DSET CORP, S-1/A, 1998-03-10

DSET CORP
S-1/A, 1998-03-10
COMPUTER PROGRAMMING SERVICES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1998
REGISTRATION NO. 333-43827
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- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

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NEW JERSEY 7371 22-3000022
(STATE OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)

1011 US HIGHWAY 22
BRIDGEWATER, NEW JERSEY 08807
(908) 526-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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WILLIAM P. MCHALE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DSET CORPORATION
1011 US HIGHWAY 22
BRIDGEWATER, NEW JERSEY 08807
(908) 526-7500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

COPIES TO:
WILLIAM J. THOMAS, ESQ. WILLIAM B. ASHER, JR., ESQ.
ANDREW P. GILBERT, ESQ. MICHAEL A. CONZA, ESQ.
BUCHANAN INGERSOLL TESTA, HURWITZ & THIBEAULT, LLP
COLLEGE CENTRE HIGH STREET TOWER
500 COLLEGE ROAD EAST 125 HIGH STREET
PRINCETON, NJ 08540 BOSTON, MA 02110
(609) 987-6800 (617) 248-7000

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
--------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

MARCH 10, 1998

3,500,000 SHARES

[LOGO OF DSET APPEARS HERE]

COMMON STOCK

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Of the 3,500,000 shares of Common Stock ("Common Stock") offered hereby,
2,500,000 are being sold by DSET Corporation ("DSET" or the "Company") and
1,000,000 are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling
Shareholders. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $12.00 and $14.00 per share. See "Underwriting"
for the factors considered in determining the initial public offering price.
The Company's Common Stock has been approved for quotation, subject to notice
of effectiveness, on the Nasdaq National Market under the symbol "DSET."

-----------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
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Total(3)...................... $ $ $ $
</TABLE>
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(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting estimated expenses of $750,000, all of which will be
payable by the Company.
(3) Certain Selling Shareholders have granted the Underwriters a 30-day option
to purchase up to 525,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to the Company and
Proceeds to the Selling Shareholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."

-----------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1998.

BTALEX.BROWN
BANCAMERICA ROBERTSON STEPHENS
SOUNDVIEW FINANCIAL GROUP, INC.

THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the shares of Common
Stock offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules filed therewith. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement and to such exhibits
and schedules filed therewith. Statements contained herein as to the content
of any contract or other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, and each such statement
shall be deemed qualified in its entirety by such reference.

The Registration Statement and the exhibits and schedules thereto may be
inspected without charge at the principal office of the Commission at the
Public Reference Section of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington D.C. 20549, and at the regional offices of the Commission
located at Seven World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such documents may be obtained from the Public Reference
Section of the Commission, at prescribed rates. Such material also may be
accessed electronically by means of the Commission's website on the Internet
at http://www.sec.gov.

The Company intends to furnish its shareholders with annual reports
containing financial statements certified by its independent accountants and
make available quarterly reports containing unaudited financial information
for the first three quarters of each year.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-
COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

"DSET" and the Company's logo are United States trademarks of the Company.
All other trade names, trademarks or service marks appearing in this
Prospectus are the property of their respective owners and are not the
property of the Company.
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ materially from those anticipated in these forward-looking
statements as a result of certain factors including, but not limited to, those
discussed in "Risk Factors."

THE COMPANY

DSET is a leading provider of telecommunications network management
solutions, including industry-standard application development tools, custom
application development services and carrier-to-carrier network applications.
Telecommunications carriers and equipment vendors utilize the Company's tools
and development services to build applications which facilitate the remote
management of network devices, the rapid implementation of new
telecommunication services and the flow-through of information to higher level
applications, such as billing, ordering and provisioning systems. The Company's
tools are also used by the Company and by its customers to build carrier-to-
carrier applications which are designed to facilitate the flow-through of
information between carriers' networks and systems. These solutions are based
on the Telecommunications Management Network ("TMN") standard, which defines
the application programming interfaces ("APIs") and communication protocols
required to ensure interoperability within and between carrier networks that
incorporate devices deployed from multiple vendors. The Company's customers
include AT&T, BellSouth, MCI, Advanced Fibre Communications, Ciena, Fujitsu,
Hitachi, Lockheed Martin IMS, Lucent, Samsung, Tekelec and Tellabs.

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

The Company's highly functional and scalable TMN-based solutions (i) enable
carriers to remotely manage large and complex telecommunication networks
comprising thousands of network devices in a multi-vendor environment, (ii)
facilitate the rapid deployment of new technologies and network equipment and
the rapid provisioning of telecommunications services and (iii) expedite the
development of carrier-to-carrier applications which enable carriers to quickly
and cost-effectively enter new markets.

DSET's objective is to become the leading provider of industry standard
network management solutions for evolving telecommunications networks. Key
elements of the Company's strategy include: (i) extending its technological
leadership by continuing to invest its resources to enhance and expand its

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<PAGE>

products and to ensure compatibility with emerging technologies such as CORBA
and Java; (ii) expanding its application development services capabilities;
(iii) delivering a suite of carrier-to-carrier applications; (iv) expanding its
sales and distribution capabilities; and (v) pursuing strategic acquisitions of
complementary businesses or technologies.

The Company markets its products and services through a direct sales
organization in North and South America and through distributors in Europe and
Asia. As of December 31, 1997, the Company's direct sales force consisted of
eight sales managers supported by nine consulting engineers based in its New
Jersey, California and Texas offices. The Company also markets its products and
services through non-exclusive distributors in China, Taiwan, South Korea and
Japan, and an exclusive distributor in Europe.

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

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.................. 2,500,000 shares
Common Stock offered by the Selling Shareholders..... 1,000,000 shares
Common Stock to be outstanding after the offering.... 9,303,092 shares(1)
Use of proceeds...................................... General corporate
purposes, working capital
and possible acquisitions
Proposed Nasdaq National Market Symbol............... DSET
</TABLE>
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(1) Excludes 2,848,493 shares of Common Stock issuable upon the exercise of
stock options outstanding as of December 31, 1997 at a weighted average
exercise price of $2.23 per share, of which options to purchase 1,173,384
shares of Common Stock are exercisable. Also excludes 185,331 shares of
Common Stock issuable upon the exercise of warrants outstanding as of
December 31, 1997 at an exercise price of $2.18 per share, of which
warrants to purchase 46,333 shares of Common Stock are exercisable.
Includes 28,000 shares underlying outstanding options which will be
exercised and sold upon consummation of this offering. See "Risk Factors--
Shares Eligible for Future Sale," "Management--Stock Option Plans" and
"Description of Capital Stock--Warrants."

4
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SUMMARY FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
License revenues.......................... $1,456 $2,838 $5,734 $7,005 $10,850
Service revenues.......................... 245 1,172 2,179 6,111 8,515
------ ------ ------ ------ -------
Total revenues............................. 1,701 4,010 7,913 13,116 19,365
Gross profit............................... 1,620 3,692 7,403 10,834 14,686
Operating income........................... 383 871 2,653 2,870 3,520
Net income................................. 227 572 1,705 2,013 2,469
Net income per common share................ $ 0.04 $ 0.10 $ 0.28 $ 0.37 $ 0.45
Weighted average number of common shares
outstanding............................... 5,330 5,760 6,003 3,309 3,567
Net income per common share assuming
dilution.................................. $ 0.04 $ 0.10 $ 0.26 $ 0.27 $ 0.30
Weighted average number of common shares
and common equivalent shares outstanding.. 5,333 5,807 6,490 7,393 8,346
Pro forma(1):
Net income per common share............... $ 0.37
Weighted average number of common shares
outstanding.............................. 6,610
Net income per common share assuming
dilution................................. $ 0.30
Weighted average number of common shares
and common equivalent shares
outstanding.............................. 8,346
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)(2)
------ -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..... $3,206 $32,681
Working capital...................................... 6,276 35,751
Total assets......................................... 13,315 42,790
Series A preferred stock............................. 11,604 --
Total shareholders' equity (deficit)................. (3,401) 37,678
</TABLE>
- --------------------
(1) Gives effect to the automatic conversion of all issued and outstanding
shares of Series A Preferred Stock (the "Series A Stock") into 3,043,625
shares of Common Stock. See "Description of Capital Stock."
(2) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by
the Company hereby after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company. See "Use of
Proceeds" and "Capitalization."

Except as otherwise specified, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option; (ii) has been adjusted
to give effect to a three-for-one stock split of the Company's Common Stock
effected on May 24, 1996 and a three-for-two stock split of the Company's
Common Stock effected on December 31, 1997; (iii) assumes the conversion of all
outstanding Series A Stock into an aggregate of 3,043,625 shares of Common
Stock upon the consummation of this offering; and (iv) assumes the issuance of
2,500,000 shares of Common Stock offered by the Company hereby from the
treasury and the simultaneous cancellation of all remaining shares of Common
Stock held in treasury. See "Description of Capital Stock" and "Underwriting."

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<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.

Fluctuations of Quarterly Operating Results; Seasonality. The Company's
historical operating results have varied substantially from quarter to
quarter, and the Company expects that they will continue to do so. Due to the
relatively fixed nature of certain of the Company's costs, including personnel
and facilities costs, a decline in revenue, failure to achieve expected
revenue in any fiscal quarter, or unanticipated variations in billing and
utilization rates of service personnel would result in lower profitability in
that quarter. A variety of factors, many of which are not within the Company's
control, influence the Company's quarterly operating results, including timing
and levels of hardware and software purchases by customers, the timing, size
and stage of application development projects, new product and service
introductions by the Company or its competitors, levels of market acceptance
for the Company's products and services, or the hiring of additional
personnel. In addition, the Company's revenues in any period generally have
been, and likely will continue to be in the near term, derived from a
relatively small number of sales transactions and fixed price development
projects and, therefore, any delays in closing such engagements or the failure
to accurately estimate the resources necessary to complete fixed price
contracts will have a material adverse impact on the Company's results of
operations for that period. In addition, the Company historically has
recognized a large portion of its revenues from sales in the last month of a
quarter such that the magnitude of quarterly fluctuations may not become
evident until late in, or at the end of, a particular quarter. Furthermore,
the Company's revenues are partly dependent upon run-time license fees which
may fluctuate from period to period depending upon the size and timing of
deployments by equipment vendors to telecommunications carriers of network
devices which have embedded applications built with the Company's software.
The Company believes, therefore, that past operating results and period-to-
period comparisons should not be relied upon as an indication of future
performance. Demand for the Company's products generally is higher during the
fourth quarter, primarily due to capital spending trends by telecommunications
companies. The Company anticipates that its business will continue to be
subject to such seasonal variations. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Selected Quarterly Results
of Operations."

Dependence on Rapidly Evolving Telecommunications Industry. The Company's
success will depend on continued growth in the market for advanced
telecommunications products and services. The global telecommunications market
is evolving rapidly and it is difficult to predict its potential size or
future growth rate. There can be no assurance that the global deregulation and
privatization of the worldwide telecommunication market that has resulted in
increased competition and escalating demand for new technologies and services
will continue in a manner favorable to the Company or its business strategies.
Since the Company's customers are concentrated in the telecommunications
industry, the Company's future success is dependent upon increased utilization
of its application development tools, custom application development services
and carrier-to-carrier applications by telecommunications carriers and network
equipment vendors. There can be no assurance that the Company's current or
future products or services will achieve widespread acceptance among
telecommunications carriers, network equipment vendors and other potential
customers or that such customers will not adopt alternative architectures or
technologies that are incompatible with the Company's technologies, any of
which would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that telecommunications carriers will upgrade the infrastructure of
their networks necessitating the implementation of new network devices which
require embedded applications developed with the Company's products or
services. Industry-wide network improvements driving the demand for the
Company's products or services may be delayed or prevented by a variety of
factors, including cost, regulatory obstacles, the lack or reduction of
consumer demand for advanced telecommunications services and alternative
approaches to service delivery. See "Business--Industry Background."

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Dependence on the TMN Industry Standard. Substantially all of the Company's
revenue to date has been derived from application development tools and
application development services based on TMN standards. DSET depends upon the
broad and continued adoption and deployment of TMN as the industry standard
architecture for managing complex telecommunications networks.
Telecommunications carriers have only recently widely embraced TMN solutions
as an industry standard, and to remain an industry standard, TMN must continue
to be adapted to incorporate emerging technologies, such as CORBA and Java.
DSET believes that the continued implementation of TMN solutions will also
depend, in part, upon the continued demand from telecommunications carriers
and equipment vendors to quickly and cost-effectively implement TMN solutions.
There can be no assurance that TMN will remain a standard criteria for the
management of complex telecommunications networks. The emergence of new or
more favorable industry standards, or the inability of the Company to
recognize and adapt to such standards on a timely basis, would have a material
and adverse effect on the Company's business, financial condition and results
of operations. See "Business--Industry Background."

Rapid Technological Change. The markets for telecommunications devices,
network-based applications and related services are subject to rapid
technological change, evolving industry standards, changes in end-user
requirements and frequent new product and service introductions and
enhancements that may render existing offerings obsolete or unmarketable. As a
result, the Company's position in this market could erode rapidly due to
unforeseen changes in product features and functions of competing products.
The Company's growth and future results of operations will depend in part on
its ability to respond to these changes by enhancing its existing products and
services and by developing and introducing, on a timely and cost-effective
basis, new products, features and related services to meet or exceed
technological advances in the marketplace. There can be no assurance that the
Company will be successful in identifying, developing and marketing new
products, product enhancements and related services that respond to
technological change or evolving industry standards, or adequately meet new
market demands. The failure of the Company to respond to rapidly changing
technologies could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Industry
Background" and "Business--Research and Product Development."

Management of Growth. The Company's growth has placed significant demands on
its management, administrative and operational resources. From January 1, 1996
through December 31, 1997, the Company's staff increased 172% from 46 to 125
full-time employees, including an increase in the Company's direct sales force
from four to eight sales managers during the second half of 1997. The
Company's ability to manage its growth effectively will require the Company to
continue developing and improving its operational, financial and other
internal systems, as well as its business development capabilities, and to
attract, hire, train, retain, motivate and manage its employees. The Company
must be able to allocate sufficient engineering resources to develop new
products as well as maintain and improve product quality. In addition, the
Company's future success in the application development services component of
its business will depend in large part on its ability to continue to maintain
high rates of employee utilization at profitable billing rates and to maintain
project quality, particularly if the size and scope of the Company's
development projects increase. Moreover, the majority of the Company's senior
management has not previously managed a business of the Company's size and has
limited or no experience managing a public company. There can be no assurance
that the Company's continued growth will be achieved, and if achieved, that
the Company will effectively manage its growth. Any failure to accomplish any
of the foregoing would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."

Risks Associated with International Operations. International sales
constituted approximately 38% and 27% of the Company's total revenues in 1996
and 1997, respectively. The Company relies on a number of third party
distributors and agents to market and sell its products and services outside
of North America. There can be no assurance that such distributors or agents
will provide the effort and support

7
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necessary to service international markets effectively. The Company intends to
expand its existing international operations and enter new international
markets, which will demand significant management attention and financial
commitment. For example, the Company expects to open an office in the Republic
of China during the second quarter of 1998. The Company's management has
limited experience in international operations, and there can be no assurance
that the Company will successfully expand its international operations. The
failure by the Company to expand its international operations could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Sales and Marketing."

The Company's international sales currently are United States dollar-
denominated. As a result, an increase in the value of the United States dollar
relative to foreign currencies could make the Company's products and services
less competitive in international markets. Furthermore, operating in
international markets subjects the Company to additional risks, including
unexpected changes in regulatory requirements, political and economic
conditions, taxes, tariffs or other barriers, difficulties in staffing and
managing international operations, potential exchange and repatriation
controls on foreign earnings, longer sales and payment cycles and difficulty
in accounts receivable collection. For example, the recent volatility and
devaluation trends in certain Asian markets, particularly South Korea, have
resulted in delays, cancellations and increased pricing pressures on the
Company's product sales and application development activities in such
markets. Such risks may adversely affect the Company's business, financial
condition and results of operations.

Fixed Price Contracts and Other Project Risks. During 1997, over 35% of the
Company's total revenues was generated from application development projects
provided on a fixed price basis with performance and payment milestones,
rather than on a time and materials basis. The Company's failure to accurately
estimate the resources required for a fixed price project, or its failure to
complete its contractual obligations in a timely manner consistent with the
project plan upon which its fixed price contract is based, could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the past, the Company has found it necessary to
revise project plans after commencement of the project and commit
unanticipated additional resources to complete certain projects, which have
negatively affected the profitability of such projects. The Company may
experience similar situations in the future, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company may establish contract prices before the
project design specifications are finalized, which could result in fixed
prices that prove to be too low and therefore adversely affect the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Overview."

Limited Protection of Proprietary Rights; Enforcement of Rights. The
Company's success and its ability to compete effectively is dependent, in
part, upon its proprietary rights. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, as well as
confidentiality procedures and contractual restrictions, to establish and
protect its proprietary rights. Furthermore, the Company generally enters into
non-competition, non-disclosure and invention assignment agreements with its
employees and consultants, and into non-disclosure agreements with its
customers and distributors. There can be no assurance that such measures will
be adequate to protect the Company's proprietary rights. A portion of the
Company's revenues is generated from run-time license fees which generally
become due upon the deployment by equipment vendors to telecommunications
carriers of network devices which have embedded applications built with the
Company's software. Many of such customers are contractually required to
periodically report their sales to the Company. Although the Company generally
has the right to periodic audits in its contracts which provide for run-time
licenses, there can be no assurance that such customers will accurately report
such sales or that the Company will be able to effectively monitor and enforce
its contractual rights with respect to such fees. Additionally, the Company
may be subject to further risks as it enters into transactions in countries
where intellectual property laws are not well developed or are difficult to
enforce. Legal protections of the Company's

8
<PAGE>

proprietary rights may be ineffective in such countries. Litigation may be
necessary to defend and enforce the Company's proprietary rights, which could
result in substantial costs and diversion of management resources and could
have a material adverse effect on the Company's business, financial condition
and results of operations, regardless of the final outcome of such litigation.
Despite the Company's efforts to safeguard and maintain its proprietary rights
both in the United States and abroad, there can be no assurance that the
Company will be successful in doing so or that the steps taken by the Company
in this regard will be adequate to deter misappropriation or independent
third-party development of the Company's technology or to prevent an
unauthorized third party from copying or otherwise obtaining and using the
Company's products or technology. Any of such events could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company or its employees may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. In its
licenses and software development and distribution agreements, the Company
agrees to indemnify its customers and distributors for any expenses and
liabilities resulting from claimed infringements of patents, trademarks,
copyrights or other proprietary rights of third parties. The amount of the
Company's indemnity obligations may be greater than the revenues the Company
may have received under such agreements. There can be no assurance that third
parties will not assert infringement or misappropriation claims against the
Company, its customers or distributors in the future with respect to its
employees or current or future products or services. Any claims or litigation,
with or without merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require the Company to enter into royalty or
licensing arrangements. Such royalty or licensing arrangements, if required,
may not be available on terms acceptable to the Company, if at all, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Intellectual Property."

Competitive Market for Technical Personnel. The Company's success depends in
part on its ability to attract, hire, train, retain and motivate qualified
technical and sales personnel, with appropriate levels of managerial and
technical capabilities. The Company's complex technology generally requires a
significant level of expertise to effectively develop and market the Company's
products and services and to perform its custom application development
services. The Company has at times experienced, and continues to experience,
difficulty in recruiting qualified personnel. The Company believes that the
pool of potential applicants with such requisite expertise is limited.
Recruiting qualified personnel is an intensely competitive and time-consuming
process. The Company competes for such personnel with software companies and
telecommunications companies, many of which have greater resources than the
Company. Such competition has resulted in demands for increased compensation
from qualified applicants. Due to such competition, the Company has
experienced, and expects to continue to experience, turnover in technical
personnel. There can be no assurance that the Company will be successful in
attracting and retaining the technical personnel it requires to conduct and
expand its operations successfully. The Company's business, financial
condition and results of operations could be materially adversely affected if
the Company were unable to attract, hire, train, retain and motivate qualified
technical and sales personnel. See "Business--Strategy" and "--Employees."

Risks Associated with New Application Development Tools and Carrier-to-
Carrier Applications. As part of its strategy, the Company expects to develop
and offer to its customers new application development tools and carrier-to-
carrier applications. There can be no assurance that such new development
tools and carrier-to-carrier applications will adequately meet evolving
technological or customer requirements and emerging industry standards. The
Company's new carrier-to-carrier applications are in early stages of
development, marketing and customer acceptance, and the Company has limited
experience in developing, marketing or providing such new applications.
Accordingly, there can be no assurance that the markets for such application
development tools or carrier-to-carrier applications will develop.
Furthermore, no assurance can be given that the Company will successfully
market such application development tools and carrier-to-carrier applications
to new and existing customers, or meet customer expectations.

9
<PAGE>

The Company has, from time to time, experienced delays in the development of
new products and the enhancement of existing products, and the Company may in
the future experience delays in the development of such new application
development tools and carrier-to-carrier applications, due to resource
constraints or technological or other reasons. The inability of the Company to
develop and introduce such tools or applications in a timely manner could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Strategy," "--Products and Services" and
"--Research and Product Development."

Risks of Product Defects. Application development tools and applications
developed, licensed and sold by the Company may contain errors or failures.
There can be no assurance that errors or failures will not be found in the
Company's products or applications or, if discovered, that the Company will be
able to successfully correct such errors or failures in a timely manner or at
all. The occurrence of errors or failures in the Company's products and
applications could result in loss of or delay in market acceptance, increased
service and warranty costs or payment of compensatory or other damages. In
addition, such errors or failures may result in delays in the recognition of
revenue by the Company and diversion of the Company's engineering resources
during the period in which it is required to correct such defects. The Company
does not maintain errors and omissions insurance to cover liability associated
with its software development activities and license agreements. Although the
Company's agreements with its customers typically contain provisions intended
to limit the Company's exposure to potential claims as well as any liabilities
arising from such claims, the Company's contracts with its customers may not
effectively protect the Company against the liabilities and expenses
associated with software errors or failures. Accordingly, errors or failures
in the Company's products or applications could have a material adverse effect
upon the Company's business, financial condition and results of operations.
See "Business--Products and Services."

