<PAGE>   1
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

              {X} QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the Quarterly Period Ended December 31, 1997

              { }TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                    For the Transition Period From ____to____

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

                         Commission File Number 1-14198

                       DIGITAL TRANSMISSION SYSTEMS, INC.
        (Exact name of small business issuer as specified in its charter)

               DELAWARE                                    58-2037949
    (State or other jurisdiction of                     (I.R.S. Employer
    incorporation or organization)                      Identification No.)

            3000 NORTHWOODS PARKWAY, BUILDING 330, NORCROSS, GA 30071
               (Address of principal executive office)     (Zip Code)

                                 (770) 798-1300
                (Issuer's telephone number, including area code)

                                 NOT APPLICABLE
   (Former name, former address and former fiscal year, if changed since last
   report)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes {x}   No { }

The number of shares outstanding of the registrant's common stock as of February
11, 1998 was 4,177,043.

Transitional Small Business Disclosure Format (check one):   Yes { }   No {x}


<PAGE>   2
================================================================================


                        DIGITAL TRANSMISSION SYSTEMS INC.
                                   FORM 10-QSB

                     FOR THE QUARTER ENDED DECEMBER 31, 1997

                                      INDEX

<TABLE>
<CAPTION>
                                                                                             PAGE
PART I.         FINANCIAL INFORMATION                                                       NUMBER
                                                                                            ------
<S>             <C>                                                                         <C>
Item 1.         Financial Statements:

                Balance Sheets at December 31, 1997 (Unaudited) and June 30, 1997              3

                Statements of Operations for the Three Months
                ended December 31, 1997 and 1996 (Unaudited)                                   4

                Statements of Operations for the Six Months                                    5
                ended December 31, 1997 and 1996 (Unaudited)

                Statements of Cash Flows for the Six Months Ended
                December 31, 1997 and 1996 (Unaudited)                                         6

                Notes to Interim Financial Statements (Unaudited)                              7

Item 2.         Management's Discussion and Analysis of
                Financial Condition and Results of Operations                                  8

PART II.        OTHER INFORMATION

Items 1 - 5.     Not applicable

Item 6.          Exhibits and Reports on Form 8-K                                             14

                 Signatures                                                                   15

Exhibit 27.0     Financial Data Schedule  (SEC use only)                                      16
</TABLE>


                                     Page 2


<PAGE>   3


                          PART I. FINANCIAL INFORMATION
                       Digital Transmission Systems, Inc.
                                 Balance Sheets
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                   December 31, 1997              June 30, 1997
                                                                                        Unaudited
                                                                                   --------------------        --------------------
      <S>                                                                          <C>                         <C> 
                                                         ASSETS
      Current assets:
      Cash and cash equivalents                                                          $    468                   $    712
      Trade accounts receivable, net of allowances of $321 and
         $226 at December 31 and June 30, 1997, respectively                                5,628                      4,223
      Other receivables                                                                        20                         14
      Inventories                                                                           3,435                      2,440
      Prepaid expenses                                                                        433                        295
                                                                                         --------                   --------
         Total current assets                                                               9,984                      7,684
                                                                                         --------                   --------
      Property and equipment, net of accumulated
         depreciation and amortization                                                        939                      1,186
                                                                                         --------                   --------

      Other assets
        Deferred tax benefit                                                                  285                        285
        Intangible assets, net                                                              1,278                      1,137
        Other assets                                                                          117                         19
                                                                                         --------                   --------
      Total assets                                                                       $ 12,603                   $ 10,311
                                                                                         ========                   ========


                                                  LIABILITIES AND SHAREHOLDERS' EQUITY

      Current liabilities:
        Line of credit                                                                   $  2,126                   $  1,958
        Accounts payable and accrued liabilities                                            4,048                      3,016
        Accrued payroll and benefits                                                           24                        591
        Warranty accrual                                                                      263                        203
                                                                                         --------                   --------
            Total current liabilities                                                       6,461                      5,768
                                                                                         --------                   --------

      Long term liabilities:
        Convertible debt                                                                    4,000                          0
                                                                                         --------                   --------
           Total long term liabilities                                                      4,000                         --
                                                                                         --------                   --------

