<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, 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 May 1,
1997 was 4,066,126.

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, 1997

                                      INDEX
<TABLE>
<CAPTION>

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

                    Balance Sheets at March 31, 1997 
                    (Unaudited) and June 30, 1996                           3

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

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

                    Statements of Cash Flows for the Nine Months Ended
                    March 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 11.1        Statement of Computation of per share loss             16

Exhibit 27.0        Financial Data Schedule (SEC use only)                 17
</TABLE>





                                     Page 2


<PAGE>   3

                         PART I FINANCIAL INFORMATION

Item 1.  Financial Statements

                       Digital Transmission Systems, Inc.

                                 BALANCE SHEETS
                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                 March 31, 1997     June 30, 1996
                                                                    Unaudited
                                                                 --------------     -------------
<S>                                                                 <C>              <C>
                                ASSETS
Current assets:
Cash and cash equivalents                                           $    319         $  1,586
Investment securities                                                    597            2,001

Trade accounts receivable, net of allowances of $95 and
  $50 at March 31, 1997 and June 30, 1996, respectively                3,576            3,595
Other receivables                                                         23               75
Inventories                                                            3,287            2,341
Prepaid expenses                                                         173              262
Deferred tax benefit                                                     250              250
                                                                    --------         --------
  Total current assets                                                 8,225           10,110
                                                                    --------         --------
Property and equipment, net of accumulated
  depreciation and amortization                                          940              445
                                                                    --------         --------
Other assets
 Deferred tax bencfit                                                     35               35
 Intangible assets                                                     1,678              368
 Other assets                                                             41               26
                                                                    --------         --------
Total assets                                                        $ 10,919         $ 10,984
                                                                    ========         ========
                                LIABILITIES AND SHAREHOLDERS'EQUITY
Current liabilities:
 Accounts payable - trade                                           $  2,177         $  1,901
 Accrued liabilities                                                     355              376
 Warranty accrual                                                         93              102
 Line of credit                                                        1,147               --
                                                                    --------         --------
   Total current liabilities                                           3,772            2,379
                                                                    --------         --------

Shareholders' equity:
Preferred stock; 3,000,000 shares authorized;
  0 issued and outstanding                                                --               --
Common stock - $.01 par value; 15,000,000 shares authorized;
  4,039,998 and 3,920,700 issued and outstanding
  at March 31, 1997 and June 30, 1996, respectively                       40               39
Additional paid-in capital                                            11,173           11,137
Deferred compensation                                                   (152)            (188)
Accumulated deficit                                                   (3,914)          (2,383)
                                                                    --------         --------
Total shareholders' equity                                             7,147            8,605
Commitments and contingencies                                             --               --
                                                                    --------         --------

                                                                       7,147            8,605
                                                                    --------         --------
  Total liabilities and shareholders' equity                        $ 10,919         $ 10,984
                                                                    ========         ========
</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 MARCH 31
                                                                    ---------------------------
                                                                       1997            1996
                                                                     Unaudited       Unaudited
                                                                     ---------       ---------
<S>                                                                  <C>             <C>
Net sales                                                            $ 4,095         $  3,210

Cost of sales                                                          2,333            1,879
                                                                     -------         --------
 Gross profit                                                          1,762            1,331
                                                                     -------         --------

Selling, general and administrative                                    1,551              926

Product development                                                      419              642
                                                                     -------         --------

 Total operating expenses                                              1,970            1,568
                                                                     -------         --------
 Operating income (loss)                                                (208)            (237)

Other income (expense), net                                               21               20
                                                                     -------         --------

Income (loss) before income tax expense                                 (187)            (217)

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

Net loss                                                             ($  187)        ($   217)
                                                                     =======         ========
Net loss attributable to
 common shareholders                                                 $  (187)        $   (217)
                                                                     =======         ========

