---

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

FORM 10-Q

(BOX WITH AN X)     
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2000

(EMPTY BALLOT BOX)     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 registrant 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
(Registrant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
preceeding 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   (BOX WITH AN X) No   (EMPTY BALLOT BOX)

The number of shares outstanding of the registrants common stock as of
February 09, 2001 was 11,670,059.

---



---



DIGITAL TRANSMISSION SYSTEMS, INC.FORM 10-Q

For the Quarter Ended December 31, 2000

INDEX

|            |  |                                                                                                                         |  |      |    | 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|PART I.     |  | FINANCIAL INFORMATION                                                                                                   |  | PAGE
|Item 1.     |  | Financial Statements:                                                                                                  
|           
|           
|           
|           
|            |  | Condensed Consolidated Balance Sheets at December 31, 2000
      and June 30, 2000 (Unaudited)                          |  |      | 3  | 
|           
|           
|           
|           
|            |  | Condensed Consolidated Statements of Operations for the Three
      Months ended December 31, 2000 and 1999 (Unaudited) |  |      | 4  | 
|           
|           
|           
|           
|            |  | Condensed Consolidated Statements of Operations for the Six
      Months ended December 31, 1999 and 1998 (Unaudited)   |  |      | 5  | 
|           
|           
|           
|           
|            |  | Condensed Consolidated Statements of Cash Flows for the Six
      Months Ended December 31, 2000 and 1999 (Unaudited)   |  |      | 6  | 
|           
|           
|           
|           
|            |  | Notes to Condensed Consolidated Financial Statements
      (Unaudited)                                                  |  |      | 7  | 
|           
|           
|           
|           
|Item 2.     |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations                                   |  |      | 11 | 
|           
|           
|           
|           
|Item 3.     |  | Quantitative and Qualitative Disclosure about Market Risk                                                               |  |      | 19 | 
|           
|           
|           
|           
|PART II.    |  | OTHER INFORMATION                                                                                                      
|           
|           
|           
|           
|Items 1  5 |  | Not applicable                                                                                                          |  |      | 20 | 
|           
|           
|           
|           
|Item 6.     |  | Exhibits and Reports on Form 8-K                                                                                        |  |      | 20 | 
|           
|           
|           
|           
|            |  | Signatures                                                                                                              |  |      | 21 | 

Page 2



---



DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share data)

|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |         |       |        | 
|--------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------- | ------------ | ------ | ------ | ------- | ----- | ------ | 
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               | December 31,
|Assets                      |                                                                                                                                                                            | 2000                                                                                                                           |                                            | June 30, 2000
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |              
|Current assets:            
|                           
|                           
|                           
|                           
|                            | Cash and cash equivalents                                                                                                                                                  |                                                                                                                                | $                                          | 544           |              |        |        | 1,646   |      
|                           
|                           
|                           
|                           
|                            | Trade accounts receivable, net of allowances for
returns and doubtful accounts of $1,597 and $2,313
at December 31, 2000 and June 30, 2000,
respectively                   |                                                                                                                                |                                            | 9,184         |              |        |        | 10,885  |      
|                           
|                           
|                           
|                           
|                            | Accounts receivable from related parties                                                                                                                                   |                                                                                                                                |                                            | 71            |              |        |        | 161     |      
|                           
|                           
|                           
|                           
|                            | Inventories                                                                                                                                                                |                                                                                                                                |                                            | 13,945        |              |        |        | 13,117  |      
|                           
|                           
|                           
|                           
|                            | Prepaid expenses and other current assets                                                                                                                                  |                                                                                                                                |                                            | 243           |              |        |        | 507     |      
|                           
|                           
|                           
|                           
|                            | Deferred income tax assets                                                                                                                                                 |                                                                                                                                |                                            | 2,225         |              |        |        | 2,225   |      
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        
|                            |                                                                                                                                                                            |                                                                                                                                | Total current assets                       |               |              | 26,212 |        |         |       | 28,541 | 
|                           
|                           
|                           
|                           
|Property and equipment, net |                                                                                                                                                                            |                                                                                                                                | 4,975                                      |               |              |        | 4,898  |        
|                           
|                           
|                           
|                           
|Intangible assets, net      |                                                                                                                                                                            |                                                                                                                                | 13,636                                     |               |              |        | 15,717 |        
|                           
|                           
|                           
|                           
|Other assets                |                                                                                                                                                                            |                                                                                                                                | 3,309                                      |               |              |        | 3,121  |        
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        
|                            |                                                                                                                                                                            |                                                                                                                                | Total assets                               |               | $            | 48,132 |        |         |       | 52,277 | 
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        
|                            |                                                                                                                                                                            |                                                                                                                                | Liabilities
and Shareholders Equity      
|                           
|                           
|                           
|                           
|Current liabilities:       
|                           
|                           
|                           
|                           
|                            | Notes payable to banks                                                                                                                                                     |                                                                                                                                | $                                          | 10,864        |              |        |        | 7,684   |      
|                           
|                           
|                           
|                           
|                            | Accounts payable and accrued liabilities                                                                                                                                   |                                                                                                                                |                                            | 11,510        |              |        |        | 13,952  |      
|                           
|                           
|                           
|                           
|                            | Acquisition payable                                                                                                                                                        |                                                                                                                                |                                            |              |              |        |        | 7,655   |      
|                           
|                           
|                           
|                           
|                            | Accrued payroll and benefits                                                                                                                                               |                                                                                                                                |                                            | 259           |              |        |        | 241     |      
|                           
|                           
|                           
|                           
|                            | Notes payable to related parties                                                                                                                                           |                                                                                                                                |                                            | 3,113         |              |        |        | 3,000   |      
|                           
|                           
|                           
|                           
|                            | Current maturities of long term debt                                                                                                                                       |                                                                                                                                |                                            | 104           |              |        |        | 146     |      
|                           
|                           
|                           
|                           
|                            | Current maturities of obligations under capital leases                                                                                                                     |                                                                                                                                |                                            | 14            |              |        |        | 33      |      
|                           
|                           
|                           
|                           
|                            | Warranty accrual                                                                                                                                                           |                                                                                                                                |                                            | 593           |              |        |        | 1,112   |      
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        
|                            |                                                                                                                                                                            |                                                                                                                                | Total current liabilities                  |               |              | 26,457 |        |         |       | 33,823 | 
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        
|Long-term liabilities:     
|                           
|                           
|                           
|                           
|                            | Long term debt, excluding current maturities                                                                                                                               |                                                                                                                                |                                            |              |              |        |        | 4       |      
|                           
|                           
|                           
|                           
|                            | Notes payable to related party                                                                                                                                             |                                                                                                                                |                                            | 721           |              |        |        | 721     |      
|                           
|                           
|                           
|                           
|                            | Obligations under capital leases, excluding current maturities                                                                                                             |                                                                                                                                |                                            | 31            |              |        |        | 44      |      
|                           
|                           
|                           
|                           
|                            | Deferred income tax liability                                                                                                                                              |                                                                                                                                |                                            | 2,225         |              |        |        | 2,225   |      
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        
|                            |                                                                                                                                                                            |                                                                                                                                | Total long-term liabilities                |               |              | 29,434 |        |         |       | 36,817 | 
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        
|Shareholders equity:      
|                           
|                           
|                           
|                           
|                            | Preferred stock, $0.01 par value, 10,000,000 shares authorized:                                                                                                           
|                           
|                           
|                           
|                           
|                            |                                                                                                                                                                            | Series A, convertible, liquidation preference of $1.00 per share,
1,314,333 shares issued and outstanding                      |                                            |               | 1,314        |        |        |         | 1,314 |       
|                           
|                           
|                           
|                           
|                            |                                                                                                                                                                            | Series B, convertible, liquidation preference of $7.125 per share,
454,737 shares issued and outstanding                       |                                            |               | 3,000        |        |        |         | 3,000 |       
|                           
|                           
|                           
|                           
|                            |                                                                                                                                                                            | Series C, convertible, liquidation preference of $2.58 per share,
2,330,217 shares issued and outstanding at December 31, 2000 |                                            |               | 4,809        |        |        |         |      |       
|                           
|                           
|                           
|                           
|                            | Common stock  $0.01 par value, 50,000,000 shares authorized;
11,670,059 and 10,240,070 shares issued and outstanding at
December 31, 2000 and June 30, 2000, respectively |                                                                                                                                |                                            | 117           |              |        |        | 102     |      
|                           
|                           
|                           
|                           
|                            | Common stock subscribed                                                                                                                                                    |                                                                                                                                |                                            |              |              |        |        | 41      |      
|                           
|                           
|                           
|                           
|                            | Additional paid-in capital                                                                                                                                                 |                                                                                                                                |                                            | 32,722        |              |        |        | 30,299  |      
|                           
|                           
|                           
|                           
|                            | Notes receivable from stock sales                                                                                                                                          |                                                                                                                                |                                            |              |              |        |        | (63     | )    
|                           
|                           
|                           
|                           
|                            | Accumulated deficit                                                                                                                                                        |                                                                                                                                |                                            | (23,264       | )            |        |        | (19,233 | )    
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        
|                            |                                                                                                                                                                            |                                                                                                                                | Total shareholders equity                 |               |              | 18,698 |        |         |       | 15,460 | 
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        
|                            |                                                                                                                                                                            |                                                                                                                                | Total liabilities and shareholders equity |               | $            | 48,132 |        |         |       | 52,277 | 
|                            |                                                                                                                                                                            |                                                                                                                                |                                            |               |              |        |        |        

