.00          52,875                6.8               $27.36               38,874              $ 27.51
 $38.52 -$ 56.76          47,239                6.9               $46.87               28,234              $ 46.90
 $58.76 -$ 82.50          60,865                6.7               $68.69               34,803              $ 66.31
 $96.12 -$142.25          50,998                8.0              $123.22               15,152              $121.09
 ---------------   --------------------       -------         --------------    --------------------    --------------
 $ 0.51 -$142.25         395,046                7.6               $39.62              161,193              $ 44.43
</Table>


    SFAS No. 123, 'Accounting for Stock-Based Compensation,' establishes
financial accounting and reporting standards for stock-based employee
compensation plans. However, SFAS No. 123 also permits the measurement of
compensation costs using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, 'Accounting for Stock Issued to Employees',
and its related interpretations. The Company has elected to account for its
employee stock compensation plans under the guidance prescribed by APB Opinion
No. 25 and has made the required pro forma disclosures of net income (loss) and
net income (loss) per share as if the fair value based method of accounting
defined in SFAS No. 123 had been applied as indicated below:

<Table>
<Caption>
                                                        YEARS ENDED DECEMBER 31,
                                                ----------------------------------------
                                                    2001           2000          1999
                                                    ----           ----          ----
<S>                                             <C>            <C>            <C>
Net income (loss) applicable to common shares:
    As reported...............................  $(33,272,866)  $(18,812,361)  $6,516,730
    Pro forma.................................  $(32,769,774)  $(24,372,633)  $4,593,009
Net income (loss) per common share:
    As reported...............................  $     (11.61)  $      (6.61)  $     2.50
    Pro forma.................................  $     (11.43)  $      (8.56)  $     1.76
Net income (loss) per common share assuming
  dilution:
    As reported...............................       $(11.61)        $(6.61)       $2.36
    Pro forma.................................       $(11.43)        $(8.56)       $1.66
</Table>

    The fair value of option grants was calculated using the Black-Scholes
option valuation method with the following assumptions for the years ended
December 31, 2001, 2000 and 1999: risk-free interest rates of 3.50%, 6.25%, and
5.49%, respectively; expected life of 4 years, volatility of 102%, 108% and

                                      F-17





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

80%, respectively, and dividend yields of 0.0%. These methods require the input
of highly subjective assumptions. Changes in the subjective input assumptions
can materially affect the fair value estimate. The decrease in the net loss in
2001 was due to the forfeitures during the year exceeding the number of options
granted. In management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock options.

10. INCOME TAXES

    The provision (benefit) for federal, state, local and foreign taxes consists
of the following:

<Table>
<Caption>
                                                          YEARS ENDED DECEMBER 31,
                                                      ---------------------------------
                                                        2001       2000         1999
                                                        ----       ----         ----
<S>                                                   <C>        <C>         <C>
Current:
    Federal.........................................  $ 90,880   $(758,314)  $3,065,129
    State and local.................................    14,156       2,855      465,217
    Foreign.........................................    35,364      61,392       27,815
                                                      --------   ---------   ----------
                                                       140,400    (694,067)   3,558,161
                                                      --------   ---------   ----------
Deferred:
    Federal.........................................   113,180    (202,225)    (269,652)
    State and local.................................     --         (6,339)     (38,602)
                                                      --------   ---------   ----------
                                                       113,180    (208,564)    (308,254)
                                                      --------   ---------   ----------
    Provision (benefit) for income taxes............  $253,580   $(902,631)  $3,249,907
                                                      --------   ---------   ----------
                                                      --------   ---------   ----------
</Table>

    The effective tax rate reconciles to the amount computed by multiplying
income before income taxes by the United States federal statutory rate of 34% as
follows:

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31,
                                                              -------------------------
                                                              2001      2000      1999
                                                              ----      ----      ----
<S>                                                           <C>       <C>       <C>
Statutory rate..............................................  (34.0)%   (34.0)%    34.0%
State taxes, net of federal benefit.........................   (2.3)     (1.9)      3.1
Research and development tax credits........................    0.0      (3.7)     (4.6)
Deferred stock compensation.................................    0.1       0.2       0.6
Other.......................................................    1.6      (0.3)      0.2
Valuation allowance.........................................   35.4      35.1      --
                                                              -----     -----     -----
Effective rate..............................................    0.8%     (4.6)%    33.3%
                                                              -----     -----     -----
                                                              -----     -----     -----
</Table>