Net loss per common and common
 equivalent shares for 1997 and per pro forma
 common shares for 1996 (see note 2)                                 $ (0.05)        $  (0.07)
                                                                     =======         ========

Weighted average common and common
 equivalent shares outstanding for 1997 and
 pro forma shares outstanding for 1996                                 4,024            3,280
                                                                     =======          =======

</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>

                                                                     NINE MONTHS ENDED MARCH 31
                                                                     --------------------------
                                                                        1997            1996
                                                                     Unaudited        Unaudited
                                                                     ---------        ---------
<S>                                                                  <C>               <C>
Net sales                                                            $10,773          $ 7,851
Cost of sales                                                          6,245            4,467
                                                                     -------          -------
 Gross profit                                                          4,528            3,384
                                                                     -------          -------

Selling, general and administrative                                    4,346            2,852
Product development                                                    1,795            1,791
                                                                     -------          -------
 Total operating expenses                                              6,141            4,643
                                                                     -------          -------

 Operating income (loss)                                              (1,613)          (1,259)

Other income (expense), net                                               81               45
                                                                     -------          -------
Income (loss) before income tax expense                               (1,532)          (1,214)

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

Net loss                                                            ($ 1,532)        ($ 1,214)
                                                                     =======          =======

Accretion of redemption value and
 dividends accrued on redeemable convertible
 preferred stock                                                           -              169
                                                                     -------          -------
                                                                      
Net loss attributable to
 common shareholders                                                 $(1,532)         $(1,383)
                                                                     =======          =======
Net loss per common and common
 equivalent shares for 1997 and per pro forma 
 common shares for 1996 (see note 2)                                 $ (0.39)         $ (0.39)
                                                                     =======          =======

Weighted average common and common
 equivalent shares outstanding for 1997 and
 pro forma shares outstanding for 1996                                 3,968            3,084
                                                                     =======          =======

Pro forma net income (loss) per share:
 Net income (loss)                                                                     (1,214)       
                                                                                      =======               
Pro forma net income (loss) per share                                                 $(0.39)       
                                                                                      =======               
Pro forma common shares outstanding                                                     3,084        
                                                                                      =======

</TABLE>


See accompanying notes to financial statements.







                                     Page 5





<PAGE>   6




                       DIGITAL TRANSMISSION SYSTEMS, INC.

                            STATEMENTS OF CASH FLOWS

                                 (in thousands)

<TABLE>
<CAPTION>

                                                                       NINE MONTHS ENDED MARCH 31
                                                                   --------------------------------
                                                                         1997             1996
                                                                      Unaudited         Unaudited
                                                                      ----------        ---------
<S>                                                                   <C>               <C>
Cash flows from operating activities:
 Net loss                                                             $( 1,532)        $( 1,214)

 Adjustments to reconcile net loss
   to net cash used in operating activities:
     Depreciation and amortization                                         494              290                
     Change in valuation reserves                                            4               --                
     Amortization of deferred compensation expense                          36               65                
                                                                                                              
 Changes in assets and liabilities:                                                                           
     Trade and other accounts receivable                                    26             (475)               
     Inventories                                                          (905)            (352)                  
     Prepaid expenses                                                       90              (25)                  
     Trade accounts payable                                                276              891                   
     Accrued liabilities                                                   (21)             547                                    
     Deposits                                                              (15)              --                     
     Warranty reserve                                                       (9)              --                   
                                                                      --------             ----                   
 Net cash used in operating activities                                  (1,556)            (273)
                                                                      --------             ----


 Cash flows from investing activities:
    Purchases of property and equipment                                   (982)            (200)
    Additions to capitalized product development costs                  (1,317)              --
    Proceeds from maturity of investment securities                      1,404           (3,000)
                                                                      --------             ----
 Net cash used in investing activities                                    (895)          (3,200)
                                                                      --------             ----
                                                                      