See accompanying notes to condensed consolidated financial statements.

Page 3



---



DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(unaudited)
(in thousands, except per share data)

|                                            |             |                              |                                              |        |                                 |        |       |       |       |      |  
|------------------------------------------- | ----------- | ---------------------------- | -------------------------------------------- | ------ | ------------------------------- | ------ | ----- | ----- | ----- | ---- | -
|                                            |             |                              |                                              |        | Three months ended December 31,
|                                            |             |                              |                                              |        |                                
|                                            |             |                              |                                              |        | 2000                            |        | 1999 
|                                            |             |                              |                                              |        |                                 |        |      
|Net sales                                   |             | $                            | 10,591                                       |        |                                 | $      | 1,123 |      
|                                           
|                                           
|                                           
|                                           
|Cost of sales                               |             |                              | 7,635                                        |        |                                 |        | 628   |      
|                                            |             |                              |                                              |        |                                 |        |       |      
|                                            |             | Gross profit                 |                                              |        | 2,956                           |        |       |       | 495   |     
|                                            |             |                              |                                              |        |                                 |        |       |      
|Selling, general and administrative         |             |                              | 4,061                                        |        |                                 |        | 390   |      
|                                           
|                                           
|                                           
|                                           
|Product development                         |             |                              | 350                                          |        |                                 |        | 171   |      
|                                           
|                                           
|                                           
|                                           
|Depreciation and amortization               |             |                              | 1,144                                        |        |                                 |        | 116   |      
|                                            |             |                              |                                              |        |                                 |        |       |      
|                                            |             | Total operating expenses     |                                              |        | 5,555                           |        |       |       | 677   |     
|                                            |             |                              |                                              |        |                                 |        |       |      
|                                            |             | Operating loss               |                                              |        | (2,599                          | )      |       |       | (182  | )   
|                                           
|                                           
|                                           
|                                           
|Other income                                |             |                              | 10                                           |        |                                 |        |      |      
|                                           
|                                           
|                                           
|                                           
|Interest expense, net                       |             |                              | (375                                         | )      |                                 |        | (92   | )    
|                                            |             |                              |                                              |        |                                 |        |       |      
|Loss before income taxes                    |             |                              | (2,964                                       | )      |                                 |        | (274  | )    
|                                           
|                                           
|                                           
|                                           
|Income taxes                                |             |                              |                                             |        |                                 |        |      |      
|                                            |             |                              |                                              |        |                                 |        |       |      
|                                            |             |                              | Net loss                                     |        | $                               | (2,964 | )     |       | $     | (274 | )
|                                            |             |                              |                                              |        |                                 |        |       |      
|Preferred stock dividends                   |             |                              | 20                                           |        |                                 |        |      |      
|                                           
|                                           
|                                           
|                                           
|                                            |             |                              | Net loss attributable to common shareholders |        | $                               | (2,984 | )     |       | $     | (274 | )
|                                            |             |                              |                                              |        |                                 |        |       |      
|Net loss per share  basic and diluted:    
|                                           
|                                           
|                                           
|                                           
|                                            |             | Net loss per share  basic   |                                              | $      | (0.27                           | )      |       | $     | (0.06 | )   
|                                            |             |                              |                                              |        |                                 |        |       |      
|                                            |             | Net loss per share  diluted |                                              | $      | (0.27                           | )      |       | $     | (0.06 | )   
|                                            |             |                              |                                              |        |                                 |        |       |      
|Weighted average common shares outstanding:
|                                           
|                                           
|                                           
|                                           
|                                            | Basic       |                              |                                              | 10,955 |                                 |        |       | 4,646 |      
|                                            |             |                              |                                              |        |                                 |        |       |      
|                                            | Diluted (1) |                              |                                              | 10,955 |                                 |        |       | 4,646 |      
|                                            |             |                              |                                              |        |                                 |        |       |      



|(1) |  | Potentially dilutive securities not included as their effect
Would be anti-dilutive
|--- |  | -----------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements.

Page 4



---



DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(unaudited)
(in thousands, except per share data)

