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, 1998


                         Commission File Number 0-23611

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

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


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


                                 (908) 526-7500
--------------------------------------------------------------------------------
               Registrant's telephone number, including area code


Securities registered pursuant to Section 12(b) of the Act:

      Title of Each Class             Name of Each Exchange on Which Registered
      -------------------             -----------------------------------------


              None
---------------------------------     ------------------------------------------

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

Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, no par value
--------------------------------------------------------------------------------
                                (Title of Class)

--------------------------------------------------------------------------------
                                (Title of Class)


<PAGE>

     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: $95,738,005 at March 1, 1999 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, 1999:


                   Class                             Number of Shares
                   -----                             ----------------
         Common Stock, no par value                     10,248,403


     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 1999 Annual Meeting of Shareholders  are incorporated by reference into Part
III of this Report.




<PAGE>
                                TABLE OF CONTENTS



                  Item                                                     Page
                  ----                                                     ----

PART I         1.  Business...........................................       1

               2.  Properties.........................................      13

               3.  Legal Proceedings..................................      13

               4.  Submission of Matters to a Vote of Security 
                       Holders .......................................      13

PART II        5.  Market for the Company's Common Equity
                       and Related Stockholder Matters................      14

               6.  Selected Financial Data............................      16

               7.  Management's Discussion and Analysis of Financial
                       Condition and Results of Operations............      18

              7A.  Quantitative and Qualitative Disclosures About
                       Market Risk....................................      26

               8.  Financial Statements and Supplementary Data........      26

               9.  Changes in and Disagreements with Accountants on
                       Accounting and Financial Disclosure............      26

PART III      10.  Directors and Executive Officers of the Company....      27

              11.  Executive Compensation.............................      27

              12.  Security Ownership of Certain Beneficial Owners
                       and Management.................................      27

              13.  Certain Relationships and Related Transactions.....      27

PART IV       14.  Exhibits, Financial Statement Schedules, and
                         Reports on Form 8-K..........................      28

SIGNATURES............................................................      29

EXHIBIT INDEX.........................................................      31

FINANCIAL DATA AND SCHEDULES..........................................     F-1





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                                     PART I


ITEM 1.   BUSINESS.


GENERAL

     DSET designs,  develops,  markets and supports standards-based  application
development tools,  custom application  development  services,  and Local Number
Portability  Solutions  ("LNP") and operational  support systems ("OSS") gateway
products for the global telecommunications  industry.  Network equipment vendors
utilize the Company's application  development tools to build applications which
manage  network  devices and  provision  new  services  such as voice,  data and
Internet access. The Company also provides application  development services for
those  customers who cannot devote  internal  resources to quickly build network
management,  number portability or OSS interconnection  solutions. The Company's
LNP and OSS interconnection solutions are used by telecommunications carriers to
facilitate  the flow of information  between  competing  carriers'  networks and
their   respective   OSSs.   Most  of   DSET's   solutions   are  based  on  the
Telecommunications  Management  Network  ("TMN")  standard,  which  defines  the
functionality,  application  programming  interfaces  ("APIs") and communication
protocols  required  to  ensure  interoperability  within  and  between  carrier
networks that incorporate devices deployed from multiple vendors.  The Company's
current customers  include  Allegiance  Telecom,  AT&T,  BellSouth,  Choice One,
Fujitsu, Hitachi, Lucent, MCI, Samsung, Tellabs and US Xchange.

     Telecommunications  carriers face an  increasingly  competitive and complex
market environment due to continued deregulation and privatization of the global
telecommunications industry. Consequently, telecommunications carriers worldwide
are investing  aggressively in new  technologies and equipment to enhance access
to their networks and expand  systems  capacity or bandwidth in order to provide
new and enhanced services. As a result,  telecommunication equipment vendors are
delivering a variety of new  technologies and equipment to address the carriers'
requirements,  including SONET and SDH multiplexers,  dense wavelength  division
multiplexers  ("DWDM"),  ATM  switches,  next  generation  digital  loop carrier
systems,  wireless local loop systems and digital subscriber line products.  The
proliferation of new technologies,  equipment and services,  and the pressure to
deploy and provide them rapidly, has placed increased demands on the operations,
administration   and   management  of  carrier   networks.   In  addition,   the
Telecommunications  Act of  1996  mandated  access  to the  incumbent  carriers'
networks  and  OSSs in order to  enable  the  flow-through  of  information  and
services  between  new  competitive  carriers  and the  incumbents  in  order to
facilitate  customer  choice of  carriers.  As a result,  carriers  increasingly
require TMN-compliant  applications to facilitate the operation,  administration
and management of their networks and systems.

     The Company's highly functional and scalable TMN-based solutions (i) enable
carriers  to  remotely  manage  large  and  complex  telecommunication  networks
comprised of thousands of network  devices in a multi-vendor  environment;  (ii)
facilitate the rapid deployment of new

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<PAGE>
technologies   and   network   equipment   and   the   rapid   provisioning   of
telecommunications   services; and    (iii)   expedite   the    development   of
carrier-to-carrier   applications   which   enable   carriers   to  quickly  and
cost-effectively enter new markets.

     DSET's  objective is to become a leading  provider of applications  for the
telecommunications industry. Key elements of the Company's strategy include: (i)
delivering  pre-built  electronic bonding gateways that interconnect the OSSs of
competitive  local exchange  carriers  ("CLECs") and the regional bell operating
companies,  also known as the incumbent local exchange carriers ("ILECs");  (ii)
delivering  pre-built  network  management  applications  to  network  equipment
vendors  and  CLECs;  (iii)  expanding  distribution  in Europe  and Asia;  (iv)
pursuing strategic acquisitions of complementary businesses or technologies; and
(v)  continuing  to invest in  research  and  development  projects  to  enhance
existing  products  and develop  new  products  to support  emerging  technology
standards.

     The Company was incorporated in New Jersey in 1989. The Company's executive
offices are located at 1011 US Highway 22,  Bridgewater,  New Jersey 08807,  and
its telephone number is (908) 526-7500.

FORWARD-LOOKING STATEMENTS

     Statements  contained or incorporated by reference in this Annual Report on
Form 10-K that are not based on historical fact are "forward-looking statements"
within the meaning of Section 21E of the  Securities  Exchange  Act of 1934,  as
amended (the "Exchange  Act").  Forward-looking  statements may be identified by
the  use  of  forward-looking  terminology  such  as  "may,"  "will,"  "expect,"
"estimate," "anticipate," "continue," or similar terms, variations of such terms
or the negative of those terms. In particular, the Company's statements relating
to the Year 2000  compliance  of its products and internal  systems are forward-
looking  statements  intended  to qualify  for the safe  harbor  provided by the
Exchange Act. Such  forward-looking  statements involve risks and uncertainties,
including,  but not  limited  to: (i) the  Company's  dependence  on the rapidly
evolving  telecommunications  industry, (ii) the Company's dependence on the TMN
industry standard,  (iii) rapid technological  change in the Company's industry,
(iv) risks  associated  with the  development  and  marketing  of new  products,
including  carrier-to-carrier  applications,  such as LNP or OSS  gateways,  (v)
risks associated with acquisitions of businesses by the Company, including risks
relating  to  unanticipated  liabilities  or  expenses  or lower  than  expected
revenues of such acquired  businesses,  and (vi) risks and variables,  including
engineering  costs,  associated with the remediation of certain of the Company's
products which are not Year 2000  compliant.  The success of the Company depends
to a large degree upon  increased  utilization  of its  application  development
tools,   custom   application   development   services  and   carrier-to-carrier
applications,  such as LNP or OSS gateways, by  telecommunications  carriers and
network equipment vendors, and the buying patterns of CLECs. As a result of such
risks and others  expressed from time to time in the Company's  filings with the
Securities and Exchange  Commission  (the  "Commission"),  the Company's  actual
results may differ  materially  from the results  discussed in or implied by the
forward-looking statements contained herein.


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<PAGE>
PRODUCTS AND SERVICES

     The Company designs,  develops, markets and supports an integrated suite of
object-oriented  application  development tools and provides custom  application
development services,  both of which facilitate the rapid development of network
management applications for the global telecommunications  industry. The Company
also offers pre-built carrier-to-carrier  applications which facilitate the flow
of business information between competing carriers. Telecommunications equipment
vendors  utilize the Company's  tools and  development  services to build a full
range of TMN agent,  manager and LNP  applications.  CLECs utilize the Company's
pre-built electronic bonding gateways to interconnect their OSSs with the ILEC's
OSSs, such as an interface between order management systems.

APPLICATION DEVELOPMENT TOOLS

     DSET's application development tools enable its customers to rapidly create
scalable  solutions for the  management of network  devices  within  wireline or
wireless   telecommunications   networks.  The  Company  offers  two  suites  of
TMN-compliant  application  development  tools, the TMN Agent Tool Suite and the
TMN  Manager++  Tool Suite.  Telecommunications  equipment  vendors  utilize the
Company's TMN Agent Tool Suite to build agent  applications that are embedded in
their network devices and  subsequently  sold to and deployed by carriers.  Such
network devices include SONET multiplexers, DWDMs, digital loop carrier systems,
wireless base station  controllers  and ATM switches.  Carriers  utilize the TMN
Manager++  Tool Suite to build  applications  that assist in  remotely  managing
network  devices  from a specific  vendor and  facilitate  the  flow-through  of
information within the carrier's network management infrastructure.

     TMN Agent Tool Suite

     TMN agent  applications  built with DSET tools are  incorporated in network
devices and enable the remote  management of the devices and the  implementation
of new services, such as provisioning of new voice lines, Internet access, video
conferencing  and  advanced  voice  capabilities.  This  suite  of  agent  tools
includes:

    Visual Agent Builder                  GDMO Agent Toolkit
    Visual Agent Tester                   CMIP Translator
    CMIS/ROSE                             OODB Interfaces
    Distributed Systems Generator         Information Modeling Tools
    ASN.C Compiler                        Cross Development Kits
    GDMO Compiler                         OSI, RFC 1006, GR-303 Protocol Stacks

     TMN Manager++ Tool Suite

     The Company  introduced  the TMN Manager++ Tool Suite to customers on March
8, 1999.  The TMN  Manager++  Tool Suite  includes  the  Company's  original TMN
Manager Tool

                                       3
<PAGE>

Suite, together with enhancements such as an integrated development environment,
which increases  productivity in the  development of  applications.  TMN manager
applications  built  with DSET  tools  generally  reside on UNIX or  Windows  NT
workstations  and  interact  with  the  agent  applications  to  facilitate  the
monitoring of network  devices and to direct the  flow-through of information to
higher level applications,  such as fault management,  configuration management,
performance and security within the network management infrastructure.  This new
suite of manager  tools,  based on the NMF++  standard,  includes the  following
products:

    Manager Tester                         OSI, RFC 1006, GR-303 Protocol Stacks
    CMIS++/ROSE                            Manager Tool Kit
    Distributed Systems Generator++        Visual Manager Builder
    ASN.C++ Compiler                       Visual TMN Application Builder
    GDMO++ Compiler

     The OSI Stack and Information Modeling Tools are distributed by the Company
pursuant  to  distribution   arrangements   with  ATOS,  S.A.  and  Erisoft  AB,
respectively.  The Company's tools share a common software architecture enabling
a  wide  range  of  platform,   operating  system  and  communication   protocol
independence.  The  development  tools  operate in UNIX and Windows NT operating
systems and are supported on platforms from Sun  Microsystems,  Hewlett Packard,
IBM and Digital Equipment Corporation.  The Company also provides cross-platform
toolkits  so that the agent  applications  can be ported to run under  real time
operating  systems.  The  Company's  products  operate  with  leading  real time
operating systems,  including pSOS, VxWorks and VRTX, and also support a variety
of communication  protocols,  including OSI, RFC 1006,  TCP/IP and GR-303.  This
cross-platform  support  enables  DSET's  customers,   when  switching  platform
vendors, to preserve their investment in applications built with DSET's tools.

     The Company  licenses  its tools on both a suite and  individual  component
basis.  Prices for development  licenses of the tool suites typically range from
approximately  $150,000  to  $250,000,  depending  on  the  number  of  licensed
components and users. The Company's  license  agreements also typically  provide
for the payment of run-time royalty fees for applications  built with DSET tools
when such applications are shipped to carriers by the licensee.

CUSTOM APPLICATION DEVELOPMENT SERVICES

     DSET offers a broad range of value-added  application  development services
to its customers.  DSET currently  offers system design,  information  modeling,
complete "end-to-end" development, integrated testing and test plan simulations,
and design optimization services for rapid solution deployment.  The Company has
assembled a team of application  engineers with expertise in GDMO, ASN.1,  CMIP,
OSI,  TCP/IP and GR-303 (a  Bellcore  specification  for local  access)  the key
technologies  underlying  TMN,  as well as PCS and GSM,  to provide  application
development  services  to  telecommunications  equipment  vendors  and  carriers
worldwide.  DSET engineers utilize DSET's tools, their accumulated TMN expertise
and their knowledge of specific

                                       4
<PAGE>

hardware   environments  to  develop  agent,   manager  and   carrier-to-carrier
applications.  The  Company  generally  retains  the  right to  rebuild  similar
applications for other customers.