 Cash flows from financing activities:
    Net borrowings under
      line of credit agreement                                           1,147             (450)
    Proceeds from issuances of common stock                                --             6,018
    Preferred dividends paid                                               --              (200)
    Proceeds from exercise of stock options                                 37                2
                                                                      --------             ----
 Net cash provided by financing activities                               1,184            5,370
                                                                      --------             ----

 Net increase (decrease) in cash and cash equivalents                   (1,267)           1,897
 Cash and cash equivalents AT beginning of period                        1,586            1,357
                                                                      --------             ----
 Cash and cash equivalents at end of period                           $    319         $  3,254
                                                                      ========            =====
 Supplemental disclosure of cash paid for income taxes and interest
     Cash paid for income taxes                                       $      1               --
     Cash paid for interest                                           $     26               55
Supplemental disclosure of noncash investing and financing activities:  
    Note issued for purchase of SKYPLEX                               $     --         $    200
    Preferred stock converted into common stock                             --            3,496
    Common stock exchanged for preferred stock dividends                    --              323
</TABLE>



See accompanying notes to financial statements.



                                     Page 6






<PAGE>   7







                       DIGITAL TRANSMISSION SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                                 MARCH 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, wireless and internet 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 nine months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended June 30, 1997.
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, 1996.

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

Net income (loss) per share for the three months and nine months ended March 31,
1997, is computed using the weighted average number of outstanding shares of
common stock and common stock equivalents (when dilutive). Common stock
equivalents consist of the Company's common stock issuable upon the exercise of
stock options and warrants using the treasury stock method. Net income (loss)
per share computed on a fully diluted basis is not significantly different than
the weighted average number of shares computed using the primary method
described above.

For the three months and nine months ended March 31, 1996, net income (loss) per
share is computed using pro forma shares outstanding, giving effect to the
conversion of 1,813,289 shares of redeemable convertible preferred stock into an
equal number of shares of common stock in conjunction with the Company's public
stock offering on March 4, 1996. Additionally, the pro forma earnings per share
gives effect to the issuance of 69,383 shares of common stock in exchange as
partial consideration for accrued dividends on preferred stock.



                                     Page 7


<PAGE>   8





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

GENERAL

Digital Transmission Systems, Inc. (DTS) designs, manufactures, markets and
services a broad range of telecommunications products worldwide. The Company's
primary customers are long distance carriers and wireless and internet 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.

DTS has been and currently is a major supplier for T1 and T3 network control
systems to MCI. Sales to MCI have been significant in each of the last four
fiscal years. MCI sales accounted for 63% of net sales for the year ended June
30, 1996, down from 84% in the previous year. For the nine months ended March
31, 1997, MCI accounted for 36% of total revenues. The Company's strategy for
the past two years, while maintaining its established relationships with MCI and
Sprint, has been to leverage its technology and develop new network access
products and sales channels for domestic and international markets. As part of
that strategy, the Company has focused its direct sales force on the wireless
infrastructure market in the U.S. and has engaged resellers for the
telecommunications markets of developing countries in Latin America, Asia and
Eastern Europe. The result of this marketing strategy is reflected in the growth
in sales of the newer network access products - FlexT1/E1, SKYPLEX and SKYPLEX
II/FlexAir, as well as in the increase of international sales from nine percent
of total sales for the quarter ended March 31, 1996 to 27% of total sales for
the quarter ended March 31, 1997.


