<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 March 31, 1999

              { }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                         (IRS 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 March
31, 1999 was 4,250,609.

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

===============================================================================



<PAGE>   2


                        DIGITAL TRANSMISSION SYSTEMS INC.
                                   FORM 10-QSB

                      FOR THE QUARTER ENDED MARCH 31, 1999

                                      INDEX
<TABLE>
<CAPTION>


<S>             <C>                                                                          <C>
PART I.         FINANCIAL INFORMATION                                                        PAGE

Item 1.         Financial Statements:

                Condensed Consolidated Balance Sheets at March 31, 1999
                  and June 30, 1998 (Unaudited)                                                3

                Condensed Consolidated Statements of Operations for the Three
                     Months ended March 31, 1999 and 1998 (Unaudited)                          4

                Condensed Consolidated Statements of Operations for the Nine
                  Months ended March 31, 1999 and 1998 (Unaudited)                             5

                Condensed Consolidated Statements of Cash Flows for the Nine
                  Months Ended March 31, 1999 and 1998 (Unaudited)                             6

                Notes to Interim Condensed Consolidated  Financial Statements
                  (Unaudited)                                                                  7

Item 2.         Management's Discussion and Analysis of
                Financial Condition and Results of Operations                                  9

PART II.           OTHER INFORMATION

Items 1 - 5        Not applicable                                                             19

Item 6.            Exhibits and Reports on Form 8-K                                           19

                   Signatures                                                                 20


Exhibit 27.0       Financial Data Schedule  (SEC use only)                                    21
</TABLE>




                                    Page 2
<PAGE>   3

                       DIGITAL TRANSMISSION SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)

<TABLE>
<CAPTION>

                                                                               March 31,
                                                                                 1999
                                                                              (Unaudited)     June 30, 1998
                                                                              -----------     -------------
    <S>                                                                       <C>             <C>
                                     ASSETS
    Current assets:

    Cash and cash equivalents                                                 $       150     $          91
    Trade accounts receivable, net of allowances for
      returns and doubtful accounts of $1,145 and $767 at
      March 31, 1999 and June 30, 1998, respectively                                1,335             2,283
    Inventories                                                                     1,359             2,469
    Prepaid expenses                                                                  208               105
                                                                              -----------     -------------
       Total current assets                                                         3,052             4,948
                                                                              -----------     -------------

    Property and equipment, net of accumulated
      depreciation and amortization                                                   466               886
    Note receivable                                                                   900                --
    Intangible assets, net                                                            419             1,045
    Other assets                                                                      411               329
                                                                              -----------     -------------
       Total assets                                                           $     5,248     $       7,208
                                                                              ===========     =============
                      LIABILITIES AND SHAREHOLDERS' DEFICIT

    Current liabilities:
    Line of credit                                                            $     1,379     $       1,329
    Accounts payable and accrued liabilities                                        3,568             4,581
    Accrued payroll and benefits                                                      101               248
    Convertible debentures - current portion                                           --             4,000
    Warranty reserve                                                                  200               618

                                                                              -----------     -------------
       Total current liabilities                                                    5,248            10,776
                                                                              -----------     -------------

    Convertible debentures - non-current portion                                    2,000                --
            
    Deferred gain on sale of subsidiary                                               900                --
                                                                              -----------     -------------
       Total liabilities
                                                                                    8,148            10,776

    Shareholders' deficit:
    Series A convertible Preferred stock; 3,000,000 shares
       authorized; 1,314,333 shares issued and outstanding at
       March 31, 1999                                                               1,314                --
                                                                                                            
    Common stock -- $.01 par value; 15,000,000 shares authorized;
       4,250,609 and 4,191,460 issued and outstanding at March 31, 1999
       and June 30, 1998, respectively                                                 42                42
    Additional paid-in capital                                                     11,644            11,462
    Deferred compensation                                                              (8)              (56)
    Notes receivable from stock sales                                                 (63)              (63)
    Accumulated deficit                                                           (15,829)          (14,953)
                                                                              -----------     -------------
       Total shareholders' deficit                                                 (2,900)           (3,568)
    Commitments and contingencies                                                      --                --
                                                                              -----------     -------------
       Total liabilities and shareholders' deficit                            $     5,248     $       7,208
                                                                              ===========     =============
</TABLE>

    See accompanying notes to condensed consolidated financial statements.


                                     Page 3
<PAGE>   4


                       DIGITAL TRANSMISSION SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                     THREE MONTHS ENDED MARCH 31
                                                                     ---------------------------
                                                                          1999           1998
                                                                       Unaudited      Unaudited
                                                                      ----------     ----------

        <S>                                                           <C>            <C>
        Net sales                                                     $    1,922     $    6,111
        Cost of sales                                                        972          4,125

                                                                      ----------     ----------
           Gross profit                                                      950          1,986
                                                                      ----------     ----------

        Selling, general and administrative                                  658          1,772
        Product development                                                  281            604

                                                                      ----------     ----------
           Total operating expenses                                          939          2,376
                                                                      ----------     ----------

           Operating income (loss)                                            11           (390)

        Interest expense, net                                               (164)          (202)
        Gain on sale of subsidiary                                         1,100             --
                                                                      ----------     ----------

        Income (loss) before income tax expense                              947           (592)

        Income tax benefit (expense)                                          --             --
                                                                      ----------     ----------

        Income (loss) before extraordinary items                             947           (592)
                                                                      ----------     ----------

        Extraordinary gain on settlement of trade                            165             --
        payables
                                                                      ----------     ----------

        Net income (loss)                                             $    1,112     $     (592)
                                                                      ==========     ==========

        Net income (loss) per share - basic and diluted:

        Income (loss) per share before extraordinary items            $     0.22     $    (0.14)

        Extraordinary gain on settlement of trade payables                  0.04             --
                                                                      ----------     ----------

        Net income (loss) per share - basic and diluted               $     0.26     $    (0.14)
                                                                      ==========     ==========