Dependence on Key Personnel. The Company's success will depend in part on
the continued service of its management, key product and application
engineers, and sales and technical sales support personnel and its ability to
identify, hire and retain additional senior personnel. In particular, the loss
of one or more key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, if one or more of the Company's key personnel resigns from the
Company to join a competitor or to form a competing company, any resulting
loss of existing or potential customers to any such competitor could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event of the loss of any key personnel, there
can be no assurance that the Company would be able to prevent the unauthorized
disclosure or use of its technical knowledge, practices or procedures by such
personnel. The Company maintains, and is the beneficiary of, a key person life
insurance policy in the face amount of $1.0 million on the life of S. Daniel
Shia, the Company's founder, Chairman of the Board and Chief Technical
Officer. There can be no assurance that the proceeds from such insurance would
be sufficient to compensate the Company in the event of the death of Mr. Shia.
The Company does not maintain key person life insurance on any of its other
key personnel. Failure to attract and retain key personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Employees" and "Management."

Length of Sales Cycle. The Company believes that the period of time between
initial customer contact and execution of a license agreement or application
development services contract typically ranges from four to nine months.
Telecommunications carriers and network equipment vendors typically conduct
extensive and lengthy product evaluations before purchasing software or
application development services. The Company does not typically receive
advance notice of contemplated changes in the budgets and purchasing
priorities of its telecommunications equipment vendors and their carrier
customers. Curtailment or termination of custom application development
projects, decreases in customer budgets or reduction in the purchasing
priority assigned to application development, particularly if significant and
unanticipated by the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations. Carriers
and equipment vendors may also encounter delays in their sales cycles of
products and services which depend on the implementation of

10
<PAGE>

applications built using the Company's software, and may therefore indirectly
and adversely impact the Company's business, financial condition and results
of operations. See "Business--Sales and Marketing."

Intense Competition. Competition in DSET's markets is intense and involves
rapidly changing technologies, evolving industry standards, frequent new
product introductions and rapid changes in customer requirements. To maintain
and improve its competitive position, DSET must continue to develop and
introduce, on a timely and cost-effective basis, new products, features and
services that keep pace with the evolving needs of its customers. The
principal competitive factors affecting the market for the Company's
application development tools are product reputation, quality, performance,
price, customer support and product features such as adaptability,
scalability, ability to integrate with other products, functionality and ease
of use. The Company believes that the principal competitive factors in the
market for application development services include compliance with industry
standards, quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and
business expertise. The Company believes that the principal competitive
factors in the market for carrier-to-carrier applications includes many of the
same factors as the market for application development services as well as the
ability of such applications to facilitate the flow-through of information
between carriers' networks and systems. There can be no assurance that the
Company will be able to compete effectively based upon such competitive
factors.

The Company competes in the application development tools market with other
software tool providers. The Company's competitors in the markets for
application development services and carrier-to-carrier applications include
the in-house development staffs of telecommunications carriers, network
equipment vendors and systems integrators. Many of its competitors have longer
operating histories, greater name recognition, larger or captive customer
bases and significantly greater financial, technical, sales, customer support,
marketing and other resources. Furthermore, TMN, as an open systems
architecture, can lead to increased competition as third parties develop
competitive products and services. Competitors may be able to respond more
quickly to emerging technologies and changes in customer requirements. See
"Business--Competition."

Customer Concentration. The Company had two, one and one significant
customers which accounted for 32%, 18% and 12%, respectively, of total
revenues for the years ended December 31, 1995, 1996 and 1997, respectively.
Sales to Hitachi, Ltd. ("Hitachi") and McCaw Cellular Communications ("McCaw
Cellular") accounted for approximately 20% and 12% of total revenues,
respectively, in the year ended December 31, 1995. Sales to Hitachi accounted
for approximately 18% of total revenues in the year ended December 31, 1996.
Sales to Samsung Electronics ("Samsung") accounted for approximately 12% of
total revenues in the year ended December 31, 1997. The Company anticipates
that its results of operations in any given period will continue to depend to
a significant extent upon sales to a small number of customers. As a result of
this customer concentration, the Company's revenues from quarter to quarter
and business, financial condition and results of operations may be subject to
substantial period-to-period fluctuations. In addition, the Company's
business, financial condition and results of operations could be materially
adversely affected by the failure of customer orders to materialize as and
when anticipated, or by deferrals or cancellations of existing application
development projects. Other than certain agreements which provide for on-going
maintenance revenues or minimum fees for run-time licenses, none of the
Company's customers have entered into an agreement requiring on-going minimum
purchases from the Company. The Company's application development services
agreements generally can be terminated by the customer under certain
circumstances with limited advance notice and without significant penalty.
Many of the Company's principal customers may also be competitors of the
Company. There can be no assurance that the Company's principal customers will
continue to purchase products or services from the Company at current levels,
if at all. The loss of one or more major customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business--Customers."

11
<PAGE>

Risks Associated with Indirect Sales Channels. In order to expand the
Company's international sales efforts, the Company has utilized, and expects
to continue to utilize, third-party distributors and agents. Indirect sales
channels contributed approximately $1.9 million, or 14% of total revenues
during the year ended December 31, 1996 and approximately $5.7 million, or 30%
of total revenues during the year ended December 31, 1997. There can be no
assurance that any existing or future distributors will not become competitors
of the Company. Furthermore, selling through indirect channels may limit the
Company's information concerning the volume of products sold by the Company's
customers to end-users and impede the Company's contact with such end-users.
As a result, the Company's ability to forecast revenues accurately, evaluate
end-user satisfaction and recognize emerging end-user requirements may be
hindered. Moreover, the Company has limited experience in establishing and
maintaining indirect distribution channels and there is no assurance that it
will do so successfully. Additionally, any failure by the Company's existing
and future distributors to generate significant revenues could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business--Sales and Marketing."

Risks Associated with Year 2000 Problem. The Company generally warrants and
has represented to its customers that its products are free from Year 2000
defects. There can be no assurance that the Company's products are Year 2000
compliant, or that the Company's products or applications built with the
Company's products will not be integrated by the Company or its customers
with, or otherwise interact with, non-compliant software or other products
which may expose the Company to claims from its customers. The foregoing could
result in the loss of or delay in market acceptance of the Company's products
and services, increased service and warranty costs to the Company or payment
by the Company of compensatory or other damages. In 1997, the Company
conducted a Year 2000 compliance review of its products and determined that
versions of one component of its tool suites (versions of ASN.C sold prior to
May 1997) were unable to properly interpret four digit dates, including the
year 2000 and beyond. The Company notified all of its customers of the problem
and its correction in June 1997 and made the correction available on its
website free of charge. In addition, the Company provided annual maintenance
customers with the correction as part of the subsequent upgrade of the
product. Failure of customers to properly implement the correction, or
problems with the correction, could cause errors in customers' products which
may materially impact the functionality of those products. Additionally,
unanticipated costs incurred by the Company in connection with the remediation
of its customers' products or any disputes with customers relating to Year
2000 compliance, whether relating to such versions of ASN.C or otherwise,
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Government Regulation and Legal Uncertainties. While the Company's
operations are not directly regulated, the Company's existing and potential
customers are subject to a variety of United States and foreign governmental
regulations. Such regulations may adversely affect the telecommunications
industry, limit the number of potential customers for the Company's products
and services or otherwise have a material adverse effect on the Company's
business, financial condition and results of operations. Recently enacted
legislation, including the Telecommunications Act of 1996 (the
"Telecommunications Act"), deregulating the telecommunications industry may
cause changes in the telecommunications industry, including the entrance of
new competitors and possible industry consolidation, which could in turn
reduce the Company's potential customer base, increase pricing pressures on
the Company, decrease demand for the Company's application development tools,
application development services and carrier-to-carrier applications, increase
the Company's cost of doing business or otherwise have a material adverse
effect on the Company's business, financial condition and results of
operations. Currently the Federal Communications Commission ("FCC") and state
authorities are implementing the provisions of the Telecommunications Act and
several of the decisions by the FCC and state authorities are being challenged
in court. For example, in December 1997, a Federal District Court declared
unconstitutional provisions of the Telecommunications Act restricting the
ability of the Regional Bell Operating Companies (the

12
<PAGE>

"RBOCs") to enter the long distance services market until they have opened
their networks to potential competitors. The ruling, if upheld and broadly
applied, could adversely affect the market for the Company's products,
services and carrier-to-carrier applications. Therefore, the Company cannot at
this time predict the extent to which such legislation and related litigation
will affect the Company's current and potential customers or ultimately affect
the Company's business, results of operations and financial condition. See
"Business--Industry Background."

Risks Relating to Potential Acquisitions. An element of the Company's
strategy is to review acquisition prospects that would complement its existing
product and service offerings or enhance its technological capabilities or
that may otherwise offer growth opportunities. The Company has no current
agreements or negotiations pending with respect to any such acquisitions.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's business,
financial condition and results of operations or the price of the Company's
Common Stock. Acquisitions entail numerous risks, including difficulties in
the assimilation of acquired operations, technologies and products, diversion
of management's attention to other business concerns, risks of entering
markets in which the Company has no or limited prior experience and potential
loss of key employees of acquired organizations. The Company's management has
limited experience in assimilating acquired organizations. No assurance can be
given as to the ability of the Company to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and the failure of the Company to do so could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Use of Proceeds" and "Business--Strategy."

Benefits of this Offering to Current Shareholders. The completion of this
offering will provide significant benefits to the current shareholders of the
Company, including certain of its directors and executive officers. The
Company will not receive any of the net proceeds from the sale of shares by
the Selling Shareholders which will be approximately $12.1 million. The
completion of this offering will also create a public market for the Common
Stock and thereby is likely to increase the market value of the investment by
the current shareholders in shares of the Company. Upon the closing of this
offering, the difference between the aggregate purchase price paid by the
Company's current shareholders for their shares and the aggregate market value
of such shares will be approximately $76.6 million, based upon an estimated
initial public offering price of $13.00 per share. See "Dilution," "Principal
and Selling Shareholders" and "Shares Eligible for Future Sale."

Shares Eligible for Future Sale and Potential Adverse Effect on Market
Price. Sales of substantial amounts of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Upon completion of this offering, the Company will have
outstanding 9,303,092 shares of Common Stock. On the date of this Prospectus,
in addition to the 3,500,000 shares offered hereby, approximately 459,453
shares of Common Stock, which are not subject to 180-day lock-up agreements
(the "Lock-up Agreements") with the Representatives of the Underwriters, will
be eligible for immediate sale in the public market pursuant to Rule 144(k)
under the Securities Act of 1933, as amended (the "Securities Act").
Approximately 22,472 additional shares of Common Stock which are not subject
to the Lock-up Agreements will be eligible for sale in the public market in
accordance with Rule 144 or Rule 701 under the Securities Act beginning 90
days after the date of this Prospectus. Upon expiration of the Lock-up
Agreements 180 days after the date of this Prospectus, approximately 8,326,991
additional shares of Common Stock (including 3,005,824 shares of Common Stock
which may be acquired upon the exercise of outstanding options and warrants)
will be available for sale in the public market, subject to the provisions of
Rule 144 under the Securities Act. BT Alex. Brown may release any or all
shares subject to Lock-up Agreements at any time or from time to time without
notice. Following this offering, the Company may register an aggregate of up
to 5,082,927 shares of

13
<PAGE>

Common Stock issuable under its 1993 Stock Option Plan and 1998 Stock Plan
following the 90th day after the date of this Prospectus. Holders of
approximately 8,326,991 shares of Common Stock (including 3,005,824 shares of
Common Stock that may be acquired pursuant to the exercise of options and
warrants held by them) have agreed, pursuant to the Lock-up Agreements, not to
offer to sell, contract to sell, transfer, engage in any hedging transaction
with respect to or otherwise dispose of such shares for 180 days after the
date of this Prospectus. The Company is unable to predict the effect that
sales made under Rule 144, or otherwise, may have on the then prevailing
market price of the Common Stock. The holders of approximately 2,648,184
shares of Common Stock and warrants are entitled to certain incidental and
demand registration rights with respect to such shares. By exercising their
registration rights, such holders could cause a large number of shares to be
registered and sold in the public market. Sales pursuant to Rule 144 or other
exemptions from registration, or pursuant to registration rights, may have an
adverse effect on the market price for the Common Stock and could impair the
Company's ability to raise capital through offerings of its equity securities.
See "Management--Stock Option Plans," "Description of Capital Stock--
Registration Rights of Certain Holders," "Shares Eligible for Future Sale" and
"Underwriting."

Control By Existing Shareholders. Upon completion of this offering, the
Company's executive officers, directors and affiliated entities together will
beneficially own approximately 44% of the outstanding shares of Common Stock
(39% if the Underwriters' over-allotment option is exercised in full). As a
result, these shareholders, acting together, will be able to control matters
requiring approval by the shareholders of the Company, including the election
of directors. Such a concentration of ownership may have the effect of
delaying or preventing a change in control of the Company, including
transactions in which shareholders might otherwise receive a premium for their
shares over then current market prices. See "Principal and Selling
Shareholders."

No Prior Public Market For Common Stock; Possibility of Volatility of Stock
Prices. Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the offering. The initial
offering price will be determined by negotiations between the Company and the
Underwriters and is not necessarily indicative of the market price at which
the Common Stock of the Company will trade after this offering. The market
prices for securities of technology companies have been highly volatile and
the market has experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Announcements
of technological innovations or new products or service offerings by the
Company or its competitors, developments concerning proprietary rights,
including patents and litigation matters, domestic or international regulatory
developments affecting the telecommunications industry, general market
conditions, any shortfall in revenues or earnings from expected levels or
other failures by the Company to meet expectations of securities analysts and
other factors, may have a significant impact on the market price of the Common
Stock. See "Underwriting."

The failure by the Company to identify and elect an additional outside
director who satisfies the Nasdaq National Market listing requirements within
90 days after the effective date of this Prospectus or its inability to meet
or maintain other criteria for continued listing will result in the delisting
of the Company's Common Stock from the Nasdaq National Market. In such event,
the liquidity and trading price of the Company's Common Stock would be
materially and negatively impacted.

Anti-Takeover Effect of Certain Charter and By-Law and Other Provisions. The
Company's Amended and Restated Certificate of Incorporation (the "Certificate
of Incorporation") authorizes the Board of Directors to issue, without
shareholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. The issuance of
Preferred Stock or of rights to purchase Preferred Stock could be used to
discourage an unsolicited acquisition proposal. In addition, the possible
issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay in the

14
<PAGE>

future for shares of the Company's Common Stock. The Certificate of
Incorporation also provides that: (i) the Board of Directors may adopt, amend
or repeal the by-laws of the Company, and the affirmative vote of the holders
of at least 66 2/3% of the voting power of all outstanding shares of the
capital stock of the Company shall be required for shareholders to adopt,
amend or repeal any provision of the by-laws of the Company; (ii) shareholders
of the Company may not take any action by written consent; (iii) special
meetings of shareholders may be called only by the President, the Chairman of
the Board or a majority of the Board of Directors and business transacted at
any such special meeting shall be limited to matters relating to the purposes
set forth in the notice of such special meeting; (iv) the Board of Directors,
when evaluating an offer related to a business combination, merger,
consolidation, or sale of all or substantially all of the assets of the
Company, is authorized to give due consideration to any relevant factors,
including the social, legal and economic effects upon employees, suppliers,
customers, creditors, the community in which the Company conducts its
business, and the economy of the state, region and nation; (v) the affirmative
vote of the holders of at least 66 2/3% of the voting power of all outstanding
shares of the capital stock of the Company shall be required to amend the
above provisions; and (vi) the affirmative vote of the holders of at least 80%
of the voting power of all outstanding shares of the capital stock of the
Company shall be required to amend the provisions of the Company's by-laws and
Certificate of Incorporation with respect to indemnification of directors and
officers and limitation of director liability. The foregoing provisions of the
Certificate of Incorporation could have the effect of delaying, deterring or
preventing a change in control of the Company.

In addition, following this offering, the Company will be subject to certain
"anti-takeover" provisions of the New Jersey Business Corporation Act which,
subject to certain exceptions, restricts certain transactions and business
combinations between a corporation and a shareholder owning 10% or more of the
corporation's outstanding voting stock (an "interested shareholder") for a
period of five years from the date the shareholder becomes an interested
shareholder. These provisions may have the effect of delaying or preventing a
change of control of the Company without action by the shareholders and,
therefore, could adversely affect the price of the Company's Common Stock. In
the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to
provide accelerated vesting of outstanding options. See "Description of
Capital Stock--Preferred Stock," "--Anti-takeover Provisions" and "--
Limitation of Director Liability."

Broad Management Discretion in Use of Proceeds. The Company currently has no
specific plans for use of the estimated net proceeds from this offering. The
Company anticipates that such proceeds will be used for general corporate
purposes and working capital. As a consequence, the Company's management will
have the discretion to allocate the net proceeds to uses that shareholders may
not consider desirable, and there can be no assurance that the net proceeds
can or will be invested to yield a significant return. See "Use of Proceeds."

Immediate and Substantial Dilution. Purchasers of the shares of Common Stock
offered hereby will experience immediate and substantial dilution of $8.96 in
the net tangible book value per share of their investment from the initial
offering price. Additional dilution will occur upon exercise of outstanding
options and warrants. See "Dilution" and "Shares Eligible for Future Sale."

15
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$29.5 million, assuming an initial offering price of $13.00 per share and
after deducting the estimated underwriting discounts and commissions and
offering expenses. The Company will not receive any proceeds from the sale of
shares of Common Stock offered by the Selling Shareholders hereby. See
"Principal and Selling Shareholders."

The principal purposes of this offering are to increase the Company's
capitalization and financial flexibility, to create a public market for the
Company's Common Stock, to facilitate future access by the Company to public
equity markets, to provide liquidity to existing shareholders, to provide
increased visibility and credibility in a market in which many of the
Company's current and potential customers and competitors are or will be
publicly held companies, and to enhance the ability of the Company to use its
Common Stock as consideration for acquisitions and as a means of attracting
and retaining key personnel.

The Company expects to use the net proceeds from this offering for general
corporate purposes and working capital. The Company has not yet identified
specific uses for such proceeds and will have broad discretion over their use
and investment. The proceeds of this offering may be used to acquire
businesses, technologies or products that complement the Company's business,
although the Company has no agreements or understandings with respect to any
such transactions. Pending such uses, the Company intends to invest the net
proceeds of this offering in short-term, investment-grade, interest-bearing
instruments. The Company has not and does not propose to engage in activities
in a manner or to an extent which would require it to register as an
investment company under the Investment Company Act of 1940. See "Risk
Factors--Broad Management Discretion in Use of Proceeds."

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain any earnings to fund future growth and
the operation of its business and, therefore, does not anticipate paying any
cash dividends in the foreseeable future. The Company's revolving credit
facility with Manufacturers and Traders Trust Company (the "Bank") restricts
the Company's ability to pay cash dividends. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources."

16
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company: (i) as of
December 31, 1997; and (ii) pro forma as adjusted to give effect to the
automatic conversion of all issued and outstanding shares of Series A Stock
into 3,043,625 shares of Common Stock and the sale by the Company of 2,500,000
shares of Common Stock offered hereby assuming an initial offering price of
$13.00 per share, after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company and the application
of the estimated net proceeds therefrom. See "Use of Proceeds."

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
Long-term debt, less current portion............... $ 112 $ 112
----------- -----------
Redeemable convertible preferred stock:
Series A preferred stock, no par value; 750,000
shares authorized, 676,361 shares issued and
outstanding, actual; no shares authorized,
issued and outstanding, pro forma as adjusted... 11,604 --
----------- -----------
Shareholders' equity (deficit):
Preferred stock, no par value; no shares
authorized, issued or outstanding, actual;
5,000,000 shares authorized, no shares issued
and outstanding, pro forma as adjusted.......... -- --
Common stock, no par value; 40,000,000 shares
authorized, 6,775,092 shares issued and
outstanding actual and 9,303,092 shares issued
and outstanding pro forma as adjusted(1)........ 2,538 33,678
Deferred stock compensation...................... (876) (876)
Retained earnings................................ 4,937 4,937
Treasury stock, 3,043,625 shares of common stock
at cost actual and no shares of common stock,
pro forma as adjusted........................... (10,000) --
----------- -----------
Total shareholders' equity (deficit)............ (3,401) 37,739
----------- -----------
Total capitalization........................... $ 8,315 $ 37,851
=========== ===========
</TABLE>
- ---------------------
(1) Excludes 2,848,493 shares of Common Stock issuable upon the exercise of
stock options outstanding as of December 31, 1997 at a weighted average
exercise price of $2.23 per share, of which options to purchase 1,173,384
shares of Common Stock are exercisable. Also excludes 185,331 shares of
Common Stock issuable upon the exercise of warrants outstanding as of
December 31, 1997 at an exercise price of $2.18 per share, of which
warrants to purchase 46,333 shares of Common Stock are exercisable. Pro
forma as adjusted includes 28,000 shares underlying outstanding options
which will be exercised and sold upon consummation of this offering. See
"Risk Factors--Shares Eligible for Future Sale," "Management--Stock Option
Plans" and "Description of Capital Stock--Warrants."