      TOTAL LIABILITIES                                                                    10,461                      5,768
                                                                                         ========                   ========


      Shareholders' equity:
      Preferred stock; 3,000,000 shares authorized;
         None issued                                                                           --                         --
      Common stock -- $.01 par value; 15,000,000 shares authorized;
         4,139,450 and 4,121,143 issued and outstanding
         at December 31 and June 30, 1997, respectively                                        41                         41
      Additional paid-in capital                                                           11,255                     11,232
      Deferred compensation                                                                   (88)                      (124)
      Notes receivable from stock sales                                                       (36)                       (33)
      Accumulated deficit                                                                  (9,030)                    (6,573)
                                                                                         --------                   --------
         Total shareholders' equity                                                         2,142                      4,543
      Commitments and contingencies
                                                                                         --------                   --------
         Total liabilities and shareholders' equity                                      $ 12,603                   $ 10,311
                                                                                         ========                   ========
</TABLE>

      See accompanying notes to financial statements.



                                     Page 3


<PAGE>   4



                       Digital Transmission Systems, Inc.
                            STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                             Three months ended December 31
                                                             ------------------------------
                                                                 1997            1996
                                                               Unaudited       Unaudited
                                                             ------------     -----------
<S>                                                          <C>                 <C>  
   Net sales                                                     4,373            3,678

   Cost of sales                                                 3,099            2,189

                                                              --------         --------
      Gross profit                                               1,274            1,489
                                                              --------         --------

   Selling, general and administrative                           1,591            1,493
   Product development                                             497              648
                                                              --------         --------
      Total operating expenses                                   2,088            2,141
                                                              --------         --------
      Operating loss                                              (814)            (652)

   Other expense, net                                             (152)             (15)
                                                              --------         --------
   Loss before income tax expense                                 (966)            (667)

   Income tax benefit (expense)                                     --               --

                                                              ========         ========
   Net loss                                                   $   (966)        $   (667)
                                                              ========         ========

   Net loss per share - basic and diluted                     $  (0.23)        $  (0.17)
                                                              ========         ========


   Weighted average shares outstanding - basic and diluted       4,135            3,960
                                                              ========         ========
</TABLE>
   See accompanying notes to financial statements.




                                     Page 4


<PAGE>   5



                       Digital Transmission Systems, Inc.
                            STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                 Six months ended December 31
                                                               ---------------------------------
                                                                    1997            1996
                                                                  Unaudited       Unaudited
                                                               ---------------  ----------------
                                                                                         
      <S>                                                      <C>              <C>  
      Net sales                                                    6,576            6,678

      Cost of sales                                                4,888            3,912

                                                                --------         --------
         Gross profit                                              1,688            2,766
                                                                --------         --------

      Selling, general and administrative                          2,922            2,795
      Product development                                          1,016            1,375

                                                                --------         --------
         Total operating expenses                                  3,938            4,170
                                                                --------         --------

         Operating loss                                           (2,250)          (1,404)

      Other expense, net                                            (207)              60
                                                                --------         --------
      Loss before income tax expense                              (2,457)          (1,344)

      Income tax benefit (expense)                                    --               --

                                                                ========         ========
      Net loss                                                  $ (2,457)        $ (1,344)
                                                                ========         ========


      Net loss per share - basic and diluted                    $  (0.59)        $  (0.34)
                                                                ========         ========


      Weighted average shares outstanding - basic and diluted      4,131            3,940
                                                                ========         ========
</TABLE>

      See accompanying notes to financial statements.


                                     Page 5


<PAGE>   6




                       Digital Transmission Systems, Inc.
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                        Six months ended December 31
                                                                     ----------------------------------
                                                                           1997             1996
                                                                         Unaudited        Unaudited
                                                                     -----------------  ---------------
    <S>                                                              <C>                <C>
    Cash flows from operating activities:  
      Net loss                                                           $(2,457)          $(1,344)   

      Adjustments to reconcile net loss                                                               
       to net cash used in operating activities:
         Depreciation and amortization                                       721               299    
         Change in valuation reserves                                        118               (61)   
         Amortization of deferred compensation expense                        36                24    