        Weighted average shares outstanding - basic and diluted            4,250          4,158
                                                                      ==========     ==========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                     Page 4
<PAGE>   5




                       DIGITAL TRANSMISSION SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                     NINE MONTHS ENDED MARCH 31
                                                                     --------------------------
                                                                         1999           1998
                                                                      Unaudited      Unaudited
                                                                     -----------     ----------

        <S>                                                          <C>             <C>
        Net sales                                                     $    4,846     $   12,687
        Cost of sales                                                      3,045          9,013

                                                                      ----------     ----------
           Gross profit                                                    1,801          3,674
                                                                      ----------     ----------

        Selling, general and administrative                                2,241          4,695

        Product development
                                                                           1,203          1,620

                                                                      ----------     ----------
           Total operating expenses                                        3,444          6,315
                                                                      ----------     ----------

           Operating loss                                                 (1,643)        (2,641)

        Interest expense, net                                               (498)          (409)
        Gain on sale of subsidiary                                         1,100             --
                                                                      ----------     ----------

        Loss before income tax expense                                    (1,041)        (3,050)

        Income tax benefit (expense)                                          --             --
                                                                      ----------     ----------

        Loss before extraordinary items:                                  (1,041)        (3,050)

        Extraordinary gain on settlement of trade                                               
        payables                                                             165             --
                                                                      ----------     ----------
        Net loss                                                      $     (876)    $   (3,050)
                                                                      ==========     ==========

        Net income (loss) per share - basic and diluted:

        Income (loss) per share before extraordinary items            $    (0.25)    $    (0.74)

        Extraordinary gain on settlement of trade payables                  0.04             --
                                                                      ----------     ----------

        Net income (loss) per share - basic and diluted               $    (0.21)    $    (0.74)
                                                                      ==========     ==========


        Weighted average shares outstanding - basic and diluted            4,250          4,140
                                                                      ==========     ==========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.



                                     Page 5
<PAGE>   6









                       DIGITAL TRANSMISSION SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                     NINE MONTHS ENDED MARCH 31
                                                                                     --------------------------
                                                                                         1999           1998
                                                                                      Unaudited      Unaudited
                                                                                      ----------     ----------
<S>                                                                                  <C>             <C>
     Cash flows from operating activities:
       Net loss                                                                       $     (876)    $   (3,050)
       Adjustments to reconcile net loss
        to net cash used in (provided by) operating activities:
          Depreciation and amortization                                                      703          1,179
          Amortization of deferred compensation expense                                       48             52
          Extraordinary gain on trade payable settlements                                   (165)            --
          Gain on sale of subsidiary                                                      (1,100)            --
       Changes in assets and liabilities:
          Trade and other accounts receivable                                                740           (146)
          Inventories                                                                        846         (1,299)
          Prepaid expenses and other current assets                                         (103)          (118)
          Accounts payable and other accrued expenses                                         (5)           802
          Warranty accrual                                                                   (13)            80
                                                                                      ----------     ----------
     Net cash provided by (used in) operating activities                                      75         (2,500)
                                                                                      ----------     ----------

     Cash flows from investing activities:
       Purchases of property and equipment                                                   (62)          (576)
       Additions to capitalized product development costs                                    (98)          (540)
       Decrease (increase) in other non-current assets and liabilities                        94             --
                                                                                      ----------     ----------
     Net cash used in investing activities                                                   (66)        (1,116)
                                                                                      ----------     ----------
     Cash flows from financing activities:
       Net borrowings under line of credit agreement                                          50           (337)
       Proceeds from sale of convertible debentures                                           --          4,000
       Proceeds from exercise of stock options                                                --             60
                                                                                      ----------     ----------
     Net cash provided by financing activities                                                50          3,723
                                                                                      ----------     ----------
     Net increase in cash and cash equivalents                                                59            107
     Cash and cash equivalents at beginning of period                                         91            712
                                                                                      ==========     ==========
     Cash and cash equivalents at end of period                                       $      150     $      819
                                                                                      ==========     ==========

     Supplemental disclosure of cash paid for:
         Interest                                                                     $      119     $      184
                                                                                      ==========     ==========
     Supplemental disclosures of non-cash operating and financing activities:
         Issuance of Note Receivable in conjunction with a subsidiary liability       $      900     $       --
                                                                                      ==========     ==========
         Conversion of $1,000 of convertible debentures plus accrued
             interest to Series A convertible Preferred Stock                         $    1,314     $       --
                                                                                      ==========     ==========

         Issuance of warrants relating to conversion of debentures                    $      182     $       --
                                                                                      ==========     ==========

          Sale of subsidiary:
             Assets disposed of                                                       $      981     $       --
             Liabilities disposed of                                                      (2,081)            --
                                                                                      ----------     ----------
             Gain on sale of subsidiary                                               $    1,100     $       --
                                                                                      ==========     ==========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                     Page 6
<PAGE>   7



                       DIGITAL TRANSMISSION SYSTEMS, INC.
          NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                           MARCH 31, 1999 (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 products for the telecommunications
industry. 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 condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred significant losses in recent periods. The Company has a net capital
deficit of $2,900,000 as of March 31, 1999. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern for
a reasonable period of time.

The condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of assets and liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its financing agreements, to obtain additional
financing or refinancing as may be required, and ultimately to attain
profitability. The Company is actively pursuing additional equity financing
through discussions with potential investors, and is also pursuing potential
merger or acquisition candidates.

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 nine months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended June 30, 1999.
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 (loss) per share in accordance with the
provisions of SFAS No. 128, Earnings Per Share ("SFAS 128"), which requires
companies that have publicly held common stock or potential common stock to
present both basic and diluted earnings (loss) per share (EPS) on the face of
the income statement. Basic EPS is calculated as income (loss) available to
common shareholders divided by the weighted-average number of common shares
outstanding during the period. Diluted EPS is calculated as income (loss)
available to common shareholders divided by the weighted-average number of
common shares outstanding during the period plus any dilutive potential common
shares, such as convertible debt or stock options. The Company has restated its
earnings (loss) per share for all periods presented to conform to the provisions
of SFAS 128.