17
<PAGE>

DILUTION

The pro forma net tangible book value of the Company as of December 31, 1997
was $8,034,991, or $1.19 per share of Common Stock. Pro forma net tangible
book value per share is determined by dividing the Company's tangible net
worth (tangible assets less liabilities), by the number of shares of Common
Stock outstanding, after giving effect to the conversion into Common Stock of
all shares of Series A Stock upon consummation of this offering. After giving
effect to the sale of the shares of Common Stock offered by the Company hereby
(at an assumed initial offering price of $13.00 per share) and after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by the Company, the pro forma net tangible book value of the Company
as of December 31, 1997 would have been $4.04 per share. This represents an
immediate increase in such pro forma net tangible book value of $2.85 per
share to existing holders and immediate dilution of $8.96 per share to new
investors purchasing shares in this offering. The following table illustrates
the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value per share as of December
31, 1997................................................... $1.19
Increase per share attributable to this offering............ 2.85
-----
Pro forma net tangible book value per share after this
offering..................................................... 4.04
------
Dilution per share to new investors........................... $ 8.96
======
</TABLE>

The following table summarizes, on a pro forma basis as of December 31,
1997, the total number of shares of Common Stock purchased from the Company,
the total consideration paid and the average consideration per share paid by
existing shareholders and by new investors purchasing shares offered by the
Company hereby, at an assumed initial public offering price of $13.00 per
share:

<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(2)........ 6,775,092 73.0% $11,539,639 26.2% $ 1.70
New investors........... 2,500,000 27.0% 32,500,000 73.8 $13.00
----------- ------- ----------- -----
Total................. 9,275,092 100.0% $44,039,639 100.0%
=========== ======= =========== =====
</TABLE>
- ---------------------
(1) Sales by the Selling Shareholders in this offering will reduce the number
of shares held by existing shareholders to 5,775,092, or approximately
62.3% of the total number of shares of Common Stock outstanding after this
offering (or 5,250,092 shares and approximately 56.6% if the Underwriters'
over-allotment option is exercised in full), and will increase the number
of shares held by new investors to 3,500,000, or approximately 37.7% of
the total number of shares of Common Stock outstanding after this offering
(or 4,025,000 shares and approximately 43.4% if the Underwriters' over-
allotment option is exercised in full). See "Principal and Selling
Shareholders." See Note 2.
(2) Excludes 2,848,493 shares of Common Stock issuable upon the exercise of
stock options outstanding as of December 31, 1997 at a weighted average
exercise price of $2.23 per share, of which options to purchase 1,173,384
shares of Common Stock are exercisable. Also excludes 185,331 shares of
Common Stock issuable upon the exercise of warrants outstanding as of
December 31, 1997 at an exercise price of $2.18 per share of which
warrants to purchase 46,333 shares of Common Stock are exercisable. Also
excludes 28,000 shares underlying outstanding options which will be
exercised and sold upon consummation of this offering. Additional dilution
will occur upon exercise of outstanding options and warrants. See "Risk
Factors--Shares Eligible for Future Sale," "Management--Stock Option
Plans" and "Description of Capital Stock--Warrants."

18
<PAGE>

SELECTED FINANCIAL DATA

The following data, as it relates to the years 1995, 1996 and 1997 has been
derived from annual financial statements audited by Price Waterhouse LLP,
independent accountants, including the balance sheets as of December 31, 1996
and 1997 and the related statements of income, of changes in cumulative
redeemable convertible preferred stock and shareholders' equity (deficit) and
of cash flows for the three years ended December 31, 1997 and notes thereto
appearing elsewhere herein. The selected financial data as of, and for the
period ended, December 31, 1994 has been derived from audited financial
statements not included in this Prospectus. The selected financial data as of,
and for the period ended, December 31, 1993 has been derived from unaudited
financial statements not included in this Prospectus. The unaudited financial
data includes all adjustments consisting only of normal, recurring adjustments
that the Company considers necessary for fair presentation of the financial
position and results of operations for these periods. The following should be
read in conjunction with the financial statements and notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" appearing elsewhere in this Prospectus:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
License revenues.................. $ 1,456 $ 2,838 $ 5,734 $ 7,005 $ 10,850
Service revenues.................. 245 1,172 2,179 6,111 8,515
------- ------- ------- ------- --------
Total revenues................... 1,701 4,010 7,913 13,116 19,365
------- ------- ------- ------- --------
Cost of revenues:
License revenues.................. -- 17 74 133 1,274
Service revenues.................. 81 301 436 2,149 3,405
------- ------- ------- ------- --------
Total cost of revenues........... 81 318 510 2,282 4,679
------- ------- ------- ------- --------
Gross profit...................... 1,620 3,692 7,403 10,834 14,686
------- ------- ------- ------- --------
Operating expenses:
Sales and marketing............... 482 1,444 2,588 4,255 4,986
Research and product development.. 426 517 865 1,328 3,299
General and administrative........ 329 860 1,297 2,381 2,881
------- ------- ------- ------- --------
Total operating expenses......... 1,237 2,821 4,750 7,964 11,166
------- ------- ------- ------- --------
Operating income.................. 383 871 2,653 2,870 3,520
------- ------- ------- ------- --------
Net income......................... $ 227 $ 572 $ 1,705 $ 2,013 $ 2,469
======= ======= ======= ======= ========
Net income per common share........ $ 0.04 $ 0.10 $ 0.28 $ 0.37 $ 0.45
Weighted average number of common
shares outstanding................ 5,330 5,760 6,003 3,309 3,567
Net income per common share
assuming dilution................. $ 0.04 $ 0.10 $ 0.26 $ 0.27 $ 0.30
Weighted average number of common
shares and common equivalent
shares outstanding................ 5,333 5,807 6,490 7,393 8,346
Pro forma:(1)
Net income per common share....... $ 0.37
Weighted average number of common
shares outstanding............... 6,610
Net income per common share
assuming dilution................ $ 0.30
Weighted average number of common
shares and common equivalent
shares outstanding............... 8,346
<CAPTION>
DECEMBER 31,
------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities............ $ 195 $ 312 $ 7,004 $ 1,778 $ 3,206
Working capital................... 584 1,113 2,541 4,284 6,276
Total assets...................... 1,590 2,651 10,424 7,445 13,315
Series A preferred stock.......... -- -- 9,943 10,744 11,604
Retained earnings................. 346 918 2,117 3,328 4,937
Total shareholders' equity
(deficit)........................ 1,069 1,641 (6,669) (5,410) (3,401)
</TABLE>
- ---------------------
(1) Gives effect to the automatic conversion of all issued and outstanding
shares of Series A Stock into 3,043,625 shares of Common Stock. See
"Description of Capital Stock."

19
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

This prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus which could cause actual results to
differ materially from those indicated by such forward-looking statements,
including the matters set forth under the caption "Risk Factors."

GENERAL

The Company designs, develops, markets and supports an integrated suite of
object-oriented application development tools and provides custom application
development services, both of which facilitate the rapid development of TMN-
compliant network management applications for the global telecommunications
industry. The Company also offers complete carrier-to-carrier applications
which facilitate the flow of business information between carriers. From its
founding in 1989, the Company has focused on distributed concurrent object
technology and the creation of applications that could be distributed among
many processors. Additionally, the Company developed extensive knowledge of
requirements for multiple protocols and multi-vendor communications as well as
real time operating systems. In the early 1990's, the Company made a strategic
decision to focus on creating suites of tools that facilitate the development
of TMN solutions. Substantially all of the Company's revenues to date has been
derived from application development tools and services based on TMN
standards. The Company's success will depend on continued growth in the market
for advanced telecommunications products and services. In the years ended
December 31, 1996 and 1997, the Company derived approximately 53.4% and 56.0%,
respectively, of its total revenues from license revenues and approximately
46.6% and 44.0%, respectively, of its total revenues from service revenues.

In the two years ended December 31, 1997, the Company's total revenues
increased to $19.4 million, or 144.7%. In conjunction with such revenue
growth, from January 1, 1996 through December 31, 1997, the Company's staff
increased 172% from 46 to 125 full-time employees.

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

The Company's service revenues are comprised of fees derived from
application development services, maintenance fees, and other revenues
generated from customer support services. The Company's application
development services projects are generally individually negotiated and
contracted for on a fixed price basis. Prices for such projects vary depending
upon the size and scope of the project and estimated time to completion.
Revenues from application development services are generally recognized on a
percentage of completion basis calculated as direct labor costs are incurred
in relation to estimated total costs at completion for each project. The
cumulative impact of revisions in percentage of completion estimates is
reflected in the period in which the revisions are made. Maintenance services,
for which the

20
<PAGE>

Company typically charges 18% annually of the total amount paid by the
customer for the products licensed, may be purchased at the customer's option.
Maintenance fees are recognized as revenue over the term of the maintenance
period, which is typically a 12-month term.

The Company had two, one and one significant customers which accounted for
32%, 18% and 12%, respectively, of total revenues for the years ended December
31, 1995, 1996 and 1997, respectively. Sales to Hitachi and McCaw Cellular
accounted for approximately 20% and 12% of total revenues, respectively, in
the year ended December 31, 1995. Sales to Hitachi accounted for approximately
18% of total revenues in the year ended December 31, 1996. Sales to Samsung
accounted for approximately 12% of total revenues in the year ended December
31, 1997. The Company anticipates that its results of operations in any given
period will continue to depend to a significant extent upon sales to a small
number of customers. As a result of this customer concentration, the Company's
revenues from quarter to quarter and business, financial condition and results
of operations may be subject to substantial period-to-period fluctuations.

The Company's costs of license revenues consist primarily of royalties paid
to third party software companies. The Company generally is not contractually
obligated to minimum royalty payments. Costs of service revenues include
primarily payroll, related benefit costs, personnel and other operating
expenses. Sales and marketing expenses consist of salaries, commissions and
bonuses paid to sales and marketing personnel, as well as travel and
promotional expenses. Research and product development expenses encompass
primarily software engineering personnel costs, costs of third-party equipment
and software utilized for development purposes. Research and product
development expenses are generally charged to operations as such costs are
incurred. The Company's research and development projects are evaluated for
technological feasibility in order to determine whether they meet
capitalization requirements. General and administrative expenses are comprised
of personnel costs and occupancy costs for administrative, executive and
finance personnel. The Company has recorded deferred compensation expense of
$875,835 for the difference between the exercise price and the deemed fair
market value of certain shares of the Company's Common Stock underlying
options granted during the year ended December 31, 1997. The compensation
expense attributable to 1997 was deemed immaterial by the Company. However, of
the total deferred compensation expense, approximately $328,000 will be
recognized as compensation expense during the year ended December 31, 1998.
The remainder will be amortized over the ensuing three year period. See Note 6
to Notes to Financial Statements.

The Company markets and sells its products and services through a direct
sales force in the United States and directly and indirectly though
distributors in South America, Europe, Israel and Asia. Typically,
distributors receive a commission of 30% of the sale price of the Company's
products and 10% of any maintenance and training sales. Commissions are
payable only after the Company's receipt of the total revenues for such sale.
In May 1997, the Company entered into a joint venture with ATOS, S.A. to form
TMN Tools, S.A. ("TMN Tools"), which serves as the Company's exclusive sales
and marketing arm in Europe and Israel. The Company owns 49% of the
outstanding equity securities of TMN Tools.

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

21
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain financial
data as a percentage of total revenues:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
License revenues................................... 72.5% 53.4% 56.0%
Service revenues................................... 27.5 46.6 44.0
------- ------- -------
Total revenues................................... 100.0 100.0 100.0
------- ------- -------
Cost of revenues:
License revenues................................... 0.9 1.0 6.6
Service revenues................................... 5.5 16.4 17.6
------- ------- -------
Total cost of revenues........................... 6.4 17.4 24.2
------- ------- -------
Gross profit......................................... 93.6 82.6 75.8
------- ------- -------
Operating expenses:
Sales and marketing................................ 32.7 32.4 25.7
Research and product development................... 10.9 10.1 17.0
General and administrative......................... 16.4 18.2 14.9
------- ------- -------
Total operating expenses......................... 60.0 60.7 57.6
------- ------- -------
Operating income..................................... 33.6 21.9 18.2
------- ------- -------
Net income......................................... 21.5% 15.3% 12.7%
======= ======= =======
</TABLE>

Years Ended December 31, 1997 and 1996

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

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

22
<PAGE>

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

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

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

Income taxes. The Company's effective tax rate was 32% for 1997 and 1996.
Such effective tax rates were lower than the statutory tax rates due primarily
to research and development tax credits.

Years Ended December 31, 1996 and 1995

Revenues. Total revenues increased 65.8% to $13.1 million in 1996 from $7.9
million in 1995. License revenues increased 22.2% to $7.0 million in 1996 from
$5.7 million in 1995. This increase was primarily attributable to an increased
demand for the Company's agent tools products. Service revenues increased
180.5% to $6.1 million in 1996 from $2.2 million in 1995. This increase was
attributable primarily to the establishment of a separate group within the
Company devoted to third party application development. In 1996, sales to
Hitachi accounted for approximately 18% of the Company's total revenues.

Gross profit. The Company's gross profit increased 46.3% to $10.8 million in
1996 from $7.4 million in 1995. Gross profit percentage decreased from 93.6%
in 1995 to 82.6% in 1996. The primary reason for the decrease in gross profit
percentage was the introduction of significant application development
services for the first time in 1996. The margins on development services
typically are significantly lower than the margins on product licenses.

Sales and marketing expenses. Sales and marketing expenses increased 64.4%
to $4.3 million in 1996 from $2.6 million in 1995, but remained relatively
constant at 32.7% and 32.4% of total revenues for such respective periods.

Research and product development expenses. Research and product development
expenses increased 53.5% to $1.3 million in 1996 from $865,000 in 1995, which
constituted a slight decrease from 10.9% to 10.1% of total revenues from 1995
to 1996. The increase in research and product development expenses in absolute
dollars was due primarily to expansion in the number of projects under
development and the increase in personnel.

General and administrative expenses. General and administrative expenses
increased 83.5% to $2.4 million in 1996 from $1.3 million in 1995, and
increased as a percentage of total revenues from 16.4%

23
<PAGE>

to 18.2%. The increase in general and administrative expenses was due
primarily to increased personnel costs associated with the establishment of
both human resources and legal departments as well as expansion of the finance
and accounting department to support the Company's revenue growth.

Income taxes. The Company's effective tax rate was 32% and 37% in 1996 and
1995, respectively. The decrease in the Company's effective tax rate resulted
primarily from greater utilization of research and development tax credits in
1996.

24
<PAGE>

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table presents certain condensed unaudited quarterly financial
information for each of the eight most recent quarters in the period ended
December 31, 1997. This information is derived from unaudited financial
statements of the Company that include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results of operations for such periods. This table should
be read in conjunction with the audited Financial Statements of the Company
and notes thereto beginning on page F-1 of this Prospectus.

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License revenues...... $1,451 $1,400 $1,775 $2,379 $1,482 $2,524 $2,654 $4,190
Service revenues...... 1,070 1,721 1,835 1,486 1,712 2,514 2,535 1,754
------ ------ ------ ------ ------ ------ ------ ------
Total revenues...... 2,521 3,121 3,610 3,865 3,194 5,038 5,189 5,944
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
License revenues...... 77 11 33 13 70 519 375 310
Service revenues...... 365 553 622 608 689 827 1,117 772
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues........... 442 564 655 621 759 1,346 1,492 1,082
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 2,079 2,557 2,955 3,244 2,435 3,692 3,697 4,862
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing... 1,082 834 1,128 1,211 791 1,183 1,286 1,726
Research and product
development.......... 301 330 345 352 709 776 754 1,060
General and
administrative....... 464 562 569 786 649 589 707 936
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses........... 1,847 1,726 2,042 2,349 2,149 2,548 2,747 3,722
------ ------ ------ ------ ------ ------ ------ ------
Operating income........ 232 831 913 895 286 1,144 950 1,140
------ ------ ------ ------ ------ ------ ------ ------
Income before taxes..... 276 851 924 919 306 1,166 984 1,190
------ ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 187 $ 576 $ 626 $ 623 $ 205 $ 782 $ 660 $ 822
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

25
<PAGE>

The following table sets forth certain financial data expressed as a
percentage of total revenues:

<TABLE>
<CAPTION>
.QUARTER ENDED
-------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License revenues...... 57.6% 44.9% 49.2% 61.6% 46.4% 50.1% 51.1% 70.5%
Service revenues...... 42.4 55.1 50.8 38.4 53.6 49.9 48.9 29.5
----- ----- ----- ----- ----- ----- ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License revenues...... 3.1 0.4 0.9 0.3 2.2 10.3 7.2 5.2
Service revenues...... 14.5 17.7 17.2 15.7 21.6 16.4 21.5 13.0
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues........... 17.6 18.1 18.1 16.0 23.8 26.7 28.7 18.2
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 82.4 81.9 81.9 84.0 76.2 73.3 71.3 81.8
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing... 42.9 26.7 31.2 31.3 24.7 23.5 24.8 29.0
Research and product
development.......... 11.9 10.6 9.6 9.1 22.2 15.4 14.5 17.8
General and
administrative....... 18.4 18.0 15.8 20.3 20.3 11.7 13.6 15.8
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses........... 73.2 55.3 56.6 60.7 67.2 50.6 52.9 62.6
----- ----- ----- ----- ----- ----- ----- -----
Operating income........ 9.2 26.6 25.3 23.3 9.0 22.7 18.4 19.2
----- ----- ----- ----- ----- ----- ----- -----
Income before taxes..... 10.9 27.3 25.6 23.8 9.6 23.1 19.0 20.0
----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 7.4% 18.5% 17.3% 16.1% 6.4% 15.5% 12.7% 13.8%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

Demand for the Company's products generally is higher during the fourth
quarter, primarily due to capital spending trends by telecommunications
companies which has resulted in higher license revenues in those periods and
lower license revenues in the first quarter. The Company anticipates that its
business will continue to be subject to such seasonal variations.

The operating results for any quarter are not necessarily indicative of
results which may be obtained for any future period. Due to the relatively
fixed nature of certain of the Company's costs, including personnel and
facilities costs, a decline in revenue, failure to achieve expected revenue in
any fiscal quarter or unanticipated variations in billing and utilization
rates of service personnel would result in lower profitability in that
quarter. The Company's quarterly results may fluctuate as a result of a
variety of factors, many of which are not within the Company's control,
including timing and levels of hardware and software purchases by customers,
the timing, size and stage of development projects, new product and service
introductions by the Company or its competitors, levels of market acceptance
for the Company's products and services, or the hiring of additional
personnel. In addition, the Company's revenues generally have been, and likely
will continue to be in the near term, derived from a relatively small number
of sales transactions and fixed price development projects and, therefore any
delays in closing such engagements or the failure to accurately estimate the
resources necessary to complete fixed price contracts will have a material
adverse impact on the Company's results of operations for that period. In
addition, the Company historically has recognized a large portion of its
revenues from sales in the last month of a quarter such that the magnitude of
quarterly fluctuations may not become evident until late in, or at the end of,
a particular quarter. Furthermore, the Company's revenues are partly dependent
upon run-time license fees which may fluctuate from period to period depending
upon the size and timing of deployments by equipment vendors to
telecommunications carriers of network devices which have embedded
applications built with the Company's software. The Company believes,
therefore, that past operating results and period-to-period comparisons should
not be relied upon as an indication of future performance.

26
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Since its inception in 1989, the Company has financed its operations
primarily through cash generated by operations. At December 31, 1997, the
Company's cash, cash equivalents and marketable securities aggregated
approximately $3.2 million, of which cash and cash equivalents aggregated
approximately $2.1 million. The Company's working capital was $4.3 million and
$6.3 million at December 31, 1996 and 1997, respectively.

Accounts receivable increased from $4.5 million at December 31, 1996 to $7.6
million at December 31, 1997 primarily as a result of the increase in billings
in the fourth quarter of 1997 as compared to the fourth quarter of 1996. In
addition, the Company billed $889,560 to a major customer which related to an
application development contract, all of which remained in accounts receivable
at December 31, 1997. The Company bills its maintenance contracts on an annual
basis. A significant portion of such billing occurs in the fourth quarter.
Three customers comprised an aggregate of 49% of accounts receivable at
December 31, 1996, and one customer comprised 12% of accounts receivable at
December 31, 1997.

The Company bills its customers, several of which are based in Korea and
Japan, in U.S. dollars at agreed-upon contractual terms. The Company has not
experienced any significant negative effects on its liquidity as a result of
the volatility and devaluation trends that recently have been experienced in
certain Asian markets. Accounts receivable at December 31, 1997 includes
approximately $1.5 million from customers in this region.

The Company has an unsecured revolving credit facility with the Bank
pursuant to which it may borrow up to a maximum of $3.0 million. Amounts
outstanding under such facility bear interest at the Bank's prime rate less
0.25% on aggregate principal amounts outstanding of $1.0 million or less and
at the Bank's prime rate to the extent aggregate principal amounts exceed $1.0
million. The Company also has certain LIBOR options. No borrowings under the
revolving credit facility were outstanding as of December 31, 1997. The credit
facility contains, among other provisions, a covenant which restricts the
Company's ability to pay cash dividends.

The Company's capital expenditures were approximately $708,000 and $808,000
for the years ended December 31, 1996 and 1997, respectively. Although the
Company anticipates higher levels of equipment and facilities-related
expenditures in the foreseeable future, such future expenditures are not
anticipated to be significantly higher as a percentage of total revenues as
compared to prior periods.

The Company has been notified by the Internal Revenue Service that the
Company is being audited for the fiscal year ended December 31, 1995. Although
the Company does not believe that it will have any additional tax liability
for such period, the audit is in its early stages and the Company is unable to
determine the impact, if any, of such audit.

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

RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" was issued in February 1997 and replaces Accounting Principles Board
("APB") Opinion No. 15. The new statement simplifies the computations of
earnings per share ("EPS") by replacing the presentation of primary EPS with
basic EPS, which is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS under the new

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statement is computed similarly to fully diluted EPS pursuant to APB Opinion
No. 15. SFAS No. 128 is effective for financial statements for both interim
and annual periods ending after December 15, 1997. Early application was
prohibited. See Note 12 to Notes to Financial Statements.

SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in 1995.
This statement requires companies to measure stock compensation plans based on
the fair value method of accounting or to continue to apply APB Opinion 25,
"Accounting for Stock Issued to Employees" and provide pro forma footnote
disclosure under the fair value method. Effective in December 1996, the
Company adopted the disclosure-only provisions of SFAS No. 123 and continues
to follow APB Opinion 25 and related interpretations to account for the
Company's stock compensation plans.

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 applies
to all companies and is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Management believes that the adoption of SFAS No. 130
will not have a material impact on the financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 applies to all public companies and is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires that business segment financial information be reported in the
financial statements utilizing the management approach. The management
approach is defined as the manner in which management organizes the segments
within the enterprise for making operating decisions and assessing
performance. Management believes the adoption of SFAS No. 131 will not have a
material impact on the financial statements.

In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition," which is
effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Statement of Position governs the recognition of
revenue by enterprises that license, sell, lease or otherwise market software,
except where software is incidental to the products or services being offered
as a whole. Application of this Statement of Position is not expected to have
a material impact on the Company's financial statements.

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BUSINESS

OVERVIEW

DSET is a leading provider of telecommunications network management
solutions, including industry-standard application development tools, custom
application development services and carrier-to-carrier network applications.
Telecommunications carriers and equipment vendors utilize the Company's tools
and development services to build applications which facilitate the remote
management of network devices, the rapid implementation of new
telecommunication services and the flow-through of information to higher level
applications, such as billing, ordering and provisioning systems. The
Company's tools are also used by the Company and by its customers to build
carrier-to-carrier applications which are designed to facilitate the flow-
through of information between carriers' networks and systems. These solutions
are based on the TMN standard, which defines the APIs and communication
protocols required to ensure interoperability within and between carrier
networks that incorporate devices deployed from multiple vendors. The
Company's customers include AT&T, BellSouth, MCI, Advanced Fibre
Communications, Ciena, Fujitsu, Hitachi, Lockheed Martin IMS, Lucent, Samsung,
Tekelec and Tellabs.

INDUSTRY BACKGROUND

Telecommunications carriers face an increasingly competitive and complex
market environment due to continued deregulation and privatization of the
global telecommunications industry. The divestiture of AT&T in 1984, and the
resulting creation of the RBOCs, led to increased competition in domestic
telephony markets. The breakup of AT&T also opened the United States market to
global telecommunications equipment vendors which were previously
disadvantaged in competing with AT&T's equipment division. In the early
1990's, further deregulation of the United States long distance market created
the need for connectivity between competitive carrier networks and
applications to facilitate customer choice of carriers. Throughout this
period, the RBOCs continued to have relative monopolies in the local telephone
service market. The Telecommunications Act mandated broader domestic
deregulation which created competition among local exchange and long distance
carriers for the right to provide local and long distance service.
Internationally, privatization of state-owned carriers and the opening of
previously closed markets have led to investment in new network
infrastructures and increased competition worldwide.

Today, domestic and international carriers must not only compete with new
entrants in the market, but also with cable companies, wireless carriers and
Internet service providers for traditional and enhanced voice services, data
services, Internet access and emerging video services. This increase in
competition is forcing carriers to provide a broad range of services in order
to differentiate themselves among their competitors.

In response to these dramatic industry changes, carriers are investing
aggressively in new technologies and equipment to enhance access to their
networks and expand systems capacity, or bandwidth. As a result,
telecommunications equipment vendors are integrating new technologies into
their products that improve network access and increase network bandwidth,
enabling carriers to deliver new services at enhanced performance levels.
Examples of such new products include next generation digital loop carrier
systems, wireless local loop systems, SONET/SDH multiplexers, WDMs, ATM
switches and digital subscriber line products. Equipment vendors and carriers
are also implementing new applications for the deployment of advanced voice
and data services across the Advanced Intelligent Network, a supplementary
network that operates in conjunction with the carriers' current telephone
networks.

Carriers rely on network management systems ("NMS") and OSSs to manage their
telecommunications networks and to deploy services. These software systems,
among other functions, automate service provisioning and enable the remote
monitoring and maintenance of thousands of

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network devices and millions of network components. The proliferation of new
communication technologies, products and services, and pressure to provision
them quickly and cost-effectively, has placed increased demands on the
operations, administration and management of carrier networks. In addition,
the Telecommunications Act of 1996 mandated access to carriers' OSSs in order
to enable the flow-through provisioning of services between the incumbent and
new local carriers. For example, a new carrier-to carrier application is local
number portability ("LNP"), which enables a customer to move from one local
exchange carrier to another without a change in telephone number. LNP and
other carrier-to-carrier applications require a significant amount of
information to be exchanged electronically between the carriers' NMSs and
OSSs, which may utilize various messaging, management and communication
protocols. This information exchange requires an industry standard
architecture to ensure interoperability between carriers' networks and
systems.

As a result, carriers increasingly require that network management solutions
comply with TMN, an industry standard architecture developed by the
International Telecommunications Union. TMN defines the APIs and communication
protocols necessary to enable interoperability within and between carrier
networks that incorporate devices deployed from multiple vendors. Even with
the benefits of a standards-based approach, the task of developing TMN-
compliant applications typically is complex, costly and time consuming. Such
complexity has resulted in increased time-to-market pressures (i) for the
equipment vendors which must provide new TMN-compliant devices to their
carrier customers and (ii) for the carriers which must deliver new service
offerings to their business and residential consumers. In addition, the
complex development process is complicated by a shortage of experienced TMN
software developers. Consequently, carriers and equipment vendors are
increasingly relying upon TMN-based application development tools to simplify
the internal development of TMN-compliant applications as well as outsourcing
complex TMN development projects.

THE DSET SOLUTION

DSET provides TMN-compliant application development tools, custom
application development services and carrier-to-carrier applications.
Telecommunications carriers and equipment vendors utilize the Company's tools
and development services to build a full range of TMN agent and manager
applications. Agent applications built with DSET tools are incorporated in
network devices and enable the remote management of such devices and the rapid
implementation of new telecommunications services. Manager applications built
with DSET tools interact with the agent applications to direct the flow-
through of information to higher level applications, such as billing, ordering
and provisioning systems. The Company's tools are also used by the Company and
its customers to build carrier-to-carrier applications which facilitate the
flow-through of information between carriers' networks and systems.

The Company's highly functional, flexible and scalable TMN-compliant
application development tools and application development capabilities (i)
enable the management of large and complex telecommunication networks by
allowing carriers to remotely manage thousands of network devices in a multi-
vendor environment, (ii) facilitate the rapid provisioning of new and enhanced
services such as Internet access, video conferencing and advanced voice
capabilities and (iii) expedite the development of carrier-to-carrier
applications, allowing carriers to quickly and cost effectively enter new
markets.

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STRATEGY

The Company's objective is to become the leading provider of industry-
standard network management solutions for evolving telecommunications
networks. The Company's strategy involves the following key elements:

. Extend Technological Leadership. The Company has extensive technical
experience in TMN-compliant technologies and intends to continue to
invest its resources to improve and expand its products and application
development services to ensure compatibility with existing and emerging
technologies. The Company's product development engineering staff has
focused on the TMN requirements for multiple protocols, multi-vendor
communications, distributed processing and real-time operating systems
and is building new products based on CORBA and the C++ APIs endorsed by
the Network Management Forum ("NMF"). DSET's development efforts are
also focused on simplifying the use of the key technologies underlying
TMN, such as Guideline for the Definition of Managed Objects ("GDMO"),
Abstract Syntax Notation 1 ("ASN.1"), Common Management Information
Protocol ("CMIP"), and Open Systems Interconnection ("OSI"), as well as
evaluating emerging technologies such as Java.

. Expand Application Development Services. The Company intends to increase
the number, size and scope of its application development projects by
expanding its application development staff and broadening its
technological competence. DSET has assembled a team of application
development engineers with TMN expertise to provide application
development services to telecommunications equipment vendors and
carriers worldwide. The Company intends to continue to expand its
service offerings, which currently include system design, information
modeling, complete "end-to-end" development, integrated testing and test
plan simulations and design optimization services for rapid solution
deployment.

. Deliver a Suite of Carrier-to-Carrier Applications. The Company intends
to continue to utilize its application development tools and leverage
the experience of its application development staff to deliver new
carrier-to-carrier applications. For example, the Company is utilizing
the experience gained from building a local service management system
("LSMS") for the emerging LNP market to develop additional LNP
applications such as service order activation ("SOA") systems. In
addition, the Company intends to expand its offerings by developing
carrier-to-carrier gateway products.

. Expand Sales and Distribution Capabilities. The Company intends to
continue expanding its sales, marketing and distribution capabilities in
order to capitalize on opportunities in the global market. During 1997,
the Company increased its direct sales force from four to eight sales
managers who focus their efforts on potential opportunities in North and
South America. The Company utilizes multiple non-exclusive international
distributors and agents in Asia and the Pacific Rim. In 1997, the
Company established a joint venture with ATOS, S.A. for exclusive
distribution of its products and services in Europe and Israel. In
addition, the Company is targeting telecommunications equipment vendors
and systems integrators to resell the Company's carrier-to-carrier
applications.

. Pursue Strategic Acquisitions. The Company intends to pursue
acquisitions of complementary businesses or technologies in order to
expand its products and services offerings, to add technical or sales
personnel or to obtain additional customer relationships. As part of its
strategy, in May 1997, the Company acquired the assets of Marben
Products, Inc. and the exclusive distribution rights in the Americas and
Asia for complementary telecommunications products, including the Marben
OSI Stack.

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PRODUCTS AND SERVICES

APPLICATION DEVELOPMENT TOOLS

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

TMN Agent Tool Suite

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

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

TMN Manager Tool Suite

TMN manager applications built with DSET tools generally reside on UNIX or
Windows NT workstations and interact with the agent applications to facilitate
the monitoring of network devices and to direct the flow-through of
information to higher level applications, such as billing, ordering and
provisioning systems, within the network management infrastructure. This suite
of manager tools, which incorporates certain components of the TMN Agent Tool
Suite, includes:

Manager Code Generator ASN.C Compiler
Manager Tester GDMO Compiler
CMIS/ROSE OSI, RFC 1006, GR-303 Protocol Stacks
Distributed Systems Generator

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

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

APPLICATION DEVELOPMENT SERVICES

DSET's professional services organization offers a broad range of value-
added application development services to its customers. DSET currently offers
system design, information modeling, complete "end-to-end" development,
integrated testing and test plan simulations, and design optimization services
for rapid solution deployment. The Company has assembled a team of application
engineers with expertise in GDMO, ASN.1, CMIP, OSI, TCP/IP and GR-303, the key
technologies underlying TMN, as well as PCS and GSM, to provide application
development services to telecommunications equipment vendors and carriers
worldwide. The organization utilizes DSET's tools and TMN expertise to develop
agent, manager and carrier-to-carrier applications. The Company generally
retains the right to rebuild similar applications for other customers.

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

CARRIER-TO-CARRIER APPLICATIONS

The Company intends to continue to utilize its application development tools
and leverage the experience of its application development staff to deliver
new carrier-to-carrier applications. The first of DSET's carrier-to-carrier
applications addresses LNP applications. As a result of the Telecommunications
Act of 1996, the FCC mandated local exchange carriers to provide LNP services
to its customers enabling customers to move from one local exchange carrier to
another without a change in telephone number. LNP and other carrier-to-carrier
applications require a significant amount of information to be exchanged
electronically between carriers' NMSs and OSSs, which may utilize various
messaging, management and communication protocols.

DSET builds LSMS and SOA applications, which are utilized by carriers
deploying network facilities for local telephone service. The Company was
selected by Lockheed Martin IMS to help provide the required TMN interface
between the telephone companies and the nation's first Number Portability
Administration Center. Additionally, the Company entered into an agreement
with Tekelec Incorporated ("Tekelec") to build a customized LSMS and has
retained the right to build and sell similar LSMS applications to other
customers. The Company leveraged its experience gained in such project to
build and sell a series of additional applications which accelerate
development of LSMSs. In addition, the Company is developing a local SOA
system and intends to begin marketing this application in conjunction with the
LSMS during 1998.

As new local exchange carriers are emerging, they also need to access the
incumbent local exchange carriers' pre-ordering, ordering, billing, trouble
administration and primary interexchange carrier applications. This
interaction between carriers requires electronic gateways, which in turn may
require new applications. No assurance can be given that the Company's
carrier-to-carrier applications will achieve market acceptance. See "Risk
Factors--Risks Associated with New Application Development Tools and Carrier-
to-Carrier Applications."

CUSTOMER SUPPORT SERVICES

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

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Maintenance. The Company's maintenance services include problem
identification and notification, work-around solutions, temporary software
patches and bug fixes. Depending upon the complexity of the problem, the
Company provides technical support solutions via electronic mail, website
access, telephone or on-site support. Such services are offered to all
licensees of the Company's application development tools under maintenance
contracts, for which the Company typically charges 18% annually of the total
amount paid by the customer for the products licensed. The Company utilizes a
number of procedures to ensure prompt service, including tracking all
technical support issues in a computerized system to ensure same-day
acknowledgment of the customer report. Domestically, technical support is
provided directly by the Company's technical support engineers.
Internationally, local distributors, supported by the Company's regional
offices, provide first line technical support services. The Company's products
generally are covered by a 90-day warranty which covers defects in the media
provided to the customer, as well as a warranty for Year 2000 compliance. In
certain circumstances, the Company has provided a warranty that its products,
as delivered, will meet customer specifications.

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

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

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

TECHNOLOGY

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

The Company has leveraged its experience in distributed technologies to add
value to the TMN-based technologies and to differentiate its application
development tools from those of its competitors. The Company's distributed
technologies allow for concurrency, or multi-threading, and scalability for
the processing of management information. The Company believes that the multi-
threading and scalability capabilities of its application development tools
are competitive advantages. Many competitive alternatives utilize sequential
processing which cannot take full advantage of the multi-processing
capabilities of high performance computing platforms.

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

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CUSTOMERS

The Company's customers are primarily telecommunications equipment vendors
and carriers. The following is a partial list of customers who have purchased
products or services during 1997.

ACT Networks Fujitsu
ADC Telecommunications Hitachi
Advanced Fibre Communications Lockheed Martin IMS
AT&T Lucent Technologies
Bell Communications Research, MCI
Inc. (Bellcore) NEC America
BellSouth Applied Technologies Samsung
Cabletron Systems Seiscor Technologies
Ciena Corporation Tekelec
DSC Technologies Tellabs
Ericsson Hewlett-Packard (EHPT)

The Company had two, one and one significant customers which accounted for
32%, 18% and 12%, respectively, of total revenues for the years ended December
31, 1995, 1996 and 1997, respectively. Sales to Hitachi and McCaw Cellular
accounted for approximately 20% and 12% of total revenues, respectively, in the
year ended December 31, 1995. Sales to Hitachi accounted for approximately 18%
of total revenues in the year ended December 31, 1996. Sales to Samsung
accounted for approximately 12% of total revenues in the year ended December
31, 1997. The Company anticipates that its results of operations in any given
period will continue to depend to a significant extent upon sales to a small
number of customers. Other than customer agreements which provide for minimum
royalties for run-time licenses, none of the Company's customers has entered
into an agreement requiring minimum purchases from the Company. The Company's
software development services agreements with its customers generally can be
terminated by either party with limited or no advance notice, and without
significant penalty. Many of the Company's customers may also be competitors of
the Company. See "Risk Factors--Customer Concentration."

CASE STUDIES

The following case studies illustrate some of the business needs of DSET's
customers and solutions the Company has provided.

APPLICATION DEVELOPMENT TOOLS

Ciena Corporation: Ciena, a leading telecommunications equipment vendor,
utilized the Company's application development tools for the internal
development of an agent application for its WDM.

Ciena entered the competitive WDM equipment business by securing a
significant contract with a major long distance carrier which was committed to
open network management interfaces based on the TMN standard. Such carrier
required the rapid deployment of TMN-compliant WDM equipment in order to
accelerate the offering of enhanced services to its customers. Ciena selected
the DSET TMN Agent Tool Suite to develop TMN-compliant applications for
integration into its WDM. DSET also provided consulting services to support
Ciena's development efforts. Using the DSET tools, Ciena met its development
time schedule.

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APPLICATION DEVELOPMENT SERVICES

Samsung: Samsung, a leading international telecommunications equipment
vendor, engaged the Company to develop custom applications for PCS network
devices.

The Company developed a TMN agent application for three different PCS
network devices consisting of a wireless telephone switch, base station system
and home location register. The application enabled Samsung's PCS network
elements to be managed by multiple vendors' network management systems for the
purpose of configuration management, performance management and fault
management.

CARRIER-TO-CARRIER APPLICATIONS

Tekelec: Tekelec, a leading telecommunications equipment vendor, engaged the
Company to develop LNP applications, including an LSMS, for its customers.

Tekelec needed to provide TMN-compliant solutions which ensured
interoperability, were competitive on price, and could be delivered within
strict timeframes. Tekelec engaged DSET because of its application development
tools and the technical capabilities of its professional services organization
to build the LSMS. The project was delivered on time and within budget.

SALES AND MARKETING

The Company markets its products and services through its direct sales
organization in North and South America and international distributors in
Europe and Asia. As of December 31, 1997, the Company's direct field sales
force consisted of eight sales managers supported by nine consulting engineers
based in its New Jersey, California and Texas offices.

The Company also markets its products and services through non-exclusive
distributors in China, Taiwan, South Korea and Japan. Sales, marketing and
technical support is provided to the international distributors by DSET
personnel in the United States. The Company utilizes TMN Tools, S.A., its
joint venture created in May 1997 with ATOS, S.A., to distribute DSET's
products and services in Europe and Israel. TMN Tools has exclusive rights to
sell the Company's products pursuant to a two-year contract ending in May
1999. In addition, the Company is targeting telecommunications equipment
vendors and systems integrators to resell the Company's carrier-to-carrier
applications.

In general, the non-exclusive distributor agreements require distributors to
use their best efforts to promote and solicit orders for the Company's
products and allow distributors to use the Company's trademarks and trade
names in advertising and promoting Company products. Typically, distributors
receive a commission of 30% of the sale price of the Company's products and
10% of any maintenance and training sales. Commissions are payable only after
the Company's receipt of the total revenues for such sale. Customers
purchasing products through non-exclusive distributors are required to enter
into license agreements with the Company.

The Company has a lengthy sales cycle and believes that the period of time
between initial customer contact and execution of a license agreement or
development services contract typically ranges from four to nine months.
Telecommunications carriers and network equipment vendors typically conduct
extensive and lengthy product evaluations before purchasing software or
application development services. See "Risk Factors--Length of Sales Cycle."

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

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RESEARCH AND PRODUCT DEVELOPMENT

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

The Company is pursuing several product development projects and allocates
its research and product development resources in response both to market
research and customer demands for additional features and products. The
Company's product development strategy involves rolling out initial versions
of its products and adding features over time. The Company regularly
incorporates product feedback received from customers into its product
development process. The Company's research and product development efforts
are principally focused on (i) the enhancement of existing products to support
new features, (ii) the development of new products capable of enabling
customers to build applications based on new technologies, and (iii) creation
of carrier-to-carrier applications. The Company is currently developing
several products that will support C++ APIs endorsed by the NMF and is
investing in the development of new tools utilizing other technologies, such
as CORBA. DSET's development efforts are also focused on simplifying the use
of the key technologies underlying TMN, such as GDMO, ASN.1, CMIP, and OSI, as
well as evaluating emerging technologies such as Java.

The Company employs highly qualified engineers and utilizes its in-house
development capabilities to efficiently manage design processes and to shorten
product introduction lead times. The Company seeks to maximize the use of
existing technology to minimize time to market of its products and
applications. Most of the Company's research and development personnel hold
engineering and other advanced technical degrees. The Company's research and
development team consists of 47 engineers and support personnel as of December
31, 1997. The Company's research and development expenditures were
approximately $865,000, $1.3 million and $3.3 million in 1995, 1996 and 1997,
respectively.

COMPETITION

Competition in DSET's markets is intense and involves rapidly changing
technologies, evolving industry standards, frequent new product introductions
and rapid changes in customer requirements. To maintain and improve its
competitive position, DSET must continue to develop and introduce, on a timely
and cost-effective basis, new products, features and services that keep pace
with the evolving needs of its customers. The principal competitive factors
affecting the market for the Company's software tools are product reputation,
quality, performance, price, customer support and product features such as
adaptability, scalability, ability to integrate with other products,
functionality and ease of use. The Company believes that the principal
competitive factors in the market for application development services include
compliance with industry standards, quality of service and deliverables, speed
of development and implementation, price, project management capability and
technical and business expertise. The Company believes that the principal
competitive factors in the market for carrier-to-carrier applications includes
many of the same factors as the market for application development services as
well as the ability of such applications to facilitate the flow-through of
information between carriers' networks and systems. While there can be no
assurance that the Company will be able to compete effectively based upon such
competitive factors, DSET believes that its capabilities in TMN applications
differentiates its products and services in the marketplace.

The Company competes in the application development tools market with a
small group of software tool providers. The Company's competitors in the
markets for application development services and carrier-to-carrier
applications include the in-house development staffs of telecommunications
carriers and

37
<PAGE>

network equipment vendors and systems integrators. Many of its competitors
have longer operating histories, greater name recognition, larger or captive
customer bases and significantly greater financial, technical, sales, customer
support, marketing and other resources. Furthermore, TMN, as an open systems
architecture, can lead to increased competition as third parties develop
competitive products and services. Competitors may be able to respond more
quickly to emerging technologies and changes in customer requirements.

