<PAGE>   1
===============================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-QSB

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

                For the Quarterly Period Ended December 31, 1999

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

                   For the Transition Period From ____to____

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

                         Commission File Number 1-14198

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


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

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


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

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

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

The number of shares outstanding of the registrant's common stock as of
February 11, 2000 was 6,054,152.

Transitional Small Business Disclosure Format (check one):   Yes [ ]   No [x]
===============================================================================
<PAGE>   2

                       DIGITAL TRANSMISSION SYSTEMS INC.
                                  FORM 10-QSB

                    FOR THE QUARTER ENDED DECEMBER 31, 1999

                                     INDEX


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

Item 1.         Financial Statements:

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

                Condensed Consolidated Statements of Operations for the Three
                  Months ended December 31, 1999 and 1998 (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, 1999 and 1998 (Unaudited)                             6

                Notes to Interim Condensed Consolidated Financial Statements
                  (Unaudited)                                                                     7

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

PART II.            OTHER INFORMATION

Items 1-5           Not applicable                                                               17

Item 6.             Exhibits and Reports on Form 8-K                                             17

                    Signatures                                                                   18


Exhibit 27.0        Financial Data Schedule  (SEC use only)                                      19
</TABLE>


                                    Page 2
<PAGE>   3

                       DIGITAL TRANSMISSION SYSTEMS, INC.
                                 Balance Sheets
                       (in thousands, except share data)
                                  (Unaudited)



<TABLE>
<CAPTION>
                                 ASSETS                                      DECEMBER 31,
                                                                                 1999              JUNE 30, 1999
                                                                             ------------          -------------
<S>                                                                          <C>                   <C>
Current assets:
    Cash and cash equivalents                                               $         335                    217
    Trade accounts receivable, net of allowances for
      returns and doubtful accounts of $906 and
      $1,238 at December 31, 1999 and June 30, 1999, respectively                     400                  1,133
    Accounts receivable from related parties                                           --                     43
    Inventories                                                                       737                    903
    Prepaid expenses and other current assets                                          --                     25
                                                                                 --------            -----------
                Total current assets                                                1,472                  2,321
Property and equipment, net of accumulated depreciation
    and amortization                                                                  275                    410
Note receivable from a related party                                                  127                    127
Intangible assets                                                                     439                    423
Other assets                                                                          560                    526
                                                                                 --------            -----------

                Total assets                                                 $      2,873                  3,807
                                                                                 ========            ===========

                 LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
    Line of credit                                                           $        658                  1,365
    Accounts payable and accrued liabilities                                        1,336                  1,749
    Accounts payable to related parties                                                --                     69
    Accrued payroll and benefits                                                      258                    167
    Notes payable                                                                     980                    561
    Warranty accrual                                                                  199                    197
                                                                                 --------            -----------
                Total current liabilities                                           3,431                  4,108
                                                                                 --------            -----------
Long-term liabilities:
    Convertible debentures                                                          2,000                  2,000
    Deferred gain on sale of subsidiary                                               127                    127
                                                                                 --------            -----------
                Total long-term liabilities                                         2,127                  2,127
                                                                                 --------            -----------
Shareholders' deficit:
    Preferred stock - 3,000,000 shares authorized; 1,314,333 shares
      issued and outstanding                                                        1,314                  1,314
    Common stock - $.01 par value; 15,000,000 shares
      authorized; 4,646,221 shares issued and outstanding
      at December 31, 1999 and June 30, 1999, respectively                             47                     47
    Additional paid-in capital                                                     11,651                 11,651
    Notes receivable from stock sales                                                 (63)                   (63)
    Accumulated deficit                                                           (15,634)               (15,377)
                                                                                 --------            -----------
                Total shareholders' deficit                                        (2,685)                (2,428)
Commitments and contingencies
                                                                                 --------            -----------
                Total liabilities and shareholders' deficit                  $      2,873                  3,807
                                                                                 ========            ===========
</TABLE>


See accompanying notes to financial statements.


