SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                             ____________________

                                   FORM 10-K
(MARK ONE)

  [X]   ANNUAL  REPORT  PURSUANT  TO  SECTION  13  OR  15(D)  OF THE SECURITIES
        EXCHANGE ACT OF 1934
        FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
                                      OR
  [   ] TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(D) OF THE  SECURITIES
        EXCHANGE ACT OF 1934
        FOR THE TRANSITION PERIOD FROM ________ TO ________
                        COMMISSION FILE NUMBER: 0-21669

                            DIGITAL LIGHTWAVE, INC.
            (Exact name of Registrant as specified in its charter)

<TABLE>
<CAPTION>
             DELAWARE                         95-4313013
<S>                                       <C>
  (State or Other Jurisdiction             (I.R.S. Employer
of incorporation or organization)         Identification No.)
15550 LIGHTWAVE DRIVE CLEARWATER, FLORIDA        33760
(Address of principal executive offices)      (Zip Code)
</TABLE>
       Registrant's telephone number, including area code  (727) 442-6677

          Securities registered pursuant to Section 12(b) of the Act:
                                     NONE

          Securities registered pursuant to Section 12(g) of the Act:

                   COMMON STOCK, $0.0001 PAR VALUE PER SHARE

  Indicate by check mark whether Registrant  (1) has filed all reports required
to  be  filed by Section 13 or 15(d) of the Securities  Exchange  Act  of  1934
during the preceding 12 months (or for such shorter periods that Registrant was
required  to  file  such  reports),  and  (2)  has  been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

  Indicate by check mark if disclosure of delinquent  filers  pursuant  to Item
405  of  Regulation S-K is not contained herein, and will not be contained,  to
the  best  of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements incorporated  by  reference  in  Part  III  of  this  Report  or any
amendment to this Report. [  ]

  The  aggregate  market  value  of  Registrant's  voting  stock,  held by non-
affiliates, computed by reference to the average of the closing bid  and  asked
prices of the Common Stock as reported by Nasdaq on March 4, 2002: $69,530,456.

  The  number of shares of Registrant's Common Stock issued and outstanding  as
of March 4, 2002: 31,344,710.

                       DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission for the registrant's 2002 Annual Meeting of
Stockholders to be held on May 20, 2002, are incorporated by reference into
Part III of this Form 10-K.
<PAGE>
  PART I

  The following  discussion  includes certain forward-looking statements within
the meaning of the Private Securities  Litigation  Reform  Act  of  1995. These
statements  are  based on current expectations, forecasts and assumptions  that
involve risks and uncertainties that could cause actual outcomes and results to
differ materially.  These  risks  and  uncertainties  include  fluctuations  in
operating  results,  changes  in  the  United  States and worldwide economy and
fluctuations  in capital expenditures within the  telecommunications  industry,
our dependence  on a limited number of products and uncertainties of the market
for our current and  planned  products, technological change, our dependence on
growth of the Internet, competition,  our  dependence  on  a  limited number of
major  customers,  our dependence on contract manufacturers and suppliers,  our
products may not continue  to  meet changing regulatory and industry standards,
our ability to achieve sustained operating profitability, our dependence on key
personnel,  the  significant  influence  of  our  principal  stockholder,   our
dependence on proprietary technology,  the  volatility of our market price, the
sale of a significant number of our shares pursuant  to  future sales contracts
could depress the price of our stock, the effect that anti-takeover  provisions
have  on  the  price of our common stock and past and future litigation  risks.
For a further  list  and  description  of such risks and uncertainties, see the
reports filed by Digital Lightwave with the Securities and Exchange Commission,
including  the  Company's reports on Form  10-K  and  10-Q.  Digital  Lightwave
undertakes no obligation  to  update  or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

ITEM 1.  BUSINESS

GENERAL

  Digital  Lightwave{reg-trade-mark},  Inc.  provides  the  global  fiber-optic
communications industry with products and  technology used to develop, install,
maintain, monitor, and manage fiber optic-based  networks.   Telecommunications
service  providers and equipment manufacturers deploy our products  to  provide
quality  assurance   and   ensure   optimum  performance  of  advanced  optical
communications networks and network equipment.   We sell our products worldwide
to    leading    and    emerging    telecommunications    service    providers,
telecommunications  equipment  manufacturers, equipment leasing  companies  and
international distributors.

  Fiber optics deliver increased  network  bandwidth  for  the  transmission of
voice,  video,  audio  and  data  traffic  over  public  and  private networks,
including  the  Internet.   Our  products  provide  the capabilities  to  cost-
effectively deploy and manage fiber-optic networks to address increasing demand
for bandwidth.  While the technology of optical networking  is highly advanced,
our  products are used to verify that telecommunications products  and  systems
function   and   perform  properly.   Specific  customer  applications  of  our
diagnostic   equipment   include   the   qualification   of   products   during
manufacturing,  the verification of service during network installation and the
monitoring and maintenance of deployed networks.

  Our products currently  include Network Information Computers{reg-trade-mark}
(NICs{reg-trade-mark}), which are portable instruments for the installation and
maintenance  testing  of  advanced,   high-speed   networks   and  transmission
equipment.  The NIC product family provides diagnostic capabilities for testing
the performance of both optical and legacy electrical networks with an array of
communications standards and transmission rates.  Introduced in  1996,  the NIC
offers  significant  benefits  over conventional test devices, with its compact
design,  ease  of  use  and  flexible  software-based  architecture.   We  have
continued to enhance the NIC's  functionality  and performance with the release
of  subsequent models.  In 2000, we introduced a  NIC  platform  that  analyzes
international  telecommunications  standards, thereby extending our addressable
market from principally North America  to other major regions of the world.  In
2001, we launched the NIC Plus{trademark}, a significant enhancement to the NIC
product line. The NIC Plus provides a single  platform  on  which  to perform a
multitude  of  tests  for  networks  implemented under both North American  and
international communications standards, operating at transmission rates ranging
from  the lowest-speed electrical rates  (DS0/64K)  through  the  highest-speed
optical  rates (OC-192/STM-64), as well as emerging packet-based networks, such
as Gigabit  Ethernet  and  Packet  over  SONET.  The NIC Plus also offers a new
level of flexibility, enabling users to configure  the  product  to  meet their
specific  needs  through add-ons and modules and thereby preserve the value  of
their prior investments.

  In 1998, we introduced  our  Network Access Agent{trademark} (NAA{trademark})
product   family.   NAAs  are  unattended,   software-controlled,   performance
monitoring  and  diagnostic  systems permanently installed within optical-based
networks.  NAAs embed the capabilities  of  our  portable  Network  Information
Computers  within  a  customer's  network infrastructure, allowing centralized,
remote network management.  In 1999,  we  introduced  the  NAA IV{trademark}, a
monitoring  and  diagnostic system for global optical and electrical  networks,
including  Dense  Wavelength  Division  Multiplexing  (DWDM)  technology.   The
modular architecture  of  our NIC has enabled the transfer of technology to our
NAA product family, resulting  in a broad range of embedded diagnostic products
for  optical,  electrical  and  emerging   packet-based   networks.   The   NIC
architecture  allows  our  customers  to  use  the  same  test solution in both
portable   and   network-installed  implementations,  which  yields   increased
flexibility and a greater return on their investment in test equipment.

  Both NICs and NAAs  can  be configured with a multi-port, high-speed, optical
module, enabling concurrent  measurement  and  monitoring  of  multiple optical
channels.   This  capability  offers  our  customers  the ability to thoroughly
exercise and test their equipment under fully operational load conditions.

  We also provide, as an extension of our product line,  optical monitoring and
diagnostic  circuit  packs  and  subsystems  that are custom-designed  to  meet
specific customer requirements.  These solutions  enable  customers  to utilize
our  flexible  architecture  for  the  testing  of  unique  or product-specific
requirements, which can result in significant customer cost savings compared to
off-the-shelf solutions.

  Digital Lightwave was incorporated in California on October  12,  1990, under
the  name Digital Lightwave, Inc., and reincorporated in Delaware on March  18,
1996.   Unless the context indicates otherwise, the "Company", "we", "our", and
"Digital  Lightwave", as used in this Report, refer to Digital Lightwave, Inc.,
a Delaware  corporation,  and  its predecessor entity.  Our principal executive
offices are located at 15550 Lightwave  Drive,  Clearwater, Florida, 33760, and
the telephone number is (727) 442-6677.

INDUSTRY

  The telecommunications industry has undergone significant fundamental changes
over  the past decade.  The volume of traffic carried  over  telecommunications
networks  has increased significantly as the result of the rapid growth of data
traffic and the steady growth of voice traffic. Non-voice traffic has increased
substantially  due  to a variety of factors, including electronic mail (email);
the Internet; electronic  commerce;  fax,  audio  and video transmission; and a
proliferation of bandwidth-intensive applications,  as  well  as personal hand-
held  email  and  Internet appliances.  Bandwidth is defined as the  volume  of
information that can  be  transmitted  through  a medium, such as glass fibers,
without distortion.

  The  telecommunications  industry  has addressed the  demand  for  increased,
reliable network capacity by installing  new  fiber-optic  transmission  lines,
accelerating  transmission  rates  and employing new technologies such as Dense
Wavelength Division Multiplexing (DWDM),  a  process  that expands the carrying
capacity of existing fiber by permitting the transmission of multiple lightwave
signals  over  a  single  optical  fiber.   Faster  transmission   speeds,  new
technologies  and  a  broadening  range  of  traffic  types have magnified  the
complexity of telecommunications networks, while continuing demands for greater
bandwidth have stressed the capacity of these networks.   In  addition, various
"protocols" are required for encoding and transmitting information across these
networks.    Examples  of  these  protocols  include  the  T-Carrier  protocol,
Plesiochronous  Digital Hierarchy (PDH), Synchronous Optical Network Technology
(SONET), Synchronous  Digital  Hierarchy  (SDH)  and Asynchronous Transfer Mode
(ATM).   New  fiber-optic  networks  must be compatible  with  existing  legacy
networks  and  protocols,  as well as with  wireless  networks  using  cellular
technologies. The T-Carrier protocol, used primarily in North America, utilizes
insulated  copper  wire cables  that  carry  electrically  transmitted  digital
signals, while PDH is  the  equivalent protocol for the majority of the rest of
the world.  The SONET protocol is used primarily in North America and Japan for
variable optical bandwidth products  which  enable  the  transmission of voice,
video  and data at very high speeds, while SDH is the equivalent  protocol  for
most of  the  remaining  worldwide  market.   ATM  is  an  information transfer
standard that is one of a general class of technologies commonly  used  for the
relay of traffic over global optical networks.

  Due to its characteristics, non-voice traffic is more efficiently transmitted
in  "packages".   This  has  led  to the creation and implementation of "packet
protocols", which are used in evolving networks, and to a transition in network
equipment from "circuit-switched" to  "packet-switched"  technology.  There are
several  existing and emerging packet-based protocols used  in  packet-switched
networks,  including  Gigabit  Ethernet, Multi-Protocol Label Switching (MPLS),
Packet over SONET (POS), and others.

  The growing demand for telecommunications  capabilities,  in conjunction with
the worldwide deregulation of the telecommunications industry,  has  led  to  a
proliferation  of  service providers entering the industry.  Market conditions,
in addition to increasing  volumes  of data and voice traffic, have intensified
the  need  to provide uninterrupted service,  while  creating  new  competitive
pressures for service providers to improve operational efficiencies.

  Telecommunications  network  diagnostic  equipment  is  required  for quality
assurance during network installation and to monitor and maintain the integrity
of  existing  networks.  Portable test equipment is used to qualify and  verify
the telecommunications  infrastructure,  including  transmission  lines, signal
generators,  switches,  and  other  equipment  during  the installation of  new
networks.   Simultaneous  and  independent real-time analysis  is  required  to
monitor network performance and reduce the possibility of network interruptions
or system failures, in order to improve overall operational efficiency once the
network has been deployed.

THE DIGITAL LIGHTWAVE SOLUTION

  We provide telecommunications  service  providers and equipment manufacturers
with capabilities to cost-effectively deploy and manage fiber-optic networks to
address the increasing demand for bandwidth.   Our products are used to qualify
telecommunications equipment during the manufacturing  process,  verify service
during optical network installation and provide ongoing quality assurance after
new equipment has been deployed.

  We  believe that our Network Information Computers (NICs) and Network  Access
Agents  (NAAs)  offer  a  broad range of features and capabilities that provide
distinct competitive advantages  over  traditional  network test equipment.  We
designed  our  NICs to offer network technicians a more  compact,  lightweight,
easy-to-use product with significantly greater functionality.

  The NIC (i) is  an  integrated  test  instrument that is capable of analyzing
multiple protocols concurrently and independently;  (ii)  utilizes an intuitive
Microsoft  Windows-based  graphical user interface (GUI) with  a  touch  sensor
display to create an easy-to-use diagnostic tool; and (iii) is a software-based
solution which can be easily upgraded and customized.

  In 1998, we introduced our  first  NAA,  which utilized the technology of the
NIC.   NAAs  are  software-controlled  performance  monitoring  and  diagnostic
equipment  which  is permanently embedded  at  multiple  access  points  within
optical networks, providing  real-time  analysis  and network management from a
centralized location.  Using these real-time analysis  capabilities,  a network
operator  is  able  to monitor signal degradation, diagnose and isolate network
failures,  and  maintain   a  constant  view  of  the  network.   This  ensures
fulfillment of service-level  agreements  with  the  operator's  customers  and
enables  the  operator to respond immediately to certain situations in order to
prevent potential network interruptions or failures.

  Our products  are  based  on  modular  and  scalable  hardware  and  software
platforms  and  a  flexible architecture that allow customers to easily upgrade
existing systems to accommodate new technologies and thereby preserve the value
of their original investment.  We are utilizing the core technology of our NICs
and NAAs to continue developing portable and embedded products that address the
evolving needs of the optical networking industry.

PRODUCTS

  Our current portfolio  of  products  is  organized  into  two  product lines:
Network Information Computers (NICs) and Network Access Agents (NAAs).

  Network  Information  Computers.   Our portable NICs enable users to  verify,
qualify  and  monitor  the  performance  of   telecommunications  networks  and
transmission equipment.  We designed the NIC to replace existing hardware-based
network test instruments by incorporating their functions into a software-based
signal processing system, adding new functions  and improving performance while
maintaining  competitive  pricing.  Telecommunications  service  providers  and
equipment manufacturers are  able  to  plan  for and cost-effectively implement
fiber-optic network expansion and verify and manage  information concerning the
transmission  of  voice,  data,  audio,  and  video  traffic   with   the  NIC.
Telecommunications equipment manufacturers also use the NIC to design, engineer
and manufacture their products, install their products in the networks of their
customers and provide ongoing customer support.

  NICs  generate,  transmit,  receive,  multiplex,  process  electrical (legacy
network) and optical signals and provide network analysis.  The  NIC's easy-to-
use graphical user interface is a touch sensor over a large color  display  and
provides  simple  and  intuitive  windowed  graphics  and  menus.   NICs may be
accessed  and  operated  remotely by modem or through direct connection  to  an
Ethernet local area network  (LAN).   A  LAN  is a group of computers and other
devices  dispersed  over  a  relatively  limited  area   and   connected  by  a
communications link that enables any device to interact with any  other  in the
network.  Ethernet is a protocol commonly used in LANs.

  The  following  core  technologies  are  used in NICs and provide a basis for
certain of our products in development:  (i)  a  software operating environment
that  runs  on  a Microsoft Windows platform; (ii) programs  that  operate  our
firmware and hardware;  (iii)  graphical  user  interface  programs, written in
object-oriented code, running in a windowed environment; (iv)  network protocol
translators that logically process discrete network information from signals at
specific  bandwidths and protocols; and (v) Network Protocol ProcessorsTM  that
process information  encoded  in  a specific protocol over a range of rates and
bandwidths.

  We have developed a non-blocking  switch matrix and application software that
allow our customers to "frame up" on  a  given signal, multiplex or demultiplex
the signal into different transmission speeds  and  then  map  the  signal into
different  protocols  without  interfering  with  signal transmission.  A  non-
blocking switch matrix is an internal switch in a system  that  has the ability
to  switch multiple transmissions to different circuits simultaneously  without
causing  internal  congestion  in  the  switch  itself.   Demultiplexing is the
process  of  separating  two or more signals that were previously  multiplexed.
These  functions  allow  customers   to   derive   information  concerning  the
performance of the network under various existing or potential conditions.

  Current models and certain features of the NIC include:

     * NIC{reg-trade-mark}  ASA  312{reg-trade-mark},   which   analyzes  North
       American optical networks (SONET rates: OC-1 through OC-48)  and  legacy
       electrical  networks  (T-carrier  rates:  DS0,  DS1,  DS3), operating at
       transmission  rates  ranging  from 64Kbps to 2.5 Gbps and  includes  ATM
       analysis.

     * NIC  2.5G{trademark}, which simultaneously  and  independently  analyzes
       global  optical networks (SONET/SDH rates: OC-1/STM-0 through OC-48/STM-
       16) and global  electrical networks (T-carrier/PDH rates: DS0, DS1, DS3,
       E1, E3, E4), operating at transmission rates ranging from 64 Kbps to 2.5
       Gbps and includes ATM analysis.

     * NIC 10G{trademark},  which  verifies  and  qualifies  the performance of
       global  high-speed  optical networks (SONET/SDH rates: OC-48/STM-16  and
       OC-192/STM-64), operating at transmission rates ranging from 2.5 Gbps to
       10 Gbps and includes Packet over SONET/SDH (POS) analysis.

     * NIC Plus{trademark},  a  scalable  testing  platform  for global optical
       networks (SONET/SDH rates: OC-1/STM-0 through OC-192/STM-64)  and global
       electrical  networks  (T-carrier/PDH rates: DS0, DS1, DS3, E1, E3,  E4),
       operating at transmission  rates  ranging  from  64  Kbps  to 10 Gbps an
       includes POS and ATM analysis.

  We  plan  to  continue to enhance the NIC's functionality and performance  to
meet evolving customer requirements for network technologies.

  Sales of our Network  Information  Computer  generated approximately 88%, 95%
and 99% of net sales for the years ended December  31,  2001,  2000  and  1999,
respectively.

  Network  Access  Agent.  NAAs are unattended, software-controlled performance
monitoring  and diagnostic  equipment  embedded  within  optical  networks  for
analysis, installation  and  management  of a telecommunications network from a
remote or centralized location.  NAAs are  both remotely and locally accessible
over  standard telecommunications links and are  designed  to  provide  network
operators  with  real-time  information  concerning  performance of the network
segments in which a NAA has been installed.  Installation  of  NAAs at multiple
access points throughout fiber-optic networks provides the capability  for end-
to-end   network   monitoring,   maintenance   and  management.   NAAs  provide
performance  and  quality  data  to  the network operator  through  a  standard
operations interface.  NAAs incorporate  technology  that  we developed for the
NIC,  which  includes advanced hardware and software technology  that  accesses
bits in optical and electrical telecommunications transmissions; a non-blocking
switch  matrix  that  maps  signals  into  different  transmission  speeds  and
protocols;  and object-oriented software that controls selectable features that
are accessible  through  the  Microsoft Windows operating system environment or
other user environments.

  The modular architecture of our products enables the transfer of technologies
across platforms.  Due to the flexible  design  of  our products, customers can
configure  NAAs  with  the  same capabilities as the NIC.   Also,  NAAs  enable
customers  to  perform  remote,   multi-channel   Dense   Wavelength   Division
Multiplexing (DWDM) diagnostics.

  We  plan  to  continue to enhance the NAA's functionality and performance  to
meet evolving customer requirements for network technologies.

  Sales of our NAA generated revenues of approximately 12%, 5% and 1% of annual
net sales for the years ended December 31, 2001, 2000 and 1999, respectively.

  Customer-Specific  Network  Products.  We also provide optical monitoring and
diagnostic  circuit  packs and subsystems  that  are  custom-designed  to  meet
specific  customer  requirements   in   both  portable  and  network  installed
implementations.


CUSTOMERS

  Through  December  31,  2001,  we  sold  over  4,600  units  of  the  Network
Information Computer and over 130 Network Access  Agents to over 380 customers.
Our products are purchased and used by domestic and  international customers in
the following industry segments:

-  Incumbent Local Exchange Carriers,

-  Inter-Exchange Carriers,

-  Competitive Local Exchange Carriers,

-  Internet Service Providers,

-  Communications Equipment Manufacturers,

-  Carriers' Carriers,

-  Utility Companies,

-  Equipment Rental and Leasing Companies,

-  Wireless Service Providers and

-  Enterprise Network Operators.


  We  also  sell  our  products  to  other  segments  of the telecommunications
industry  including  independent  telephone  companies  and   private   network
operators.