INTELLECTUAL PROPERTY

The Company's success and its ability to compete effectively is dependent,
in part, upon its proprietary rights. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, as well as
confidentiality procedures and contractual restrictions, to establish and
protect its proprietary rights. Furthermore, the Company generally enters into
non-competition, non-disclosure and invention assignment agreements with its
employees and consultants, and into non-disclosure agreements with its
customers and distributors. There can be no assurance that such measures will
be adequate to protect the Company's proprietary rights. A portion of the
Company's revenues is generated from run-time license fees which generally
become due upon the deployment by equipment vendors to telecommunications
carriers of network devices which have embedded applications built with the
Company's software. Many of such customers are contractually required to
periodically report their sales to the Company. There can be no assurance that
such customers will accurately report such sales or that the Company will be
able to effectively monitor and enforce its contractual rights with respect to
such fees. Additionally, the Company may be subject to further risks as it
enters into transactions in countries where intellectual property laws are not
well developed or are difficult to enforce. Legal protections of the Company's
proprietary rights may be ineffective in such countries. Litigation may be
necessary to defend and enforce the Company's proprietary rights, which could
result in substantial costs and diversion of management resources and could
have a material adverse effect on the Company's business, financial condition
and results of operations, regardless of the final outcome of such litigation.
Despite the Company's efforts to safeguard and maintain its proprietary rights
both in the United States and abroad, there can be no assurance that the
Company will be successful in doing so or that the steps taken by the Company
in this regard will be adequate to deter misappropriation or independent
third-party development of the Company's technology or to prevent an
unauthorized third party from copying or otherwise obtaining and using the
Company's products or technology. Any of such events could have a material
adverse effect on the Company's business, financial condition and results of
operations.

38
<PAGE>

EMPLOYEES

As of December 31, 1997, the Company had a total of 125 employees. Of the
total, 47 were in engineering and product development, 36 were in professional
services, 17 were in sales and sales support, 11 were in administration,
finance and operations, eight were in customer service, and six were in
marketing. The Company's future performance depends in significant part upon
the continued service of its management, key product and application
engineers, and sales and technical sales support personnel. Competition for
such personnel is intense and there can be no assurance that the Company will
be successful in attracting or retaining such personnel in the future. None of
the Company's employees are represented by a labor union or are subject to a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.

FACILITIES

The Company's executive offices, research and product development, and
primary production operations are located in Bridgewater, New Jersey, where
the Company occupies approximately 19,755 square feet pursuant to a lease
expiring in 1999. The annual rent and maintenance for the facility is
approximately $328,000.

In addition, the Company leases 5,465 square feet of office space for a
professional services office in Richardson, Texas. The Company also leases
facilities in San Jose, California and Fremont, California, occupying 2,797
square feet and 3,275 square feet, respectively. See Note 10 of Notes to
Financial Statements for information regarding the Company's obligations under
such leases. The Company believes that suitable additional or alternative
space will be available as needed on commercially reasonable terms. The
Company expects to open an office in the Republic of China during the second
quarter of 1998.

LEGAL PROCEEDINGS

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

39
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William P. McHale, Jr... 48 President, Chief Executive Officer and Director
S. Daniel Shia(1)....... 46 Chairman of the Board, Chief Technical Officer and Director
Paul A. Lipari.......... 50 Chief Financial Officer, Treasurer and Secretary
Paul R. Smith........... 51 Senior Vice President Worldwide Sales and Marketing
Victor W. Mak........... 37 Vice President, Engineering
Vincent J. Sheu......... 45 Vice President, Professional Services
Hui-Yun Rosanna Yuan.... 45 Director
Elizabeth K. 47 Director
Adams(2)(3)............
Bruce R. Evans(1)(3).... 38 Director
</TABLE>
- ---------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Option Committee.

Within 90 days after the effective date of this Prospectus and pursuant to
Nasdaq National Market listing requirements, the Company intends to identify
and elect at least one new director who will be an independent, unaffiliated
director. The failure by the Company to identify and elect such new director
who satisfies such listing requirements within the requisite timeframe will
result in the delisting of the Company's Common Stock from the Nasdaq National
Market. See "Risk Factors--No Prior Public Market for Common Stock;
Possibility of Volatility of Stock Prices."

All directors hold office until the next annual meeting of shareholders and
until their successors shall have been duly elected and qualified. All
executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Other than Mr. Shia and Ms. Yuan, who are husband and wife, there are no
family relationships among any of the directors and executive officers of the
Company.

Mr. McHale joined the Company in January 1997 as President and Chief
Operating Officer and was elected to the Board of Directors in January 1997.
In July 1997, he became Chief Executive Officer. Mr. McHale also serves on the
Board of Directors of TMN Tools, S.A., the Company's European joint venture.
Prior to joining the Company, Mr. McHale was Vice President of Sales and
Marketing at F3 Software Corporation from January 1995 to December 1996. From
February 1991 to December 1994, Mr. McHale owned and operated a private firm
where he periodically provided senior management or consulting services. Mr.
McHale also served as President and Chief Executive Officer of each of
Mitchell Management Systems from November 1989 to January 1991, and Component
Software Corporation from July 1992 to July 1994. Prior to that, Mr. McHale
held various sales and marketing positions at IBM, Wang Laboratories and
Digital Equipment Corporation.

Mr. Shia founded the Company and currently serves as its Chairman of the
Board and Chief Technical Officer. Mr. Shia served as President from the
Company's founding in 1989 until January 1997. Mr. Shia also served as Chief
Executive Officer from 1989 until July 1997. Prior to founding the Company,
Mr. Shia served as a consultant to Bellcore from October 1985 to January 1989
where he developed OSI protocols and a distributed network management system
for a high performance metropolitan area network. From 1983 to October 1985,
Mr. Shia was a consultant to AT&T Bell Laboratories.

40
<PAGE>

Mr. Lipari joined the Company in September 1996 as Chief Financial Officer
and Secretary. In December 1997, he also became Treasurer of the Company. Mr.
Lipari also serves on the Board of Directors of TMN Tools, S. A. Prior to
joining the Company, Mr. Lipari served as Vice President of Finance and Chief
Financial Officer for Chamberlain Phipps North America, Inc. from 1995 to
1996, Vice President of Finance and Operations and Chief Financial Officer for
Netlink, Incorporated from 1993 to 1995, and as Chief Financial Officer of
Moscom Corporation, from 1983 to 1993. Mr. Lipari is a certified public
accountant.

Mr. Smith joined the Company in September 1992, and currently serves as
Senior Vice President Worldwide Sales and Marketing. Prior to joining the
Company, from 1987 to 1992, Mr. Smith founded and directed The Center for
Strategic Communications, a marketing consulting firm serving the
telecommunications, health-care and computer industries. Prior to that Mr.
Smith served in various engineering, marketing, sales, product management,
strategic planning and business development positions with AT&T Bell
Laboratories and AT&T Network Systems from 1968 to 1987.

Mr. Mak joined the Company in April 1994, and currently serves as Vice
President of Engineering. Mr. Mak served the Company as an Engineering Manager
from April 1994 to April 1996, and as Director of Engineering from April 1996
to April 1997. Mr. Mak was promoted to Vice President of Engineering in April
1997. Prior to joining the Company, Mr. Mak worked as a research scientist for
Bellcore from 1987 to 1994.

Mr. Sheu joined the Company in August 1995, and currently serves as Vice
President of Professional Services. Mr. Sheu served as the Company's Director
of Professional Services from August 1995 to April 1997. Mr. Sheu was promoted
to Vice President of Professional Services in April 1997. Prior to joining the
Company, Mr. Sheu served as a senior manager for DSC Telecom L.P. from January
1992 to August 1995.

Ms. Yuan has been a director of the Company since 1995 and served as the
Company's Controller from 1990 to December 1997 and Treasurer from September
1993 to December 1997. Prior to joining the Company, Ms. Yuan served as a
computer software consultant to the Company, Bellcore, AT&T and Bell
Laboratories from 1981 to 1993.

Ms. Adams has been a director of the Company since July 1997. Since 1990,
Ms. Adams has served as President of Rational Management Group, Inc., a
consulting firm. Ms. Adams also serves as Managing Director of the Network
Management Forum, an international consortium of telecommunications carriers
and equipment vendors. Prior to joining Rational Management Group, Inc., Ms.
Adams held a variety of positions with AT&T and Bell System companies.

Mr. Evans has been a director of the Company since December 1995. Since
1991, Mr. Evans has been a general partner with Summit Partners, a venture
capital firm, where he has been employed since 1986. Mr. Evans serves as a
director of Pediatrix Medical Group, Inc., Omtool Ltd. and several privately-
held companies. See "Principal and Selling Shareholders."

The Board of Directors has a Compensation Committee, which approves salaries
and incentive compensation for executive officers of the Company, an Option
Committee which administers the Company's stock option plans, and an Audit
Committee, which reviews the results and scope of the audit and other services
provided by the Company's independent accountants.

DIRECTORS' COMPENSATION

Directors who are not employees or affiliates of the Company or its
subsidiaries, who currently consist of Ms. Adams, receive a retainer of $500
per meeting for attending regular meetings of the Board of Directors. All
Directors are reimbursed for reasonable expenses incurred in attending Board
meetings.

The Company granted to Elizabeth Adams options to purchase 21,000 shares of
Common Stock on July 25, 1997 at an exercise price of $4.00 per share. The
options vest to the extent of one-third of the shares on each of July 25,
1998, 1999 and 2000.

41
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation
for services in all capacities awarded to, earned by or paid to the Company's
chief executive officer and the other four most highly paid executive officers
of the Company whose aggregate compensation exceeded $100,000 during the year
ended December 31, 1997 (collectively, the "Named Executives").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
----------------------------- ------------
NUMBER
OF
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------------------ -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
William P. McHale,
Jr.(1).................. $157,500 $ -- $ -- 364,950 $45,171(2)
President and Chief
Executive Officer
S. Daniel Shia........... 198,462 70,165 5,800(3) 12,100 6,805(4)
Chairman of the Board
and Chief Technical
Officer
Paul A. Lipari........... 133,416 24,067 -- 64,143 36,496(5)
Chief Financial Officer,
Treasurer, and
Secretary
Paul R. Smith............ 120,412 89,521 4,100(3) 20,808 6,660(6)
Senior Vice President,
Worldwide Sales and
Marketing
Vincent J. Sheu.......... 123,707 16,978 -- 28,151 4,412(7)
Vice President,
Professional Services
</TABLE>
- ---------------------
(1) Mr. McHale joined the Company in January 1997.
(2) Includes relocation allowance of $44,446 and compensation relating to life
insurance premiums paid on his behalf of $725.
(3) Represents automobile allowance.
(4) Includes contributions by the Company under the 401(k) Plan of $5,700 and
compensation relating to life insurance premiums paid on his behalf of
$1,105.
(5) Includes relocation allowance of $31,151, contributions by the Company
under the 401(k) Plan of $4,724 and compensation relating to life
insurance premiums paid on his behalf of $621.
(6) Includes contributions by the Company under the 401(k) Plan of $5,700 and
compensation relating to life insurance premiums paid on his behalf of
$960.
(7) Includes contributions by the Company under the 401(k) Plan of $4,080 and
compensation relating to life insurance premiums paid on his behalf of
$332.

42
<PAGE>

OPTION GRANTS IN 1997

The following table sets forth information concerning individual grants of
stock options to each of the Named Executives during 1997. The Company has
never granted any stock appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(4)
--------------------------------------------- -----------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (1) YEAR(2) PER SHARE(3) DATE 5% 10%
- ---- ---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William P. McHale, Jr... 225,000 18.4% $3.29 1/31/07 $ 465,068 $1,178,573
139,950 11.5 4.00 7/31/07 352,055 892,177
S. Daniel Shia.......... 7,100 0.6 3.29 4/1/02 6,447 14,246
5,000 0.4 4.00 10/01/02 5,526 12,210
Paul A. Lipari.......... 58,500 4.8 3.29 2/24/07 120,918 306,429
2,343 0.2 3.29 4/1/02 2,128 4,701
3,300 0.3 4.00 10/1/02 3,647 8,059
Paul R. Smith........... 15,000 1.2 3.29 4/1/07 31,005 78,572
3,408 0.3 3.29 4/1/02 3,095 6,838
2,400 0.2 4.00 10/1/02 2,652 5,861
Vincent J. Sheu......... 2,846 0.2 3.29 4/1/02 2,584 5,711
22,500 1.8 3.29 4/1/07 46,554 117,977
2,805 0.2 4.00 10/1/02 3,100 6,850
</TABLE>

OPTION GRANTS IN 1997

- ---------------------
(1) Options granted during 1997 were granted pursuant to and in accordance
with the Company's 1993 Stock Option Plan. See "--Stock Option Plans."
(2) Based on an aggregate of 1,219,695 options granted to employees in 1997,
including options granted to Named Executives.
(3) The exercise price per share equaled the fair market value of the Common
Stock on the date of grant, as determined by the Company's Board of
Directors.
(4) Potential realizable value is based on the assumption that the price per
share of Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. The assumed 5% and 10% annual rates of
appreciation (compounded annually) over the term of the option are set
forth in accordance with the rules and regulations adopted by the
Securities and Exchange Commission, do not represent the Company's
estimate of stock price appreciation and do not take into account any
other appreciation in the Common Stock from the date of grant to the date
hereof.

The following table sets forth information concerning each exercise of
options during 1997 by each of the Named Executives and the fiscal year-end
value of unexercised in-the-money options.

AGGREGATE OPTION EXERCISES IN 1997
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NUMBER OF FISCAL FISCAL
SHARES YEAR-END YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- -------- --------------- ---------------------
<S> <C> <C> <C> <C>
William P. McHale, Jr... -- -- --/364,950 --/$3,445,050
S. Daniel Shia.......... 45,000 $138,300(2) 737,109/315,948 $8,954,439/$3,436,835
Paul A. Lipari.......... -- -- 20,250/124,893 $219,105/$1,278,003
Paul R. Smith........... -- -- 61,335/47,162 $729,612/$461,923
Vincent J. Sheu......... 13,824 $ 39,199(2) 1,875/47,600 $20,288/$480,780
</TABLE>
- ---------------------
(1) Based on the fair market value of the Common Stock at the end of 1997 as
determined by the Company's Board of Directors, or $13.00 per share, less
the exercise price payable for such shares.
(2) Based on the fair market value of the Common Stock on the date of exercise
as determined by the Company's Board of Directors, or $4.00 per share,
less the exercise price payable for such shares.

43
<PAGE>

STOCK OPTION PLANS

1993 Stock Option Plan

The 1993 Stock Option Plan (the "1993 Plan") was adopted by the Board of
Directors and became effective on September 15, 1993. The 1993 Plan was
approved by the shareholders of the Company on September 10, 1994. As of
December 31, 1997, a total of 3,310,927 shares are reserved for issuance upon
the exercise of options granted under the 1993 Plan, of which options to
purchase 2,848,493 shares have been granted and are currently outstanding.
Those eligible to receive stock option grants under the 1993 Plan include
employees, officers, directors and consultants. The 1993 Plan is administered
by the Option Committee of the Board of Directors of the Company. Upon
effectiveness of the Company's 1998 Stock Plan, no further grants shall be
made under the 1993 Plan.

Subject to the provisions of the 1993 Plan, the administrator of the 1993
Plan has the discretion to determine the optionees, the type of options to be
granted (incentive stock options or non-qualified stock options), the vesting
provisions, the terms of the grants and such other related provisions as are
consistent with the 1993 Plan. The exercise price of an option may not be less
than the fair market value per share of the Common Stock on the date of grant
or, in the case of any optionee who owns 10% or more of the total combined
voting power of all classes of stock of the Company, not less than 110% of the
fair market value per share on the date of grant. Fair market value is
determined by the Board of Directors from time to time in good faith. However,
the 1993 Plan provides that upon listing on the Nasdaq National Market, the
fair market value shall be the average of the closing price for Common Stock
of the Company on the last trading day prior to the grant date.

The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the total combined voting
power of all classes of stock of the Company may be no longer than five years.
Generally, options under the 1993 Plan vest over four years from the date of
grant. Options are not assignable or otherwise transferable except by will or
by the laws of descent and distribution. In the event of a dissolution or
liquidation of the Company, a merger in which the Company is not the surviving
corporation, or the sale of all or substantially all of the Company's assets
in which the successor corporation does not assume outstanding options or
issue substantially equivalent options, all outstanding options accelerate and
become exercisable in full for a period of at least ten days.

At the Board of Directors' discretion, the Company (or the Company's
assignees) may reserve a right of first refusal to purchase any shares of
stock that may be purchased upon the exercise of options granted under the
1993 Plan that an optionee may propose to transfer to a third party. In
addition, the Company may reserve a right to repurchase all shares held by an
optionee upon the optionee's termination of employment or service with the
Company, for any reason, within a specified time as determined by the Board of
Directors at the time of grant. The Company may repurchase such terminated
optionee's shares at (i) the optionee's original purchase price (provided that
the right to repurchase at such price shall lapse at the rate of 20% per year
from the date of grant), (ii) the fair market value of such shares as
determined by the Board of Directors in good faith or (iii) a price determined
by formula or other provision set forth in the grant of stock options.

1998 Stock Plan

The 1998 Stock Plan was adopted by the Board of Directors on December 31,
1997 and was approved by the shareholders of the Company in February 1998. The
1998 Stock Plan shall be effective on the date of the consummation of this
offering and shall terminate ten years from such date. Upon effectiveness of
the 1998 Stock Plan, a total of 1,800,000 shares shall be reserved for
issuance upon the exercise of options and/or stock purchase rights granted
thereunder. Those eligible to receive stock option grants or stock purchase
rights under the 1998 Stock Plan shall include employees, non-employee
directors and consultants. The 1998 Stock Plan shall be administered by the
Option Committee of the Board of Directors of the Company, which is comprised
solely of outside directors.

44
<PAGE>

Subject to the provisions of the 1998 Stock Plan, the administrator of the
1998 Stock Plan shall have the discretion to determine the optionees and/or
grantees, the type of options to be granted (incentive stock options ("ISOs")
or non-qualified stock options ("NQSOs")), the vesting provisions, the terms
of the grants and such other related provisions as are consistent with the
1998 Stock Plan. The exercise price of an ISO may not be less than the fair
market value per share of the Common Stock on the date of grant or, in the
case of an optionee who beneficially owns 10% or more of the outstanding
capital stock of the Company, not less than 110% of the fair market value per
share on the date of grant. The exercise price of a NQSO may not be less than
85% of the fair market value per share of the Common Stock on the date of
grant or, in the case of an optionee who beneficially owns 10% or more of the
outstanding capital stock of the Company, not less than 110% of the fair
market value per share on the date of grant. The purchase price of shares
issued pursuant to stock purchase rights may not be less than 50% of the fair
market value of such shares as of the offer date of such rights.

The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the outstanding shares of
capital stock may be no longer than five years. The Company anticipates that
options granted under the 1998 Stock Plan will vest over four years from the
date of grant. Options are not assignable or otherwise transferable except by
will or the laws of descent and distribution. In the event of a merger or
consolidation of the Company with or into another corporation or the sale of
all or substantially all of the Company's assets in which the successor
corporation does not assume outstanding options or issue equivalent options,
the Board of Directors of the Company is required to provide accelerated
vesting of outstanding options.

401(K) PLAN

The Company currently maintains a 401(k) salary reduction plan (the "401(k)
Plan") which is intended to qualify under Sections 401(a) and 401(k) of the
Internal Revenue Code of 1986. Generally, all employees are eligible to
participate in the 401(k) Plan after they complete three months of service.
All eligible executive officers, other than Mr. McHale, have elected to
participate in the 401(k) Plan.

Eligible employees electing to participate in the 401(k) Plan may defer a
portion of their compensation on a pre-tax basis, by contributing a percentage
thereof to the 401(k) Plan. The maximum contribution is prescribed in Section
401(k) of the Internal Revenue Code of 1986. The contribution limit for 1997
was $9,500. The Company made matching contributions ranging up to three
percent of the employee's gross earnings in 1997, subject to the foregoing
limit. Eligible employees who elect to participate in the 401(k) Plan are
generally vested in the Company's matching contribution according to the
following schedule: less than one year of service-0%; one year of service-20%;
two years of service-40%; three years of service-60%; four years of service-
80%; and five years of service-100%.

EMPLOYMENT AGREEMENTS, INDEMNIFICATION AGREEMENTS, NON-COMPETITION, NON-
DISCLOSURE AND INVENTION ASSIGNMENT AGREEMENTS

William P. McHale, Jr. entered into an agreement with the Company in January
1997. He currently receives an annual salary of $175,000 and is eligible for
an annual bonus of up to $72,500, the amount and payment of which is within
the discretion of the Compensation Committee of the Board of Directors. The
Company also has agreed, subject to certain restrictions, to pay Mr. McHale
the equivalent of six months salary in the event that Mr. McHale is terminated
without cause, and the equivalent of 6 months salary and the acceleration of
all options in the event Mr. McHale is terminated without cause in connection
with a change in control of the Company. In July 1997, the Company also
granted Mr. McHale options to purchase 93,300 shares of Common Stock at an
exercise price of $4.00 per share. Such options vest upon the earlier of July
30, 2007 or the date upon which it is determined that the Company has achieved
certain levels of net income per share in two consecutive years commencing
with the year ended December 31, 1998.

45
<PAGE>

S. Daniel Shia entered into a five-year employment agreement with the
Company commencing October 1, 1996. Under such agreement, he is currently
entitled to an annual salary of $200,000. Mr. Shia is eligible for an annual
bonus, the amount and payment of which is within the discretion of the
Compensation Committee of the Board of Directors provided that Mr. Shia shall
receive a minimum bonus equal to 50% of his annual salary multiplied by a
percentage equal to the Company's actual pre-tax profit divided by the
budgeted pre-tax profit for the applicable year. The Company also has agreed,
subject to certain restrictions, to pay Mr. Shia the equivalent of two years
salary in the event Mr. Shia is terminated without cause.

Paul A. Lipari entered into an agreement with the Company in September 1996
and amended in April 1997. Mr. Lipari currently is entitled to an annual
salary of $140,000. Mr. Lipari is eligible for an annual bonus, the amount and
payment of which is within the discretion of the Compensation Committee of the
Board of Directors. The Company also has agreed, subject to certain
restrictions, to pay Mr. Lipari the equivalent of six months salary in the
event Mr. Lipari is terminated without cause, and the equivalent of 12 months
salary and the acceleration of all options in the event Mr. Lipari is
terminated without cause in connection with a change in control of the
Company. See "Certain Transactions" for a loan transaction between the Company
and Mr. Lipari.

