<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                   FORM 10-Q

           [  X  ] Quarterly Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934

                   For Quarterly Period Ended June 30, 1999

                        Commission File Number 0-23282


                       Natural MicroSystems Corporation
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


         Delaware                                          04-2814586
--------------------------------------------------------------------------------
(State or other jurisdiction of                           (IRS Employer
incorporation or organization)                         Identification Number)


           100 Crossing Boulevard, Framingham, Massachusetts    01702
--------------------------------------------------------------------------------
             (Address of principal executive offices)         (Zip Code)


                                (508) 620-9300
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,115,292 shares of Common
Stock, $.01 par value, outstanding at July 30, 1999.

The Index to Exhibits appears on Page 16 Total Number of Pages with Exhibits: 27
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I    FINANCIAL INFORMATION
                                                                                Page
                                                                                ----
<S>                                                                            <C>
          Item 1.  Financial Statements and Notes
                      Condensed Consolidated Balance Sheets                       3
                      Condensed Consolidated Statements of Operations             4
                      Condensed Consolidated Statements of Cash Flow              5
                      Notes to Consolidated Financial Statements                6 - 9

          Item 2.  Management's Discussion and Analysis of
                      Financial Condition and Results of Operations            10 - 14

PART II   OTHER INFORMATION

          Item 6.  Exhibits and Reports on Form 8-K                              15
</TABLE>

                                       2
<PAGE>

                       Natural MicroSystems Corporation
                     Condensed Consolidated Balance Sheets
                                  (In $000's)

<TABLE>
<CAPTION>
                                                                                      June 30,                December 31,
                                                                                        1999                      1998
ASSETS                                                                               (unaudited)
------                                                                            ------------------        -----------------
<S>                                                                               <C>                       <C>
Current assets:
     Cash and marketable securities                                                 $        18,025           $        17,922
     Accounts receivable, net of allowance for uncollectable
         accounts of $1,349 and $779, respectively                                           12,830                    17,224
     Inventories                                                                              8,674                     9,773
     Prepaid expenses and other current assets                                                6,512                     6,599
                                                                                    ----------------          ---------------
         Total current assets                                                                46,041                    51,518

Property and equipment, net of accumulated                                                   14,106                    13,981
     depreciation of $10,657 and $8,376, respectively
Other long-term assets                                                                        8,660                     9,214
Goodwill, net                                                                                 3,950                     3,925
                                                                                    ----------------          ---------------
Total Assets                                                                        $        72,757           $        78,638
                                                                                    ================          ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
      Accounts payable                                                                         4,729                    5,662
      Accrued expenses and others liabilities                                                  9,084                    7,592
      Current portion of long-term obligations                                                    95                       73
                                                                                    ----------------          ---------------
           Total current liabilities                                                          13,908                   13,327

Long-term obligations, less current portion                                                       37                      158

Stockholders' equity                                                                          58,812                   65,153
                                                                                    ----------------          ---------------
Total Liabilities and Stockholders' equity                                          $         72,757          $        78,638
                                                                                    ================          ===============
</TABLE>

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

                                       3
<PAGE>

                       Natural MicroSystems Corporation
                Condensed Consolidated Statements of Operations
                       (In $000's except per share data)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                           For the Three Months Ended             For the Six Months Ended
                                                                   June 30,                                June 30,
                                                            1999                 1998              1999                  1998
                                                         ------------         -----------         -----------         -----------
<S>                                                      <C>                  <C>                 <C>                 <C>
Revenues                                                 $    17,565          $   18,436          $   34,186          $   38,443

Cost of revenues                                               6,953               6,629              13,578              12,695
                                                         -----------          ----------          ----------          ----------
Gross profit                                                  10,612              11,807              20,608              25,748


Operating expenses:
   Selling, general and administrative                         9,584               7,164              19,174              13,469
   Research and development                                    5,757               4,612              11,311               9,195
   Provision for uncollectable receivable                                              -                                   2,500
                                                         -----------          ----------          ----------          ----------
      Total operating expenses                                15,341              11,776              30,485              25,164
                                                         -----------          ----------          ----------          ----------