                                      F-18





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

    Deferred tax assets (liabilities) are comprised of the following:

<Table>
<Caption>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 2001          2000
                                                                 ----          ----
<S>                                                           <C>           <C>
Deferred tax assets:
    Accrued vacation........................................  $    64,681   $  230,899
    Bad debt reserve........................................    2,831,867    4,447,415
    Deferred revenues.......................................      240,424      416,327
    Accrued bonus...........................................      --            36,197
    Warranty reserve........................................       19,171       85,684
    Deferred rent...........................................      202,185      182,906
    Net operating losses....................................   12,146,508    1,032,018
    Tax credits.............................................    1,512,423    1,157,028
    Accrued restructuring...................................    1,404,138       --
    Reserve for officer loan................................      128,765       --
    Impairment of non-compete...............................      140,733      128,765
    Other...................................................       42,590       27,365
    Valuation allowance.....................................  (18,579,238)  (6,920,992)
Deferred tax liabilities:
    Fixed assets............................................     (154,247)    (178,919)
    Unrealized (appreciation) depreciation on investments...      --          (112,572)
    Capitalized software costs..............................      --          (157,740)
    Acquired technology.....................................      --          (374,381)
                                                              -----------   ----------
    Total...................................................  $   --        $   --
                                                              -----------   ----------
                                                              -----------   ----------
</Table>

11. REVENUE AND RECEIVABLE CONCENTRATION

    The Company had one customer that accounted for 19% of revenues for the year
ended 2001 and no such customers for the years ended December 31, 2000 and 1999
who accounted for more than 10% of revenue. Revenues from customers in the
following geographic regions as a percentage of total revenues are as follows:

<Table>
<Caption>
                                                                      YEARS ENDED DECEMBER
                                                                              31,
                                                                   --------------------------
                                                                   2001       2000       1999
                                                                   ----       ----       ----
<S>                                                                <C>        <C>        <C>
    North America...........................................        99%        94%        93%
    Asia/Pacific Rim........................................         0          3          3
    Europe..................................................         1          3          4
                                                                   ---        ---        ---
                                                                   100%       100%       100%
                                                                   ---        ---        ---
                                                                   ---        ---        ---
</Table>

    At December 31, 2001, four customers accounted for 59% of the accounts
receivable (gross) balance. At December 31, 2000 two customers accounted for
approximately 21% of the accounts receivable (gross) balance. Unbilled accounts
receivable was $1.1 million as of December 31, 2001 and $2.9 million as of
December 31, 2000.

12. EMPLOYEE BENEFIT PLAN

    The Company has a savings plan pursuant to Section 401(k) of the Internal
Revenue Code (the 'Code') covering all employees meeting eligibility
requirements. Subject to certain limits set forth in the Code, employees are
permitted to make contributions to the plan on a pre-tax salary reduction basis,
and the Company may make voluntary contributions of up to 60% of employee
contributions.

                                      F-19





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

The Company made contributions approximating $223,000, $338,000, and $296,000
for the years ended December 31, 2001, 2000, and 1999, respectively.

13. COMMITMENTS

LEASES

    The Company has operating leases for its offices and certain equipment.
Generally, the leases carry renewal provisions and require the payment of
maintenance costs. Rental expense charged to operations for the years ended
December 31, 2001, 2000, and 1999 was approximately $2,424,000, $3,256,000, and
$2,050,000, respectively, net of sub-rental income of approximately $378,000 in
2001.

    The future minimum rental payments under noncancellable operating leases
approximate the following:

<Table>
<Caption>
                 YEARS ENDING DECEMBER 31,
                 -------------------------
<S>                                                           <C>
2002........................................................  $ 3,206,735
2003........................................................    2,476,603
2004........................................................    2,186,481
2005........................................................    1,684,656
2006........................................................    1,280,754
For the years 2007 and beyond...............................    3,390,656
                                                              -----------
    Total...................................................  $14,225,885
                                                              -----------
                                                              -----------
</Table>

    In August 2001, the Company sublet one floor of its Bridgewater facility for
three years. Annual payment to be received is $807,482. In November 2001, the
Company sublet the Canada office space through December 30, 2004. Annual payment
to be received is approximately $267,000.