                                     Page 7
<PAGE>   8




3.    LEGAL MATTERS

In August 1998, a vendor of the Company filed suit against the Company alleging
nonpayment of account. Total damages alleged are in excess of $400,000 in unpaid
invoices, plus pre-judgment and post-judgment interest on principal amounts
outstanding and court costs. The Company is disputing the validity and accuracy
of the billed amounts.

The Company has asserted a counterclaim, believes that it has meritorious
defenses to the plaintiff's claims, and intends to continue a vigorous defense
in this matter. While management disputes plaintiffs' claims, no assurance can
be given as to the ultimate outcome with respect to such lawsuit and the amount,
if any, which may be paid in excess of amounts already accrued.

The Company is also involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.


4.    GAIN ON SALE OF SUBSIDIARY; RESTRUCTURING OF CONVERTIBLE DEBENTURE;
      AMENDMENT TO BANK AGREEMENT

During the third quarter of fiscal 1999 (quarter ended March 31, 1999), the
Company recognized a gain on the sale of its international subsidiary,
SouthTech, Inc. Additionally, the Company restructured its Convertible Debenture
agreement with Sirrom Capital and reached an amended agreement with its primary
lender, Silicon Valley Bank. These items are fully disclosed and discussed in
detail in the accompanying Management Discussion and Analysis of Financial
Condition and Results of Operations.





                                     Page 8
<PAGE>   9







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

GENERAL

Digital Transmission Systems, Inc., a Delaware corporation ("DTS" or the
"Company"), designs, manufactures, and markets a broad range of products for the
telecommunications industry. The Company's primary customers are domestic
wireless service providers, including those offering cellular telephone services
and Personal Communications Services ("PCS") and domestic and international
resellers who sell to and service end users with telecom equipment. Customers
include Nextel, Alltel, AirTouch, and GTE Mobilnet.

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. 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.

DTS markets its products through a direct sales force and several reseller
channels. Domestically, wireless service providers, including cellular,
Specialized Mobile Radio ("SMR") and PCS service companies, are targeted as
prospective customers directly by the Company's sales force. DTS utilizes
telecommunications equipment resellers in the United States to market to public
and private network customers.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998

The following table sets forth certain financial data derived from the Company's
statement of operations for the three months ended March 31, 1999 and March 31,
1998.


<TABLE>
<CAPTION>

                                                          THREE MONTHS ENDED                THREE MONTHS ENDED
                                                             MARCH 31, 1999                   MARCH 31, 1998
                                                             --------------                   --------------

                                                            $         % OF SALES           $          % OF SALES
                                                     -------------------------------------------------------------

<S>                                                         <C>       <C>                  <C>        <C>
Net sales                                                    1,922            100            6,111            100
Gross profit                                                   950             49            1,986             32
Product development                                            281             15              604             10
Selling, general and administrative                            658             34            1,772             29
Net income (loss)                                            1,112             58             (592)           (10)

</TABLE>




                                     Page 9
<PAGE>   10



NET SALES. Net sales decreased by 69%, to $1,922,000 for the three months ended
March 31, 1999 from $6,111,000 for the three months ended March 31, 1998. 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
                           MARCH 31,                MARCH 31,
                           ---------                ---------

                      1999         1998         1999      1998
                     ------       ------       ------    ------

<S>                  <C>          <C>          <C>       <C>
Flex T1/E1           $1,472       $4,466           77        73
SKYPLEX                 383        1,555           20        25
Other products           67           90            3         2
                     ------       ------       ------    ------

Totals               $1,922       $6,111          100       100
                     ======       ======       ======    ======
</TABLE>




For the three months ended March 31, 1999, revenues from the Company's FlexT1/E1
product line decreased 67% from $4,466,000 for the three months ended March 31,
1998 to $1,472,000 for the three months ended March 31, 1999. The decrease is
attributable to a reduction in shipments to customers due to working capital
restraints. Revenues from sales of the Company's SKYPLEX product decreased 75%
to $383,000 for the three months ended March 31, 1999 from $1,555,000 for the
three months ended March 31, 1998 reflecting an overall decrease in sales to
markets in Asia and Latin America, continued product quality problems associated
with the Company's international radio products and the overall decrease in
international sales as a result of the sale of the Company's international
subsidiary on February 5, 1999.

The Company expects sales for the 4th quarter of fiscal 1999 to be less than
sales for the 4th quarter of fiscal 1998 and the Company expects sales for
fiscal 1999 to be less than 1998.

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 52% from $1,986,000 for the three month period
ended March 31, 1998 to $950,000 for the three month period ended March 31, 1999
primarily due to the accompanying decrease in sales noted for the same period.
As a percentage of sales, gross profit increased 17% from 32% of sales to 49% of
sales for the three month period ended March 31, 1999. The increase is primarily
attributable to reduced compensation and overhead costs related to production
and shipping of the Company's products. Additionally, the Company recorded
$138,000 as a reduction of cost of sales for the three month period ended March
31, 1999, thereby improving the overall gross profit margin for the period. The
offset was recorded due to a change in estimate of amounts payable to one of the
Company's primary product suppliers at March 31, 1999.

PRODUCT DEVELOPMENT. Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
decreased 53%, to $281,000 for the three months ended March 31, 1999 from
$604,000 for the three months ended March 31, 1998. The decrease in product
development expense for the three month period ended March 31, 1999 is primarily
due to reduced spending on new development projects and reduction in overall
research and development charges following the sale of the Company's
international subsidiary, SouthTech, Inc., on February 5, 1999. Approximately
$4,000 of development costs related to new projects were capitalized for the
three month period ended March 31, 1999 as compared to $246,000 for the three
month period ended March 31, 1998. As a percentage of sales, product development
costs were 15% for the three months ended March 31, 1999 and 10% for the three
months ended March 31, 1998.