Each of the Company's executive officers has agreed to maintain the
confidentiality of Company information and, for a period of time following the
termination of employment, not to solicit the Company's customers or
employees. In addition, each of Messrs. McHale and Shia has agreed that during
the term of his employment and thereafter for a period of two years, with
respect to Mr. Shia, and one year, with respect to Mr. McHale, such person
will not compete with the Company in any state or territory of the United
States, or any other country, where the Company does business by engaging in
any capacity in any business which is competitive with the business of the
Company.

The Company has executed indemnification agreements with each of its
executive officers and directors pursuant to which the Company has agreed to
indemnify such party to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.

The Company generally requires its employees to maintain the confidentiality
of Company information and to assign inventions to the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee currently consists of Mr. Shia and Mr. Evans.
Within 90 days after the effective date of this Prospectus, the Company
intends to identify and elect an additional independent unaffiliated director
who will serve as a member of the Compensation Committee. There are no
Compensation Committee Interlocks.

Mr. Evans was appointed to the Board of Directors as the designee of Summit
Ventures IV, L.P. and Summit Investors II, L.P. (collectively, "Summit"). See
"Certain Transactions."

KEY PERSON INSURANCE

The Company maintains and is the beneficiary of, a life insurance policy on
the life of S. Daniel Shia, the Company's founder, Chairman of the Board and
Chief Technical Officer. The face amount of such policy is $1.0 million. The
Company does not maintain key person life insurance on any of its other key
personnel.

46
<PAGE>

CERTAIN TRANSACTIONS

On July 22, 1997, the Company loaned $100,000 to Paul A. Lipari, the
Company's Chief Financial Officer, Treasurer and Secretary, on an unsecured
basis, at an adjustable interest rate (initially 5.37% per annum). Such loan
is due and payable on July 22, 2002. Mr. Lipari has agreed to pay the
outstanding balance of such loan from the net proceeds received by Mr. Lipari,
as a Selling Shareholder, upon the consummation of this offering. For a
discussion of agreements with members of management, see "Management--
Employment Agreements, Indemnification Agreements, Non-Competition, Non-
Disclosure and Invention Assignment Agreements."

In December 1995, the Company sold an aggregate of 676,361 shares of Series
A Stock at an aggregate purchase price of $10.0 million to Summit. The
Company, pursuant to the Preferred Stock purchase agreement with Summit (the
"Summit Agreement"), repurchased an aggregate of 3,043,625 shares of Common
Stock from certain existing shareholders of the Company for an aggregate of
$10.0 million. Among such shareholders, the Company repurchased from Mr. Shia
and certain of his relatives an aggregate of 1,031,472 shares of Common Stock.
All shares of Series A Stock outstanding as of the consummation of this
offering will be automatically converted into an aggregate of 3,043,625 shares
of Common Stock. In connection with such Series A Stock transaction, Bruce R.
Evans, a general partner of Summit Partners, was elected to the Company's
Board of Directors as Summit's designee. In September 1996, the Company,
pursuant to certain convenants in the Summit Agreement, issued to Summit, for
no additional consideration, warrants (the "Summit Warrants") to purchase up
to a maximum of 185,331 shares of Common Stock. See "Description of Capital
Stock--Warrants."

The shares of Common Stock issuable upon conversion of the Series A Stock
and the shares of Common Stock issuable upon the exercise of the Summit
Warrants are entitled to certain registration rights. See "Description of
Capital Stock--Registration Rights of Certain Holders."

The Board of Directors of the Company has adopted a policy requiring that
any future transactions between the Company and its officers, directors,
principal shareholders and their affiliates be on terms no less favorable to
the Company than could be obtained from unrelated third parties and that any
such transactions be approved by a majority of the disinterested members of
the Company's Board of Directors.

47
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997, and as
adjusted to reflect the sale by the Company and the Selling Shareholders of
the shares of Common Stock offered hereby, by (i) each person (or group of
affiliated persons) who is known to the Company to own beneficially more than
5% of the outstanding shares of Common Stock, (ii) each of the Company's
directors and Named Executives, (iii) the Selling Shareholders, and (iv) all
directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING(1)
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(2) BEING OFFERED NUMBER PERCENT(2)
- ------------------------ --------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS, EXECUTIVE
OFFICERS AND
FIVE PERCENT
SHAREHOLDERS:(3)
Summit Partners(4)...... 3,089,958 45.3% 580,772 2,509,186 26.8%
S. Daniel Shia(5)(15)... 1,705,832 22.7 41,339 1,503,654 14.9
Hui-Yun R. Yuan(5)(15).. 1,705,832 22.7 16,839 1,503,654 14.9
David Wu(6)............. 343,629 5.1 -- 343,629 3.7
William P. McHale,
Jr.(7)................. 56,250 * -- 56,250 *
Paul A. Lipari(8)....... 60,375 * 28,000 32,375 *
Paul R. Smith(9)........ 285,584 4.2 -- 285,584 3.0
Victor W. Mak(10)....... 133,392 1.9 -- 133,392 1.4
Vincent J. Sheu(11)..... 20,199 * -- 20,199 *
Elizabeth K. Adams...... -- -- -- -- --
Bruce R. Evans(4)(12)... 3,089,958 45.3 -- 2,509,186 26.8
All directors and
executive officers as a
group(13) (9 persons).. 5,351,590 68.6 86,178 4,540,640 44.0
OTHER SELLING
SHAREHOLDERS:
Yi Chang................ 326,700 4.8 32,670 294,030 3.2
Loretta Yang............ 326,700 4.8 32,670 294,030 3.2
Hai-Perng Kuo........... 241,766 3.6 51,195 190,571 2.0
James K. Chang.......... 217,661 3.2 21,766 195,895 2.1
James Jen and Lorine
Jen(14)................ 203,120 3.0 7,324 47,296 *
Lorine Jen, custodian
for Wenchung Jonathan
Shia(15)............... 144,000 2.1 144,000 -- *
Ying-Tsai (Allen) Yang.. 82,269 1.2 8,227 74,042 *
Lan-Yuan Hsia(16)....... 67,733 * 9,077 58,656 *
So-Kong Shia & Jenny
Lin(17)................ 34,234 * 4,587 29,647 *
Gary Tsai............... 30,000 * 4,020 25,980 *
Lorine Jen, custodian
for Alexander Jen 22,500 * 4,500 18,000 *
Shou-Chang Hsia......... 22,500 * 3,015 19,485 *
Antony Yuan and H. H.
Yuan................... 9,999 * 9,999 -- *
</TABLE>
- ---------------------
*Less than one percent.
(1) The number of shares beneficially owned by each shareholder is determined
under rules promulgated by the Securities and Exchange Commission, and
the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares as to which the individual or entity has sole or shared voting
power or investment power and also any shares which the individual or
entity has a right to acquire within 60 days of December 31, 1997 through
the exercise of any stock option, warrant or other right. The

48
<PAGE>

inclusion herein of such shares, however, does not constitute an admission
that the named shareholder is a direct or indirect beneficial owner of
such shares. Unless otherwise indicated, each person or entity named in
the table has sole voting power and investment power (or shares such power
with his or her spouse) with respect to all shares of capital stock listed
as owned by such person or entity.
(2) Applicable percentage of ownership is based on 6,775,092 shares of Common
Stock outstanding on December 31, 1997 and 9,303,092 shares of Common
Stock outstanding after the completion of this offering.
(3) Unless otherwise specified, the address of all persons who are executive
officers or directors of the Company is in care of the Company, 1011
Route 22 West, Bridgewater, New Jersey 08807.
(4) Includes 2,914,893 shares held by Summit Ventures IV, L.P. and 128,732
shares held by Summit Investors II, L.P. Also includes 44,373 shares and
1,960 shares purchasable upon exercise of warrants exercisable as of
December 31, 1997 or sixty days thereafter held by Summit Ventures IV,
L.P. and Summit Investors II, L.P., respectively. Excludes an aggregate
of 138,998 shares underlying warrants exercisable thereafter. The address
of both entities is 600 Atlantic Avenue, Suite 2800, Boston,
Massachusetts 02210. The respective general partners of these entities
exercise sole voting and investment power with respect to the shares
owned by such parties. See Note 12 for information relating to such
general partners. The number of shares being offered by such holders does
not include an aggregate of 390,097 shares to be sold in the event the
Underwriters' over-allotment option is exercised in full.
(5) Mr. Shia and Ms. Yuan are husband and wife. Consists of 672,899 shares
held by Mr. Shia and 737,109 shares purchasable upon the exercise of
options held by Mr. Shia which are exercisable as of December 31, 1997 or
sixty days thereafter and excludes 315,948 shares underlying options
exercisable thereafter. Also includes 151,824 shares held by Ms. Yuan and
144,000 shares held by Ms. Yuan's sister, Lorine Jen, as custodian for
Mr. Shia's and Ms. Yuan's minor child which are being offered hereby.
(6) Mr. Wu's address is 2/F, 87A Waterloo Road, Kowloon, Hong Kong SAR,
China.
(7) Represents 56,250 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 308,700 shares underlying options exercisable
thereafter. The number of shares being offered by such holder does not
include 36,495 shares underlying options which will be exercised and sold
in the event the Underwriters' over-allotment option is exercised in
full.
(8) Includes 34,875 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 110,268 shares underlying options exercisable
thereafter. The number of shares being offered by such holder represents
shares underlying options which will be exercised and sold upon
consummation of this offering.
(9) Includes 61,335 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 47,162 shares underlying options exercisable
thereafter. The number of shares being offered by such holder does not
include 33,275 shares to be sold in the event the Underwriters' over-
allotment option is exercised in full.
(10) Includes 83,892 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 54,995 shares underlying options exercisable
thereafter. The number of shares being offered by such holder does not
include 18,838 shares to be sold in the event the Underwriters' over-
allotment option is exercised in full.
(11) Includes 1,875 shares of Common Stock purchasable upon the exercise of
options which are exercisable as of December 31, 1997 or sixty days
thereafter and excludes 47,600 shares underlying options exercisable
thereafter. The number of shares being offered by such holder does not
include 6,780 shares to be sold in the event the Underwriters' over-
allotment option is exercised in full.
(12) Represents the shares beneficially owned by Summit Ventures IV, L.P. and
Summit Investors II, L.P. See Note 4 above. Mr. Evans is a general
partner of Summit Investors II, L.P. and is a general partner

49
<PAGE>

of Stamps, Woodsum & Co. IV, which is the general partner of Summit
Partners IV, L.P., which is the general partner of Summit Ventures IV,
L.P. The general partners of Stamps, Woodsum & Co. IV are E. Roe Stamps,
IV, Stephen G. Woodsum, Gregory M. Avis, Martin J. Mannion, John A.
Genest, Ernest K. Jacquet, Bruce R. Evans, Walter G. Kortschak, Thomas S.
Roberts and Joseph F. Trustey. Each of such general partners disclaims
beneficial ownership of the shares held by Summit Ventures IV, L.P.,
except to the extent of their respective pecuniary interest therein. Mr.
Evans may be deemed to share voting and investment power with respect to
all shares held by the partnerships. Mr. Evans expressly disclaims
beneficial ownership of these shares, except to the extent of his
pecuniary interest therein.
(13) See Note 5 and Notes 7 through 12.
(14) Includes 28,500 shares held jointly by such holders and 8,120 shares held
by Lorine Jen. Also includes an aggregate of 166,500 shares held by
Lorine Jen as custodian for minor children. See Notes 5 and 15. The
number of shares being offered includes 5,700 shares held jointly by
James and Lorine Jen and 1,624 shares held individually by Lorine Jen.
(15) Wenchung Jonathan Shia is the minor child of S. Daniel Shia and Hui-Yun
R. Yuan.
(16) Includes 33,750 shares held as custodian for David Tsai. The number of
shares being offered includes 4,554 held of record by Ms. Hsia and 4,523
shares held as custodian.
(17) Includes 7,519 shares of Common Stock purchasable by Mr. Shia upon the
exercise of options which are exercisable as of December 31, 1997 or
sixty days thereafter.

50
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon consummation of this offering, the Company's authorized capital stock
will consist of 40,000,000 shares of Common Stock and 5,000,000 shares of
undesignated Preferred Stock, without par value (the "Preferred Stock").

COMMON STOCK

Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the shareholders of the Company.
Holders of shares of Common Stock will be entitled to receive dividends,
subject to the senior rights of preferred shareholders, if any, when, as and
if declared by the Board of Directors (see "Dividend Policy") and to share
ratably in the assets of the Company legally available for distribution to its
shareholders in the event of the liquidation, dissolution or winding-up of the
Company. Holders of Common Stock have no preemptive, subscription, redemption
or conversion rights. All of the issued and outstanding shares of Common Stock
are, and all shares of Common Stock to be sold in this offering will be, duly
authorized, validly issued, fully paid and nonassessable.

At December 31, 1997, there were 3,731,467 shares of Common Stock issued and
outstanding and held of record by 50 shareholders and options to purchase an
aggregate of 2,848,493 shares of Common Stock were outstanding. In addition,
warrants to purchase 185,331 shares of Common Stock were outstanding at
December 31, 1997. See "--Warrants" and "Management--Stock Options Plans."

PREFERRED STOCK

The Company's Board of Directors may without further action by the Company's
shareholders, from time to time, direct the issuance of shares of Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of Preferred Stock
would normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of the Common Stock. The Company does not presently intend
to issue any series of Preferred Stock.

The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change-in-control attempts. To the extent that
this ability has this effect, removal of the Company's incumbent Board of
Directors and management may be rendered more difficult. Further, this may
have an adverse impact on the ability of shareholders of the Company to
participate in a tender or exchange offer for the Common Stock and in so doing
diminish the market value of the Common Stock. See "Risk Factors--Control by
Existing Shareholders; Anti-takeover Effect of Certain Charter and By-law and
Other Provisions."

At December 31, 1997, there were 676,361 shares of Series A Stock issued and
outstanding. Simultaneously with the closing of the offering contemplated
hereby, all outstanding shares of Series A Stock automatically shall be
converted into shares of Common Stock on the basis of four and one-half shares
of Common Stock for each share of Series A Stock. Upon the automatic
conversion of such shares of the Series A Stock as described above, all such
Series A Stock shall be canceled, retired and eliminated. There are no other
classes of Preferred Stock designated and no other shares of Preferred Stock
outstanding.

WARRANTS

In September 1996, pursuant to the Summit Agreement, the Company issued the
Summit Warrants to Summit for no additional consideration. Such warrants
enable Summit to purchase at $2.18 per share, up to a maximum of 185,331
shares of Common Stock of the Company. The Summit Warrants are, or shall
become, exercisable to the extent of 25% on each of September 13, 1997, 1998,
1999 and 2000. The holders of the shares of Common Stock issuable upon the
exercise of the Summit Warrants are entitled to certain registration rights.
See "--Registration Rights of Certain Holders."

51
<PAGE>

REGISTRATION RIGHTS OF CERTAIN HOLDERS

In December 1995, the Company, in connection with the issuance and sale by
the Company to Summit of the Series A Stock, entered into the Summit Agreement
pursuant to which the Company has granted certain registration rights to such
shareholders. Pursuant to the Summit Agreement, at any time, the holders of at
least 25% of the aggregate of the Common Stock issued upon the conversion of
the Series A Stock and the Common Stock otherwise held by Summit (including
the shares issuable upon the exercise of the Summit Warrants) (the
"Registrable Securities") have the right, subject to certain restrictions set
forth in the Summit Agreement, to require that the Company register the
Registrable Securities requested by such holders at the Company's expense (on
no more than two occasions) under the Securities Act. The Company is not,
however, required to register any Registrable Securities unless such shares
represent at least 25% of the Registrable Securities, or, if less than 25%, if
the anticipated aggregate offering price exceeds $5.0 million.

After the Company has qualified for the use of Form S-3 under the Securities
Act, the holders of Registrable Securities have the right to an unlimited
number of registrations on such Form. Also pursuant to the Summit Agreement,
if, at any time, the Company proposes to register any of its Common Stock
under the Securities Act for sale to the public, the holders of the
Registrable Securities have unlimited piggyback registration rights at the
Company's expense, subject to certain restrictions set forth in the Summit
Agreement.

LIMITATION OF DIRECTOR LIABILITY

The Amended and Restated Certificate of Incorporation of the Company limits
the liability of directors and officers of the Company to the Company or its
shareholders to the fullest extent permitted by New Jersey law. Specifically,
directors and officers of the Company will not be personally liable for money
damages for breach of a duty as a director or an officer, except for liability
(i) for any breach of the director's or officers duty of loyalty to the
Company or its shareholders, (ii) for acts or omissions not in good faith or
which involve a knowing violation of the law, (iii) as to directors only,
under section 14a:6-12(1) of the New Jersey Business Corporation Act, which
relates to unlawful declarations of dividends or other distributions of assets
to shareholders or the unlawful purchase of shares of the corporation, or (iv)
for any transaction from which the director or officer derived an improper
personal benefit.

ANTI-TAKEOVER PROVISIONS

New Jersey Statute

The Company is governed by the provisions of Section 14A:10A-1 et seq., the
New Jersey Shareholders Protection Act (the "New Jersey Act"), of the New
Jersey Business Corporation Act, an anti-takeover law. In general, the statute
prohibits a publicly-held New Jersey corporation from engaging in a "business
combination" with an "interested shareholder" for a period of five years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested shareholder.
An "interested shareholder" is a person who, together with affiliates and
associates, owns (or within five years, did own) 10% or more of the
corporation's voting stock. After the five-year waiting period has elapsed, a
business combination between a corporation and an interested shareholder will
be prohibited unless the business combination is approved by the holders of at
least two-thirds of the voting stock not beneficially owned by the interested
shareholder, or unless the business combination satisfies the New Jersey Act.
The New Jersey Act's fair price provision is intended to provide that all
shareholders (other than the interested shareholders) receive a fair price for
their shares.

Charter and By-laws Provisions

The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without shareholder approval, 5,000,000 shares

52
<PAGE>

of Preferred Stock with voting, conversion and other rights and preferences
that could adversely affect the voting power or other rights of the holders of
Common Stock. The issuance of Preferred Stock or of rights to purchase
Preferred Stock could be used to discourage an unsolicited acquisition
proposal. In addition, the possible issuance of Preferred Stock could
discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. The Certificate of Incorporation also provides that: (i) the
Board of Directors may adopt, amend or repeal the by-laws of the Company, and
the affirmative vote of the holders of at least 66 2/3% of the voting power of
all outstanding shares of the capital stock of the Company shall be required
to adopt, amend or repeal any provision of the by-laws of the Company; (ii)
shareholders of the Company may not take any action by written consent; (iii)
special meetings of shareholders may be called only by the President, the
Chairman of the Board or a majority of the Board of Directors and business
transacted at any such special meeting shall be limited to matters relating to
the purposes set forth in the notice of such special meeting; (iv) the Board
of Directors, when evaluating an offer related to a business combination,
merger, consolidation, or sale of all or substantially all of the assets of
the Company, is authorized to give due consideration to any relevant factors,
including the social, legal and economic effects upon employees, suppliers,
customers, creditors, the community in which the Company conducts its
business, and the economy of the state, region and nation; (v) the affirmative
vote of the holders of at least 66 2/3% of the voting power of all outstanding
shares of the capital stock of the Company shall be required to amend the
above provisions; and (vi) the affirmative vote of the holders of at least 80%
of the voting power of all outstanding shares of the capital stock of the
Company shall be required to amend the provisions of the Company's by-laws and
Certificate of Incorporation with respect to indemnification of directors and
officers and limitation on director liability. The foregoing provisions of the
Certificate of Incorporation could have the effect of delaying, deterring or
preventing a change in control of the Company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the securities
of the Company. Upon completion of this offering, based upon the number of
shares outstanding at December 31, 1997, there will be 9,303,092 shares of
Common Stock of the Company outstanding (assuming no exercise of the
Underwriters' over-allotment option or outstanding warrants or options of the
Company other than the exercise of options to purchase 28,000 shares to be
sold by a Selling Shareholder). Of these shares, the 3,500,000 shares sold in
this offering will be freely tradeable without restriction or further
registration under the Securities Act, except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the limitations of Rule 144 described below.

SALES OF RESTRICTED SHARES

The remaining 5,803,092 shares of Common Stock are deemed "restricted
securities" under Rule 144. Of the restricted securities, approximately
459,453 shares of Common Stock, which are not subject to the 180-day Lock-up
Agreements with the Representatives of the Underwriters, will be eligible for
immediate sale in the public market pursuant to Rule 144(k) under the
Securities Act. Approximately 22,472 additional shares of Common Stock, which
are not subject to Lock-up Agreements, will be eligible for sale in the public
market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus. Upon expiration of the
Lock-up Agreements 180 days after the date of this Prospectus, approximately
8,326,991 additional shares of Common Stock (including 3,005,824 shares of
Common Stock that may be acquired pursuant to the exercise of outstanding
options and warrants) will be available for sale in the public market, subject
to the provisions of Rule 144 under the Securities Act.

53
<PAGE>

The executive officers and directors of the Company, and affiliated entities
holding in the aggregate approximately 5,585,311 shares of Common Stock
(including 2,038,340 shares of Common Stock that may be acquired pursuant to
the exercise of options or warrants held by them but after giving effect to
sales by such holders in this offering) on the date of this Prospectus, have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not offer to sell, contract to sell, transfer, engage in any hedging
transaction with respect to, or otherwise dispose of any shares of Common
Stock, or any shares convertible into or exchangeable for shares of Common
Stock, owned directly by such persons or with respect to which they have the
power of disposition, without the prior written consent of BT Alex. Brown,
which may be given at any time or from time to time as to any or all such
shares without notice. The holders of 2,648,184 shares of Common Stock,
including the shares issuable upon exercise of the Summit Warrants, have the
right in certain circumstances to require the Company to register their shares
under the Securities Act for resale to the public.

