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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

(Mark one)

For the fiscal year ended December 31, 2002

OR

For the transition period from                          to

Commission File Number 0-19640

VERTEL CORPORATION

(Exact name of Registrant as specified in its charter)

21300 Victory Boulevard, Suite 700, Woodland Hills, California 91367

(Address of principal executive offices) (zip code)

(818) 227-1400

(Registrant’s telephone number, including area code)

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

None

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

Common Stock, $0.01 Par Value

(Title of Class)

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

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.  x

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

As of March 31, 2003 there were 34,534,253 shares of the Registrant’s Common Stock outstanding. The aggregate market value of the stock held on that date by non-affiliates was approximately $2.6 million based on the closing price of $0.075 per share as reported by The Over-The-Counter Bulletin Board. As of June 30, 2002 the aggregate market value of the stock held on that date by non-affiliates was approximately $5.4 million based on the closing price of $0.16 per share as reported by The NASDAQ SmallCap Market.

INTRODUCTORY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Except for historical information, the matters discussed in this document are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These “forward-looking statements” include, but are not limited to: any projections of earnings or revenues, statements regarding improvements in margins, investments in research and development, increases in sales and marketing expenses or other financial items; any statements of the plans and objectives of management for future operations; any statements concerning proposed new products or services, including but not limited to any statements regarding leveraging professional services, enhancing mediation software products or any new products such as TicketExchange; any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing.

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

The Company’s future financial condition and results of operations, as well as any “forward-looking statements” are subject to inherent risks and uncertainties including, but not limited to, the risk factors as set forth on page 18 and other reasons described elsewhere in this document. All “forward-looking statements” and the reasons why results may differ that are included in this document are made as of the date hereof and the Company does not plan to update such “forward-looking statements” or the reasons why actual results may differ.

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PART I

ITEM 1.    BUSINESS

General

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

The Company has two sources of revenues: license and royalty revenues from software products and professional services revenues from custom network management solutions and product maintenance contracts. The Company’s product offerings are primarily targeted at the wireline, wireless and broadband market segments within the telecommunications industry.

Vertel’s software products are sold under the M*Ware^™ brand name and provide complete integration and management solutions across the entire Telecommunications Management Network (TMN) standard hierarchy as well as emerging standards (i.e. NG-OSS) and technologies. This software is typically used to enhance connectivity for a variety of telecommunications hardware and software solutions.

History

Vertel Corporation was founded as Retix in 1985 and originally focused on software that governed communications among devices in a telecommunications network. In 1995, the Company released its first version of TMN software products and services. In 1996, the Company was divided into three distinct operating units, each with its own management structure. The three units were: Sonoma Systems, Inc., focused on software for internetworking; Vertel Corporation I, focused on software for telecommunications network management; and Wireless Solutions, Inc., focused on software applications for wireless telecommunications.

In 1997, the Company merged Wireless Solutions into Vertel I. In the same year Sonoma Systems, Inc. was restructured to focus solely on broadband access equipment for the telecommunications market. In January 1998, the Company ceased investing in Sonoma Systems and reduced its voting ownership to 19.9% as Sonoma Systems raised additional capital from outside investors. In December 1998, the Company sold its Series B and Series C preferred stock in Sonoma Systems to a party affiliated with Newbridge Networks Corporation. In October 2000, Nortel Networks Corporation acquired Sonoma Systems and the Company exchanged its remaining investment (principally consisting of $1.0 million of non-convertible, non-voting, Series A preferred stock) for common stock in Nortel Networks.

In 1998, Vertel Corporation I was merged into Retix to create the present day Vertel Corporation, Inc. The combined company concentrated efforts on network management software for the telecommunications industry.

In March 1999, Vertel Corporation acquired Expersoft Corporation, a developer and marketer of standards-based, high-performance CORBA software technology. The acquisition price of Expersoft was approximately $3,225,000 and consisted of cash ($3,000,000) and related acquisition costs ($225,000). The acquisition was treated for accounting purposes as a purchase. Expersoft Corporation was subsequently merged into Vertel Corporation in December 1999.

In May 2001, the Company acquired the assets of Trigon Technology Group, Inc. (Trigon), a privately held corporation providing network management tools and solutions. The Company provided 4.5 million shares of restricted common stock in exchange for the Trigon assets and the acquisition was treated for accounting purposes as a purchase. Subsequently, 675,000 shares held in escrow were returned in settlement of unresolved claims and expenses related to the acquisition.

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Significant Events

Connectivity has always been the primary objective of Vertel. In 2001, the Company made the decision to develop a single mediation platform as the foundation for M*Ware—“Mediation Ware”—the cornerstone of the Company’s mediation and management solutions. In mid-2002, the Company launched M*Ware and throughout the second half of the year customers validated Vertel’s M*Ware strategy by upgrading to the new software or purchasing packaged solutions.

In conjunction with the M*Ware strategy, in December of 2002 the Company sold its e*ORB product line, related intellectual property rights and customer contracts to PrismTech Limited, a United Kingdom company. The agreement was for cash and royalty payments based on future e*ORB sales. Cash of $600,000 was payable over a 180-day period commencing with the closing date of the transaction. Royalty payments are payable monthly based on sales over the 24-month period commencing with the closing and were not to exceed an additional $600,000. As of April 1, 2003 all payments were made on schedule and only $100,000 remained to be paid.

Industry Background

Mediation, in the telecommunications marketplace, is a technology used to connect different types of hardware and software—essentially the connector or translator between different types of systems.

Management, in the same context, is the translation of network data into meaningful, actionable information that can be used to set and control the behavior of the network through the use of automated or semi-automated responses.

To maintain competitive and comprehensive service offerings, telecommunication operators must offer customer services across multiple networks and technologies. In doing so, it is imperative that these disparate components are able to communicate and exchange information. However, in many instances network components are not designed to operate or be managed together. For example, a variety of incompatible telecommunications protocols connect network elements to element management systems. In turn, these element management systems are connected to incompatible network management systems.

Operators are increasingly challenged by the complexity of integrating and managing multiple telecommunication networks and their components. The differences in systems force operators to develop complex custom adaptors and purchase a variety of separate Operational Support Systems (OSS) solutions that often require redundant staffs to coordinate and maintain the various system elements and technologies.

Technology Trends

As a result of continued shortcomings in connectivity and network management systems, the International Telecommunications Union (ITU), an organization of telecommunications companies and governments, identified the need for a standard to facilitate interoperability or the exchange of data among network management solutions. In 1994 the ITU established the Telecommunication Management Network (TMN) standard.

Today, the TMN standard is used globally in a number of telecommunication networks such as GSM (global systems mobile), SONET (synchronous optical networks) and SDH (synchronous digital hierarchy) and is predominant in the Asia/Pacific markets. However, a limitation of the TMN standard is that it is specific to the telecommunication industry. As a result, the adoption of TMN protocols has slowed significantly over the last two years as telecommunication providers and network equipment manufacturers have begun to look to general computing technologies, such as CORBA, for the next generation of telecommunication management solutions.

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To resolve the differences between systems, technologies such as CORBA, Java, SNMP, Extensible Markup Language (XML), and other new and proprietary technologies are being developed and deployed in both equipment and software applications. Importantly, these technologies are more attractive than TMN because they are used in a wide number of other information-based industries, not just telecommunications. In addition, these technologies have been specifically designed to facilitate the exchange of data and there is a greater availability of knowledgeable software engineers experienced in these technologies.

The telecommunications industry hopes to increase the pace of innovation by making use of these technologies. However, in coming years the increased adoption of these new technologies and the differences in their protocols is expected to lead to an even greater need for convergent network mediation solutions.

Economic Trends

In addition to the technological challenges of operating complex networks, the telecom market as a whole faces new economic realities. The challenge is to leverage existing voice and data network investments, reduce implementation time, improve operating margins by reducing costs, integrate new standards and capabilities in a cost effective manner and manage the resulting complex networks, support systems and services effectively.

To leverage existing investments companies will need to find new technologies to communicate with existing legacy hardware and software and to more efficiently mediate and manage all aspects of the system. To reduce implementation costs these technologies must be easy to use and must integrate seamlessly with existing systems and standards. To manage efficiently and effectively, companies will need meaningful real-time information about the data flow over their networks in order to re-assign network resources, manage quality and deliver the level of service required in complex SLA (Service Level Agreement) commitments.

In addition, telecommunication service providers may also want to focus on specific technical and geographical domains. To offer sufficient service coverage and a wide portfolio of service offerings, providers may also need to work intensively with external business partners. For example, complex protocols and specialized electronic bonding systems have been developed to allow operators and service providers to share work order, outage, performance and billing data with their partners and customers. These solutions tend to follow one standard or another, but the investments in more established standards do not always provide the advantages of newer standards or technologies.

Market Opportunity

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

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

As 2003 continues to develop and 2004 approaches, many analysts believe investments in new network technologies will begin to approach the rate of growth experienced in the early to mid-1990s. When that occurs,

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the Company believes its customers are well positioned to cost effectively integrate those new investments into their existing network infrastructure. As a result, Vertel expects its growth will track closely to the growth in spending on OSS solutions.

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

M*Ware Strategy

The initial release of M*Ware’s core mediation platform was introduced in early 2002 when Vertel had five separate solutions for the marketplace: mediation, network management, ticket exchange, TMN tools and CORBA middleware. Each solution had its own product line, customer base and, in most instances, business support unit within the Vertel organization.

The first general availability release of M*Ware was introduced in June 2002. This version completely integrated Vertel’s mediation and management products into a single product line with one platform that could perform both mediation and management capabilities with the dynamic addition of adaptors and services. Adaptors are interfaces to hardware and software while services are the business logic responsible for transforming data to actionable information and events.

The second release, M*Ware 6.1, was introduced in November 2002. This version integrated TMN tools and Ticket Exchange products as well as delivered new functionality necessary for Quality of Service (QoS) and Service Level Agreement (SLA) management. This release also provided M*Ware with a single development environment based on Model Driven Architecture (MDA) technology.