  We  involve  key  customers  in the evaluation of products in development and
continually solicit suggestions  from  customers regarding additional desirable
features of products that we have introduced  or  plan  to  develop.   We  have
generally  been  able  to  satisfy  requests  for  additional  feature  sets by
providing software upgrades for loading into our products in the field.

  For  the  year  ended  December  31,  2001,  our  largest  customer,  Level 3
Communications,  accounted  for approximately 12% of total sales. For the years
ended December 31, 2000 and 1999,  our  largest customer, Telogy, accounted for
approximately 15% and 21% of total sales,  respectively.  For  the  year  ended
December  31,  1999,  one  additional  customer,  Technology  Rental  Services,
accounted for 18% of total sales.  No other customer accounted for sales of 10%
or more during those years.

SALES, MARKETING AND CUSTOMER SUPPORT

  Sales.   We  primarily  sell  our  products in the domestic market through  a
direct  sales  force  to  telecommunications   service  providers  and  network
equipment manufacturers. We primarily sell our products  in  the  international
markets through international distributor channels.

  Marketing. We focus our marketing efforts of the Network Information Computer
on  the  divisions of telecommunications service providers that are responsible
for planning  and  installing extensions of the network and on the divisions of
telecommunications equipment  manufacturers  that  are  responsible for quality
assurance.  We have directed our marketing efforts of the  Network Access Agent
on the strategic planning divisions of telecommunications service providers and
private network operators in order to define customer requirements.  We seek to
build  awareness  of our products through a variety of marketing  channels  and
methodologies, including  industry trade shows, conferences and direct mailings
to targeted customers and trade advertising.

  Customer Support.  We offer  technical  support  to  our customers 24 hours a
day,  seven  days  a week. Our customer support organization  is  comprised  of
highly skilled employees  with  extensive  experience  across  a broad range of
fiber  optics  networks.  All service and repairs are performed at  either  our
Clearwater, Florida facility or by a contract manufacturer.  We offer between a
one-year and a three-year limited warranty on our products.

PRODUCTION

  During  2001,  our production  operations  consisted  primarily  of  material
planning and procurement, final assembly, software loading, testing and quality
assurance. Our operational  strategy  relied on outsourcing of manufacturing to
reduce fixed costs and to provide flexibility  in  meeting  market  demand.  We
subcontracted  the  manufacture  of  computer  system boards, plastic molds and
metal  chassis  and  certain  subassemblies  and  components  for  the  Network
Information Computer and the Network Access Agent.  We performed final assembly
and  programmed the products with our software. We implemented  strict  quality
control  procedures  throughout  each  stage  of  the manufacturing process and
tested the boards and subassemblies at various stages in the process, including
final test and qualification of the product.

  In  December  2001, we signed a manufacturing service  agreement  with  Jabil
Circuit,  Inc.  ("Jabil"),  a  leading  provider  of  technology  manufacturing
services with a customer base of industry-leading companies. Under the terms of
the  agreement, Jabil  will  serve  as  Digital  Lightwave's  primary  contract
manufacturer for the Company's circuit board and product assembly and will also
provide  engineering  design  services.    Jabil  purchased  approximately $4.9
million  of  raw  materials  inventory  from us in December 2001.   Jabil  will
continue to purchase our existing raw materials  inventory  until all parts are
depleted to safety stock levels.

  In January 2002, we implemented our outsourcing strategy with  Jabil.   Jabil
currently  provides  product  assembly,  direct  order  fulfillment, design for
manufacturability and product cost improvement services for  all of our Network
Information Computer and Network Access Agents products.  We intend to continue
to  perform  final  testing and qualification of the finished products  at  our
Clearwater,  Florida  facility.   We  are  ISO  9001  certified,  which  is  an
international standard for quality management and assurance.

  We currently utilize  several  key  components used in the manufacture of our
products from a sole-source or limited  sources.   We utilize certain laser and
laser amplifier components, power supplies, touch-screen  sensors, single-board
computers  and  SONET  overhead  terminators  used  in the Network  Information
Computer  and the Network Access Agent from a single or  a  limited  number  of
suppliers. We purchase a filter, a controller board and an interface board from
a single or  limited  number of suppliers for the Network Access Agent.  We are
currently attempting to qualify certain additional suppliers for certain of the
sole-sourced components. The loss of any of these key components or termination
of our relationship with Jabil could seriously disrupt our operations.

  We forecast product sales  quarterly and order materials and components based
on these forecasts. Lead times  for materials and components that we order vary
significantly and depend on factors  such  as  the  specific supplier, purchase
terms  and  demand  for a component at a given time.  We  may  have  excess  or
inadequate inventory  of certain materials and components if actual orders vary
significantly from forecasts.

ENGINEERING AND DEVELOPMENT

  We have organized our  engineering  and  development  efforts into product or
project  teams. We organize our teams around the development  of  a  particular
product and each team is responsible for all aspects of the development of that
product and  any  enhanced  features  or  upgrades.  Our  engineering teams are
located at our corporate headquarters in Clearwater, Florida.

  During  fiscal  years  2001,  2000,  and  1999, we spent approximately  $15.0
million,  $14.1  million  and  $10.2  million  on engineering  and  development
activities, respectively.

INTELLECTUAL PROPERTY

  Our  success  and  our  ability  to  compete  depends  upon  our  proprietary
technology that we protect through a combination  of  patent,  copyright, trade
secret  and  trademark  law.  As of March 4, 2002, we have five issued  patents
relating to the Network Information  Computer  and  Network Access Agent in the
United  States.   We have filed continuation applications  for  each  of  these
issued  patents. Currently  we  have  four  patents  pending  relating  to  our
technology.   Our  growth  strategy  includes  a plan to expand our presence in
international markets and the laws of some foreign  countries  may  not protect
our proprietary rights to the same extent as do the laws of the United States.

  We generally enter into non-disclosure agreements and proprietary information
and  invention agreements with our employees and suppliers and limit access  to
and distribution  of our proprietary information.  It may be possible for third
parties  to  copy  or   otherwise   obtain   and  use  our  technology  without
authorization despite these precautions.

  We may either license our proprietary rights  to  third  parties  or  license
certain   technologies  from  third  parties  for  use  in  our  products.  The
telecommunications industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
We have no  reason  to believe that our technology infringes on the proprietary
rights of others and  we have not received any notice of claimed infringements.
Nonetheless, third parties  may  assert  infringement  claims against us in the
future that may or may not be successful. If we must defend  ourselves  or  our
customers  against  such claims, we could incur substantial costs regardless of
the merits of the claims.  Parties  making  such  claims  may be able to obtain
injunctive or other equitable relief that could effectively  block  our ability
to sell our products and could obtain an award of substantial damages. Any such
claim  could seriously damage our business. In the event of a successful  claim
of infringement  against  us, we may be required to obtain one or more licenses
from third parties including our customers.

BACKLOG

  We have not entered into  long-term agreements or blanket purchase orders for
the sale of our products.  We  generally  obtain  purchase orders for immediate
shipment and other cancelable purchase commitments.  We  do not expect to carry
substantial backlog from quarter to quarter in the future.   Our sales during a
particular quarter are highly dependent upon orders placed by  customers during
the  quarter.  Sales  may  fluctuate significantly from quarter-to-quarter  and
year-to-year due to the timing  and  amount  of  orders from customers. Because
most  of  our  operating expenses are relatively fixed  and  cannot  be  easily
reduced in response to decreased revenues, quarterly fluctuations in sales have
a significant effect on net income.

   We believe that  backlog  is  not a meaningful indicator of future financial
results.

SEASONALITY

  Our sales are generally seasonal  with the largest portion of quarterly sales
tied to telecommunications industry purchasing  patterns  and  tend to decrease
during the first calendar quarter of the year.

COMPETITION

  The  market  for  our  products  is  competitive  and  is  subject  to  rapid
technological change, frequent product introductions with improved performance,
competitive  pricing  and  changing  industry  standards.  We  believe that the
principal factors on which we compete include:

  -  Product performance,

  -  Product quality,

  -  Product reliability,

  -  Value,

  -  Customer service and support and

  -  Length of operating history, industry experience and name recognition.

  We  believe we compete favorable on all of these factors other  than  on  the
last factor  because  or  our limited operating history.  We believe that there
are five principal competitors  that currently offer products that compete with
the Network Information Computer,  including Acterna, Agilent, Anritsu, NetTest
and  Tektronix.   Although  there  are several  companies  that  offer  network
monitoring and test instruments, including Acterna, Agilent, Gnubi and Spirent,
the NAA product line is the only one  to  offer a comprehensive solution across
WDM  and  DWDM  networks.  We  are aware of certain  companies  that  are  also
developing equipment to monitor  lightwave transmissions but we believe at this
point they do not offer a complete  DWDM  solution. Many of our competitors and
certain prospective competitors have significantly  longer operating histories,
larger  installed  bases,  greater name recognition and  significantly  greater
technical, financial, manufacturing and marketing resources.  A number of these
competitors  have  long  established   relationships  with  our  customers  and
potential customers.

REGULATORY MATTERS

  Our products must meet industry standards  and regulations which are evolving
as  new technologies are deployed.  In the United  States,  our  products  must
comply  with  various  regulations  promulgated  by  the Federal Communications
Commission  and  Underwriters  Laboratories  as  well  as  industry   standards
established  by  the  American  Standards  Institute  and  other organizations.
Internationally,  our  products must comply with standards established  by  the
European Union and communication authorities in other countries as well as with
recommendations of the Consultative  Committee  on  International Telegraph and
Telephony. In addition, some of our planned products  may  be  required  to  be
certified  by  Bell Communications Research in order to be commercially viable.
The failure of the  our  products  to comply, or delays in compliance, with the
various existing and evolving standards and regulations could negatively impact
our ability to sell products.

INTERNATIONAL

  We sell our products in domestic and  international  markets.   Our  domestic
sales  represented  approximately 80%, 91% and more than 99% of our annual  net
sales for the years ending 2001, 2000 and 1999 respectively.  Our international
sales represented approximately  20%,  9%  and  less  than 1% of our annual net
sales for the years ending 2001, 2000 and 1999 respectively.

EMPLOYEES

  As  of  March 4, 2002, we employed a full-time staff of  108  employees.   In
October 2001, the Company reduced its workforce by 38 employees and consultants
and instituted  temporary executive salary reductions of up to 20%.  In January
2002, the Company  implemented  a second reduction of force of 46 employees and
contractors.  All employees included  in  the  reductions  in  force were given
severance based upon years of service with the Company.  None of  the Company's
employees are represented by labor unions.

#


<PAGE>

                   FACTORS THAT MAY AFFECT OPERATING RESULTS

  The following factors, in addition to the other information contained in this
report, should be considered carefully in evaluating us and our prospects. This
report  (including  without  limitation  the following factors that may  affect
operating results) contains forward-looking  statements  (within the meaning of
Section  27A of the Securities Act of 1933 and Section 21E  of  the  Securities
Exchange Act  of  1934)  regarding  us  and  our business, financial condition,
results of operations and prospects. Words such  as  "expects,"  "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations  of such words are intended to identify forward-looking  statements,
but are not the  exclusive  means  of identifying forward-looking statements in
this report. Additionally, statements  concerning  future  matters  such as the
development of new products, enhancements or technologies, possible changes  in
legislation  and other statements regarding matters that are not historical are
forward-looking statements.

  Forward-looking  statements in this report reflect the good faith judgment of
our management and the  statements  are based on facts and factors we currently
know.  Forward-looking statements are  subject  to  risks and uncertainties and
actual results and outcomes may differ materially from the results and outcomes
discussed  in  the  forward-looking statements. Factors  that  could  cause  or
contribute to such differences  in  results  and  outcomes include, but are not
limited to, those discussed below and in "Management's  Discussion and Analysis
of Financial Condition and Results of Operations" as well  as  those  discussed
elsewhere  in  this  report.  Readers are urged not to place undue reliance  on
these forward-looking statements  which  speak  only as of the date of the this
report.  We  undertake  no obligation to revise or update  any  forward-looking
statements in order to reflect  any  event or circumstance that may arise after
the date of the report.


WE EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS

  Our quarterly operating results have  fluctuated  in  the past and our future
quarterly operating results are likely to vary significantly  due  to a variety
of  factors  which  are  outside  our  control.  Factors that could affect  our
quarterly operating results include:

-  Announced capital expenditure cutbacks by customers within the
   telecommunications industry,

-  Limited number of major customers,

-  The product mix, volume, timing and number of orders  we  receive  from  our
   customers,

-  The long sales cycle for obtaining new orders,

-  The timing of introduction and market acceptance of new products,

-  Our success in developing, introducing and shipping product enhancements and
   new products,

-  Pricing changes by our competitors,

-  Our  ability  to  enter into long term agreements or blanket purchase orders
   with customers,

-  Our  ability  to obtain  sufficient  supplies  of  sole  or  limited  source
   components for our products,

-  Our ability to attain and maintain production volumes and quality levels for
   our current and future products,

-  Changes in costs of materials, labor and overhead and

-  Additional customer bankruptcies.


  Our operating results  for  any  particular  quarter may not be indicative of
future  operating  results,  in  part because our sales  often  reflect  orders
shipped in the same quarter in which they are received and this makes our sales
vulnerable to short-term fluctuations.  The  factors have historically been and
are expected to be difficult to forecast. Any  unfavorable  changes in these or
other  factors could have a material adverse effect on our business,  financial
condition and results of operations.

  Our revenues  and operating results generally depend on the volume and timing
of the orders we  receive  from customers and our ability to fulfill the orders
received.  The timing of orders may be cancelled, modified or rescheduled after
receipt.  Most of our operating  expenses  are  relatively  fixed and cannot be
reduced  in response to decreases in net sales. The timing of  orders  and  any
subsequent  cancellation,  modification or rescheduling of orders have affected
and will continue to affect  our  results of operation from quarter to quarter.
The deferral of any large order from  one  quarter  to  another  could  have  a
material  adverse  effect  on  our business, financial condition and results of
operations.

   We must obtain orders during  each  quarter  for shipment in that quarter to
achieve our revenue and profit objectives.


CHANGES IN UNITED STATES AND WORLDWIDE ECONOMIES  AND  FLUCTUATIONS  IN CAPITAL
EXPENDITURES WITHIN THE TELECOMMUNICATIONS INDUSTRY

  Our  products are purchased and used by telecommunications customers.   Sales
are impacted by the following conditions in this marketplace:

-    The weak economic conditions in the United States and global markets have
     resulted in decreased capital expenditures by telecommunication equipment
     manufacturers and equipment rental and leasing companies,

-    The telecommunications sector in the United States and global markets have
     experienced significant bankruptcies and decreased capital expenditures.
     This includes the competitive local exchange carriers, Internet service
     providers and enterprise network operator segments and

-    The  incumbent  local  exchange carriers are becoming increasingly active,
     but  historically  have  been   slow   to  implement  bandwidth  expansion
     strategies.  We are now focusing on sales to this segment of the industry.

  These  continued  weak  economic  conditions,  additional   bankruptcies  and
decreased   capital   expenditures   may  contribute  to  quarterly  or  annual
fluctuations in our operating results  and could have a material adverse effect
on our business, financial condition and results of operations.


WE ARE DEPENDENT ON A LIMITED NUMBER OF  PRODUCTS  AND  ARE  UNCERTAIN  OF  THE
MARKET FOR OUR CURRENT PRODUCTS AND PLANNED PRODUCTS

    The  majority  of  our  sales  are  from  our  initial product, the Network
Information Computer and we expect that sales of Network  Information Computers
will  continue  to  account  for  a  substantial portion of our sales  for  the
foreseeable future. During 1998, we started  shipping  a  commercial version of
our  Network  Access  Agent based on the same core technology  as  the  Network
Information  Computer.  During   2001,  Network  Access  Agents  accounted  for
approximately 12% of our revenues.  We  cannot  predict  the  future  level  of
acceptance  by our customers of the Network Access Agent and we may not be able
to generate significant revenues from this product.  We are uncertain about the
size and scope  of  the  market for our current and future products. Our future
performance will depend on increased sales of the Network Information Computer,
market acceptance of the Network  Access  Agent,  our  ability  to  enter  into
additional  original  equipment  manufacturer  agreements  and  the  successful
development,  introduction  and  market  acceptance  of  other new and enhanced
products.   Market  acceptance  of  our products and our credibility  with  our
customers might be diminished if we are delayed in introducing or producing new
products or fail to detect software or  hardware  errors in new products (which
frequently occur when new products are first introduced).    This  could have a
material  adverse  effect  on our business, financial condition and results  of
operations.


OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE

  To remain competitive, we  must  respond to the rapid technological change in
our  industry  by  developing,  manufacturing  and  selling  new  products  and
technology and improving our existing  products  and  technology. Our market is
characterized by:

  -  Rapid technological change,

  -  Changes in customer requirements and preferences,

  -  Frequent new product introductions and

  -  The emergence of new industry standards and practices.

  These  factors  could  cause  our  sales  to decrease or render  our  current
products obsolete. Our success will depend upon our ability to:

  -  Create improvements on and enhancements to our existing products,

  -  Develop, manufacture and sell new products  to  address  the  increasingly
     sophisticated and varied needs of our current and prospective customers,

  -  Respond  to  technological  advances  and emerging industry standards  and
     practices on a cost effective and timely basis and

  -  Increase market acceptance of our products.

  Failure to meet these objectives or to adapt to changing market conditions or
customer requirements could have a material  adverse  effect  on  our business,
financial condition and results of operations.


OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET

  A significant portion of our revenues comes from telecommunications carriers,
telecommunications equipment manufacturers and other customers that  rely  upon
the  growth  of  the  Internet.  Our future results of operations substantially
depend on the continued  acceptance  and  use  of  the Internet as a medium for
commerce and communication. Rapid growth in the use  of  and  interest  in  the
Internet  and  online  services  is  a recent phenomenon. Our business could be
harmed if this rapid growth does not continue  or  if the rate of technological
innovation, deployment or use of the Internet slows  or  declines.   The growth
and  development  of  the  market  for  Internet-based  services may prompt the
introduction of new laws and regulations. Laws may impose additional burdens on
those companies that conduct business online and could decrease  the  expansion
of  the  use  of  the  Internet.  A decline in the growth of the Internet could
decrease demand for our products and  services  or  increase  our cost of doing
business  and  could  have material adverse effects on our business,  financial
condition and results of operations.


OUR INDUSTRY IS EXTREMELY  COMPETITIVE  AND  SUCH  COMPETITION  MAY  NEGATIVELY
AFFECT OUR BUSINESS

  The market for our products is intensely competitive and is subject  to rapid
technological change, frequent product introductions with improved performance,
competitive  pricing  and  shifting  industry  standards.  We  believe that the
principal factors on which we compete include:

  -  Product performance,

  -  Product quality,

  -  Product reliability,

  -  Value,

  -  Customer service and support and

  -  Length of operating history, industry experience and name recognition.

  We  believe  that  there are five principal competitors that currently  offer
products that compete with the Network Information Computer, including Acterna,
Agilent, Anritsu, NetTest  and Tektronix.  Although there are several companies
that offer network monitoring and test instruments, including Acterna, Agilent,
Gnubi  and  Spirent,  the  NAA  product  line  is  the  only  one  to  offer  a
comprehensive solution across WDM  and  DWDM  networks. We are aware of certain
companies that are also developing equipment to monitor lightwave transmissions
but at this point they have yet to offer a complete  DWDM solution. Many of our
competitors  and  certain  prospective  competitors  have significantly  longer
operating  histories,  larger  installed  bases, greater name  recognition  and
significantly  greater  technical,  financial,   manufacturing   and  marketing
resources.  In  addition,  a  number of these competitors have long established
relationships  with our customers  and  potential  customers.  We  expect  that
competition will increase in the future and that new competitors will enter the
market for most,  if  not  all,  of  the  products  we  will  offer.  Increased
competition could reduce our profit margins and cause us to lose or prevent  us
from  gaining  market  share. Any of these events could have a material adverse
effect on our business, financial condition and results of operation.


WE ARE DEPENDENT ON A LIMITED  NUMBER  OF  MAJOR  CUSTOMERS  AND  A DECREASE IN
ORDERS FROM ANY MAJOR CUSTOMER COULD DECREASE OUR REVENUES

  For  the  year  ended  December  31,  2001,  our  largest  customer, Level  3
Communications, accounted for approximately 12% of total sales.  For  the years
ended  December 31, 2000 and 1999, our largest customer, Telogy, accounted  for
approximately  15%  and  21%  of  total sales, respectively. For the year ended
December  31,  1999,  one  additional  customer,  Technology  Rental  Services,
accounted for 18% of total sales.  No other customer accounted for sales of 10%
or more during those years.  There can be  no assurance regarding the amount or
timing  of  purchases  by  any  customer  in  any future  period  and  business
fluctuations affecting our customers have affected  and will continue to affect
our business.