     The  Company's  application  development  services  projects are  generally
individually  negotiated  and  contracted  for  on  a  fixed  price  basis  with
performance and payment milestones. Prices for such projects vary depending upon
the size and scope of the project and estimated time to completion. There can be
no assurance that the Company will be able to accurately  estimate the resources
required for its fixed price projects or complete its contractual obligations in
a timely  manner  consistent  with the project plans upon which such fixed price
projects are based.

CARRIER-TO-CARRIER APPLICATIONS

     As a result of the  Telecommunications  Act of 1996,  the FCC has  required
local  exchange  carriers to support  the  implementation  of LNP which  enables
customers to move from their  current  telephone  carrier to another,  without a
change in telephone  number.  LNP applications  require a significant  amount of
information  to be  exchanged  electronically  between  carriers  and the  seven
FCC-approved Number Portability  Administration  Centers ("NPACs") managed by an
independent third party company.

     During 1998, DSET introduced new  applications  which address LNP. DSET has
built a local service management system ("LSMS") application, which provides the
required TMN interface between the telephone  companies and the NPACs. A LSMS is
the "local  database  manager" for all numbers ported through NPACs. A carrier's
LSMS  receives  information  from the NPAC  about  subscribers  who are  porting
telephone  numbers  from one carrier to another and then  downloads  information
about the ported  numbers to the  relevant  network  devices.  The Company  also
markets a product called the NPAC  Simulator  which helps carriers and equipment
vendors simulate the performance of the NPAC which shortens the interoperability
testing time necessary for certifying the TMN interface.

     The  Telecommunications Act of 1996 also stipulated that ILEC's unbundle or
decouple portions of their networks and make them available to the CLECs. Of the
thousands of CLECs today, approximately 100 to 200 are purchasing central office
switches.  These facility-based CLECs then order from the ILEC the "local loop,"
also called the last mile, which connects the customer (business or consumer) to
the ILEC's central  office  switch.  The ILEC must unbundle this local loop. The
CLEC requests to order an unbundled local loop have been  predominantly  handled
by fax  transmissions  which  result in frequent  communication  inefficiencies.
Facsimile and overnight delivery services simply cannot accommodate the required
information flow between the competing carriers.  An alternative is to utilize a
software  application  known as an electronic  bonding  gateway.  These gateways
process  orders  electronically  between two  companies,  in this case,  between
competing telecommunications service providers.

     The Company  began  shipping two  electronic  bonding  gateways,  the Local
Service Order  Administration  ("LSOA")  gateway and the Local  Service  Request
("LSR") gateway, in the third and fourth quarters of 1998, respectively. The LSR
gateway  enables the CLEC to send an order from its order  management  system to
the ILEC's  order  management  system to request  that the 

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local loop be plugged into the CLEC's new central office  switch.  Once the CLEC
gets  confirmation  that it can get the local loop from the ILEC, it must notify
the NPAC. The LSOA gateway sends a message to the NPAC,  alerting it to the fact
that a customer  has switched  from an ILEC to a CLEC.  The message will in turn
trigger  messages to be sent from the NPAC to each  carrier's  LSMS,  which will
ensure that the new CLEC  customer can keep their local  telephone  number.  The
Company  believes these two gateways are critical to reducing the time necessary
for a CLEC to turn on service for a new  customer;  the target is to reduce what
now takes four to six weeks to only one week.

     The Company has  announced  four  additional  gateways  for delivery in the
second  quarter of 1999. The Access Service  Request  gateway (ASR)  facilitates
ordering  dedicated trunks from the ILEC, the Line  Information  Database (LIDB)
provides  for calling  card  validation,  the  Calling  Name  Management  (CNAM)
provides  customer  name  verification  for  "caller ID"  services  and the E911
gateway  addresses  emergency  services.  All of these gateways  assist CLECs in
ordering  network  capabilities  from the ILEC, or updating the service  bureaus
that support services such as caller ID or emergency services.

     Individual  gateways are licensed to carriers for fees ranging from $75,000
to $500,000,  depending upon gateway type and  complexity.  All six gateways are
marketed  under the name "ILEC in a Box" and CLECs can order between two and six
gateways.  The  price  for this  suite  of  gateways  ranges  from  $150,000  to
$1,100,000.  Maintenance, consulting services and custom integration to OSSs are
also available as optional services.  ILEC interoperability  interfaces built in
accordance  with Joint  Implementation  Agreements  between  ILECs and CLECs are
available on a licensed or custom-built basis.

     In an effort to  continue  to deliver new  solutions  to CLECs,  in January
1999, the Company acquired certain assets of Network  Programs,  LLC ("NPL"),  a
company  specializing in software aimed at automatically  comparing the services
offered  by the ILEC to a  catalog  of  services  the CLEC  has the  ability  to
provide.  The results of the comparison are processed and subsequently produce a
"sales proposal"  enabling the CLEC sales team to more efficiently  compete with
other  CLECs  and  ILECs.  There  can be no  assurance  that  the  Company  will
successfully   market  these  new   applications  to  CLECs  or  that  such  new
applications will achieve market acceptance.

CUSTOMER SUPPORT SERVICES

     The Company  believes  that its ability to provide a high level of customer
support is critical to achieving long term customer  satisfaction.  Accordingly,
the Company has increased  its customer  support staff and expanded its services
offerings.

     Maintenance.   The   Company's   maintenance   services   include   problem
identification  and  notification,  work-around  solutions,  temporary  software
patches and bug fixes. Depending upon the complexity of the problem, the Company
provides  technical  support  solutions via  electronic  mail,  website  access,
telephone or on-site support.  Such services are offered to all licensees of the
Company's application  development tools under maintenance contracts,  for which
the Company  typically  charges 18%  annually of the list price of the  products
licensed by the

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customer.  The Company utilizes a number of procedures to ensure prompt service,
including  tracking all technical  support  issues in a  computerized  system to
ensure same-day acknowledgment of the customer report.  Domestically,  technical
support is  provided  directly by the  Company's  technical  support  engineers.
Internationally,   local  distributors,  supported  by  the  Company's  regional
offices,  provide first line technical support services.  The Company's products
generally  are covered by a 90-day  warranty  which covers  defects in the media
provided to the  customer,  as well as a warranty for Year 2000  compliance.  In
certain circumstances, the Company has provided a warranty that its products, as
delivered, will meet customer specifications.

     Software  Upgrades.   In  most  cases,  the  Company  provides  its  annual
maintenance customers with the option to receive product upgrades, including new
releases and product  patches,  for no additional fee.  Software  patches may be
downloaded by customers  from the Company's  website.  Software  upgrades may be
purchased  for an  additional  fee by customers  which have not  contracted  for
annual maintenance services.

     Consulting Services.  The Company provides a variety of consulting services
to its  customers.  Such  consulting  services  include  architectural  reviews,
debugging customer  applications,  performance tuning, product porting and other
related services.  The provision of consulting  services often leads to sales of
application development tools.

     Training.  DSET  provides  a variety  of  training  courses  which  educate
software  developers  on the use of its  tools  or  end-users  on the use of its
gateways.  The courses are offered on a fee basis at the Company's  headquarters
and at  customer  sites.  The courses  range from basic tool  training to highly
advanced  telecommunications  standards and software  topics.  In addition,  the
Company offers customized training to meet specific customer requests.

TECHNOLOGY

     From its  founding in 1989,  the  Company  has  focused on the  creation of
applications  that could be distributed  among many processors in order to solve
highly  complex  problems in the network  management  arena.  Additionally,  the
Company has developed extensive knowledge of requirements for multi-protocol and
multi-vendor communications as well as real time operating systems. In the early
1990's,  the Company  made a strategic  decision to focus on creating  suites of
tools that  facilitate the development of solutions based upon the TMN standard.
Through these efforts,  the Company's  engineers  broadened  their  expertise in
GDMO,  CMIP,  ASN.1 and OSI, the key  technologies  underlying TMN, as well as a
variety of other emerging technologies.

     The Company has leveraged its experience in distributed technologies to add
value to the TMN-based toolkits and to differentiate its application development
tools from those of its  competitors.  The  Company's  distributed  technologies
allow for concurrency, or multi-threading, and scalability for the processing of
significant  amounts of management  information.  The Company  believes that the
multi-threading  and scalability  capabilities  of its  application  development
tools  are  competitive  advantages.   Many  competitive   alternatives  utilize
sequential

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<PAGE>

processing which cannot take full advantage of the multi-processing capabilities
of high performance computing platforms.

     The  Company's   innovative   software   technologies   include   sub-agent
capabilities,  which,  in  conjunction  with the  Company's  virtual  management
information  tree capability,  enable the management of millions of objects.  In
addition, DSET's products can support simultaneous  synchronous/asynchronous and
connection-oriented/connection-less     inter-process    communications.    This
capability,  in addition to ensuring the high performance of applications,  also
facilitates  integration with third-party products. DSET has also simplified the
process of using these complex  technologies  by developing  high level APIs and
GUIs.

CUSTOMERS

     The Company's customers are primarily  telecommunications network equipment
vendors and carriers. The following is a partial list of customers who purchased
products or services during 1998.


    Accelerated Networks                       Lucent
    Alcatel                                    MaxComm Technologies
    Allegiance Telecom                         MCI
    Ameritech                                  Net2000
    AT&T                                       Nortel Networks
    BellSouth                                  Ovation
    Carrier Access Corp.                       Samsung
    Choice One                                 Siemens Canada Ltd.
    Fujitsu                                    Southwestern Bell Telephone Co.
    Hitachi                                    Tellabs
    Italtel                                    Tollbridge Technologies
    Lockheed Martin IMS                        US Xchange


     The Company had one  significant  customer in each of the three years ended
December 31, 1998.  Sales to Hitachi  accounted for  approximately  18% of total
revenues in the year ended  December 31, 1996.  Sales to Samsung  accounted  for
approximately  12% of total revenues in the year ended December 31, 1997.  Sales
to DSC Communications  (now known as Alcatel) accounted for approximately 17% of
total revenues in the year ended December 31, 1998. The Company anticipates that
its  results of  operations  in any given  period  will  continue to depend to a
significant  extent  upon  sales to a small  number  of  customers.  Other  than
customer  agreements which provide for minimum  royalties for run-time  licenses
and maintenance,  none of the Company's  customers has entered into an agreement
requiring minimum purchases from the Company. The Company's software development
services  agreements  with its  customers  generally can be terminated by either
party with limited or no advance notice, and without significant  penalty.  Many
of the Company's customers may also be competitors of the Company.


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SALES AND MARKETING

     The Company  markets its  products  and  services  through its direct sales
organization in North America and Asia and  international  distributors in South
America,  Europe, Israel and Asia. As of December 31, 1998, the Company's direct
field  sales force  consisted  of 14 sales  people  supported  by 10  consulting
engineers based in its New Jersey, California and Texas offices.

     The Company also markets its products and services through direct sales and
non-exclusive  distributors  in China,  Taiwan,  South  Korea and Japan.  Sales,
marketing and technical support is provided to the international distributors by
DSET personnel in the United States.  The Company utilizes TMN Tools, S.A. ("TMN
Tools"),  its joint venture  created in May 1997 with ATOS,  S.A., to distribute
DSET's  products  and  services  in Europe and Israel.  TMN Tools has  exclusive
rights to sell the Company's products in such territories pursuant to a two-year
contract ending on May 21, 1999.

     In general, the non-exclusive  distributor  agreements require distributors
to use their best  efforts  to  promote  and  solicit  orders for the  Company's
products and allow distributors to use the Company's  trademarks and trade names
in advertising and promoting Company products. Typically, distributors receive a
commission  of 30% of the sale price of the  Company's  products  and 30% of any
maintenance and training sales. Commissions are payable only after the Company's
receipt of the total  revenues  for such  sale.  Customers  purchasing  products
through non-exclusive distributors are required to enter into license agreements
with the Company.

     The Company has a lengthy sales cycle for application development tools and
custom  application  development  services and believes  that the period of time
between  initial  customer  contact  and  execution  of a license  agreement  or
development  services  contract  typically  ranges  from  four to  nine  months.
Telecommunications  carriers and network  equipment  vendors  typically  conduct
extensive  and  lengthy  product   evaluations  before  purchasing  software  or
application  development  services.  The sales cycle for CLECs is  approximately
three to four months.

     The Company has implemented  marketing initiatives to support the sales and
distribution of its products and services.  The objective of these efforts is to
inform customers of the capabilities and benefits of the Company's  products and
services. Marketing programs include on-site customer seminars, participation in
industry  trade  shows and  forums,  distribution  of  marketing  materials  and
dissemination  of  information  concerning  products  and  services  through the
Company's website.