RESULTS OF OPERATIONS

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

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

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED           THREE MONTHS ENDED
                                              MARCH 31, 1997               MARCH 31, 1996
                                            -------------------          ------------------
                                                          % of                         % of
                                                $        Sales               $        Sales
                                           -------       -----             -------    -----
<S>                                        <C>           <C>               <C>        <C>
Net sales                                  $ 4,095         100             $ 3,210      100           
Gross profit                                 1,761          43               1,331       41           
Product development                            419          10                 642       20           
Selling, general and administrative          1,551          38                 926       29           
Net income (loss)                             (187)         (5)               (217)      (7)          
</TABLE>



Net Sales. Net sales increased by 28%, to $4,095,000 for the three months ended
March 31, 1997 from $3,210,000 for the three months ended March 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 8

<PAGE>   9

<TABLE>
<CAPTION>

                                                                          PERCENTAGE OF
                                                                              TOTAL
                                           THREE MONTHS ENDED           THREE MONTHS ENDED
                                              MARCH 31,                      MARCH 31,
                                           ------------------           ------------------
                                         1997           1996            1997          1996
                                       -------         ------          -------       -------
<S>                                   <C>            <C>               <C>           <C>
Network control                       $ 1,463        $ 2,072             36             65
FlexT1/E1                               1,180            789             29             24
SKYPLEX and SKYPLEX II/FlexAir            940            287             23              9
DIV modem                                 260             32              6              1
Other products                            252             30              6              1
</TABLE>



For the three months ended March 31, 1997 and 1996, MCI accounted for 30% and
62% of net sales, respectively. Results for the three months ended March 31,
1997 reflect a shift in product mix to the Company's newer products-FlexT1/E1,
SKYPLEX and SKYPLEX II/FlexAir. The FlexT1/E1 product accounted for 29% of sales
for the three months ended March 31, 1997, as compared to 24% for the three
months ended March 31, 1996. The SKYPLEX and SKYPLEX II/FlexAir line accounted
for 23% of sales for the three months ended March 31, 1997, primarily reflecting
sales to markets in Latin America and Asia, up from 9% of sales for the three
months ended March 31, 1996.

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, amortized amounts of capitalized product development costs, along with
the support and warranty expense associated with such products. Gross profit
increased by 32%, to $1,762,000 for the three months ended March 31, 1997 from
$1,331,000 for the three months ended March 31, 1996. As a percentage of sales,
gross profit increased slightly to 43% for the three months ended March 31, 1997
from 41% for the three months ended March 31, 1996. The increase in gross margin
is due to larger, system sales in the Flex T1/E1 product line which have higher
gross margins than previous, smaller Flex sales. In addition, the increase in
total sales volume allows certain fixed manufacturing costs to be spread over a
greater number of units. Margins were negatively impacted by the increase in
sales of the SKYPLEX line which has lower gross margins than other products.
Average SKYPLEX margins are expected to increase as the Company ships its newly
designed SKYPLEX I product.

Product Development. Product development expense consists of personnel costs,
consulting, prototyping, supplies and depreciation expenses. Product development
expenses decreased by 35%, to $419,000 for the three months ended March 31, 1997
from $642,000 for the three months ended March 31, 1996. Additionally, the
Company incurred $428,000 of product development costs that were capitalized.
The Company amortized $8,000 of capitalized product development costs during the
three months ended March 31, 1997. The decrease in product development expenses
resulted from the higher level of development spending that was capitalized
during the final development and testing stages of the Company's new radio
product, SKYPLEX I. As a result, product development expenses as a percent of
total revenue decreased to 10% for the three months ended March 31, 1997 from
20% in the three months ended March 31, 1996. It is expected that total spending
on product development will continue to increase on an absolute basis, but will
grow more slowly than total revenue.

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,
depreciation expense, as well as accounting, legal and consulting fees.






                                     Page 9

<PAGE>   10

Selling, general and administrative expense increased by 67%, to $1,551,000 for
the three months ended March 31, 1997 from $926,000 for the three months ended
March 31, 1996. Total selling, general and administrative costs were 38% of
total sales for the three months ended March 31, 1997, which was up from 29% of
sales for the three months ended March 31, 1996. Selling expense increased by
70%, to $831,000 for the three months ended March 31, 1997 from $489,000 for the
three months ended March 31, 1996. This increase was due to the expansion of the
Company's international sales efforts as well as the additional costs of selling
the Company's new products domestically. 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 increased from $237,000 for the three months ended March
31, 1996 to $345,000 for the three months ended March 31, 1997. General and
administrative expenses increased by 88%, to $375,000 for the three months ended
March 31, 1997 from $200,000 for the three months ended March 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. In addition, there are higher administrative costs
associated with the Company's responsibilities as a publicly traded entity.