Operating income (loss)                                       (4,729)                 31              (9,877)                584

Other income, net                                                214                 231                  53                 454
                                                         -----------          ----------          ----------          ----------
Income (loss) before income taxes                             (4,515)                262              (9,824)              1,038
                                                         -----------          ----------          ----------          ----------

   Income tax expense (benefit)                               (1,580)                 92              (3,438)                364
                                                         -----------          ----------          ----------          ----------
Net income  (loss)                                            (2,935)         $      170          $   (6,386)         $      674
                                                         ===========          ==========          ==========          ==========

  Basic net income (loss) per common share               $     (0.26)         $     0.02          $    (0.58)         $     0.06
                                                         ===========          ==========          ==========          ==========

  Weighted average shares outstanding                         11,090              10,903              11,057              10,863
                                                         ===========          ==========          ==========          ==========

  Diluted net income (loss) per common share             $     (0.26)         $     0.01         $    (0.58)         $     0.06
                                                         ===========          ==========         ==========          ==========

  Weighted average shares outstanding                         11,090              11,372             11,057              11,260
                                                         ===========          ==========         ==========          ==========
</TABLE>

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

                                       4
<PAGE>

                        Natural MicroSystems Corporation
                Condensed Consolidated Statements of Cash Flow
                                  (In $000's)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                              For the Six Months Ended
                                                                                                      June 30,
                                                                                              1999                  1999
                                                                                         --------------        --------------
<S>                                                                                      <C>                   <C>
Cash flow from operating activities:
     Net income (loss)                                                                   $     (6,386)         $        674
     Adjustments to reconcile net income to net cash
        provided by operating activities:
          Depreciation and amortization                                                         3,152                 2,355
          Provision for bad debts                                                                 887                    75
          Deferred tax asset                                                                      413
          Gain (loss) on sale of marketable securities                                                                   (2)
          Changes in assets and liabilities:
                         Accounts receivable                                                    3,085                 1,699
                         Inventories                                                              948                  (640)
                         Prepaid expenses and other assets                                       (193)               (1,426)
                         Income tax receivable                                                                          130
                         Accounts payable                                                        (823)                1,168
                         Accrued restructuring charges                                         (1,023)
                         Accrued expenses and other liabilities                                 2,738                (3,938)
                                                                                         --------------        --------------
Cash provided by operating activities                                                           2,798                    95
                                                                                         --------------        --------------

Cash flow from investing activities:
     Additions to property and equipment                                                       (2,757)               (4,117)
     Additions to goodwill                                                                       (515)
     Additions to license agreements                                                              (26)               (2,040)
     Purchases of marketable securities                                                        (6,571)               (3,813)
     Proceeds from the maturity of marketable securities                                        6,371                 6,316
     Other investing activities                                                                    (6)                   23
                                                                                         --------------        --------------
Cash used in investing activities                                                              (3,504)               (3,631)
                                                                                         --------------        ---------------

Cash flow from financing activities:
     Payments on capital lease oblicagions                                                         (9)
     Payments of refundable advances                                                             (101)                  (79)
     Proceeds from issuance of common stock, net of
          Issuance costs                                                                          298                 1,844
     Non-statutory stock options                                                                                          3
                                                                                         --------------        --------------
Cash provided by financing activities                                                             188                 1,768
                                                                                         --------------        --------------
Effect of exchange rate changes on cash                                                           427                    43
Net decrease in cash and cash equivalents                                                         (91)               (1,725)
Cash and cash equivalents, beginning of period                                                 12,024                 6,318
                                                                                         --------------        --------------
Cash and cash equivalents, end of period                                                 $     11,933          $      4,593
                                                                                         ==============        ==============
</TABLE>

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


                                       5
<PAGE>

                       Natural MicroSystems Corporation
             Notes to Condensed Consolidated Financial Statements


A.   UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated balance sheet as of June 30, 1999 and the condensed
consolidated statements of income, operations and cash flow for the three month
and six month periods ending June 30, 1999 and 1998 include the accounts of
Natural MicroSystems Corporation and its wholly owned subsidiaries (the
"Company").