                                    Page 10
<PAGE>   11





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 occupancy costs and compensation expenses for administrative and
finance personnel, as well as accounting, legal and consulting fees. Selling,
general and administrative expense decreased by 63%, to $658,000 for the three
months ended March 31, 1999 from $1,772,000 for the three months ended March 31,
1998. Total selling, general and administrative costs were 34% of total sales
for the three months ended March 31, 1999 as compared to 29% of sales for the
three months ended March 31, 1998 . The overall decrease in selling, general and
administrative expenses is primarily due to the Company's reduction in personnel
compensation and other administrative costs due to several cost reduction plans
instituted by management during the fourth quarter of fiscal 1998 and the first
and second quarters of fiscal 1999. Additionally, the Company experienced an
overall reduction in selling, general, and administrative expenses following the
sale of the Company's international subsidiary on February 5, 1999. As of March
31, 1999 the Company had approximately 29 full-time employees reflecting a
decrease in overall headcount of 30, from 59 full-time employees as of March 31,
1998. Selling expense decreased by 72%, to $274,000 for the three months ended
March 31, 1999 from $991,000 for the three months ended March 31, 1998. This
decrease was due to lower sales personnel compensation costs and sales
commission costs associated with the decreased sales level for the three months
ended March 31, 1999 as compared to the three months ended March 31, 1998.
Marketing expenditures decreased by 69% from $285,000 to $88,000 due to reduced
advertising efforts and a reduction in tradeshow participation during the three
month period ended March 31, 1999. General and administrative expenses decreased
by 40%, to $296,000 for the three months ended March 31, 1999 from $496,000 for
the three months ended March 31, 1998. This decrease is primarily a result of
the overall decrease in headcount at March 31, 1999 as compared to March 31,
1998.

NET INCOME/LOSS. Net income for the three month period ended March 31, 1999 of
$1,112,000 reflects an overall increase of $1,704,000 as compared to the net
loss of $592,000 reported for the three month period ended March 31, 1998. The
increase is primarily attributable to a recorded gain of $1,100,000 resulting
from the sale of the Company's international subsidiary and an extraordinary
gain resulting from troubled debt restructurings of certain payables.
Additionally, the increase reflects the substantially lower operating costs of
the Company. The reduction in overall operating costs is due to (1) the
institution of cost reduction plans during early fiscal 1999, (2) the overall
decrease in headcount as of March 31, 1999 as compared to March 31, 1998, and
(3) the sale of the Company's international subsidiary on February 5, 1999.

NINE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998

The following table sets forth certain financial data derived from the Company's
statement of operations for the nine months ended March 31, 1999 and March 31,
1998.


<TABLE>
<CAPTION>

                                                          NINE MONTHS ENDED               NINE MONTHS ENDED
                                                             MARCH 31, 1999                 MARCH 31, 1998
                                                             --------------                 --------------

                                                           $         % OF SALES           $          % OF SALES
                                                     -------------------------------------------------------------

<S>                                                        <C>       <C>                  <C>        <C>
Net Sales                                                    4,846            100           12,687            100
Gross Profit                                                 1,801             37            3,674             29
Product development                                          1,203             25            1,620             13
Selling, general and administrative                          2,241             46            4,695             37
Net income (loss)                                             (876)           (18)          (3,050)           (24)
</TABLE>




                                    Page 11
<PAGE>   12








NET SALES. Net sales decreased by 62%, to $4,846,000 for the nine months ended
March 31, 1999 from $12,687,000 for the nine months ended March 31, 1998. 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
                      NINE MONTHS ENDED         NINE MONTHS ENDED
                           MARCH 31,                 MARCH 31,

                      1999          1998          1999      1998
                     ------       -------       -------   -------

<S>                  <C>          <C>           <C>       <C>
Flex T1/E1           $3,284       $ 8,011            68        63
SKYPLEX               1,399         4,369            29        34
Other products          163           307             3         3
                     ------       -------       -------   -------

Totals               $4,846       $12,687           100       100
                     ======       =======       =======   =======
</TABLE>




For the nine months ended March 31, 1999, revenues from the Company's FlexT1/E1
product line decreased 59% from $8,011,000 for the nine months ended March 31,
1998 to $3,284,000 for the nine months ended March 31, 1999. The decrease is
primarily attributable to reduced shipments to customers due to working capital
constraints. Revenues from sales of the Company's SKYPLEX product decreased 68%
to $1,399,000 for the nine months ended March 31, 1999 from $4,369,000 for the
nine months ended March 31, 1998 reflecting an overall decrease in sales to
markets in Asia and Latin America, continued product quality problems associated
with the Company's international radio products and the overall decrease in
international sales as a result of the sale of the Company's international
subsidiary on February 5, 1999.


The Company expects sales for the 4th quarter of fiscal 1999 to be less than
sales for the 4th quarter of fiscal 1998 and the Company expects sales for
fiscal 1999 to be less than 1998.

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 51% from $3,674,000 for the nine month period
ended March 31, 1998 to $1,801,000 for the nine month period ended March 31,
1999 primarily due to the accompanying decrease in sales noted for the same
period. As a percentage of sales, gross profit increased from 29% of sales for
the nine months ended March 31, 1998 to 37% of sales for the nine months ended
March 31, 1999. The increase is primarily attributable to a reduction in the
Company's overhead costs as a result of specific cost reduction plans that were
instituted by management during late fourth quarter of fiscal 1998 and the first
quarter of fiscal 1999 coupled with an increased sales mix of the Company's
higher margin products (Flex T1/E1).