      Changes in assets and liabilities:          
         Trade and other accounts receivable                              (1,506)             (634)   
         Inventories                                                      (1,018)             (881)   
         Prepaid expenses                                                   (138)               41    
         Accounts payable and other accrued expenses                         465               669    
         Warranty accrual                                                     60                (3)            
                                                                         -------           -------    
    Net cash used in operating activities                                 (3,719)           (1,890)   
                                                                         -------           -------    

    Cash flows from investing activities:         
      Purchases of property and equipment                                   (415)             (706)   
      Additions to capitalized product development costs                    (294)             (940)   
      Proceeds from maturity of investment securities                                        1,000                
                                                                         -------           -------    
    Net cash used in investing activities                                   (709)             (646)   
                                                                         -------           -------    
    Cash flows from financing activities:       
      Net borrowings under                                                                            
        line of credit agreement                                             168             1,147    
      Proceeds from sale of convertible debentures                         4,000                      
      Proceeds from exercise of stock options                                 16                33    
                                                                         -------           -------    
    Net cash provided by financing activities                              4,184             1,180    
                                                                         -------           -------    
                                        
    Net increase (decrease) in cash and cash equivalents                    (244)           (1,356)   
    Cash and cash equivalents at beginning of period                         712             1,586    
                                                                         =======           =======    
    Cash and cash equivalents at end of period                           $   468           $   230    
                                                                         =======           =======    
                                                                                                      
    Supplemental disclosure of cash paid for income taxes and interest  
        Cash paid for income taxes                                       $    --           $     1    
        Cash paid for interest                                           $   154           $     9    
</TABLE> 
         
    See accompanying notes to financial statements.


                                        
                                     Page 6


<PAGE>   7


                       DIGITAL TRANSMISSION SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997
                                    UNAUDITED

1.  DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Digital Transmission Systems, Inc. (the "Company") designs, manufactures,
markets and services a broad range of telecommunications products for domestic
and international sale. The Company's primary customers are long distance
carriers and wireless service providers. The Company's products, consisting of
proprietary software and hardware modules, facilitate the control, monitoring
and efficient transmission of high-speed digital information through public or
private telecommunications networks.

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
information included herein is unaudited; however, the information reflects all
adjustments (consisting solely of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Operating results for the six months ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended June 30, 1998.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Form 10-KSB for the year ended June 30, 1998.

There have been no changes to the accounting policies of the Company during the
periods presented. For a description of these policies, see Note 1 of the Notes
to Financial Statements in the Company's Annual Report on Form 10-KSB.

2.  INCOME (LOSS) PER COMMON SHARE

The Company has presented earnings per share in accordance with the provisions
of Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings per
Share." SFAS 128 requires companies that have publicly held common stock or
common stock equivalents to present both basic and diluted earnings per share
(EPS) on the face of the income statement. Basic EPS is calculated as income
available to common stockholders divided by the weighted average number of
common shares outstanding during the period. Diluted EPS is calculated to
reflect the potential dilution that would occur if stock options or other
contracts to issue common stock were exercised and resulted in additional common
stock that would share in the earnings of the Company. The Company has restated
its earnings per share for all periods presented to reflect the adoption of SFAS
128. Diluted EPS is the same as Basic EPS for all periods since the addition of
common stock equivalents would be anti-dilutive.



                                     Page 7


<PAGE>   8




ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS 

GENERAL

Digital Transmission Systems, Inc. (the Company) designs, manufactures and
markets a broad range of products for the telecommunications industry. The
Company's primary customers are domestic and international long distance
carriers and wireless service providers, including those offering cellular
telephone services and Personal Communications Services ("PCS"). Customers
include Nextel, PrimeCo Personal Communications L.P., 360 Communications,
AirTouch, Sprint, MCI, Tele2000 in Peru and TeleBahia in Brazil.

The Company's products, consisting of proprietary software and hardware modules,
facilitate the control, monitoring and efficient transmission of high-speed
digital information through public or private telecommunications networks. The
Company's network access products enable telecommunications service providers to
give their customers economical, high-quality access to public and private
networks and various telecommunications services. These services include voice
and high-speed data transmission, the Internet and video and desktop
conferencing. The Company's network control products enable service providers to
detect degradation on their networks so that appropriate actions may be taken in
advance of service interruption. Important product requirements in these market
segments include high feature density, modularity, quality performance and
compactness. The Company's products meet these requirements and are suitable for
both wireline and wireless service environments.