In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a shareholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least
one year from the later of the date such securities were acquired from the
Company or (if applicable) the date they were acquired from an Affiliate is
entitled to sell, within any three-month period, a number of such shares that
does not exceed the greater of one percent of the then outstanding shares of
Common Stock (approximately 93,030 shares immediately after this offering) or
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding the date on which notice of such sale was filed under Rule
144, provided certain requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition,
under Rule 144(k), if a period of at least two years has elapsed between the
later of the date restricted securities were acquired from the Company or (if
applicable) the date they were acquired from an Affiliate of the Company, a
shareholder who is not an Affiliate of the Company at the time of sale and has
not been an Affiliate of the Company for at least three months prior to the
sale is entitled to sell the shares immediately without compliance with the
foregoing requirements under Rule 144.

Securities issued in reliance on Rule 701 (such as shares of Common Stock
acquired pursuant to the exercise of certain options granted under the
Company's stock option plans) are also restricted securities and, beginning 90
days after the effective date of the Registration Statement of which this
Prospectus is a part, may be sold by shareholders other than Affiliates of the
Company subject only to the manner of sale provisions of Rule 144 and by
Affiliates under Rule 144 without compliance with its one-year holding period
requirement.

OPTIONS

The Company may file registration statements on Form S-8 under the
Securities Act to register all shares of Common Stock issuable under the 1993
Stock Option Plan and the 1998 Plan following the 90th day after the date of
this Prospectus. Shares issued upon the exercise of stock options after the
effective date of the Form S-8 registration statements will be eligible for
resale in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-up Agreements noted above,
if applicable.

EFFECT OF SALES OF SHARES

Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares for sale will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of the Common Stock in
the public market could adversely affect the market price of the Common Stock
and could impair the Company's future ability to raise capital through an
offering of its equity securities.

54
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
BT Alex. Brown Incorporated, BancAmerica Robertson Stephens and SoundView
Financial Group, Inc., have severally agreed to purchase from the Company and
the Selling Shareholders the following respective numbers of shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
BT Alex. Brown Incorporated...............................
BancAmerica Robertson Stephens............................
SoundView Financial Group, Inc............................

---------
Total................................................... 3,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.

The Company and the Selling Shareholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the initial public offering, the public
offering price and other selling terms may be changed by the Representatives
of the Underwriters.

Certain Selling Shareholders have granted to the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to 525,000 additional shares of Common Stock at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise such option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 3,500,000, and such Selling
Shareholders will be obligated, pursuant to the option, to sell such shares to
the Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 3,500,000 shares are being offered.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act.

The Company, each of its officers and directors, and certain of its
shareholders, including all of the Selling Shareholders, have agreed, subject
to certain exceptions, not to offer to sell, contract to sell, transfer,
engage in any hedging transaction with respect to or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of BT Alex. Brown. BT Alex.
Brown, on behalf of the Representatives, may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject
to Lock-up Agreements. See "Shares Eligible for Future Sale."

55
<PAGE>

The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.

In connection with this offering, the Underwriters and other persons
participating in this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
Underwriters may over-allot in connection with this offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to
an Underwriter or a dealer for distributing Common Stock in this offering, if
the Underwriters repurchase previously distributed Common Stock in
transactions to cover their short position, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of
Common Stock in market making transactions. These activities may stabilize or
maintain the market price of the Common Stock above market levels that may
otherwise prevail. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.

Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors considered in such
negotiations were prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalization and stages of
development of other companies which the Company and the Representatives of
the Underwriters believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.

LEGAL MATTERS

The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Buchanan Ingersoll, Princeton, New Jersey.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.

EXPERTS

The financial statements as of December 31, 1997 and 1996 and for each of
the three years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.

56
<PAGE>

DSET CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance sheets as of December 31, 1996 and 1997 and pro forma December 31,
1997 (unaudited)......................................................... F-3
Statements of income for the years ended December 31, 1995, 1996 and
1997..................................................................... F-4
Statements of changes in cumulative redeemable convertible preferred stock
and shareholders' equity (deficit) for the years ended December 31, 1995,
1996 and 1997 and pro forma December 31, 1997 (unaudited)................ F-5
Statements of cash flows for the years ended December 31, 1995, 1996 and
1997..................................................................... F-6
Notes to financial statements............................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
DSET Corporation

In our opinion, the accompanying balance sheets and the related statements
of income, of changes in cumulative redeemable convertible preferred stock and
shareholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of DSET Corporation at December 31,
1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
Morristown, New Jersey
February 2, 1998

F-2
<PAGE>

DSET CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY
----------------------- DECEMBER 31,
1996 1997 1997
---------- ----------- -------------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 784,086 $ 2,081,846
Marketable securities................. 993,920 1,123,795
Accounts receivable, net of allowance
for doubtful accounts of $12,000 and
$125,504 ............................ 4,465,519 7,564,442
Deferred income taxes................. 24,216 158,681
Prepaid expenses and other current
assets............................... 33,914 243,883
---------- -----------
Total current assets.................. 6,301,655 11,172,647
Capitalized software development costs,
less accumulated amortization of
$646,718 and $746,322................. 99,604 --
Fixed assets, net...................... 1,017,406 1,560,948
Goodwill, net.......................... -- 167,873
Other assets........................... 26,037 413,760
---------- -----------
Total assets.......................... $7,444,702 $13,315,228
========== ===========
LIABILITIES, CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses............................. $1,054,089 $ 2,779,954
Income taxes payable.................. 35,153 --
Deferred revenues..................... 928,625 1,897,039
Note payable.......................... -- 220,000
---------- -----------
Total current liabilities............. 2,017,867 4,896,993
Deferred income taxes.................. 92,731 103,714
Note payable........................... -- 111,657
---------- -----------
Total liabilities..................... 2,110,598 5,112,364
---------- -----------
Commitments (Notes 4 and 10)...........
Series A cumulative redeemable
convertible preferred stock, no par
value; 750,000 shares authorized,
676,361 shares issued and outstanding
at December 31, 1996 and 1997;
cumulative accrued and undeclared
dividends of $821,304 and $1,680,859
at December 31, 1996 and 1997,
respectively; no shares issued or
outstanding on a pro forma basis...... 10,744,441 11,603,996 --
---------- ----------- ----------
Shareholders' equity (deficit):
Preferred stock, no par value; no
shares authorized, issued or
outstanding at December 31, 1996 and
1997; 5,000,000 shares authorized, no
shares issued and outstanding on a pro
forma basis........................... -- -- --
Common stock, no par value; authorized
40,000,000 shares, issued 6,390,360,
6,775,092 and 9,818,717 shares at
December 31, 1996 and 1997 and pro
forma at December 31, 1997,
respectively.......................... 1,261,817 2,537,806 14,141,802
Deferred stock compensation............ -- (875,835) (875,835)
Retained earnings...................... 3,327,843 4,936,894 4,936,894
Treasury stock, 3,043,625 shares of
common stock at cost.................. (9,999,997) (9,999,997) (9,999,997)
---------- ----------- ----------
Total shareholders' equity (deficit).. (5,410,337) (3,401,132) $8,202,864
---------- ----------- ==========
Total liabilities, cumulative
redeemable convertible preferred
stock and shareholders' equity
(deficit)............................ $7,444,702 $13,315,228
========== ===========
</TABLE>

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

F-3
<PAGE>

DSET CORPORATION

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
License revenues........................... $5,734,122 $7,005,313 $10,850,275
Service revenues........................... 2,179,052 6,111,227 8,514,512
---------- ---------- -----------
Total revenues.......................... 7,913,174 13,116,540 19,364,787
---------- ---------- -----------
Cost of revenues:
License revenues........................... 74,180 133,209 1,274,355
Service revenues........................... 435,962 2,149,036 3,404,484
---------- ---------- -----------
Total cost of revenues.................. 510,142 2,282,245 4,678,839
---------- ---------- -----------
Gross profit.............................. 7,403,032 10,834,295 14,685,948
---------- ---------- -----------
Operating expenses:
Sales and marketing........................ 2,588,231 4,255,455 4,986,286
Research and product development........... 865,135 1,327,682 3,299,337
General and administrative................. 1,297,116 2,380,679 2,880,804
---------- ---------- -----------
Total operating expenses................ 4,750,482 7,963,816 11,166,427
---------- ---------- -----------
Operating income.......................... 2,652,550 2,870,479 3,519,521
Amortization of goodwill.................... -- -- (22,172)
Interest and other expense.................. -- -- (12,194)
Interest and other income................... 50,441 99,004 160,847
---------- ---------- -----------
Income before income taxes.................. 2,702,991 2,969,483 3,646,002
Provision for income taxes.................. 997,631 956,889 1,177,396
---------- ---------- -----------
Net income.................................. 1,705,360 2,012,594 2,468,606
Less: accrued preferred stock dividends..... 19,726 801,578 859,555
---------- ---------- -----------
Net income applicable to common shares...... $1,685,634 $1,211,016 $ 1,609,051
========== ========== ===========
Net income per common share................. $ 0.28 $ 0.37 $ 0.45
========== ========== ===========
Weighted average number of common shares
outstanding................................ 6,003,014 3,308,763 3,566,764
========== ========== ===========
Net income per common share assuming
dilution................................... $ 0.26 $ 0.27 $ 0.30
========== ========== ===========
Weighted average number of common shares and
common equivalent shares outstanding....... 6,490,017 7,392,793 8,346,365
========== ========== ===========
Pro Forma (Notes 2 and 12):
Net income per common share................ $ 0.37
===========
Weighted average number of common shares
outstanding............................... 6,610,389
===========
Net income per common share assuming
dilution.................................. $ 0.30
===========
Weighted average number of common shares
and common equivalent shares outstanding.. 8,346,365
===========
</TABLE>

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

F-4
<PAGE>

DSET CORPORATION

STATEMENTS OF CHANGES IN CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------- ---------------------
DEFERRED
NUMBER OF NUMBER STOCK RETAINED TREASURY
SHARES AMOUNT OF SHARES AMOUNT COMPENSATION EARNINGS STOCK TOTAL
--------- ----------- --------- ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... -- $ -- 5,760,000 $ 723,471 $ -- $ 917,604 $ -- $ 1,641,075
Common Stock--10% stock
dividend.............. -- -- 576,013 486,411 -- (486,411) -- --
Issuance of Series A
cumulative redeemable
convertible preferred
stock, net of issuance
costs................. 676,361 9,923,137 -- -- -- -- -- --
Purchase of common
stock................. -- -- -- -- -- -- (9,999,997) (9,999,997)
Exercise of stock
options............... -- -- 3,533 4,734 -- -- -- 4,734
Accrued dividends on
redeemable convertible
preferred stock....... -- 19,726 -- -- -- (19,726) -- (19,726)
Net income............. -- -- -- -- -- 1,705,360 -- 1,705,360
-------- ----------- --------- ----------- -------- ---------- ----------- -----------
Balance at December 31,
1995................... 676,361 9,942,863 6,339,546 1,214,616 -- 2,116,827 (9,999,997) (6,668,554)
Exercise of stock
options............... -- -- 50,814 47,201 -- -- -- 47,201
Accrued dividends on
redeemable convertible
preferred stock....... -- 801,578 -- -- -- (801,578) -- (801,578)
Net income............. -- -- -- -- -- 2,012,594 -- 2,012,594
-------- ----------- --------- ----------- -------- ---------- ----------- -----------
Balance at December 31,
1996................... 676,361 10,744,441 6,390,360 1,261,817 -- 3,327,843 (9,999,997) (5,410,337)
Exercise of stock
options............... -- -- 384,732 275,813 -- -- -- 275,813
Tax benefit from
exercise of stock
options............... -- -- -- 124,341 -- -- -- 124,341
Accrued dividends on
redeemable convertible
preferred stock....... -- 859,555 -- -- -- (859,555) -- (859,555)
Deferred stock
compensation.......... -- -- -- 875,835 (875,835) -- -- --
Net income............. -- -- -- -- -- 2,468,606 -- 2,468,606
-------- ----------- --------- ----------- -------- ---------- ----------- -----------
Balance at December 31,
1997................... 676,361 11,603,996 6,775,092 2,537,806 (875,835) 4,936,894 (9,999,997) (3,401,132)
Pro forma conversion of
Series A cumulative
redeemable convertible
preferred stock
(unaudited)........... (676,361) (11,603,996) 3,043,625 11,603,996 -- -- -- 11,603,996
-------- ----------- --------- ----------- -------- ---------- ----------- -----------
Pro forma balance at
December 31, 1997
(unaudited)............ -- $ -- 9,818,717 $14,141,802 $875,835 $4,936,894 $(9,999,997) $ 8,202,864
======== =========== ========= =========== ======== ========== =========== ===========
</TABLE>

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

F-5
<PAGE>

DSET CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 1,705,360 $ 2,012,594 $ 2,468,606
Adjustments to reconcile net income to
net cash provided by operating
activities:
Deferred income taxes.................. (39,778) (47,300) (123,482)
Tax benefit from exercise of stock
options............................... -- -- 124,341
Depreciation........................... 114,402 257,815 399,035
Amortization........................... 149,170 149,170 121,776
Earnings from joint venture............ -- -- (26,131)
Changes in assets and liabilities:
Accounts receivable................... (1,021,278) (1,916,125) (3,014,841)
Other assets.......................... (28,003) (16,379) (94,759)
Accounts payable and accrued
expenses............................. 87,471 604,778 1,631,892
Income taxes payable.................. 505,042 (682,609) (108,468)
Deferred revenues..................... 506,632 166,914 887,386
----------- ----------- -----------
Net cash provided by operating
activities.......................... 1,979,018 528,858 2,265,355
----------- ----------- -----------
Cash flows from investing activities:
(Loans to) repayment by officers and
shareholders.......................... 78,000 -- (150,000)
Purchases of marketable securities..... (1,004,614) (1,829,932) (1,080,768)
Redemption of marketable securities.... 200,000 1,640,626 1,150,000
Acquisition of fixed assets............ (387,536) (707,750) (807,640)
Loan repayments........................ -- -- (110,000)
Investment in joint venture............ -- -- (245,000)
----------- ----------- -----------
Net cash used in investing
activities.......................... (1,114,150) (897,056) (1,243,408)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from the issuance of
Series A preferred stock.............. 9,923,137 -- --
Purchases of treasury stock............ (4,905,989) (5,094,008) --
Proceeds from the exercise of stock
options............................... 4,734 47,201 275,813
----------- ----------- -----------
Net cash provided by (used in)
financing activities................ 5,021,882 (5,046,807) 275,813
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 5,886,750 (5,415,005) 1,297,760
Cash and cash equivalents, beginning of
period................................. 312,341 6,199,091 784,086
----------- ----------- -----------
Cash and cash equivalents, end of
period................................. $ 6,199,091 $ 784,086 $ 2,081,846
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes................................. $ 442,343 $ 1,678,798 $ 1,157,868
Cash paid during the period for
interest.............................. -- -- 12,194
Non-cash activities:
Issuance of common stock dividend...... $ 486,411 $ -- $ --
Accrued dividends on Series A preferred
stock................................. 19,726 801,578 859,555
Note issued for purchase of net assets
of Marben Products Inc. .............. -- -- 441,657
</TABLE>

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

F-6
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. NATURE OF BUSINESS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

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

Marketable Securities

The marketable securities portfolio held by the Company consists primarily
of money market funds which are considered to be available-for-sale securities
and are reported at fair value. Unrealized holding gains and losses were not
significant at December 31, 1996 and 1997.

Capitalized Software Development Costs

Capitalization of costs begins on establishment of technological
feasibility. Costs incurred prior to establishment of technological
feasibility are charged to research and product development expense. The
ongoing assessment of recoverability of capitalized costs requires
considerable judgment by management with respect to certain factors including
the anticipated future gross revenue, estimated economic life and changes in
technology. These factors are considered on a product-by-product basis.

Amortization of capitalized software costs is calculated using a straight-
line method over the estimated useful life of the respective product (five
years). Amortization expense related to capitalized software costs was
approximately $149,000 for each of the years 1995 and 1996 and approximately
$100,000 for 1997.

Fixed Assets

Equipment, furniture and purchased software are stated at cost less
accumulated depreciation. Depreciation is calculated using a straight-line
method over estimated useful lives ranging from three to seven years.

Goodwill

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

Revenue Recognition

License revenues are recorded when the software has been delivered to the
Company's licensees and all significant obligations have been satisfied.
Revenues from run-time licenses are recognized as equipment using the
Company's software is deployed by the Company's customers. Service revenues
are recognized over the period in which the service is performed based on the
percentage of direct labor

F-7
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

costs incurred to the total costs estimated. Revenues from maintenance
contracts are deferred and recognized over the term of the respective
contracts (typically twelve months).

Income Taxes

The Company utilizes an asset and liability approach to financial reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in
the future, based on enacted tax laws and rates applicable to the period in
which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce the deferred tax assets
to the amount expected to be realized.

Fair Value of Financial Instruments

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

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Unaudited Pro Forma Presentation

Under the terms of the Company's agreement with the holders of the
cumulative redeemable convertible preferred stock (see Note 4), all of such
preferred stock will be converted automatically into shares of common stock
upon the closing of a Qualified Public Offering, as defined in the Company's
Preferred Stock Purchase Agreement with Summit Ventures IV, L.P. and Summit
Investors II, L.P. (the "Agreement"). The unaudited pro forma shareholders'
equity as of December 31, 1997 reflects the conversion of such preferred stock
into 3,043,625 shares of common stock as if the conversion occurred on
December 31, 1997.

Pro Forma Basic and Diluted Net Income per Common and Common Equivalent
Shares (Unaudited)

Unaudited pro forma basic net income per common share for the year ended
December 31, 1997 is based on the weighted average number of common shares
outstanding during the period. Unaudited pro forma net income per common share
assuming dilution for the year ended December 31, 1997 is based on the
weighted average number of common and common equivalent shares outstanding
during the period, computed in accordance with the treasury stock method. The
unaudited pro forma weighted average number of common shares assumes that the
cumulative redeemable convertible preferred stock had been converted to common
stock as of the original issuance date and includes shares issuable upon
exercise of stock options and warrants. Historical net income per share data
have not been presented, as such information is not considered to be relevant
or meaningful given the change in capital structure that will occur in
connection with the proposed public offering.

Recently Issued Accounting Standards

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 applies to
entities with publicly held common stock or potential

F-8
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

common stock and is effective for financial statements issued for periods
ending after December 15, 1997. Accordingly, the Company implemented SFAS No.
128 for the year ended December 31, 1997 (see Note 12).

Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The adoption of this standard had no material effect on the Company's
financial statements. In October 1995, SFAS No. 123, "Accounting for Stock-
Based Compensation," was issued. The Company has adopted this standard
effective January 1, 1996 by means of disclosure of the pro forma effect of
the compensation components of stock-based compensation (see Note 6).

F-9
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

3. FIXED ASSETS

Fixed assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Computer equipment................................... $ 953,436 $1,574,171
Purchased software................................... 312,013 540,315
Furniture, fixtures and office equipment............. 156,480 304,678
Transportation equipment............................. 45,788 41,242
Leasehold improvements............................... 11,863 32,692
---------- ----------
1,479,580 2,493,098
Less: accumulated depreciation....................... (462,174) (932,150)
---------- ----------
$1,017,406 $1,560,948
========== ==========
</TABLE>

4. CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK

During December 1995, the Company issued 676,361 shares of cumulative,
convertible Series A Preferred Stock in exchange for $10,000,000. As an
integral part of the Agreement, the Company was required to use the proceeds
received upon the sale of the preferred stock to repurchase, on or before
January 31, 1996, an aggregate of 3,043,625 shares of common stock. As of
December 31, 1995, 1,493,190 shares were repurchased at an aggregate purchase
price of $4,905,989 with the balance of 1,550,435 shares repurchased by the
Company during January 1996 for $5,094,008. Of the total shares repurchased by
the Company, an aggregate of 1,031,472 shares were repurchased from the
individual then serving as the Company's President and members of his family.
In addition, the Company is required at all times to keep available out of its
authorized but unissued shares of common stock a sufficient number of shares
to effect the conversion of all of the then outstanding shares of the Series A
Preferred Stock.

Voting Rights

Shareholders of Series A Preferred Stock are entitled to votes equal to the
number of common shares into which the shares of preferred stock are
convertible.

Dividends

The Series A Preferred shareholders are entitled to receive cumulative
annual dividends equal to the "Applicable Percentage Rate" of 8%, as defined
in the Agreement, of the original purchase price paid per share. Such
dividends accrue and are cumulative whether or not they are earned or declared
by the Company. If cumulative dividends have not been declared or paid, the
deficiency will first be fully paid before any dividend can be declared or
paid on any other class of the Company's common stock. In the event of
conversion of the preferred stock to common stock, however, all accumulated
and unpaid dividends on the preferred stock shall be deemed forgiven.

Conversion

The holders of the Series A Preferred Stock have the option to convert, at
any time, their shares into fully-paid and nonassessable shares of common
stock at the "Applicable Conversion Rate," which is four and one-half shares
of common stock for each share of Series A Preferred Stock converted. The
Series A Preferred Stock will be automatically converted into common stock
upon the closing of an initial public offering in which net proceeds to the
Company equals or exceeds $15,000,000 and the price paid by the public for
such shares shall be at least three times the then conversion value per share
(currently $3.29 per share) as defined by the Agreement.

F-10
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Redemption

The holders of the Series A Preferred Stock have the option to sell their
shares to the Company in the event that an "Exercise Event," as described in
the Agreement, occurs prior to the Company consummating a Qualified Public
Offering, also described in the Agreement. In the event that the shareholders
exercise this option, the price paid by the Company for the Shares to be sold
under the Option shall be the fair market value as of the date of such
proposed repurchase as agreed upon in good faith by the Company and the Series
A Preferred Shareholders' Representative. In no event, however, shall the
aggregate purchase price paid for such shares being redeemed be less than the
original purchase price paid plus unpaid accrued dividends. In addition, the
holders of at least 51% of the then outstanding shares of Series A Preferred
Stock have the option (the "Optional Redemption by Holders") to elect the
Company to redeem, from all holders of Series A Preferred Stock, one-fourth of
their Series A Preferred Stock outstanding on December 31, 1999 on January 1,
of 2000, 2001, 2002 and 2003 (the "Final Redemption Date").