|                                            |             |                              |                                              |        |                               |        |       |       |       |      |  
|------------------------------------------- | ----------- | ---------------------------- | -------------------------------------------- | ------ | ----------------------------- | ------ | ----- | ----- | ----- | ---- | -
|                                            |             |                              |                                              |        | Six months ended December 31,
|                                            |             |                              |                                              |        |                              
|                                            |             |                              |                                              |        | 2000                          |        | 1999 
|                                            |             |                              |                                              |        |                               |        |      
|Net sales                                   |             | $                            | 23,539                                       |        |                               | $      | 3,742 |      
|                                           
|                                           
|                                           
|                                           
|Cost of sales                               |             |                              | 16,094                                       |        |                               |        | 2,332 |      
|                                            |             |                              |                                              |        |                               |        |       |      
|                                            |             | Gross profit                 |                                              |        | 7,445                         |        |       |       | 1,410 |     
|                                            |             |                              |                                              |        |                               |        |       |      
|Selling, general and administrative         |             |                              | 7,900                                        |        |                               |        | 772   |      
|                                           
|                                           
|                                           
|                                           
|Product development                         |             |                              | 551                                          |        |                               |        | 407   |      
|                                           
|                                           
|                                           
|                                           
|Depreciation and amortization               |             |                              | 2,212                                        |        |                               |        | 278   |      
|                                            |             |                              |                                              |        |                               |        |       |      
|                                            |             | Total operating expenses     |                                              |        | 10,663                        |        |       |       | 1,457 |     
|                                            |             |                              |                                              |        |                               |        |       |      
|                                            |             | Operating loss               |                                              |        | (3,218                        | )      |       |       | (47   | )   
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |             |                              | (60                                          | )      |                               |        |      |      
|                                           
|                                           
|                                           
|                                           
|Interest expense, net                       |             |                              | (898                                         | )      |                               |        | (210  | )    
|                                            |             |                              |                                              |        |                               |        |       |      
|Loss before income taxes                    |             |                              | (4,176                                       | )      |                               |        | (257  | )    
|                                           
|                                           
|                                           
|                                           
|Income taxes                                |             |                              |                                             |        |                               |        |      |      
|                                            |             |                              |                                              |        |                               |        |       |      
|                                            |             |                              | Net loss                                     |        | $                             | (4,176 | )     |       | $     | (257 | )
|                                           
|                                           
|                                           
|                                           
|Preferred stock dividends                   |             |                              | 20                                           |        |                               |        |      |      
|                                           
|                                           
|                                           
|                                           
|                                            |             |                              | Net loss attributable to common shareholders |        | $                             | (4,196 | )     |       | $     | (257 | )
|                                            |             |                              |                                              |        |                               |        |       |      
|Net loss per share  basic and diluted:    
|                                           
|                                           
|                                           
|                                           
|                                            |             | Net loss per share  basic   |                                              | $      | (0.38                         | )      |       | $     | (0.06 | )   
|                                            |             |                              |                                              |        |                               |        |       |      
|                                            |             | Net loss per share  diluted |                                              | $      | (0.38                         | )      |       | $     | (0.06 | )   
|                                            |             |                              |                                              |        |                               |        |       |      
|Weighted average common shares outstanding:
|                                           
|                                           
|                                           
|                                           
|                                            | Basic       |                              |                                              | 10,955 |                               |        |       | 4,646 |      
|                                            |             |                              |                                              |        |                               |        |       |      
|                                            | Diluted (1) |                              |                                              | 10,955 |                               |        |       | 4,646 |      
|                                            |             |                              |                                              |        |                               |        |       |      



|(1) |  | Potentially dilutive securities not included as their effect
Would be anti-dilutive
|--- |  | -----------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements.

Page 5



---



Digital Transmission Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

|                                                                                          |  |                               |         |      |  |   |       |  
|----------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | ---- |  | - | ----- | -
|                                                                                          |  | Six months ended December 31,
|                                                                                          |  |                              
|                                                                                          |  | 2000                          |         | 1999
|                                                                                          |  |                               |         |     
|Cash flows from operating activities:                                                    
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net loss                                                                                  |  |                               | ($4,176 | )    |  |   | ($257 | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Depreciation and amortization                                                             |  |                               | 2,255   |      |  |   | 278   |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Changes in assets and liabilities:                                                       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Trade and other accounts receivable                                                       |  |                               | 1,701   |      |  |   | 776   |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Inventories                                                                               |  |                               | (828    | )    |  |   | 166   |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Prepaid expenses and other assets                                                         |  |                               | 354     |      |  |   | (9    | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Accounts payable and other accrued expenses                                               |  |                               | (2,219  | )    |  |   | (372  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Warranty accrual                                                                          |  |                               | (519    | )    |  |   | 3     |  
|                                                                                          |  |                               |         |      |  |   |       |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net cash (used in) provided by operating activities                                       |  |                               | (3,432  | )    |  |   | 585   |  
|                                                                                          |  |                               |         |      |  |   |       |  
|Cash flows from investing activities:                                                    
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Purchases of property and equipment                                                       |  |                               | (745    | )    |  |   | (11   | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Additions to capitalized product development costs                                        |  |                               | (105    | )    |  |   | (148  | )
|                                                                                          |  |                               |         |      |  |   |       |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net cash used in investing activities                                                     |  |                               | (850    | )    |  |   | (159  | )
|                                                                                          |  |                               |         |      |  |   |       |  
|Cash flows from financing activities:                                                    
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net borrowings (payments) under line of credit agreement                                  |  |                               | 3,180   |      |  |   | (708  | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Proceeds from issuance of note payable                                                    |  |                               |        |      |  |   | 400   |  
|                                                                                          |  |                               |         |      |  |   |       |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net cash provided by (used in) financing activities                                       |  |                               | 3,180   |      |  |   | (308  | )
|                                                                                          |  |                               |         |      |  |   |       |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                               | (1,102  | )    |  |   | 118   |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cash and cash equivalents at beginning of period                                          |  |                               | 1,646   |      |  |   | 217   |  
|                                                                                          |  |                               |         |      |  |   |       |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cash and cash equivalents at end of period                                                |  | $                             | 544     |      |  | $ | 335   |  
|                                                                                          |  |                               |         |      |  |   |       |  
|Supplemental disclosure of cash paid for:                                                
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Interest                                                                                  |  | $                             | 588     |      |  | $ | 67    |  
|                                                                                          |  |                               |         |      |  |   |       |  
|Supplemental disclosure of non-cash financing and investing activities:                  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Issuance of Series C Preferred Stock to reduce acquisition payable                        |  | $                             | 4,809   |      |  |   |      |  
|                                                                                          |  |                               |         |      |  |   |       |  
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Issuance of common stock to reduce acquisition payable                                    |  | $                             | 2,728   |      |  |   |      |  
|                                                                                          |  |                               |         |      |  |   |       |  

See accompanying notes to condensed consolidated financial statements.

Page 6



---



Digital Transmission Systems, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2000 (Unaudited)

1. Description of the Business and Summary of Significant Accounting Policies.

Digital Transmission Systems, Inc. (DTS) and subsidiaries (collectively
termed the Company) designs, manufactures, repairs, refurbishes, and markets
a broad range of products for the wireless telecommunications (telecom)
industry. The Companys primary customers are domestic and international
wireless service providers, including those offering cellular telephone
services and Personal Communication Services (PCS), and domestic and
international resellers/integrators who sell to and service wireless and
wireline with telecom equipment.

The Companys products of original design, consisting of proprietary software
and hardware modules, facilitate the control, monitoring, and efficient
transmission of high-speed digital information through wireless public or
private telecommunications networks. The Companys network access products
enable wireless service providers to give their customers economical, high
quality access to public and private networks and various telecommunications
services. Important product requirements in the market segments the Company
serves 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. Through its wholly-owned
subsidiary, Telcor Communications, Inc. (Telcor), the Company also acquires
and markets de-installed and refurbished telecom equipment originally designed
and manufactured by leading telecom equipment suppliers such as Nokia, Lucent,
and Ericsson. In addition, Telcor offers repair services to its customers on
products from third party vendors. Major customers of DTS and Telcor also
include Nextel, Alltel Wireless and Alltel Supply, Dobson Cellular, Lucent,
Telmar, and Verizon.

The Company markets its products through a direct sales force employing inside
and outside sales representatives 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. The Company also utilizes
telecommunications equipment resellers and agents in the United States and
other countries to market to customers.

The 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, and to obtain additional
financing or refinancing as may be required. The Company is actively pursuing
additional equity financing through discussions with potential investors.

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
financial information included herein is unaudited; however, the information
reflects all adjustments (consisting solely of normal recurring adjustments)
that are, in the opinion of management, necessary for a fair presentation of
the financial position, results of operations and cash flows for the interim
periods. Operating results for the six months ended December 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2001. For further information, refer to the financial statements and
footnotes thereto included in the Companys Form 10-K for the year ended June
30, 2000.