PRODUCT DEVELOPMENT. Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
decreased 26%, to $1,203,000 for the nine months ended March 31, 1999 from
$1,620,000 for the nine months ended March 31, 1998. The decrease in product
development expense for the nine month period ended March 31, 1999 is primarily
due to reduced spending on new development projects and the overall reduction in
research and development charges following the sale of the Company's
international subsidiary on February 5, 1999. Approximately $98,000 of
development costs related to new projects were capitalized for the nine month
period ended March 31, 1999 as compared to $540,000 for the nine month period
ended March 31, 1998. As a percentage of sales, product development costs were
25% for the nine months ended March 31, 1999 and 13% for the nine months ended
March 31, 1998.

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 occupancy costs and compensation expenses for administrative and
finance personnel, as well as accounting, legal and consulting fees. Selling,


                                    Page 12
<PAGE>   13


general and administrative expense decreased by 52%, to $2,241,000 for the nine
months ended March 31, 1999 from $4,695,000 for the nine months ended March 31,
1998. Total selling, general and administrative costs were 46% of total sales
for the nine months ended March 31, 1999, as compared to 37% of sales for the
nine months ended March 31, 1998. The overall decrease in selling, general and
administrative expenses is primarily due to the Company's reduction in personnel
compensation and other administrative costs due to several cost reduction plans
instituted by management during the fourth quarter of fiscal 1998 and the first
and second quarters of fiscal 1999. As of March 31, 1999, the Company had
approximately 29 full-time employees reflecting a decrease in overall headcount
of 30, from 59 full-time employees as of March 31, 1998. Selling expense
decreased by 64%, to $909,000 for the nine months ended March 31, 1999 from
$2,549,000 for the nine months ended March 31, 1998. This decrease was due to
lower sales personnel compensation costs and sales commission costs associated
with the decreased sales level for the nine months ended March 31, 1999 as
compared to the nine months ended March 31, 1998. Marketing expenditures
decreased by 58% from $837,000 to $354,000 due to reduced advertising efforts
and a reduction in tradeshow participation during the nine month period ended
March 31, 1999. General and administrative expenses decreased by 25%, to
$978,000 for the nine months ended March 31, 1999 from $1,309,000 for the nine
months ended March 31, 1998. This decrease is primarily a result of the overall
decrease in headcount at March 31, 1999 as compared to March 31, 1998 and the
reduced operating expenses of the Company as a result of the sale of the
Company's international subsidiary on February 5, 1999.

NET LOSS. The net loss decreased to $876,000 for the nine months ended March 31,
1999, from $3,050,000 for the nine months ended March 31, 1998. The decrease is
primarily attributable to a recorded gain of $1,100,000 resulting from the sale
of the Company's international subsidiary during the 3rd quarter of fiscal 1999
and a recorded extraordinary gain from debt restructuring of certain payables.
Additionally, the decrease reflects the substantially lower operating costs of
the Company. The reduction in overall operating costs is due to (1) the
institution of cost reduction plans during early fiscal 1999, (2) the overall
decrease in headcount as of March 31, 1999 as compared to March 31, 1998, and
(3) the sale of the Company's international subsidiary on February 5, 1999.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred significant losses in recent periods and has previously been in
violation of its debt covenants. However, through the sale of its international
subsidiary, SouthTech, Inc., on February 5, 1999, and the amendment of its bank
line with Silicon Valley Bank and its debenture agreement with Tandem Capital,
the Company is currently in compliance with all loan covenants and its net
capital deficit has been reduced to $2,900,000 as of March 31, 1999. Although
these accomplishments and the profitability of the fiscal quarter ended March
31, 1999 have improved the Company's financial condition from December 31, 1998,
the Company's access to additional working capital and current cash condition
still raise doubt about the Company's ability to continue as a going concern for
a reasonable period of time.

The condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of assets and liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its financing agreements, to obtain additional
financing or refinancing as may be required, and ultimately to attain
profitability. The Company is pursuing additional equity financing through
discussions with potential investors and is pursuing potential merger or
acquisition candidates.

On October 14, 1998, NASDAQ delisted the Company because the Company did not
meet its listing requirement of minimum net assets. The Company's securities are
currently traded on the OTC Bulletin Board. The delisting action has hampered
the Company's efforts to raise capital through a private placement of its stock
with qualified investors. However, the Company has employed several programs in
an effort to help the Company preserve cash which, in the first and second
fiscal quarters of 1999, was being used to fund severance costs of terminated
employees, to fund payroll and essential expenses and the purchase of supplies
from critical vendors. First, a group of employees and affiliates volunteered to
forego or delay salary, commission and other compensation payments through a
restricted stock for cash program offered by Board resolution on August 10,
1998. Under that program a


                                    Page 13
<PAGE>   14

total of approximately 395,612 common shares were approved by the Board to
compensate those employees and affiliates in return for cancellation of salary
or other compensation payments totaling $52,320 and a delay of payment of
another $62,206. These shares cannot be pledged, sold or traded until November
30, 1999 at which time, under Rule 144, they will have the restricted legend
removed from their certificates and are freely tradable. Secondly, another
program to preserve cash has been to work out extended payment terms with
certain key material suppliers for overdue amounts payable. The Company has been
able to complete formal negotiations with three critical suppliers and establish
extended payment terms (over a 12 month period) for overdue amounts payable.
Third, non-critical suppliers have been offered settlements in the form of
uniform terms and reduced but immediate cash payments for cancellation of long
standing past due amounts. A total of $208,000 of amounts payable have been
settled for a reduced amount under these conditions. The Company has recorded an
extraordinary gain of $165,000 to reflect the settlement transactions closed
during the third quarter of fiscal 1999 and is included in the accompanying
financial statements.