                                       9
<PAGE>
RESEARCH AND PRODUCT DEVELOPMENT

     The  Company  believes  that its future  success  depends on its ability to
develop and introduce  applications  that embrace new  technologies and evolving
industry  standards to meet the rapidly  changing  demands of customers  and the
marketplace.  The Company's research and product development objectives focus on
compatibility  with new technologies and enhancement of products and services in
response to customer  needs and  industry and market  trends.  While the Company
expects that new  applications  will  continue to be developed  internally,  the
Company  may,  based on  timing  and cost  considerations,  acquire  or  license
technologies, products or applications from third parties.

     The Company is building several new products and allocates its research and
product  development  resources in response both to market research and customer
demands for additional features and products.  The Company's product development
strategy  involves  rolling out  initial  versions  of its  products  and adding
features over time. The Company regularly incorporates product feedback received
from customers into its product development  process. The Company's research and
product  development  efforts are principally  focused on (i) the enhancement of
existing  products  to  support  new  features;  (ii)  the  development  of  new
electronic bonding gateways and related applications;  and (iii) new development
platforms/frameworks  that  will  support  emerging  technology  standards.  The
Company  recently  began  shipping  several new  products  that support C++ APIs
endorsed by the Telemanagement  Forum and is utilizing other technologies,  such
as CORBA and Java.

     The Company  employs highly  qualified  engineers and utilizes its in-house
development  capabilities to efficiently  manage design processes and to shorten
product  introduction  lead  times.  The Company  seeks to  maximize  the use of
existing technology to minimize time to market of its products and applications.
Most of the Company's  research and development  personnel hold  engineering and
other advanced  technical  degrees.  The Company's research and development team
consisted of 82 engineers and engineering  services personnel as of December 31,
1998. The Company's  research and development  expenditures  were  approximately
$1.3  million,   $3.3  million  and  $6.2  million  in  1996,   1997  and  1998,
respectively.

COMPETITION

     Competition  in DSET's  markets is intense and  involves  rapidly  changing
technologies,  evolving industry standards,  frequent new product  introductions
and rapid  changes  in  customer  requirements.  To  maintain  and  improve  its
competitive position,  DSET must continue to develop and introduce,  on a timely
and  cost-effective  basis,  new products,  features and services that keep pace
with the evolving  needs of its  customers.  The principal  competitive  factors
affecting the market for the Company's  software  tools are product  reputation,
quality,  performance,  price,  customer  support and product  features  such as
adaptability,   scalability,   ability  to   integrate   with  other   products,
functionality  and  ease  of  use.  The  Company  believes  that  the  principal
competitive factors in the market for application  development  services include
compliance with industry standards,  quality of service and deliverables,  speed
of development


                                       10
<PAGE>

and  implementation,  price,  project  management  capability  and technical and
business expertise.  The Company believes that the principal competitive factors
in the market for electronic  bonding  gateways include many of the same factors
as the market for application  development services together with the ability of
such  applications  to  support   additional   technologies  to  facilitate  the
flow-through of information between carriers' networks and systems.  While there
can be no assurance that the Company will be able to compete  effectively  based
upon such  competitive  factors,  DSET  believes  that its  capabilities  in the
products  it  has  built   differentiates  its  products  and  services  in  the
marketplace.

     The Company competes in the application development tools market with other
software  tool  providers.   The  Company's   competitors  in  the  markets  for
application  development  services and electronic  bonding  gateways include the
in-house development staffs of  telecommunications  carriers,  network equipment
vendors and systems integrators.  In addition,  there are new companies building
electronic  bonding  gateways which include other software vendors and companies
providing  order  management  systems.  Many  of  its  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.   Furthermore,   TMN,  as  an  open  systems
architecture,  can  lead to  increased  competition  as  third  parties  develop
competitive  products  and  services.  Competitors  may be able to respond  more
quickly to emerging technologies and changes in customer requirements.

INTELLECTUAL PROPERTY

     The Company's success and its ability to compete  effectively is dependent,
in part,  upon  its  proprietary  rights.  The  Company  relies  primarily  on a
combination  of copyright,  trademark,  patent and trade secret laws, as well as
confidentiality  procedures  and  contractual  restrictions,  to  establish  and
protect its proprietary rights.  Furthermore,  the Company generally enters into
non-competition,  non-disclosure  and invention  assignment  agreements with its
employees and consultants, and into non-disclosure agreements with its customers
and distributors.  There can be no assurance that such measures will be adequate
to protect the Company's proprietary rights.

     Additionally, the Company may be subject to further risks as it enters into
transactions  in  countries  where  intellectual  property  laws  are  not  well
developed  or are  difficult  to enforce.  Legal  protections  of the  Company's
proprietary  rights may be  ineffective  in such  countries.  Litigation  may be
necessary to defend and enforce the Company's  proprietary  rights,  which could
result in substantial costs and diversion of management resources and could have
a material  adverse effect on the Company's  business,  financial  condition and
results of  operations,  regardless  of the final  outcome  of such  litigation.
Despite the Company's  efforts to safeguard and maintain its proprietary  rights
both in the United States and abroad, there can be no assurance that the Company
will be  successful  in doing so or that the steps  taken by the Company in this
regard will be adequate to deter  misappropriation  or  independent  third-party
development  of the  Company's  technology or to prevent an  unauthorized  third
party from copying or otherwise  obtaining and using the  Company's  products or
technology.  Any of such  events  could  have a material  adverse  effect on the
Company's business, financial condition and results of operations.


                                       11
<PAGE>

     The Company or its employees may become  subject to claims of  infringement
or  misappropriation  of the  intellectual  property  rights of  others.  In its
licenses and  software  development  and  distribution  agreements,  the Company
agrees  to  indemnify  its  customers  and  distributors  for any  expenses  and
liabilities  resulting  from  claimed  infringements  of  patents,   trademarks,
copyrights or other proprietary rights of third parties. The Company attempts to
limit its liability to the value of the  agreement,  however,  the amount of the
Company's indemnity obligations may be greater than the revenues the Company may
have  received  under  such  agreements.  There can be no  assurance  that third
parties will not assert  infringement  or  misappropriation  claims  against the
Company,  its  customers  or  distributors  in the  future  with  respect to its
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 the Company to enter into royalty or
licensing arrangements. Such royalty or licensing arrangements, if required, may
not be available on terms acceptable to the Company, if at all, which could have
a material  adverse effect on the Company's  business,  financial  condition and
results of operations.

     A portion of the Company's revenues is generated from run-time royalty fees
which  generally  become  due  upon  the  deployment  by  equipment  vendors  to
telecommunications  carriers of network devices which have embedded applications
built with the Company's software.  Such customers are contractually required to
periodically  report their sales to the Company.  The Company's  sales contracts
typically provide for the Company's right to audit reported sales.  There can be
no assurance,  however, that such customers will accurately report such sales or
that the Company will be able to effectively monitor and enforce its contractual
rights with respect to such fees.

EMPLOYEES

     As of December 31, 1998, the Company had a total of 170  employees.  Of the
total, 82 were in engineering and product  development,  18 were in professional
services, 31 were in sales and sales support, 20 were in administration, finance
and  operations,  8 were in  customer  service,  and 11 were in  marketing.  The
Company's  future  performance  depends in  significant  part upon the continued
service of its management,  key product and application engineers, and sales and
technical sales support personnel. Competition for such personnel is intense and
there can be no assurance  that the Company will be  successful in attracting or
retaining  such  personnel in the future.  None of the  Company's  employees are
represented  by  a  labor  union  or  are  subject  to a  collective  bargaining
agreement.  The Company has not experienced any work stoppages and considers its
relations with its employees to be good.

     In connection  with the acquisition of certain assets of NPL on January 25,
1999, the Company hired  approximately 22 systems engineers formerly employed by
NPL.

                                       12
<PAGE>
ITEM 2.   PROPERTIES.

     The Company's  executive  offices,  research and product  development,  and
primary production operations are located in Bridgewater,  New Jersey, where the
Company occupies  approximately  19,755 square feet pursuant to a lease expiring
in 1999.  The annual rent and  maintenance  for the  facility  is  approximately
$328,000.  In  addition,  the  Company has entered  into a  short-term  lease in
Branchburg,  New Jersey for 10,000 square feet of additional  office space which
lease expires on June 1, 1999.  The rent for such facility is $15,000 per month.
Effective  May 29,  1999,  the  Company  will  commence a ten-year  lease of new
corporate  offices in  Bridgewater,  New Jersey,  which  includes  executive and
administrative,   research  and  development,   and  operations   offices,   for
approximately  45,679 square feet with an annual rent of approximately  $770,000
per year for the first three years.  Thereafter  certain rent escalation clauses
become  effective.  In addition,  the Company leases 5,465 square feet of office
space for a professional services office in Richardson,  Texas. The Company also
leases  facilities in Campbell,  California and Fremont,  California,  occupying
2,797 square feet and 3,275 square feet,  respectively.  In February  1999,  the
Company  moved  employees  to  its  Campbell  office  and  closed  its  Fremont,
California  office.  Pursuant  to the lease  agreement  for such  location,  the
Company remains  obligated until December 2002 at an approximate  annual rent of
$72,500.   Management  is  actively  pursuing  sublease  alternatives  for  this
location.  The Company's  subsidiary,  Chengdu DSET Science and Technology  Co.,
Ltd., leases approximately 2,100 square feet of office space in Chengdu,  China.
See Note 11 of Notes to  Financial  Statements  for  information  regarding  the
Company's  obligations  under such leases.  The Company  believes  that suitable
additional  or  alternative  space will be available  as needed on  commercially
reasonably terms.


ITEM 3.   LEGAL PROCEEDINGS.

     The Company is not a party to any material legal proceedings.


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

     Not applicable.



                                       13
<PAGE>
                                     PART II


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

     Prior to March  1998,  there was no  established  market  for shares of the
Company's Common Stock. Since March 13, 1998, the Common Stock has traded on the
Nasdaq  National  Market  ("NNM")  under the symbol  "DSET." The initial  public
offering price per share in the Company's initial public offering was $16.00 per
share.

     The following table sets forth the high and low sales price information for
the Common Stock for each of the quarters in the period beginning March 13, 1998
as reported on the NNM. Such quotations  reflect  inter-dealer  prices,  without
retail   mark-up,   mark-down  or  commission  and  may  not  represent   actual
transactions.

         Quarter Ended                      High            Low
     ---------------------------------------------------------------

     March 31, 1998..............         $22.00          $17.00
     June 30, 1998...............         $21.875         $13.375
     September 30, 1998..........         $19.875         $ 7.187
     December 31, 1998...........         $15.75          $ 6.187

     As of March 1,  1999,  the  approximate  number of holders of record of the
Common Stock was 100 and the  approximate  number of  beneficial  holders of the
Common Stock was 2,129. 

     The Company has never  declared or paid any cash  dividends  on its capital
stock.  The Company intends to retain any earnings to fund future growth and the
operation of its business and,  therefore,  does not anticipate  paying any cash
dividends in the foreseeable future.

Changes in Securities

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

                                       14
<PAGE>

     OPTION GRANTS

     1.   During the fourth quarter of 1998,  the Company  granted stock options
          pursuant  to its 1998 Stock Plan which were not  registered  under the
          Securities Act of 1933, as amended (the "Securities Act"). All of such
          option  grants were  granted at the then  current fair market value of
          the Common Stock.  The following table sets forth certain  information
          regarding such grants during the quarter:

                                             WEIGHTED
                                             AVERAGE
                         NUMBER              EXERCISE
                        OF SHARES             PRICE
                        ---------             -----
 
                         323,000            $  8.68

     COMMON STOCK ISSUANCES

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

                                             WEIGHTED
                                             AVERAGE
                         NUMBER              EXERCISE
                        OF SHARES             PRICE
                        ---------             -----
                         159,025            $  2.04


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

                                       15
<PAGE>

     Use of Proceeds from Initial Public Offering

     On  March  12,  1998,  the  Commission  declared  effective  the  Company's
Registration Statement  (Registration Statement No. 333-43827) as filed with the
Commission in connection  with the Company's  initial public  offering of Common
Stock, which was managed by BT Alex. Brown Incorporated,  BancAmerica  Robertson
Stephens and  SoundView  Financial  Group,  Inc.  Pursuant to such  Registration
Statement,  the Company  registered and sold an aggregate of 2,500,000 shares of
its Common Stock,  for a gross  aggregate  offering price of $40.0 million.  The
Company incurred  underwriting  discounts and commissions of approximately  $2.8
million.  In connection with such offering,  the Company incurred total expenses
of approximately $1.1 million. As of December 31, 1998, all of the $36.1 million
in net proceeds  received by the Company  upon  consummation  of such  offering,
pending specific application, were invested in short-term securities of grade A2
or better with maturities of two years or less.