M*Ware 6.1 completed the consolidation of Vertel’s products and re-introduced the full line of mediation, management, and exchange solutions under the M*Ware brand. As a result, M*Ware 6.1’s products and solutions offer customers a tightly integrated alternative to the products and solutions they already have in global production. Additional releases for M*Ware are under development for release in 2003.

The primary data mediated by M*Ware is network: fault, performance, configuration and security data. Therefore M*Ware is complementary to billing mediation that transforms usage/billing data. M*Ware management capabilities are extensions to the mediation platform and capture and translate data into information and actionable provisioning and configuration, monitoring, security, and repair events.

Upgrading to M*Ware has provided customers with a variety of cost effective new options including dramatic performance and functionality improvements. As an example, customers have:

One of the features customers appreciate the most is the flexibility M*Ware provides by supporting a wide variety of platforms, databases and reporting tools, including public domain products. This strategy delivers the greatest possible flexibility and creates new options for customers to leverage existing investments.

Traditionally, Vertel’s customers had to either invest in significant numbers of development resources to keep up with the multiple standards and technologies or limit the capability and advantages of their data sharing systems. Now customers have a third option that leverages existing investments, gains access to the advantages of new technology and provides a migration path to upgrade to new technology solutions when the business is in

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a better position to make such investments. With M*Ware a customer is able to purchase one product that can be configured to address a portion of their management and mediation needs and later, cost effectively add another component to address new or increasingly difficult challenges.

M*Ware permits different protocol-based network elements to communicate and be managed as a single system. Without mediation and management solutions, customers would have to:

In addition to the decision to develop a single platform for M*Ware, the Company also decided to align all business units and product lines around the M*Ware mediation and management strategy. As a result, the Vertel management team developed a core set of objectives to guide efforts in 2002. These objectives were:

Early in 2002, Vertel began to consolidate these separate businesses and products around the new M*Ware strategy—essentially consolidating five business units into one. These consolidations reduced operating expenses through the elimination of redundant business functions.

M*Ware Products and Services

In 2003 the Company’s operational objectives are to focus on solid business execution and revenue growth from the following market opportunities:

Mediation and Management Products:  These include tools that allow customers to build and test their own connectivity, mediation, management and exchange solutions or to extend the standard M*Ware solutions provided by Vertel. These products are primarily sold through the Company’s direct sales force to independent software vendors (ISVs) and network integrators, as well as network equipment manufacturers.

M*Ware mediation and management products yield license and maintenance revenues from direct sales as well as royalties whenever a customer deploys M*Ware solutions within products they sell to their customers. In some cases service providers and enterprise IT organizations also purchase M*Ware product components and development environments to accelerate custom network connectivity and management efforts addressed by their in-house development staffs. These sales are also principally made by Vertel’s direct sales force and also yield development and production deployment licensing fees.

Mediation and Management Solutions:  These include proprietary developed off-the-shelf solutions developed by Vertel based on the M*Ware product line. These solutions are primarily sold by the direct sales force to telecommunications service providers, enterprise IT organizations and equipment manufacturers. In each case M*Ware Solutions are sold as deployment licenses and may include the additional sale of professional services (such as configuration and implementation services) or development licenses that grant in-house developers the right to perform their own configuration and extension work.

Professional and Support Services:  These primarily include M*Ware product and solution implementation, training and related support services to customers. They may also include implementation, training and support of custom connectivity, mediation and management solutions that in general can only

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In the future, the Company intends to focus efforts on packaging and delivering capabilities around the following three suites of already-developed products, solutions and services:

M*Ware Mediation and Management Products

The M*Ware product line is based on a flexible, self-managed, mediation platform that supports dynamically activated services (modules providing specific business functions) and adaptors which support a variety of standards-based protocols and application interfaces. The M*Ware product line also offers a development environment that allows developers to use model driven development tools and techniques to automate a substantial portion of custom service and adaptor development including associated database and self management configurations. With M*Ware, any type of network management application solutions (mediation, management or exchange) can be developed and/or configured.

There are four groups of M*Ware Product components:

Mediation Engine: Self-managed solutions that supports a variety of platforms, databases, orbs, and reporting tools

Adaptors: Interfaces that provide connectivity to hardware and applications

Services: Business logic that converts network data to actionable events

Development Environment: Test and Model Driven Architecture (MDA) tools including simulators, protocol stacks and a compiler suite.

M*Ware Component Architecture

M*Ware Mediation Engine:  The M*Ware Mediation Engine provides the platform for translation and routing of all network data that passes through an M*Ware-based solution. The Mediation engine collects fault, performance, configuration and security data from activated adaptors, translates and stores this data in a Common Information Model (CIM) and notifies activated services of specific data-driven events. The M*Ware CIM is also accessed by those components within M*Ware Services that are responsible for translating network data into network information that is also stored in the CIM.

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M*Ware Adaptors:  M*Ware interfaces to network elements and systems using advanced adaptor technology. Adaptors +communicate fault, configuration, performance, and security data using such technologies as CMIP, SNMP, TL-1, ASCII, CORBA and XML. All adaptors provide both northbound and southbound functionality for networks and applications connectivity. M*Ware also includes a set of off-the-shelf application adaptors (such as adaptors for Remedy ARS, Siebel e-business and Clarify products) and development tools that can be used to build custom adaptors.

M*Ware Services:  The M*Ware product-line provides all the software components, M*Ware Services, needed to manage network information. M*Ware Services include pre-packaged business logic responsible for translating raw network data into information that can be acted upon. The services also automate the actions necessary for provisioning and configuration, monitoring and repairing complex networks. M*Ware Services also store transformed information and event detail in the M*WARE CIM for later access in reporting and analysis.

M*Ware Services support the following standards-compliant business functions: House Keeping, Alarm Management, Performance, Topology, Inventory, Event, Log, Naming, Activity, Downstream Transport, Profile, Scripting, Inventory Discovery, Network Discovery, Software Management, Audit, Delayed Activation, Request Multicast, Protection Switching, Connection Management, Test Management, Fault Tolerance, Rules-based Mediation, Script-based Mediation, Trouble Ticket Management, and Simple Scanner. Additional services are constantly under developed by Vertel and custom services can easily be developed using the M*Ware Development Environment.

M*Ware Development Environment:  The M*Ware Development Environment (DE) is based on Model-Driven Architecture and includes compilers, simulators, protocol stacks and other technologies that greatly reduce the time required to configure and test adaptors, services, data bases and mediators. M*Ware DE tools also have been proven to significantly accelerate the in-house development of custom network integration, mediation and management solutions.

M*Ware Development Environment Process

M*Ware Mediation and Management Solutions

Vertel has developed an off-the-shelf suite of network mediation and management solutions that can dramatically improve the integration and management of complex networks. These solutions can be quickly deployed to address specific business challenges. Once an M*Ware Solution has been deployed, customers can cost effectively activate additional M*Ware functionality addressing other costly business challenges or enabling integration of new network investments. The M*Ware Mediation and Management Solutions to date include: Mediation, Convergent Network Management, and Exchange.

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M*Ware Mediation Solutions:  M*Ware Mediation enables convergence and can be a very attractive alternative for replacing networks and/or support systems and can significantly extend the lifetime of existing resources. M*Ware mediation supports all major network equipment and protocols covering fault, configuration, performance and security data. M*Ware offers two different types of mediation: dynamic mediation and compiled mediation.

Compiled Mediation provides the highest performance and can address the most complex distributed mediation solutions. Dynamic Mediation provides the flexibility to change business logic or add new functionality to a mediation component of a running system. Both solutions offer distributed protocol and application mediation that provides a highly scalable solution to network protocol and OSS application integration.

M*Ware Convergent Network Management Solutions:  M*Ware Convergent Network Management includes multiple technology umbrella management, service management, network management and element management.

Integrated or umbrella management are rapidly becoming key requirements for service providers. Without a seamless, highly automated control system, correlating the events in different networks with services offerings and customers is next to impossible. Without this capability delivering and managing to specific SLA objectives is extremely difficult.

M*Ware Convergent Network Manager delivers a new network management strategy to Vertel’s customers. A single system with complex distribution capabilities can now manage elements, network-to-network connectivity, service availability and customer impact analysis. For example, service providers and enterprise IT organizations can use a portion of the M*Ware Convergent Network Management to improve the ability to configure, monitor or manage a complex or highly proprietary network device. Customers can then enhance this basic use to manage collections of disparate devices thereby expanding M*Ware capabilities based on internal business priorities and budget. Providing customers with the ability to grow a single solution from element management to complex umbrella management is critical to leveraging their existing network investment.

Supporting multiple network technologies and management systems in a single platform allows customers to dramatically reduce operational costs and offers a cost effective method for quickly integrating future investments.

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Relating network problems to impacted customers and to their specific applications within a common platform enables customers to transition from managing devices to managing service availability and customer satisfaction. M*Ware Convergent Network Manager provides a set of plug-in services that perform this customer service correlation to perfection.

SLA Demands Driving Convergent Network Management

M*Ware Exchange Solutions:  Manual interfacing processes between communication service providers and their partners and customers dramatically impact operational costs and service quality. New, complex services like 3G require intense collaboration between different network, access and content providers. M*Ware Exchange automates telecommunications electronic bonding processes and allows customers to focus on core capabilities and efficiently leverage partners.

Electronic collaboration for networks and services requires more than basic document exchange. Development and maintenance of complex content, process, application interfaces and end-to-end monitoring are all difficult challenges. M*Ware exchange is capable of addressing all of these specific challenges and is designed to extend the automated enterprise.

M*Ware Ticket Exchange automates the exchange of trouble tickets between existing CRM systems and reduces the cost of Customer Care with every interaction between the internal helpdesk, business partners

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M*Ware Fault Exchange goes a step further and mutually informs service providers, their partners and customers about real-time network and service fault, performance, configuration and security events. Manual errors are avoided and the efficiency of notification, diagnosis and repair processes is increased.