The Company markets its products through a direct sales force and several
reseller channels. Domestically, inter-exchange carriers and wireless service
providers, including cellular, Specialized Mobile Radio ("SMR") and PCS service
providers, are serviced directly by the Company's sales force. The Company
utilizes telecommunications equipment resellers in the United States and Canada
to sell to private network customers. Within the last twenty four months, the
Company has signed thirty-four reseller agreements in Latin America, Asia
Pacific, Europe and the Middle East.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996

The following table sets forth certain financial data derived from the Company's
statement of operations for the three months ended December 31, 1997 and
December 31, 1996.


<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED             THREE MONTHS ENDED
                                                    DECEMBER 31, 1997             DECEMBER 31, 1996
                                                 -----------------------        -----------------------
                                                                  % OF                          % OF
                                                        $        SALES                 $       SALES
                                                 -------------  --------        ------------  ---------
      <S>                                        <C>            <C>             <C>           <C>
      Net sales                                     4,373        100               $3,678        100
      Gross profit                                  1,274         29                1,489         40
      Product development                             497         11                  648         18
      Selling, general and administrative           1,591         36                1,493         41
      Net income (loss)                              (966)       (22)                (667)       (18)
</TABLE>



                                     Page 8


<PAGE>   9


Net Sales. Net sales increased by 19%, to $4,373,000 for the three months ended
December 31, 1997 from $3,678,000 for the three months ended December 31, 1996.
The sales mix, and the corresponding percentage of total sales of the Company's
products, is set forth in the chart below:


<TABLE>
<CAPTION>
                                                                    PERCENTAGE OF
                                                                        TOTAL
                                       THREE MONTHS ENDED          THREE MONTHS ENDED
                                          DECEMBER 31,                DECEMBER 31,
                                    ------------------------     ---------------------
                                       1997          1996          1997        1996
                                    -----------   ----------     ---------   ---------
<S>                                 <C>           <C>            <C>         <C>
MCI network control                    $   --      $1,340            --         36
Other network control                      --         238            --          7
FlexT1/E1                               2,717       1,232            62         33
SKYPLEX and SKYPLEX II/FlexAir          1,533         700            35         19
Other products                            123         168             3          5
                                       ======      ======           ===        ===
        Totals                         $4,373      $3,678           100        100
                                       ======      ======           ===        ===
</TABLE>


For the three months ended December 31, 1996, MCI accounted for 36% of net
sales. For the three months ended December 31, 1997, there were no sales of
proprietary products developed specifically for MCI. Results for the three
months ended December 31, 1997 reflect a shift in product mix to the Company's
newer products-FlexT1/E1 and SKYPLEX. The Company's Flex product line accounted
for 62% of sales for the three months ended December 31, 1997, as compared to
33% for the three months ended December 31, 1996. The SKYPLEX line grew by 119%
to account for 35% of sales for the three months ended December 31, 1997,
reflecting sales to markets in Latin America and Asia, up from 19% of sales for
the three months ended December 31, 1996.

Total sales of products other than proprietary MCI products increased from
$2,338,000 in the three months ended December 31, 1996 to $4,373,000 in the
three months ended December 31, 1997, an increase of $2,035,000, or 87%.

Gross Profit. Cost of sales consists of component costs, compensation costs and
the overhead costs related to the production and shipping of the Company's
products, along with the support and warranty expense associated with such
products. Gross profit decreased by 14%, to $1,274,000 for the three months
ended December 31, 1997 from $1,489,000 for the three months ended December 31,
1996. As a percentage of sales, gross profit decreased to 29% for the three
months ended December 31, 1997 from 40% for the three months ended December 31,
1996. The decrease in gross margin percentage is due to the increase in total
sales of the Flex and SKYPLEX product lines in relation to the total sales for
the Company. Gross margins are lower for these new products than for the
Company's more mature products. Margins for these products will begin to
increase as sales volumes reach levels high enough to realize certain economies
of scale in production and handling costs. In addition, cost of sales for the
quarter reflected higher than normal operations costs associated with initial
production for certain large orders.