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-K.

Page 7



---



2. Income (Loss) Per Common Share

Basic earnings (loss) per share (EPS) is calculated as income (loss)
available to common shareholders divided by the weighted-average number of
common shares outstanding during each period. Diluted EPS is calculated as
income (loss) available to common shareholders divided by the weighted-average
number of common shares outstanding during each period plus the effect of any
potential dilutive common shares, such as those attributable to convertible
debt, convertible preferred stock, warrants, or stock options.

Three months ended December 31, 2000.A total of 2,275,000 of additional
common shares related to the potential conversion of warrants and shares
attributable to convertible securities were excluded from the computation of
diluted net loss per share in the three months ended December 31, 2000, because
the exercise price of these securities was greater than the average market
price of the Companys common stock. In addition, the Company excluded all
remaining convertible preferred stock, warrants, outstanding stock options and
convertible debentures from the calculations of diluted net loss per share as
all such securities are anti-dilutive for all periods presented. The total
potential number of dilutive equivalent common shares excluded was 3,228,000
and 2,433,000 for three month periods ended December 31, 2000 and 1999,
respectively.

3. Legal Matters

The Company is involved in various 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. Inventories

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 offering wireless services. The Company purchases both new and used
hardware for applications in telecommunications and computer networking
required by wireless service providers. Used hardware is refurbished and
tested prior to shipment. Inventories are stated at the lower of cost or
market. Cost is determined using average cost which approximates the first-in,
first-out (FIFO) method. The Company purchases de-installed telecom equipment
individually and in bulk lots. Cost is allocated to individual items in bulk
purchases based on managements assessment of each items value in relation to
the total cost of the purchase. The Company has established a valuation
allowance for inventories based on a review of the composition, quantity, and
expected future usage or sales of inventories including expected sales prices.

5. Comprehensive Income (Loss)

No statements of comprehensive income (loss) have been included in the
accompanying condensed consolidated financial statements since comprehensive
loss and net loss presented in the accompanying condensed consolidated
statements of operations would be the same.

Page 8



---



6. Segment Reporting

The Companys operations are classified into two reportable business segments
for the three and six months ended December 31, 2000: Telcor Communications,
Inc. and DTS. Prior to the acquisition of Telcor on March 31, 2000, the
Company operated in one reportable segment: developer of proprietary equipment
for wireless service providers. The Companys two reportable segments are
currently managed as separate divisions; however, the Company is in the process
of integrating several functions of the two divisions.

Segment information for the three months ended December 31, 2000:

A reconciliation of the Companys segment information for the three months
ended December 31, 2000 to the respective information in the condensed
consolidated financial statements is as follows:

|                              |  |     |        |        |  |       |        |   |  |  |        |  
|----------------------------- |  | --- | ------ | ------ |  | ----- | ------ | - |  |  | ------ | -
|                              |  | DTS |        | Telcor |  | Total
|                              |  |     |        |        |  |      
|Sales                         |  | $   | 2,261  |        |  |       | 8,330  |   |  |  | 10,591 |  
|                             
|                             
|                             
|                             
|Operating loss                |  |     | (1,225 | )      |  |       | (1,374 | ) |  |  | (2,599 | )
|                             
|                             
|                             
|                             
|Net loss                      |  |     | (1,310 | )      |  |       | (1,654 | ) |  |  | (2,964 | )
|                             
|                             
|                             
|                             
|Total assets                  |  |     | 19,858 |        |  |       | 28,274 |   |  |  | 48,132 |  
|                             
|                             
|                             
|                             
|Depreciation and amortization |  |     | 840    |        |  |       | 304    |   |  |  | 1,144  |  
|                             
|                             
|                             
|                             
|Capital expenditures          |  |     | 52     |        |  |       | 268    |   |  |  | 320    |  

Segment information for the six months ended December 31, 2000:

A reconciliation of the Companys segment information for the six months ended
December 31, 2000 to the respective information in the condensed consolidated
financial statements is as follows:

|                              |  |     |        |        |  |       |        |   |  |  |        |  
|----------------------------- |  | --- | ------ | ------ |  | ----- | ------ | - |  |  | ------ | -
|                              |  | DTS |        | Telcor |  | Total
|                              |  |     |        |        |  |      
|Sales                         |  | $   | 4,680  |        |  |       | 18,859 |   |  |  | 23,539 |  
|                             
|                             
|                             
|                             
|Operating loss                |  |     | (1,971 | )      |  |       | (1,247 | ) |  |  | (3,218 | )
|                             
|                             
|                             
|                             
|Net loss                      |  |     | (2,245 | )      |  |       | (1,931 | ) |  |  | (4,176 | )
|                             
|                             
|                             
|                             
|Total assets                  |  |     | 19,858 |        |  |       | 28,274 |   |  |  | 48,132 |  
|                             
|                             
|                             
|                             
|Depreciation and amortization |  |     | 1,604  |        |  |       | 608    |   |  |  | 2,212  |  
|                             
|                             
|                             
|                             
|Capital expenditures          |  |     | 101    |        |  |       | 644    |   |  |  | 745    |  

Page 9



---



7. Unaudited Pro forma Data

The following unaudited pro forma combined financial data of Digital
Transmission Systems, Inc. (DTS) and Telcor Communications, Inc. (Telcor)
combine the consolidated financial information of DTS for the three and six
months ended December 31, 1999 with the consolidated financial information of
Telcor for the three and six months ended December 31, 1999. We have prepared
the unaudited pro forma information using the purchase method of accounting as
if the acquisition took place at the beginning of the periods presented. The
pro forma information does not give effect to any restructuring costs, expenses
due to terminated full-time or contract employees, discontinued product lines,
inventory write-downs, increased reserves, one-time cost of sales adjustments,
merger transactional expenses or to any potential expense savings or other
operating efficiencies that could result from the merger.

The unaudited pro forma combined financial information is not intended to
represent what the combined companys financial position or results of
operations would have been had the merger occurred at the beginning of the
earliest period presented or to project the combined financial position or
results of operations for any future date or period.

Pro forma Data  Three and six months ended December 31, 1999 (000s omitted)

|                                |                |                |        |   |  |   |        |  
|------------------------------- | -------------- | -------------- | ------ | - |  | - | ------ | -
|                                | Six months     | Three months  
|                                | ended Dec. 31, | ended Dec. 31,
|                                | 1999           | 1999          
|                                |                |               
|Revenues                        |                | $              | 38,553 |   |  | $ | 20,898 |  
|                               
|                               
|                               
|                               
|Loss before extraordinary items |                |                | (1,039 | ) |  |   | (945   | )
|                               
|                               
|                               
|                               
|Net loss                        |                |                | (1,039 | ) |  |   | (945   | )
|                               
|                               
|                               
|                               
|Net loss per share:            
|                               
|                               
|                               
|                               
|Basic                           |                |                | (.22   | ) |  |   | (.20   | )
|                               
|                               
|                               
|                               
|Diluted                         |                |                | (.22   | ) |  |   | (.20   | )

Page 10



---



ITEM 2: Managements Discussion and Analysis of Financial Condition and
                Results of Operations

General

Digital Transmission Systems, Inc. (DTS) and subsidiaries (collectively
termed the Company) designs, manufactures, repairs, refurbishes, and markets
a broad range of products for the wireless telecommunications (telecom)
industry. The Companys primary customers are domestic and international
wireless service providers, including those offering cellular telephone
services and Personal Communication Services (PCS), and domestic and
international resellers/integrators who sell to and service wireless and
wireline with telecom equipment.