Net Loss. The net loss decreased to $187,000 for the three months ended March
31, 1997 from $217,000 for the three months ended March 31, 1996. The
improvement was due to the increase in gross margin of $431,000 which was
balanced by increased expenses of $401,000, of which, $342,000 was for increases
in selling expenses.


NINE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996

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

<TABLE>
                                                  NINE MONTHS ENDED               NINE MONTHS ENDED
                                                   MARCH 31,1997                    MARCH 31,1996
                                             ------------------------          ---------------------
                                                               % OF                            % OF
                                               $              SALES              $            SALES
                                           --------           ------         --------         --------
<S>                                        <C>                <C>            <C>              <C>
Net sales                                  $ 10,773              100         $  7,851              100
Gross profit                                  4,528               42            3,384               43
Product development                           1,795               17            1,791               23
Selling, general and administrative           4,346               40            2,852               36
Net income (loss),                           (1,532)             (14)          (1,214)             (15)
</TABLE>

Net Sales. Net sales increased by 37%, to $10,773,000 for the nine months ended
March 31, 1997 from $7,851,000 for the nine months ended March 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      
                                         NINE MONTHS ENDED             NINE MONTHS ENDED         
                                             MARCH 31,                     MARCH 31,             
                                       --------------------           -----------------
                                         1997          1996           1997         1996
                                       ------         -----           ----         ----
<S>                                    <C>            <C>             <C>          <C>
Network control                        $4,751         5,750            44            73
FlexT1/EI                               2,996         1,294            28            17
SKYPLEX and SKYPLEX II/Flex Air         2,245           423            21             5
DIV modem                                 399           271             4             4
Other products                            382           113             3             1
</TABLE>

Revenue from MCI, as a percentage of total Company revenues, dropped from 67%
for the nine months ended March 31, 1996 to 36% for the nine months ended March
31, 1997. While MCI revenue dropped from $5,268,000 to $3,895,000 during this
period, revenue from the Company's other products increased from $2,583,000 to
$6,878,000 (an increase of 266%) during the same period. Flex products accounted
for 28% of sales for the nine months ended March 31, 1997, as compared to 17%
for the nine months ended March 31, 1996. SKYPLEX sales increased from 5% for
the nine months ended March 31, 1996 to 21% for the nine months ended March 31,
1997 due to the increased selling efforts in international markets.

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, amortized amounts of capitalized product development costs, along with
the support and warranty expense associated with such products. Gross profit
increased by 33%, to $4,528,000 for the nine months ended March 31, 1997 from
$3,384,000 for the nine months ended March 31, 1996. As a percentage of sales,
gross profit decreased slightly to 42% for the nine months ended March 31, 1997
from 43% for the nine months ended March 31, 1996. The decrease in gross margin
percentage is due to the increasing sales of the Company's SKYPLEX product line
which has lower gross margins than the Company's other product lines. Average
SKYPLEX margins should increase as the Company ships larger volumes of its new
SKYPLEX I product.

Product Development. Product development expense consists of personnel costs,
consulting, prototyping, supplies and depreciation expenses. Product development
expenses increased slightly to $1,795,000 for the nine months ended March 31,
1997 from $1,791,000 for the nine months ended March 31, 1996. Additionally, the
Company incurred $1,368,000 of product development costs that were
capitalized. The Company amortized $8,000 of capitalized product development
costs during the nine months ended March 31, 1997. The increase in product
development expenses resulted from increased engineering investment in new
products for the FlexT1/E1 and SKYPLEX product lines balanced by a reduction in
expenses for development costs that were capitalized. Management expects that
this trend of increasing product development expense will continue as the
Company further develops its product lines. As a percentage of sales, product
development costs were 17% for the nine months ended March 31, 1997 and 23% for
the nine months ended March 31, 1996. While product development expenses will
continue to increase on an absolute basis, as total revenues increase, it is
expected that product development expenses as a percentage of total revenues
will decrease.