Product Development. Product development expense consists of personnel costs,
consulting, prototyping, supplies and depreciation expenses. Product development
expenses decreased by 23%, to $497,000 for the three months ended December 31,
1997 from $648,000 for the three months ended December 31, 1996. Additionally,
the Company incurred $149,000 of costs of sub-contracted product development
that were capitalized during the three months ended December 31, 1997. The 
slight decrease resulted from a switch of resources from product development to
operations and support. Management expects that product development expense will
increase on an absolute basis, but will decrease as a percentage of total 
revenues as revenues continue to 


                                     Page 9


<PAGE>   10


grow. As a percentage of sales, product development costs were 11% for the three
months ended December 31, 1997 and 18% for the three months ended December 31,
1996.

Selling, General and Administrative. Selling expense consists primarily of
compensation costs for sales and marketing personnel, travel, consulting, trade
show and advertising expenses. General and administrative expense consists
primarily of compensation expenses for administrative and finance personnel, as
well as accounting, legal and consulting fees.

Selling, general and administrative expense increased slightly, to $1,591,000
for the three months ended December 31, 1997 from $1,493,000 for the three
months ended December 31, 1996. Total selling, general and administrative costs
were 36% of total sales for the three months ended December 31, 1997, which was
down from 41% of sales for the three months ended December 31, 1996. Selling
expense decreased by 3%, to $847,000 for the three months ended December 31,
1997 from $870,000 for the three months ended December 31, 1996. Management
expects to continue to expand the Company's international and domestic sales and
marketing efforts and intends to increase the Company's sales and marketing
expenditures.

Marketing expenditures decreased from $308,000 for the three months ended
December 31, 1996 to $293,000 for the three months ended December 31, 1997.
General and administrative expenses increased by 43%, to $451,000 for the three
months ended December 31, 1997 from $315,000 for the three months ended December
31, 1996. The increase in general and administrative expenses is a result of
higher costs necessary to build the infrastructure to support increasing sales
of multiple product lines in new markets.

Net Loss. The net loss increased to $966,000 for the three months ended December
31, 1997 from $667,000 for the three months ended December 31, 1996. The
increased loss was primarily due to lower margins experienced on revenues for
the quarter.

SIX MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996

The following table sets forth certain financial data derived from the Company's
statement of operations for the six months ended December 31, 1997 and December
31, 1996.


<TABLE>
<CAPTION>
                                                             SIX MONTHS ENDED               SIX MONTHS ENDED
                                                             DECEMBER 31, 1997             DECEMBER 31, 1996
                                                          ------------------------       -----------------------
                                                                           % OF                          % OF
                                                                 $        SALES                 $       SALES
                                                          -------------  ---------       ------------  ---------
      <S>                                                 <C>            <C>             <C>           <C>
      Net sales                                               $6,576        100             $6,678        100
      Gross profit                                             1,688         26              2,766         41
      Product development                                      1,016         15              1,375         21
      Selling, general and administrative                      2,922         44              2,795         42
      Net income (loss)                                       (2,457)       (37)            (1,344)       (20)
</TABLE>


Net Sales. Net sales decreased by 2%, to $6,576,000 for the six months ended
December 31, 1997 from $6,678,000 for the six months ended December 31, 1996.
The sales mix, and the corresponding percentage of total sales of the Company's
products, is set forth in the chart below:


                                    Page 10


<PAGE>   11


<TABLE>
<CAPTION>
                                                                 PERCENTAGE OF
                                                                     TOTAL
                                        SIX MONTHS ENDED       SIX MONTHS ENDED
                                          DECEMBER 31,           DECEMBER 31,
                                    ----------------------    ------------------
                                       1997        1996         1997       1996
                                    ---------   ----------    --------   -------
<S>                                   <C>       <C>           <C>        <C>
MCI network control                   $   --     $2,680          --         40
Other network control                     --        609          --          9
FlexT1/E1                              3,585      1,816          54         27
SKYPLEX and SKYPLEX II/FlexAir         2,814      1,305          43         20
Other products                           177        268           3          4
                                      ======     ======         ===        ===
        Totals                        $6,576     $6,678         100        100
                                      ======     ======         ===        ===
</TABLE>