  Our success is dependent upon our ability to broaden our customer base and to
obtain orders from additional original equipment manufacturers  to increase our
level  of  sales.  None of our customers has a written agreement with  us  that
obligates them to purchase  additional  products.  If  one or more of our major
customers  decide  not  to  purchase  additional  products  or  cancels  orders
previously  placed,  our net sales could decrease which could have  a  material
adverse effect on our business, financial condition and results of operations.


WE  ARE  DEPENDENT  ON CONTRACT  MANUFACTURERS  AND  SOLE  AND  LIMITED  SOURCE
SUPPLIERS WHICH COULD ADVERSELY AFFECT OUR OPERATIONS

  In January 2002, we  implemented  a  new outsourcing strategy with a tier-one
contract manufacturer to provide product  assembly,  direct  order fulfillment,
design for manufacturability and product cost improvement services  for all our
Network  Information  Computer and Network Access Agents products.  Failure  to
smoothly  and  successfully   implement   this  strategy  could  interrupt  our
operations and adversely impact our ability  to  manufacture  our products.  In
the  event our relationship with our contract manufacturer abruptly  terminated
for any  reason,  we  could  have  difficulty  obtaining and implementing a new
contract  manufacturer  which  would  disrupt our ability  to  manufacture  our
products, book sales and fulfill customer orders.

  We currently utilize several key components  used  in  the manufacture of our
products from a sole-source or limited sources.  We utilize  certain  laser and
laser  amplifier components, power supplies, touch-screen sensors, single-board
computers  and  SONET  overhead  terminators  used  in  the Network Information
Computer  and  the Network Access Agent from a single or a  limited  number  of
suppliers. We purchase a filter, a controller board and an interface board from
a single or limited  number  of suppliers for the Network Access Agent.  We are
currently attempting to qualify certain additional suppliers for certain of the
sole-sourced  components.  The loss  of  any  of  these  key  components  could
seriously disrupt our operations.

  We forecast product sales  quarterly and order materials and components based
on these forecasts. Lead times  for materials and components that we order vary
significantly and depend on factors  such  as  the  specific supplier, purchase
terms  and  demand  for a component at a given time.  We  may  have  excess  or
inadequate inventory  of certain materials and components if actual orders vary
significantly from forecasts.

  In the past, there have  been  industry-wide shortages in some of the optical
components used in our Network Information Computers and Network Access Agents.
If  such  shortages  arise again, our  suppliers  may  be  forced  to  allocate
available quantities among  their  customers  and  we may not be able to obtain
components and material on the schedule we require, if at all.  These shortages
could  lead  to  delays  in  shipping our products to our  customers.   Delayed
shipping to our customers could  significantly harm our business.  If prices of
these components increase significantly,  our  margins  on  our  products  will
decrease.


OUR  PRODUCTS  MAY  NOT  CONTINUE  TO  MEET  CHANGING  REGULATORY  AND INDUSTRY
STANDARDS

  Our products must meet industry standards and regulations which are  evolving
as  new  technologies  are  deployed.   In the United States, our products must
comply  with  various regulations promulgated  by  the  Federal  Communications
Commission,  and  Underwriters  Laboratories  as  well  as  industry  standards
established by  the  American  Standards  Institute  and  other  organizations.
Internationally,  our  products must comply with standards established  by  the
European Union and communication authorities in other countries as well as with
recommendations of the Consultative  Committee  on  International Telegraph and
Telephony.  Some of our planned products may be required  to  be  certified  by
Bell Communications Research in order to be commercially viable. The failure of
the  our products to comply, or delays in compliance, with the various existing
and evolving  and  regulations  could  prevent  us from selling our products in
certain markets which could have a material adverse  effect  on  our  business,
financial condition and results of operations.


WE MAY NOT BE ABLE TO ACHIEVE SUSTAINED OPERATING PROFITABILITY

  We  shipped  our first product, the Network Information Computer, in February
1996, and have shipped  only  limited  quantities  of  our  second product, the
Network Access Agent. We have incurred substantial costs, including costs to:

  - Develop and enhance our technology and products,

  - Develop our engineering, production and quality assurance operations,

  - Recruit and train sales, marketing and customer service groups and

  - Build administrative and operational support organizations.

  Our accumulated net losses totaled approximately $6.4 million  as of December
31, 2001. We anticipate that our losses will continue through 2002 as we create
and introduce new products and technologies and develop additional distribution
channels.  We  expect  that  any related increases in revenues will lag  behind
these cost increases for the foreseeable future. If we cannot sustain operating
profitability or positive cash flow from operations, we may not be able to meet
our cash and working capital requirements.  This  would have a material adverse
effect on our business, financial condition and results of operations.


WE ARE DEPENDENT ON KEY PERSONNEL

  Our success depends to a significant degree upon  the continued contributions
of  key  management  and other personnel, some of whom could  be  difficult  to
replace. We do not maintain  key man life insurance covering our officers.  Our
success will depend on the performance  of  our officers, our ability to retain
and  motivate  our officers, our ability to integrate  new  officers  into  our
operations and the  ability  of all personnel to work together effectively as a
team.  The Company has had significant  turnover  of  its executive officers in
the past and could continue to have problems retaining and recruiting executive
officers in the future.  In October 2001, the Company's  former Chief Financial
Officer  and  Secretary,  Steven  Grant,  resigned  and  in January  2002,  the
Company's former Chairman of the Board, President and Chief  Executive Officer,
Gerry  Chastelet,  resigned.   Our failure to retain and recruit  officers  and
other key personnel could have a  material  adverse  effect  on  our  business,
financial condition and results of operations.


OUR PRINCIPAL STOCKHOLDER HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY

  As of March 4, 2002, Dr. Bryan J. Zwan, the Company's chairman of the  board,
president and chief executive officer, beneficially owned approximately 60%  of
the outstanding shares of our common stock (including approximately 7.4 million
shares,  or  24%, which are subject to forward sales agreements).  Dr. Zwan has
the ability to  cause  a change of control of the board of directors of Digital
Lightwave by electing candidates  of  his  choice to the board at a stockholder
meeting, approve or disapprove any matter requiring  stockholder  approval  and
has significant influence over our affairs, including the power to cause, delay
or prevent a change in control or sale of the Company.


WE ARE DEPENDENT ON PROPRIETARY TECHNOLOGY

  Our success and our ability to compete depend upon our proprietary technology
that  we  protect  through a combination of patent, copyright, trade secret and
trademark law. As of March 4, 2002, we have five issued patents relating to the
Network Information  Computer and Network Access Agent in the United States. We
have  filed  continuation  applications  for  each  of  these  issued  patents.
Currently we have  four  patents  pending relating to our technology. We cannot
assure you that the patents for which  we  have applied or intend to apply will
be issued or that the steps that we take to  protect  our  technology  will  be
adequate to prevent misappropriation. Our competitors may independently develop
technologies  that  are substantially equivalent or superior to our technology.
Our growth strategy includes  a  plan  to  expand our presence in international
markets and the laws of some foreign countries  may not protect our proprietary
rights to the same extent as do the laws of the United States.

  We generally enter into non-disclosure agreements and proprietary information
and invention agreements with our employees and suppliers  and  limit access to
and distribution of our proprietary information.  It may be possible  for third
parties   to   copy   or  otherwise  obtain  and  use  our  technology  without
authorization despite these precautions.

  We may either license  our  proprietary  rights  to  third parties or license
certain  technologies  from  third  parties  for  use  in  our  products.   The
telecommunications industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
We  believe  that our technology does not infringe on the proprietary rights of
others and we  have  not received any notice of claimed infringements. However,
third parties may assert  infringement claims against us in the future that may
or may not be successful. We  could  incur  substantial costs regardless of the
merits of the claims if we must defend ourselves  or our customers against such
claims. Parties making such claims may be able to obtain  injunctive  or  other
equitable  relief that could effectively block our ability to sell our products
and could obtain  an award of substantial damages. We may be required to obtain
one or more licenses  from  third parties, including our customers in the event
of a successful claim of infringement  against  us. Any such claim could have a
material adverse effect on our business, financial  condition  and  results  of
operations.


THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE

  The  market price of our common stock has been and is likely in the future to
be highly  volatile.  Our  common  stock  price  may fluctuate significantly in
response to factors such as:

-    Quarterly variations in our operating results,

-    Announcements of technological innovations,

-    New product introductions by us or our competitors,

-    Competitive activities,

-    Changes in earnings estimates by analysts or  our  failure  to  meet  such
     earnings estimates,

-    Announcements   by   us   regarding  significant  acquisitions,  strategic
     relationships or capital expenditure commitments,

-    Additions or departures of key personnel,

-    Issuance of convertible or equity securities for general or merger and
     acquisition purposes,

-    Changes  in  federal,  state  or   foreign   regulations   affecting   the
     telecommunications industry,

-    General market and economic conditions and

-    Defending significant litigation.

  The  stocks of technology companies have experienced extreme price and volume
fluctuations.  These fluctuations often have been unrelated or disproportionate
to the operating  performance  of  these  companies.  These  broad  market  and
industry  factors may have a material adverse effect on the market price of our
common stock,  regardless  of  our actual operating performance.   Factors like
this could have a material adverse  effect on our business, financial condition
and results of operations.


THE SALE OF A SIGNIFICANT NUMBER OF OUR SHARES PURSUANT TO FUTURE SALES
CONTRACTS COULD DEPRESS THE PRICE OF OUR STOCK

  Sales or issuances of a large number  of shares of common stock in the public
market or the perception that sales may occur  could  cause the market price of
our common stock to decline.  As of March 4, 2002, 31,344,710  shares of common
stock were outstanding.  Of these shares, 19,786,967 were eligible  for sale in
the public market without restriction (including 7,415,000 million held  by Dr.
Zwan  that  are subject to forward sales agreements).  The remaining 11,557,743
shares of outstanding  common  stock  were  held  by  Dr.  Zwan,  our  majority
stockholder,  and other company insiders.  As an "affiliate" (as defined  under
Rule 144, under  the Securities Act ("Rule 144") of Digital Lightwave, Dr. Zwan
may only sell his  shares  of  common  stock in the public market in compliance
with the volume limitations of Rule 144.


SOME ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON STOCK

  Our Board of Directors has the authority  to issue up to 20,000,000 shares of
preferred  stock and to determine the preferences,  rights  and  privileges  of
those shares without any further vote or action by our stockholders. The rights
of the holders  and  the  market  value  of  our  common stock may be adversely
affected by the rights of the holders of any series of preferred stock that may
be issued in the future. Some provisions of our certificate  of  incorporation,
our  bylaws and Delaware law could have the effect of making it more  difficult
for a third party to acquire a majority of our outstanding voting stock even if
doing so would be beneficial to our stockholders. These include provisions that
prohibit  stockholders  from  taking action by written consent and restrict the
ability of stockholders to call special meetings.


THE COMPANY IS EXPOSED TO VARIOUS RISKS RELATED TO LEGAL PROCEEDINGS OR CLAIMS

  The Company has been, currently is, or in the future may be involved in legal
proceedings or claims regarding  employment  law  issues,  contractual  claims,
securities  laws  violations and other matters (See Item 3. Legal Proceedings).
These legal proceedings  and  claims,  whether  with or without merit, could be
time-consuming  and  expensive  to  prosecute  or  defend   and   could  divert
management's attention and resources.  There can be no assurance regarding  the
outcome  of  current or future legal proceedings.  The Company has incurred and
may continue to  incur  significant  litigation  expenses associated with legal
proceedings  and  claims,  which have and could continue  to  have  a  material
adverse effect on our business, financial condition and results of operations.


ITEM 2.  PROPERTIES

  Our corporate headquarters and production and shipping facilities are located
in an approximately 92,000 square foot, three-story concrete and steel building
at 15550 Lightwave Drive, Clearwater, Florida.  We currently lease the building
space from Lightwave Drive LLC,  a  limited  partnership.  The lease expires in
November 2008 and may be extended by the company  for  up  to two (2) five-year
periods.


ITEM 3.  LEGAL PROCEEDINGS

   On November 23, 1999, Seth P. Joseph, a former officer and  director  of the
Company  commenced  arbitration proceedings against the Company alleging breach
of his employment agreement  and  stock  option  agreements,  violation  of the
Florida  Whistleblower  statute  and breach of an indemnification agreement and
the Company bylaws. As relief, Mr.  Joseph  sought  $500,000,  attorneys' fees,
interest  and  stock  options for 656,666 shares of the Company's Common  Stock
exercisable at a price  of $5.25 per share. The Company filed an answer denying
Mr.  Joseph's  allegations  and  alleging  multiple  affirmative  defenses  and
counterclaims. The Company's counterclaims against Mr. Joseph seek repayment of
loans totaling approximately  $113,000  plus interest.  Mr. Joseph subsequently
dismissed without prejudice all of his claims  other  than  his claim under the
whistleblower  statue.   The arbitration hearing on Mr. Joseph's  whistleblower
claim and the Company's counterclaims concluded on October 5, 2001. The parties
submitted proposed findings  to  the arbitrator on October 17, 2001. As part of
his proposed findings, Mr. Joseph sought an award of $48 million and attorneys'
fees  and  costs.   On  November 9, 2001,  the  Company  was  notified  of  the
arbitrator's decision that  awarded  Mr.  Joseph  the sum of approximately $3.7
million and attorneys' fees and costs.  On December  20,  2001,  the arbitrator
issued  a  corrected  award and awarded Mr. Joseph the sum of $3.9 million  and
attorneys' fees and costs  in  amounts  yet  to  be determined.  On January 23,
2002, Mr. Joseph filed a motion seeking the award of $1.1 million in attorneys'
fees, costs and interest thereon.

  On December 26, 2001, the Company filed a petition  to  vacate  or  modify
the arbitration  award in the Circuit Court of the Sixth Judicial Circuit,
Pinellas County, Florida,  in  an  action  entitled  Digital  Lightwave, Inc.
v. Seth P. Joseph,  Case  No.  01-9010C1-21.   The  Company filed an amended
petition  on December 26, 2001, following the corrected  arbitration  award.
Subsequently, Mr.  Joseph  filed  a  cross-motion  to  confirm  the arbitration
award. Oral argument on the Company's petition and Mr. Joseph's  cross-motion
was heard by the Court on February 27, 2002.  On March 7, 2002, the court
announced that it will  deny the Company's petition to vacate the arbitration
award. The Company intends  to  appeal  the decision.  The Company has recorded
an accrual of $4.1 million related to this  arbitration for the year ended
December 31, 2001. The Company believes its petition is meritorious and intends
to pursue the petition vigorously. There can be no assurance that the action
will not have a material adverse effect on the Company.

   In January 2002, an employee  terminated  as  part  of the Company's October
2001  restructuring  initiatives  discussed  in  Note  12  of the  Consolidated
Financial  Statements  -- Restructuring Charges, filed a lawsuit  claiming  the
Company wrongly discharged  him  and  has withheld commission payments due him.
The suit does not seek a specified amount  of  damages, but does claim that the
2001 compensation plan presented to him in October  2001  unfairly  lowered his
salary.  The plaintiff seeks attorneys' fees, interest and punitive damages  to
be assessed  by  the  court.  The suit was not properly filed with the court so
the Company does not have  a  deadline  to  respond.   It  is expected that the
plaintiff  will  refile  the  action and the Company will have thirty  days  to
respond to the complaint.  The  Company  has  accrued  the  estimated  costs to
defend  this  action  in the restructuring charges discussed in Note 12 of  the
Consolidated Financial Statements -- Restructuring Charges.

   The Company from time  to  time  is  involved  in various other lawsuits and
actions  by  third  parties arising in the ordinary course  of  business.   The
Company  is  not  aware   of  any  additional  pending  litigation,  claims  or
assessments  that  could have  a  material  adverse  effect  on  the  Company's
business, financial condition and results of operations.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  At the annual meeting of stockholders of the Company on October 26, 2001, the
stockholders voted on  two  proposals.  The first was a proposal to elect Gerry
Chastelet, Gerald A. Fallon, Dr. William  F. Hamilton, Robert F. Hussey and Dr.
Bryan J. Zwan as directors of the Company.  The  following table sets forth the
votes in such election:

     DIRECTOR                                   VOTES FOR    VOTES WITHHELD
     --------                                   ---------    --------------
     Gerry Chastelet........................... 29,223,541        96,131
     Gerald A. Fallon.......................... 29,230,028        89,644
     Dr. William F. Hamilton................... 29,216,920       102,752
     Robert F. Hussey.......................... 29,217,536       102,136
     Dr. Bryan J. Zwan......................... 29,198,304       121,368

     The    second    was    a   proposal   to   ratify   the   selection    of
PricewaterhouseCoopers LLP as  the Company's independent auditor for the fiscal
year ending December 31, 2001:

     NUMBER OF SHARES:

     Voted For............................................29,250,029
     Voted Against........................................    48,445
     Abstentions..........................................    21,198






                     EXECUTIVE OFFICERS OF THE REGISTRANT

The following table and notes set forth information about the Company's four
executive officers:

NAME                  AGE       POSITION

Dr. Bryan J. Zwan (1) 54        Chairman, President and Chief Executive Officer

Mark E. Scott (2)     48        Vice President, Finance, Chief Financial
                                Officer and Secretary

James Green (3)       51        Chief Operating Officer

Dr. Glenn Dunlap (4)  58        Chief Strategy Officer

___________________________

  (1)Dr. Zwan founded the Company in October 1990 and served as Chairman of the
Board from its inception until July  1999.  In addition, Dr. Zwan served as the
Company's Chief Executive Officer from the Company's  inception  until December
31, 1998 and served as its President from inception until March 1996  and  from
October  1996  until  December  31,  1998.  He was re-appointed Chairman of the
Board, Chief Executive Officer and President  on  January  23,  2002.  Dr. Zwan
holds a Ph.D. in Space Physics from Rice University and B.S. degrees in Physics
and Chemistry from the University of Houston.

  (2)Mr.  Scott  currently  serves  as Vice President, Finance, Chief Financial
Officer and Secretary and joined the  Company in January 2002. Prior to joining
the Company, Mr. Scott served as Chief  Financial  Officer  of  Network  Access
Solutions   Corporation,   a   publicly-traded   broadband  solutions  provider
headquartered  in Herndon, Virginia.  Prior to Network  Access  Solutions,  Mr.
Scott  was  the  Vice   President,  Finance  and  Chief  Financial  Officer  of
Teltronics,  Inc.,  a Sarasota,  Florida-based  international  manufacturer  of
telephone switching systems  and  software.   Before  that,  he  served as Vice
President,  Finance and Controller of Protel, Inc., a global telecommunications
company.  Mr. Scott has also held various senior financial management positions
at RHM Holdings, Inc.

  (3)Mr. Green currently serves as Chief Operating Officer.  He joined the
Company in August 1999 as a consultant. Prior to joining the Company, Mr. Green
served as the CEO of Trillium Industries from October 1995 to April 1999. Prior
to that, Mr. Green served as Vice President--Operations for the MATCO
Electronics Group from April 1993 to October 1995. Mr. Green is APICS Certified
and also holds a CPM Certification.

  (4)Dr. Dunlap  currently  serves  as  Chief  Strategy  Officer and joined the
Company   in  February  2001.  Dr.  Dunlap  has  an  extensive  background   in
telecommunications  and  microelectronics.  Prior  to  joining  the Company, he
served  as  Chairman,  President  and  Chief  Executive  Officer  of  Wandel  &
Goltermann ATE Systems, a manufacturer of telecommunications test systems, from
February  1996  to  February  2001.  Prior  to  that, Dr. Dunlap served as Vice
President of the Electronics Technologies Division  at MCNC, from February 1992
to  August  1995.  Dr. Dunlap has an MS and Ph.D. in Engineering  from  Arizona
State University, and  a  BS  in Aeronautics and Mathematics, also from Arizona
State University.
#


<PAGE>

                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  The Company's shares of Common  Stock  have  traded  on  the  Nasdaq National
Market  System under the symbol "DIGL" since February 7, 1997. The  prices  set
forth below  represent  quotes  between dealers and do not include commissions,
mark-ups or mark-downs, and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                               COMMON STOCK
<S>         <C>                <C>
                       --------------------------
                         HIGH               LOW
                       ---------         ---------
2000
1st Quarter            $150.0000         $ 44.5000
2nd Quarter            $104.8750         $ 26.1870
3rd Quarter            $125.0000         $ 63.0000
4th Quarter            $ 76.3750         $ 25.4370
2001
1st Quarter            $ 52.8125         $ 17.1875
2nd Quarter            $ 56.0300         $ 12.8125
3rd Quarter            $ 33.8000         $  9.8100
4th Quarter            $ 11.8400         $  5.4000
</TABLE>

  On March 4, 2002, the closing price  of the Company's Common Stock was $5.62.
As of March 4, 2002, there were approximately  594  holders  of  record  of the
Company's Common Stock.