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 was amended on
March 18, 1998 to increase the maximum eligible borrowing to the lesser of
$4,000,000 or 80% eligible receivables plus 30% of eligible inventory, as
defined, through the maturity date of April 10, 2000. The loan is secured by the
Company's assets and bears interest at the rate of prime plus 2.25%. A net worth
covenant was amended on March 16, 1998, requiring the Company to have a net
worth of $1,000,000. In September 1998, the Company agreed to a UCC filing
whereby all assets of the Company become collateral under the Agreement. 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 agreement term is two
years with an automatic renewal each year unless written notice of termination
is given by one of the parties. The Company issued 60,000 two year warrants to
Silicon Valley Bank at a strike price of $5.25 each as consideration for the
amended agreement. On February 25, 1999 the Company signed an amendment to the
loan agreement with Silicon Valley Bank which modified previous loan covenants.
The revised covenants are primarily based upon minimum monthly and quarterly
revenue levels. As consideration for the amended agreement, the Company issued
250,000 two year warrants for common stock of the Company at $0.119 per share
which represents the market price of the Company's common stock at the close of
business on December 2, 1998 when a new agreement was reached. The financial and
accounting value of the warrants issued is immaterial to the Company's financial
statements and has not been recorded as of March 31, 1999. Under the revised
agreement the maximum borrowing has been reduced to $1,500,000 and bears
interest at prime plus 2 1/4 (10% at March 31, 1999). The Company was in
compliance with all covenants in the revised bank agreement as of March 31,
1999.

During fiscal 1998, the Company issued $4 million of 11.5% subordinated
debentures to Sirrom Capital of Nashville, Tennessee. During March 1999, The
FINOVA Group consummated its previously announced acquisition of Sirrom Capital
Corporation. Sirrom Capital will begin operating as FINOVA Mezzanine Capital, a
specialty finance company headquartered in Nashville, Tennessee. The
aforementioned debentures were issued on September 25, 1997 with a contractual
due date of September 25, 2002. The Debenture Purchase Agreement contains
numerous rights, privileges, and conditions in favor of the lender, only certain
of which have been included herein. 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 conversion price changes
to $8.00 per share if the Company's common stock is trading for less than that
amount on September 25, 1998. 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 (a) there is a change in control, as
defined in the Debenture Agreement, (b) the Company's common stock is delisted
from NASDAQ, or (c) the Company's common stock ceases to be publicly traded at
the sum of the principal amount of the debentures tendered for redemption, plus
any accrued and/or unpaid interest outstanding related to the debentures, plus
15% interest on outstanding principal and interest amounts due, plus any expense
or costs owed to the lender as set forth in the Debenture Agreement. Due to
continued noncompliance with debt covenants and the NASDAQ listing criteria, the
Company was delisted as of October 14, 1998. However, accompanying the sale of
the Company's international subsidiary, SouthTech, Inc., Sirrom Capital agreed
to restructure the $4,000,000 debenture with the Company by transferring
$1,000,000 to SouthTech, Inc. as it was sold to Chapala Communications. In
addition, Sirrom Capital agreed to convert $1,000,000 along with accrued but
unpaid interest of $314,333 into Series A convertible preferred stock which
bears no dividends and is convertible into common stock at $1.00 per share. The
remaining $2,000,000 debenture, convertible now at $1.00 per share and bearing
interest at 10% per annum, requires an interest payment of $200,000 on February
5, 2000.


                                    Page 14
<PAGE>   15

After February 5, 2000, interest under the debenture is to be paid (i) on each
June 1, September 1, December 1, and February 1 until and including February 1,
2002 (ii) on the first day of each month commencing March 1, 2002 and (iii) on
the final maturity date of February 5, 2004. Monthly interest payments shall be
accompanied by payments of principal on the first day of each month (i)
beginning on February 1, 2002, in the amount of $55,555 each, and (ii) beginning
on February 1, 2003 in the amount of $111,111 each, and (iii) all remaining
principal shall become due on February 5, 2004. As consideration for the
restructuring of the convertible debenture by Sirrom Capital, the Company
granted 702,615 warrants to Sirrom Capital with a strike price of $1.00 per
share. The warrants were valued at $182,000 and has been allocated to Other
Assets within the accompanying balance sheet. The warrant value will be
amortized over the life of the amended debenture agreement which approximates 5
years.

On December 31, 1998 an option to purchase 1,738,159 common shares of DTS stock
was granted to MicroTel International ("MicroTel") by Peregrine Ventures, a
California based limited partnership and shareholder of DTS, in consideration
for a certain amount of MicroTel common stock. On the same date, the two DTS
Board members representing Peregrine Ventures interests, tendered their
resignations effective immediately. The option, due to expire on January 31,
1999, was exercised by MicroTel and thus became DTS' largest single shareholder,
holding approximately 40% of the then outstanding stock. Two MicroTel
representatives were elected to the DTS Board of Directors at the DTS
Shareholders Meeting held on April 13, 1999. MicroTel is a Delaware corporation
whose stock is publicly traded in the NASDAQ exchange under the ticker symbol
MCTLC. In addition to various subsidiaries whose principal business is to
manufacture and market power supplies, keypads, video displays, circuit boards
and other electronic assemblies to a variety of aerospace and communications
clients MicroTel also owns two CXR subsidiaries - CXR Telcom and CXR S.A. -
which manufacture and market telecommunications products to telco and private
network users.

At March 31, 1999, the Company had approximately $150,000 in cash and cash
equivalents. For the nine months ended March 31, 1999, $75,000 was provided by
operations as compared to $2,500,000 used in operations for the same period
ending March 31, 1998. The net loss for the nine month period ended March 31,
1999 of $876,000 includes non-cash depreciation and amortization charges of
$757,000, a non-cash recorded gain of $1,100,000 recognized upon the sale of the
Company's international subsidiary, SouthTech, Inc. and an additional non-cash
recorded gain of $165,000 recognized in conjunction with certain debt
restructuring. Exclusive of the non-cash charges, cash was provided for
operations primarily through a decrease in accounts receivable of $740,000 and a
decrease in inventory of $846,000.

The Company purchased $62,000 and $576,000 of property, plant and equipment
during the nine months ended March 31, 1999 and 1998, respectively. In addition,
the Company capitalized certain product development expenses paid to outside
contractors. During the nine months ended March 31, 1999, the Company
capitalized $98,000 of such costs as compared to capitalized costs of $540,000
for the nine months ended March 31, 1998.