In the opinion of management, all adjustments, which are of a normal recurring
nature, necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made. 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 dates of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates. The operating results for the
three month and six month periods ended June 30, 1999 are not necessarily
indicative of the operating results to be expected for the full fiscal year.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The financial statements should be read in
conjunction with the consolidated financial statements of the Company as of and
for the year ended December 31, 1998.

B.   STOCKHOLDERS' EQUITY: (In $000's)

<TABLE>
<CAPTION>
                                                                                                  Accumulated
                                                                 Additional                          Other
                                          Common Stock             Paid-in       Accumulated      Comprehensive
                                  ---------------------------
                                     Shares        Amount          Capital         Deficit        Income (loss)      Total
                                  ---------------------------  --------------  --------------  ----------------  ---------------
<S>                               <C>              <C>          <C>             <C>             <C>               <C>
Balance at December 31, 1998             11,018    $      110   $      67,585   $      (2,494)  $           (48)  $      65,153

Exercise of common                           36                            42                                                42
stock options

Employee Stock Purchase Plan                 54             1             236                                               237

Net loss                                                                               (6,386)                           (6,386)

Foreign currency                                                                                           (234)           (234)
Translation adjustment
                                  ---------------------------   -------------  --------------  ----------------   -------------
Balance at June 30, 1999                 11,108     $     111   $      67,863   $      (8,880)  $          (282)  $      58,812
                                  ===========================   =============  ==============  ================   =============
</TABLE>



C.   INDEBTEDNESS

The Company established a new $7.5 million bank line of credit for working
capital purposes effective May 14, 1999. Borrowings under the line of credit
bear interest at the bank's floating rate of prime plus one percent. The Company
is subject to covenants requiring maintenance of certain profitability, equity
and liquidity ratios. As of June 30, 1999 the Company is currently compliant
with all covenants under the line, and there are no amounts currently
outstanding. This agreement is subject to renewal on May 13, 2000.

                                       6
<PAGE>

D.   EARNINGS PER SHARE

The following is a reconciliation of basic to the diluted earning per share
(EPS) computations for net income (loss). The shares outstanding calculation for
the three months and six months ended June 30, 1999 do not include 2,946,185
anti-dilutive shares:

<TABLE>
<CAPTION>
                                                                      Three months ended June 30, 1999
                                                           ----------------------------------------------------------
                                                                  Income              Shares              Per Share
(In $000's except per share data)                                 (loss)                                    Amount
---------------------------------------------------------  ----------------------------------------------------------
<S>                                                          <C>                      <C>                <C>
Basic EPS (income available to all shareholders)             $      (2,935)             11,090           $   (0.26)
Effect of dilutive securities (stock options)
---------------------------------------------------------  ----------------------------------------------------------
Diluted EPS (income available to common
   stockholders + assumed conversions)                       $      (2,935)             11,090           $   (0.26)
                                                           ==========================================================

                                                                      Three months ended June 30, 1998
                                                           ----------------------------------------------------------
                                                                  Income               Shares             Per Share
(In $000's except per share data)                                 (loss)                                    Amount
---------------------------------------------------------  ----------------------------------------------------------
Basic EPS (income available to all shareholders)             $         170              10,903           $    0.02
Effect of dilutive securities (stock options)                                              469
---------------------------------------------------------  ----------------------------------------------------------
Diluted EPS (income available to common
   stockholders + assumed conversions)                       $         170              11,372           $    0.01
                                                           ==========================================================