NJTC VENTURE FUND, L.P.

    In November 2000 the Company agreed to participate in the NJTC Venture Fund,
L.P. with an initial investment of $100,000 with a total commitment of
$1,000,000. A subsequent additional investment of $100,000 was made in
January 2002. The fund will seek to make venture capital investments primarily
in technology-related companies in rapidly growing market sectors. In accordance
with APB Opinion No. 18, 'The Equity Method of Accounting for Investments in
Common Stock', the Company is accounting for this investment on the cost basis,
as the Company's maximum participation in the fund is 4.8% and the Company only
has limited protective investor rights.

NE TECHNOLOGIES LICENSE AGREEMENT

    In December 2000, the Company signed an exclusive license agreement with NE
Technologies Inc. for three years, effective January 1, 2001. This agreement may
be extended by NE Technologies for an additional two years. Under this
agreement, the Company granted to NE Technologies the rights to use, modify,
copy, reproduce and create derivative works from the Company's network products.
During the first three years, NE Technologies shall pay the Company royalties of
20% on license fee of product, 50% on run-time royalty, 15% on maintenance
support and consulting projects and 10% on all non-tools revenues. During the
extended period of two years, NE Technologies shall pay the Company 15% of the
gross revenues. As part of the agreement, the Company agreed to provide NE
Technologies with financial assistance up to $600,000 with interest at 10% which
expired December 31, 2001. As of December 31, 2001 NE Technologies had not
borrowed on this agreement.

                                      F-20





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

14. ACQUISITIONS

    On January 25, 1999, DSET Acquisition Corp., a wholly-owned subsidiary of
the Company consummated the acquisition of certain assets of NPL. The purchase
price consisted of $2,500,000 payable to NPL and professional fees of $158,416.

    The costs to acquire NPL were recorded as acquired technology and goodwill.
In addition, research and product development costs associated with bringing the
acquired assets to market were recorded as capitalized software development
costs. Amortization of these costs commenced with the shipment of the product in
the second quarter of 1999: amortization expense related to these costs was zero
in 2001, $384,792 in 2000 and $240,000 in 1999. All further development costs
associated with the product were expensed.

    The following is a summary of the purchase price allocation:

<Table>
<S>                                                           <C>
    Acquired technology.....................................  $2,458,416
    Goodwill................................................     200,000
                                                              ----------
        Total...............................................  $2,658,416
                                                              ----------
                                                              ----------
</Table>

    In 2001, the Company decided to discontinue the sale of certain products. As
a result, the Company recognized an asset impairment of $2.2 million for the
unamortized balances of acquired technology and goodwill related to these
discontinued products.

    On September 30, 1999, the Company purchased Konark Inc. and related
technologies for approximately $3.3 million in cash and certain deferred
payments plus professional fees and related deferred tax liabilities. The
acquisition price, along with certain other acquisition costs and associated
deferred tax liabilities were recorded as acquired technology and goodwill to be
amortized over five years.

    The following is a summary of the purchase price allocation and
consideration:

<Table>
<S>                                                           <C>
    PURCHASE PRICE ALLOCATION
    Acquired technology.....................................  $ 2,195,507
    Other assets............................................      695,507
    Goodwill................................................    1,036,015
    Deferred income taxes...................................     (525,000)
                                                              -----------
                                                              $ 3,402,029
                                                              -----------
                                                              -----------
    CONSIDERATION
    Cash....................................................  $(1,120,000)
    Notes payable-current...................................     (971,470)
    Long-term notes payable.................................   (1,310,559)
                                                              -----------
                                                              $(3,402,029)
                                                              -----------
                                                              -----------
</Table>

    In 2001, the Company decided to discontinue the sale of all Konark products.
As a result, the Company recognized an asset impairment of $450,000 for the
unamortized balances of acquired technology and goodwill related to these
discontinued products.