CREATION AND SALE OF SOUTHTECH, INC.

In fiscal 1998 the DTS Board of Directors directed the creation of a wholly
owned subsidiary - SouthTech, Inc. ("SouthTech"), a Georgia corporation - to
which certain assets and liabilities will pertain and whose business purpose is
the administration and growth of the Company's international business. The
SKYPLEX and DIV product lines and associated intellectual property together with
the payables and receivables pertaining to the sales realized from those product
lines form part of the assets and liabilities transferred. Since its creation,
investment capital had been sought for the subsidiary in order to fund its
operating losses which have been substantial in the past for the Company's
international business. Cash resources of the Company had been used for the
purposes of developing the SKYPLEX I product line, a set of microwave radio
products utilizing spread spectrum technology, and developing sales distribution
channels in Latin America, Asia Pacific and the Mid-East global sectors.

The Company entertained an offer from a private group of investors to buy
SouthTech, Inc. in the latter part of 1998 but the offer was later withdrawn on
November 10, 1998. In late November 1998, Chapala Communications, Inc.
("Chapala"), a Georgia based company, offered to purchase the stock of
SouthTech. The sale involved the transfer of certain assets and liabilities of
SouthTech, Inc. to Chapala. The transaction resulted in approximately $981,000
of assets and $2,081,000 of liabilities being transferred to Chapala. As
additional consideration for the sale, the Company received 19.5% of Chapala
stock ownership. The Company has valued their interest in Chapala at $0 within
the accompanying financial statements and has no obligations to fund the
Company's future operations or present liabilities. The transaction was closed
on February 5, 1999.

                                    Page 15
<PAGE>   16


In conjunction with the sale of SouthTech, Inc., the Company was issued a note
from Chapala Communications in the amount of $900,000 on February 5, 1999. The
note represents the portion of a significant vendor liability that Chapala will
be assuming upon the Company obtaining formal waivers and consents from the
vendor. The liability represents approximately $900,000 and is recorded within
the accompanying balance sheet as of March 31, 1999. In lieu of the formal
consent or novation from the vendor on February 5, 1999, the Company accepted
the $900,000 note from Chapala and has deferred $900,000 of the gain associated
with the transaction. The Company expects to receive a formal consent from the
vendor with respect to transfer of a portion of the $900,000 liability during
the 4th quarter of fiscal 1999. Upon receipt of such a consent, the Company will
recognize an additional gain to the extent of the liability transfer.

Accompanying the sale of SouthTech, the Company completed the restructuring of
the Sirrom Capital convertible debenture originally issued September 25, 1997
(as discussed within Liquidity and Capital Resources above).

ELECTION OF BOARD MEMBERS & SHAREHOLDER MEETING - APRIL 13, 1999

On December 31, 1998, Frank LaHaye (first elected in 1993) and Gene Miller
(first elected in 1990), two DTS Board members representing Peregrine Ventures,
a venture capital firm and the Company's largest single shareholder, tendered
their resignations effective the same day. The Board of Directors accepted their
resignations and subsequently proposed two replacement candidates for election
to the DTS Board of Directors at the Shareholder Meeting scheduled for Tuesday,
April 13, 1999 at the Company headquarters. The candidates were nominated by
representatives from MicroTel International. With 90% of the shares outstanding
voting in the affirmative, the two candidates from MicroTel - Carmine T. Oliva
and Jim Butler - were elected to the DTS Board of Directors at the April 13,
1999 Shareholders Meeting. Further, Mr. Oliva was elected Chairman of the Board
at a DTS Board meeting held April 13, 1999. The term for Mr. Robert Francis
(appointed in 1995 and elected for a two year term in October 1996) expired in
October 1998, however, Mr. Francis continued to serve on the Board until April
12, 1999 with the consent of the other Board Members. The current Board of
Directors of the Company consists of Mr. Carmine T. Oliva (Chairman and CEO,
MicroTel International, Inc.), Chairman; Mr. Jim Butler (CFO, MicroTel
International, Inc.); Mr. Andres C. Salazar (CEO, DTS); and Mr. Edwin Kantor
(Vice Chairman, Barrington Capital).

Two other proposals were voted on at the April 13, 1999 Shareholder Meeting with
both being voted in the affirmative by a substantial margin from the ballots
received by the Company. One proposal concerned the increase of stock options
for employees and affiliates as a amendment to the Company's 1996 Stock
Incentive Plan. An additional 400,000 options were added to the current option
pool of that Plan. The remaining proposal requested that KPMG LLP be approved
and retained as the Company's independent auditors. The firm has been providing
auditing services to the Company since July 1996.

MANAGEMENT CHANGES AND EMPLOYMENT AGREEMENTS WITH CERTAIN EMPLOYEES

At the Board Meeting held on April 13, 1999, a resolution was passed that
approved certain management changes and accompanying employment agreements. Mr.
Andres C. Salazar, then DTS President and CEO was re-appointed CEO and granted
an employment agreement for one year, renewable annually. Simultaneously, Mr.
Salazar was appointed Senior Vice President and Group Executive for MicroTel
International by the MicroTel Board of Directors. In that role, Mr. Salazar is
expected to perform strategic planning services for MicroTel. His advisory
services, expected to take up approximately 60% of his time, and expenses
incurred on behalf of MicroTel will be reimbursed to DTS by MicroTel. Mr.
Woodrow B. Cannon, then DTS Vice President and General Manager, was appointed
DTS President and Chief Operating Officer and granted an employment agreement
for two years, renewable annually for one year after the first two years. Copies
of both of these agreements can be found in adjunct SEC filings by the Company.

SEASONALITY

The Company's sales have been subject to quarterly fluctuations mainly due to
the purchasing cycle of the Company's major customers. Other fluctuations occur
due to increased buildout of the telecommunications infrastructure during the
summer months. 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 will decrease the seasonality of its sales. The Company operates with a
moderate level of backlog for each product line due to advance purchase
commitments and production lead times.