DIVIDEND POLICY

  The  Company  has  not  paid  any  dividends since its inception and does not
contemplate  payment  of  dividends  in the  foreseeable  future.  The  Company
anticipates that any earnings in the near  future  will  be  retained  for  the
development  and  expansion  of  its  business. Certain of the Company's credit
facilities require consent from the banks prior to payments of dividends.


RECENT SALES OF UNREGISTERED SECURITIES

  In  1999,  the  Company  entered  into  a financing  agreement  with  certain
investors pursuant to which the Company agreed  to  issue  $3.0  million  of 9%
Secured  Bridge  Notes  due  January 17, 2000. In connection with the financing
agreement, the Company issued  warrants  to  purchase  an  aggregate of 550,000
shares of the Company's common stock at an exercise price of  $2.75  per share,
which  was  the market price of the stock on the date prior to the issuance  of
the warrants.  The warrants had a term of five years from the date of issuance.
The Company agreed  to register the warrants and the common stock issuable upon
exercise thereof under  the Securities Act of 1933. The registration took place
on January 7, 2000 and the warrants were subsequently exercised.

  The issuance of securities  in  this  Item  5  was  deemed  to be exempt from
registration  under  the  Securities  Act of 1933, as amended (the  "Act"),  in
reliance on Section 4(2) of the Act as a transaction by an issuer not involving
any public offering.  The recipients of  the  securities  in  such  transaction
represented their intention to acquire the securities for investment  only  and
not  with a view to or for sale in connection with any distribution thereof and
appropriate  legends were affixed to the securities issued in such transaction.
The recipients were given adequate access to information about the Company.


  During the fiscal  year  ended  December  31,  2001,  there  were no sales of
unregistered securities.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

                     SELECTED CONSOLIDATED FINANCIAL DATA
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

  The  following  selected  consolidated  financial data are derived  from  the
Consolidated  Financial Statements of the Company.  The  selected  consolidated
financial data  should  be  read  in  conjunction  with  "Item  7. Management's
Discussion  and Analysis of Financial Condition and Results of Operations"  and
the Consolidated Financial Statements of the Company and Notes thereto.

<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31,
<S>                              <C>             <C>  <C>             <C> <C>              <C> <C>            <C>  <C>           <C>
                                 -----------------------------------------------------------------------------------------------

                                      2001                 2000                 1999                1998               1997
                                  -------------        -------------       -------------       -------------       -------------
Consolidated Statement of
Operations:
  Net sales                          $    82,780           $  100,675          $    50,474         $   24,191        $     9,081
                                   -------------        -------------        -------------      -------------      -------------
         Gross profit                     51,170               67,438               33,043             14,972              5,957
                                   -------------        -------------        -------------      -------------      -------------
Operating expenses:
  Engineering and development             14,985               14,092               10,204             14,335              5,342
  Selling and marketing                   22,261               15,628               12,724             11,363              5,260
  General and administrative               8,063                7,085                5,240              7,223              3,812
  Restructuring charges                      500 (4)               --                   --              1,018  (1)            --
  Litigation settlements and
       charges                             4,100 (5)               --                   --             11,500  (2)            --
                                   -------------        -------------        -------------      -------------      -------------
         Total operating
           expenses                       49,909               36,805               28,168             45,439             14,414
                                   -------------        -------------        -------------      -------------      -------------
Income (loss) from operations              1,261               30,633                4,875           (30,467)            (8,457)

Other income                               1,545                  770                   78                642              1,767
                                   -------------        -------------        -------------      -------------      -------------
         Net income (loss)         $       2,806        $      31,403        $       4,953      $    (29,825)      $     (6,690)
                                   =============        =============        =============      =============      =============
Income (loss) per share            $        0.09        $        1.06        $        0.18      $      (1.13)      $      (0.25)
                                   =============        =============        =============      =============      =============
Diluted income (loss) per
       share                       $        0.09        $        0.98        $        0.17      $      (1.13)  (3) $      (0.25)(3)
                                   =============        =============        =============      =============      =============
Weighted average shares               30,927,386           29,548,905           26,808,158         26,475,749         26,084,208
Weighted average shares and
  common equivalent shares            32,109,888           31,946,416           29,151,628         26,494,439         27,060,221
Consolidated Balance Sheet Data:
  Cash                             $      51,044        $      30,481        $       7,466      $       3,848       $     24,031
  Working capital                         64,755               58,977               12,913              2,267             32,495
  Total assets                            86,262               78,833               39,998             27,558             44,361
  Total long-term liabilities                809                  854                  498                281                 25
  Stockholders' equity                    74,066               67,369               22,153             12,320             39,419
</TABLE>

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

(1)Includes non-recurring  expense  $1.0  million  for restructuring charges as
   described in Form 10-K for the fiscal year ended December 31, 2000.
(2) Includes a charge of $8.5 million made in connection with the settlement of
   a class action legal proceeding and a one-time charge  of  $3.0 million made
   in connection with the settlement of Haney litigation as described  in  Form
   10-K for the fiscal year ended December 31, 2000.
(3)Incremental shares for common stock equivalents are not included in the loss
   per share calculations due to the anti-dilutive effect.
(4)Includes  non-recurring  expense  of  $500,000  for restructuring charges as
   described under "Management's Discussion and Analysis of Financial Condition
   and  Results  of  Operations -- Overview" and Note 12  of  the  Consolidated
   Financial Statements -- Restructuring Charges.
(5)Includes a charge of  $4.1  million  made in connection with the Seth Joseph
   arbitration  as  described  under  Note 13  of  the  Consolidated  Financial
   Statements -- Legal Proceedings.
#


<PAGE>

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

  The following discussion includes certain forward-looking  statements  within
the  meaning  of  the  Private  Securities Litigation Reform Act of 1995. These
statements are based on current expectations,  forecasts  and  assumptions that
involve risks and uncertainties that could cause actual outcomes and results to
differ  materially.  These  risks  and  uncertainties  include fluctuations  in
operating  results,  changes  in  the United States and worldwide  economy  and
fluctuations in capital expenditures  within  the  telecommunications industry,
our dependence on a limited number of products and uncertainties  of the market
for  our current and planned products, technological change, our dependence  on
growth  of  the  Internet,  competition,  our dependence on a limited number of
major customers, our dependence on contract  manufacturers  and  suppliers, our
products  may not continue to meet changing regulatory and industry  standards,
our ability to achieve sustained operating profitability, our dependence on key
personnel,  the  significant  influence  of  our  principal  stockholder,   our
dependence  on  proprietary technology, the volatility of our market price, the
sale of a significant  number  of our shares pursuant to future sales contracts
could depress the price of our stock,  the effect that anti-takeover provisions
have on the  price of our common stock and  past  and  future litigation risks.
For  a  further list and description of such risks and uncertainties,  see  the
reports filed by Digital Lightwave with the Securities and Exchange Commission,
including  the  Company's  reports  on  Form  10-K  and 10-Q. Digital Lightwave
undertakes  no  obligation to update or revise any forward-looking  statements,
whether as a result of new information, future events or otherwise.


OVERVIEW

  Digital  Lightwave,  Inc.  provides  the  global  fiber-optic  communications
industry with  products  and  technology  used  to  develop, install, maintain,
monitor  and  manage  fiber  optic-based networks.  Telecommunications  service
providers and equipment manufacturers  deploy the Company's products to provide
quality  assurance  and  ensure  optimum  performance   of   advanced   optical
communications networks and network equipment.  The Company's products are sold
worldwide   to  leading  and  emerging  telecommunications  service  providers,
telecommunications  equipment  manufacturers,  equipment  leasing companies and
international distributors.

  Fiber  optics  deliver  increased network bandwidth for the  transmission  of
voice,  video,  audio, and data  traffic  over  public  and  private  networks,
including the Internet.   The  Company's  products  provide the capabilities to
cost-effectively deploy and manage fiber-optic networks  to  address increasing
demand  for  bandwidth.  While the technology of optical networking  is  highly
advanced, the  Company's  products  are  used to verify that telecommunications
products  and  systems  function  and  perform   properly.   Specific  customer
applications of the Company's diagnostic equipment include the qualification of
products  during  manufacturing,  the verification of  service  during  network
installation and the monitoring and maintenance of deployed networks.

  The Company's two product lines are Network Information Computers and Network
Access Agents.  Network Information  Computers are portable instruments for the
installation  and  maintenance testing of  advanced,  high-speed  networks  and
transmission  equipment.    The   NIC   product   family   provides  diagnostic
capabilities for testing the performance of both optical and  legacy electrical
networks  with  an  array  of communications standards and transmission  rates.
NAAs are unattended, software-controlled, performance monitoring and diagnostic
systems permanently installed  within  optical-based  networks.  NAAs embed the
capabilities of our portable Network Information Computers  within a customer's
network infrastructure, allowing centralized remote network management.

  The  Company's  net  sales are generated from sales of its products  less  an
estimate for customer returns.   We  expect  that  the  average  selling  price
("ASP")  of  its  NIC and its NAA will fluctuate based on a variety of factors,
including product configuration,  potential  volume discounts to customers, the
timing of new product introductions and enhancements  and  the  introduction of
competitive  products.   Because  the  cost  of  goods  sold  tends  to  remain
relatively  stable  for  any given product, fluctuations in the ASP may have  a
material adverse effect on  our  business,  financial  condition and results of
operations.

  The  Company  primarily sells its products through a direct  sales  force  to
telecommunications  service  providers and network equipment manufacturers. The
Company  sells  to  international  markets  through  international  distributor
channels with some direct  sales and sales support.  Sales of our products have
tended to be concentrated with  a  few major customers and we expect sales will
continue to be concentrated with a few  major customers in the future.  For the
year ended December 31, 2001, our largest  customer,  Level  3  Communications,
accounted  for  approximately 12% of total sales. For the years ended  December
31, 2000 and 1999,  our  largest  customer, Telogy, accounted for approximately
15% and 21% of total sales, respectively. For the year ended December 31, 1999,
one additional customer, Technology Rental Services, accounted for 18% of total
sales.  No other customer accounted  for  sales  of  10%  or  more during those
years.

  The  Company  has  not entered into long-term agreements or blanket  purchase
orders for the sale of  its  products. It generally obtains purchase orders for
immediate shipment and other cancelable  purchase commitments. The Company does
not expect to carry substantial backlog from  quarter to quarter in the future.
Our sales during a particular quarter are highly  dependent  upon orders placed
by customers during the quarter.  Most of our operating expenses  are fixed and
cannot be easily reduced in response to decreased revenues. Variations  in  the
timing  of revenues could cause significant variations in results of operations
from quarter to quarter and result in continuing quarterly losses. The deferral
of any large  order  from  one  quarter  to another would negatively affect the
results of operations for the earlier quarter.   The Company must obtain orders
during each quarter for shipment in that quarter to  achieve revenue and profit
objectives.

  Reduced  customer  capital  expenditures  and the overall  economic  weakness
caused  the  Company to incur net operating losses  in  the  third  and  fourth
quarters of 2001.   In  October 2001 and January 2002, the Company took certain
measures to reduce its future  operating  costs.   These  measures  included  a
reduction  in  force,  pay  cuts  for  management  and  other expense reduction
actions.   The Company can give no assurance as to whether  its  revenues  will
return to previous levels or when it will return to profitability.


CRITICAL ACCOUNTING POLICIES

  We believe  that  the following accounting policies are critical in that they
are important to portrayal  of  the  Company's financial conditions and results
and they require difficult, subject and  complex  judgments  that are often the
results of estimates that are inherently uncertain:

    *  Revenue recognition and

    *  Estimating valuation allowances and accrued liabilities, specifically
       sales returns and other allowances, the reserve for uncollectible
       accounts, the reserve for excess and obsolete inventory and assessment
       of the probability of the outcome of our current litigation.

  Revenue Recognition

    We  derive our revenue from product sales.  We make certain  judgments  and
estimates  used  in  connection  with  the revenue recognized in any accounting
period.  It is likely that material differences  would result in the amount and
timing of our revenue for any period if we made different judgments or utilized
different estimates.

  We  recognize  revenue  from the sale of our products  when  we  believe  the
following factors have been achieved:

    *  Persuasive evidence of a sales arrangement exists,

    *  The product has been delivered,

    *  The price is fixed and determinable and

    *  Collection of the resulting receivable is reasonably assured.

  We use a binding purchase order as evidence that an arrangement for all sales
exist.   Sales through our international distributors are evidenced by a master
agreement governing the relationship with the distributor.  We either obtain an
end-user purchase order documenting  that  an  order  has  been placed with the
distributor  or  proof  of  delivery  to  the  end  user  as evidence  that  an
arrangement for sale exists.

  For  demonstration  units  sold  to  distributors,  we use the  distributor's
binding purchase order as evidence of a sales arrangement.

  For domestic sales, delivery generally occurs when product  is delivered to a
common carrier.  Demonstration units sold to our international distributors are
considered delivered when the units are delivered to a common carrier.   In the
case of shipments to an international distributor that will be resold, delivery
occurs when we receive either a copy of the end-user binding purchase order  or
proof  of  delivery to the end-user.  We provide an allowance for sales returns
based on historical experience.

  We assess whether the price associated with our revenue transactions is fixed
and determinable  and  whether  or  not collection is reasonably assured at the
time  of  the  transaction.  Our  assessment   that  the  price  is  fixed  and
determinable  is based on the payment terms associated  with  the  transaction.
Our standard payment  terms for domestic customers are 30 days from the invoice
date.  Distributor contracts provide standard payment terms of 60 days from the
invoice  date.   We  have  not  offered  extended  payment  terms.   We  assess
collection based on a  number  of  factors,  including past transaction history
with the customer and the credit-worthiness of  the customer. We do not request
collateral from our customers. If we determine that  collection  of an accounts
receivable  is  not reasonably assured, we will defer the amount and  recognize
revenue at the time collection becomes reasonably assured.

  Our arrangements  do not generally include acceptance clauses. However, if an
arrangement includes  an  acceptance  provision,  acceptance  occurs  upon  the
earlier  of  receipt  of  a  written  customer  acceptance or expiration of the
acceptance period.

  Sales returns and other allowances, reserve for uncollectible accounts,
reserve for excess and obsolete inventory and litigation

  The preparation of financial statements requires  us  to  make  estimates and
assumptions  that  affect  the  reported  amount  of  assets and disclosure  of
contingent assets and liabilities at the date of the financial  statements  and
the reported amounts of revenues and expenses during the reported period.

  We estimate the amount of potential future product returns related to current
period  product  revenue.   We consider many factors when making our estimates,
including analyzing historical  returns,  current  economic  trends, changes in
customer demand and acceptance of our products to evaluate the  adequacy of the
sales  returns and other allowances.  Our estimate of the provision  for  sales
returns and other allowances as of December 31, 2001was $0.7 million.

  We also  estimate  the  uncollectability  of  our  accounts  receivables.  We
consider  many factors when making our estimates, including analyzing  accounts
receivable  and historical bad debts, customer concentrations, customer credit-
worthiness, current  economic  trends and changes in our customer payment terms
when evaluating the adequacy of  the  reserve  for  uncollectible accounts. Our
accounts receivable balance was as of December 31, 2001,  $7.6  million, net of
our estimated reserve for uncollectible accounts of $5.9 million.

  We  estimate  the amount of excess and obsolete inventory.  We consider  many
factors when making  our  estimates,  including  analyzing current and expected
sales trends, the amount of current parts on hand,  the current market value of
parts on hand and the viability and technical obsolescence of our products when
evaluating the adequacy of the reserve for excess and  obsolete inventory.  Our
inventory  balance  as  of  December  31, 2001, was $16.6 million  net  of  our
estimated reserve for excess and obsolete inventory of $3.8 million.

  We estimate the amount of liability the  Company  may  incur  as  a result of
pending litigation.  Our estimate of legal liability is uncertain and  is based
on  the  size of the outstanding claims and an assessment of the merits of  the
claims.   We   accrued  $4.1  million  for  liability  resulting  from  pending
litigation as of  December  31,  2001.   We will assess the potential liability
related  to  our  pending litigation and revise  our  estimates  as  additional
information becomes available.

  We make significant  judgments  and  estimates  and assumptions in connection
with  establishing  the  amount  of  sales  returns and other  allowances,  the
uncollectability of our account receivables,  the amount of excess and obsolete
inventory and the amount of liability related to  pending litigation during any
accounting period.  If we made different judgments  or used different estimates
or assumptions for establishing such amounts, it is likely  that  our financial
results for any period would be materially different.

#


<PAGE>
RESULTS OF OPERATIONS

  The  following  table  sets  forth  certain  financial  data  expressed as  a
percentage of net sales.

<TABLE>
<CAPTION>
                                                               FISCAL YEAR
<S>                                    <C>             <C>    <C>             <C>   <C>            <C>
                                                           ENDED DECEMBER 31,
                                       -----------------------------------------------------------
                                            2001                   2000                  1999
                                         ----------             ----------            ----------
Net sales                                          100 %                  100 %                100 %
Cost of goods sold                                  38                     33                   35
                                            ----------             ----------           ----------
Gross profit                                        62                     67                   65
Operating expenses:
  Engineering and development expenses              18                     14                   20
  Sales and marketing expenses                      27                     16                   25
  General and administrative expenses               10                      7                   10
  Reorganization charges                             1                     --                   --
  Litigation charge                                  5                     --                   --
                                            ----------             ----------           ----------
          Total operating expenses                  61                     37                   55
                                            ----------             ----------           ----------
Operating income                                     1                     30                   10
Interest income                                      2                      1                    1
Interest expense                                    --                     --                   (1)
Other income (expense),net                          --                     --                   --
                                            ----------             ----------           ----------
Net income                                           3 %                   31 %                 10 %
                                            ==========             ==========           ==========
</TABLE>

     -- Represents less than 1% of net sales.


YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

  Net Sales

  Net sales decreased by  $17.9 million, or 18%, to $82.8 million  from  $100.7
million  in  fiscal  2000. Sales to existing customers for the year represented
90% of sales, or $74.7  million  as  compared to 71% of sales, or $71.6 million
for  fiscal  2000. During fiscal 2001, the  Company  shipped  977  total  units
(including 47  NAA's)  at  an  ASP of approximately $82,600 compared with 1,463
units (including 70 NAA's) at an  ASP of approximately $65,900 for fiscal 2000.
The increase in ASP is related to the  product  mix with increased shipments of
higher speed NIC and NAA products.

  International sales for the year ended December  31, 2001, as a percentage of
total sales, increased 11%, to 20% of total sales as  compared  to  9% of total
sales in 2000.   The majority of these sales were made in the first and  second
quarters of 2001 as part of the Company's international growth strategy.

  Beginning  in  the  third  quarter  of  2001, the telecommunications industry
experienced a dramatic economic downturn that  was  brought on by a significant
decrease in network build-outs and capital spending by  the  telecommunications
carriers  and  equipment  manufacturers.   Our  customers'  declining  business
resulted in a major decrease in sales of our products during the second half of
2001.

Cost of Goods Sold

  Cost  of  goods sold for the year ended December 31, 2001 decreased  by  $1.6
million, or 5%,  to  $31.6  million  as  compared to $33.2 million in 2000. The
decrease in cost of goods sold was due to  the reduction in the volume of units
sold offset by a $5.2 million charge related  to  excess and obsolete inventory
in 2001.

Gross Profit

  Gross profit for the year ended December 31, 2001  decreased by $16.3 million
to $51.1 million as compared to $67.4 million in 2000.  Gross  margin  for  the
year  decreased  to 61.8% from 67.0% in 2000.  The decrease in gross profit was
primarily attributable  to  lower  sales  volume  combined  with a $5.2 million
charge for excess and obsolete inventory in 2001.

Engineering and Development

  Engineering  and  development  expenses  principally  include  salaries   for
engineering   and   development   personnel,  depreciation  of  production  and
development assets, outside consulting  fees  and  other  development expenses.
Engineering  and  development  expenses  for the year ended December  31,  2001
increased by $0.9 million to $15.0 million,  or  18%  of  net sales, from $14.1
million,  or  14%  of  net  sales, last year.  The dollar increase  related  to
development efforts on the Company's NIC and NAA product lines, principally the
NIC Plus product.

Sales and Marketing

  Sales  and  marketing expenses  principally  include  salaries,  commissions,
travel, tradeshows,  promotional  materials,  warranty  expenses  and  customer
incentive  programs.  Sales  and marketing expenses for the year ended December
31, 2001 increased by $6.7 million  to $22.3 million, or 27% of net sales, from
$15.6 million, or 16% of net sales in  2000.   The  dollar increase is directly
related to an increase in the provision for uncollectible  accounts  receivable
and an increase in marketing and international travel expenses associated  with
the  increase  in  international  sales.   These costs were partially offset by
decreased commissions paid on reduced net sales.