     On January 25, 1999, DSET Acquisition  Corp., a wholly-owned  subsidiary of
the Company,  consummated the acquisition of certain assets of Network  Programs
LLC, a Delaware limited liability company ("NPL").  The purchase price consisted
of  $2,500,000  payable in cash to NPL.  NPL  provided  specialized  software to
CLECs.


ITEM 6.   SELECTED FINANCIAL DATA.

     The selected  financial  data set forth below with respect to the Company's
statement  of income data for each of the years in the  three-year  period ended
December  31, 1998,  and with respect to the balance  sheet data at December 31,
1997 and 1998 are derived  from and are  qualified  by  reference to the audited
financial statements and the related notes thereto of the Company found at "Item
14.  Exhibits,  Financial  Statement  Schedules,  and  Reports on Form 8-K." The
statement of income data for the years ended  December 31, 1994 and December 31,
1995 and the  balance  sheet data as of  December  31,  1994,  1995 and 1996 are
derived from audited 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, the  Company's  audited
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.



                                       16
<PAGE>
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                           -----------------------------------------------
                                                           1994       1995      1996       1997       1998
                                                           ----       ----      ----       ----       ----
                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
<S>                                                       <C>        <C>       <C>       <C>        <C>    
  Revenues:
    License revenues...................................   $2,838     $5,734    $7,005    $10,850    $16,338
    Service revenues...................................    1,172      2,179     6,111      8,515     12,952
                                                          ------     ------    ------    -------    -------
     Total revenues....................................    4,010      7,913    13,116     19,365     29,290
                                                          ------     ------    ------    -------    -------
   Cost of revenues:
    License revenues...................................       17         74       133      1,274      1,775
    Service revenues...................................      301        436     2,149      3,405      3,692
                                                          ------     ------    ------    -------    -------
     Total cost of revenues............................      318        510     2,282      4,679      5,467
                                                          ------     ------    ------    -------    -------
  Gross profit.........................................    3,692      7,403    10,834     14,686     23,823
                                                          ------     ------    ------    -------    -------
  Operating expenses:
    Sales and marketing................................    1,444      2,588     4,255      4,986      9,193
    Research and product development...................      517        865     1,328      3,299      6,237
    General and administrative.........................      860      1,297     2,381      2,881      2,708
                                                          ------     ------    ------    -------    -------
     Total operating expenses..........................    2,821      4,750     7,964     11,166     18,138
                                                          ------     ------    ------    -------    -------
  Operating income.....................................      871      2,653     2,870      3,520      5,685
                                                          ------     ------    ------    -------    -------
Net income.............................................   $  572     $1,705    $2,013     $2,469    $ 4,794
                                                          ======     ======    =======    ======     ======

Net income per common share............................   $ 0.10     $ 0.28    $ 0.37    $  0.45    $  0.53
Weighted average number of common shares outstanding...    5,760      6,003     3,309      3,567      9,012
Net income per common share assuming dilution..........   $ 0.10     $ 0.26    $ 0.27    $  0.30    $  0.43
Weighted average number of common shares and common
 equivalent shares outstanding.........................    5,807      6,490     7,393      8,346     11,043

Pro forma:(1)
  Net income per common share..........................                                  $  0.37
  Weighted average number of common shares outstanding.                                    6,610
  Net income per common share assuming dilution........                                  $  0.30
  Weighted average number of common shares and common
   equivalent shares outstanding.......................                                    8,346


                                                                            DECEMBER 31,
                                                           -----------------------------------------------
                                                           1994       1995      1996       1997       1998
                                                           ----       ----      ----       ----       ----
                                                                          (IN THOUSANDS)
BALANCE SHEET DATA:
  Cash, cash equivalents and marketable securities.....   $  312     $7,004    $1,778    $ 3,206    $45,023
  Working capital......................................    1,113      2,541     4,284      6,276     49,037
  Total assets.........................................    2,651     10,424     7,445     13,315     56,854
  Series A preferred stock.............................       --      9,943    10,744     11,604         --
  Retained earnings....................................      918      2,117     3,328      4,937      9,731
  Total shareholders' equity (deficit).................    1,641     (6,669)   (5,410)    (3,401)    51,189

(1) Gives  effect to the  automatic  conversion  of all issued  and  outstanding shares of Series A Preferred
    Stock into 3,043,625 shares of Common Stock upon the consummation of the Company's initial public offering.
</TABLE>


                                       17
<PAGE>
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.


OVERVIEW

GENERAL

     DSET designs,  develops,  markets and supports standards-based  application
development tools,  custom  application  development  services,  and LNP and OSS
gateway products for the global  telecommunications  industry. From its founding
in 1989, the Company has focused on the creation of  applications  that could be
distributed  among many processors in order to solve highly complex  problems in
the network  management arena.  Additionally,  the Company  developed  extensive
knowledge of requirements for multiple protocols and multi-vendor communications
as well as real time operating systems.  In the early 1990's, the Company made a
strategic  decision to focus on  creating  suites of tools that  facilitate  the
development of TMN  solutions.  Substantially  all of the Company's  revenues to
date has been derived from application  development  tools and services based on
TMN standards.  The Company's  recently developed  pre-built  carrier-to-carrier
applications  facilitate  the flow of  business  information  between  competing
carriers  and their  respective  OSSs.  The  Company's  success  will  depend on
continued  growth in the market for  advanced  telecommunications  products  and
services.  In the years ended  December 31, 1997 and 1998,  the Company  derived
approximately 56.0% and 55.8%, respectively,  of its total revenues from license
revenues and approximately 44.0% and 44.2%, respectively,  of its total revenues
from service revenues.

     DSET's  license  revenues  are  derived  from the  sale of its  application
development  tools to customers  under  contracts  which  generally  provide for
license fees and run-time royalty fees. The Company licenses its tools on both a
suite and individual  component  basis.  Prices for development  licenses of the
Company's tool suites typically range from  approximately  $150,000 to $250,000,
depending  on the number of  licensed  components  and  development  users.  The
Company's  license   agreements  also  typically  provide  for  the  payment  of
maintenance (recorded as service revenues) and run-time royalty fees at the time
of deployment  by equipment  vendors to  telecommunications  carriers of network
devices which have embedded  applications built with the Company's  software.  A
run-time  license  permits  an  equipment  vendor  to  incorporate  applications
developed with the Company's software tools in such vendor's  telecommunications
network devices.  License  revenues from development  licenses are recognized at
the time the  product is  shipped to the  customer.  Run-time  royalty  fees are
recognized  as the  Company is  notified  of such  deployment.  Notification  is
typically  received from customers pursuant to quarterly reports or via purchase
orders for individual licenses.  In addition,  license revenues are derived from
the sale of  electronic  bonding  gateways to  carriers  under  contracts  which
provide for license fees. Prices for licenses of the electronic bonding gateways
range  from  $150,000  to  $1,100,000   depending  on  the  number  of  licensed
components.

     The  Company's   service  revenues  are  comprised  of  fees  derived  from
application development services, maintenance fees, and other revenues generated
from customer support 

                                       18
<PAGE>

services.   The  Company's   application   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 to completion. Revenues from application development services are
generally  recognized on a percentage of completion  basis  calculated as direct
labor costs are incurred in relation to estimated  total costs at completion for
each  project.  The  cumulative  impact of revisions in percentage of completion
estimates  is  reflected  in  the  period  in  which  the  revisions  are  made.
Maintenance  services,  for which the Company  typically charges 18% annually of
the list price of the products licensed by the customer, may be purchased at the
customer's  option.  Maintenance fees are recognized as service revenue over the
term of the maintenance period, which is typically a 12-month term.

     The Company had one  significant  customer in each of the three years ended
December 31, 1998.  Sales to Hitachi  accounted for  approximately  18% of total
revenues in the year ended  December 31, 1996.  Sales to Samsung  accounted  for
approximately  12% of total revenues in the year ended December 31, 1997.  Sales
to DSC Communications  (now known as Alcatel) accounted for approximately 17% of
total revenues in the year ended December 31, 1998. The Company anticipates that
its  results of  operations  in any given  period  will  continue to depend to a
significant  extent upon sales to a small  number of  customers.  As a result of
this customer concentration,  the Company's revenues from quarter to quarter and
business,  financial  condition  and  results  of  operations  may be subject to
substantial period-to-period fluctuations.

     The Company's costs of license revenues consist primarily of royalties paid
to third party software  companies.  The Company  generally is 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  and  software
utilized for development purposes. Research and product development expenses are
generally  charged to  operations  as such  costs are  incurred.  The  Company's
research and development projects are evaluated for technological feasibility in
order to determine whether they meet  capitalization  requirements.  The Company
has not  capitalized  any  research  and  development  expense in the last three
years. General and administrative  expenses are comprised of personnel costs and
occupancy costs for administrative,  executive and finance personnel. During the
year ended  December  31,  1997,  deferred  stock  compensation  of $875,835 was
recorded for options  granted during the year.  This amount will be amortized to
compensation expense over the vesting period of the options (two to four years).
At December 31, 1998,  the remaining  unamortized  deferred  stock  compensation
balance was $494,306. See Note 7 of Notes to Financial Statements.

     The Company  markets and sells its products  and services  through a direct
sales  force  in North  America  and Asia and  directly  and  indirectly  though
distributors in South America, Europe, Israel and Asia. Typically,  distributors
receive a commission of 30% of the sale price of the Company's  products and 30%
of any maintenance  and training  sales.  Commissions are payable only after the
Company's  receipt of the total revenues for such sale. In May 1997, the 

                                       19
<PAGE>

Company  entered into a joint  venture  with ATOS,  S.A. to form TMN Tools which
currently  serves as the Company's  exclusive  sales and marketing arm in Europe
and Israel.  The Company owns 49% of the  outstanding  equity  securities of TMN
Tools.

     The Company  derives a portion of its  revenues  from  international  sales
which constituted approximately 15%, 27% and 38% of the Company's total revenues
in  1998,  1997  and  1996,  respectively.  The  Company's  international  sales
currently are United States dollar-denominated.  As a result, an increase in the
value of the United States dollar relative to foreign  currencies could make the
Company's products and services less competitive in international markets.

     On January 25, 1999, DSET Acquisition  Corp., a wholly-owned  subsidiary of
the Company,  consummated the acquisition of certain assets of Network  Programs
LLC, a Delaware limited liability company ("NPL").  The purchase price consisted
of  $2,500,000  payable in cash to NPL.  NPL  provided  specialized  software to
CLECs.  Management  expects the NPL  Acquisition to be accretive to earnings for
the fiscal year ending December 31, 1999.


RESULTS OF OPERATIONS

     Years Ended December 31, 1998 and December 31, 1997

     Revenues.  Total  revenues  increased  51.3% to $29.3  million in 1998 from
$19.4 million in 1997.  License revenues  increased by 50.6% to $16.3 million in
1998 from $10.9 million in 1997. This increase was primarily  attributable to an
increase  in  market   acceptance  of  the  Company's   TMN-based  agent  tools,
recognition  of run-time  royalties,  and licenses  associated  with OSS gateway
products.  Service  revenues  increased 52.1% to $13.0 million in 1998 from $8.5
million in 1997. This increase was attributable  primarily to custom application
development projects, fees from consulting services and training courses and new
customers  purchasing  the Company's  GR-303  solutions,  which  include  custom
application development work.

     Gross profit.  The Company's gross profit  increased 62.2% to $23.8 million
in 1998 from $14.7 million in 1997. Gross profit  percentage  increased to 81.3%
of total  revenues  in 1998 from  75.8% in 1997.  Gross  profit  percentage  for
license revenues increased to 89.1% in 1998 from 88.3% in 1997 due to less third
party  software as a component  of sales.  Gross profit  percentage  for service
revenues  increased  to 71.5% in 1998  from  60.0% in 1997.  This  increase  was
attributable to higher margins  associated with  consulting  services,  training
revenues,  an  increase  in the average  billing  rate and new GR-303  solutions
purchased by network equipment vendors.

     Sales and marketing expenses.  Sales and marketing expenses increased 84.4%
to $9.2  million in 1998 from $5.0  million in 1997 and  increased to 31.4% from
25.7% of total  revenues.  The  increase  in sales  and  marketing  expenses  in
absolute   dollars  and  as  a  percentage  of  total   revenues  was  primarily
attributable  to  increased  personnel  and  related  costs  resulting  from the
increase in the Company's  sales force and an expanded  marketing  department as
well as higher variable expenses such as travel and living costs and commissions
related to higher sales.

                                       20
<PAGE>

     Research and product development expenses. Research and product development
expenses  increased 89.1% to $6.2 million in 1998 from $3.3 million in 1997, and
increased  from 17.0% to 21.3% of total  revenues.  The increase in research and
product  development  expenses  both in absolute  dollars and as a percentage of
total  revenues was due primarily to an increase in staffing and an expansion in
the number of new products under development.