M*Ware QoS Exchange provides the final piece of the partnering puzzle by performing real-time correlation and exchange of SLA issues and repair statuses.

The Company typically warrants products for thirty days and, as of year-end, there have been no significant product warranty issues.

Professional and Support Services

In part, successful adoption of M*Ware depends on the ability of telecom service providers, network operators, network hardware and software vendors as well as systems integrators to implement these solutions and utilize Vertel’s Mediation Framework quickly and cost-effectively. As such, Vertel has a fully dedicated professional services group as well as a technical support group.

Professional Services Group:  The Company’s Professional Services Group works with systems integrators, application developers and in-house engineers to enable customers to deploy a complete solution. Professional services include program management, system analysis and design, source code porting, conformance testing and certification as well as custom application development. Professional services are generally provided based on a detailed statement of work. Staff located in Poland, Germany and the United States provides these services.

M*Ware solutions provide customers with turnkey projects for mediators that integrate management systems. Mediation-based projects typically mediate between equipment, equipment management systems, network management systems or service management systems. Other possible projects include customization to create platforms or proprietary interfaces.

To ensure customer engagements are delivered on time, on budget and on functionality, Vertel has developed a standard, formal, project management methodology for use by its Professional Services staff worldwide. Precision / Predictable / Program Management, or (3) PM^SM, defines the policies and procedures used by Vertel project managers to successfully complete customer engagements. These policies and procedures, together with a series of standard document templates, cover the entire project’s life cycle within five main components: business development, project definition, project delivery, project completion and program quality and control.

During the course of any customer engagement, it is critical that certain controls exist to ensure, at a minimum, that changes are adequately documented, communications channels established, schedules developed, base-lined and tracked, and sufficient status is provided to ensure quick verification of a project’s progress.

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(3) PM^SM templates provide the Vertel professional services project team with standardized tools that utilize best practices for program management activities including:

Vertel’s Program Management Office constantly monitors (3) PM’s effectiveness to ensure it remains up-to-date when warranted based upon both the customer and project team feedback.

Technical Support Group:  M*Ware offers a broad range of technical support services to assist customers in designing and operating integrated solutions. Support consists of the following services:

Training:  The Company trains customers on a per-product basis. Training services range from detailed technical tutorials on technology products to product configuration, management and training on end-user products.

Product Support and Maintenance:  Vertel provides global coverage 24 hours a day, seven days a week with on-demand access to technicians and product support engineers. In response to a high demand for expert-level, on-site product support, the Company also offers on-demand service staffed by highly competent product experts. Staff located in US, Korean and European facilities typically provide this product support. Customers subscribing to product support and maintenance also receive periodic software updates and maintenance releases.

On-site Consulting:  Vertel’s software engineers are available for travel to customer sites for specified periods to consult on system design, training, customization and development support.

Customer Benefits

Vertel’s mediation and management products and solutions offer a number of benefits to telecommunications operators and equipment manufacturers, software vendors and telecom systems integrators serving telecom operators:

Improve Time to Market.    As opposed to independently developing protocols, connectivity software and management functions from scratch, the Company’s products and services enable customers to produce proprietary, standards-compliant network management solutions for their products faster and with fewer developers. M*Ware provides off-the-shelf standards-based software that customers can easily and quickly embed in their products and systems. This reduces development efforts and improves the quality of the overall end product. Vertel also offers turnkey services that solve critical service assurance functions with minimal, if any, customer development time.

Reduce Costs.    M*Ware software solutions enable telecommunications operators to reduce costs by efficiently managing diverse networks and network equipment with a single, integrated management system. Unlike many proprietary systems, M*Ware solutions do not require large, expensive technical organizations for additional development and maintenance. By employing standard interfaces and the latest in state-of-the-art technology, M*Ware solutions allow multiple systems to connect across applications, networks, vendors and systems. This interoperability enables telecom service providers to purchase the most cost-effective equipment from a broad range of vendors. In addition, by utilizing Vertel’s Professional Services Group customers can reduce the cost of their in-house development efforts.

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Drive Incremental Revenues.  M*Ware’s network management solutions also enable telecommunications service providers to bring new functionality and services to market more rapidly by providing an integrated, standards-based suite of tools that facilitate the rapid development and deployment of new software applications and solutions across different telecom networks. For example, Vertel’s products have been used by telecommunications switch equipment manufacturers, operations support systems (OSS) vendors and telecommunications service providers to provide data collection information to support billing, trouble ticketing and inter-service provider exchange of management information.

Implement Complete Solutions. Successful implementation requires seamless vertical integration of network management and back office systems that are often based on disparate protocols. M*Ware provides the best commercially available suite of products and services with complete end-to-end solutions.

Preserve Existing Investments.    M*Ware solutions enable telecommunications service providers to continue to use and integrate their existing legacy systems with newer, standards-based systems. M*Ware manages CORBA, TL1 (Bellcore’s Transaction Language 1), SNMP and other legacy equipment and systems.

Enhance Partner and Customer Communications.    M*ware enables the deployment of systems that allow telecommunications service providers and network operators to manage new and existing services and equipment across multiple service provider networks. The products also enable enterprise network operators to deploy systems that manage the services of multiple service providers.

Competition

Competition in the market is intense and is characterized by rapidly changing technologies, evolving industry standards, the development of in-house or proprietary solutions, frequent new product introductions and rapid changes in customer requirements. Moreover, it is expected that the market will continue to experience new entrants in the foreseeable future.

To maintain and improve its competitive position, the Company must continue to develop or acquire, in a timely and cost-effective manner, new services, products and/or product features that keep pace with competitors’ offerings, technological developments and changing industry standards.

Vertel’s current and prospective competitors offer a variety of products and services to address focused problems in the network and systems management applications market as well as the mediation market. The Company’s strategy is to make these solutions work together to leverage customers’ investments in whatever technology they deem necessary to meet their business objectives and remain competitive.

Competitors for each product lines are as follows:

Mediation:  Competitors are primarily internal software development organizations and large consulting firms. Network mediation is very different compared to enterprise application integration. However, most customers already deploy EAI products in their BSS layer and use these tools to develop network integration solutions despite clear deficiencies. Companies such as Tibco, Vitria, WebMethods, BEA and IBM, as well as several smaller companies provide EAI products.

Network Management:  Competitors are primarily internal software development organizations and, to a lesser extent, smaller companies that provide products similar to components in Vertel’s Convergent Network Management product family. The Company continues to see some competition in the network and service management space from equipment manufacturers that have extended their element management offerings. These competitors typically face integration issues when building solutions incorporating disparate products.

TMN Tools and Services:  Competition in this market segment continues to shrink as TMN standards fall from favor within the telecommunications industry. However, integration between TMN and newer

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Exchange:  Competitors include providers of hosted exchange services, gateway products, e-commerce products, extended EAI products and proprietary products. EAI and e-commerce products see the telecom market as additive and lack specialized features. However, since they may already provide more generic business services to telecom players, they remain a serious competitor.

Most of the specialized competitors focus on the US provisioning and billing/clearing market. Several have recently been acquired or ceased operations. Internal software development in this market continues to be the primary competition.

Many current and potential customers are continually evaluating whether to design, develop and support their own proprietary telecommunications network management systems and applications or purchase them from outside vendors. These customers have traditionally designed and developed their own software solutions internally for their particular needs and are often reluctant to purchase products offered by independent vendors. Nevertheless, a significant percentage of telecommunications network management solutions are still developed in-house. In addition, despite its limitations for deployment in public or very large enterprise networks, SNMP continues to serve as the de facto standard for managing enterprise data networks. As a result, the Company must continuously educate existing and prospective customers on the advantages of open management technology versus internal, proprietary telecommunication network management systems and management applications.

The global acceptance of Vertel’s technologies could lead to increased competition as third parties develop telecommunications network management systems and management applications. Some of these competitors may be able to respond more quickly to new technologies and changing customer requirements. These competitors may also be in a position to devote greater resources to the development, promotion and sale of their products. There is no assurance that Vertel’s development efforts can keep pace with current or potential competitors that may develop products comparable or superior to those developed by Vertel or adapt more quickly than to new technologies, evolving industry standards, new product introductions or changing customer requirements.

Proprietary Technology

The Company primarily relies on a combination of copyright, trade secret and trademark laws and nondisclosure and other contractual restrictions on copying and distribution to protect its proprietary technology. As part of confidentiality procedures, the Company generally enters into nondisclosure agreements with employees, consultants, distributors and corporate partners and limits access to and distribution of software, documentation and other proprietary information. It may be possible for a third party to copy or otherwise obtain and use Vertel products or technologies without authorization, or to develop similar technologies. The Company also routinely licenses portions of its source code to certain customers and distributors and there can be no assurance that the foregoing measures are adequate to protect proprietary technologies. In addition, products are licensed in other countries and the laws of such countries may treat the protection of proprietary rights differently or to a lesser extent than laws in the United States.

Dependence on Particular Customers

The Company continues to expand its customer base and broaden its sales constituency. These efforts have reduced the reliance on any one particular customer. Nevertheless, in 2002 the Company sold a substantial amount of products and services to several major customers. Verizon and Nokia accounted for 13.0% and 10.2% of net revenues, respectively. No other single customer accounted for more than 8% of net revenues in 2002. The loss of any one of these customers could have a material adverse affect on the Company. In 2001 Alcatel accounted for 14.5% of Company of net revenues. No other single customer accounted for more than 10%.

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Sales, Marketing and Customers

The sales cycle for the Company’s products is lengthy and often entails providing a significant level of education to prospective customers related to the use and benefits of the products. As a result, the Company sells primarily through a direct sales, support and marketing organization of highly skilled technical sales people. In addition, the Company sometimes uses third-party agents in certain territories and distributor sales channels. On December 31, 2002 the direct sales, support and marketing organization consisted of 22 people, including agents.

The Company typically transacts business worldwide in U.S. currency. International revenues from export sales totaled approximately $3.0 million in 2002. Historically, there has not been a backlog of license sales because the Company is able to fill all license orders upon receipt of a firm purchase order.