    In June 2000 the Company purchased an exclusive worldwide license for
various products from Daleen Technologies, Inc. for $2.5 million payable in
cash. In 2001, the Company decided to discontinue the sale of all Daleen
products. As a result, the Company recognized an asset impairment of $2.2
million for the unamortized balances of acquired technology and goodwill
related to these discontinued products.

                                      F-21





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

15. EARNINGS PER SHARE

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

<Table>
<Caption>
                                                             FOR THE YEAR ENDED DECEMBER 31, 2001
                                                             ------------------------------------
                                                                                        PER SHARE
                                                                INCOME       SHARES      AMOUNT
                                                                ------       ------      ------
<S>                                                          <C>            <C>         <C>
Basic EPS and assuming dilution:
    Net (loss) applicable to common shares.................  $(33,272,866)  2,866,462    $(11.61)
                                                             ------------   ---------
                                                             ------------   ---------
</Table>

    At December 31, 2001, the exercise prices of all outstanding stock options
exceeded the market price of the Company's common stock. At December 31, 2001,
outstanding options to purchase 395,046 shares of common stock are antidilutive
and excluded from the computation of diluted loss per share at December 31,
2001.

<Table>
<Caption>
                                                             FOR THE YEAR ENDED DECEMBER 31, 2000
                                                             ------------------------------------
                                                                                        PER SHARE
                                                                INCOME       SHARES      AMOUNT
                                                                ------       ------      ------
<S>                                                          <C>            <C>         <C>
Basic EPS and assuming dilution:
    Net (loss) applicable to common shares.................  $(18,812,361)  2,846,959    $(6.61)
                                                             ------------   ---------
                                                             ------------   ---------
</Table>

    At December 31, 2000, the exercise prices of almost all outstanding stock
options exceeded the market price of the Company's common stock. At
December 31, 2001, outstanding options to purchase 546,880 shares of common
stock were antidilutive and excluded from the computation of diluted loss per
share at December 31, 2000.

<Table>
<Caption>
                                                             FOR THE YEAR ENDED DECEMBER 31, 1999
                                                             ------------------------------------
                                                                                        PER SHARE
                                                                INCOME       SHARES      AMOUNT
                                                                ------       ------      ------
<S>                                                          <C>            <C>         <C>
Basic EPS:
    Net income applicable to common shares.................  $  6,516,730   2,606,313    $ 2.50
Assuming dilution:
    Stock options..........................................       --          125,628
    Warrants...............................................       --           34,741
                                                             ------------   ---------
                                                             $  6,516,730   2,766,682    $ 2.36
                                                             ------------   ---------
                                                             ------------   ---------
</Table>

16. RESTRUCTURING AND IMPAIRMENT CHARGES

    During 2001, the Company deemed it necessary to reduce and consolidate the
workforce in the United States and Canada by 178 employees and close its
Canadian facility due to changes and deterioration of conditions in the
marketplace, and discontinue certain product lines in an effort to conserve
cash.

                                      F-22





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

    The approximate restructuring and impairment charges recorded in 2001 are
summarized as follows:

<Table>
<S>                                                           <C>
Work force reductions.......................................  $ 2,141,000
Fixed assets impairments and future non-refundable fixed
  asset lease payments......................................    3,888,000
Software and acquired technology asset impairments..........    6,675,000
Goodwill asset impairment...................................      731,000
Covenant not to compete asset impairment....................      417,000
Future rent payments for Plano, Texas facility..............    1,256,000
Prepaid software license impairment.........................      185,000
Capitalized software impairment.............................      371,000
Other.......................................................       47,000
                                                              -----------
    Total 2001 restructuring and impairment charges.........  $15,711,000
                                                              -----------
                                                              -----------
</Table>

    For the year ended December 31, 2001, the amount of termination benefits
paid to employees due to the above restructurings was approximately $1.9
million.