     General and administrative  expenses.  General and administrative  expenses
decreased  6.0% to $2.7 million in 1998 from $2.9 million in 1997, and decreased
from 14.9% to 9.2% of total revenues. The decrease in general and administrative
expenses  in absolute  dollars and as a  percentage  of total  revenues  was due
primarily  to the  transition  of the  Company's  Chief  Technical  Officer from
administrative  functions to technical research and development  functions,  and
significantly lower recruiting costs.

     Interest  income and other  income/expenses,  net. Net interest  income and
other income/expenses increased to $1.7 million in 1998 compared to $126,000 for
1997. This increase was primarily due to  significantly  higher balances in cash
and short-term  investments as a result of the Company's initial public offering
of its Common Stock in March 1998.

     Income taxes. The Company's effective tax rate was 34.8% and 32.3% for each
of 1998 and 1997, respectively. The effective rate was higher than the statutory
tax rates in 1998 due to the  non-deductibility  of deferred stock  compensation
associated  with the issuance of stock  options,  offset by the  utilization  of
research and development tax credits.  In 1997, the effective tax rate was lower
than the statutory tax rates due to the  utilization of research and development
tax credits.

     Years Ended December 31, 1997 and December 31, 1996

     Revenues.  Total  revenues  increased  47.6% to $19.4  million in 1997 from
$13.1 million in 1996.  License revenues  increased by 54.9% to $10.9 million in
1997 from $7.0 million in 1996.  This increase was primarily  attributable to an
increase in market acceptance of the Company's  TMN-based tools and, to a lesser
extent,  distribution by the Company of the Marben OSI Stack.  Service  revenues
increased 39.3% to $8.5 million in 1997 from $6.1 million in 1996. This increase
was attributable  primarily to the initiation of several major projects in 1997,
including  a  $2.5  million  contract  with  Samsung,   which  resulted  in  the
recognition  of  $2.2  million  in  revenues  in  1997.  Samsung  accounted  for
approximately 12% of total revenues in 1997.

     Gross profit.  The Company's gross profit  increased 35.6% to $14.7 million
in 1997 from $10.8 million in 1996. Gross profit percentage decreased from 82.6%
of total  revenues  in 1996 to 75.8% in 1997.  The  decline in the gross  profit
percentage  for  license  revenues  from  98.1% in 1996 to 88.3% in 1997 was due
primarily  to the  commencement  of sales of third  party  software  upon  which
royalties  must be paid.  The  decline in gross  profit  percentage  for service
revenues  from  64.8%  of  service  revenues  in  1996  to  60.0%  in  1997  was
attributable primarily to higher personnel costs in 1997.

                                       21
<PAGE>

     Sales and marketing expenses.  Sales and marketing expenses increased 17.2%
to $5.0 million in 1997 from $4.3 million in 1996,  but decreased  from 32.4% to
25.7% of total  revenues.  The  increase  in sales  and  marketing  expenses  in
absolute  dollars  was  primarily  attributable  to  increased  personnel  costs
partially offset by lower sales-related operating expenses.

     Research and product development expenses. Research and product development
expenses increased 148.5% to $3.3 million in 1997 from $1.3 million in 1996, and
increased  from 10.1% to 17.0% of total  revenues.  The increase in research and
product  development  expenses  both in absolute  dollars and as a percentage of
total revenues was due primarily to an increase in staffing which  approximately
doubled period over period.

     General and administrative  expenses.  General and administrative  expenses
increased 21.0% to $2.9 million in 1997 from $2.4 million in 1996, but decreased
from  18.2%  to  14.9%  of  total   revenues.   The   increase  in  general  and
administrative expenses in absolute dollars was due primarily to the addition of
key  management  personnel,  the  investment  in additional  administrative  and
accounting operating systems, and the addition of support personnel.

     Interest  income and other  income/expenses,  net. Net interest  income and
other  income/expenses  increased  to $126,000  in 1997  compared to $99,000 for
1996.  This  increase was primarily due to  investment  income  associated  with
higher cash balances  offset by amortization  expense from the Marben  Products,
Inc. acquisition in March 1997.

     Income taxes. The Company's effective tax rate was 32.3% and 32.2% for each
of 1997 and 1996,  respectively.  Such  effective  tax rates were lower than the
statutory tax rates due primarily to research and development tax credits.


LIQUIDITY AND CAPITAL RESOURCES

     Since its  inception  in 1989,  the Company  has  financed  its  operations
primarily  through cash  generated  by  operations.  At December  31, 1998,  the
Company's  cash,  cash   equivalents   and  marketable   securities   aggregated
approximately  $45.0  million,  of which  cash and cash  equivalents  aggregated
approximately $1.2 million and marketable  securities  aggregated  approximately
$43.8  million.  Marketable  securities  at December 31, 1998 were  comprised of
fixed income  government  securities,  corporate  bonds,  money market funds and
overnight  commercial paper. The Company's working capital was $49.0 million and
$6.3 million at December 31, 1998 and 1997, respectively.

     Accounts  receivable  increased  to $9.1  million at December 31, 1998 from
$7.6  million at December  31,  1997  primarily  as a result of the  increase in
billings  in the fourth  quarter of 1998 as  compared  to the fourth  quarter of
1997.  The  Company  bills  its  maintenance  contracts  on an annual  basis.  A
significant  portion of such billing occurs in the fourth quarter.  One customer
comprised  25% of accounts  receivable  at December 31,  1998,  and one customer
comprised an aggregate of 12% of accounts receivable at December 31, 1997.

                                       22
<PAGE>

     The Company bills its customers in U.S. dollars at agreed-upon  contractual
terms.  While the Company has  customers in Asian  countries,  such as Korea and
Japan,  the Company has not experienced any significant  negative effects on its
liquidity as a result of the  volatility  and  devaluation  trends that recently
have been experienced in such Asian markets. Accounts receivable at December 31,
1998 includes approximately $460,000 from customers in this region.

     The Company has an unsecured  revolving credit facility with  Manufacturers
and Traders Trust  Company (the "Bank")  pursuant to which it may borrow up to a
maximum of $3.0 million.  Amounts  outstanding under such facility bear interest
at the Bank's prime rate less 0.25% on aggregate  principal amounts  outstanding
of $1.0  million  or less and at the Bank's  prime rate to the extent  aggregate
principal  amounts  exceed  $1.0  million.  The Company  also has certain  LIBOR
options.  No borrowings  under the revolving credit facility were outstanding as
of December 31, 1998. The credit facility  contains,  among other provisions,  a
covenant which restricts the Company's ability to pay cash dividends.

     The Company's capital expenditures were approximately $593,000 and $808,000
for the years  ended  December  31,  1998 and 1997,  respectively.  The  Company
anticipates  higher levels of equipment and  facilities-related  expenditures in
the foreseeable future as a result of moving and expanding  corporate offices in
mid-1999.

     The Company  underwent an audit by the Internal  Revenue Service for fiscal
years  ending  December  31,  1995  and  1996.  No  significant  adjustments  to
previously recorded tax liabilities resulted. In addition, the Company underwent
an audit by the NJ State  Division of Taxation  covering the fiscal years ending
December 31, 1992 through 1997. No material  adjustments to previously  recorded
liabilities resulted.

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

YEAR 2000 ISSUES

     Assessment.  The Company  believes  that its exposure to Year 2000 problems
lies primarily in three areas:  (i) its internal  operating  systems;  (ii) Year
2000 compliance of its tool suites, custom applications and pre-built electronic
bonding gateways and network management  applications;  and (iii) non-compliance
of third parties with whom the Company has material  relationships.  The Company
has completed its assessment with respect to its internal  operating systems and
tool suites.  The Company continues to evaluate its exposure with respect to its
pre-built electronic bonding gateways, network management applications,  certain
custom applications and its relationships with third parties.

                                       23
<PAGE>

     Internal  Operating  Systems.  The Company believes its internal  operating
computer  systems  and  recently  purchased  management  information  system are
currently Year 2000 compliant,  and the Company does not believe that there will
be future significant costs related to future maintenance of such compliance.

     Tool  Suites and  Pre-Built  Applications.  The Company  has  conducted  an
internal  review and believes that its tool suites  developed after May 27, 1997
have been tested and are Year 2000 complaint. These products include:

                    PRODUCT NAME                          VERSION
                    ------------                          -------
                    ASN.C/C++                              3.5.3
                    Agent Tester                           2.0.1
                    CMIP Translator                        1.0.1
                    Distributed Systems Generator          4.2.0
                    GDMO Agent Emulator                    2.0.0
                    GDMO Agent Toolkit                     2.0.0
                    LNP Test Extensions                    2.0.0
                    Manager Code Generator                 1.0.4
                    Marben OSIAM Stack                   2.6f/2.6g
                    Visual Agent Builder                   1.0.0

     Testing of the Company's pre-built  electronic bonding gateways and network
management  applications for Year 2000 compliance are ongoing. In addition,  the
Company  continues  to  review  and  monitor  all such  products  for Year  2000
compliance.

     Custom Applications.  In November 1998, the Company determined that certain
custom applications  developed and delivered to approximately ten customers were
not Year 2000 compliant.  All of these customers were notified of such Year 2000
compliance  status in  November  1998.  The Company has agreed to assist each of
these customers with any and all remediation  solutions required to achieve Year
2000 compliance with the Company's  products.  The Company does not believe such
remediation  will  be  significant  or  will  materially  adversely  affect  the
Company's  financial  condition and results of operations.  To date, the Company
has incurred certain remediation  expenses related to such compliance,  pursuant
to the warranty provisions of the applicable agreements.  Presently, the Company
is  continuing  to  analyze  the  extent  to which  any of the  affected  custom
applications  were  integrated by customers into other products which may expose
the Company to claims from its  customers.  A failure to properly  implement the
correction,  or problems with the  correction,  could cause errors in customers'
products which may materially impact the functionality of those products.

     Third Party Relationships.  The Company is dependent on various third party
software and hardware  vendors and  suppliers.  The Company is also dependent on
third party service providers and partners such as telephone  companies,  banks,
insurance carriers,  auditors and marketing partners.  The failure of such third
parties to deliver Year 2000 compliant  products or to remediate  their internal
systems could  jeopardize the Company's  ability to meet its  obligations 

                                       24
<PAGE>

to its customers.  As a result, the Company is presently conducting inquiries of
its outside  vendors,  suppliers,  service  providers and marketing  partners to
identify and resolve Year 2000 exposure from third parties.  Upon  completion of
the  foregoing,  the Company will be able to assess such  exposure and financial
impact, if any, should such parties fail to be Year 2000 compliant.

     Risks of Year 2000 Issues.  The Company expects to identify and resolve all
Year  2000  problems  that  could  materially  adversely  affect  its  business,
financial condition or results of operations. However, the Company believes that
it is not  possible to  determine  with  complete  certainty  that all Year 2000
problems affecting the Company have been identified or corrected.  Further,  the
Company  cannot  accurately  predict how many failures  related to the Year 2000
Problem will occur or the severity,  duration or financial  consequences of such
failures.  The Company believes that the most reasonably  likely worst case Year
2000 scenario would include a combination of some or all of the following:

     o      The  Company's  internal  operating  systems  may  fail  or  provide
            erroneous  information.   Such  failure  could  result  in:  reduced
            utilization of technical or other personnel; the inability to timely
            generate financial reports and statements;  and improper billing and
            record keeping;

     o      A number of system failures that may require  significant efforts by
            the  Company  or its  customers  to prevent  or  alleviate  material
            business disruptions; and

     o      Failure in HVAC, lighting,  telephone,  security and similar systems
            on which the Company relies.

     Additionally,  the Company  cannot  guarantee that its products will not be
used by other companies, or its customers, to build applications which might not
be Year 2000 compliant,  or that the Company's  products or  applications  built
with  the  Company's  products  will not be  integrated  by the  Company  or its
customers or interact with  non-compliant  software or other  products which may
expose the Company to claims from its customers.

     Costs.  Other  than  time  spent  by the  Company's  personnel,  the  costs
associated with remediating non-compliant custom applications and assessing Year
2000 compliance  issues have not been  significant to date. The Company believes
that the  continued  analysis of  compliance  of new  releases  of products  and
evaluation of potential Year 2000 problems will result in aggregate expenditures
of less than $100,000.

     Contingency  Plans.  The Company believes its plans for addressing the Year
2000 Problem are adequate. The Company does not believe it will incur a material
financial  impact  from  system  failures,  or from the  costs  associated  with
assessing   the  risks  of  failure,   arising  from  the  Year  2000   Problem.
Consequently, the Company does not intend to create a detailed contingency plan.
In the event that the Company does not adequately  identify and resolve its Year
2000 issues, the absence of a detailed contingency plan may materially adversely
affect the Company's business, financial condition and results of operations.