                                    Page 3
<PAGE>   4

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


<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED DECEMBER 31
                                                         ------------------------------
                                                              1999           1998
                                                            Unaudited      Unaudited
                                                         --------------  --------------

<S>                                                      <C>             <C>
Net sales                                                    $    1,123      $    1,405
Cost of sales                                                       628           1,000

                                                             ----------      ----------
   Gross profit                                                     495             405
                                                             ----------      ----------

Selling, general and administrative                                 506             748

Product development                                                 171             419


                                                             ----------      ----------
   Total operating expenses                                         677           1,167
                                                             ----------      ----------

   Operating loss                                                  (182)           (762)

Interest expense, net                                               (92)           (149)

                                                             ----------      ----------
Loss before income tax expense                                     (274)           (911)

Income tax benefit (expense)                                         --              --


                                                             ----------      ----------
Net loss                                                     $     (274)     $     (911)
                                                             ==========      ==========

Net loss per share - basic and diluted                       $    (0.06)     $    (0.22)
                                                             ==========      ==========


Weighted average shares outstanding - basic and diluted           4,646           4,178
                                                             ==========      ==========
</TABLE>


See accompanying notes to condensed consolidated financial statements.


                                    Page 4
<PAGE>   5

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


<TABLE>
<CAPTION>
                                                                                SIX MONTHS ENDED DECEMBER 31
                                                                              --------------------------------
                                                                                  1999                1998
                                                                                Unaudited          Unaudited
                                                                              -------------       ------------


<S>                                                                           <C>                 <C>
Net sales                                                                        $    3,742         $    2,924
Cost of sales                                                                         2,332              2,073

                                                                                 ----------         ----------
   Gross profit                                                                       1,410                851
                                                                                 ----------         ----------

Selling, general and administrative                                                   1,050              1,583

Product development                                                                     407                922

                                                                                 ----------         ----------
   Total operating expenses                                                           1,457              2,505
                                                                                 ----------         ----------

   Operating loss                                                                       (47)            (1,654)

Interest expense, net                                                                  (210)              (334)
                                                                                 ----------         ----------
Loss before income tax expense                                                         (257)            (1,988)

Income tax benefit (expense)                                                             --                 --


                                                                                 ==========         ==========
Net loss                                                                         $     (257)        $   (1,988)
                                                                                 ==========         ==========

Net loss per share - basic and diluted                                           $    (0.06)        $    (0.48)
                                                                                 ==========         ==========


Weighted average shares outstanding - basic and diluted                               4,646              4,178
                                                                                 ==========         ==========
</TABLE>


See accompanying notes to condensed consolidated financial statements.


                                    Page 5
<PAGE>   6

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


<TABLE>
<CAPTION>
                                                                           SIX MONTHS ENDED DECEMBER 31
                                                                        -------------------------------
                                                                           1999                   1998
                                                                         Unaudited            Unaudited
                                                                         ----------           ---------
<S>                                                                     <C>                   <C>
Cash flows from operating activities:
  Net loss                                                              $     (257)           $   (1,988)
  Adjustments to reconcile net loss
   to net cash used in (provided by) operating activities:
     Depreciation and amortization                                             278                   438
     Amortization of deferred compensation expense                              --                    32
  Changes in assets and liabilities:
     Trade and other accounts receivable                                       776                   765
     Inventories                                                               166                   689
     Prepaid expenses and other assets                                          (9)                  (48)
     Accounts payable and other accrued expenses                              (372)                  475
     Warranty accrual                                                            3                   (13)

                                                                        ----------            ----------
Net cash provided by operating activities                                      585                   350
                                                                        ----------            ----------

Cash flows from investing activities:
  Purchases of property and equipment                                          (11)                  (46)
  Additions to capitalized product development costs                          (148)                  (94)

                                                                        ----------            ----------
Net cash used in investing activities                                         (159)                 (140)
                                                                        ----------            ----------

Cash flows from financing activities:
  Net payments under line of credit agreement                                 (708)                 (246)
  Proceeds from issuance of note payable                                       400                    --
  Proceeds from exercise of stock options                                       --                    --