For the six months ended December 31, 1996, MCI accounted for 40% of net sales.
For the six months ended December 31, 1997, there were no sales of proprietary
products developed specifically for MCI. Results for the six months ended
December 31, 1997 reflect a shift in product mix to the Company's newer
products-FlexT1/E1 and SKYPLEX. The Company's Flex product line accounted for
54% of sales for the six months ended December 31, 1997, as compared to 27% for
the six months ended December 31, 1996. The SKYPLEX line grew by 116% to account
for 43% of sales for the six months ended December 31, 1997, reflecting sales to
markets in Latin America and Asia, up from 20% of sales for the six months ended
December 31, 1996.

Total sales of products other than proprietary MCI products increased from
$3,998,000 in the six months ended December 31, 1996 to $6,576,000 in the six
months ended December 31, 1997, an increase of $2,578,000, or 64%.

Gross Profit. Cost of sales consists of component costs, compensation costs and
the overhead costs related to the production and shipping of the Company's
products, along with the support and warranty expense associated with such
products. Gross profit decreased by 39%, to $1,688,000 for the six months ended
December 31, 1997 from $2,766,000 for the six months ended December 31, 1996. As
a percentage of sales, gross profit decreased to 26% for the six months ended
December 31, 1997 from 41% for the six months ended December 31, 1996. The
decrease in gross margin percentage is due to the increasing sales of the
Company's newer Flex and SKYPLEX product lines. Gross margins are lower for
these new products than for the Company's more mature products. Margins for
these products will begin to increase as sales volumes reach levels high enough
to realize certain economies of scale in production and handling costs.

Product Development. Product development expense consists of personnel costs,
consulting, prototyping, supplies and depreciation expenses. Product development
expenses decreased by 26%, to $1,016,000 for the six months ended December 31,
1997 from $1,375,000 for the six months ended December 31, 1996. Additionally,
the Company incurred $294,000 of costs of sub-contracted product development
that were capitalized during the six months ended December 31, 1997. The
decrease resulted from a switch of resources from product development to
operations and support. Management expects that product development expense will
increase on an absolute basis, but will decrease as a percentage of total
revenues as revenues continue to grow. As a percentage of sales, product
development costs were 15% for the six months ended December 31, 1997 and 21%
for the six months ended December 31, 1996.

Selling, General and Administrative. Selling expense consists primarily of
compensation costs for sales and marketing personnel, travel, consulting, trade
show and advertising expenses. General and 





                                     Page 11


<PAGE>   12


administrative expense consists primarily of compensation expenses for
administrative and finance personnel, as well as accounting, legal and
consulting fees.

Selling, general and administrative expense increased by 5%, to $2,922,000 for
the six months ended December 31, 1997 from $2,795,000 for the six months ended
December 31, 1996. Total selling, general and administrative costs were 44% of
total sales for the six months ended December 31, 1997, compared to 42% of sales
for the six months ended December 31, 1996. Selling expense increased by 4%, to
$1,558,000 for the six months ended December 31, 1997 from $1,629,000 for the
six months ended December 31, 1996.  Management expects to continue to expand
the Company's international and domestic sales and marketing efforts and intends
to increase the Company's sales and marketing expenditures.

Marketing expenditures decreased from $555,000 to $551,000 during the same
period. General and administrative expenses increased by 33%, to $813,000 for
the six months ended December 31, 1997 from $611,000 for the six months ended
December 31, 1996. This increase is a result of higher costs necessary to build
the infrastructure to support increasing sales of multiple product lines in new
markets, including information systems and order management support.

Net Loss. The net loss increased to $2,457,000 for the six months ended December
31, 1997 from $1,344,000 for the six months ended December 31, 1996. The
increased loss was primarily due to lower margins experienced on revenues for
the six months ended December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, the Company had approximately $468,000 in cash and
investment securities.

On April 10, 1997, the Company established a bank line of credit agreement with
Silicon Valley Bank which makes available $2,500,000 in borrowings with
availability based on the Company's accounts receivable. The loan is secured by
the Company's assets and bears interest at the rate of prime plus 2.25% (9.6% at
December 31, 1997). The loan requires a monthly monitoring fee of $1,000 and a
commitment fee of 0.125% due monthly on the unused portion of the facility. The
line of credit agreement term is one year with automatic renewal each year
unless written notice of termination is given by one of the parties.