See additional disclosures regarding international sales and assets located in foreign countries in Note 12 to the accompanying consolidated financial statements.

Research and Product Development

The Company expects to continually enhance M*Ware Product and Solutions and to develop new products to meet ever-changing customer requirements. A separate product management staff works with customers, industry experts and strategic partners to ensure existing products evolve and new products develop to satisfy market requirements. The Company’s future depends in large part on its ability to capitalize on core technologies by developing applications that utilize them, enhance existing products, develop new products, maintain technological competitiveness and meet a wide range of customer needs. The Company intends to continue to invest in research and development.

The Company’s research and development organization is located principally in Dallas, Texas and Poznan, Poland. In July of 2002, the Poznan center received its ISO9001 2000 certification. As of December 31, 2002, the research and development group consisted of 24 people. Research and development expense totaled $4.3 million, $4.0 million and $5.2 million for the years ended December 31, 2002, 2001, and 2000, respectively.

Principal Offices

Vertel’s principal offices are located at 21300 Victory Boulevard, Suite 700, Woodland Hills, California 91367. The telephone number is (818) 227-1400 and the Company’s website address is www.vertel.com.

Employees

A continued decline in market conditions in 2002 led the Company to reduce the number of employees from 109 on January 1, 2002 to 91 on May 10, 2002 and then again to 64 on October 31, 2002. As of December 31, 2002 the Company employed 61 employees, of which 24 were primarily engaged in research and development activities, 18 in sales and marketing, 12 in professional services and support, and 7 in general management and administration. On February 28, 2003 the Company further reduced the number of employees to 47, including 16 in sales and marketing, 15 in research and development, 10 in professional services and support, and 6 in general management and administration.

The Company’s future performance depends significantly on the continued efforts of senior management and other key personnel in product development, support and sales. Future success will also depend, in large part, on the Company’s ability to attract and retain qualified personnel. The Company believes it can attract and retain qualified employees with competitive compensation in the form of salaries, benefits, equity participation and a workplace environment. The Company has no collective bargaining agreements with employees and has never experienced a work stoppage. The Company believes employee relations are good.

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In October 2001, the Company’s President and Chief Executive Officer, Cyrus Irani, stepped down from his position to pursue other interests. Mr. Irani continued in a consulting capacity through March 2002 and remained a member of the board of directors until his resignation on August 15, 2002.

In October 2001, Marc Maassen was named President and Chief Executive Officer.

In January 2003, the Company’s Chief Financial Officer and Vice President of Finance and Administration, Craig Scott, stepped down from his position to pursue other interests. Concurrent with that announcement the Company retained T. James Ranney as interim Chief Financial Officer and Vice President of Finance and Administration.

Web Site Information

The Company currently does not offer hyperlinks to its financial statements or report filings with the Securities and Exchange Commission (SEC) on its web site but is working toward being compliant in the near future.

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RISK FACTORS

There is Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The Company has reported operating losses from continuing operations for each of the most recent five fiscal years. For the year ended December 31, 2002 operating losses were $14,429,000. As of December 31, 2002 the Company had an accumulated deficit of $97,599,000 and negative working capital of $2,006,000, which includes cash and cash equivalents amounting to $881,000.

The inability thus far of the Company to generate sufficient revenues to offset expenses raises substantial doubt about Vertel’s ability to continue as a going concern and the Company may, therefore, be unable to realize assets and discharge liabilities in the normal course of business. The Company expects to continue to incur operating losses throughout the first half of 2003 and currently spends about $2.4 million per quarter in expenses. Management has approved a plan of operation for 2003 that forecasts modest sales growth and additional expense reductions. If the plan is met, the Company will require additional short-term borrowings to meet cash flow needs in 2003. If operating income is not achieved and Vertel is not able to raise additional equity capital the Company may not be able to continue as a going concern.

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

If The Worldwide Economic Slowdown Continues, The Company’s Revenues May Continue To Decline And This Would Have A Material Adverse Affect On The Company

The telecommunications sector continued to languish in 2002. The slowdown in the U.S. economy that began in 2000 has caused many of Vertel’s customers to re-evaluate their purchasing strategies. This has lengthened an already lengthy and unpredictable sales process.

Many industry analysts predict that the softness within the telecommunications industry may continue through much of 2003. If the softness in the worldwide economy continues, the telecommunications industry will most likely continue to be adversely affected and in turn, the Company’s revenues may continue to decline.

The Company’s Quarterly Results Are Likely To Fluctuate Significantly And Any Negative Changes In Quarterly Results Will Likely Have A Material Adverse Affect On The Company’s Stock Price

A substantial portion of the Company’s revenues have been, and will continue to be, derived from a small number of large software orders placed by large organizations after their extensive evaluation and review. In addition, a significant portion of the Company’s software license revenues occur in the last month of each quarter, and frequently in the last weeks or even days of the quarter. As such, small delays in the timing of any one order may cause material fluctuations in operating results, particularly from quarter to quarter.

In addition, the Company’s quarterly operating results may vary significantly depending on factors such as: the capital spending patterns of customers; changes in the pricing policies of the Company or its competitors; increased competition; the cancellation of service or maintenance agreements; changes in operating expenses, changes in personnel, changes in demand for the Company’s products; the significance, number and timing of existing product enhancements and new product introductions as well as the timing of their announcements by the Company and/or its competitors; the mix of U.S. and international sales; the mix of direct and indirect sales; and other general economic conditions.

Based on these factors, the Company believes quarterly revenues and operating results will likely vary significantly in the future and that period-to-period comparisons of operating results may or may not be meaningful and may or may not be relied on as indicators of future performance. There is no assurance that

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revenues will increase or will be sustained in future periods or that the Company will be profitable in any future period. Furthermore, the price of the Company’s common stock will likely be materially adversely affected by negative fluctuations in the Company’s quarterly revenues and operating results.

The Company’s Stock Price Has Been Historically Volatile And Trading Was Moved From The NASDAQ National Market To The NASDAQ Small Cap Market And Then To The OTCBB After Successive De-listings In February and August 2002, Respectively. This May Make Shares Of The Company’s Stock More Difficult To Re-sell At The Time You Want And At Prices You Find Attractive

In general, the stock market and stock prices of technology-related companies in particular, have experienced extreme volatility that has at times been unrelated to the operating performance of any particular company or companies. In February 2002, NASDAQ notified the Company of its intent to de-list the Company’s securities from The NASDAQ National Market. In April the stock was de-listed and moved to The NASDAQ Small Cap Market. Subsequently the stock did not meet the $1.00 per share minimum bid price requirement and in August 2002 was de-listed from the NASDAQ Small Cap Market and moved to the Over-The-Counter Bulletin Board. As a result of these de-listings the Company’s stock is more thinly traded and the Company is in default under the terms of its outstanding convertible securities (First and Second Notes and Warrants) identified in Note 5 of Item 8: Financial Statements and Supplementary Data. As a consequence of such defaults, the holder of the notes and warrants could demand repayment of the notes at the prepayment price (115% of the principal outstanding), could convert the remaining principal on the notes (significantly diluting current shareholders), or exercise or otherwise enforce any one or more rights under the applicable agreements.

The Company’s stock price could become subject to wide fluctuations in response to factors such as the following: actual or anticipated variations in quarterly operating results, sales of substantial amounts of common stock; announcements of technological innovations, new products or services by the Company or competitors; changes in the financial estimates or recommendations of securities analysts; conditions or trends in the telecommunications industry; changes in the market valuations of other telecommunications software companies, Company announcements of significant acquisitions, strategic relationships, joint ventures or capital commitments; additions or departures of key personnel; general market conditions; or other events or factors, many of which are beyond the Company’s control.

In the past, securities class action litigation has often been brought against companies following periods of volatility in their stock prices. In the future, the Company may be the target of similar litigation. Securities litigation could result in substantial costs and significantly divert management’s time and resources, thereby causing the business to suffer.

If the Company’s stock price continues to be volatile or the stock becomes illiquid, it may become more difficult for shareholders to sell shares at a particular time or at an acceptable price, thereby adversely affecting the Company’s ability to raise additional capital.

If the Company’s Note Holders Convert Their Promissory Notes And Exercise Warrants, Existing Shareholders’ Interests Will Be Significantly Diluted; And Future Sales Of A Substantial Amount Of Company Stock Could Cause The Price To Fall

On January 3, 2002, the Company sold a convertible promissory note in the amount of $3,500,000 and issued corresponding warrants to purchase 800,000 shares of common stock. On August 13, 2002 the Company sold a second convertible promissory note in the amount of $3,100,000 and issued a corresponding warrant to purchase 2,625,000 shares of common stock. Pursuant to the terms of the August transaction, both notes are secured by all of the Company’s assets. In addition, $1,500,000 of the proceeds from the August note were used to reduce the outstanding principal balance on the January note.

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To the extent that the convertible promissory notes are partially or entirely converted and related warrants are exercised, a significantly greater number of the Company’s common shares will be outstanding and will substantially dilute the interests of existing shareholders. If these additional shares were sold into the market, they could serve to greatly reduce the market price of the Company’s common stock and would likely encourage short sales that could result in further downward price pressure.

The Company’s common stock is thinly traded and the price is considered volatile. As a result, if a shareholder sells substantial amounts of common stock, including any shares issued on exercise of outstanding options and warrants and conversion of convertible promissory notes, the market price of the common stock could fall significantly as a result. Such sales also may make it more difficult for the Company to sell equity or equity-related securities in the future at a time and price deemed appropriate. In addition, such sales could make it more difficult for the Company to obtain future financing when most needed and may affect its ability to execute operating plans.