The Companys products of original design, consisting of proprietary software
and hardware modules, facilitate the control, monitoring, and efficient
transmission of high-speed digital information through wireless public or
private telecommunications networks. The Companys network access products
enable wireless service providers to give their customers economical, high
quality access to public and private networks and various telecommunications
services. Important product requirements in the market segments the Company
serves 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. Through its wholly-owned
subsidiary, Telcor Communications, Inc. (Telcor), the Company also acquires
and markets de-installed and refurbished telecom equipment originally designed
and manufactured by leading telecom equipment suppliers such as Nokia, Lucent,
and Ericsson. In addition, Telcor offers repair services to its customers on
products from third party vendors. Major customers of DTS and Telcor also
include Nextel, Alltel Wireless and Alltel Supply, Dobson Cellular, Lucent,
Telmar, and Verizon.

The Company markets its products through a direct sales force employing inside
and outside sales representatives 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. The Company also utilizes
telecommunications equipment resellers and agents in the United States and
other countries to market to customers.

Results of Operations

Three Months Ended December 31, 2000 and December 31, 1999

The following table sets forth certain financial data derived from the
Companys statement of operations for the three months ended December 31, 2000
and December 31, 1999 (dollars in thousands).

|                                    |  |                    |        |                    |  |   |     |            |  |  |       |   |  |  |     |  
|----------------------------------- |  | ------------------ | ------ | ------------------ |  | - | --- | ---------- |  |  | ----- | - |  |  | --- | -
|                                    |  | Three months ended |        | Three months ended
|                                    |  | December 31, 2000  |        | December 31, 1999 
|                                    |  |                    |        |                   
|                                    |  | $                  |        | % of Sales         |  | $ |     | % of Sales
|                                    |  |                    |        |                    |  |   |     |           
|Net Sales                           |  |                    | 10,591 |                    |  |   | 100 |            |  |  | 1,123 |   |  |  | 100 |  
|                                   
|                                   
|                                   
|                                   
|Gross Profit                        |  |                    | 2,956  |                    |  |   | 28  |            |  |  | 495   |   |  |  | 44  |  
|                                   
|                                   
|                                   
|                                   
|Product development                 |  |                    | 350    |                    |  |   | 3   |            |  |  | 171   |   |  |  | 15  |  
|                                   
|                                   
|                                   
|                                   
|Selling, general and administrative |  |                    | 4,061  |                    |  |   | 38  |            |  |  | 390   |   |  |  | 35  |  
|                                   
|                                   
|                                   
|                                   
|Net loss                            |  |                    | (2,964 | )                  |  |   | (28 | )          |  |  | (274  | ) |  |  | (24 | )

Page 11



---



Net Sales. Net sales increased by 843%, to $10,591,000 for the three months
ended December 31, 2000 from $1,123,000 for the three months ended December 31,
1999. The increase in sales was due in large part to the doubling of FlexT1/E1
shipments and revenue from the Companys wholly-owned subsidiary, Telcor
Communications. The sales mix, and the corresponding percentage of total sales
of the Companys products, is set forth in the chart below (dollars in
thousands):

|                |  |                    |        |                    |  |      |       |      |  |               |     |  |  |  |     | 
|--------------- |  | ------------------ | ------ | ------------------ |  | ---- | ----- | ---- |  | ------------- | --- |  |  |  | --- | 
|                |  |                    |        |                    |  |      |       |      |  | Percentage of
|                |  |                    |        |                    |  |      |       |      |  | total        
|                |  | Three months ended |        | Three months ended
|                |  | December 31,       |        | December 31,      
|                |  |                    |        |                   
|                |  | 2000               |        | 1999               |  | 2000 |       | 1999
|                |  |                    |        |                    |  |      |       |     
|FlexT1/E1       |  | $                  | 2,261  |                    |  | $    | 1,002 |      |  |               | 21  |  |  |  | 89  | 
|               
|               
|               
|               
|Equipment sales |  |                    | 8,122  |                    |  |      |      |      |  |               | 77  |  |  |  |    | 
|               
|               
|               
|               
|Other products  |  |                    | 208    |                    |  |      | 121   |      |  |               | 2   |  |  |  | 11  | 
|                |  |                    |        |                    |  |      |       |      |  |               |     |  |  |  |     | 
|Totals          |  | $                  | 10,591 |                    |  | $    | 1,123 |      |  |               | 100 |  |  |  | 100 | 
|                |  |                    |        |                    |  |      |       |      |  |               |     |  |  |  |     | 

For the three months ended December 31, 2000, revenues from the Companys
FlexT1/E1 product line increased 126% from $1,002,000 for the three months
ended December 31, 1999 to $2,261,000 for the three months ended December 31,
2000 due to greater demand for the Companys network access products from its
two largest customers. Equipment sales of $8,122,000 and $0 were recorded for
the three month periods ended December 31, 2000 and 1999, respectively. The
increase is due to the acquisition of Telcor Communications, Inc. on March 31,
2000. The Company began consolidating the results of operations of Telcor on
April 1, 2000 and, accordingly, no equipment sales were recorded during the
three month period ended December 31, 1999. Telcor sales for the three month
period ended December 31, 2000 were less than the same period a year ago due to
discontinuance of certain consumer oriented product lines and other products
not targeted to wireless carriers.

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 increased 497% from $495,000 for the three month period
ended December 31, 1999 to $2,956,000 for the three month period ended December
31, 2000. As a percentage of sales, gross profit decreased from 44% for the
three month period ended December 31, 1999 to 28% for the three month period
ended December 31, 2000. The decrease reflects the inclusion of a significant
portion of lower margin sales of new and refurbished equipment as realized by
the Companys subsidiary, Telcor Communications, Inc. during the three month
period ended December 31, 2000. Margins on new and refurbished equipment sales
at Telcor have historically ranged from 25% to 35% depending upon the product
mix and customer. Inventory adjustments at Telcor have caused higher cost of
sales during the current period. The J.D. Edwards ERP system, New World, has
been installed and is now fully operational and will be used to track inventory
valuation at Telcor.

Product Development.Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
increased 105%, to $350,000 for the three months ended December 31, 2000 from
$171,000 for the three months ended December 31, 1999. The increase in product
development expense for the three month period ended December 31, 2000 is
primarily due to increased spending on new development projects. Further,
approximately $33,000 of development costs related to new projects were
capitalized for the three month period ended December 31, 2000 as compared to
$43,000 for the three month period ended December 31, 1999. As a percentage of
sales, product development costs were 3% for the three months ended December
31, 2000 and 15% for the three months ended December 31, 1999. The significant
difference as a percentage of sales is attributable to the sharp increase in
sales noted during the three month period ended December 31, 2000 as compared
to the three month period ended December 31, 1999.

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

Page 12



---



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 increased by 941%, to $4,061,000 for the
three months ended December 31, 2000 from $390,000 for the three months ended
December 31, 1999. The increase is attributable to the Companys acquisition of
Telcor Communications, Inc. (Telcor) on March 31, 2000. The Company began
consolidating the results of operations of Telcor on April 1, 2000 and, as
such, no comparable selling, general and administrative expense was recorded
during the three month period ended December 31, 1999. For the three month
period ended December 31, 2000, Telcor contributed $3,315,000 to total selling,
general and administrative expenses. Excluding the Telcor contribution,
selling, general and administrative expenses increased by $356,000 for the
three month period ended December 31, 2000 as compared to the same period ended
December 31, 1999. The increase is attributable to additional personnel
compensation costs as a result of an increase in headcount and an increase in
professional and legal fees as compared to the same period in the prior year.
As of December 31, 2000 the Company had approximately 132 full-time employees
reflecting an increase in overall headcount of 105, from 27 full-time employees
as of December 31, 1999. Total selling, general and administrative costs were
38% of total sales for the three months ended December 31, 2000 as compared to
35% of sales for the three months ended December 31, 1999.