                                       25
<PAGE>

EUROPEAN MONETARY UNION

     On January 1, 1999,  eleven of the fifteen member countries of the European
Union set fixed  conversion  rates between their existing legacy  currencies and
the euro. At such time, these participating  countries adopted the euro as their
common legal currency.  The eleven  participating  countries now issue sovereign
debt exclusively in euro and will redenominate  outstanding  sovereign debt. The
legacy  currencies  will continue to be used as legal tender through  January 1,
2002,  at which time the legacy  currencies  will be canceled and euro bills and
coins will be used for cash transactions in the participating countries.

     The Company does not denominate its international  licensing  agreements in
foreign  currencies.  The  Company  currently  does  not  believe  that the euro
conversion will have a material impact on the Company's results of operations or
financial condition.


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

     The Company  believes  that it is not  subject to a material  impact to its
financial  position or results of operations  relating to market risk associated
with derivative securities. See Note 2 of Notes to Financial Statements.


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."


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

     Not applicable.


                                       26
<PAGE>
                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

     The information relating to the Company's directors,  nominees for election
as directors and executive  officers under the headings  "Election of Directors"
and "Executive  Officers" in the Company's  definitive  proxy  statement for the
1999 Annual Meeting of Shareholders is incorporated  herein by reference to such
proxy statement.


ITEM 11.  EXECUTIVE COMPENSATION.

     The discussion under the heading "Executive  Compensation" in the Company's
definitive  proxy  statement  for the 1999  Annual  Meeting of  Shareholders  is
incorporated herein by reference to such proxy statement.


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

     The discussion under the heading "Security  Ownership of Certain Beneficial
Owners and Management" in the Company's  definitive proxy statement for the 1999
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The  discussion  under  the  heading  "Certain  Relationships  and  Related
Transactions"  in the Company's  definitive  proxy statement for the 1999 Annual
Meeting  of  Shareholders  is  incorporated  herein by  reference  to such proxy
statement.



                                       27
<PAGE>
                                     PART IV


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

 (a)  (1) Financial Statements.

          Reference is made to the Index to Financial  Statements  and Schedules
          on Page F-1.

      (2) Financial Statement Schedules.

          Reference is made to the Index to Financial  Statements  and Schedules
          on Page F-1.

      (3) Exhibits.

          Reference is made to the Index to Exhibits on Page 31.

 (b)      Reports on Form 8-K.

          No Reports on Form 8-K were filed  during the quarter  ended  December
          31, 1998.


                                       28
<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 31st day of March,
1999.

                                        DSET CORPORATION

                                        By:/s/William P. McHale, Jr. 
                                           -----------------------------
                                              William P. McHale, Jr., President
                                              and Chief Executive Officer


                                       29
<PAGE>


     Pursuant to the  requirements of the Securities  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.

                Signature                    Title                    Date
--------------------------------- --------------------------   -----------------

/s/ William P. McHale, Jr.        President, Chief Executive   March 31, 1999
-----------------------------
    William P. McHale, Jr.        Officer and Director
                                  (Principal Executive 
                                  Officer)

/s/ Susan M. Boykas               Acting Chief Financial       March 31, 1999
-----------------------------
   Susan M. Boykas                Officer (Principal 
                                  Financial and Accounting
                                  Officer)

                                  Chairman of the Board,
-----------------------------
   S. Daniel Shia                 Chief Technical Officer
                                  and Director

/s/ Elizabeth K. Adams            Director                     March 31, 1999
-----------------------------
   Elizabeth K. Adams

/s/ Bruce R. Evans                Director                     March 31, 1999
-----------------------------
   Bruce R. Evans

/s/ John C. Thibault              Director                     March 31, 1999
-----------------------------
   John C. Thibault

                                  Director
-----------------------------
   Jacob J. Goldberg



                                       30
<PAGE>


                                  EXHIBIT INDEX

EXHIBIT NO.                          DESCRIPTION OF EXHIBIT
-----------                          ----------------------

   3.1(a)      Amended and Restated Certificate of Incorporation.

   3.2(a)      Amended and Restated Bylaws.

   4.1(a)      1993 Stock Option Plan of the Company, as amended.

   4.2(a)      1998 Stock Plan of the Company.

   4.3(a)      Form of Warrant Agreement, dated as of September 13, 1996 between
               the Company and Summit Ventures IV, L.P. and Summit Investors II,
               L.P.

   4.4(a)      Registration  Rights  Provisions  granted to Summit  Ventures IV,
               L.P. and Summit Investors II, L.P.

  10.1(a)      Corporate Revolving and Term Loan Agreement between Manufacturers
               and Traders Trust Company and the Company dated August 5, 1997.

  10.2(a)      Joint  Venture  Agreement  dated as of May 21, 1997 between ATOS,
               S.A. (formerly Sligos/Marben S.A.) and the Company.

  10.3(a)      Lease dated November 20, 1995 between Hocroft  Associates and the
               Company, as amended August 16, 1996 and April 7, 1997.

  10.4(a)(b)   Form  of  Indemnification  Agreement  executed  by  each  of  the
               Company's directors and executive officers.

  10.5(a)(b)   Employment  Agreement  dated  October 1, 1996 between the Company
               and S. Daniel Shia.

  10.6(a)(b)   Employment  Agreement  dated  January 1, 1998 between the Company
               and William P. McHale, Jr.

  10.7(a)(b)   Letter  agreements  dated  September  9, 1996 and April 28,  1997
               between the Company and Paul A. Lipari.

  10.8(a)      DSET Corporation 401(k) Plan.

  21           List of Subsidiaries.

  27           Financial Data Schedule.


(a)    Incorporated by reference to the Company's Registration Statement on Form
       S-1 (File Number 333-43827) which became effective on March 12, 1998.
(b)    A management contract or compensatory plan or arrangement  required to be
       filed as an exhibit pursuant to Item 14(c) of Form 10-K.



                                       31
<PAGE>


                                DSET CORPORATION

                          INDEX TO FINANCIAL STATEMENTS

                                                                           PAGE
                                                                           ----

Report of Independent Accountants......................................     F-2

Balance Sheets as of December 31, 1998 and 1997........................     F-3

Statements of Income for the Years Ended December 31, 1998, 1997
  and 1996.............................................................     F-4

Statements of Changes in Cumulative Redeemable Convertible 
  Preferred Stock and Shareholders' Equity (Deficit) for the
  Years Ended December 31, 1998, 1997 and 1996.........................     F-5

Statements of Cash Flows for the Years Ended December 31, 1998,
  1997 and 1996........................................................     F-6

Notes to Financial Statements..........................................     F-7



                                       F-1
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of
DSET Corporation


In our opinion,  the accompanying  balance sheets and the related  statements of
income,  of changes in cumulative  redeemable  convertible  preferred  stock and
shareholders' equity (deficit) and of cash flows present fairly, in all material
respects,  the financial  position of DSET  Corporation at December 31, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended  December  31,  1998,  in  conformity  with  generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audits 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 the opinion expressed above.





/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 2, 1999



                                       F-2
<PAGE>
DSET Corporation
December 31, 1998
Balance Sheets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                               DECEMBER 31,
                                                                          1998           1997
<S>                                                                <C>               <C>         
ASSETS
Current assets:
  Cash and cash equivalents                                        $    1,159,070    $  2,081,846
  Marketable securities                                                43,863,980       1,123,795
  Accounts receivable, net of allowance for doubtful accounts
    of $175,979 and $125,504                                            9,108,059       7,564,442
  Deferred income taxes                                                   258,144         158,681
  Prepaid expenses and other current assets                               193,418         243,883
                                                                   --------------    ------------
      Total current assets                                             54,582,671      11,172,647
Fixed assets, net                                                       1,592,114       1,560,948
Goodwill, net                                                             129,864         167,873
Other assets                                                              548,963         413,760
                                                                   --------------    ------------
      Total assets                                                 $   56,853,612    $ 13,315,228
                                                                   --------------    ------------

LIABILITIES, CUMULATIVE REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable and accrued expenses                            $    3,560,994    $  2,779,954
  Income taxes payable                                                    145,673               -
  Deferred revenues                                                     1,726,906       1,897,039
  Note payable                                                            111,657         220,000
                                                                   --------------    ------------
      Total current liabilities                                         5,545,230       4,896,993
  Deferred income taxes                                                   119,127         103,714
  Note payable                                                                  -         111,657
                                                                   --------------    ------------
      Total liabilities                                                 5,664,357       5,112,364
                                                                   --------------    ------------
Commitments (Notes 5 and 11)
Series A cumulative redeemable convertible preferred stock,
  no par value; 750,000 shares authorized,  no shares
  issued or outstanding at December 31, 1998; 676,361 shares
  issued and outstanding at December 31, 1997, cumulative
  accrued and undeclared dividends of $1,680,859 at
  December 31, 1997                                                             -      11,603,996
                                                                   --------------    ------------
Shareholders' equity (deficit):
  Preferred stock, no par value; 5,000,000 shares authorized,
    no shares issued or outstanding at December 31, 1998;
    no shares authorized, issued or outstanding at
    December 31, 1997                                                           -               -
  Common stock, no par value; 40,000,000 shares authorized,
    11,636,245 and 6,775,092 shares issued and outstanding
    at December 31, 1998 and 1997, respectively                        41,912,361       2,537,806
  Deferred stock compensation                                            (494,306)       (875,835)
  Retained earnings                                                     9,731,077       4,936,894
  Unrealized appreciation in investments                                   40,123               -
  Treasury stock, no shares and 3,043,625 shares of common
    stock at cost                                                               -      (9,999,997)
                                                                   --------------    ------------
      Total shareholders' equity (deficit)                             51,189,255      (3,401,132)
      Total liabilities, cumulative redeemable convertible
        preferred stock and shareholders' equity (deficit)         $   56,853,612    $ 13,315,228
                                                                   ==============    ============
</TABLE>



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


                                       F-3
<PAGE>


DSET Corporation
December 31, 1998
Statements of Income
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                              YEARS ENDED DECEMBER 31,
                                                        1998            1997           1996
<S>                                                <C>             <C>             <C>       
Revenues:
  License revenues                                 $ 16,337,615    $ 10,850,275    $ 7,005,313
  Service revenues                                   12,952,549       8,514,512      6,111,227
                                                   ------------    ------------     ----------
        Total revenues                               29,290,164      19,364,787     13,116,540
                                                   ------------    ------------    -----------
Cost of revenues:
  License revenues                                    1,775,144       1,274,355        133,209
  Service revenues                                    3,692,092       3,404,484      2,149,036
                                                   ------------    ------------    -----------
        Total cost of revenues                        5,467,236       4,678,839      2,282,245
                                                   ------------    ------------    -----------
      Gross profit                                   23,822,928      14,685,948     10,834,295
                                                   ------------    ------------    -----------
Operating expenses
  Sales and marketing                                 9,192,593       4,986,286      4,255,455
  Research and product development                    6,237,484       3,299,337      1,327,682
  General and administrative                          2,707,856       2,880,804      2,380,679
                                                   ------------    ------------     ----------
        Total operating expenses                     18,137,933      11,166,427      7,963,816
                                                   ------------    ------------    -----------
      Operating income                                5,684,995       3,519,521      2,870,479
  Amortization of goodwill                              (38,009)        (22,172)             -
  Interest and other expense                           (120,160)        (12,194)             -
  Interest and other income                           1,827,830         160,847         99,004
                                                   ------------    ------------    -----------
  Income before income taxes                          7,354,656       3,646,002      2,969,483
  Provision for income taxes                          2,560,473       1,177,396        956,889
                                                   ------------    ------------    -----------
  Net income                                          4,794,183       2,468,606      2,012,594
  Less:  accrued preferred stock dividends                    -         859,555        801,578
                                                   ------------    ------------    -----------

  Net income applicable to common shares           $  4,794,183    $  1,609,051    $ 1,211,016
                                                   ============    ============    ===========

  Net income per common share                      $       0.53    $       0.45    $      0.37
                                                   ============    ============    ===========

  Weighted average number of common shares
    outstanding                                       9,012,019       3,566,764      3,308,763
                                                   ============    ============    ===========

  Net income per common share assuming dilution    $       0.43    $       0.30    $      0.27
                                                   ============    ============    ===========
  Weighted average number of common shares and
    common equivalent shares outstanding             11,043,422       8,346,365      7,392,793
                                                   ============    ============    ===========
</TABLE>