If Certain Events Occur, The Company May Be Required To Pay Substantial Penalties To The  Note Holder

Under terms of the promissory note agreements, the Company is required to pay substantial penalties to the note holder under specific circumstances including, among others, the following: failure to pay principal or interest on the convertible promissory notes when due; failure to deliver shares of common stock upon conversion of the convertible promissory notes and exercise of warrants; failure to maintain the listing of common stock on The NASDAQ SmallCap Market for a period of five consecutive trading days; failure to comply with a request for conversion of the convertible promissory note or exercise of warrants; failure to maintain the effectiveness of the registration statement covering the shares of common stock required upon conversion of the promissory notes and exercise of warrants; failure to perform or observe any material covenants or conditions; making a material misrepresentation or false warranty; failure to obtain timely shareholder approval for the issuance of additional shares of common stock as required for the conversion of the promissory note and exercise of warrants,; failure to make payment of any indebtedness in excess of $100,000 or failure to perform any agreement or condition relating to the indebtedness that causes or permits or requires the acceleration or early repayment; the Company files for or consents to the filing of bankruptcy or makes or permits a general assignment for the benefit of creditors or appoints a trustee, receiver, custodian or liquidator for a substantial part of property or assets; or a proceeding or case is commenced against the Company seeking  (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or (iii) a dissolution.

As of the date of this Form 10-K filing, the Company’s common stock has been de-listed as detailed above and the Company has failed to maintain sufficient authorized shares and to register the necessary shares to support the underlying convertible promissory notes and warrants as agreed. Although the holders of the notes and warrants could demand repayment of the notes at the prepayment price (115% of the principal outstanding), demand an increased interest rate during the period of default, seek money damages for lost stock sales opportunities during the period of default, convert the remaining principal on the notes (significantly diluting current shareholders), or exercise or otherwise enforce any one or more rights under the applicable agreements, the note holders have not advised the Company that it is in default or taken any other remedial action.

If The Company Does Not Achieve Its Operating Plan In 2003 And Is Unable To Raise Additional Working Capital, The Company Will Not Be Able To Successfully Deploy Products And Services And May Not Be Able To Continue Operating

The Company has reported operating losses from continuing operations for each of the most recent five fiscal years. The Company incurred net losses of $15.0 million, $12.1 million and, $5.3 million, for the years ended December 31, 2002, 2001 and 2000, respectively. Losses from operations were $14.4 million, $11.7 million, and $7.0 million for the same years. In 2002 the Company reported a negative cash flow from

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operations of approximately $6.6 million. At December 31, 2002, the Company had negative working capital of $2,006,000, which included $881,000 of cash and $1.8 million of net accounts receivable.

The Company believes that further headcount reductions in February 2003, coupled with the $500,000 raised in late March as well as other cost savings efforts that are underway, will see the Company through the near-term. However, if the Company does not achieve revenue targets or the degree of cost savings anticipated are not realized, the Company may not have sufficient cash to fund operations beyond the second quarter of 2003 and would be unable to continue as a going concern.

If The Company’s New Products Are Not Widely Adopted, The Company Will Likely Be Materially Adversely Affected

The Company’s future success will depend in large part on the ability to effectively maintain existing relationships and develop new relationships with telecommunications service providers. In 2002, the Company introduced its new M*Ware suite of product offerings based on Common Object Request Broker Architecture (CORBA). If a different protocol becomes the standard in the telecommunications industry, service providers will be less likely to purchase CORBA products. Telecommunications service providers have historically depended on proprietary systems and not standards. While the Company has invested substantial efforts to encourage the adoption of CORBA by service providers, Vertel does not have ultimate control over this process and cannot provide any assurance that CORBA will be ultimately adopted. Telecommunications service providers could adopt a competing standard or no standard at all. Similarly, they could adopt CORBA, but outside of Vertel’s projected timeframe. If telecommunications service providers adopt a standard other than CORBA, or adopt CORBA but not in a timely way or do adopt no standards at all, the Company’s business, operating results, financial condition and strategic position would be materially adversely affected.

If The Company Is Unable To Substantially Increase Its Customer Base For New Products, Or If The Company’s New Products And Services Do Not Adequately Address Customers’ Needs, The Company Will Be Materially Adversely Affected

The markets for M*Ware are characterized by rapidly changing technologies and frequent new product introductions. These markets are highly competitive and are subject to frequent technological changes. Vertel’s future success will depend on its ability to enhance existing products and to develop and introduce new products that achieve market acceptance on a timely basis.

Vertel’s largest current and potential competitors, such as Accenture, Compaq, Micromuse, NightFire, Hewlett-Packard, Microsoft, Sun Microsystems and Telecordia all have longer operating histories and greater resources than Vertel. As a result, the Company may not be able to effectively respond to changing customer requirements, new technologies or product developments by competitors.

As markets develop further, a number of companies with resources significantly greater than Vertel’s could attempt to increase their presence in the marketplace by acquiring or forming strategic alliances with competitors. If any new or enhanced Company products are not widely accepted by customers or if the Company is unable to successfully identify, develop, manufacture, market or support new products or if the Company is unable to respond effectively to changing customer requirements, technological changes, revisions in industry standards or competitive product offerings, the Company’s business, financial condition and operating results could be materially adversely affected.

Vertel expects new products and related services will account for a substantial portion of revenues in the near future. Since the Company expects to rely less on existing products for future revenues, factors adversely affecting the price or demand for new software solutions (such as competition for new products or lack of customer acceptance) could have a disproportionately adverse affect on the Company’s business, financial condition and results of operations.

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Vertel’s International Sales Are Subject To Factors Outside Of The Company’s Control And Are Subject To Currency Fluctuations That Could Have A Materially Adverse Affect

Sales to customers outside the United States comprised approximately 36%, 38% and 30% of net revenues in 2002, 2001 and 2000, respectively, and in the near-term, the Company expects international sales will continue to account for a significant portion of net revenues. International sales and operations are subject to many factors beyond the Company’s control, such as the imposition of governmental controls, export license requirements, restrictions on the export of critical technology, political instability, trade restrictions and tariffs. Furthermore, since offices are maintained in different countries in order to facilitate sales, management must address differences in regulatory environments and cultures in those countries. If the Company were unable to successfully address these differences, the Company’s business, financial condition and results of operations would be adversely affected.

Although international sales are typically denominated in U.S. Dollars, weakness in foreign currencies could increase the cost of the Company’s products in foreign markets, resulting in a slow down or cancellation of sales. Fluctuations in exchange rates could also result in exchange losses. The Company is unable to adequately predict the impact of future exchange rate fluctuations and although it has not sought to hedge these risks, it may begin hedging such risks in the future. The Company’s business, financial condition and results of operations may be materially adversely affected by fluctuations in exchange rates.

If The Company Is Unable To Adequately Protect Intellectual Property Or If The Company Infringes On The Intellectual Property Of Third Parties, It Could Be Materially Adversely Affected

Vertel’s products are considered to be proprietary and the Company relies on a combination of statutory and common law copyright, trademark and trade secret laws, customer licensing agreements, employee and third party nondisclosure agreements and other methods to protect proprietary rights. The Company generally enters into confidentiality and invention assignment agreements with employees and consultants and routinely enters into confidentiality agreements with customers and potential customers to limits access to and distribution of source code and other proprietary information. Despite these precautions, however, a third party may be able to copy or otherwise obtain and use Company technologies without authorization or develop similar technologies independently. Furthermore, the Company conducts business in certain countries, such as China and Korea, which do not have laws that protect software and intellectual property rights to the same extent as the laws in the United States.

Some of the Company’s software does not contain any mechanisms to prevent or inhibit unauthorized use. Generally, the Company either requires the execution of an agreement that restricts copying and the use of products or provides for the same restrictions in a “break-the-seal” license agreement. The unauthorized copying or misuse of the Company’s products to any substantial degree could have a material adverse effect on the business, financial condition and results of operations. Furthermore, the Company cannot provide any assurance that the means employed to protect proprietary rights will be adequate. There are also no assurances that competitors will not independently develop similar technology.

Vertel has not received any claims by third parties alleging infringement on their proprietary rights nor is it aware of any threatened claims by third parties regarding any of the Company’s future product offerings. Any claim, with or without merit, could result in costly litigation, require the Company to cease using third-party products or require the Company to enter into royalty or licensing agreements. If required, such agreements could be on unfavorable terms.

The Company’s Future Growth Will Depend On Its Ability To Make And Successfully Integrate Additional Acquisitions That May Involve Risks

Vertel’s success depends on the Company’s ability to continually enhance and expand products and services in response to changing technologies, customer demands and competitive pressures. As a result, the Company

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has acquired complementary technologies or businesses in the past and may do so in the future. If Vertel is unable to identify suitable acquisition targets, successfully complete acquisitions or successfully integrate into existing business operations any acquired business, technology or personnel, the Company’s ability to increase product and service offerings could be greatly reduced. In turn, this could cause the Company to lose business to competitors and have an unfavorable impact on operating results.

Vertel is actively seeking to identify and acquire companies with attributes complementary to the Company’s existing products and services. In May 2001, the Company made its most recent acquisition. Any acquisitions involves numerous risks, including: diverting management’s attention from other business concerns; maintaining uniform standards, controls, policies and procedures; integrating the acquired businesses, technologies and other assets successfully into the existing business; and entering markets that the Company has limited or no direct prior experience to draw upon. The Company may also improperly evaluate new services and technologies or otherwise being unable to fully exploit the anticipated opportunities. If the Company inaccurately assesses any newly acquired businesses or technologies, Vertel may suffer.

Future acquisitions may involve the assumption of obligations or impairment charges related to goodwill and other intangible assets. In addition, in order to finance any future acquisition, the Company may need to raise additional funds through public or private financings. In this event, Vertel could become obliged to obtain equity or debt financing on unfavorable terms that may result in shareholder dilution.

The Company Faces Competition From Proprietary Solutions And Freeware

In a tightening economy, customers may be reluctant to purchase the Company’s products and services and rely instead on internally developed, proprietary solutions or freeware. Although these solutions may not be supported and may have higher long-term development costs, they do pose a market threat, particularly for the Company’s Mediation Framework and CORBA based product lines.