                                                                      Six months ended June 30, 1999
                                                           ----------------------------------------------------------
                                                                  Income               Shares             Per Share
(In $000's except per share data)                                 (loss)                                    Amount
---------------------------------------------------------  ----------------------------------------------------------
Basic EPS (income available to all shareholders)             $      (6,386)             11,057           $   (0.58)
Effect of dilutive securities (stock options)
---------------------------------------------------------  ----------------------------------------------------------
Diluted EPS (income available to common
   stockholders + assumed conversions)                       $      (6,386)        $    11,057           $   (0.58)
                                                           ==========================================================

                                                                      Six months ended June 30, 1998
                                                           ----------------------------------------------------------
                                                                  Income               Shares             Per Share
(In $000's except per share data)                                 (loss)                                    Amount
---------------------------------------------------------  ----------------------------------------------------------
Basic EPS (income available to all shareholders)             $         674              10,863           $    0.06
Effect of dilutive securities (stock options)                                              397
---------------------------------------------------------  ----------------------------------------------------------
Diluted EPS (income available to common
   stockholders + assumed conversions)                       $         674              11,260           $    0.06
                                                           ==========================================================
</TABLE>

                                       7
<PAGE>

E.   INVENTORIES

Inventories are stated at the lower of cost (principally first-in, first-out) or
market.  Inventories, as of June 30, 1999 and December 31, 1998 were comprised
of the following:

<TABLE>
<CAPTION>
                             June 30,        December 31,
(In $000's)                    1999              1998
                            ----------      --------------
<S>                         <C>             <C>
Raw materials                  $   617            $   967
Work in Process                  4,174              5,747
Finished goods                   3,883              3,059
                            ----------      --------------
                               $ 8,674            $ 9,773
                            ==========      ==============
</TABLE>

F.   SEGMENT INFORMATION

The following table presents the Company's revenues and operating income by
geographic segment:

<TABLE>
<CAPTION>
   (In $000's)
                                        Three Months ended    Six Months ended
                                             June 30,              June 30,


                                          1999      1998      1999       1998
                                        -------   -------    -------   -------
<S>                                     <C>       <C>        <C>       <C>
Revenues
   North America                        $12,634   $12,888    $24,171   $28,038
   Europe                                 3,525     3,105      6,952     5,386
   Other                                  1,406     2,443      3,063     5,019
                                        -------   -------    -------   -------
     Total revenues                     $17,565   $18,436    $34,186   $38,443
                                        =======   =======    =======   =======

Operating Income (loss)
   North America                        $(4,420)  $  (702)   $(9,158)  $(1,197)
   Europe                                  (281)     (332)      (726)     (730)
   Other                                    (28)    1,065          7     2,511
                                        -------   -------    -------   -------
     Total operating income (loss)      $(4,729)  $    31    $(9,877)  $   584
                                        =======   =======    =======   =======
</TABLE>

                                       8
<PAGE>

G.   COMPREHENSIVE INCOME

The following table represents the Company's comprehensive income for the stated
periods.


<TABLE>
<CAPTION>
(In $000's)                                            Three Months ended           Six Months ended
                                                            June 30,                    June 30,

                                                      1999           1998           1999         1998
                                                     -------        -------       -------       -------
<S>                                                  <C>            <C>           <C>           <C>
Net income (loss)                                    $(2,935)        $ 170        $(6,386)       $ 674
Other comprehensive income (loss) Items:
    Foreign currency translation adjustment              (45)           (1)          (234)         (63)

                                                     -------        -------       -------       -------
Comprehensive income (loss)                          $(2,980)        $ 169        $(6,620)       $ 611
                                                     =======        =======       =======       =======
</TABLE>

                                       9
<PAGE>

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Natural MicroSystems Corporation designs, manufactures and markets integrated
hardware and software products which enable its customers to develop and
implement high-value telecommunications solutions that operate globally. The
Company's state-of-the-art technologies are based on open, standards-based, PC
platforms, collectively referred to as Open Telecommunications. Use of these
state-of-the-art hardware and software products, combined with the Company's
consulting and support services, enable customers to shorten time to market for
computer telephony systems including Internet/IP voice and fax systems, web-
enabled call centers, network-based enhanced services, integrated voice response
(IVR), speech recognition, wireless, SS7, and CompactPCI. Specific examples of
these applications include long distance least-cost routing and bypass, cellular
and other wireless switching services, telephone banking, medical alert and
prescription services, hotel and hospital information systems, transaction card
authorization, telemarketing, help desks, school bulletin boards, security
monitoring, and automated operator services.