                                                                        ----------            ----------
Net cash used in financing activities                                         (308)                 (246)
                                                                        ----------            ----------

Net increase (decrease) in cash and cash equivalents                           118                   (36)
Cash and cash equivalents at beginning of period                               217                    91

                                                                        ==========            ==========
Cash and cash equivalents at end of period                              $      335            $       55
                                                                        ==========            ==========

Supplemental disclosure of cash paid for income taxes and interest
    Cash paid for income taxes                                                  --                    --
                                                                        ----------            ----------
    Cash paid for interest                                              $       67            $       83
                                                                        ----------            ----------
</TABLE>


See accompanying notes to condensed consolidated financial statements.


                                    Page 6
<PAGE>   7

                       DIGITAL TRANSMISSION SYSTEMS, INC.
          NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                         DECEMBER 31, 1999 (UNAUDITED)

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

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

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

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

The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred significant losses in recent periods. The Company has a net capital
deficit of $2,685,000 as of December 31, 1999. These factors, among others,
raise substantial doubt about the Company's ability to continue as a going
concern for a reasonable period of time.

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

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows
for the interim periods. Operating results for the six months ended December
31, 1999 are not necessarily indicative of the results that may be expected for
the year ended June 30, 2000. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form 10-KSB for the
year ended June 30, 1999.

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


                                    Page 7
<PAGE>   8

2.  INCOME (LOSS) PER COMMON SHARE

The Company has presented earnings (loss) per share in accordance with the
provisions of SFAS No. 128, Earnings Per Share ("SFAS 128"), which requires
companies that have publicly held common stock or potential common stock to
present both basic and diluted earnings (loss) per share (EPS) on the face of
the income statement. Basic EPS is calculated as income (loss) available to
common shareholders divided by the weighted-average number of common shares
outstanding during the period. Diluted EPS is calculated as income (loss)
available to common shareholders divided by the weighted-average number of
common shares outstanding during the period plus any dilutive potential common
shares, such as convertible debt or stock options. The Company has restated its
earnings (loss) per share for all periods presented to conform to the
provisions of SFAS 128.

3.  LEGAL MATTERS

The Company is not party to any material legal proceedings. From time to time,
the Company is involved in various routine legal proceedings incidental to the
conduct of its business.

4.  SIGNIFICANT TRANSACTIONS

On December 29, 1999 the Company entered into an agreement with Wi-LAN, Inc., a
Calgary, Alberta company in Canada to sell $1.5 million in debentures which
would provide the Company with much needed additional working capital. The new
debentures would have similar terms to those that had been placed with Finova
Mezzanine Capital with a few exceptions. Namely, the debentures would have a
four-year term with 10% coupon rate and principal and cumulative interest due
at the end of the term. In addition, the Company would have no buy-back
provision and the conversion rate would be $1 per share. On January 7, 2000 a
closing on the Wi-LAN debentures was held whereby the Company received a first
tranche of the debenture payment of $400,000 with additional tranches of the
same amount due on February 1 and March 1. A final tranche of $300,000 is due
on April 1, 2000. Through the final agreement signed on January 7, 2000 Wi-LAN,
Inc. has the option to purchase an additional debenture of $1.5 million with
similar terms but at a conversion rate to be determined by the market price of
DTSX common stock at the time that the option is exercised. Simultaneous to the
debenture transaction with DTS on January 7, 2000, Wi-LAN purchased 1,738,159
shares of DTSX stock from Microtel and the $2 million debenture from Finova
Mezzanine Capital. By converting $1.3 million of the Finova debenture, Wi-LAN
received 1,300,000 shares of DTSX stock and thus gaining over 50% of the
outstanding common stock of DTS. Through the transaction with Finova, Wi-LAN
received a warrant for 734,000 shares of DTSX common stock at a exercise price
of $1 per share and a warrant for 500,000 shares of LinkaNet Labs, a DTS
affiliate.