Net Loss.For the three month period ended December 31, 2000 the Company
recorded a net loss of $2,964,000 as compared to a net loss of $274,000
reported for the three month period ended December 31, 1999. The increase in
the net loss is primarily a result of amortization of intangible assets
recorded as a result of the Telcor acquisition on March 31, 2000, additional
selling general and administrative expenses, and increased interest costs.
Interest expense of the Company increased from $92,000 for the three months
ended December 31, 1999 to $375,000 for the three months ended December 31,
2000. The Telcor and DTS contributions to interest expense for the three
months ended December 31, 2000 were $260,000 and $115,000, respectively.
Excluding depreciation and amortization charges, the Companys operating loss
for the three month period ended December 31, 2000 was $1,455,000 which
reflects additional product development charges and increased general and
administrative expenses of the Company.

Six Months Ended December 31, 2000 and December 31, 1999

The following table sets forth certain financial data derived from the
Companys statement of operations for the six months ended December 31, 2000
and December 31, 1999 (dollars in thousands).

|                                    |  |                   |        |                   |  |   |     |            |  |  |       |   |  |  |     |  
|----------------------------------- |  | ----------------- | ------ | ----------------- |  | - | --- | ---------- |  |  | ----- | - |  |  | --- | -
|                                    |  | Six months ended  |        | Six months ended 
|                                    |  | December 31, 2000 |        | December 31, 1999
|                                    |  |                   |        |                  
|                                    |  | $                 |        | % of Sales        |  | $ |     | % of Sales
|                                    |  |                   |        |                   |  |   |     |           
|Net Sales                           |  |                   | 23,539 |                   |  |   | 100 |            |  |  | 3,742 |   |  |  | 100 |  
|                                   
|                                   
|                                   
|                                   
|Gross Profit                        |  |                   | 7,445  |                   |  |   | 32  |            |  |  | 1,410 |   |  |  | 38  |  
|                                   
|                                   
|                                   
|                                   
|Product development                 |  |                   | 551    |                   |  |   | 2   |            |  |  | 407   |   |  |  | 11  |  
|                                   
|                                   
|                                   
|                                   
|Selling, general and administrative |  |                   | 7,900  |                   |  |   | 34  |            |  |  | 772   |   |  |  | 21  |  
|                                   
|                                   
|                                   
|                                   
|Net loss                            |  |                   | (4,176 | )                 |  |   | (18 | )          |  |  | (257  | ) |  |  | (7  | )

Page 13



---



Net Sales. Net sales increased 529%, to $23,539,000 for the six months ended
December 31, 2000 from $3,742,000 for the six months ended December 31, 1999.
The sales mix, and the corresponding percentage of total sales of the Companys
products, is set forth in the chart below (dollars in thousands):

|                |  |                  |        |                  |  |      |       |      |  |               |     |  |  |  |     | 
|--------------- |  | ---------------- | ------ | ---------------- |  | ---- | ----- | ---- |  | ------------- | --- |  |  |  | --- | 
|                |  |                  |        |                  |  |      |       |      |  | Percentage of
|                |  |                  |        |                  |  |      |       |      |  | total        
|                |  | Six months ended |        | Six months ended
|                |  | December 31,     |        | December 31,    
|                |  |                  |        |                 
|                |  | 2000             |        | 1999             |  | 2000 |       | 1999
|                |  |                  |        |                  |  |      |       |     
|FlexT1/E1       |  | $                | 4,680  |                  |  | $    | 3,610 |      |  |               | 20  |  |  |  | 96  | 
|               
|               
|               
|               
|Equipment sales |  |                  | 18,614 |                  |  |      |      |      |  |               | 79  |  |  |  |    | 
|               
|               
|               
|               
|Other products  |  |                  | 245    |                  |  |      | 132   |      |  |               | 1   |  |  |  | 4   | 
|                |  |                  |        |                  |  |      |       |      |  |               |     |  |  |  |     | 
|Totals          |  | $                | 23,539 |                  |  | $    | 3,742 |      |  |               | 100 |  |  |  | 100 | 
|                |  |                  |        |                  |  |      |       |      |  |               |     |  |  |  |     | 

For the six months ended December 31, 2000, revenues from the Companys
FlexT1/E1 product line increased 30% from $3,610,000 for the six months ended
December 31, 1999 to $4,680,000 for the six months ended December 31, 2000.
Equipment sales of $18,614,000 and $0 were recorded for the six month periods
ended December 31, 2000 and 1999, respectively. The increase is due to the
acquisition of Telcor Communications, Inc. on March 31, 2000. The Company
began consolidating the results of operations of Telcor on April 1, 2000 and,
accordingly, no equipment sales were recorded during the six month period ended
December 31, 1999.

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 increased 428% from $1,410,000 for the six month period
ended December 31, 1999 to $7,445,000 for the six month period ended December
31, 2000. As a percentage of sales, gross profit decreased from 38% for the
six month period ended December 31, 1999 to 32% for the six month period ended
December 31, 2000. The decrease reflects the inclusion of a significant
portion of lower margin sales of new and refurbished equipment as realized by
the Companys subsidiary, Telcor Communications, Inc. during the six month
period ended December 31, 2000. Margins on new and refurbished equipment sales
at Telcor have historically ranged from 25% to 35% depending upon the product
mix and customer.

Product Development.Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
increased 35%, to $551,000 for the six months ended December 31, 2000 from
$407,000 for the six months ended December 31, 1999. The increase in product
development expense for the six month period ended December 31, 2000 is
primarily due to increased spending on new development projects and an increase
in engineering headcount. Further, approximately $105,000 of development costs
related to new projects were capitalized for the six month period ended
December 31, 2000 as compared to $148,000 for the six month period ended
December 31, 1999. As a percentage of sales, product development costs were 2%
for the six months ended December 31, 2000 and 11% for the six months ended
December 31, 1999.

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 increased by 923%, to $7,900,000 for the six
months ended December 31, 2000 from $772,000 for the six months ended December
31, 1999. The increase is attributable to the Companys acquisition of Telcor
Communications, Inc. (Telcor) on March 31, 2000. The Company began
consolidating the results of operations of Telcor on April 1, 2000 and, as
such, no comparable selling, general and administrative expense was recorded
during the six month period ended December 31, 1999. For the six month period
ended December 31, 2000, Telcor contributed $6,537,000 to total
selling, general and administrative expenses. Excluding the Telcor
contribution, selling, general and administrative expenses

Page 14



---



increased by
$591,000 for the six month period ended December 31, 2000 as compared to the
same period ended December 31, 1999. The increase is attributable to
additional personnel compensation costs as a result of an increase in headcount
and an increase in professional and legal fees as compared to the same period
in the prior year. As of December 31, 2000 the Company had approximately 132
full-time employees reflecting an increase in overall headcount of 105, from 27
full-time employees as of December 31, 1999. Total selling, general and
administrative costs were 34% of total sales for the six months ended December
31, 2000 as compared to 21% of sales for the six months ended December 31,
1999.