Results of Operations

Revenues

Revenues of $17.6 million for the three months ended June 30, 1999, decreased
4.7% percent from $18.4 million for the three months ended June 30, 1998.
Revenues of $34.2 million for the six months ending June 30, 1999 decreased
11.1% from $38.4 million for the six months ended June 30, 1998. The decreases
from 1998 to 1999 were the result of lower sales volume in North America, Asia
and Latin America partially offset by higher European and service contract
revenues.

Revenues from customers located outside of North America of $4.9 million for the
three months ended June 30 ,1999 decreased 11.1% from $5.5 million for the three
months ended June 30, 1998 and represented 28.1% and 30.1% of total revenues,
respectively. The dollar and percentage decrease in revenues for 1999 over 1998
was due to significant decreases of sales in Asia and Latin America partially
offset by increased sales in Europe. Revenues from customers located outside of
North America of $10.0 million for the six months ended June 30, 1999 were
relatively unchanged from $10.4 million for the six months ended June 30, 1998,
and represented 29.3% and 27.1% of total revenues, respectively.

Cost of Revenues

Cost of revenues of $7.0 million for the three months ended June 30, 1999
increased 4.9% from $6.6 million for the three months ended June 30, 1998, and
represented 39.6% and 36.0% of total revenues, respectively. The increase is
directly related to expenses incurred for investment in the services and
manufacturing departments. Cost of revenues of $13.6 million for the six months
ended June 30, 1999 increased 7.0% from $12.7 million for the six months ended
June 30,1998 and represented 39.7% and 33.0% of total revenues, respectively.

Selling, General and Administrative

Selling, general and administrative expenses of $9.6 million for the three
months ended June 30, 1999 increased 33.8% from $7.2 million for the three
months ended June 30, 1998 and represented 54.6% and 38.9% of total revenues,
respectively. These increases were due to costs associated with increased
selling activities in Japan, China, Brazil, Spain and Italy, as well as
increased expenditures for international marketing, service administration and
marketing programs. The Company expects that its selling, general and
administrative expenditures will vary as a percentage of product revenues in
future periods.

Selling, general and administrative expenses of $19.2 million for the six months
ended June 30,1999 increased 42.4% from $13.5 million for the six months ended
June 30, 1998 and represented 56.1% and 35.0% of revenues, respectively. These
increases were due to an

                                       10
<PAGE>

increase in both the sales and development support personnel in the European and
Asian markets.

Research and Development

Research and development expenditures of $5.8 million for the three months ended
June 30, 1999 increased 24.8% from $4.6 million for the three months ended June
30,1998, and represented 32.8% and 25.0% of total revenues, respectively. The
increases were due to increased personnel and development project related cost
related to IP Telephony functionality and software tools. Research and
development expenditures of $11.3 million for the six months ended June 30, 1999
increased 23.0% from $9.2 million for the six months ended June 30,1998, and
were 33.1% and 23.9% of total revenues, respectively. The Company expects that
its research and development expenditures will continue to increase, but may
vary as a percentage of product revenues in future periods.

Provision for Uncollectable Receivable

The Company recorded a provision against a trade receivable in 1998 from a
customer that abruptly ceased operations in April of that same year.