On January 18, 2000 DTS entered into a technology licensing agreement with
Wi-LAN., a Calgary, Alberta company in Canada, whereby DTS would receive
documentation and services about a technology named Wideband Orthogonal
Frequency Division Multiplexing ("W-OFDM"). W-OFDM technology has been widely
proclaimed as the preferred method of transmitting very high-speed digital
information through wireless links at speeds above 1 Mbps. Recently the IEEE
802.11a Committee accepted W-OFDM as a standard for wireless transmission from
5 Mbps to 50 Mbps. Wi-LAN owns key patents on W-OFDM and has developed
components and modules that allow a licensee to develop systems and products
that incorporate the patented technology. The license granted DTS by Wi-LAN
allows DTS to develop and sell products on an exclusive basis for the Local
Multipoint Distribution Services ("LMDS") worldwide market in the frequency
range 10GHz to 100GHz. The license will allow DTS to enter a market relevant to
that being served currently with its line of products - Flex, microFlex and the
IP Processor.


                                    Page 8
<PAGE>   9

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

GENERAL

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

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

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

RESULTS OF OPERATIONS

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

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


<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED             THREE MONTHS ENDED
                                            DECEMBER 31, 1999              DECEMBER 31, 1998
                                           ------------------             ------------------

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

<S>                                        <C>          <C>               <C>          <C>
Net Sales                                  1,123              100         1,405               100
Gross Profit                                 495               44           405                29
Product development                          171               15           419                30
Selling, general and administrative          507               45           748                53
Net income (loss)                           (275)             (24)         (911)              (65)
</TABLE>


                                    Page 9
<PAGE>   10

NET SALES. Net sales decreased by 20%, to $1,123,000 for the three months ended
December 31, 1999 from $1,405,000 for the three months ended December 31, 1998.
The sales mix, and the corresponding percentage of total sales of the Company's
products, is set forth in the chart below:


<TABLE>
<CAPTION>
                                                                         PERCENTAGE OF
                                                                            TOTAL
                                                 THREE MONTHS ENDED   THREE MONTHS ENDED
                                                    DECEMBER 31,         DECEMBER 31,
                                                 ------------------   ------------------

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

<S>                                              <C>       <C>        <C>          <C>
Flex T1/E1                                       $   963   $    843         86        60
SKYPLEX                                               39        489          3        35
Other products                                       121         73         11         5
                                                 ---------------------------------------

Totals                                           $ 1,123   $  1,405        100       100
                                                 =======================================
</TABLE>




For the three months ended December 31, 1999, revenues from the Company's
FlexT1/E1 product line increased 14% from $843,000 for the three months ended
December 31, 1998 to $963,000 for the three months ended December 31, 1999.
Revenues from sales of the Company's SKYPLEX product decreased 92% to $39,000
for the three months ended December 31, 1999 from $489,000 for the three months
ended December 31, 1998 reflecting a shift in the Company's sales focus from
international to domestic after the sale of the Company's international
subsidiary on February 5, 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 22% from $405,000 for the three month period
ended December 31, 1998 to $495,000 for the three month period ended December
31, 1999. As a percentage of sales, gross profit increased from 29% for the
three month period ended December 31, 1998 to 44% for the three month period
ended December 31, 1999. The increase is due to a higher margin product mix
noted for the three month period ended December 31, 1999.

PRODUCT DEVELOPMENT. Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
decreased 59%, to $171,000 for the three months ended December 31, 1999 from
$419,000 for the three months ended December 31, 1998. The decrease in product
development expense for the three month period ended December 31, 1999 is
primarily due to reduced spending on new development projects. Approximately
$143,000 of development costs related to new projects were capitalized for the
three month period ended December 31, 1999 as compared to $60,000 for the three
month period ended December 31, 1998. As a percentage of sales, product
development costs were 15% for the three months ended December 31, 1999 and 30%
for the three months ended December 31, 1998.