    The total remaining restructuring accrual inclusive of termination benefits
and non-refundable lease payments at December 31, 2001 is approximately $2.2
million as summarized as follows:

<Table>
<Caption>
                                                           2001                      2000
                                                  -----------------------   ----------------------
                                                  SHORT-TERM   LONG-TERM    SHORT-TERM   LONG-TERM
                                                  ----------   ---------    ----------   ---------
<S>                                               <C>          <C>          <C>          <C>
Equipment Leases................................  $  373,000   $  339,000    $ --        $  --
Rent............................................     488,000      682,000      76,000       --
Severance.......................................     237,000       --         572,000       --
Other...........................................      79,000       --          --           --
                                                  ----------   ----------    --------    --------
    Total.......................................  $1,177,000   $1,021,000    $648,000    $  --
                                                  ----------   ----------    --------    --------
                                                  ----------   ----------    --------    --------
</Table>

    All of the accrued restructuring balance at December 31, 2000 was paid in
2001.

17. RELATED PARTY TRANSACTIONS

    During the year ended December 31, 2000, the Company extended three loans to
its Chief Executive Officer totaling $902,728 with a 6% interest rate per annum
with one due November 2000, one due May 2001 and one due October 2001. As of
December 31, 2000, the President and Chief Executive Officer repaid $527,728
against these loans leaving an outstanding balance of $627,728 inclusive of a
loan of $252,728, which originated in August 1999. The Company's Chief Executive
Officer has pledged various personal assets including vested options to purchase
the Company's stock, shares of the Company's Common Stock, personal real estate
assets and various securities against these loans. The Company recorded a bad
debt provision of $350,000 against these loans in 2000 for the estimated amount
of the loans that exceeded the estimated realizable value. As of December 31,
2001 and 2000 the reserve for the officer loan was $350,000.

    In March 2001, the Company and its Chief Executive Officer entered into a
new loan arrangement which consolidated the outstanding balance for all previous
loans and provided for a four-year payment schedule with a balloon payment due
at the end of the term. Effective October 1, 2001 the Company and Chief
Executive Officer entered into a promissory note in the amount of $624,112 which
cancelled the March 2001 agreement. Under the October 1, 2001 agreement, the
interest rate is based on the lower of the alternative Federal short-term rate
or the statutory Federal short-term rate for the month in which payment is made.
Under the October agreement, there is a forty-one month payment schedule with a
balloon payment due at the end of the term.

                                      F-23





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 2001

18. SUBSEQUENT EVENTS

MERGER

    In June 2001, the Company announced an agreement to merge with ISPsoft Inc.
('ISPsoft'), which merger closed on January 31, 2002. ISPsoft has developed
Internet Protocol provisioning software which has achieved technological
feasibility. At closing, ISPsoft security holders received an aggregate of
2,281,143 shares of DSET common stock, $1,000,000 in cash, issuance of an
aggregate of $800,000 of DSET notes payable and payment of $544,519 in cash in
exchange for certain debts payable by ISPsoft to certain ISPsoft security
holders and/or affiliates, and entitled to receive and up to $500,000 in cash
and/or unregistered shares of DSET common stock in potential milestone payments
in exchange for their ISPsoft securities in the merger. DSET also assumed the
ISPsoft 2000 Stock Plan and granted the holders of 2,781,010 issued and
outstanding options to purchase shares of ISPsoft common stock the right to
purchase up to 241,483 shares of DSET common stock.

    In May 2001, simultaneously with the execution of a letter of intent related
to the merger with ISPsoft, DSET loaned ISPsoft $500,000 pursuant to a
collateralized promissory note.

    In June 2001, simultaneously with the execution of the merger agreement with
ISPsoft, ISPsoft issued to DSET a $2.0 million promissory note, which replaced
the $500,000 note. During the second half of 2001, DSET loaned $1.85 million
to ISPsoft for a total outstanding amount of $3.85 million as of December 31,
2001. Additionally, in Janary 2002 DSET loaned ISPsoft $550,000 bring the total
amount loaned to ISPsoft through January 31, 2002 to $4.4 million.