Restructuring Charges

During the last quarter of the Company's fiscal year, in an effort to create
efficiencies and manage its business more effectively a restructuring was
implemented. The balance of accrued restructuring charges at of the beginning of
the quarter amounted to $3.0 million. The Company has paid $351,000 during the
current quarter and $1.0 million in 1999, leaving approximately $2.0 million in
accrued charges outstanding. The Company experienced more favorable terms than
anticipated in the termination of existing lease commitments pertaining to its
new corporate office space. These savings, however, were offset by reduction in
force of certain executives also occurring in the second quarter ended June 30,
1999.

Operating and Net Income (Loss)

As a result of the foregoing, operating income (loss), for the three months
ended June 30, was ($4.7) million and $31,000 for 1999 and 1998, respectively.
Net income (loss) was ($2.9) million and $170,000 for the same periods,
respectively. Operating income (loss) for the first six months ended June 30,
was ($9.9) million and $584,000 for 1999 and 1998, respectively. Net income
(loss) for the six months ended June 30, was ($6.4) million and $674,000 for
1999 and 1998, respectively.

Income Tax Expense (Benefit)

Income tax expense (benefit), for the three months ended June 30, was ($1.6)
million and $92,000 for 1999 and 1998, respectively. Income tax expense
(benefit), for the six months ended June 30, was ($3.4) million and $364,000 for
1999 and 1998, respectively. Income tax expense is based on an effective tax
rate which differed from the U. S. Federal statutory rate primarily due to state
and foreign income taxes and income tax credits. The Company's current effective
tax rate is 35.0%, on a worldwide basis. For U.S. federal income tax purposes
the Company has net operating loss carryforwards available to reduce income of
approximately $3.5 million at December 31, 1998. These carryforwards will begin
to expire in 2004. Utilization of net operating loss carryforwards are subject
to an annual limitation of approximately $1.0 million under Internal Revenue
Code Section 382. In addition, ViaDSP, a wholly owned subsidiary, has net
operating loss carryforwards available to reduce future income of approximately
$1.6 million at December 31, 1998. These carryforwards are subject to annual
limitations of approximately $402,000 under Internal Revenue Code Section 382
and will be available to reduce future taxable income of ViaDSP only. The
Company continuously re-evaluates the recoverability of its deferred tax asset.
The amount of the deferred tax asset considered realizable could be
significantly or completely reduced if income is not generated in the near term
periods. Although realization is not assured, management believes it is more
likely than not the net deferred tax asset will be realized. The Company will
continue to assess the valuation of the deferred tax asset each quarter.

                                       11
<PAGE>

Other Income (Expense), Net

Other income, net the for the three months ended June 30, 1999 and 1998 was
$214,000 and $231,000, respectively. Other income, net for the six months ended
June 30, 1999 and 1998 was $53,000 and $454,000 respectively. The decrease in
both periods was due to a combination of both foreign exchange losses and lower
cash balances.

Liquidity and Capital Resources

Cash provided by operations for the six months ended June 30 ,1999 and 1998 was
$2.8 million and $95,000 respectively. Cash provided by operations in 1999 was
largely due to reductions in inventory and accounts receivable generated through
better collection rates, improved inventory management and increases in accrued
expenses. Cash was provided by operations in 1998 by a reduction in accounts
receivable and an increase in accounts payable, offset by increases in
inventory, prepaid expenses and other assets and a decrease in accrued expenses
and other liabilities.

Cash used in investing activities for the six months ended June 30, 1999 and
1998 was $3.5 million and $3.6 million, respectively. During 1999, $2.8 million
was utilized to purchase property and equipment. An additional $515,000 was used
for additions to goodwill associated with the acquisition of Teknique, Inc. In
1998, cash of $4.1 million was used for purchases of property and equipment and
$2.0 million was invested in license agreements to support new product
offerings.

Cash provided by financing activities for the six months ended June 30, 1999 and
1998 was $188,000 and $1.8 million, respectively. In both years cash proceeds
were from the issuance of common stock upon the exercise of common stock options
as well as the employee stock purchase plan.