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,
depreciation expense, as well as accounting, legal and consulting fees.



                                    Page 11


<PAGE>   12

Selling, general and administrative expense increased by 52%, to $4,346,000 for
the nine months ended March 31, 1997 from $2,852,000 for the nine months ended
March 31, 1996. Total selling, general and administrative costs were 40% of
total sales for the nine months ended March 31, 1997 compared to 36% for the
nine months ended March 31, 1996. Selling expense increased by 78%, to
$2,459,000 for the nine months ended March 31, 1997 from $1,384,000 for the nine
months ended March 31, 1996. This increase represents the Company's continued
investment in establishing its products in new markets both domestically and
internationally. 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 increased from $855,000 to $900,000 during the same
period, due to continued increases in investments in marketing and advertising
for the Company's new products and the marketing support required to establish
sales in new geographic areas. General and administrative expenses increased by
61%, to $987,000 for the nine months ended March 31, 1997 from $613,000 for the
nine months ended March 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. In addition, there are higher administrative costs
associated with the Company's responsibilities as a publicly traded entity.

Net Loss. The net loss increased to $1,532,000 for the nine months ended March
31, 1997 from $1,383,000 for the nine months ended March 31, 1996. While gross
profit increased by more than $1,144,000, selling expenses increased by
$1,075,000 and general and administrative expenses increased by $374,000.


LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1997, the Company had approximately $916,000 in cash and investment
securities.

On April 10, 1997, the Company signed an agreement securing a bank line of
credit with a borrowing limit up to $2,500,000 based on eligible accounts
receivable. The borrowings are secured by the Company's assets and will bear
interest at prime plus 2.25% per annum.

For the nine months ended March 31, 1997, the Company used $1,556,000 in cash
from operating activities as compared to $273,000 for the same period the
previous year. This change of $1,283,000 was primarily due to an increase in
inventory of $905,000. In addition, $1,532,000 of cash was used in the Company's
net loss for the period, as adjusted for changes in depreciation, amortization
and reserves. Cash outflows were partially offset by increases in accounts
payable and accrued liabilities of $255,000.

The Company purchased $982,000 and $200,000 of property, plant and equipment
during the nine months ended March 31, 1997 and 1996, respectively. In addition,
the Company capitalized certain product development expenses. During the nine
months ended March 31, 1997, the Company capitalized $1,368,000 of such costs.
The Company realized cash from the maturities of $1,404,000 of short-term
investments during the nine months ended March 31, 1997, resulting in net cash
flows used in investing activities of $895,000.

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.




                                    Page 12


<PAGE>   13








SEASONALITY

The Company's sales are subject to quarterly fluctuations mainly due to the
purchasing cycle of the Company's significant customers such as MCI and other
telecommunications carriers. 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. The
Company typically operates with a backlog of orders for its network control
equipment, but carries little backlog for the FlexTl/E1 and FlexAir and other
products.


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

(A) EXHIBITS

    Exhibit
     Number         Description of Exhibits
     ------         -----------------------

     [S]            [C]          
     11.1           Statement of computation of per share earnings (loss)

     27.0           Financial Data Schedule (for SEC use only)


(B) REPORTS ON FORM 8-K

The registrant did not file any reports on Form 8-K during the nine months
ended March 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:   May 14, 1997                 By: /s/ Andres C. Salazar                 
                                         ---------------------------------    
                                         Andres C. Salazar, President          
                                         and Chief Executive Officer           
                                                                               
                                                                               
                                                                               
Date:   May 14, 1997                 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