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

                                       F-4
<PAGE>
DSET Corporation
December 31, 1998
Statements of Changes in Cumulative Redeemable
Convertible Preferred Stock and Shareholders' Equity (Deficit)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                     Series A Convertible
                        Preferred Stock          Common Stock         Deferred                               Other
                        Number                Number                   Stock      Retained    Treasury   Comprehensive
                      of Shares   Amount     of Shares    Amount    Compensation  Earnings      Stock       Income          Total
<S>                   <C>      <C>           <C>        <C>          <C>         <C>         <C>           <C>          <C>
Balance at 
January 1, 1996       676,361  $ 9,942,863   6,339,546  $ 1,214,616  $       -   $2,116,827  $(9,999,997)  $       -    $(6,668,554)
 Exercise of 
  stock options             -            -      50,814       47,201          -            -            -           -         47,201
 Accrued dividends
  on redeemable
  convertible
  preferred stock           -      801,578           -            -          -     (801,578)           -           -       (801,578)
 Net income                 -            -           -            -          -    2,012,594            -           -      2,012,594
                    ---------  -----------  ----------  -----------   --------   ----------  -----------   ---------    -----------
Balance at
 December 31, 1996    676,361   10,744,441   6,390,360    1,261,817          -    3,327,843   (9,999,997)          -     (5,410,337)
 Exercise of stock
  options                   -            -     384,732      275,813          -            -            -           -        275,813
 Tax benefit from
  exercise of stock
  options                   -            -           -      124,341          -            -            -           -        124,341
 Accrued dividends 
  on redeemable
  convertible
  preferred stock           -      859,555           -            -          -     (859,555)           -           -       (859,555)
 Deferred stock 
  compensation              -            -           -      875,835  (875,835)            -            -           -              -
 Net income                 -            -           -            -          -    2,468,606            -           -      2,468,606
                    ---------  -----------  ----------  -----------   --------   ----------  -----------   ---------    -----------
Balance at
 December 31, 1997    676,361   11,603,996   6,775,092    2,537,806   (875,835)   4,936,894   (9,999,997)          -     (3,401,132)
 Exercise of stock
  options                   -            -   2,361,153    1,307,790          -            -            -           -      1,307,790
 Tax benefit from
  exercise of stock
  options                   -            -           -      501,217          -            -            -           -        501,217
 Amortization of
  deferred stock
  compensation              -            -           -       (6,808)   298,620            -            -           -        291,812
 Forfeitures of
  55,571 shares of
  stock options             -            -           -      (82,909)    82,909            -            -           -              -
 Sale - Issuance of
  common stock              -            -   2,500,000   37,200,000          -            -            -           -     37,200,000
 Costs related to
  issuance of 
  common stock              -            -           -   (1,148,734)         -            -            -           -     (1,148,734)
 Conversion of 
  series A cumulative
  redeemable
  convertible
  preferred stock    (676,361) (11,603,996)  3,043,625   11,603,996          -            -            -           -     11,603,996
 Retirement of
  treasury stock            -            -  (3,043,625)  (9,999,997)         -            -    9,999,997           -              -
 Unrealized 
  appreciation on
  investments               -            -           -            -          -            -            -      40,123         40,123
 Net income                 -            -           -            -          -    4,794,183            -           -      4,794,183
                    ---------  -----------  ----------  -----------   --------   ----------  -----------   ---------    -----------
Balance at 
 December 31, 1998          -  $         -  11,636,245  $41,912,361  $(494,306)  $9,731,077  $         -   $  40,123    $51,189,255
                    =========  ===========  ==========  ===========  =========   ==========  ===========   =========    ===========
</TABLE>

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


                                      F-5
<PAGE>
DSET Corporation
December 31, 1998
Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                         1998              1997             1996
<S>                                                                <C>               <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                         
  Net income                                                       $  4,794,183      $  2,468,606     $  2,012,594
  Adjustments to reconcile net income to net cash                                                           
  provided by operating activities:                                                                         
    Deferred income taxes                                               (84,050)         (123,482)         (47,300)
    Tax benefit from exercise of stock options                          501,217           124,341               --
    Amortization of deferred stock compensation                         291,812                --               --
    Depreciation                                                        559,954           399,035           257,815
    Gain on disposal of assets                                           (1,172)               --               --
    Amortization                                                         38,009           121,776          149,170
    Loss (earnings) from joint venture                                   79,914           (26,131)              --
    Changes in assets and liabilities:                                                                      
      Accounts receivable                                            (1,543,617)       (3,014,841)      (1,916,125)
      Other assets                                                     (264,652)          (94,759)         (16,379)
      Accounts payable and accrued expenses                             781,040         1,631,892          604,778
      Income tax payable                                                145,673          (108,468)        (682,609)
      Deferred revenues                                                (170,133)          887,386          166,914
                                                                   ------------      ------------     ------------
        Net cash provided by operating activities                     5,128,178         2,265,355          528,858
                                                                   ------------      ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of marketable securities                                (85,851,994)       (1,080,768)      (1,829,932)
  Redemption of marketable securities                                43,151,932         1,150,000        1,640,626
  Acquisition of fixed assets                                          (593,007)         (807,640)        (707,750)
  Proceeds on disposition of fixed assets                                 3,059                --               --
  Investment in joint venture                                                --          (245,000)              --
                                                                   ------------      ------------     ------------
        Net cash used in investing activities                       (43,290,010)         (983,408)        (897,056)
                                                                   ------------      ------------     ------------ 

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment by (loans to) officers and shareholders                     100,000          (150,000)              --
  Loan repayments                                                      (220,000)         (110,000)              --
  Proceeds from issuance of common stock, net                        36,051,266                --               --
  Purchases of treasury stock                                                --                --       (5,094,008)
  Proceeds from the exercise of stock options                         1,307,790           275,813           47,201
                                                                   ------------      ------------     ------------
        Net cash provided by (used in) financing activities          37,239,056            15,813       (5,046,807)
                                                                   ------------      ------------     ------------ 
        Net (decrease) increase in cash and cash equivalents           (922,776)        1,297,760       (5,415,005)
Cash and cash equivalents, beginning of period                        2,081,846           784,086        6,199,091
                                                                   ------------      ------------     ------------
Cash and cash equivalents, end of period                           $  1,159,070      $ $2,081,846     $    784,086
                                                                   ============      ============     ============
Supplemental disclosure of cash flow information:
  Cash paid during the period for income taxes                     $  1,142,000      $  1,157,868     $  1,678,798
  Cash paid during the period for interest                               12,458            12,194               --
Non-cash activities:
  Conversion of Series A preferred stock to common stock           $ 11,603,996      $         --     $         --
  Retirement of treasury stock                                        9,999,997                --               --
  Accrued dividends on Series A preferred stock                              --           859,555          801,578
  Note issued for net assets of Marben Products Inc.                         --           441,657               --
  Forfeiture of stock options with deferred stock compensation           82,909                --               --
</TABLE>


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

                                      F-6
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------
1.   NATURE OF BUSINESS

     DSET  Corporation  (the  "Company"),  which was  founded in 1989,  designs,
     develops,  markets and  supports  an  integrated  suite of  object-oriented
     application  development tools and provides custom application  development
     services.  The Company  also  offers  carrier-to-carrier  applications.  In
     addition, the Company provides its customers with consulting,  training and
     technical services.  Headquartered in Bridgewater,  New Jersey, the Company
     serves customers worldwide.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     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  portfolio held by the Company are considered to
     be available-for-sale securities and are reported at fair value. Unrealized
     holding  gains and losses were  $40,123 at  December  31, 1998 and were not
     significant at December 31, 1997. 

     FIXED ASSETS
     Equipment,  furniture  and  purchased  software  are  stated  at cost  less
     accumulated depreciation.  Depreciation is calculated using a 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.

     GOODWILL
     The  Company  amortizes  goodwill  using a  straight-line  method  over its
     estimated useful life of five years. The Company periodically  assesses the
     realizability of the asset based on estimated future cash flows.

     REVENUE RECOGNITION
     License  revenues  are  recorded  when the software has been shipped to the
     Company's  licensees and all significant  obligations  have been satisfied.
     Revenues  from  run-time  licenses are  recognized  as equipment  using the
     Company's  software  is  deployed  by  the  Company's   customers.   Custom
     application  development service revenues are recognized over the period in
     which the service is  performed  based on the  percentage  of direct  labor
     costs incurred to the total costs estimated.

     Revenues from maintenance contracts are deferred and recognized over the
     term of the respective contracts (typically twelve months).

     INCOME TAXES
     The Company utilizes an asset and liability approach to financial reporting
     for income taxes.  Deferred  income tax assets and liabilities are computed
     annually for differences  between the financial  statement and tax 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 expected to be realized.

                                      F-7
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------

     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.
     
     FAIR VALUE OF FINANCIAL INSTRUMENTS
     The  carrying  amounts  in the  financial  statements  for  cash  and  cash
     equivalents, accounts receivable, and accounts payable and accrued expenses
     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. 

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


3.   MARKETABLE SECURITIES

     Marketable  securities  at  December  31, 1998 and 1997 were  comprised  as
     follows:

                                                             DECEMBER 31,
                                                        1998              1997

       Government fixed income securities       $  26,174,048      $           -
       Corporate bonds                              9,650,732            100,000
       Money market funds                           3,575,868          1,023,795
       Overnight investments                        4,463,332                  -
                                                 ------------      -------------

        Total                                   $  43,863,980      $   1,123,795
                                                 ============      =============


     The Company's credit policy provides for all short-term securities of grade
     A2 or better with  maturities of two years or less.  Interest income earned
     related to market  securities  was  $1,667,000  and  $122,000 for the years
     ended December 31, 1998 and 1997, respectively.

                                      F-8
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------

 4. FIXED ASSETS

    Fixed assets consist of the following:
                                                             DECEMBER 31,
                                                      1998                1997

      Computer equipment                     $    1,688,910       $   1,574,171
      Purchased software                            839,668             540,315
      Furniture, fixtures and office 
        equipment                                   451,452             304,678
      Leasehold improvements                         68,080              32,692
      Transportation equipment                       32,692              41,242
                                             --------------       -------------
                                                  3,080,802           2,493,098
        Less:  accumulated depreciation          (1,488,688)           (932,150)
                                             ---------------      --------------
                                             $    1,592,114       $   1,560,948
                                             ==============       ==============

5.   CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK

     During  December  1995,  the Company  issued  676,361 shares of cumulative,
     convertible  Series A Preferred  Stock in exchange for  $10,000,000.  As an
     integral  part  of the  Agreement,  the  Company  was  required  to use the
     proceeds received upon the sale of the preferred stock to repurchase, on or
     before January 31, 1996, an aggregate of 3,043,625 shares of common stock.

     Shareholders  of Series A Preferred  Stock were  entitled to votes equal to
     the number of common  shares into which the shares of  preferred stock were
     convertible.  The Series A  Preferred  shareholders  were also  entitled to
     receive  cumulative  annual  dividends equal to the "Applicable  Percentage
     Rate" of 8%, as defined in the  Agreement,  of the original  purchase price
     paid per share. In the event of conversion of the preferred stock to Common
     Stock, however, all accumulated and unpaid dividends on the preferred stock
     were to be forgiven.  The holders of the Series A Preferred  stock also had
     certain redemption and liquidation rights.

     The holders of the Series A Preferred  Stock had the option to convert,  at
     any time, their shares into fully-paid and  nonassessable  shares of common
     stock at the  "Applicable  Conversion  Rate,"  which was four and  one-half
     shares  of  Common  Stock  for each  share  of  Series  A  Preferred  Stock
     converted.  The Series A Preferred Stock was to be automatically  converted
     into Common Stock upon the closing of an initial  public  offering in which
     net proceeds to the Company  equaled or exceeded  $15,000,000 and the price
     paid by the  public  for such  shares  was at least  three  times  the then
     conversion  value per share as defined by the Agreement.  The shares of the
     Series A Preferred Stock were automatically converted upon the consummation
     of the Company's initial public offering.

     In the event of the issuance of stock options to two  specified  executives
     (one of which  is no  longer  with the  Company),  the  Series A  Preferred
     Shareholders  were entitled to receive warrants to purchase a proportionate
     number of shares with an identical  exercise price per share.  In September
     1996,  warrants to purchase  185,331 shares with an exercise price of $2.18
     per share were issued for no  consideration.  Such  warrants are or will be
     exercisable to the extent of 25% on each of September 13, 1997,  1998, 1999
     and 2000. At December 31, 1998, all warrants were still outstanding.


                                      F-9
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------

6.   COMMON STOCK

     On December 29, 1997, the Company amended its Certificate of  Incorporation
     to increase the number of  authorized  shares of Common Stock to 40,000,000
     shares.  On December 31, 1997, the Company  effected a three-for-two  stock
     split of the  Company's  Common  Stock.  All  references  to  common  share
     amounts,  shares,  per share data, and preferred  stock  conversion  rights
     included in the financial  statements  and notes have been adjusted to give
     retroactive  effect  to the  stock  split  for all  periods  presented.  On
     December 31, 1997, the Company's Board of Directors authorized the officers
     of  the  Company  to  amend  and  restate  the  Company's   Certificate  of
     Incorporation  to  reflect,   among  other  things,  the  authorization  of
     5,000,000  shares  of a new class of  undesignated  preferred  stock.  Such
     amendment  and  restatement  to the  Certificate  of  Incorporation  became
     effective upon the  effectiveness of the Company's  registration  statement
     filed in  connection  with the  Company's  initial  public  offering of its
     Common Stock.

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


7.   STOCK OPTIONS

     The  Company  maintains  a stock  option  plan (the "1993  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  this 1993 Plan may be 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").  Nonqualified  stock options
     are exercisable for five years from the date of grant.