Liquidation Preference

In the event of any liquidation, dissolution or winding up of the affairs of
the Company, the Series A Preferred Shareholders are entitled to receive prior
to and in preference to the common shareholders an amount equal to the greater
of (i) $14.785 per share plus all accrued and unpaid dividends thereon,
whether or not declared or (ii) such amount per share as would have been
payable had each share of Series A Preferred Stock been converted into common
stock immediately prior to such liquidation, dissolution or winding up. Any
remaining assets of the Company shall be distributed ratably to all other
shareholders.

Warrants

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

5. COMMON STOCK

Effective May 24, 1996, the Company declared a three-for-one stock split.
All shares of common stock and common stock options included in these
financial statements have been restated to give retroactive effect to the
stock split for all periods presented.

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

F-11
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

6. STOCK OPTIONS

The Company maintains a stock option plan (the "1993 Plan") covering
officers, employees, directors and consultants, pursuant to which options may
be granted to purchase shares of the Company's common stock. At December 31,
1997, options to purchase 1,173,384 shares of common stock were exercisable at
a weighted average exercise price per share of $1.96. Options granted under
this 1993 Plan may be either incentive stock options or nonqualified stock
options, as designated at the time of grant and vest over a period not to
exceed four years.

The 1993 Plan provides that the option price shall not be less than the fair
market value of the shares at date of grant (as determined by the 1993 Plan's
administrators), except for a more than 10% voting shareholder, in which case
it will not be less than 110% of the fair market value at date of grant.
Incentive stock options are exercisable for ten years from the date of grant
("10 Year Options"), except for a more than 10% voting shareholder, in which
case the option is exercisable for five years ("5 Year Options"). Nonqualified
stock options are exercisable for five years from the date of grant.

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

1998 Stock Plan

The 1998 Stock Plan was adopted by the Board of Directors on December 31,
1997. The 1998 Stock Plan shall be effective on the date of the consummation
of this offering and terminates ten years from such date. Upon effectiveness
of the 1998 Stock Plan, a total of 1,800,000 shares shall be reserved for
issuance upon the exercise of option and/or stock purchase rights granted
thereunder. Those eligible to receive stock option grants or stock purchase
rights under the 1998 Stock Plan shall include employees, non-employee
directors and consultants. The 1998 Stock Plan shall be administered by the
Option Committee of the Board of Directors of the Company, which is comprised
solely of outside directors.

A summary of option transactions during 1995, 1996 and 1997 are as follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES AVERAGE
------------------------------- EXERCISE
10 YEAR 5 YEAR PRICE PER
OPTIONS OPTIONS TOTAL SHARE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1995.. 276,750 630,000 906,750 $0.54
Granted......................... 67,500 487,557 555,057 $0.89
Exercised....................... -- (3,533) (3,533) $0.85
--------- --------- ---------
Outstanding December 31,
1995......................... 344,250 1,114,024 1,458,274 $0.67
Granted......................... 633,000 202,886 835,886 $2.19
Forfeited....................... -- (4,482) (4,482) $0.85
Exercised....................... -- (50,814) (50,814) $0.93
--------- --------- ---------
Outstanding December 31,
1996......................... 977,250 1,261,614 2,238,864 $1.23
Granted......................... 827,400 392,359 1,219,759 $3.67
Forfeited ...................... (141,000) (84,398) (225,398) $2.67
Exercised....................... (157,500) (227,232) (384,732) $0.72
--------- --------- ---------
Outstanding December 31, 1997
............................. 1,506,150 1,342,343 2,848,493 $2.23
========= ========= =========
</TABLE>

F-12
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes financial
accounting and reporting standards for stock-based employee compensation
plans. The statement defines a fair value based method of accounting for
employee stock options and similar equity instruments and encourages the use
of that method of accounting for all employee stock compensation plans.
However, SFAS No. 123 also permits the measurement of compensation costs using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to account for its employee stock
compensation plans under the guidance prescribed by APB Opinion No. 25 and has
made the required pro forma disclosures of net income and net income per share
as if the fair value based method of accounting defined in SFAS No. 123 had
been applied as indicated below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON SHARES:
As reported............................. $1,685,634 $1,211,016 $1,609,051
Pro forma effect of applying SFAS No.
123.................................... 1,606,702 1,089,641 950,593
NET INCOME PER COMMON SHARE:
As reported............................. $ 0.28 $ 0.37 $ 0.45
Pro forma effect of applying SFAS No.
123.................................... $ 0.27 $ 0.33 $ 0.27
NET INCOME PER COMMON SHARE ASSUMING
DILUTION:
As reported............................. $ 0.26 $ 0.27 $ 0.30
Pro forma effect of applying SFAS No.
123.................................... $ 0.25 $ 0.26 $ 0.22
</TABLE>

The fair value for these options was estimated at the date of grant using
the minimum value method with the following weighted average assumptions for
the years ended December 31, 1995, 1996 and 1997: risk-free interest rates of
5.3% to 7.28%; expected life of 5 to 10 years and dividend yields of 0.0%. The
minimum value method requires the input of highly subjective assumptions.
Changes in the subjective input assumptions can materially affect the fair
value estimate. In management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.

F-13
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

7. INCOME TAXES

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT:
Federal................................ $ 810,747 $ 714,202 $1,079,038
State and local........................ 138,659 90,189 149,584
Foreign................................ 88,003 199,798 72,256
---------- ---------- ----------
1,037,409 1,004,189 1,300,878
---------- ---------- ----------
DEFERRED:
Federal................................ (35,312) (40,476) (111,830)
State and local........................ (4,466) (6,824) (11,652)
---------- ---------- ----------
(39,778) (47,300) (123,482)
---------- ---------- ----------
Provision for income taxes............... $ 997,631 $ 956,889 $1,177,396
========== ========== ==========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Provision of statutory rate................................ 34.0% 34.0% 34.0%
State taxes net of federal benefit......................... 3.3 1.9 2.5
Research and development tax credits....................... (0.5) (3.8) (4.2)
Other...................................................... 0.1 0.1 --
---- ---- ----
36.9% 32.2% 32.3%
==== ==== ====
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- ---------
<S> <C> <C>
CURRENT:
Accrued vacation..................................... $ 24,216 $ 82,971
Bad debt reserve..................................... -- 47,390
Accrued bonus........................................ -- 28,320
-------- ---------
Total.............................................. $ 24,216 $ 158,681
======== =========
NON-CURRENT:
Capitalized software costs........................... $(37,222) $ --
Fixed assets......................................... (55,509) (103,714)
-------- ---------
Total.............................................. $(92,731) $(103,714)
======== =========
</TABLE>

F-14
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

8. REVENUE AND RECEIVABLE CONCENTRATION

The Company had two, one and one significant customers which accounted for
approximately 32%, 18% and 12%, respectively, of total revenues for 1995, 1996
and 1997. No other customer accounted for more than 10% of total revenues in
any of the three years ended December 31, 1997. Revenues from customers in the
following geographic regions as a percentage of total revenues are as follows:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
North America................................................ 61% 62% 73%
Asia/Pacific Rim............................................. 36 35 22
Europe....................................................... 3 3 5
--- --- ---
100% 100% 100%
=== === ===
</TABLE>

At December 31, 1996 and 1997, three and one customer(s), respectively,
accounted for approximately 49% and 12%, respectively, of accounts receivable.

9. EMPLOYEE BENEFIT PLAN

During 1994, the Company instituted a savings plan pursuant to Section
401(k) of the Internal Revenue Code (the "Code") covering all employees
meeting eligibility requirements. Subject to certain limits set forth in the
Code, employees are permitted to make contributions to the plan on a pre-tax
salary reduction basis, and the Company may make voluntary contributions of up
to 60% of employee contributions. The Company made contributions approximating
$35,000, $64,000 and $164,000 for the years ended December 31, 1995, 1996 and
1997, respectively.

10. COMMITMENTS

a) Leases

The Company has operating leases for its offices and certain equipment.
Generally, the leases carry renewal provisions and require the payment of
maintenance costs. Rental expense charged to operations for the years ended
December 31, 1995, 1996 and 1997 was approximately $169,000, $277,000 and
$402,000, respectively.

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

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998.............................................................. $311,000
1999.............................................................. 148,000
--------
Total............................................................. $459,000
========
</TABLE>

b) Lines of Credit

In August 1997, the Company obtained an unsecured revolving credit facility
with a bank totaling $3 million. Borrowings under this line of credit bear
interest at the bank's prime rate less 0.25% on amounts outstanding of less
than $1 million and at the bank's prime rate for aggregate principal amounts
exceeding $1 million. No borrowings under this line were outstanding as of
December 31, 1997. This credit facility contains, among other provisions, a
covenant which restricts the Company's ability to pay cash dividends.

F-15
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

11. ACQUISITION OF MARBEN PRODUCTS, INC.

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

The following is a summary of the purchase price allocation:

<TABLE>
<S> <C>
Current assets and other tangible assets.......................... $ 426,615
Current liabilities assumed....................................... (175,003)
Note issued in acquisition........................................ (441,657)
Goodwill.......................................................... 190,045
</TABLE>

The following unaudited pro forma summary represents the results of
operations of the Company as if the acquisition of the net assets of MPI had
occurred at the beginning of the period presented and does not purport to be
indicative of what would have occurred had the acquisition been made as of
those dates or the results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Pro forma net revenues............................. $16,773,775 $19,742,634
Pro forma net income applicable to common shares... 869,674 1,291,927
Pro forma net income per common share.............. $ 0.26 $ 0.36
Pro forma net income per common share assuming
dilution.......................................... $ 0.23 $ 0.26
</TABLE>

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

12. EARNINGS PER SHARE

In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" (EPS),
which specifies the computation, presentation and disclosure requirements for
earnings per share of entities with publicly held common stock or potential
common stock. The statement defines two earnings per share calculations, basic
and diluted. The objective of basic EPS is to measure the performance of an
entity over the reporting period by dividing income available to common stock
by the weighted average shares outstanding. The objective of diluted EPS is
consistent with that of basic EPS, that is to measure the performance of an
entity over the reporting period, while giving effect to all dilutive
potential common shares that were outstanding during the period. The
calculation of diluted EPS is similar to basic EPS except both the numerator
and denominator are increased for the conversion of potential common shares.
The following table is a reconciliation of the numerator and denominator under
each method:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31, 1995
------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- --------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income applicable to common shares....... $1,685,634 6,003,014 $0.28
ASSUMING DILUTION:
Net income applicable to common shares
Convertible preferred stock................ 19,726 126,818
Stock options.............................. -- 360,185
---------- ---------
$1,705,360 6,490,017 $0.26
========== =========
</TABLE>

F-16
<PAGE>

DSET CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31, 1996
------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- --------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income applicable to common shares....... $1,211,016 3,308,763 $0.37
ASSUMING DILUTION:
Net income applicable to common shares
Convertible preferred stock................ 801,578 3,043,625
Warrants................................... -- 7,435
Stock options.............................. -- 1,032,971
---------- ---------
$2,012,594 7,392,793 $0.27
========== =========
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31, 1997
------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- --------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income applicable to common shares....... $1,609,051 3,566,764 $0.45
ASSUMING DILUTION:
Net income applicable to common shares
Preferred stock............................ 859,555 3,043,625
Warrants................................... -- 98,217
Stock options.............................. -- 1,637,760
---------- ---------
$2,468,606 8,346,365 $0.30
========== =========
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31, 1997
------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- --------- ---------
<S> <C> <C> <C>
PRO FORMA (SEE NOTE 2):
BASIC EPS:
Net income applicable to common shares....... $2,468,606 6,610,388 $0.37
ASSUMING DILUTION:
Net income applicable to common shares
Stock options.............................. -- 1,637,760
Warrants................................... -- 98,217
---------- ---------
Net income applicable to common shares....... $2,468,606 8,346,365 $0.30
========== =========
</TABLE>

F-17
<PAGE>

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

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................................................... 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 20
Business................................................................. 29
Management............................................................... 40
Certain Transactions..................................................... 47
Principal and Selling Shareholders....................................... 48
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
Index to Financial Statements............................................ F-1
</TABLE>

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

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

3,500,000 SHARES

[LOGO OF DSET APPEARS HERE]

COMMON STOCK

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

PROSPECTUS

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

BT ALEX. BROWN

BANCAMERICA ROBERTSON STEPHENS

SOUNDVIEW FINANCIAL GROUP, INC.

, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth an itemized estimate of fees and expenses
payable by the registrant in connection with the offering described in this
registration statement, other than underwriting discounts and commissions:

<TABLE>
<S> <C>
SEC registration fee............................................ $ 16,623.25
NASD filing fee................................................. 6,135.00
Nasdaq/NNM listing fee.......................................... 40,758.00
Counsel fees and expenses....................................... 300,000.00
Accounting fees and expenses.................................... 250,000.00
Blue sky fees and expenses...................................... 15,000.00
Printing expenses............................................... 100,000.00
Transfer agent and registrar fees............................... 3,500.00
Miscellaneous................................................... 17,983.75
-----------
Total..................................................... $750,000.00
===========
</TABLE>
All of the above expenses will be paid by the registrant.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 14A:3-5 of the New Jersey Business Corporation Act permits each New
Jersey business corporation to indemnify its directors, officers, employees
and agents against expenses and liabilities in connection with any proceeding
involving such persons by reason of his serving or having served in such
capacities or for each such person's acts taken in his capacity as a director,
officer, employee or agent of the corporation if such actions were taken in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal proceeding, if he had no reasonable cause to believe his conduct was
unlawful, provided that any such proceeding is not by or in the right of the
corporation.

Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability (i) for any breach of the director's or officer's duty of loyalty to
the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve a knowing violation of law, (iii) as to directors only,
under Section 14A:6-12(1) of the New Jersey Business Corporation Act, which
relates to unlawful declarations of dividends or other distributions of assets
to shareholders or the unlawful purchase of shares of the corporation, or (iv)
for any transaction from which the director or officer derived an improper
personal benefit.

The registrant's Amended and Restated Certificate of Incorporation limits
the liability of its directors and officers as authorized by Section 14A:2-
7(3).

Article XI of the registrant's Amended and Restated By-laws specifies that
the registrant shall indemnify its directors, officers, employees and agents
to the extent such parties are a party to any action because he was a
director, officer, employee or agent of the Company. This provision of the By-
laws is deemed to be a contract between the registrant and each director and
officer who serves in such capacity at any time while such provision and the
relevant provisions of the New Jersey Business Corporation Act are in effect,
and any repeal or modification thereof shall not offset any action, suit or
proceeding theretofore or thereafter brought or threatened based in whole or
in part upon any such state of facts. The affirmative vote of the holders of
at least 80% of the voting power of all outstanding shares of capital stock of
the Company is required to adopt, amend or repeal such provisions of the By-
laws.

II-1
<PAGE>

The registrant has executed indemnification agreements with each of its
officers and directors pursuant to which the registrant has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.

The registrant intends to obtain liability insurance for the benefit of its
directors and officers which will provide coverage for losses of directors and
officers for liabilities arising out of claims against such persons acting as
directors or officers of the registrant (or any subsidiary thereof) due to any
breach of duty, neglect, error, misstatement, misleading statement, omission
or act done by such directors and officers, except as prohibited by law.

At present, there is no pending litigation or proceeding involving a
director or officer of the registrant as to which indemnification is being
sought nor is the registrant aware of any threatened litigation that may
result in claims for indemnification by any director or officer.

Reference is made to Section 8 of the Underwriting Agreement, the proposed
form of which is filed as Exhibit One, in which the Underwriters agree to
indemnify the directors and officers of the registrant and certain other
persons, against civil liabilities, including certain liabilities under the
Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since January 1, 1995, the registrant issued and sold unregistered
securities in the following transactions:

1. In December 1995, the Company sold an aggregate of 676,361 shares of
Series A Stock at an aggregate purchase price of $10.0 million to Summit.
In connection therewith, the Company repurchased an aggregate of 3,043,624
shares of Common Stock from certain existing shareholders of the Company
for an aggregate of $10.0 million. See "Certain Transactions."

2. In September 1996, the Company, pursuant to certain convenants in the
Summit Agreement, issued to Summit, for no additional consideration,
warrants to purchase up to a maximum of 185,331 shares of Common Stock. See
"Description of Capital Stock--Warrants."

3. The registrant from time to time has granted stock options to
employees, directors and consultants. The following table sets forth
certain information (on a post stock split recapitalization basis)
regarding such grants:

<TABLE>
<S> <C> <C>
RANGE OF
NO. OF SHARES EXERCISE PRICES
------------- ---------------
1995........................................... 555,057 $ 0.85-0.93
1996........................................... 835,886 2.01-2.78
1997........................................... 1,219,759 2.78-8.00
</TABLE>

4. The registrant from time to time has issued stock to employees,
directors and consultants pursuant to the exercise of stock options. The
following table sets forth certain information (on a post stock split
recapitalization basis) regarding such issuances:

<TABLE>
<S> <C> <C>
RANGE OF
NO. OF SHARES EXERCISE PRICES
------------- ---------------
1995........................................... 3,533 $ 0.85
1996........................................... 50,814 0.93
1997........................................... 384,726 0.45-2.41
</TABLE>

No underwriter was employed by the registrant in connection with the
issuance and sale of the securities described above. The registrant claims
that the issuance and sale of all of the foregoing securities were exempt from
registration pursuant to either (i) Section 4(2) of the Act as transactions
not involving any public offering or (ii) Rule 701 under the Act as
transactions made pursuant to a written compensatory plan or pursuant to a
written contract relating to compensation. No public offering was involved and
the securities were acquired for investment and not with a view to
distribution. All recipients had adequate access to information about the
registrant.

II-2
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation, to be filed with
the Secretary of State of New Jersey upon the effectiveness of this
Offering.
3.2* Amended and Restated Bylaws.
4.1* 1993 Stock Option Plan of the Company, as amended to date.
4.2* 1998 Stock Plan of the Company.
4.3* Form of Warrant Agreement, dated as of September 13, 1996 between the
Company and Summit Ventures IV, L.P. and Summit Investors II, L.P.
4.4* Registration Rights Provisions granted to Summit Ventures IV, L.P. and
Summit Investors II, L.P.
5* Opinion of Buchanan Ingersoll as to validity of Common Stock.
10.1* Corporate Revolving and Term Loan Agreement between Manufacturers and
Traders Trust Company and the Company dated August 5, 1997.
10.2* Joint Venture Agreement dated as of May 21, 1997 between ATOS, S.A.
(formerly Sligos/Marben S.A.) and the Company.
10.3* Lease dated November 20, 1995 between Hocroft Associates and the
Company, as amended August 16, 1996 and April 7, 1997.
10.4* Form of Indemnification Agreement executed by each of the Company's
directors and executive officers.
10.5* Employment Agreement dated October 1, 1996 between the Company and S.
Daniel Shia.
10.6* Amendment No. 1 to Employment Agreement effective January 10, 1998
between the Company and S. Daniel Shia.
10.7* Letter agreements dated September 9, 1996 and April 28, 1997 between
the Company and Paul A. Lipari.
10.8* Letter agreement dated January 3, 1997 between the Company and William
P. McHale, Jr.
23.1 Consent of Price Waterhouse LLP.
23.2* Consent of Buchanan Ingersoll (contained in the opinion filed as
Exhibit 5 to the Registration Statement).
24* Powers of Attorney of certain officers and directors of the Company
(contained on the signature page of this Registration Statement).
27* Financial Data Schedule.
</TABLE>

(b) Financial Statement Schedules

All financial statement schedules are omitted because the information is not
required, or is otherwise included in the financial statements or the notes
thereto.
- ---------------------
* Previously filed. All other exhibits filed herewith.

II-3
<PAGE>

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes that:

(1) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(2) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(3) For the purpose of determining any liability under the Act each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(4) At the closing specified in the underwriting agreement, registrant
shall provide the Underwriters certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

II-4
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF
BRIDGEWATER, STATE OF NEW JERSEY, ON MARCH 10, 1998.

DSET Corporation

/s/ William P. McHale, Jr.
By: _________________________________
WILLIAM P. MCHALE, JR.,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

II-5
<PAGE>

Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<S> <C> <C>
SIGNATURE TITLE DATE

/s/ William P. McHale, Jr. President, Chief March 10, 1998
- ------------------------------------ Executive Officer
WILLIAM P. MCHALE, JR. and Director
(Principal
Executive Officer)

* Chairman of the March 10, 1998
- ------------------------------------ Board, Chief
S. DANIEL SHIA Technical Officer
and Director

/s/ Paul A. Lipari Chief Financial March 10, 1998
- ------------------------------------ Officer, Treasurer
PAUL A. LIPARI and Secretary
(Principal
Financial and
Accounting
Officer)

* Director March 10, 1998
- ------------------------------------
HUI-YUN ROSANNA YUAN

* Director March 10, 1998
- ------------------------------------
ELIZABETH K. ADAMS

* Director March 10, 1998
- ------------------------------------
BRUCE R. EVANS
- --------------------
</TABLE>
* By his signature set forth below the undersigned, pursuant to duly authorized
powers of attorney filed with the Securities and Exchange Commission, has
signed this Amendment to the Registration Statement on behalf of the persons
indicated.

/s/ Paul A. Lipari
By: ________________________________
Paul A. Lipari (Attorney-in-fact)

II-6
<PAGE>

EXHIBIT INDEX

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 2, 1998,
relating to the financial statements of DSET Corporation, which appears in
such Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus. However, it should
be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data."

Price Waterhouse LLP
Morristown, New Jersey

March 9, 1998