Net Loss.The net loss increased to $4,176,000 for the six months ended
December 31, 2000, from $257,000 for the six months ended December 31, 1999.
The increase in the net loss is primarily a result of amortization of
intangible assets recorded as a result of the Telcor acquisition on March 31,
2000, additional selling general and administrative expenses, and increased
interest costs. Interest expense of the Company increased from $210,000 for
the six months ended December 31, 1999 to $898,000 for the six months ended
December 31, 2000. The Telcor and DTS contributions to interest expense for
the six months ended December 31, 2000 were $664,000 and $234,000,
respectively. Excluding depreciation and amortization charges, the Companys
operating loss for the six month period ended December 31, 2000 was $1,006,000
which reflects additional product development charges and increased general and
administrative expenses of the Company.

Liquidity and Capital Resources

OVERVIEW. The accompanying 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. As shown in the
accompanying financial statements during the six months ended December 31,
2000, the Company incurred a net loss of $4,176,000. Although the Company has
an accumulated deficit of $23,264,000 as of December 31, 2000, the Company has
made substantial progress over the past several quarters with respect to its
overall financial position. As of December 31, 2000 total net equity of the
Company increased to $18,698,000 as compared to a net deficit of ($2,685,000)
as of December 31, 1999. Additionally, the Company received monetary support
from a significant investor during fiscal year 2000. Such support enabled the
Company to more effectively manage its cash commitments and indebtedness.
Additional equity may be required during the upcoming quarters in fiscal 2001
and the Company is actively pursuing various financing alternatives.

As of December 31, 2000 the Companys cash position is $544,000. Additionally,
available borrowings under the Companys notes payable to banks at December 31,
2000 is $265,000. Such availability will be utilized in the near term to
address the Companys existing accounts payable, notes payable and inventory
purchase commitments. The Company believes its current cash position and
availability under its credit facilities may be inadequate to address immediate
cash requirements as dictated by the Companys existing commitments. As such,
the Company is actively pursuing any and all potential financing alternatives
to raise immediate short-term cash.

Potential additional sources of cash for use in future periods may include, but
are not limited to, private or public placements of the Companys securities
and securing additional financing with certain financial institutions. In the
event the Company is able to raise additional capital, the Company intends on
using such proceeds to accelerate product development initiatives, add
additional personnel as may be required and to pay down existing and any
additional indebtedness. Given the significant improvement in the Companys
overall financial position during fiscal 2000, the Company believes that the
probability of obtaining additional equity during fiscal 2001, although
dependent on a number of uncontrollable external factors, has increased as
compared to previous periods.

EQUITY. On October 14, 1998, NASDAQ delisted the Company because the Company
did not meet the 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 employed
several programs in an effort to help the Company preserve cash which, in the
first and second fiscal quarters of 1999, was 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 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 could not be pledged, sold or traded
until November 30, 1999 at which time, under Rule 144, the restricted legend
was removed from the certificates and the certificates are now freely tradable.

Page 15



---



On December 29, 1999, the Company entered into an agreement with Wi-LAN Inc.
(Wi-LAN), a leading provider of wireless data communications technology and
products, to sell Wi-LAN $1.5 million in convertible debentures (the 1999
debentures). The debentures, convertible into the Companys common stock at
any time by the holder, have a four-year term with a 10% interest rate with
principal and interest due at maturity. The Company has no buy-back provision,
and the conversion rate is one share per $1 in debentures, which approximated
the fair value of the Companys common stock on the date the Company entered
into the agreement. On January 7, 2000, a closing on the Wi-LAN debentures was
held whereby the Company received the proceeds from the first tranche of the
debentures of $400,000. The remaining $1,100,000 in proceeds from the issuance
of debentures was received prior to March 31, 2000. In connection with various
transactions subsequent to the sale of the $1.5 million in debentures and
through June 30, 2000, Wi-LAN has converted $1,278,900 of the 1999 debentures
into 1,278,900 shares of the Companys common stock. The outstanding amount of
these 1999 debentures as of December 31, 2000 is $221,100. In connection with
the agreement, Wi-LAN also received an option to purchase additional debentures
of $1.5 million with similar terms but at a conversion rate to be determined by
the market price of the Companys common stock at the time the option is
exercised. The expiration on the option to purchase additional debentures of
$1.5 million is January 7, 2002.

Apart from the transactions described above, in January 2000, Wi-LAN purchased
1,738,159 shares of the Companys common stock from MicroTel, another DTS
shareholder, and the outstanding $2 million in debentures (the 1997
debentures) with outstanding warrants from Finova Mezzanine Capital, a DTS
lender. By converting $1,310,000 of the 1997 debentures, Wi-LAN received
1,310,000 shares of the Companys common stock and gained over 50% of the
outstanding common stock of the Company. Through the transaction with Finova,
Wi-LAN also received outstanding warrants for 702,615 shares of common stock at
an exercise price of $1 per share which expire in March 2004. All 702,615
warrants remain outstanding and exercisable as of December 31, 2000.

Additionally, Wi-LAN converted another $190,000 of the 1997 debentures into
190,000 shares of the Companys common stock through September 30, 2000. The
outstanding amount of the 1997 debentures as of December 31, 2000 is $500,000.

On March 31, 2000, Wi-LAN purchased 454,737 shares of the Companys Series B
preferred stock for $3 million in cash. The Companys Series B Preferred Stock
is convertible into common shares at $7.125 per share, the market closing price
of the Companys common stock on March 30, 2000.

In June 2000, Digital Transmission Systems, Inc. announced that Wi-LAN Inc.
entered into a purchase and assignment agreement with the two former
shareholders of Telcor to acquire the right to receive approximately 31% of the
merger consideration still due to the former Telcor shareholders. According to
the agreement, Wi-LAN acquired $6,100,000 of the original $20 million
acquisition payable for $500,000 in cash and $5,600,000 by issuing the former
Telcor shareholders a right to receive $5,600,000 of Wi-LAN common shares based
on the market value of Wi-LAN shares on July 17, 2000, subject to a specified
maximum number of shares. Wi-LAN may redeem all or part of the right for cash.
In addition, Wi-LAN granted the former Telcor shareholders an option
exercisable by August 31, 2000, to sell between $2,000,000 and $4,000,000 of
additional merger consideration to Wi-LAN for the issuance of a right to
receive Wi-LAN shares of equivalent value, based on the market value of Wi-LAN
shares at October 30, 2000, subject to a specified maximum number of shares.
The former Telcor shareholders exercised the option (mentioned above) on
October 31, 2000 and agreed to sell $4,000,000 of merger consideration to
Wi-LAN, Inc.

On November 30, 2000, the Company paid down the entire remaining acquisition
payable balance of $7,655,400 through the issuance of common and Preferred
stock. The Company issued 638,273 shares of its common stock valued at $2.064
per share and remitted a cash payment of $117,605 to the former shareholders of
Telcor as final consideration owed to the former Telcor shareholders under the
amended merger agreement. The value of $2.064 per share represents the share
value calculated by the parties pursuant to the terms of the merger agreement
as executed on March 31, 2000. Further, the Company issued 683,543 common
shares valued at $2.064 per share and 2,330,217 shares of Series C Preferred
Stock convertible into the Companys common stock at $2.064 per share to
Wi-LAN, Inc. also reflecting final payment of all remaining merger
consideration then payable. The total
consideration paid under the above transactions was $7,655,400 and represented
the final payments for all amounts owed under the merger agreement, as amended,
to the former shareholders of Telcor and to Wi-LAN, Inc.