SELLING, GENERAL AND ADMINISTRATIVE. Selling expense consists primarily of
compensation costs for sales and marketing personnel, travel, consulting, trade
show and advertising expenses. General and administrative expense consists
primarily of occupancy costs and compensation expenses for administrative and
finance personnel, as well as accounting, legal and consulting fees. Selling,
general and administrative expense decreased by 32%, to $507,000 for the three
months ended December 31, 1999 from $748,000 for the three months ended
December 31, 1998. Total selling, general and administrative costs were 45% of
total sales for the three months ended December 31, 1999 as compared to 53% of
sales for the three months ended December 31, 1998. The overall decrease in
selling, general and administrative expenses is primarily due to the Company's
reduction in personnel compensation and other administrative costs due to
several cost reduction plans instituted by management during the fourth quarter
of fiscal 1998 and the first quarter of fiscal 1999. As of December 31, 1999
the Company had approximately 28 full-time employees reflecting a decrease in
overall headcount of 10, from 38 full-time employees as of December 31, 1998.
Selling expense decreased by 40%, to $171,000 for the three months ended
December 31, 1999 from $285,000 for the three months ended December 31, 1998.
This decrease was due to lower sales personnel


                                    Page 10
<PAGE>   11

compensation costs and sales commission costs associated with the decreased
sales level for the three months ended December 31, 1999 as compared to the
three months ended December 31, 1998. Marketing expenditures decreased by 50%
from $104,000 to $52,000 due to reduced advertising efforts and a reduction in
tradeshow participation during the three month period ended December 31, 1999.
General and administrative expenses decreased by 21%, to $284,000 for the three
months ended December 31, 1999 from $358,000 for the three months ended
December 31, 1998. This decrease is primarily a result of the overall decrease
in headcount at December 31, 1999 as compared to December 31, 1998.

NET LOSS. The net loss decreased to $275,000 for the three months ended
December 31, 1999, from $911,000 for the three months ended December 31, 1998.
This decrease was primarily the result of the decrease in selling, general and
administrative expenses as a result of an overall reduction in operating
expenses.

SIX MONTHS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998

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


<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED            SIX MONTHS ENDED
                                                        DECEMBER 31, 1999           DECEMBER 31, 1998
                                                        -----------------           -----------------

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

<S>                                                  <C>          <C>             <C>      <C>
Net Sales                                                3,742           100        2,924         100
Gross Profit                                             1,410            38          851          29
Product development                                        407            11          922          32
Selling, general and administrative                      1,051            28        1,583          54
Net income (loss)                                         (258)           (7)      (1,988)        (68)
</TABLE>




NET SALES. Net sales increased 28%, to $3,742,000 for the six months ended
December 31, 1999 from $2,924,000 for the six months ended December 31, 1998.
The sales mix, and the corresponding percentage of total sales of the Company's
products, is set forth in the chart below:


<TABLE>
<CAPTION>
                                                                                  PERCENTAGE OF
                                                                                      TOTAL
                                                       SIX MONTHS ENDED          SIX MONTHS ENDED
                                                         DECEMBER 31,              DECEMBER 31,
                                                       ----------------          ----------------

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

<S>                                                    <C>      <C>              <C>         <C>
Flex T1/E1                                             $ 3,571  $ 1,812             95         62
SKYPLEX                                                     39    1,016              1         35
Other products                                             132       96              4          3
                                                       ------------------------------------------

Totals                                                 $ 3,742  $ 2,924            100        100
                                                       ==========================================
</TABLE>




For the six months ended December 31, 1999, revenues from the Company's
FlexT1/E1 product line increased 97% from $1,812,000 for the six months ended
December 31, 1998 to $3,571,000 for the six months ended December 31, 1999.
Revenues from sales of the Company's SKYPLEX product decreased 96% to $39,000
for the six months ended December 31, 1999 from $1,016,000 for the six months
ended December 31, 1998 reflecting an overall


                                    Page 11
<PAGE>   12

decrease in international sales of the SKYPLEX product line as a result of the
sale of the Company's international subsidiary on February 5, 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 66% from $851,000 for the six month period
ended December 31, 1998 to $1,410,000 for the six month period ended December
31, 1999 primarily due to the accompanying increase in sales of higher margin
products noted for the same period. As a percentage of sales, gross profit
increased from 29% of sales for the six months ended December 31, 1998 to 38%
of sales for the six months ended December 31, 1999. The increase is primarily
attributable to a reduction in the Company's overhead costs as a result of
specific cost reduction plans that were instituted by management during late
fourth quarter of fiscal 1998 and the first quarter of fiscal 1999.