  The Company increased the reserve for uncollectible accounts by approximately
$5.7  million in 2001.  The majority of the reserve  related  to  international
accounts  with  large  past due balances.  With the current uncertain worldwide
economic conditions, the  Company  determined that these international accounts
would be uncollectible.  The Company's ability to pursue a cost-effective legal
remedy for payment if an account went  bankrupt  or insolvent was considered to
be remote.

General and Administrative

  General   and   administrative   expenses   principally   include   salaries,
professional  fees,  facility  rentals, compensation  and  information  systems
related to general management functions.  General  and  administrative expenses
for  the  year  ended  December  31,  2001, increased by $1.0 million  to  $8.1
million, or 10% of net sales, from $7.1 million, or 7% of net sales, last year.

  The increase relates to increased professional fees relating to various legal
matters,  indemnification  expenses  for  current   and   former  officers  and
directors, employee recruiting, insurance and facilities expenses.

Restructuring Charges

     In  October  2001,  the Company's board of directors approved  a  plan  to
reduce  the current workforce  by  38  employees  and  consultants  across  all
departments  and instituted temporary executive salary reductions of up to 20%.
The overall objective  of  the  initiative  was  to  lower  operating costs and
improve efficiency.

     All affected employees were terminated in October 2001 and given severance
based  upon  years  of  service  with  the  Company.   The  Company recorded  a
restructuring  charge  of  $500,000  in  2001  related  to this cost  reduction
program.  The costs included in the restructuring charge  include  severance to
employees included in the reduction in force, legal costs associated  with  the
cost  reduction  program  and  the  remaining lease liability on the New Jersey
location.   The costs are expected to  be  paid  by  November  2002.   Activity
associated with the restructuring charges was as follows:

<TABLE>
<CAPTION>
                                Balance at                               Payments/              Balance at
                                January 1,             Additions         Reductions             December 31,
                                   2001								   2001
<S>                      <C>                        <C> <C>             <C> <C>               <C> <C>
                                ------------           -----------       -----------            -------------
                                                                (in thousands)
Severance                       $         --          $        251     $        (172)         $           79
Legal and other expenses                  --                   109               (22)                     87
Lease payments                            --                   140               (22)                    118
                                -------------         -------------     --------------         --------------
                                $         --          $        500     $        (216)         $          284
                                =============         =============     ==============         ==============
</TABLE>

  In January  2002,  the  board of directors approved additional cost reduction
initiatives aimed at further  reducing operating costs. These included a second
reduction in force of 46 employees  and  contractors  and  the  outsourcing  of
manufacturing  and  production  for  our product lines.  All affected employees
were terminated in January 2002 and given severance based upon years of service
with  the Company.  The Company expects  to  take  a  restructuring  charge  of
approximately  $1.3  million  in  the  first  quarter of 2002.  The total costs
associated with the restructuring will be paid by January 2003.  These actions,
combined  with the October initiative, are expected  to  reduce  the  Company's
operating  expenses  by  approximately  $16  million  on  an  annualized  basis
beginning in the second quarter of 2002.

Litigation Charge

  During 2001,  the  Company  recorded  a charge of $4.1 million related to the
Seth Joseph arbitration case and appeal.   There was no corresponding charge in
2000.

Other Income (Expense)

  Other income for the year ended December 31,  2001  increased by $0.7 million
to $1.5 million from $0.8 million last year. This category primarily represents
interest earned on invested cash balances.

Net Income

  Net income for the year ended December 31, 2001, decreased  by  $28.6 million
to $2.8 million or $0.09 per diluted share, from a net income of $31.4  million
or $0.98 per diluted share in 2000 for the reasons discussed above.


YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999

  Net Sales

  Net  sales  increased  by $50.2 million, or 99%, to $100.7 million from $50.5
million in 1999. Sales to  existing  customers  for the year represented 71% of
sales, or $71.6 million as compared to 85% of sales, or $43.0 million for 1999.
During 2000, the Company shipped 1,463 total units  (including  70 NAA's) at an
ASP of approximately $65,900 compared with 1,158 units (including  14 NAA's) at
an  ASP  of  approximately  $41,400  for 1999.  The primary increase in ASP  is
related  to product mix with increased  sales  of  higher  speed  NIC  and  NAA
products.

Cost of Goods Sold

  Cost of  goods  sold  for the year ended December 31, 2000 increased by $15.8
million to $33.2 million  as compared to $17.4 million in 1999. The increase in
cost of goods sold was due  to  the  increase  in  the volume of units sold and
product mix with increased shipments of higher speed NIC and NAA products.

Gross Profit

  Gross profit for the year ended December 31, 2000  increased by $34.4 million
to $67.4 million as compared to $33.0 million in 1999.   Gross  margin for year
increased  to  67.0%  from  65.5% in 1999.  The increase was primarily  due  to
product mix with increased shipments of higher speed NIC and NAA products.

Engineering and Development

  Engineering  and  development   expenses  principally  include  salaries  for
engineering  and  development  personnel,   depreciation   of   production  and
development  assets,  outside  consulting fees and other development  expenses.
Engineering and development expenses  for  the  year  ended  December  31, 2000
increased  by  $3.9  million  to $14.1 million, or 14% of net sales, from $10.2
million, or 20% of net sales, last year.

  The dollar increase is related  to  development efforts for the Company's NIC
and NAA product lines.

Sales and Marketing

  Sales  and  marketing  expenses principally  include  salaries,  commissions,
travel,  tradeshows,  promotional  material  expenses  and  customer  incentive
programs.  Sales and marketing  expenses  for  the year ended December 31, 2000
increased by $2.9 million to $15.6 million, or 16%  of  net  sales,  from $12.7
million, or 25% of net sales, last year.

  The  dollar increase is related to higher commissions, travel, marketing  and
investor relations and employee benefit expenses.

General and Administrative

  General   and   administrative   expenses   principally   include   salaries,
professional  fees,  facility  rentals,  compensation  and  information systems
related  to  general management functions. General and administrative  expenses
for the year ended December 31, 2000 increased by $1.9 million to $7.1 million,
or 7% of net sales, from $5.2 million, or 11% of net sales, last year.

  The increase  relates  to  increased  legal fees, rental and employee benefit
expenses.  These  items  were partially offset  by  reductions  in  salary  and
consulting expenses.

Other Income (Expense)

  Other income for the year  ended  December 31, 2000 increased by $0.7 million
to $0.8 million from $0.1 million last year. This category primarily represents
interest earned on invested cash balances.

Net Income

  Net income for the year ended December 31, 2000 increased by $26.4 million to
$31.4 million or $0.98 per diluted share,  from a net income of $5.0 million or
$0.17 per diluted share in 1999.

INCOME TAXES

  As of December 31, 2001, the Company had net operating loss carry forwards of
approximately  $245  million for tax purposes.   Our  loss  carryforwards  will
expire between the years 2009 and 2021.

  The major components of the net operating loss carry forwards are as follows:

  *  Tax deductions of  $118  million  related to the exercise of non-qualified
     stock options,

  *  A  ruling  from  the  Internal Revenue  Service  regarding  an  additional
     deduction related to securities  litigation costs that  resulted in a $127
     million increase to the Company's net operating loss carryforward.

  The  Company has recorded a valuation  allowance  against  the  deferred  tax
assets resulting  from  the net operating loss as it has determined  that it is
more likely than not that  the  deferred  tax assets will not be realized.  The
benefit associated with the net operating loss  will be reported as an increase
in  additional  paid-in  capital and will not be recognized  in  the  Company's
Consolidated Statement of Operations when the deferred tax assets are realized.


LIQUIDITY AND CAPITAL RESOURCES

  As  of December 31, 2001,  the  Company's  cash  and  cash  equivalents  were
approximately  $51.0  million,  an  increase of $20.5 million from December 31,
2000. As of December 31, 2001, the Company's  working capital was approximately
$64.8 million as compared to $59.0 million at December  31,  2000.  During 2001
and   2000,  we  reported  net  income  of  $2.8  million  and  $31.4  million,
respectively,  and  cash  flows  from  operations  of  $20.8  million and $19.8
million,  respectively.  We  had  an  accumulated  deficit  of $6.4 million  at
December 31, 2001.

  During  the  third  and  fourth quarters of 2001, we experienced  a  combined
operating loss of $25.6 million  and  expect  to incur operating losses through
2002. Management has taken actions to significantly  reduce cost of goods sold,
operating   expenses   and   capital   expenditures.   These  actions   include
restructuring operations to more closely align operating costs with revenues.

  Operating Activities. Net cash provided by operating activities  for the year
ending December 31, 2001 was $20.8 million. This was primarily the result  of a
decrease  in  accounts  receivable  of  $11.7  million,  increases  in  accrued
litigation charges of $4.1 million,  non-cash expenses consisting primarily  of
depreciation  and  amortization  of  $3.4  million,  provision  for  excess and
obsolete inventory of $5.2 million and provision for uncollectible accounts  of
$6.0  million.  These  were  partially  offset  by  a  $9.4 million increase in
inventory,  accompanied  by  a  decrease  in  accounts  payable   and   accrued
liabilities of $3.6 million.

  Net  cash  provided by operating activities for the year ending December  31,
2000 was $19.8  million.  This was primarily the result of net income of $31.4,
accompanied by increases in  accounts  payable  and accrued liabilities of $2.9
million,  non-cash expenses of depreciation and amortization  of  $2.9  million
and  provision  for  excess  and  obsolete  inventory of $0.7 million. This was
partially  offset  by increases in accounts receivable  of  $10.3  million  and
inventory of $8.0 million.

   Net cash used in  operating activities for the year ending December 31, 1999
was $1.6 million. This  was  primarily  the  result  of  increases  in accounts
receivable  of  $9.2  million  and inventory of $1.2 million and a decrease  in
accrued litigation charges of $1.1  million.  This  was partially offset by net
income  of $5.0 million along with increases in accounts  payable  and  accrued
liabilities of $1.4 million, non-cash expenses of depreciation and amortization
of $2.5 million and obsolete inventory of $0.4 million.

   Investing  Activities.  Net  cash  used  in  investing  activities  was $3.5
million, $1.3 million and $1.9 million  for the years ended December 31,  2001,
2000  and  1999,  respectively.   Investing  activities related to purchases of
property and equipment.

  Financing  Activities.  Net cash provided by financing  activities  was  $3.3
million for the year ended  December 31, 2001. This was primarily the result of
net proceeds from employee exercises  of  stock options of $3.9 million.  These
were partially offset by principal payments  on  capital  lease  obligations of
$0.7 million.

  Net cash provided by financing activities was $4.5 million for the year ended
December 31, 2000. This was primarily the result of net proceeds from  employee
exercises  of stock options of $7.8 million and payments received on leases  of
$0.3 million.   These  were  partially  offset  by  principal payments on notes
payable of $3.0 million and principal payments on capital  lease obligations of
$0.5 million.

  Net cash provided by financing activities was $7.1 million  for  year  ending
December  31, 1999. This was primarily the result of net proceeds from employee
exercises of stock options of $3.7 million, payments received on leases of $0.7
million and  proceeds  from  issuance  of notes payable of $3.0 million.  These
were partially offset by principal payments  on  capital  lease  obligations of
$0.3 million.

  Line of Credit. In October 2000, the Company entered into a Loan and Security
Agreement  (the "Loan Agreement") with Congress Financial Corporation  pursuant
to which Congress  provided  the  Company  with a $10.0 million line of credit.
Under the Loan Agreement, the Company is entitled to borrow up to $10.0 million
initially  bearing  interest  at prime plus one-half  of  one  percent  (.50%),
subject to certain borrowing limitations  based  on  amounts  of  the Company's
accounts  receivable  and inventories.  The Loan Agreement expires in  November
2002. All indebtedness  outstanding  under the Loan Agreement is collateralized
by substantially all of the Company's  assets.  Under  the  terms  of  the Loan
Agreement,  the  Company  is required to maintain certain financial ratios  and
other financial conditions.  The  Loan  Agreement  also  prohibits the Company,
without  prior  written  consent  from  Congress,  from  incurring   additional
indebtedness,  limits  certain  investments,  advances  or  loans and restricts
substantial asset sales, capital expenditures and cash dividends.  As  of March
4,  2002, the Company had utilized $2.13 million of the $10.0 million available
under  the  credit  facility  to collateralize a letter of credit required by a
lease  for office space. A fee for  this  letter  of  credit  accommodation  is
assessed  at  one  and  one  quarter percent (1.25%) per annum.   There were no
borrowings under this line of credit at December 31, 2001.

  Other Material Commitments.  The Company's contractual cash obligations as of
December 31, 2001, are summarized (in thousands) in the table below.





<TABLE>
<CAPTION>
                                                         Payable
                                                         during        Payable       Payable
      Contractual Cash Obligations          Total         2002        2003-2005     after 2005
<S>                                      <C> <C>        <C> <C>           <C> <C>          <C> <C>
----------------------------------------  ----------   ------------  ------------    ----------
Operating leases                            $ 12,316   $      1,787   $     5,248    $    5,281
Capital lease obligations                        445            435            10            --
Non-cancelable purchase orders                 5,439          5,439            --            --
                                          ----------   ------------  ------------    ----------
Total contractual cash obligations          $ 18,200   $      7,661   $     5,258    $    5,281
                                          ==========   ============  ============    ==========
</TABLE>


  The Company continues to consider  various  financing alternatives, including
other  equity  or  debt  issuances  (the  "Financing   Sources").  The  Company
anticipates that its existing cash and cash equivalents  and  anticipated  cash
flow  from  operations  together with funds provided from the Financing Sources
will  be  sufficient  to  fund   the  Company's  working  capital  and  capital
expenditure requirements for at least  the  next twelve months. The anticipated
cash flow from operations assumes the Company achieves a level of sales that is
sufficient to offset expected operating expenses. In the event that these sales
levels are not attained, the Company may be required  to  use its cash reserves
to fund operations or supplement its working capital with additional funding or
financing alternatives. There can be no assurance, however,  that  the  Company
will  achieve  sufficient   sales  levels or that adequate additional financing
will  be available when needed or if  available  on  terms  acceptable  to  the
Company.

New Accounting Pronouncements

  In  July  2001,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement  No.  141, Business Combinations, and Statement No. 142, Goodwill and
Other  Intangible   Assets.  Statement  No.  141  requires  that  all  business
combinations initiated  after June 30, 2001 be accounted for under the purchase
method of accounting. Use  of  the  pooling-of-interests  method  is  no longer
permitted. The Company did not make any acquisitions in 2001. With the adoption
of  Statement  No. 142 effective January 1, 2002, goodwill and other indefinite
lived intangibles  will no longer be amortized to earnings, but will instead be
reviewed for impairment by applying a fair-value-based test. The Company had no
goodwill recorded at December 31, 2001.

  In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for  Asset  Retirement  Obligations. Statement No. 143 requires
entities  to  record  the fair value of a liability  for  an  asset  retirement
obligation in the period  in  which  it  is  incurred.  When  the  liability is
initially  recorded,  the entity capitalizes a cost by increasing the  carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each  period and the capitalized cost is depreciated over the
useful life of the related  asset.  Upon settlement of the liability, an entity
either settles the obligation for its  recorded amount or incurs a gain or loss
upon  settlement. Statement No. 143 is effective  for  fiscal  years  beginning
after June  15, 2002, with earlier application encouraged. The Company does not
expect the implementation of Statement No. 143 to have a material impact on its
financial statements.

  In October  2001,  the  FASB  issued  Statement  No.  144, Accounting for the
Impairment  or  Disposal  of Long-Lived Assets. Statement 144  supersedes  FASB
Statement No. 121, Accounting  for  the Impairment of Long-Lived Assets and for
Long-Lived  Assets  to  Be  Disposed  Of.    Statement  No.  144  develops  one
accounting model (based on the model in  Statement  No. 121) for all long-lived
assets and requires that long-lived assets that are to  be  disposed of by sale
be measured at the lower of book value or fair value less cost  to  sell.  That
requirement eliminates Accounting Principles Board Opinion No. 30's requirement
that  discontinued  operations  be  measured  at  net  realizable value or that
entities  include under "discontinued operations" in the  financial  statements
amounts  for  operating  losses  that  have  not  yet  occurred.  Additionally,
Statement  No.  144 expands the scope of discontinued operations to include all
components of an  entity with operations that (i) can be distinguished from the
rest of the entity  and  (ii) will be eliminated from the ongoing operations of
the  entity in a disposal transaction.  Statement  No.  144  is  effective  for
financial  statements issued for fiscal years beginning after December 15, 2001
and generally its provisions are to be applied prospectively.  The Company does
not expect the implementation of Statement No. 144 to have a material impact on
its financial statements.

TREND AND UNCERTAINTIES

   Prior to 2001, we had experienced sequential growth over a five-year period.
This growth  was  attributable primarily to the rapid expansion and substantial
installation of fiber  optic  networks  fueled  by  an unprecedented demand for
bandwidth  to  accommodate  exponentially  increasing  Internet   traffic.   We
participated  in that growth as a leading supplier of products that are used in
the installation,  maintenance  and  management  of  fiber  optic communication
networks.

   During 2001, our industry experienced a dramatic economic  downturn that was
brought on by a significant decrease in network build-outs and capital spending
by the telecommunications carriers and equipment manufacturers.  Our customers'
declining business resulted in a major decrease in sales of our  products.   We
do not anticipate a near-term recovery of the fiber optic test equipment market
and  do  not  expect the overall capital spending by telecommunication carriers
and equipment factors will increase during 2002.

   In January 2002,  we  announced  a  program  for  rescaling  our business in
response to the current market environment.  Specific actions taken  as part of
our plan include:

   Reducing  Cost.   We have taken immediate steps during the last two quarters
   of 2001 and in January  of 2002 to reduce costs.  These initiatives included
   a reduction in workforce and expenses that we expect will reduce expenses by
   approximately $16 million  on  an  annualized  basis beginning in the second
   quarter of 2002.

   With  the  successful  migration  of  our  current product  lines  to  next-
   generation  platforms,  we began outsourcing manufacturing  activities  with
   Jabil Circuit, Inc. in January  of  2002.   We  expect  this  to allow us to
   further reduce operating expenses associated with manufacturing overhead and
   lower the carrying risks of inventory during economically driven  shifts  in
   customer demand.

   Growing  Market Share.  We are focused on maintaining market leadership with
   our product  lines.   We  have  evaluated  our  sales  efforts  to  identify
   opportunities where our account presence can be improved and are working  to
   exploit  those  opportunities.  We expect new applications for our installed
   product  base  to  be  realized  with   use   of  new  modular  add-ons  and
   enhancements.    We  are  expanding our distribution  channels  to  specific
   global markets.

   Accelerating Product Development.   We  are  escalating our efforts to bring
   products currently under development to market faster.  We are concentrating
   on the products and technologies that we believe  are  most important to our
   customers.  We plan to introduce enhancements to our product  lines  to meet
   growing international needs and global high-speed data service requirements.

   Expanding  into  Additional  Telecommunications Markets.  We are identifying
   and pursuing specific telecommunication  market  segments, both domestically
   and internationally, that we believe will be synergistic  with  our  current
   business and create opportunities for growth.

We  believe  that  the  initiatives  outlined will allow us to meet our current
customer needs, develop new opportunities and position the Company for a market
recovery.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   We are not exposed to fluctuations in currency exchange rates because all of
our services are invoiced in U.S. dollars.  We  are  exposed  to  the impact of
interest  rate changes on our short-term cash investments, consisting  of  U.S.
Treasury obligations  and other investments in respect of institutions with the
highest credit ratings,  all  of which have maturities of three months or less.
These short-term investments carry  a  degree of interest rate risk. We believe
that the impact of a 10% increase or decline  in  interest  rates  would not be
material to our investment income.


ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                          PAGE
<S>                                                <C>
                                                   ------------------
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants         30
Consolidated Balance Sheets                                31
Consolidated Statements of Operations                      32
Consolidated Statements of Stockholders' Equity            33
Consolidated Statements of Cash Flows                      34
Notes to Consolidated Financial Statements               35-46
FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and qualifying accounts           50
</TABLE>
#


<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders of
Digital Lightwave, Inc. and its subsidiaries

  In   our  opinion,  the  consolidated  financial  statements  listed  in  the
accompanying  index  present  fairly,  in  all material respects, the financial
position of Digital Lightwave, Inc. and its  subsidiaries  (the  "Company")  at
December  31, 2001 and 2000, and the results of their operations and their cash
flows for each  of  the  three  years  in the period ended December 31, 2001 in
conformity with accounting principles generally  accepted  in the United States
of  America.  In  addition,  in  our opinion, the financial statement  schedule
listed in the accompanying index presents fairly, in all material respects, the
information  set  forth therein when  read  in  conjunction  with  the  related
consolidated financial  statements.  These  financial  statements and financial
statement  schedule  are  the responsibility of the Company's  management;  our
responsibility is to express  an  opinion  on  these  financial  statements and
financial  statement schedule based on our audits. We conducted our  audits  of
these statements  in  accordance  with auditing standards generally accepted in
the United States of America, which  require that we plan and perform the audit
to obtain reasonable assurance about whether  the financial statements are free
of  material  misstatement.  An  audit includes examining,  on  a  test  basis,
evidence supporting the amounts and  disclosures  in  the financial statements,
assessing  the  accounting principles used and significant  estimates  made  by
management, and evaluating  the  overall  financial  statement presentation. We
believe that our audits provide a reasonable basis for our opinion.