Current assets at June 30, 1999, were $46.0 million, 10.6% less than current
assets of $51.5 million at December 31, 1998. Current liabilities at June 30,
1999 were $13.9 million, 4.4% more than current liabilities of $13.3 million at
December 31, 1998. Higher accrued expenses and other liabilities partially
offset by a decrease in accounts payable accounted for the increase in
liabilities in 1999.

The Company established a new $7.5 million bank line of credit for working
capital purposes effective May 14,1999. Borrowings under the line of credit bear
interest at the bank's floating rate of prime plus one percent. The Company is
subject to covenants requiring maintenance of certain profitability, equity and
liquidity ratios. As of June 30,1999 the Company is currently compliant with all
covenants under the line, and there are no amounts currently outstanding. This
agreement is subject to renewal on May 13, 2000.

Year 2000 Readiness Disclosure

The Year 2000 issue encompasses the inability of certain computer programs and
equipment that utilize embedded chips to perform accurately after the year 2000.
Concerns relating to the Year 2000 issue generally arise out of the potential
that this issue will affect business operations on an ongoing basis, as well as
the costs to correct possible system failures.

The Company has been implementing a Year 2000 compliance program to address the
Year 2000 issue. This program is designed to ensure that the Company's current
product offerings are Year 2000 compliant, that Year 2000 disruptions of vendors
and other third party relationships will not materially affect the Company's
operations, and that the Company's internal systems will continue to function
properly. As part of this implementation, since February 1998, the Company has
been publishing on its external web site Year 2000 information concerning the
Company's product offerings and other information relating to the Company's Year
2000 compliance program. Furthermore, an external consulting firm has completed
its report on the Company's Year 2000 readiness and has provided assistance for
the Company to comply with the Year 2000 requirements.

The Company is pursuing its Year 2000 compliance program in accordance with the
following five phases: (1) conduct an inventory to determine all potential Year
2000 problem areas having a material impact on the Company; (2) prioritize the
identified Year 2000 problem areas; (3) formally

                                       12
<PAGE>

test or assess material items for Year 2000 readiness; (4) repair or replace
material items determined not to be Year 2000 compliant; and (5) design and
implement a contingency and business continuation plan for items not to be
repaired or replaced.

Phases 1 through 3 for all functions of the Company's program have been
completed. Phase 4 for product testing, information technology and vendor
compliance is as follows:

The Company has tested 100% of its major product offerings and 80% of its legacy
products. The Company does not plan to test any additional products. All current
major Company product offerings are already Year 2000 compliant. Certain older
legacy products, which the Company no longer sells, may not be Year 2000
compliant. The Company will address this issue by publishing on the Company's
external web site that these products may not be Year 2000 compliant, and that
each customer who purchased these products should test, repair and/or replace
any of these products if they are still in use.

The Company's enterprise-wide business system is the Company's primary internal
management information system. This system is warranted to be Year 2000
compliant by the vendor. The Company believes that its internal systems and
equipment will not pose a significant operational problem from a Year 2000
standpoint. All information technology production servers have been upgraded to
date. Internal desktop computers are 90% compliant, with a target date of
October, 1999 for full compliance.

The Company is verifying the readiness of its suppliers by issuing
questionnaires relating to Year 2000 issues. The Company is auditing the
responses of top tier suppliers and any other supplier who could have a material
impact on the Company's operations. Where the Company believes that a particular
supplier poses an unacceptable risk, the Company will identify an alternative
source. The mailing of questionnaires to suppliers has been completed, and the
Company is reviewing the responses as they are submitted. Approximately 70% of
suppliers have responded to date, of which, 92% have been evaluated that they
are Year 2000 compliant. This process will be ongoing as new vendors are added
as suppliers to the Company's operations.

The Company is addressing the Year 2000 readiness of significant customers. On
an on-going basis, the Company is reviewing their publicly available published
information relating to their Year 2000 status. The Company has not encountered
any material concerns with its significant customers to date.