PRODUCT DEVELOPMENT. Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
decreased 56%, to $407,000 for the six months ended December 31, 1999 from
$922,000 for the six months ended December 31, 1998. The decrease in product
development expense for the six month period ended December 31, 1999 is
primarily due to reduced spending on new development projects. Approximately
$148,000 of development costs related to new projects were capitalized for the
six month period ended December 31, 1999 as compared to $94,000 for the six
month period ended December 31, 1998. As a percentage of sales, product
development costs were 11% for the six months ended December 31, 1999 and 32%
for the six months ended December 31, 1998.

SELLING, GENERAL AND ADMINISTRATIVE. Selling expense consists primarily of
compensation costs for sales and marketing personnel, travel, consulting, trade
show and advertising expenses. General and administrative expense consists
primarily of occupancy costs and compensation expenses for administrative and
finance personnel, as well as accounting, legal and consulting fees. Selling,
general and administrative expense decreased by 34%, to $1,051,000 for the six
months ended December 31, 1999 from $1,583,000 for the six months ended
December 31, 1998. Total selling, general and administrative costs were 28% of
total sales for the six months ended December 31, 1999 as compared to 54% of
sales for the six months ended December 31, 1998. The overall decrease in
selling, general and administrative expenses is primarily due to the Company's
reduction in personnel compensation and other administrative costs due to
several cost reduction plans instituted by management during the fourth quarter
of fiscal 1998 and the first quarter of fiscal 1999. As of December 31, 1999
the Company had approximately 28 full-time employees reflecting a decrease in
overall headcount of 10, from 38 full-time employees as of December 31, 1998.
Selling expense decreased by 45%, to $346,000 for the six months ended December
31, 1999 from $634,000 for the six months ended December 31, 1998. This
decrease was due to lower sales personnel compensation costs and sales
commission costs associated with the decreased sales level for the six months
ended December 31, 1998 as compared to the six months ended December 31, 1997.
Marketing expenditures decreased by 58% from $265,000 to $110,000 due to
reduced advertising efforts and a reduction in tradeshow participation during
the six month period ended December 31, 1999. General and administrative
expenses decreased by 13%, to $595,000 for the six months ended December 31,
1999 from $684,000 for the six months ended December 31, 1998. This decrease is
primarily a result of the overall decrease in headcount at December 31, 1999 as
compared to December 31, 1998.

NET LOSS. The net loss decreased to $258,000 for the six months ended December
31, 1999, from $1,988,000 for the six months ended December 31, 1998. This
decrease was primarily the result of the decrease in selling, general and
administrative expenses as a result of an overall reduction in operating
expenses.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred significant losses in recent periods and has previously been in
violation of its debt covenants. However, through the sale of its international
subsidiary, SouthTech, Inc., on February 5, 1999, and the amendment of its
debenture agreement with Sirrom Capital, the Company is currently in compliance
with all loan covenants and its net capital deficit has been reduced to
$2,685,000 as of December 31, 1999. Although these accomplishments have
improved the Company's financial condition from December 31, 1998, the
Company's access to additional working capital and current cash condition still
raise doubt about the Company's ability to continue as a going concern for a
reasonable period of time.