/s/ PRICEWATERHOUSECOOPERS LLP


Tampa, Florida
January 29, 2002

#


<PAGE>

                            DIGITAL LIGHTWAVE, INC.

                         CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,             DECEMBER 31,
<S>                                                                          <C> <C>                    <C> <C>
                                                                                       2001                     2000
                                                                                -----------------        -----------------
                                                            ASSETS
Current assets:
  Cash and cash equivalents                                                     $          51,044         $          30,481
  Accounts receivable, less reserve for uncollectible accounts of $5,900 and
       $250 in 2001 and 2000, respectively                                                  7,638                    25,301
  Inventories, net                                                                         16,565                    13,048
  Prepaid expenses and other current assets                                                   895                       757
                                                                                -----------------         -----------------
          Total current assets                                                             76,142                    69,587
Property and equipment, net                                                                 9,917                     8,910
Other assets                                                                                  203                       336
                                                                                -----------------         -----------------
          Total assets                                                          $          86,262         $          78,833
                                                                                =================         =================
                                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities                                      $           7,287         $          10,610
  Accrued litigation charge                                                                 4,100                        --
                                                                                -----------------         -----------------
          Total current liabilities                                                        11,387                    10,610
Long-term liabilities                                                                         809                       854
                                                                                -----------------         -----------------
          Total liabilities                                                                12,196                    11,464
                                                                                -----------------         -----------------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $.0001 par value; authorized 20,000,000
     shares; no shares issued or outstanding                                                   --                        --
Common stock, $.0001 par value; authorized
     200,000,000 shares; issued and outstanding 31,269,723
     and 30,476,211 shares in 2001 and 2000, respectively                                       3                         3
  Additional paid-in capital                                                               80,511                    76,620
  Accumulated deficit                                                                      (6,448)                   (9,254)
                                                                                -----------------         -----------------
          Total stockholders' equity                                                       74,066                    67,369
                                                                                -----------------         -----------------
          Total liabilities and stockholders' equity                            $          86,262         $          78,833
                                                                                =================         =================
</TABLE>















   The accompanying notes are an integral part of these consolidated financial
                                    statements.

#


<PAGE>

                            DIGITAL LIGHTWAVE, INC.

                    CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)

<TABLE>
<CAPTION>
                                                                       FOR THE YEARS ENDED DECEMBER 31,
<S>                                                    <C> <C>                  <C> <C>                  <C> <C>
                                                            ----------------------------------------------------------
                                                                    2001                  2000                 1999
                                                                ------------          ------------        ------------
Net sales                                                       $     82,780           $   100,675        $     50,474
Cost of goods sold                                                    31,610                33,237              17,431
                                                                ------------          ------------        ------------
Gross profit                                                          51,170                67,438              33,043
                                                                ------------          ------------        ------------
Operating expenses:
  Engineering and development                                         14,985                14,092              10,204
  Sales and marketing                                                 22,261                15,628              12,724
  General and administrative                                           8,063                 7,085               5,240
  Restructuring charges                                                  500                    --                  --
  Litigation charge                                                    4,100                    --                  --
                                                                ------------          ------------        ------------
          Total operating expenses                                    49,909                36,805              28,168
                                                                ------------          ------------        ------------
Operating income                                                       1,261                30,633               4,875
                                                                ------------          ------------        ------------
Other income (expense):
  Interest income                                                      1,592                 1,093                 341
  Interest expense                                                       (56)                 (112)               (252)
  Other income (expense), net                                              9                  (211)                (11)
                                                                ------------          ------------        ------------
          Total other income                                           1,545                   770                  78
                                                                ------------          ------------        ------------
Income before income taxes                                             2,806                31,403               4,953
Provision for income taxes                                                --                    --                  --
                                                                ------------          ------------        ------------
          Net income                                            $      2,806          $     31,403        $      4,953
                                                                ============          ============        ============
Per share of common stock:
  Net income per share                                          $       0.09          $       1.06        $       0.18
                                                                ============          ============        ============
  Diluted income per share                                      $       0.09          $       0.98        $       0.17
                                                                ============          ============        ============
  Weighted average common shares outstanding                      30,927,386            29,548,905          26,808,158
                                                                ============          ============        ============
  Weighted average common and common equivalent shares
     outstanding                                                  32,109,888            31,946,416          29,151,628
                                                                ============          ============        ============
</TABLE>















   The accompanying notes are an integral part of these consolidated financial
                                    statements.

#


<PAGE>

                            DIGITAL LIGHTWAVE, INC.

               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
            FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
                      (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
<S>                                   <C> <C>             <C> <C>               <C> <C>               <C> <C>               <C> <C>
                                                  COMMON STOCK                ADDITIONAL
                                        -------------------------------         PAID-IN          ACCUMULATED
                                           SHARES            AMOUNT             CAPITAL            DEFICIT             TOTAL
                                       ---------------   ---------------    ---------------   -----------------   ---------------
Balance, January 1, 1999                    26,535,332   $             3        $    57,927   $        (45,610)   $        12,320
  Issuance of common stock                   1,120,771                --              4,863                 --              4,863
  Issuance of options to non-employee               --                --                 13                 --                 13
  Issuance of stock warrants                        --                --                  4                 --                  4
  Net income                                        --                --                 --              4,953              4,953
                                        --------------    --------------     --------------     --------------     --------------
Balance, December 31, 1999                  27,656,103                 3             62,807            (40,657)            22,153
  Issuance of common stock                   2,820,108                --             14,077                 --             14,077
  Cost associated with exercise of
     warrants                                       --                --              (264)                 --               (264)
  Net income                                        --                --                 --             31,403             31,403
                                        --------------    --------------     --------------     --------------     --------------
Balance, December 31, 2000                  30,476,211                 3             76,620             (9,254)            67,369
  Issuance of common stock                     793,512                --              3,891                 --              3,891
  Net income                                        --                --                 --              2,806              2,806
                                        --------------    --------------     --------------     --------------     --------------
Balance, December 31, 2001                  31,269,723    $            3     $       80,511      $      (6,448)    $       74,066
                                        ==============    ==============     ==============     ==============     ==============
</TABLE>








   The accompanying notes are an integral part of these consolidated financial
                                    statements.
#


<PAGE>
                            DIGITAL LIGHTWAVE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 FOR THE YEARS ENDED DECEMBER 31,
<S>                                                                  <C> <C>                 <C> <C>              <C> <C>
                                                                      -------------------------------------------------------
                                                                             2001                2000              1999
                                                                        --------------      --------------    --------------
Cash flows from operating activities:
  Net income                                                            $        2,806      $     31,403      $      4,953
  Adjustments to reconcile net income  to cash
     provided (used) by operating activities:
     Depreciation and amortization                                               3,399             2,877             2,524
     Loss on disposal of property                                                   38               168                19
     Provision for uncollectible accounts                                        5,971               161               215
     Provision for excess and obsolete inventory                                 5,167               700               397
     Restructuring charges                                                         500                --                --
  Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable                                 11,655           (10,315)           (9,168)
     Increase in inventories                                                    (9,380)           (7,961)           (1,246)
     (Increase) decrease in prepaid expenses and other assets                       89              (100)              424
     Increase (decrease) in accounts payable and accrued liabilities            (3,583)            2,860             1,364
     Increase (decrease) in accrued litigation charges                           4,100                --            (1,064)
                                                                        --------------    --------------    --------------
          Net cash provided (used) by operating
            activities                                                          20,762            19,793            (1,582)
                                                                        --------------    --------------    --------------
Cash flows from investing activities:
  Increase in notes receivable                                                    (200)               --                --
  Purchases of property and equipment                                           (3,259)           (1,326)           (1,888)
                                                                        --------------    --------------    --------------
          Net cash used by investing activities                                 (3,459)           (1,326)           (1,888)
                                                                        --------------    --------------    --------------
Cash flows from financing activities:
  Proceeds from notes payable                                                       --                --             3,000
  Principal payments on notes payable                                               --            (3,000)               --
  Principal payments on capital lease obligations                                 (668)             (547)             (307)
  Payments received from lease receivables                                          37               249               708
  Proceeds from sale of common stock, net of expense                             3,891             7,846             3,687
                                                                        --------------    --------------    --------------
          Net cash provided by financing activities                              3,260             4,548             7,088
                                                                        --------------    --------------    --------------
Net increase in cash and cash equivalents                                       20,563            23,015             3,618
Cash and cash equivalents at beginning of period                                30,481             7,466             3,848
                                                                        --------------    --------------    --------------
Cash and cash equivalents at end of period                              $       51,044    $       30,481    $        7,466
                                                                        ==============    ==============    ==============
Other supplemental disclosures:
  Cash paid for interest                                                $           56    $          181    $          183
Non-cash investing and financing activities:
  Capital lease obligations incurred                                    $          358    $          461    $          722
  Accounts receivable related to capital leases                         $            -    $            -    $          270
  Issuance of common stock pursuant to litigation
     settlement (Note 13)                                               $            -    $        6,231    $        1,194
</TABLE>










   The accompanying notes are an integral part of these consolidated financial
                                    statements.
#


<PAGE>


                            DIGITAL LIGHTWAVE, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

  Digital  Lightwave,  Inc.  (the "Company") designs, develops  and  markets  a
portfolio of portable and network  based  products  for installing, maintaining
and  monitoring  fiber  optic  circuits  and  networks. Network  operators  and
telecommunications  service providers use fiber  optics  to  provide  increased
network bandwidth to  transmit  voice  and  other  non-voice  traffic  such  as
Internet,  data  and  multimedia  video  transmissions.   The  Company provides
telecommunications service providers and equipment manufacturers  with  product
capabilities  to  cost-effectively  deploy  and  manage fiber optic networks to
address  the rapidly increasing demand for bandwidth.   The  Company's  wholly-
owned subsidiaries  are  Digital  Lightwave  Leasing  Corporation  ("DLLC") and
Digital  Lightwave  (UK)  Limited  ("DLL").   DLLC  provided financing for  the
purchase  of the Company's product in the form of capital  leases  as  well  as
equipment rental  to the Company's customers. On December 31, 2001, DLLC had no
outstanding leases and was dissolved.  Its remaining assets were transferred to
the  Company.  DLL  provides  international  sales  support.   All  significant
intercompany transactions and balances are eliminated in consolidation.

CASH EQUIVALENTS

  The Company considers  all highly liquid investments with an initial maturity
of three months or less to be cash equivalents.

INVENTORIES

  Inventories are stated at the lower of cost (first-in, first-out) or market.

PROPERTY AND EQUIPMENT

  The Company's property and  equipment, including certain assets under capital
leases, are stated at cost, less  accumulated  depreciation  and  amortization.
Depreciation and amortization are provided using the straight-line  method over
estimated  useful lives of 5 to 7 years or over the lesser of the term  of  the
lease  or  the   estimated  useful  life  of  assets  under  capital  lease  or
improvements made  to  leased property. Maintenance and repairs are expensed as
incurred while renewals  and  improvements  are  capitalized.  The accounts are
relieved of the cost and the related accumulated depreciation  and amortization
upon the sale or retirement of property and equipment and any resulting gain or
loss is included in the results of operations.

  Long-lived assets are reviewed for impairment whenever events  or  changes in
circumstances  indicate  that  the  carrying  amount  of  an  asset  may not be
recoverable.   Recoverability  of assets to be held and used is measured  by  a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset.  If  such  assets  are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.  There were no fixed
asset impairments in 2001 and 2000.

ACCRUED WARRANTY

  The  Company  provides the customer a warranty with  each  product  sold  and
accrues warranty expense based upon historical data. Warranty costs are charged
against the accrual  when  incurred.    At December 31, 2001, the total accrued
warranty expense of $1,550,000 was comprised  of  current  accrued warranty  of
$750,000 and accrued long-term warranty of $800,000.

REVENUE RECOGNITION

  The  Company derives its revenue from product sales.  The Company  recognizes
revenue  from  the  sale of products when persuasive evidence of an arrangement
exists, the product has been delivered, the price is fixed and determinable and
collection of the resulting receivable is reasonably assured.

  For all sales, the  Company  uses a binding purchase order as evidence that a
sales  arrangement  exists.    Sales  through  international  distributors  are
evidenced  by  a  master  agreement   governing   the   relationship  with  the
distributor.  The Company either obtains an end-user purchase order documenting
the order placed with the distributor or proof of delivery  to  the end user as
evidence  that  a  sales arrangement exists.  For demonstration units  sold  to
distributors, the distributor's  binding  purchase order is evidence of a sales
arrangement.

  For domestic sales, delivery generally occurs  when product is delivered to a
common  carrier.   Demonstration units sold to international  distributors  are
considered delivered  when the units are delivered to a common carrier.  In the
case of shipments to an international distributor that will be resold, delivery
occurs when the Company receives either a copy of the end-user binding purchase
order or proof of delivery to the end-user.  An allowance is provided for sales
returns based on historical experience.

  At the time of the  transaction,  the  Company  assesses  whether  the  price
associated  with its revenue transactions is fixed and determinable and whether
or not collection is reasonably assured. The Company assesses whether the price
is fixed and  determinable  based  on  the  payment  terms  associated with the
transaction.  Standard payment terms for domestic customers are  30  days  from
the invoice date.  Distributor contracts  provide standard  payment terms of 60
days from the invoice date.  The Company does not offer extended payment terms.

  The  Company assesses collection based on a number of factors, including past
transaction  history  with  the  customer  and  the  credit-worthiness  of  the
customer. Collateral is not requested from customers.  If it is determined that
collection  of  an accounts receivable is not reasonably assured, the amount of
the  accounts receivable  is  deferred  and  revenue  recognized  at  the  time
collection becomes reasonably assured.

  Most sales arrangements do not generally include acceptance clauses. However,
if a sales arrangement includes an acceptance provision, acceptance occurs upon
the earlier  of  receipt  of a written customer acceptance or expiration of the
acceptance period.

DEFERRED REVENUE

  Deferred revenue represents  amounts  billed  and collected from customers in
advance of shipment or amounts billed and collected  from distributors prior to
the distributor's sale of the goods. Revenue is subsequently  recognized at the
date  of  shipment  or,  in  the  case  of  distributor sales, at the time  the
distributor ships the product to the end user.

RESEARCH AND DEVELOPMENT

  Software  and  product  development costs are  included  in  engineering  and
development and are expensed  as  incurred.  Capitalization of certain software
development   costs  occurs  during  the  period  following   the   time   that
technological feasibility  is  established until general release of the product
to customers. The capitalized cost is then amortized over the estimated product
life. To date, the period between  achieving  technological feasibility and the
general  release  to customers has been short and  software  development  costs
qualifying for capitalization have been insignificant.

INCOME TAXES

  The Company recognizes  deferred  tax liabilities and assets for the expected
future tax consequences of events that  have  been included in the consolidated
financial statements or tax returns. Deferred tax  liabilities  and  assets are
determined based on the difference between the consolidated financial statement
and  the tax basis of assets and liabilities using enacted tax rates in  effect
for the  year  in  which the differences are expected to reverse.   The Company
provides for a valuation  allowance  for  the  deferred  tax  assets   when  it
concludes that it is more likely than not that the deferred tax assets will not
be realized.

#


<PAGE>
COMPUTATION OF NET INCOME PER SHARE

  Basic  net income per share is based on the weighted average number of common
shares outstanding  during  the  periods  presented.  The table below shows the
calculation  of  basic  weighted  average  common  shares outstanding  and  the
incremental number of shares arising from common stock  equivalents  under  the
treasury stock method:

<TABLE>
<CAPTION>
                                                         For The Year Ended December 31,
<S>                                          <C> <C>              <C> <C>             <C> <C>
                                              -----------------------------------------------------
                                                    2001               2000              1999
                                               --------------     --------------    --------------
Basic:
  Weighted average common shares outstanding       30,927,386         29,548,905        26,808,158
                                               --------------     --------------    --------------
          Total basic                              30,927,386         29,548,905        26,808,158
Diluted:
  Incremental shares for common stock
     equivalents                                    1,182,502          2,397,511         2,343,470
                                               --------------     --------------    --------------
          Total dilutive                           32,109,888         31,946,416        29,151,628
                                               ==============     ==============    ==============
</TABLE>

CONCENTRATIONS OF CREDIT RISK

  Financial  instruments that potentially subject the Company to concentrations
of credit risk  consist  principally  of cash and cash equivalents and accounts
receivable. As of December 31, 2001, 2000,  and  1999, substantially all of the
Company's   cash   balances,  were  deposited  with  high   quality   financial
institutions. During  the normal course of business, the Company extends credit
to customers conducting  business  primarily in the telecommunications industry
both within the United States and internationally.

   For  the  year  ended  December 31, 2001,  the  Company's  largest  customer
accounted for approximately  12%  of  total sales. For the years ended December
31, 2000 and 1999, the Company's largest  customer, accounted for approximately
15% and 21% of total sales, respectively. For the year ended December 31, 1999,
one additional customer accounted for 18% of  total  sales.  No other customers
accounted for sales of 10% or more during those years.

  The  Company sells its products in both domestic and  international  markets.
Domestic  sales  represented approximately 80%, 91% and more than 99% of annual
net sales for the  years ending 2001, 2000 and 1999 respectively. International
sales represented approximately  20%,  9%  and less than 1% of annual net sales
for the years ending 2001, 2000 and 1999 respectively.

USE OF ESTIMATES

  The  preparation  of consolidated financial  statements  in  conformity  with
generally accepted accounting  principles requires management to make estimates
and assumptions that affect the  reported amounts of assets and liabilities and
disclosure of contingent assets and  liabilities  at  the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.

SEGMENT REPORTING

  As of December 31, 2001, the Company was not organized  by multiple operating
segments   for   the   purpose  of  making  operating  decisions  or  assessing
performance. Accordingly,  the  Company  operated  in one operating segment and
reported only certain enterprise-wide disclosures.

NEW ACCOUNTING PRONOUNCEMENTS

  In  July  2001,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement No. 141, Business Combinations, and Statement No.  142,  Goodwill and
Other   Intangible  Assets.  Statement  No.  141  requires  that  all  business
combinations  initiated after June 30, 2001 be accounted for under the purchase
method of accounting.  Use  of  the  pooling-of-interests  method  is no longer
permitted. The Company did not make any acquisitions in 2001. With the adoption
of  Statement  No. 142 effective January 1, 2002, goodwill and other indefinite
lived intangibles  will no longer be amortized to earnings, but will instead be
reviewed for impairment by applying a fair-value-based test. The Company had no
goodwill recorded at December 31, 2001.

  In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for  Asset  Retirement  Obligations. Statement No. 143 requires
entities  to  record  the fair value of a liability  for  an  asset  retirement
obligation in the period  in  which  it  is  incurred.  When  the  liability is
initially  recorded,  the entity capitalizes a cost by increasing the  carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each  period and the capitalized cost is depreciated over the
useful life of the related  asset.  Upon settlement of the liability, an entity
either settles the obligation for its  recorded amount or incurs a gain or loss
upon  settlement. Statement No. 143 is effective  for  fiscal  years  beginning
after June  15, 2002, with earlier application encouraged. The Company does not
expect the implementation of Statement No. 143 to have a material impact on its
financial statements.

  In October  2001,  the  FASB  issued  Statement  No.  144, Accounting for the
Impairment  or  Disposal  of Long-Lived Assets. Statement 144  supersedes  FASB
Statement No. 121, Accounting  for  the Impairment of Long-Lived Assets and for
Long-Lived  Assets  to  Be  Disposed  Of.    Statement  No.  144  develops  one
accounting model (based on the model in  Statement  No. 121) for all long-lived
assets and requires that long-lived assets that are to  be  disposed of by sale
be measured at the lower of book value or fair value less cost  to  sell.  That
requirement eliminates Accounting Principles Board Opinion No. 30's requirement
that  discontinued  operations  be  measured  at  net  realizable value or that
entities  include under "discontinued operations" in the  financial  statements
amounts  for  operating  losses  that  have  not  yet  occurred.  Additionally,
Statement  No.  144 expands the scope of discontinued operations to include all
components of an  entity with operations that (i) can be distinguished from the
rest of the entity  and  (ii) will be eliminated from the ongoing operations of
the  entity in a disposal transaction.  Statement  No.  144  is  effective  for
financial  statements issued for fiscal years beginning after December 15, 2001
and generally its provisions are to be applied prospectively.  The Company does
not expect the implementation of Statement No. 144 to have a material impact on
its financial statements.