    In connection with the closing of the merger with ISPsoft on January 31,
2002, DSET issued two promissory notes in exchange for certain notes previously
issued by ISPsoft. Each note is in the principal amount of $400,000 bearing
simple interest of 8% per annum. The notes are due at the earlier of: a) one
year (January 31, 2003); b) DSET receiving equity financing of at least $10
milion; or c) the receipt by ISPsoft or successor of an aggregate of $5 million
in cash from sales of ISPsoft's products (provided however that the sales
agreements were executed prior to January 31, 2002).

TAX REFUND

    On March 9, 2002, President George W. Bush signed into law the 'Job Creation
and Worker Assistance Act' (H.R. 3090) which should allow the Company to collect
an estimated $1.1 million federal tax refund pursuant to the temporary extension
of the general carry back period to five years (from two years under present
law) for Net Operating Losses arising in taxable years ending in 2001 and 2002.

19. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

    The following table presents certain condensed unaudited quarterly financial
information for each of the eight most recent quarters in the period ended
December 31, 2001. This information is derived from unaudited financial
statements of the Company that include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results of operation of such periods.

<Table>
<Caption>
                        QUARTER   QUARTER   QUARTER   QUARTER    QUARTER   QUARTER   QUARTER   QUARTER
                         ENDED     ENDED     ENDED     ENDED      ENDED     ENDED     ENDED     ENDED
                        3/31/01   6/30/01   9/30/01   12/31/01   3/31/00   6/30/00   9/30/00   12/31/00
                        -------   -------   -------   --------   -------   -------   -------   --------
                                              (IN $000 EXCEPT PER SHARE AMOUNTS)
<S>                     <C>       <C>       <C>       <C>        <C>       <C>       <C>       <C>
Revenue...............  $ 3,415   $ 2,616   $2,015     $1,869    $11,598   $16,234   $13,867   $ 5,343
Gross Profit..........      923       527      801      1,221      8,564    12,782     8,981     1,593
Net Income (Loss).....  (10,923)  (13,157)  (7,565)    (1,628)       921     2,171    (3,251)  (18,653)
Earnings (Loss) Per
  Share of Common
  Stock:
    Basic.............    (3.76)    (4.53)   (2.61)      (.59)      0.08      0.19     (0.28)    (1.65)
    Diluted...........    (3.76)    (4.53)   (2.61)      (.59)      0.08      0.18     (0.28)    (1.65)
</Table>

                                      F-24





<PAGE>

                       DSET CORPORATION AND SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<Table>
<Caption>
----------------------------------------------------------------------------------------------------
                COLUMN A                   COLUMN B       COLUMN C      COLUMN D          COLUMN E
----------------------------------------------------------------------------------------------------
                                           BALANCE AT    CHARGED TO                      BALANCE AT
                                          BEGINNING OF    COSTS AND                        END OF
              DESCRIPTION                    PERIOD       EXPENSES     DEDUCTIONS          PERIOD
----------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>           <C>               <C>
Year 2001
  Valuation reserve -- deferred tax
  asset.................................  $ 6,920,992   $11,658,246    $   --            $18,579,238
  Allowance for doubtful accounts.......  $12,285,676   $   986,708(b) $ 5,575,001(a)    $ 7,697,383
  Accrued restructuring expenses........  $   647,779   $ 6,311,191    $ 5,781,816       $ 1,177,154
  Long term accrued restructuring
    expenses............................  $   --        $ 1,021,344    $   --            $ 1,021,344

Year 2000
  Valuation reserve -- deferred tax
  asset.................................  $   --        $ 6,920,992    $   --            $ 6,920,992
  Allowance for doubtful accounts.......  $   600,000   $13,378,237    $ 1,692,561(a)    $12,285,676
  Accrued restructuring expenses........  $   --        $   880,100    $   232,321       $   647,779

Year 1999
  Allowance for doubtful accounts.......  $   175,979   $   665,116    $   241,095(a)    $   600,000
</Table>

---------

 (a) Amounts written off as uncollectible.
 (b) Amounts in the consolidated statements of income (loss) include a reversal
     of $400,000 due to a resolution of customer credits recorded as a
     liability and $331,272 resolution of royalties on accounts receivable that
     have been written off.



                                      S-1





                          STATEMENT OF DIFFERENCES
                          ------------------------

 The dagger symbol shall be expressed as................................ 'D'