Costs incurred in the Company's Year 2000 effort will be expensed as incurred.
The Company's final evaluation of total costs has been determined to be
approximately $1 million for external services, upgrades and other compliance
related expenditures. Should these estimates prove to be correct, it is believed
that the expense will not have a material impact on its business, operating
results or ongoing operations resulting from Year 2000 issues.

The Company is addressing concerns relating to its products, internal facilities
and material relationships with third parties. At this time, the Company cannot
assure that there will not be any material effect on the Company's business,
results of operations or financial condition as a result of (i) products from
third parties that have not become Year 2000 compliant or (ii) currently unknown
information. However, the Company is reducing its risks relating to the Year
2000 issue by implementing its Year 2000 program, and will develop contingency
plans to any reasonably likely worst case scenario that it may become aware of.

Readers should be cautioned that forward-looking statements contained in the
Year 2000 update should be read in conjunction with the Company's disclosure
under the heading "Cautionary Statement" for the purposes of the safe harbor
provisions of the Private Securities Litigation Reform Act.

European Union Currency Conversion

On January 1, 1999, eleven member nations of European Economic and Monetary
Union began using a common currency, the Euro. For a three-year transition
period ending June 30, 2002, both

                                       13
<PAGE>

the Euro and each of the currencies for such member nations will remain in
circulation. After June 30, 2002, the Euro will be the sole legal tender for
those countries. The adoption of the Euro will affect many financial systems and
business applications as the commerce of those countries will be transacted in
the Euro and the existing national currency during the transition period. Of the
eleven currently using the Euro, the Company has subsidiary operations in
France, Germany and Italy, and branch operations in Spain. The Company has
assessed the potential impact of the Euro conversion in a number of areas,
particularly including the potential impact upon pricing and other marketing
strategies, and upon product development. Although the Company does not
currently expect that the conversion, either during or after the transition
period, will adversely affect its operations of financial condition, the
conversion has only recently been implemented and there can be no assurance that
it will not have some unexpected adverse impact.

A significant portion of the Company's revenues are subject to the risks
associated with international sales. Although most of the Company's product
prices are denominated in United States currency, customers in other geographic
regions generally evaluate purchases of products, such as those sold by the
Company, based on the purchase price expressed in the customer's currency.
Therefore, changes in foreign currency exchange rates may adversely affect the
demand for the Company's products.

The Company believes that its revenues and results of operations have not been
significantly impacted by inflation during the past three fiscal years.

Cautionary Statement

When used anywhere in this Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result", "the company expects", "will
continue", "is anticipated", "estimated", "project", or "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Such risk factors are set forth in Part I of the Company's annual
report on Form 10-K for the year ended December 31, 1998. The Company
specifically declines any obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.

                                       14
<PAGE>

PART II - OTHER INFORMATION

ITEMS 1-5      Not Applicable.

ITEM 6.        Exhibits and Reports on Form 8-K.

     A.        Exhibits

               No. 10.23 Loan and Security Agreement
               No.  27.1 - Financial Data Schedule

     B.        Reports on Form 8-K

               Not applicable.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

                                    Natural MicroSystems Corporation

Dated: August 11, 1999              By: /S/ Robert P. Schechter
                                        --------------------------------
                                    Robert P. Schechter
                                    President and Chief Executive Officer
                                    And Chairman of the Board of Directors

Dated: August 11, 1999              By: /S/ Robert E. Hult
                                        --------------------------------
                                    Robert E. Hult
                                    Senior Vice President of Finance and
                                    Operations, Chief Financial Officer
                                    and Treasurer

                                       15
<PAGE>

                       Natural MicroSystems Corporation
                                 Exhibit Index


<TABLE>
<CAPTION>
Exhibit No.    Title                                                            Page
<S>            <C>                                                              <C>
  10.23        Loan and security agreement between Silicon Valley Bank and        17
               Natural Microsystems Corporation dated May 14, 1999.
   27.1        Financial Data Schedule                                            43
</TABLE>

                                      16