Changes In Governmental Regulations Could Make Products Less Marketable

The telecommunications industry is subject to regulation and control in the United States and other countries. As a result, the Company’s customers and the products they use are often subject to regulatory approvals from multiple organizations with varying standards. The enactment of new laws or regulations or amendment of existing laws or a change in the interpretation of existing laws by federal, state or foreign governments could adversely affect the Company’s products and the businesses of current and potential customers, thereby affecting the Company’s business, financial condition and operating results.

Certain Portions Of The Company’s Costs Are Fixed In The Short Term

Because only a small portion of Vertel’s expenses varies with revenue in the short term, net income may be disproportionately affected by a reduction in revenue, particularly since any reduction may not become apparent until the last days of a quarter. Similarly, to the extent any additional expenses are not subsequently followed by an increase in revenues, the Company’s business, financial condition and operating results could suffer. Furthermore, if revenue levels are below expectations, operating results are likely to be materially adversely affected.

Lengthy Sales Cycle Makes Revenue Projections Difficult

Vertel’s product offerings typically have lengthy sales cycles and are subject to delays beyond the Company’s control. The Company’s products are complex and the sales process often requires educating the customer on the uses and benefits of products and services. Customers often perform extensive evaluations and the decision making process often involves many different parties within the customer’s organization. Negotiations of license and service agreements are often time consuming and subject to multiple levels of

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executive approval. Furthermore, software product implementations typically involve a significant commitment by the customer over an extended period of time. Whether or not within the Company’s control, significant delays in the sales cycle or subsequent product implementation could materially adversely affect the Company’s business, financial position and operating results.

Fixed Price Arrangements Could Result In Losses

From time to time the Company enters into fixed price arrangements for professional services. If the work effort is miscalculated or priced incorrectly, fixed price engagements could result in losses. Furthermore, unanticipated delays in the implementation process or other complexities with the customer’s software or unforeseen circumstances could result in losses. The size, number and timing of such engagements could materially adversely affect the Company’s business, financial position and operating results.

Vertel’s Software Is Complex And Therefore Prone To Bugs And Potential Performance Issues

The development, enhancement and implementation of the Company’s products entail risks associated with product defects or failures. In the past the Company has discovered software bugs in certain of products and software solutions. Although to date there have been no material adverse effects from any software bugs, there can be no assurance that errors will not be found in the future in existing or new product releases. The complexities involved in implementing and customizing software solutions often bear the additional risk of performance failures or performance that is less than expected. Software errors and performance issues could result in implementation delays, loss of revenue, loss of market share, failure to achieve market acceptance or otherwise adversely impact the Company’s business, operating results and financial condition.

The Company Depends On Third Parties For Key Elements Of Its Technology

The Company licenses certain technology that is embedded in its products. While the Company believes this technology can be replaced, substantial time and effort may be required to do so. In the event the Company is unable to utilize this technology, operations could be materially adversely affected.

ITEM 2.    PROPERTIES

The Company’s principal administrative, sales, marketing and support facilities are located in Woodland Hills, California. Two additional research and development facilities are located in Dallas, Texas and Poznan, Poland. The Company’s headquarters in Woodland Hills consists of approximately 9,100 square feet and is subject to lease terms that expire in June 2005. Exclusive of headquarters, other worldwide field sales, research and development, and service offices consist of approximately 8,600 square feet with leases expiring in 2003. The Company believes that existing facilities are adequate for future foreseeable needs.

ITEM 3.    LEGAL PROCEEDINGS

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

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

Not applicable.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The Company’s common stock is quoted on the Over-The-Counter Bulletin Board (OTC-BB) under the symbol: VRTL-OB. Prior to August 2002, the stock traded on the NASDAQ Small Cap Market and prior to February 2002 the stock traded on the NASDAQ National Market. Until April 1998 the Company was known as Retix and traded on the NASDAQ National Market under the symbol: RETX.

The high and low closing bid prices of the Company’s common stock at the end of each quarter during the fiscal years ended December 31, 2002 and 2001 were as follows:

The forgoing prices reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

There were approximately 534 shareholders of record on March 31, 2003 and the closing bid price for a share of the Company’s common stock on The Over-The-Counter Bulletin Board was $0.075.

Dividend Policy

The Company has never paid cash dividends on its common stock and does not expect to do so in the foreseeable future. The Company expects to retain all available cash to fund operations and meet any debt requirements.

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected financial information has been derived from Vertel’s Consolidated Financial Statements. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.

Selected Consolidated Financial Data

Five Years Ended December 31, 2002

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The Company has reported operating losses from continuing operations for each of the most recent five fiscal years. For the year ended December 31, 2002 operating losses were $14,429,000. As of December 31, 2002 the Company had an accumulated deficit of $97,599,000 and negative working capital of $2,006,000, which includes cash and cash equivalents amounting to $881,000.

The inability thus far of the Company to generate sufficient revenues to offset expenses raises substantial doubt about Vertel’s ability to continue as a going concern and the Company may, therefore, be unable to realize assets and discharge liabilities in the normal course of business. The Company expects to continue to incur operating loses throughout the first half of 2003 and currently spends about $2.4 million per quarter in expenses. Management has approved a plan of operation for 2003 that forecasts modest sales growth and additional expense reductions. If the plan is met, the Company will require additional short-term borrowings to meet cash flow needs in 2003. If operating income is not achieved and Vertel is not able to raise additional equity capital the Company may not be able to continue as a going concern.

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

Background

Vertel is a telecommunications software and services company with two lines of business: license revenues and royalties from software products and professional services revenues from software solutions and maintenance contracts.

The Company’s software license agreements generally do not provide for a right of return and are earned upon shipment. The Company maintains reserves for returns and potential credit losses; neither of which has had a material effect on results of operations or the Company’s financial condition through December 31, 2002.

Pursuant to the Company’s license agreements, licensees may distribute their products with binary or embedded versions of the Company’s software. Royalty revenues are due upon product shipment by the licensee or at the time run-time licenses are granted to their customers. The revenues often lag the sale of the original license agreement by as much as nine months due to the development time required by licensees to design and ship products to their customers.

The Company also offers professional services, including system design and engineering, custom application development, conformance testing and certification/application development. These services are typically based on a detailed statement of work and often take one to six months to complete. Revenues from professional services vary according to the size, timing and complexity of the project and are typically recognized based on the completion of certain project milestones or on a per diem basis. In certain cases, customers also reimburse the Company for non-recurring engineering efforts. Not all license sales involve professional services.

Technical support services consist of product support and maintenance, training and on-site consulting. Product support and maintenance fees have constituted the majority of technical support and service revenue.

The Company’s products and services are sold primarily through a direct sales force in the United States, Europe and Asia and, in certain instances, through third-party agents. Customers include telecommunications service providers and their customers, network equipment manufacturers, independent software developers and software platform vendors.

Critical Accounting Policies and Estimates

The Securities and Exchange Commission (SEC) recently issued disclosure guidance for “critical accounting policies.” The SEC defines “critical accounting policies” as those that require application of

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management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the Company believes the following accounting policies that affect more significant judgments and estimates used in the preparation of consolidated financial statements, could be deemed to be critical within the SEC definition.

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

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

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

Throughout much of 2002 the telecommunications market continued to experience an unfavorable economic environment. Vertel experienced similar conditions during the year and the Company’s common stock share price and market capitalization declined significantly. As a result of these declines, the Company reviewed the carrying value of its goodwill at June 30, 2002 and recorded an impairment charge of $4.8 million. At December 31, 2002, the Company conducted its annual review of the carrying value of goodwill and recorded an impairment charge of $3.0 million. The Company retained a third-party valuation consultant to assist in determining the extent of goodwill impairment using the discounted cash flow method.

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

Warrant Obligations.    On January 3, 2002, in connection with the first Note and the first Warrant Purchase Agreement with SDS, the Company issued SDS a warrant initially exercisable into 800,000 shares of Vertel common stock at an initial exercise price of $0.9988 per share. On August 13, 2002, in connection with the second Note and the second Warrant Purchase Agreement with SDS, the Company issued SDS a warrant initially exercisable into 2,625,000 shares of Vertel common stock at an initial exercise price of $0.20 per share. These financing transactions are more fully described in Note 6 of the Notes to Financial Statements included in this Form 10-K.

Emerging Issues Task Force (EITF) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” requires that the Company initially classify the Warrants as a liability since the provisions of the agreements with the holder of the First and Second Notes and the First

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and Second Warrants could require the Company to pay cash to settle the warrant contracts. Accordingly, the Company recorded the fair value of the First Warrant of $428,000, net of the $77,000 discount arising from the allocation of the net proceeds to the First Note and First Warrant, as a warrant obligation on January 3, 2002, the transaction commitment date. The Company recorded the fair value of the Second Warrant of $255,000, net of the $29,000 discount arising from the allocation of the net proceeds to the Second Note and Second Warrant, as a warrant obligation on August 13, 2002, the transaction commitment date. EITF No. 00-19 requires that the carrying value of the warrant obligations be adjusted to their fair value on each reporting date. As of December 31, 2002, the fair value of the First Warrant was estimated at $87,000 and the Second Warrant was estimated at $285,000 using the Black-Scholes option-pricing model and the following assumptions: a risk-free interest rate of 2.76%, expected volatility of 225%, and no expected dividends. The decrease in the First Warrant fair value from January 3, 2002 to December 31, 2002 of approximately $341,000 was reflected as other income. The increase in the Second Warrant fair value from August 13, 2002 to December 31, 2002 of approximately $30,000 was also reflected as other income.