                                    Page 12
<PAGE>   13

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

On October 14, 1998, NASDAQ delisted the Company because the Company did not
meet its listing requirement of minimum net assets. The Company's securities
are currently traded on the OTC Bulletin Board. The delisting action has
hampered the Company's efforts to raise capital through a private placement of
its stock with qualified investors. However, the Company has employed several
programs in an effort to help the Company preserve cash which, in the first and
second fiscal quarters of 1999, was being used to fund severance costs of
terminated employees, to fund payroll and essential expenses and the purchase
of supplies from critical vendors. First, a group of employees and affiliates
volunteered to forego or delay salary, commission and other compensation
payments through a restricted stock for cash program offered by Board
resolution on August 10, 1998. Under that program a total of approximately
395,612 common shares were approved by the Board to compensate those employees
and affiliates in return for cancellation of salary or other compensation
payments totaling $52,320 and a delay of payment of another $62,206. These
shares cannot be pledged, sold or traded until November 30, 1999 at which time,
under Rule 144, they will have the restricted legend removed from their
certificates and are freely tradable. Secondly, another program to preserve
cash has been to work out extended payment terms with certain key material
suppliers for overdue amounts payable. The Company has been able to complete
formal negotiations with three critical suppliers and establish extended
payment terms (over a 12 month period) for overdue amounts payable. Third,
non-critical suppliers have been offered settlements in the form of uniform
terms and reduced but immediate cash payments for cancellation of long standing
past due amounts. A total of $208,000 of amounts payable have been settled for
a reduced amount under these conditions.

On April 10, 1997, the Company established a bank line of credit agreement with
Silicon Valley Bank which makes available $2,500,000 in borrowings with
availability based on the Company's accounts receivable. The loan was amended
on March 18, 1998 to increase the maximum eligible borrowing to the lesser of
$4,000,000 or 80% eligible receivables plus 30% of eligible inventory, as
defined, through the maturity date of April 10, 2000. The loan is secured by
the Company's assets and bears interest at the rate of prime plus 2.25%. A net
worth covenant was amended on March 16, 1998, requiring the Company to have a
net worth of $1,000,000. In September 1998, the Company agreed to a UCC filing
whereby all assets of the Company become collateral under the Agreement. The
loan requires a monthly monitoring fee of $1,000 and a commitment fee of 0.125%
due monthly on the unused portion of the facility. The agreement term is two
years with an automatic renewal each year unless written notice of termination
is given by one of the parties. The Company issued 60,000 two year warrants to
Silicon Valley Bank at a strike price of $5.25 each as consideration for the
amended agreement. On February 25, 1999 the Company signed an amendment to the
loan agreement with Silicon Valley Bank which modified previous loan covenants.
The revised covenants are primarily based upon minimum monthly and quarterly
revenue levels. As consideration for the amended agreement, the Company issued
250,000 two year warrants for common stock of the Company at $0.119 per share
which represents the market price of the Company's common stock at the close of
business on December 2, 1998 when a new agreement was reached. The financial
and accounting value of the warrants issued is immaterial to the Company's
financial statements and has not been recorded as of December 31, 1999. Under
the revised agreement the maximum borrowing has been reduced to $1,500,000 and
bears interest at prime plus 2 1/4 (10.75% at December 31, 1999).

During fiscal 1998, the Company issued $4 million of 11.5% subordinated
debentures to Sirrom Capital of Nashville, Tennessee. During March 1999, The
FINOVA Group consummated its previously announced acquisition of Sirrom Capital
Corporation. Sirrom Capital will begin operating as FINOVA Mezzanine Capital, a
specialty finance company, headquartered in Nashville, Tennessee. The
aforementioned debentures were issued on September 25, 1997 with a contractual
due date of September 25, 2002. The Debenture Purchase Agreement contained
numerous rights, privileges, and conditions in favor of the lender, only
certain of which are described herein. The debentures were originally
convertible at any time by the lender into common stock of the Company at a
conversion price of $10.25 per share, subject to adjustment in certain events.
The conversion price would change to $8.00 per share if the Company's common
stock was trading for less than that amount on September 25, 1998. The
debentures were redeemable by the Company after September 1999 provided that
(a) the Company pays the lender additional


                                    Page 13
<PAGE>   14

interest such that the lender would receive an effective compounded 20%
interest rate from inception of the loan or (b) the 20-day average bid price
for the Company's stock exceeds $15.00 per share.