     The 1998 Stock Plan was adopted by the Board of  Directors  on December 31,
     1997. The 1998 Stock 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 Stock  Plan,  a
     total of 1,800,000  shares were  reserved for issuance upon the exercise of
     option and/or stock purchase rights granted  thereunder.  Those eligible to
     receive stock option grants or stock  purchase  rights under the 1998 Stock
     Plan include employees,  non-employee directors and

                                      F-10
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------

     consultants.  The  1998  Stock  Plan is  administered  by the  Compensation
     Committee of the Board of Directors of the Company.

     During the year ended  December 31, 1997,  deferred stock  compensation  of
     $875,835 was recorded for options granted during the year. This amount will
     be amortized to compensation expense over the vesting period of the options
     (two to four  years).  At December  31,  1998,  the  remaining  unamortized
     deferred stock compensation balance was $494,306.

     At December 31, 1998,  options to purchase 1,208,344 shares of common stock
     were  exercisable  under the  Company's  stock  option  plans at a weighted
     average exercise price per share of $1.59.

     A summary of option transactions during 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>

                                                                                     WEIGHTED
                                                    NUMBER OF                         AVERAGE
                                                     SHARES                          EXERCISE
                                     ---------------------------------------
                                     10 YEAR         5 YEAR                          PRICE PER
                                     OPTIONS         OPTIONS           TOTAL           SHARE
<S>                                  <C>           <C>             <C>             <C>       
  Outstanding January 1, 1996        344,250       1,114,024       1,458,274       $     0.67
Granted                              633,000         202,886         835,886       $     2.19
Forfeited                                  -          (4,482)         (4,482)      $     0.85
Exercised                                  -         (50,814)        (50,814)      $     0.93
                                   ---------       ---------       ---------
  Outstanding December 31, 1996      977,250       1,261,614       2,238,864       $     1.23
Granted                              827,400         392,359       1,219,759       $     3.67
Forfeited                           (141,000)        (84,398)       (225,398)      $     2.67
Exercised                           (157,500)       (227,232)       (384,732)      $     0.72
                                   ---------       ---------       ---------
  Outstanding December 31, 1997    1,506,150       1,342,343       2,848,493       $     2.23
Granted                              602,500         229,500         832,000       $    11.99
Forfeited                           (111,074)       (126,724)       (237,798)      $     6.38
Exercised                           (205,322)       (337,145)       (542,467)      $     1.56
                                   ---------       ---------       ---------
  Outstanding December 31, 1998    1,792,254       1,107,974       2,900,228       $     4.79
                                   =========       =========       =========
</TABLE>


     In October,  1995, the Financial Accounting Standards Board issued SFAS No.
     123, "Accounting for Stock-Based Compensation," which 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
     Accounting  Principles Board ("APB") Opinion No. 25,  "Accounting for Stock
     Issued to  Employees."  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 and net
     income per share as if the fair value based method of accounting defined in
     SFAS No. 123 had been applied as indicated below:



                                      F-11
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                              Years ended December 31,
                                                      1998              1997             1996
<S>                                               <C>              <C>              <C>        
NET INCOME APPLICABLE TO COMMON SHARES:
  As reported                                     $  4,794,183     $  1,609,051     $ 1,211,016
  Pro forma effect of applying SFAS No. 123          3,639,098          950,593       1,089,641
NET INCOME PER COMMON SHARE:
  As reported                                     $       0.53       $     0.45     $      0.37
  Pro forma effect of applying SFAS No. 123       $       0.40       $     0.27     $      0.33
NET INCOME PER COMMON SHARE ASSUMING DILUTION:
  As reported                                     $       0.43       $     0.30     $      0.27
  Pro forma effect of applying SFAS No. 123       $       0.33       $     0.22     $      0.26
</TABLE>


     The fair value for options  issued prior to the  Company's  initial  public
     offering were estimated at the date of grant using the minimum value method
     with  the  following  weighted  average  assumptions  for the  years  ended
     December  31, 1996 and 1997:  risk-free  interest  rates of 4.65% to 7.28%;
     expected life of five to ten years,  volatility  0% and dividend  yields of
     0.0%.  The fair value of option  grants  subsequent  to the initial  public
     offering  were  calculated  using the  absolute  method with the  following
     assumptions for the year ended December 31, 1998:  risk-free interest rates
     of 4.65% to 5.49%; expected life of 4 years, volatility of 80% 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.  In  management's  opinion,  the  existing
     models do not  necessarily  provide a reliable  single  measure of the fair
     value of its employee stock options.


8.   INCOME TAXES

     The  provision  (benefit)  for federal,  state and local and foreign  taxes
     consists of the following:
<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                    1998              1997            1996
<S>                                            <C>              <C>              <C>        
        CURRENT:
         Federal                               $  2,262,893     $  1,079,038     $   714,202
         State and local                            259,780          149,584          90,189
         Foreign                                    121,850           72,256         199,798
                                               ------------     ------------     -----------
                                                  2,644,523        1,300,878       1,004,189
                                               ------------     ------------     -----------
        DEFERRED:
         Federal                                    (76,649)        (111,830)        (40,476)
         State and local                             (7,401)         (11,652)         (6,824)
                                               ------------     ------------     -----------
                                                    (84,050)        (123,482)        (47,300)
                                               ------------     ------------     -----------
          Provision for income taxes           $  2,560,473     $  1,177,396     $   956,889
                                               ============     ============     ===========
</TABLE>



                                      F-12
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------

     The tax provision  reconciles to the amount computed by multiplying  income
     before income taxes by the United States  federal  statutory rate of 34% as
     follows:
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                       1998           1997              1996
<S>                                                    <C>             <C>              <C>  
         Provision of statutory rate                   34.0%           34.0%            34.0%
         State taxes, net of federal benefit            2.2             2.5              1.9
         Research and development tax credits          (3.3)           (4.2)            (3.8)
         Deferred stock compensation                    1.3               -                -
         Other                                          0.6               -              0.1
                                                  ---------      ----------        ---------
                                                       34.8%           32.3%            32.2%
                                                  =========      ==========        =========
</TABLE>


     Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                   1998                1997
<S>                                                         <C>              <C>            
        CURRENT:
         Accrued vacation                                   $     127,656    $        82,971
         Bad debt reserve                                          65,939             47,390
         Deferred maintenance revenue                              36,446                  -
         Accrued bonus                                             28,103             28,320
                                                            -------------    ---------------
           Total                                            $     258,144    $      $158,681
                                                            =============    ===============

        NON-CURRENT:
         Fixed assets                                            (119,127)          (103,714)
                                                            -------------    ---------------
           Total                                            $    (119,127)   $      (103,714)
                                                            =============    ===============
</TABLE>


9.   REVENUE AND RECEIVABLE CONCENTRATION

     The Company had one significant  customer for each of the years ended 1996,
     1997 and 1998, which accounted for approximately  18%, 12% and 17% of total
     revenues,  respectively.  No other customer  accounted for more than 10% of
     total revenues in any of the three years ended December 31, 1998.  Revenues
     from customers in the following geographic regions as a percentage of total
     revenues are as follows:



                                      F-13
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------
                                             YEAR ENDED DECEMBER 31,
                                    1998               1997             1996

         North America                 85%              73%               62%
         Asia/Pacific Rim               9               22                35
         Europe                         6                5                 3
                                ---------         --------          --------
                                      100%             100%              100%
                                =========         =========         ========

     At  December  31,  1997  and  1998,  one  and one  customer,  respectively,
     accounted  for  approximately  12%  and  25%,  respectively,   of  accounts
     receivable.


10.  EMPLOYEE BENEFIT PLAN

     During 1994,  the Company  instituted  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.  The  Company  made
     contributions  approximating $64,000,  $164,000, and $251,000 for the years
     ended December 31, 1996, 1997 and 1998, respectively.

11.  COMMITMENTS

     A) 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, 1996, 1997 and 1998 was approximately  $277,000,  $402,000 and
     $786,000, respectively.

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

        YEAR ENDING DECEMBER 31,
         1999                                        $       1,086,000
         2000                                                1,084,000
         2001                                                  986,000
         2002                                                1,053,000
         2003                                                  894,000
         For the years 2004 and beyond                       3,904,000
                                                     -----------------
                                                 
             Total                                   $       9,007,000
                                                     =================
                                              
     B) LINES OF CREDIT

     In August 1997, the Company obtained an unsecured revolving credit facility
     with a bank totaling $3 million.  Borrowings under this line of credit bear
     interest at the bank's  prime rate (7.75% at December  31, 1998) 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

                                      F-14
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------

     were  outstanding  at  December  31,  1997 or 1998.  This  credit  facility
     contains,  among other provisions, a covenant which restricts the Company's
     ability to pay cash dividends.


12.  ACQUISITION OF MARBEN PRODUCTS, INC.

     In March 1997,  the  Company  acquired  the net assets of Marben  Products,
     Inc., ("MPI") a software  distribution  company located in California.  The
     purchase price was $190,045. Included in the net assets acquired was a note
     payable of $441,657 to MPI's parent company.  The note bears interest at 5%
     per annum and  requires  quarterly  payment  of  interest  and  $55,000  of
     principal. The Company has accounted for the acquisition using the purchase
     method, and the results of operations of the acquired business are included
     in the Company's operations since acquisition.

     The following is a summary of the purchase price allocation:

        Current assets and other tangible assets                $     426,615
        Current liabilities assumed                                  (175,003)
        Note issued in acquisition                                   (441,657)
        Goodwill                                                      190,045

     The  following  unaudited  pro forma  summary  represents  the  results  of
     operations  of the Company as if the  acquisition  of the net assets of MPI
     had occurred at the beginning of the period  presented and does not purport
     to be indicative of what would have occurred had the acquisition  been made
     as of those dates or the results which may occur in the future.

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                         1997              1996
<S>                                                               <C>                 <C>        
        Pro forma net revenues                                    $   19,742,634      $16,733,775
        Pro forma net income applicable to common shares               1,291,927          869,674
        Pro forma net income per common share                     $         0.36      $      0.26
        Pro forma net income per common share assuming dilution   $         0.26      $      0.23
</TABLE>

     The unaudited pro forma results  include the  historical  operations of the
     Company  and MPI,  adjusted  to reflect the  amortization  of goodwill  and
     interest on the note payable assumed.

13.  EARNINGS PER SHARE

     In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" (EPS),
     which specifies the computation,  presentation and disclosure  requirements
     for  earnings  per share of entities  with  publicly  held 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


                                      F-15
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------

     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, 1996
                                                                                    PER SHARE
                                                      INCOME          SHARES         AMOUNT
<S>                                                <C>               <C>           <C>      
        BASIC EPS:
        Net income applicable to common shares     $  1,211,016      3,308,763     $    0.37

        ASSUMING DILUTION:
        Net income applicable to common shares
         Convertible preferred stock                    801,578      3,043,625
         Warrants                                             -          7,435
         Stock options                                        -      1,032,970
                                                   ------------   ------------
                                                   $  2,012,594      7,392,793     $    0.27
                                                   ============   ============

                                                       FOR THE YEAR ENDED DECEMBER 31, 1997
                                                                                    PER SHARE
                                                      INCOME          SHARES         AMOUNT
        BASIC EPS:
        Net income applicable to common shares     $  1,609,051      3,566,764     $    0.45

        ASSUMING DILUTION:
        Net income applicable to common shares
         Convertible preferred stock                    859,555      3,043,625
         Warrants                                             -         98,216
         Stock options                                        -      1,637,760
                                                   ------------   ------------
                                                   $  2,468,606      8,346,365     $    0.30
                                                   ============   ============

                                                       FOR THE YEAR ENDED DECEMBER 31, 1998
                                                                                    PER SHARE
                                                      INCOME          SHARES         AMOUNT
        BASIC EPS:
        Net income applicable to common shares     $  4,794,183      9,012,019     $    0.53

        ASSUMING DILUTION:
        Net income applicable to common shares
         Stock options                                        -      1,875,759
         Warrants                                             -        155,644
                                                   ------------   ------------
                                                   $  4,794,183     11,043,422     $    0.43
                                                   ============   ============
</TABLE>

14.  SUBSEQUENT EVENT

     On January 25, 1999, DSET  Acquisition  Corp., a wholly owned subsidiary of
     the Company,  acquired  certain assets of Network  Programs,  LLC (NPL) for
     $2.5  million.  NPL was a New  Jersey-based  company which  specialized  in
     software  aimed at reducing  the time  necessary  for a  competitive  local
     exchange  carrier  (CLEC)  to  provide  prospective  customers  with  sales
     proposals
                                      F-16
<PAGE>
DSET Corporation
December 31, 1998
Notes to Financial Statements
--------------------------------------------------------------------------------

     that clearly  define the CLEC's  offering vs. the incumbent  local exchange
     carrier's (ILEC) current service offering.



                                      F-17