The fair value of the warrants has been determined using the Black-Scholes option-pricing model. A significant component of the Black-Scholes model is the fair market value per share of common stock. If the fair market value of Vertel common stock increases, the fair value of the warrant obligations would likely increase, resulting in a charge to other expense. If the fair market value of Vertel common stock decreases, the fair value of the warrant obligations would likely decrease, resulting in other income, as was the case for the first, second and third quarters of 2002. For example, if the fair market value of common stock on December 31, 2002 was $1.00 per share, the fair value of the First and Second Warrant obligations determined using the Black-Scholes model, assuming all other variables remain constant, would hypothetically have been approximately $798,000 and $2,613,000, respectively, resulting in a charge of approximately $2,728,000 to other expense for 2002. Conversely, if the fair market value of common stock in December 31, 2002 was $0.05 per share, the fair value of the Warrant obligation determined using the Black-Scholes Model, assuming all other variables remain constant, would hypothetically have been approximately $38,000 and $128,000, respectively, resulting in other income of approximately $517,000 for the year 2002. Given the volatility of the common stock price, the Company cannot predict the impact fluctuations may have on consolidated statement of operations for any future period. Furthermore, EITF No. 00-19 requires the Company to evaluate the classification of the Warrants as a liability as of each reporting date. To the extent there no longer exists a potential for the Company to be required to pay cash to settle the Warrant contract, the Company may be required to reclassify the carrying value of the Warrant liability to equity. If the fair market value of the Company’s common stock increases the fair value of the warrant obligation would likely increase, resulting in a charge to other expense. If the fair market value of the Company’s common stock decreases the fair value of the warrant obligation would likely decrease, resulting in other income.

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

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

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Results of Operations

Vertel’s consolidated financial statements include the results of operations of Trigon from its May 2001 date of acquisition.

The following table sets forth certain items from Vertel’s Statement of Operations as a percentage of net revenues:

Overview

The year 2002 was another challenging year for the U.S. economy and the telecommunications sector continued to be more adversely impacted than the economy as a whole. Telecommunications companies in Europe, and to a lesser extent in Asia, also experienced adverse economic conditions. These conditions have been predominate since the second half of 2000 and during this period a number of telecommunications service providers have ceased operations or sought bankruptcy protection. This in turn has impacted telecommunication equipment manufacturers and their revenues have generally declined. Historically, a significant portion of Vertel’s customer base is comprised of equipment manufacturers and the Company has seen many customers reduce their purchases of development software and consulting services while also announcing staff layoffs and the closing and selling of business units.

As a consequence, Vertel’s revenues have also declined significantly, including revenues from royalties as customers that imbed Vertel’s software in their products experienced reduced demand from their customers. The decline in Vertel’s revenues and the inability to reduce expenses commensurately led to increased losses in 2002 and had a significant impact on the Company’s cash position. As a result, Vertel must increase revenues, reduce costs, and/or secure additional funding in 2003 in order to continue operating as a going concern.

The Company expects equipment manufacturers will begin to see an economic recovery over the next several years, thereby increasing their acquisition of software products and services that will in turn stimulate demand for Vertel’s products and services. In the past year Vertel has enhanced its product offerings through the release of M*Ware and believes that these new products and solutions in combination with professional services will expand the Company’s current customer base and enable Vertel to enter into additional markets such as network data mediation.

Net Revenues.    Net revenues declined 21% in 2002, to $8.4 million, from $10.6 million in 2001 and reflected lower revenues for licenses and professional services. The decline followed a 35% drop in net revenues

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in 2001 and a 17% decline in 2000 when net revenues were $16.4 million. The downward trend began in the third quarter of 2000 and reflects the general economic downturn in the telecommunications sector and lower demand for TMN products. The decline in 2002 was wholly related to a decline in volume.

Sales to customers outside the United States comprised approximately 36%, 38% and 30% of net revenues in 2002, 2001 and 2000, respectively. Vertel has historically reported a high percentage of sales to such customers and expects international sales to continue to be significant. International sales in 2002 were hindered by the continued strong dollar against Asian and European currencies that reduced sales abroad both in quantity and average transaction size. If the dollar strengthens significantly, the Company will either become less competitive or will have to reduce prices in Asian and/or European markets. In addition, competition and price pressures for professional services could increase as competitors and customers continue to seek engineering services from lower cost countries such as China and India. Finally, any political or economic turmoil in the Company’s major Asian markets (China, Japan and Korea) could impact sales in the affected region.

License.    License revenues consist primarily of license fees and royalties derived from software products. The Company recognizes revenue from the licensing of software when persuasive evidence of a contractual arrangement exists and the underlying software products have been shipped.

Most customer contracts contain multiple software products or other elements, such as maintenance and professional services. The Company typically delivers all software products included in a multiple element contract shortly after the contract is executed, with any service elements, such as maintenance or professional services being provided to customers over a period of time, generally less than twelve months. Royalty revenues are recognized when a customer purchases license rights in advance on a non-refundable, non-cancelable basis or when run-time licenses are shipped under key controlled license agreements.

Historically license revenues have accounted for a substantial portion of total revenue. In 2002, license revenues declined by 9.7%, to $5.0 million, from $5.5 million in 2000. This continued a 42% decline in 2001, versus 2000, when license revenues were $9.6 million.

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

Service and other revenues declined 33% in 2002, to $3.4 million, from $5.1 million in 2001. The decline reflected $1.2 million in lower professional services as customer product development work slowed and $0.5 million in lower maintenance revenues due primarily to the expiration of maintenance contracts for older, discontinued products. Service and other revenues decreased by 26% in 2001 from $6.8 million in 2000 as a result of fewer and smaller professional service contracts (down $1.3 million) and lower maintenance revenues ($0.4 million) due to the non-renewal of maintenance contracts for older, discontinued products.

Cost of Revenues—License.    Cost of license revenues consists primarily of royalty fees paid to third-party providers of software that is embedded within Vertel’s software products. These costs also include the cost of reproducing and shipping software as well as issuing user documentation. Cost of license revenues decreased 53% in 2002, to $198,000, or 4.0% of license revenues. The decrease was primarily due to a shift in product mix away from products with embedded third-party software as well as a reduction in manufacturing personnel. The 2001 cost of license revenues of $418,000 decreased $417,000, or nearly 50%, from $835,000 in 2000 and reflected a similar shift in product mix. In 2003, third-party software fees will fluctuate with the product mix and could increase if the Company sells third-party products on a revenue-sharing basis. The corresponding margins in order in each of the last three years beginning in 2002 were 96%, 92% and 91%.

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Cost of Revenues—Service.    Cost of service and other revenues consists primarily of expenses associated with performing professional consulting services, software maintenance and customer technical support such as telephone support, training services and non-recurring engineering services. These costs declined 61% in 2002, to $2.7 million, from $6.9 million, reflecting the decrease in professional service revenues and the absence of $1.1 million of expenses related to the introduction of TicketExchange, formerly known as WebResolve, as well as $583,000 of increased costs related to the absorption of Trigon’s professional services organization. Cost of service revenues was $5.4 million in 2000. The corresponding margins in order in each of the last three years beginning in 2002 were 21%, -36%, 21%.

Research and Development.    Historically the Company has made significant investments in research and development (R&D). The major components of these expenses are engineering salaries, benefits, fees to outside contractors, facilities and related overhead charges and depreciation expense primarily for computers and test environments and equipment. In some cases, customers reimburse the Company for R&D costs related to non-recurring engineering projects.

In late 2002, Vertel sold its e*ORB product line and has discontinued related R&D efforts. Nevertheless, research and development costs rose 9.3% in 2002, to $4.3 million, from $4.0 million a year earlier. The increase was largely due to increased outside services and the re-purposing of certain engineering personnel from the professional services organization to research and development in order to accelerate the completion of M*Ware. Research and development costs in 2001 were $5.2 million, a 23% decline from 2000. The decline primarily reflected lower expenses for payroll and related facility costs ($1.8 million) and travel ($149,000) offset by the addition of Trigon’s research and development organization ($804,000).

As a result of these changes in spending and lower revenues, research and development costs as a percentage of revenues increased to 54% in 2002, from 38% in 2001 and 32% in 2000. In February 2003 the R&D staff was reduced as a result of the absence of any need to further develop and support the e*ORB product line. As a result R&D expenses in 2003 are expected to be significantly lower.

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

Sales and marketing expenses continued a three-year decline in 2002, falling by 19% to $4.8 million, from $5.9 million in 2001. The decrease reflected lower third-party commissions ($417,000) along with reduced payroll, commissions and fringe costs for employees ($241,000). Other marketing and public relations expenses in the form of trade shows, advertising and consultants were also down ($144,000). Nevertheless, the decline in expenses did not keep pace with the revenue shortfall and sales and marketing expenses as a percentage of revenues increased in 2002, to 67%, from 56% in 2001. Sales and marketing expenses decline 15.5% in 2001, to $5.9 million, from nearly $7.0 million in 2000, primarily as a result of lower commissions and reduced marketing and public relations activity in the form of trade shows, advertising and outside consultants. A significant portion of these savings was offset by the addition of the sales and marketing staff from Trigon. Expenses in 2000 were 43% of revenues.

The Company expects sales and marketing expenses to decrease in 2003 due to further staff reductions that occurred in February 2003. However, lower than anticipated net revenues in the first half of 2003 could lead the Company to make even further expense reductions.

General and Administrative.    General and administrative expenses consist primarily of salaries, employee benefits and other related expenses of administrative, executive and financial personnel, as well as accounting, legal and other public company related costs including those of directors, shareholders and investor relations. These expenses decreased 3.1% in 2002, to just under $3.0 million, from nearly $3.1 million a year ago. Savings

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from lower expenses related to payroll and facilities ($230,000), directors ($59,000), shareholder ($44,000) and travel ($45,000) were partially offset by increased consulting and outside professional fees related to strategic initiatives ($336,000). General and administrative expenses decreased by 12.2% in 2001, from $3.5 million in 2000, primarily reflecting lower expenses for payroll, facilities, professional services and shareholders offset by additional administrative staff and related expenses from Trigon. As a percent of revenues, general and administrative expenses were 36%, 29% and 21% in the last three years beginning with 2002.

The Company expects general and administrative expenses will continue to decrease in 2003, reflecting additional staff reductions in February and a number of cost savings initiatives.