The debentures may be required to be redeemed by the Company at the option of
the lender at any time prior to maturity if (a) there is a change in control,
as defined in the Debenture Agreement, (b) the Company's common stock is
delisted from NASDAQ, or (c) the Company's common stock ceases to be publicly
traded at the sum of the principal amount of the debentures tendered for
redemption, plus any accrued and/or unpaid interest outstanding related to the
debentures, plus 15% interest on outstanding principal and interest amounts
due, plus any expense or costs owed to the lender as set forth in the Debenture
Agreement. Due to continued noncompliance with debt covenants and the NASDAQ
listing criteria, the Company was delisted as of October 14, 1998. However,
accompanying the sale of the Company's international subsidiary, SouthTech,
Inc., Sirrom Capital agreed to restructure the $4,000,000 debenture with the
Company by transferring $1,000,000 to SouthTech, Inc. as it was sold to Chapala
Communications. In addition, Sirrom Capital agreed to convert $1,000,000 along
with accrued but unpaid interest of $314,333 into Series A convertible
preferred stock which bears no dividends and is convertible into common stock
at $1.00 per share. The remaining $2,000,000 debenture, convertible now at
$1.00 per share and bearing interest at 10% per annum, requires an interest
payment of $200,000 on February 5, 2000.

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

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

At December 31, 1999, the Company had approximately $335,000 in cash and cash
equivalents. For the six months ended December 31, 1999 and 1998, $584,000 and
$350,000 was provided by operations, respectively. Cash was provided for
operations for the six months ended December 31, 1999 primarily through a
decrease in accounts receivable of $776,000.

The Company purchased $11,000 and $46,000 of property, plant and equipment
during the six months ended December 31, 1999 and 1998, respectively. In
addition, the Company capitalized certain product development expenses paid to
outside contractors. During the six months ended December 31, 1999, the Company
capitalized $148,000 of such costs as compared to capitalized costs of $94,000
for the six months ended December 31, 1998.

SEASONALITY

The Company's sales have been subject to quarterly fluctuations mainly due to
the purchasing cycle of the Company's major customers. Other fluctuations occur
due to increased buildout of the telecommunications infrastructure during the
summer months. The Company's business plan is to continue the diversification
of its product offerings, further develop its distribution channels and further
expand its customer base. The Company believes that the implementation of this
plan will decrease the seasonality of its sales. The Company operates with a
moderate level of backlog for each product line due to advance purchase
commitments and production lead times.


                                    Page 14
<PAGE>   15

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999.
Subsequently, the effective date was deferred until June 15, 2000. We do not
anticipate any material impact on the financial statements as a result of the
adoption of SFAS No. 133.

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 economies; (ii) the Company's
performance under current and future contracts; (iii) inflation and interest
rate fluctuations; (iv) timely and successful implementation of processing
systems to provide new products, improved functionality and increased
efficiencies; (v) technological changes; (vi) acquisitions; (vii) the ability
to increase market share and control expenses; (viii) changes in laws or
regulations or other industry standards affecting the Company's business which
require significant product redevelopment efforts; (ix) the effect of changes
in accounting policies and practices as may be adopted by the Financial
Accounting Standards Board; (x) changes in the Company's organization,
compensation and benefit plans; (xi) the costs and effects of litigation and of
unexpected or adverse outcomes in such litigation; (xii) failure to
successfully implement the Company's Year 2000 modification plans substantially
as scheduled and budgeted; and (xiii) the success of the Company at managing
the risks involved in the foregoing.

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


                                    Page 15
<PAGE>   16

                           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

<TABLE>
<CAPTION>
         Exhibit
         Number                      Description of Exhibits
         -------                     -----------------------

         <S>               <C>
         27.0              Financial Data Schedule (for SEC use only)
</TABLE>


(B)      REPORTS ON FORM 8-K

         The registrant did not file any reports on Form 8-K during the six
months ended December 31, 1999.


                                    Page 16
<PAGE>   17

                                   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 15, 2000                   By:  /s/ Andres C. Salazar
                                              --------------------------
                                                 Andres C. Salazar
                                                 Chief Executive Officer


Date: February 15, 2000                    By:  /s/  Clive N. W. Marsh
                                               -----------------------
                                                 Clive N. W. Marsh, Controller
                                                 (Principal Accounting Officer)


                                    Page 17