On January 25, 2000, the Board of Directors of the Company approved a plan
whereby certain compensation obligations of the Company to employees and Board
members could be satisfied through the issuance of restricted

Page 16



---



common stock at
the option of the holder. Approximately 30,000 shares of the Companys common
stock were issued to satisfy such obligations. The shares were issued at $3.56
per share (a 25% discount from the market closing price on January 25, 2000)
and are restricted as to trade, pledge, or sale until January 25, 2001. The
Company recorded $143,000 in compensation expense to reflect the satisfaction
of these obligations which represented the fair market value of the shares
issued.

LINE OF CREDIT ARRANGEMENTS. On April 10, 1997, DTS established a bank line of
credit agreement with Silicon Valley Bank which makes available $2,500,000 in
borrowings with availability based on DTS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% of eligible receivables plus 30% of eligible
inventory, as defined, through the maturity date of April 10, 2000. The loan
is secured by DTSs assets and bears interest at the rate of prime plus 2.25%.
A net worth covenant was amended on March 16, 1998, requiring DTS to maintain a
net worth of $1,000,000. In September 1998, DTS agreed to a UCC filing whereby
all assets of DTS became 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. DTS 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, DTS signed an amendment to the loan agreement with Silicon
Valley Bank which modified previous loan covenants and revised the maximum
borrowing amount to $1,500,000. The revised covenants are primarily based upon
minimum monthly and quarterly revenue levels. As consideration for the amended
agreement, DTS 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 the new agreement was
reached.

On February 24, 2000, DTS signed an additional amendment to the loan agreement
with Silicon Valley Bank which modified previous terms. Under the modified
terms, the revised loan agreement bears a maturity date of April 10, 2001.
Additionally, the revised and amended agreement increased the maximum borrowing
to $2,500,000 and bears interest at prime plus 2 1/4 (11.75% at December 31,
2000). Covenants under the agreement were further revised to require certain
minimum quarterly revenue and monthly income requirements. DTS was in
compliance with all covenants imposed by the agreement as of December 31, 2000.
Amounts outstanding under the DTS line of credit facility were $1,441,000 and
$658,000 at December 31, 2000 and 1999, respectively.

Additionally, the Companys wholly-owned subsidiary, Telcor Communications,
Inc. (Telcor) has a revolving credit facility with a commercial bank (PNC
Bank) at LIBOR plus 2.5% or prime, whichever is lower, the interest on which is
payable monthly. Under the agreement, Telcor is allowed to borrow up to 85% of
eligible accounts receivable and 50% of eligible inventory with an established
limit of $17,000,000 as of December 31, 2000. At December 31, 2000, amounts
outstanding under the Telcor line of credit facility are $9,423,000, and the
interest rate was 10.0%. The line is collateralized by Telcors trade accounts
receivable, inventories, and all other assets. The Telcor revolving line of
credit will expire on May 11, 2002.

Under the agreement, Telcor is required to comply with certain covenants which
include, but are not limited to, maintaining minimum requirements for debt to
equity, net worth, cash flows, and capital expenditures. At December 31, 2000,
Telcor was not in compliance with all covenants imposed by the line of credit
agreement.

CASH. As of December 31, 2000, the Company had approximately $544,000 in cash
and cash equivalents. For the six months ended December 31, 2000, $3,432,000
was used in operating activities as compared to cash provided by operations of
$585,000 for the six months ended December 31, 1999. The net loss for the six
months ended December 31, 2000 of $4,176,000 includes non-cash charges relating
to depreciation and amortization of $2,255,000. Exclusive of non-cash charges,
cash was used in operations primarily through an increase in inventory of
$828,000 and a decrease in accounts payable of $2,219,000.

The Company purchased $745,000 and $11,000 of property and equipment during the
six months ended December 31, 2000 and 1999, respectively. In addition, the
Company capitalized certain software development costs paid to
outside contractors. During the six months ended December 31, 2000, the
Company capitalized $105,000 of such costs as compared to capitalized costs of
$148,000 for the six months ended December 31, 1999.

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

Page 17



---



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. The Companys backlog
at December 31, 2000 is $4,425,857.

Year 2000 (Y2K) Impact on Companys Information Technology

Since the implementation of the Companys Y2K compliant systems and processes
in late 1999 and early 2000, the Company has not experienced any material or
adverse effects nor any business interruptions resulting from Y2K compliance
issues. The Company did not incur any costs associated with Y2K compliance
issues.

New Accounting Pronouncements

In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, Accounting for
Derivative Instruments and Hedging Activities  Deferral of the Effective Date
of FASB Statement No. 133, which deferred implementation of SFAS 133 until
fiscal quarters of fiscal years beginning after June 15, 2000.

SFAS 133 requires all derivatives to be carried on the balance sheet at fair
value. Changes in the fair value of derivatives must be recognized in the
Companys Consolidated Statement of Operations when they occur; however there
is an exception for derivatives that qualify as hedges as defined by SFAS 133.
If a derivative qualifies as a hedge, a company can elect to use hedge
accounting to eliminate or reduce the income statement volatility that would
arise from reporting changes in a derivatives fair value.

In June 2000, the FASB issued SFAS No. 138, Accounting for Derivative
Instruments and Hedging Activities  an amendment of FASB Statement No. 133.
SFAS No.138 adds to the guidance related to accounting for derivative
instruments and hedging activities. This statement should be adopted
concurrently with SFAS 133. The adoption of both SFAS 133 and 138 has not
materially impacted the Companys financial results.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 summarizes existing guidance on revenue recognition. The
implementation date of SAB 101 is no later than the fourth quarter of fiscal
years beginning after December 15, 1999. The Company believes that
implementation of SAB 101 will not have a material impact on the Companys
financial statements.

In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions involving Stock Compensation  an Interpretation of
Accounting Principles Board Opinion No. 25. FIN 44 provides guidance for
certain issues that arose in applying APB 25. The provisions were effective
July 1, 2000, and, generally, are applied prospectively. Adoption of FIN 44
has not materially impacted the Companys financial results.

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.

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

Page 18



---



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 the occurrence of unanticipated events.

Quantitative and Qualitative Disclosure About Market Risk

The Company is exposed to market risk from changes in interest rates on
variable rate indebtedness. The Companys primary interest rate risk relates
to its variable rate bank credit facilities. At December 31, 2000, the
Companys total variable rate debt obligations was $10,864,000. A hypothetical
1% increase in the Companys variable interest rate for a duration of one year
would result in additional interest expense of approximately $109,000.

Page 19



---



Part II. OTHER INFORMATION

Part II. OTHER INFORMATION

Items 1  5 are not applicable.

Item 6. Exhibits and Reports on Form 8-K



|    |  |                    
|--- |  | -------------------
|(A) |  | Exhibits           
|   
|    |  | None.              
|   
|(B) |  | Reports on Form 8-K



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | The registrant did not file any reports on Form 8-K during the three
months ended December 31, 2000.

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: February 14, 2001 | By:                                |  | /s/ Andres C. Salazar          
|                        |                                    |  | Andres C. Salazar              
|                        |                                    |  | Chief Executive Officer        
|                       
|Date: February 14, 2001 | By:                                |  | /s/ Clive N. W. Marsh          
|                        |                                    |  | Clive N. W. Marsh, V.P. Finance
|                        |                                    |  | (Principal Accounting Officer) 

Page 21