General and Administrative: Non-employee Stock Compensation.    There was $3,000 of charges for non-employee stock compensation in 2002 and none in 2001. There was a related non-cash charge of $553,000 in 2000 to reflect the value of stock options held by non-employee directors that vested in that year.

Goodwill Amortization/Impairment.    The Company’s initial goodwill resulted from the acquisition of Expersoft in March 1999 and Trigon in May 2001. The initial value of goodwill from these transactions was $4,742,000 and $7,320,000, respectively, or $12,062,000 combined. A summary of changes in goodwill since initial recording is as follows:

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

At December 31, 2002, the Company retained the consultants to test goodwill for impairment. The consultants determined that goodwill was further impaired $2,997,000 by using the methods described above. Total impairments to goodwill in 2002 were $7,792,000 and this is reflected in a separate line item in the statement of operations as Goodwill impairment charges.

Restructuring Expense.    There were no restructuring expenses or benefits recorded in 2002. In the fourth quarter of 2001 the Company restructured operations to reduce operating costs. At that time the overall workforce was reduced by approximately 25% from the previous quarter. The costs of restructuring were determined to be $259,000 and included employee severance pay and the costs associated with vacating three facilities. As of December 31, 2002 there was no remaining accrued restructuring expenses remaining to be paid.

Operating Loss.    The Company incurred losses from operations of $14.4 million in 2002, versus losses of $11.7 million in 2001. Operating losses in 2000 were $7.0 million. The increased loss reflected lower revenues and the inability of the Company to fully shelter the decline with commensurate reductions in expenses.

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Other Income (Expense).    In 2002, other expenses were $551,000 and consisted of interest expense related to the convertible promissory notes ($1,109,000) and the loss recognized on the partial repayment of the First Note with the proceeds of the Second Note ($531,000). These non-cash expenses were partially offset by a $600,000 gain on the sale of the Company’s e*ORB, a non-cash gain of $311,000 from the change in fair market value of the warrant obligations arising from the issuance of the convertible promissory notes and warrants, net sublet income of $98,000 and interest income of $30,000.

In 2001, other expense consisted primarily of non-cash impairment charges of $876,000 recognized on minority equity investments in Airtel ATN plc (Airtel), a non-publicly traded company whose value is difficult to determine, and Nortel Networks Corporation (Nortel), a publicly traded company whose share price has been highly volatile. The impairment charges were recorded because the Company believed these investments had experienced a significant decline in value that would not likely be temporary. These impairment charges were offset by interest income ($304,000) and net sublease income ($129,000).

In 2000, other income consisted primarily of a non-recurring gain on the sale of the Company’s remaining equity interest in Systems Wizards ($961,000), interest income ($713,000), net sublease income ($97,000) and a gain on the early termination of a capital lease ($55,000).

As of December 31, 2002, the Nortel investment was carried at its fair market value of $16,000, based on its aggregate trading price on the New York Stock Exchange. Future adverse changes in Nortel’s market conditions or poor operating results could result in a further decline in market value and possible further impairment in the future.

Income Tax Benefit/(Provision).    In 2002 the Company recorded a benefit from income taxes of $21,000, due primarily to the resolution of certain foreign tax liabilities. In 2001 the Company recorded a benefit from income taxes of $31,000 also due primarily to the resolution of certain foreign tax liabilities. No income tax benefit was recognized on pre-tax losses from operations of nearly $15.0 million in 2002. The same was true of the $12.1 million and $5.1 million of losses recorded in 2001 and 2000, respectively.

The Company recognizes deferred tax assets and liabilities based on differences between financial statement and tax bases of assets and liabilities using current, enacted rates. A valuation allowance equal to the total amount of net deferred tax assets of $53,816,000 at December 31, 2002 has been established. These net deferred tax assets could be realized to the extent the Company operates profitably in the future during the respective carryforward periods.

Liquidity and Capital Resources

Cash and cash equivalents totaled $881,000 on December 31, 2002, a decline of nearly $1,970,000 from the balance of $2,851,000 on December 31, 2001. The decrease in cash reflected a decrease in expenses that did not keep pace with the decline in revenues.

Net cash used for operating activities in 2002 was $6,607,000. The negative cash flow from operations was comprised primarily of a net loss ($14,959,000), decreased deferred revenue ($500,000), decreased accrued liabilities ($425,000), decreased accrued wages and related liabilities ($344,000), decreased accounts payable ($344,000), a decrease in the fair value of warrant obligations ($311,000), and the gain on the sale of e*ORB ($600,000). These amounts were partially offset by non-cash goodwill impairment charges of ($7,792,000), non-cash interest related to promissory notes ($1,056,000), decreased accounts receivable ($414,000) and non-cash depreciation and amortization expense ($437,000).

Net cash provided by investing activities was $97,000 in 2002 and resulted from purchases of property and equipment ($153,000), offset by the proceeds received from the sale of e*ORB ($250,000).

Net cash provided by financing activities totaled $4,581,000 in 2002 and included proceeds from convertible promissory notes of $6,435,000 offset by cash paid of $470,000 for financing costs, $670,000 for the

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acquisition of the beneficial conversion feature acquired in the repayment of convertible promissory note and $777,000 in repayment of convertible promissory notes. SDS Merchant Fund L.P. holds both notes.

Cash and cash equivalents at December 31, 2001 decreased by $7,976,000 to $2,851,000 from $10,827,000 at December 31, 2000. As of December 31, 2001 short-term investments totaled $1,096,000. The decrease in cash was primarily due to expenses relative to decreased revenue.

Net cash used for operating activities in 2001 was $8,172,000. The negative cash flow from operations was comprised primarily of a loss from continuing operations ($12,138,000), decreases in deferred revenue ($244,000), decreases in accounts payable ($435,000) and accrued wages and related liabilities ($381,000). These amounts were partially offset by decreases in accounts receivable ($1,545,000) and non-cash depreciation and amortization ($2,845,000) and the impairment charges recognized on the Airtel ($437,000) and Nortel investments ($437,000).

Net cash provided by investing activities was $473,000 in 2001, which resulted from net sales of short-term investments ($1,096,000), which was partially offset by purchases of property and equipment ($290,000) and cash acquired in the Trigon acquisition, net of cash paid ($298,000).

Net cash used for financing activities was $284,000 in 2001 and was used primarily to eliminate short-term debt that we assumed in the Trigon transaction ($400,000). This was partially offset by cash received from the exercise of stock options ($116,000).

The Company has reported operating losses from continuing operations for each of the most recent five fiscal years. For the year ended December 31, 2002 operating losses were $14,429,000. As of December 31, 2002 the Company had an accumulated deficit of $97,599,000 and negative working capital of $2,006,000, which includes cash and cash equivalents amounting to $881,000.

The inability thus far of the Company to generate sufficient revenues to offset expenses raises substantial doubt about Vertel’s ability to continue as a going concern and the Company may, therefore, be unable to realize assets and discharge liabilities in the normal course of business. The Company expects to continue to incur operating loses throughout the first half of 2003 and currently spends about $2.4 million per quarter in expenses. Management has approved a plan of operation for 2003 that forecasts modest sales growth and additional expense reductions. If the plan is met, the Company will require additional short-term borrowings to meet cash flow needs in 2003. If operating income is not achieved and Vertel is not able to raise additional equity capital the Company may not be able to continue as a going concern.

Vertel’s financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the classification and amounts of liabilities that may become necessary in the event the Company is unable to continue as a going concern. The audit report on the Company’s financial statements for the year ended December 31, 2002 includes a paragraph in this regard.

At December 31, 2002 long-term liquidity needs consisted principally of operating lease commitments related to facilities and office equipment.

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

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of enforcing any combination of these rights could substantially alter the Company’s ability to conduct business, severely impact liquidity, and may materially affect future business operations.

Defaults

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

Summary of Contractual Obligations and Commercial Commitments

Contractual obligations at December 31, 2002, and the effect such obligations are expected to have on liquidity and cash flow in future periods, are summarized as follows:

The notes payable on the balance sheet of $1,761,000 is net of $3,012,000 of related discounts and beneficial conversion features.

Summary of Recent Accounting Pronouncements

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

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

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

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

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

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

Quantitative Information About Market Risk.    Vertel’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio. The Company maintains an investment policy that ensures the safety and preservation of invested funds by limiting default risk, market risk and investment risk. As of December 31, 2002, the Company had $881,000 of cash and cash equivalents with a weighted average variable rate of 0.3% and no short-term investments. Cash and cash equivalents were $2.8 million at the end of 2001 and $10.8 million at the end of 2000. The weighted average variable rate for 2002 and 2001 was 1.2 % and 6.4%, respectively.

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

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

Vertel mitigates default and interest rate risk by investing in high credit quality securities and by constantly re-positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor and by placing its portfolio under the management of professional money managers who invest within specified parameters established by the Board of Directors. The portfolio includes only marketable securities with active secondary or re-sale markets to ensure portfolio liquidity and maintains a prudent amount of diversification.

37

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2002, 2001 and 2000

38

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors

Vertel Corporation

Woodland Hills, California

We have audited the accompanying consolidated balance sheet of Vertel Corporation and its subsidiaries (the Company) as of December 31, 2002 and the related consolidated statements of operations and comprehensive loss, shareholders’ equity (deficit), and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vertel Corporation and its subsidiaries at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements for the year ended December 31, 2002 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002.

/S/    BDO SEIDMAN, LLP

Los Angeles, California

February 14, 2003

39

INDEPENDENT AUDITORS’ REPORT

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VERTEL CORPORATION:

We have audited the accompanying consolidated balance sheets of Vertel Corporation and its subsidiaries (collectively the “Company”) as of December 31, 2001 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2001. Our audits also included the information for each of the two years in the period ended December 31, 2001 included in the financial statement schedule listed in the Index at Item 16. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Vertel Corporation and its subsidiaries at December 31, 2001 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements for the year ended December 31, 2001 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

DELOITTE & TOUCHE LLP

Los Angeles, California

February 7, 2002

40

VERTEL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

See accompanying notes to consolidated financial statements.

41

VERTEL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)