RECLASSIFICATIONS

  Certain prior  year  amounts  have been reclassified to conform with the 2001
presentation.


2. INVENTORIES

  Inventories at December 31, 2001 and 2000 are summarized as follows:

<TABLE>
<CAPTION>
                                                  2001            2000
<S>                                         <C> <C>            <C> <C>
                                              ------------    ------------
                                                     (IN THOUSANDS)
Raw materials                                 $      9,341    $      8,598
Work-in process                                      6,417           4,657
Finished goods                                       4,640             221
Provision for excess and obsolete inventory         (3,833)           (428)
                                              ------------    ------------
                                              $     16,565    $     13,048
                                              ============    ============
</TABLE>

  In December 2001, the Company signed  a  manufacturing service agreement with
Jabil Circuit, Inc. ("Jabil"), a leading provider  of  technology manufacturing
services with a customer base of industry-leading companies. Under the terms of
the  agreement,  Jabil  will  serve  as  Digital  Lightwave's primary  contract
manufacturer for the company's circuit board and product assembly and will also
provide  engineering  design  services.    Jabil purchased  approximately  $4.9
million of raw materials inventory from the  Company  in  December 2001.  Jabil
will continue to purchase existing raw materials inventory  until all parts are
depleted to safety stock levels.


#


<PAGE>
3. PROPERTY AND EQUIPMENT

  Property  and  equipment  at  December  31,  2001 and 2000 are summarized  as
follows:

<TABLE>
<CAPTION>
                                              2001           2000
<S>                                      <C> <C>           <C> <C>
                                          ------------   ------------
                                                 (IN THOUSANDS)
Test equipment                            $      8,464   $      6,666
Computer equipment and software                  4,866          4,586
Tooling                                          1,331            553
Tradeshow fixtures and equipment                   359            289
Office furniture, fixtures and equipment         3,124          2,730
Leasehold improvements                           2,322          1,893
                                          ------------   ------------
                                                20,466         16,717
Less accumulated depreciation                  (10,549)        (7,807)
                                          ------------   ------------
                                          $      9,917   $      8,910
                                          ============  =============
</TABLE>
  Depreciation and amortization expense was approximately  $3.3  million,  $2.8
million  and $2.5 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

  Equipment  under capital lease and related accumulated amortization, included
above at December 31, 2001 and 2000 are summarized as follows:
<TABLE>
<CAPTION>
                                      2001              2000
<S>                             <C> <C>             <C> <C>
                                  ------------      ------------
                                          (IN THOUSANDS)
Test equipment                    $      1,163      $      1,572
Computer equipment and software             29                29
                                  ------------      ------------
                                         1,192             1,601
Less accumulated amortization             (358)             (490)
                                  ------------      ------------
                                  $        834      $      1,111
                                  ============      ============
</TABLE>


4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

  Accounts payable  and  accrued  liabilities at December 31, 2001 and 2000 are
summarized as follows:
<TABLE>
<CAPTION>
                                                    2001              2000
<S>                                          <C> <C>            <C> <C>
                                               -------------      -------------
                                                       (IN THOUSANDS)
Accounts payable                                  $    3,949        $     6,482
Accrued warranty                                         750                472
Accrued returns and allowances                           698                761
Employee related accruals                                510                754
Current portion of capital lease obligations             415                427
Sales commissions                                        329                842
Accrued restructuring charges                            284                 --
Deferred revenue                                          19                566
Accrued expenses and other                               333                306
                                               -------------      -------------
                                                  $    7,287         $   10,610
                                               =============      =============
</TABLE>


5. INCOME TAXES

  The provision (benefit) for income  taxes  for  the years ending December 31,
2001, 2000 and 1999  are summarized as follows:
<TABLE>
<CAPTION>
                       2001        2000         1999
<S>             <C> <C>        <C> <C>         <C> <C>
                    ----------   ----------  ----------
                            (IN THOUSANDS)
Current:
  Federal             $    965      $10,302     $ 1,637
  State                    157        1,677         267
                    ----------   ----------  ----------
     Sub-total           1,122       11,979       1,904
                    ----------   ----------  ----------
Deferred:
  Federal                 (965)     (10,302)     (1,637)
  State                   (157)      (1,677)       (267)
                    ----------   ----------  ----------
     Sub-total          (1,122)     (11,979)     (1,904)
                    ----------   ----------  ----------
          Total       $      -   $        -    $      -
                    ==========   ==========  ==========
</TABLE>
The tax effected amounts of temporary differences at December 31, 2001 and 2000
are summarized as follows:

<TABLE>
<CAPTION>
                                                              2001              2000
<S>                                                <C> <C>                 <C> <C>
                                                          -------------    --------------
                                                               (IN THOUSANDS)
Current:
  Deferred tax asset:
     Deferred compensation                               $          124    $         317
     Accrued liabilities                                          2,441              817
     Other                                                        4,104              798
     Valuation allowance                                         (6,669)          (1,932)
                                                          -------------    -------------
          Total current deferred tax asset                           --               --
                                                          -------------    -------------
          Net current deferred tax asset                             --               --
                                                          -------------    -------------
Non-current:
  Deferred tax asset:
     Net operating loss carry forward                            92,524           43,757
     Research and experimentation credit                          4,140            1,576
     Valuation allowance                                        (95,995)         (44,325)
                                                          -------------    -------------
          Total non-current deferred tax asset                      669            1,008
                                                          -------------    -------------
  Deferred tax liability:
     Fixed assets                                                  (669)          (1,008)
                                                          -------------    -------------
          Total non-current deferred tax liability                 (669)          (1,008)
                                                          -------------    -------------
          Net deferred tax asset                        $             -    $           -
                                                          =============    =============
</TABLE>
  A full valuation allowance has been recorded at December  31,  2001  and 2000
with respect to the deferred tax assets since the Company believes that  it  is
more  likely than not that future tax benefits will not be realized as a result
of current  and  future  income.  Factors considered in determining that a full
valuation  allowance was necessary  include  the  Company's  history  of  large
operating losses  and  uncertainty  as  to whether the Company would be able to
sustain long-term profitability.

  As of December 31, 2001 the Company has  established a valuation allowance of
approximately  $102.6 million.  The result is  an  increase  in  the  valuation
allowance from December 31, 2000 of approximately $56.4 million.

  As of December 31, 2001, the Company had net operating loss carry forwards of
approximately $245.9  million  for  tax  purposes.  Due  to  certain  change of
ownership  requirements  of  Section  382 of the Internal Revenue Code ("IRC"),
utilization of the Company's net operating  losses  incurred  prior  to July 1,
1993  is  expected  to  be  limited  to  approximately  $7,500  per  year. This
limitation in conjunction with the expiration period for these pre-July 1, 1993
net  operating  losses  results  in  the  Company's  total net operating losses
available  being  limited to approximately $245.1 million.  Loss  carryforwards
will expire between the years 2009 and 2021.

  As of December 31,  2001,  the  Company  also  had  general  business  credit
carryforwards of approximately $4.1 million that expire between the years  2008
and  2021. These credits are also subject to the Section 382 annual limitation.
Approximately  $15,000  of  these credits are subject to the Section 382 annual
limitation.

  Following  is a reconciliation  of  the  applicable  federal  income  tax  as
computed at the federal statutory tax rate to the actual income taxes reflected
in the consolidated statement of operations.

<TABLE>
<CAPTION>
                                                       FOR THE YEAR ENDED DECEMBER 31,
<S>                                        <C> <C>             <C> <C>            <C> <C>
                                            -----------------------------------------------------
                                                    2001                2000               1999
                                                 ----------         ----------         ----------
                                                               (IN THOUSANDS)
Tax provision  at U.S. federal income tax
  rate                                           $      954         $   10,677         $    1,684
State income tax provision  net of federal              102              1,156                180
Other, net                                               66                146                 40
Valuation allowance decrease                         (1,122)           (11,979)            (1,904)
Research and experimentation credit                      --                 --                 --
                                                 ----------         ----------         ----------
Provision  for income taxes                      $       --         $       --         $       --
                                                 ==========         ==========         ==========
</TABLE>

  The valuation allowance change shown in the above reconciliation is different
from the actual  change  in  the  valuation  allowance  due to the tax benefits
related  to  the  exercise  of  non-qualified  stock  options  and   securities
litigation costs which are directly reflected in stockholders' equity.  For the
years  ended  December  31, 2001, 2000 and 1999, the income tax benefit of $9.7
million,  $36.4  million  and  $5.1  million,  respectively,  would  have  been
allocated to additional paid  in  capital  for the tax benefits associated with
the exercise of non-qualified stock options.  For  the  year ended December 31,
2001 the income tax benefit associated with the securities  litigation costs of
$47.7 million would have been allocated to additional paid-in  capital.   These
amounts  have  not  been recognized due to the 100% valuation allowance against
deferred tax assets.

  In January 2002, the  Company  received  a  ruling  from the Internal Revenue
Service  regarding  an  additional  deduction related to securities  litigation
costs.  This ruling resulted in a $127  million  increase  to the Company's net
operating loss carryforward that has been referenced in the above amounts.  The
tax benefit of this additional net operating loss has not been  realized due to
the 100% valuation allowance against the deferred tax assets.    This deduction
will be reported directly as an increase in additional paid-in capital and will
not be recorded in the Company's Consolidated Statement of Operations  when the
tax benefit is realized.


6. NOTES PAYABLE, LINE OF CREDIT AND LETTER OF CREDIT

  In 1998, the Company entered into an agreement with EAB Leasing Corp. ("EAB")
providing for sale of the Company's accounts receivable to EAB. Certain amounts
were  financed  during  the  term  of  the agreement that was terminated by the
Company in May 2000. All advances, interest  and fees were repaid in full prior
to termination.

  In   1999,  the  Company  entered  into a financing  agreement  with  certain
investors pursuant to which the Company  issued  $3.0  million  of  9%  Secured
Bridge  Notes  due  January  17,  2000.  They were collateralized by all of the
Company's assets and were subordinated to  the  accounts  receivable  agreement
with  EAB  described  above.  In  connection  with the financing agreement, the
Company  issued warrants to purchase an aggregate  of  550,000  shares  of  the
Company's  common  stock  at  an  exercise price of $2.75 per share, the market
price of the stock on the date prior  to  the  issuance  of  the  warrants. The
warrants had a term of five years from the date of issuance. The Company agreed
to  register  the warrants and the common stock issuable upon exercise  thereof
under  the Securities  Act  of  1933.  In  January  2000,  such  warrants  were
registered  and  subsequently  exercised.  The Secured Bridge Notes and related
interest were repaid in full on the due date.

  In October 2000, the Company entered into  a Loan and Security Agreement (the
"Loan  Agreement")  with  Congress  Financial  Corporation  pursuant  to  which
Congress provided the Company with a $10.0 million  line  of  credit. Under the
Loan Agreement, the Company is entitled to borrow up to $10.0 million initially
bearing  interest  at  prime  plus one-half of one percent (.50%),  subject  to
certain  borrowing limitations based  on  amounts  of  the  Company's  accounts
receivable  and  inventories.  The Loan Agreement expires in November 2002. All
indebtedness  outstanding   under  the  Loan  Agreement  is  collateralized  by
substantially  all  of the Company's  assets.  Under  the  terms  of  the  Loan
Agreement, the Company  is  required  to  maintain certain financial ratios and
other  financial conditions. The Loan Agreement  also  prohibits  the  Company,
without   prior  written  consent  from  Congress,  from  incurring  additional
indebtedness,  limits  certain  investments,  advances  or  loans and restricts
substantial  asset  sales,  capital  expenditures  and  cash dividends.  As  of
December 31, 2001, the Company had utilized $2.13 million  of the $10.0 million
available  under  the  credit  facility  to  collateralize a letter  of  credit
required  by  a  lease  for  office  space. A fee for  this  letter  of  credit
accommodation is assessed at one and one  quarter  percent  (1.25%)  per annum.
There were no borrowings under this line of credit at December 31, 2001.


#


<PAGE>
7. LEASES

  The  Company  is  obligated under various non-cancelable leases for equipment
and office space. Future  minimum lease commitments under operating and capital
leases were as follows as of December 31, 2001:
<TABLE>
<CAPTION>
                                                CAPITAL               OPERATING
<S>                                     <C> <C>               <C> <C>
                                                LEASES                 LEASES
                                             -------------           ------------
                                                      (IN THOUSANDS)
2002                                         $         435           $      1,787
2003                                                    10                  1,711
2004                                                    --                  1,749
2005                                                    --                  1,788
2006                                                    --                  1,827
Thereafter                                              --                  3,454
                                             -------------           ------------
                                                       445           $     12,316
                                             -------------           ============
Less: Amount representing interest                      20
                                             -------------
Present value of minimum lease payments                425
Less: Current portion                                  415
                                             -------------
                                             $          10
                                             =============
</TABLE>

  Total rental expense was  approximately  $2.0  million, $2.1 million and $1.4
million for the years ended December 31, 2001, 2000 and 1999, respectively.

8. COMMITMENTS

  At  December  31, 2001, the Company had outstanding  non-cancelable  purchase
order commitments  to  purchase  certain inventory items totaling approximately
$5.4 million. The majority of the  quantities  under order are deliverable upon
demand by the Company or within thirty (30) days  upon written notice of either
party.


9. RELATED PARTY TRANSACTIONS

  During December 1998, a stockholder borrowed $100,000  from the Company. This
note accrued interest at 9% with the principal sum and accrued interest thereon
payable no later than December 31, 1999. On February 26, 2000,  the stockholder
repaid   the   loan   outstanding   in  full,  including  accrued  interest  of
approximately $10,000.

  In 2001, an officer of the Company  borrowed  $200,000 from the Company. This
note  accrues  interest  at the prime rate plus one  percent  (1.0%)  with  the
principal sum and accrued  interest  thereon  payable on demand or, if earlier,
from the proceeds of any sale of the borrower's  stock  holdings or on the date
of  termination  of the borrower's employment with the Company.  This  note  is
collateralized by  the borrower's stock holdings in the Company and future cash
bonuses which may become payable.


10. COMMON STOCK AND STOCK OPTIONS

EMPLOYEE STOCK OPTION PLAN

  The  Company's 1996  Stock  Option  Plan  (the  "1996  Option  Plan")  became
effective  on  March  5,  1996.  A reserve of 5,000,000 shares of the Company's
Common Stock has been established  for issuance under the 1996 Option Plan. The
stockholders of the Company approved  the  2001  Stock  Option  Plan (the "2001
Option  Plan")  at  a  special meeting held February 27, 2001. Under  the  2001
Option Plan, 3,000,000 shares,  plus  (i)  the  number  of shares available for
grant  under  the  1996  Option Plan and (ii) the number of shares  subject  to
options outstanding under  the 1996 Option Plan to the extent that such options
expire or terminate for any reason prior to exercise in full, were reserved for
issuance (with the sum of (i)  and  (ii)  not  to exceed 2,735,872 shares). The
2001 Option Plan superseded the 1996 Option Plan with respect to future grants.





  Transactions  related to the 2001 and 1996 Option  Plans  are  summarized  as
follows:

<TABLE>
<CAPTION>
                                            WEIGHTED
<S>                     <C> <C>            <C> <C>
                                            AVERAGE
                             SHARES       OPTION PRICE
                          ------------    -------------
Outstanding at 1/1/99         2,690,146   $        3.98
  Granted                     1,712,064   $        6.63
  Exercised                    (760,757)  $        4.48
  Forfeited                    (286,439)  $        4.98
                           ------------
Outstanding at 12/31/99       3,355,014   $        5.12
  Granted                       710,648   $       78.63
  Exercised                  (1,244,548)  $        4.61
  Forfeited                     (84,310)  $       59.14
                           ------------
Outstanding at 12/31/00       2,736,804   $       22.78
  Granted                     2,026,237   $       26.18
  Exercised                    (754,581)  $        4.51
  Forfeited                    (882,259)  $       32.48
                           ------------
Outstanding at 12/31/01       3,126,201   $       26.66
                           ============
</TABLE>

  The following table summarizes information about stock options outstanding to
employees and directors at December 31, 2001:

<TABLE>
<CAPTION>
                             NUMBER       OUTSTANDING     OUTSTANDING        NUMBER       EXERCISABLE
<S>                     <C> <C>            <C> <C>            <C> <C>            <C> <C>            <C> <C>
                          OUTSTANDING       WEIGHTED        WEIGHTED      EXERCISABLE       WEIGHTED
                               AT           AVERAGE         AVERAGE            AT           AVERAGE
                          DECEMBER 31,     REMAINING        EXERCISE      DECEMBER 31,      EXERCISE
RANGE OF EXERCISE PRICE       2001            LIFE           PRICE            2001           PRICE
       ----------------  --------------  --------------  --------------  --------------  --------------
       $    2.313-5.875         653,772            3.15  $        3.867         315,160  $        3.065
       $    6.580-9.220         380,992            3.92  $        7.105         167,978  $        7.263
       $  10.400-19.950          68,516            4.82  $       16.520           9,388  $       13.198
       $ 21.0625-35.910       1,484,411            5.18  $       26.299          94,406  $       27.850
       $ 40.870-139.125         538,510            4.52  $       70.413         223,052  $       68.926
                         --------------                                  --------------
                              3,126,201                                         809,984
                         ==============                                  ==============
</TABLE>

  Generally, options  issued  vest  in  one-third  increments over a three-year
period,  with  the  exception  of certain option agreements  that  provide  for
various vesting schedules throughout  the  same  three-year  vesting  period or
options  allowing vesting acceleration based on certain performance milestones.
If the performance  milestones  are not met, the options vest 5 1/2 years after
issue. Option agreements generally  expire  six years from date of issue if not
exercised.  Unvested  options  are  generally  forfeited  upon  termination  of
employment with the Company.  Generally, vested shares must be exercised within
thirty  days  of termination or be forfeited.  Total  shares  exercisable  were
809,984, 378,049  and  392,066  as  of  December  31,  2001,  2000,  and  1999,
respectively.

    The  Company  applies APB No. 25 and related interpretations for accounting
for stock options.  Accordingly,  no  compensation  costs at the grant date are
recorded for options granted at fair market value. Had  compensation  cost  for
the  Company's stock options granted been determined based on the Black-Scholes
option  pricing  model  at the date of grant, consistent with the method of FAS
123, the Company's net income  (loss)  and  income  (loss) per share would have
been adjusted to the pro forma amounts shown below:
<TABLE>
<CAPTION>
                                   2001              2000             1999
<S>                        <C> <C>               <C> <C>             <C> <C>
                              ----------------    -------------   --------------
                               (IN THOUSANDS)
Pro forma net income (loss):
  As reported                 $         2,806     $      31,403   $       4,953
  As adjusted (unaudited)     $       (13,796)    $      21,540   $      (2,704)
Pro forma basic income (loss) per share:
  As reported                 $          0.09     $        1.06   $        0.18
  As adjusted (unaudited)     $         (0.45)    $        0.73   $       (0.10)
</TABLE>

  These  pro  forma  amounts were determined using the Black-Scholes  valuation
model with the following  key assumptions: (i) a discount rate of 4.68%, 6.23%,
and 5.61% for December 31, 2001, 2000 and 1999, respectively; (ii) a volatility
factor based upon averaging  the  week  ending  price for Digital Lightwave and
comparable  public companies for periods matching  the  terms  of  the  options
granted; (iii) an average expected option life of 4.19, 4.00 and 4.00 years for
December 31, 2001, 2000 and 1999, respectively; (iv) there have been no options
that have expired; and (v) no payment of dividends.



EMPLOYEE STOCK PURCHASE PLAN

  The Company's  1997  Employee Stock Purchase Plan provides employees with the
opportunity to purchase  shares  of the Company's Common Stock. An aggregate of
300,000 shares of the Company's Common  Stock  was  reserved for issuance under
the Plan. At December 31, 2001 a total of 224,201 shares  had been purchased by
employees participating in the plan at a weighted-average price  per  share  of
$7.20.


11. DEFINED CONTRIBUTION PLAN

  The  Company  offers  a  defined  contribution  plan that qualifies under IRC
section 401(k). All full-time employees are eligible to participate in the plan
after three months of service with the Company. Employees  may contribute up to
15%  of their salary to the plan, subject to certain Internal  Revenue  Service
limitations.  The  Company matches the first 6% of such voluntary contributions
at 50% of the amount  contributed  by  the  employee.  The Company has not made
unmatched contributions.  For the years ended December 31, 2001, 2000 and 1999,
total Company contributions to the plan were approximately  $285,000,  $273,000
and $206,000, respectively.



12. RESTRUCTURING CHARGES

  In  October  2001, the Company's board of directors approved a plan to reduce
the current workforce  by  38  and consultants employees across all departments
and instituted temporary executive  salary  reductions  of  up  to  20%.    The
overall  objective  of  the initiative was to lower operating costs and improve
efficiency.