For the six months ended December 31, 1997, the Company used $3,719,000 in cash
from operating activities as compared to $1,890,000 for the same period the
previous year. This change of $1,829,000 was primarily due to the loss, which
increased from $1,344,000 for the six months ended December 31, 1996 to
$2,457,000 for the six months ended December 31, 1997, and the growth in
accounts receivable, which increased by $1,556,000 during the six months ended
December 31, 1997. Depreciation and amortization represented $721,000 of the
loss during the six months ended December 31, 1997 as compared to $299,000 for
the six months ended December 31, 1996.

The Company purchased $415,000 and $706,000 of property, plant and equipment
during the six months ended December 31, 1997 and 1996, respectively. In
addition, the Company capitalized certain product development expenses paid to
outside contractors. During the six months ended December 31, 1997, the Company
capitalized $294,000 of such costs.

On September 25, 1997, the Company issued $4 million of 11.5% subordinated
debentures due September 25, 2002. The Debenture Purchase Agreement contains
numerous rights, privileges, 



                                    Page 12


<PAGE>   13


conditions, etc., in favor of the lender, only certain of which have been
included herein. Accordingly, the Debenture Purchase Agreement should be read in
conjunction with this summary note. The debentures are convertible at any time
by the lender into common stock of the Company at a conversion price of $10.25
per share, subject to adjustment in certain events. The debentures are
redeemable by the Company after September, 1999, provided that (a) the Company
pays the lender additional interest such that the lender would receive an
effective compounded 20% interest rate from inception of the loan or, (b) the
20-day average bid price for the Company's stock exceeds $15.00 per share.

The debentures may be required to be redeemed by the Company at the option of
the lender at any time prior to maturity if there is a change in control, as
defined in the debenture agreement, at the repayment prices set forth in the
debenture agreement, subject to adjustment, together with accrued interest. The
debenture agreement specifies certain covenants with which the Company must
comply.

The Company expects its cash balances and available borrowing facilities will be
sufficient to fund its currently anticipated level of cash needs for the next
twelve months.

SEASONALITY

The Company's sales are subject to quarterly fluctuations due to the purchasing
cycle of significant customers. The Company's business plan is to continue the
diversification of its product offerings, further develop its distribution
channels and further expand its customer base. The Company believes that the
implementation of this plan should decrease the seasonality of its sales and
begin to increase its backlog of orders.

IMPORTANT CONSIDERATIONS RELATED TO FORWARD-LOOKING STATEMENTS

It should be noted that this discussion contains forward-looking statements
which are subject to substantial known and unknown risks and uncertainties.
There are a number of factors which could cause actual results to differ
materially from those anticipated in statements made herein. Such factors
include, but are not limited to, changes in general economic conditions, the
growth rate of the market for the Company's products and services, the effect of
competitive products and pricing, and the irregular pattern of revenues, as well
as a number of other risk factors which could affect the future performance of
the Company.


                                     Page 13


<PAGE>   14



                           PART II. OTHER INFORMATION

ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
(A)     EXHIBITS

        Exhibit
         Number          Description of Exhibits
        -------          -----------------------
<S>     <C>              <C>

          27               Financial Data Schedule (for SEC use only)


(B)     REPORTS ON FORM 8-K
</TABLE>

The registrant did not file any reports on Form 8-K during the six months ended
December 31, 1997.



                                     Page 14


<PAGE>   15




                                   SIGNATURES

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

                                     Digital Transmission Systems, Inc.



Date:   February 13, 1998            By: /s/ Andres C. Salazar
                                        -------------------------------------
                                             Andres C. Salazar, President and
                                             Chief Executive Officer



Date:   February 13, 1998            By: /s/ Roger E. Maloch
                                        -------------------------------------
                                             Roger E. Maloch, Chief Financial
                                             Officer, Vice President of Finance
                                             and Administration (Principal
                                             Financial Officer and Principal
                                             Accounting Officer)


                                    Page 15