                                    Page 16
<PAGE>   17


YEAR 2000 (Y2K) IMPACT ON COMPANY'S INFORMATION TECHNOLOGY

The Company operates an Enterprise Resource Planning ("ERP") software system
which has modules supporting order entry, planning, inventory management,
operations, and general ledger functions. The vendor of this information system
has sent the Company a letter indicating the ERP system is Y2K compliant. The
hardware platform vendor, through its web presence, also indicates that the
system is Y2K compliant.

Most of the desktop computing systems used at the Company were manufactured
after 1995. They use operating system and document preparation software from
Microsoft Corporation. These systems are generally compliant with the Year 2000
requirements. The Company does operate older PC's in its manufacturing and
engineering organizations, but they are not used in time or date critical
operations.

The Company's products are designed to be Year 2000 compliant and have been
adequately tested as to conformance with Year 2000 date processing. All products
tested passed the conformance test and have been appropriately certified as Year
2000 compliant by the Company. The Company did not incur and does not expect to
incur any material costs to address Year 2000 compliance issues. The Company is
in the process of developing a contingency plan to address any instances of Year
2000 non-compliance and expects to complete such a contingency plan by September
1999. The Company has a number of material relationships with third parties and
is aware of the risks involved and is currently analyzing the potential impact
on future operations. The Company is, however, aware of the risk that third
parties, including vendors and customers of the Company, will not adequately
address the Year 2000 problem and the resultant potential adverse impact on the
Company.

Notwithstanding the above, there can be no assurance that the Company's internal
systems or products will operate beyond 1999 or that major business disruptions
will not occur in mission critical systems and processes.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected financial information about operating
segments in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in the annual report as of
June 30, 1999.

In October 1997, the Accounting Standards Executive Committee issued Statement
of Position 97-2, Software Revenue Recognition ("SOP 97-2"). SOP 97-2 is
effective for financial statements for fiscal years beginning after December 15,
1997. The Company does not expect that adoption of SOP 97-2 will significantly
affect its results of operations because the Company does not believe that SOP
97-2 applies to most sales. However, if the Company's products become subject to
the provisions of SOP 97-2, the adoption of SOP 97-2 could significantly
negatively affect its results of operations.

IMPORTANT CONSIDERATIONS RELATED TO FORWARD-LOOKING STATEMENTS

Certain statements contained in this filing which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by the Company with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of the Company which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenue, income or loss, earnings or loss per share, the payment or nonpayment
of dividends, capital structure and other financial items; (ii) statements of
plans and objectives of the company's management or Board of Directors,
including those relating to products or services; (iii) statements of future
economic performance; and (iv) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.

                                    Page 17
<PAGE>   18

Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (I) the strength of the U.S. economy
in general and relevant foreign economies; (ii) the Company's performance under
current and future contracts; (iii) inflation and interest rate fluctuations;
(iv) timely and successful implementation of processing systems to provide new
products, improved functionality and increased efficiencies; (v) technological
changes; (vi) acquisitions; (vii) the ability to increase market share and
control expenses; (viii) changes in laws or regulations or other industry
standards affecting the Company's business which require significant product
redevelopment efforts; (ix) the effect of changes in accounting policies and
practices as may be adopted by the Financial Accounting Standards Board; (x)
changes in the Company's organization, compensation and benefit plans; (xi) the
costs and effects of litigation and of unexpected or adverse outcomes in such
litigation; (xii) failure to successfully implement the Company's Year 2000
modification plans substantially as scheduled and budgeted; and (xiii) the
success of the Company at managing the risks involved in the foregoing.

Such forward-looking statements speak only as of the date on which statements
are made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made to reflect to occurrence of unanticipated events.



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

                                    Page 18
<PAGE>   19




PART II. OTHER INFORMATION
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>


ITEMS 1 -  5 ARE NOT APPLICABLE.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

<S>      <C>              <C>
(A)      EXHIBITS

         Exhibit
         Number            Description of Exhibits

         10.25             Second Amendment to Debenture Purchase Agreement between Sirrom Capital and the
                           Company.

         10.26             Second Amendment to Subordinated Debenture Agreement between Sirrom Capital and
                           the Company.

         10.27             Stock Purchase Warrant Agreement between Sirrom Capital and the Company.

         10.28             Shareholders' Agreement with respect to shares of Chapala Communications, Inc. and the
                           Company.

         10.29             Pledge and Security Agreement between MicroTel International, Inc. and Sirrom Capital.

         10.30             Promissory Note between SouthTech, Inc. and the Company.

         10.31             Security Agreement between SouthTech, Inc. and the Company.

         10.32*            Stock Purchase Agreement between Chapala Communications, Inc. and the Company.

         10.33**           Employment Agreement between Woodrow B. Cannon and the Company.

         10.34**           Employment Agreement between Andres C. Salazar and the Company.

         27.0              Financial Data Schedule (for SEC use only)


(B)      REPORTS ON FORM 8-K

         Form 8-K dated February 5, 1999, filed with the Securities and Exchange
         Commission on February 22, 1999, as amended by Form 8-K/A filed with
         the Securities and Exchange Commission on February 23, 1999.
</TABLE>

*     Incorporated by reference to the corresponding exhibit of the Registrant's
      Form 8-K filed February 22, 1999.

**    Constitutes a management contract or compensatory plan or arrangement
      required to be filed.


                                    Page 19
<PAGE>   20

                                   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:   May 15, 1999                 By: /s/ Andres C. Salazar
                                        -------------------------------
                                             Andres C. Salazar, President and
                                             Chief Executive Officer


Date:   May 15, 1999                 By: /s/  Clive N. W. Marsh
                                        -------------------------------
                                              Clive N. W. Marsh, Controller
                                              (Principal Accounting Officer)


                                    Page 20