  All affected employees  were  terminated  in October 2001 and given severance
based  upon  years  of  service  with  the Company.   The  Company  recorded  a
restructuring  charge  of  $500,000 in 2001  related  to  this  cost  reduction
program.  The costs included  in  the restructuring charge include severance to
employees included in the reduction  in  force, legal costs associated with the
cost reduction program and the remaining lease  liability  on  the  New  Jersey
location.   The  costs  are  expected  to  be  paid by November 2002.  Activity
associated with the restructuring charges was as follows:

<TABLE>
<CAPTION>
                                Balance at                               Payments/              Balance at
                                January 1,             Additions         Reductions             December 31,
                                   2001								   2001
<S>                      <C>                        <C> <C>             <C> <C>               <C> <C>
                                ------------           -----------       -----------            -------------
                                                                (in thousands)
Severance                       $         --          $        251     $        (172)         $           79
Legal and other expenses                  --                   109               (22)                     87
Lease payments                            --                   140               (22)                    118
                                -------------         -------------     --------------         --------------
                                $         --          $        500     $        (216)         $          284
                                =============         =============     ==============         ==============
</TABLE>

13. LEGAL PROCEEDINGS

  On  December  21,  1998,  the United States District  Court  for  the  Middle
District of Florida preliminarily  approved  a  settlement  of  a  consolidated
securities  class action lawsuit against the Company. The settlement  consisted
of $4.3 million in cash and the issuance of 1.8 million shares of Common Stock.
The Company recorded  a one-time charge of $8.5 million during 1998 as a result
of the settlement. On April  30,  1999,  the  court  entered  a  final judgment
approving  the  settlement  of  the  class action and on May 20, 1999,  a  lead
plaintiff in one of the class actions  filed  a  notice of appeal to the United
States Court of Appeals for the Eleventh Circuit.  On March 16, 2000, all parts
of the appeal that pertain to the Company were dismissed with prejudice and the
District  Court's  judgment approving the settlement of  the  securities  class
actions became final.   In  1999,  the Company issued 289,350 shares in partial
satisfaction of the settlement, which  represented  $1,194,000  of  the accrued
settlement.   In  2000,  the  Company  issued  the  remaining 1,510,650 shares,
representing $6,231,000 of the accrued settlement. Since  the  issuance  of the
shares did not involve a cash exchange, these issuances were disclosed as  non-
cash  investing  and financing activities on the Consolidated Statement of Cash
Flows.  As of December  31,  2001  certain  current  and  former  officers  and
directors  of  the  Company settled with the Securities and Exchange Commission
regarding its investigation  of the circumstances underlying the restatement of
the Company's 1997 financial results.

   On November 23, 1999, Seth  P.  Joseph, a former officer and director of the
Company commenced arbitration proceedings  against  the Company alleging breach
of  his  employment  agreement and stock option agreements,  violation  of  the
Florida Whistleblower  statute  and  breach of an indemnification agreement and
the Company bylaws. As relief, Mr. Joseph  sought  $500,000,  attorneys'  fees,
interest  and  stock  options  for 656,666 shares of the Company's Common Stock
exercisable at a price of $5.25  per share. The Company filed an answer denying
Mr.  Joseph's  allegations  and  alleging  multiple  affirmative  defenses  and
counterclaims. The Company's counterclaims against Mr. Joseph seek repayment of
loans totaling approximately $113,000  plus  interest.  Mr. Joseph subsequently
dismissed without prejudice all of his claims  other  than  his claim under the
whistleblower  statue.   The arbitration hearing on Mr. Joseph's  whistleblower
claim and the Company's counterclaims concluded on October 5, 2001. The parties
submitted proposed findings  to  the arbitrator on October 17, 2001. As part of
his proposed findings, Mr. Joseph sought an award of $48 million and attorneys'
fees  and  costs.   On  November 9, 2001,  the  Company  was  notified  of  the
arbitrator's decision that  awarded  Mr.  Joseph  the sum of approximately $3.7
million and attorneys' fees and costs.  On December  20,  2001,  the arbitrator
issued  a  corrected  award and awarded Mr. Joseph the sum of $3.9 million  and
attorneys' fees and costs  in  amounts  yet  to  be determined.  On January 23,
2002, Mr. Joseph filed a motion seeking the award of $1.1 million in attorneys'
fees, costs and interest thereon.

   On December 26, 2001, the Company filed a petition  to  vacate or modify the
arbitration award in the Circuit Court of the Sixth Judicial  Circuit, Pinellas
County,  Florida,  in  an action entitled Digital Lightwave, Inc.  v.  Seth  P.
Joseph, Case No. 01-9010C1-21.   The  Company  filed  an  amended  petition  on
December  26,  2001,  following the corrected arbitration award.  Subsequently,
Mr.  Joseph  filed a cross-motion  to  confirm  the  arbitration  award.   Oral
argument on the  Company's  petition and Mr. Joseph's cross-motion was heard by
the Court on February 27, 2002.   On March 7, 2002, the court announced that it
will deny the Company's petition to  vacate the arbitration award.  The Company
intends to appeal the decision.  The Company  has  recorded  an accrual of $4.1
million related to this arbitration for the year ended December  31, 2001.  The
Company believes its petition is meritorious and intends to pursue the petition
vigorously.

   In  January  2002,  an employee terminated as part of the Company's  October
2001 restructuring initiatives  discussed  in Note 12  filed a lawsuit claiming
the  Company wrongly discharged him and has withheld  commission  payments  due
him.  The suit does not seek a specified amount of damages, but does claim that
the 2001  compensation  plan  presented to him in October 2001 unfairly lowered
his salary. The plaintiff seeks  attorneys' fees, interest and punitive damages
to be assessed by the court.  The suit was not properly filed with the court so
the Company does not have a deadline  to  respond.   It  is  expected  that the
plaintiff  will  refile  the  action  and  the Company will have thirty days to
respond  to  the complaint.  The Company has accrued  the  estimated  costs  to
defend this action in the restructuring charges discussed in Note 12.

   The Company  from  time  to  time  is involved in various other lawsuits and
actions  by third parties arising in the  ordinary  course  of  business.   The
Company  is   not  aware  of  any  additional  pending  litigation,  claims  or
assessments that  could  have  a  material  adverse  effect  on  the  Company's
business, financial condition and results of operations.


14. QUARTERLY OPERATING RESULTS (UNAUDITED)

  The  following table presents unaudited quarterly operating results for  each
of the last  eight  quarters. This information has been prepared by the Company
on a basis consistent  with the Company's consolidated financial statements and
includes all adjustments,  consisting  only  of  normal  recurring  accruals in
accordance  with  generally  accepted  accounting  principles.  Such  quarterly
results are not necessarily indicative of future operating results.




<TABLE>
<CAPTION>
                                                                              Quarter Ended
<S>                                     <C> <C>                    <C> <C>                <C> <C>                 <C> <C>
                                             ------------------------------------------------------------------------------
                                                March 31,              June 30,          September 30,       December 31,
                                                  2001                  2001                2001                 2001
                                               -------------        -------------        -------------      -------------
                                                                (in thousands, except per share data)
Net sales                                    $         34,418        $     34,517        $       8,404      $       5,441
Gross profit (loss)                                    23,919              24,094                3,958               (801)
Operating income (loss)                                13,696              13,072              (11,140)           (14,367)
Net income (loss)                                      12,979               9,323               (6,653)           (12,843)
Basic income (loss) per share(1)                         0.43                0.30                (0.21)             (0.41)
Diluted income (loss) per share(1)                       0.40                0.28                (0.21)             (0.41)
Weighted average shares outstanding                30,530,827          30,851,260           31,114,286         31,203,724
Weighted average shares and equivalents
  outstanding                                      32,204,030          32,731,565           31,114,286         31,203,724

                                                                              Quarter Ended
                                             ------------------------------------------------------------------------------
                                               March 31,              June 30,          September 30,         December 31,
                                                  2001                  2001                2001                 2001
                                             --------------        --------------      --------------        --------------
                                                                  (in thousands, except per share data)
Net sales                                    $       18,558        $       22,109        $     26,085        $       33,921
Gross profit                                         11,992                15,007              17,646                22,792
Operating income                                      4,192                 6,098               7,878                12,465
Net income                                            4,273                 6,175               7,989                12,965
Basic income per share(1)                              0.15                  0.21                0.26                  0.43
Diluted income per share(1)                            0.14                  0.20                0.25                  0.40
Weighted average shares outstanding              28,405,400            29,120,397          30,194,307            30,458,554
Weighted average shares and equivalents
  outstanding                                    31,349,165            31,610,927          32,491,073            32,292,954
</TABLE>

______________
(1)Earnings  per share were calculated for each three-month period on a  stand-
  alone basis. Earnings per share for the quarters ended September 30, 2001 and
  December 31,  2001  do  not include the impact of common stock equivalents as
  inclusion would be anti-dilutive.

  The Company's sales and operating  results  may  fluctuate  from  quarter-to-
quarter  and  from  year-to-year  due  to  the following factors: (i) announced
capital  expenditure  cutbacks  by  customers  within   the  telecommunications
industry, (ii) limited number of major customers (iii) the product mix, volume,
timing and number of orders we receive from our customers,  (iv) the long sales
cycle  for  obtaining  new  orders  (v) the timing of introduction  and  market
acceptance of new products, (vi) our  success  in  developing,  introducing and
shipping  product enhancements and new products, (vii) pricing changes  by  our
competitors,  (viii)  our ability to enter into long term agreements or blanket
purchase orders with customers,  (ix) our ability to obtain sufficient supplies
of sole or limited source components  for  our  products,  (x)  our  ability to
attain  and maintain production volumes and quality levels for our current  and
future products  and  (xi)  changes  in costs of materials, labor and overhead.
Any unfavorable changes in these or other factors could have a material adverse
effect  on  the  Company's  business,  financial   condition   and  results  of
operations. The Company does not anticipate that its backlog at  the  beginning
of  each  quarter  will  be  sufficient  to  achieve  expected revenue for that
quarter. To achieve its revenue objectives, the Company  expects  that  it will
have  to  obtain  orders during a quarter for shipment in that quarter.  During
2001, our industry experienced a dramatic economic downturn that was brought on
by a significant decrease  in  network  build-outs  and capital spending by the
telecommunications  carriers  and  equipment  manufacturers.    Our  customers'
declining  business resulted in a major decrease in sales of our products.   We
do not anticipate a near-term recovery of the fiber optic test equipment market
and do not expect  the  overall  capital spending by telecommunication carriers
and equipment factors will increase  during  2002.   As  a result of all of the
foregoing, there can be no assurance that the Company will  be  able to sustain
profitability on a quarterly or annual basis.


15. SUBSEQUENT EVENTS

  In  January  2002, the board of directors approved additional cost  reduction
initiatives aimed  at further reducing operating costs. These included a second
reduction in force of  46  employees  and  contractors  and  the outsourcing of
manufacturing  and  production  for our product lines.  All affected  employees
were  terminated in January 2002 and   given  severance  based  upon  years  of
service  with  the Company.  The Company expects to take a restructuring charge
of approximately  $1.3  million  in the first quarter of 2002.  The total costs
associated with the restructuring will be paid by January 2003.

  In October 2001, the chief financial  officer and secretary resigned from the
Company.  The board of directors elected Mark E. Scott in January 2002 to serve
as the company's chief financial officer and secretary.

  In January 2002, the chairman of the board,  president  and  chief  executive
officer  resigned  from  the  Company.   The  board  of  directors  elected the
Company's  founder,  Dr.  Bryan  J. Zwan, chairman of the board, president  and
chief executive officer.


ITEM  9.   CHANGES IN AND DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

     None.
#


<PAGE>

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The information  required  by  this  item is incorporated by reference to the
sections of the Registrant's definitive  Proxy Statement for the Annual Meeting
of Stockholders to be held on May 20, 2002,  entitled  "Election  of Directors"
and "Information Concerning Directors and Executive Officers."

ITEM 11.   EXECUTIVE COMPENSATION

  The  information  required by this item is incorporated by reference  to  the
section of the Registrant's  definitive  Proxy Statement for the Annual Meeting
of Stockholders to be held on May 20, 2002,  entitled "Executive Compensation."

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this item is  incorporated  by  reference  to the
sections  of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders  to  be  held  on May 20, 2002, entitled "Security Ownership of
Certain Beneficial Owners and Management."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this  item  is  incorporated  by reference to the
sections of the Registrant's definitive Proxy Statement for the  Annual Meeting
of Stockholders to be held on May 20, 2002, entitled "Certain Relationships and
Related Transactions."

                                    PART IV

ITEM 14.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K

  (a)(1)  Index to Consolidated Financial Statements.

     See the Index included in Item 8 on page 29 of this Form 10-K.


  (2)Financial Statement Schedule

     See the Index included in Item 8 on page 29 of this Form 10-K.

   (3) Exhibits.
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.      Description
<S>          <C> <C>
------------     -----------------------------------------------
-
3.01(1)      --  Certificate of Incorporation of the Company
3.02(1)      --  Amendment to Certificate of Incorporation of the Company
                 dated January 8, 1997
3.03(1)      --  Amended and Restated By-laws of the Company
4.01(1)      --  Specimen Certificate for the Common Stock
10.01(1)*    --  Form of Indemnification Agreement between the Company and
                 officers and directors of the Company
10.02(1)     --  Digital Lightwave, Inc. 1996 Stock Option Plan
10.03(3)     --  Digital Lightwave, Inc. Employee Stock Purchase Plan
10.04(2)     --  Lease Agreement, dated September 26, 1997, between the
                 Company and Monmouth/Atlantic Realty Associates
10.05(3)     --  L.P. Lease Agreement, dated January 9, 1998, between the
                 Company and Orix Hogan-Burt Pinellas Venture.
10.06(3)     --  First Lease Amendment, dated February 18, 1998, between the
                 Company and Orix Hogan-Burt Pinellas Venture.
10.07(3)     --  First Lease Amendment, dated September 25, 1997, between the
                 Company and Monmouth/Atlantic Realty Associates L.P.
10.08(3)     --  Second Lease Amendment, dated February 23, 1998, between the
                 Company and Monmouth/Atlantic Realty Associates L.P.
10.09(3)*    --  Executive Employment Agreement, dated February 27, 1998,
                 between the Company and Steven H. Grant
10.10(4)*    --  Letter Agreement dated as of December 31, 1998 between the
                 Company and Gerry Chastelet
10.11(4)*    --  Letter Agreement dated April 13, 1998 and addendum thereto
                 dated February 9, 1999 between the Company and George J.
                 Matz
10.12(4)     --  Form of Stock Purchase Agreement, dated March 31, 1999,
                 between the Company and certain Purchasers, with exhibits
                 thereto
10.13(6)*    --  Form of Addenda to Employment Agreements of certain
                 employees dated October 18, 1999 and June 9, 2000
10.14(5)     --  Memorandum of Understanding between Dr. Bryan J. Zwan and
                 the Company
10.15(7)*    --  2001 Stock Option Plan
10.16(8)*    --  Promissory Note issued to the Company by James Green
10.17 (8)    --  Form of Distributor Agreement
10.18(8)*    --  Form of Letter Agreement entered into on February 27, 2001
                 with executive officers with respect to certain stock
                 options
10.19(8)*    --  Letter Agreement between the Company and James Green dated October 13, 1999
10.20(8)*    --  Addendum to Letter Agreement between the Company and James
                 Green dated February 18, 2000
10.21(8)     --  Loan and Security Agreement by and between Congress
                 Financial Corporation (Florida) and the Company
10.22(9)*    --  Form of Senior Executive Agreement
10.23(9)*    --  Form of Executive Severance Agreement
10.24        --  Manufacturing contract agreement between the Company and Jabil Circuit Inc. dated December 30, 2001.
10.25*       --  Letter Agreement dated January 23, 2002 between the Company and Gerry Chastelet
10.26*       --  Settlement of Employment Terms and Employment Letters dated January 28, 2002 between the Company and George J.
                 Matz
21.01(4)     --  Subsidiaries of the Registrant
23.01        --  Consent of PricewaterhouseCoopers LLP
</TABLE>
______________
 *    Indicates management contract or compensatory plan or arrangement.
(1)Incorporated  by  reference  to  the  similarly described exhibits filed  in
  connection with the Registrant's Registration Statement on Form S-1, File No.
  333-09457, declared effective by the Securities  and  Exchange  Commission on
  February 5, 1997.
(2)Incorporated  by  reference  to  the  exhibit  filed in connection with  the
  Registrant's  Quarterly Report on Form 10-Q for the  quarterly  period  ended
  September 30, 1997.
(3)Incorporated by  reference  to  the  similarly  described  exhibits filed in
  connection  with the Registrant's Annual Report on Form 10-K for  the  fiscal
  year ended December 31, 1997.
(4) Incorporated  by  reference  to  the  similarly described exhibits filed in
   connection with the Registrant's Annual  Report  on Form 10-K for the fiscal
   year ended December 31, 1998.
(5)Incorporated  by  reference  to the similarly described  exhibits  filed  in
  connection with the Registrant's  Form  10-Q  for the quarter ended September
  30, 1999.
(6)Incorporated  by  reference  to the similarly described  exhibits  filed  in
  connection with the Registrant's  Annual  Report  on Form 10-K for the fiscal
  year ended December 31, 1999.
(7)Incorporated  by  reference  to  the similarly described  exhibit  filed  in
  connection with the Registrant's Proxy  Statement  filed on February 15, 2001
  for the 2001 Special Meeting of Stockholders.
(8)Incorporated  by  reference  to the similarly described  exhibits  filed  in
  connection with the Registrant's  Annual  Report  on Form 10-K for the fiscal
  year ended December 31, 2000.
(9)Incorporated  by  reference  to the similarly described  exhibits  filed  in
  connection with the Registrant's  Form  10-Q  for the quarter ended March 31,
  2001.

  (b) Reports on Form 8-K.

     None.
#


<PAGE>

                                  SIGNATURES

  Pursuant  to  the  requirements  of  Section 13 or 15(d)  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 LIGHTWAVE, INC.



                                By:          /s/ BRYAN J.ZWAN
                                   ------------------------------------
                                                    Bryan J. Zwan
                                              Chairman of the Board,
                                          President and Chief Executive
                                                 Officer
Date: March 4, 2002


  Pursuant to the requirements of the Securities  Exchange  Act  of  1934, this
report  has  been  signed  below  by  the  following  persons  on behalf of the
Registrant and in the capacities and on the dates indicated.



<TABLE>
<CAPTION>
                NAME                                 TITLE                           DATE
<S>                                  <C> <C>                                  <C> <C>
------------------------------------  ------------------------------------  -----------------------
         /s/ BRYAN J. ZWAN            Chairman of the Board,                          March 4, 2002
------------------------------------    President and Chief Executive
                     Bryan J. Zwan      Officer (Principal Executive
                                        Officer)
         /s/ MARK E. SCOTT             Vice President,                                March 4, 2002
------------------------------------    Finance, Chief Financial
                     Mark E. Scott      Officer and Secretary
                                        (Principal Accounting Officer)
      /s/ WILLIAM F. HAMILTON         Director                                        March 4, 2002
------------------------------------
                 William F. Hamilton
        /s/ GERALD A. FALLON          Director                                        March 4, 2002
------------------------------------
                   Gerald A. Fallon
        /s/ ROBERT F. HUSSEY          Director                                        March 4, 2002
------------------------------------
                   Robert F. Hussey
</TABLE>

#


<PAGE>

                            DIGITAL LIGHTWAVE, INC.

               SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                             DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                  COL. A                    COL. B                       COL. C               COL. D               COL. E
<S>                                        <C> <C>             <C> <C>             <C> <C>            <C> <C>              <C> <C>
     -------------------------------         -------------   -------------------------------   --------------      --------------
                                                                        ADDITIONS
                                                             -------------------------------
                                                                  (1)              (2)
                                              BALANCE AT       CHARGED TO       CHARGED TO                            BALANCE
                                               BEGINNING        COSTS AND         OTHER                                AT END
               DESCRIPTION                     OF PERIOD        EXPENSES         ACCOUNTS        DEDUCTIONS          OF PERIOD
    ---------------------------------        -------------   --------------   --------------   --------------      --------------
Year 2001
  Reserve for uncollectible accounts          $         250    $       5,971  $            -   $          321 (a)   $      5,900

  Reserve for excess and obsolete
       inventory                                        428            5,167              --            1,762 (b)          3,833
Year 2000
  Reserve for uncollectible accounts                    215              161              --              126 (a)            250

  Reserve for excess and obsolete
       inventory                                        322              700              --              594 (b)            428

Year 1999
  Reserve for uncollectible accounts                     --              215              --               --                215

  Reserve for excess and obsolete
inventory                                                10              397              --               85 (b)            322
</TABLE>
______________

(a)  Amounts written off as uncollectible, payments or recoveries.
(b)  Amounts written off upon disposal of inventory.


#