<PAGE>   1

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                       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, 2000

                                       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)



             DELAWARE                                            95-4313013
---------------------------------                           -------------------
  (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)



       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 29,
2001: $229,300,311.

     The number of shares of Registrant's Common Stock issued and outstanding as
of March 29, 2001: 30,587,076.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None.

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                                     PART I

     The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended regarding Digital Lightwave,
our business, prospects and results of operations that are subject to certain
risks and uncertainties posed by many factors and events that could cause our
actual business, prospects and results of operations to differ from those that
may be anticipated by such forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed herein. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Those
"forward-looking statements" include, without limitation, statements containing
the words "believes," "anticipates," "estimates," "expects" and words of similar
import. Readers are urged to carefully review and consider the various
disclosures made by Digital Lightwave in this report and in our other reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect our business.

ITEM 1.  BUSINESS

GENERAL

     Digital Lightwave(R) designs, develops and markets a portfolio of portable
and embedded products and technologies for monitoring, maintaining and
installing fiber optic circuits and managing fiber optic networks. Network
operators and other communications 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. Through our products, we
provide communications service providers and equipment manufacturers with
capabilities to cost-effectively deploy and manage fiber optic networks to
address the rapidly increasing demand for bandwidth. Our largest customers in
2000 include communications service providers, such as Level 3 Communications,
MCI WorldCom, MetroMedia Fibre Networks, Qwest Communications, 360 Networks and
Verizon; communications equipment manufacturers including Cisco Systems, Lucent,
Nortel Networks, and Tellabs; equipment leasing companies such as Telogy and
Technology Rental Services and international distributors including Allen
Crawford Associates and Conformance Standards Limited.

     Customers use our products and technologies to ensure that their
communications products work properly. They qualify their products during the
manufacturing process, verify service during the network installation process,
and monitor and maintain deployed networks. In contrast to most existing
communications test equipment, we base our products on modular, scaleable
hardware and software platforms with a flexible reusable architecture. The
flexible architecture allows customers to upgrade existing systems to
accommodate new technologies. In 2000, our U.S. market share for the portable
Network Information Computers(R) increased from approximately 24% to
approximately 33%, as reported by industry analyst Frost and Sullivan. We
believe this increase was achieved because our portable products are recognized
as the industry leaders in terms of price, performance and size.

     Our Network Information Computer provides engineers and technicians with a
truly portable, easy-to-use diagnostic product that offers increased
functionality for the installation and maintenance testing of advanced, high
speed networks and transmission equipment. In late 1996, we introduced our first
Network Information Computer, the ASA 312(R). Since then, we developed
additional models of our Network Information Computer which serve the high and
low speed market both domestically and internationally, principally the NIC
10G(TM) and the NIC 2.5G(TM). We also continue to develop additional
functionality and features for the entire Network Information Computer product
family.

     In 1998, we introduced the Network Access Agent(TM) product line, which
incorporates the technology developed for the Network Information Computer. Our
Network Access Agents are unattended, software-controlled performance monitoring
and diagnostic products permanently installed within optical-based networks.
Customers use our Network Access Agents to manage optical networks from a
central location. In May 1999, we introduced the WaveAgent(TM), our first Dense
Wave Division Multiplexing, or DWDM,
<PAGE>   3

customized subsystem in the Network Access Agent line, through our original
equipment manufacturer agreement with Lucent Technologies. We designed our
WaveAgent for integration into Lucent Technologies' then latest optical
transmission system. We believe Lucent Technologies is currently running
customer lab trials on a limited number of our WaveAgents. Lucent Technologies'
placement of additional orders for WaveAgents is conditioned upon Digital
Lightwave achieving development objectives, and upon Lucent Technologies'
customer demand. We have developed other products for the Network Access Agent
product family, including additional products for the DWDM market. Network
Access Agents accounted for approximately 5% of our revenues in 2000. In order
to respond to potential market opportunities for our different product families,
in early 2001 we created our Technology and Systems Division to address the
integrated and embedded markets and the Portable Products Division to address
the portable test equipment market.

     We were incorporated in California on October 12, 1990 under the name
Digital Lightwave, Inc., and reincorporated in Delaware on March 18, 1996
through our merger into a newly formed Delaware corporation. Unless the context
otherwise requires, as used in this Report the "Company", "we", "our", and
"Digital Lightwave" 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 telephone number at that
address is (727) 442-6677.

INDUSTRY

     Over the past several years, the communications industry has undergone
fundamental changes. The volume of traffic carried over communications networks
has increased significantly, principally as the result of the rapid growth of
data traffic as well as steady growth of voice traffic. Non-voice traffic has
increased substantially due to a variety of factors, including the Internet,
e-commerce, fax, video and a proliferation of bandwidth intensive applications
and personal hand-held email and internet appliances. Bandwidth is the range of
frequencies that can be transmitted through a medium, such as glass fibers,
without distortion. The increase in the quantity and types of traffic carried
over communications networks has increased demand for networks capable of
delivering private communications in a confidential, secure manner.

     The communications industry has addressed the demand for increased,
reliable network capacity by installing new fiber optic transmission lines,
increasing transmission rates and employing new technologies such as DWDM, a
process that increases 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 an increasing range of traffic types
magnify the complexity of communications networks while continuing demands for
greater bandwidth stress their capacity. In addition, various standards or
"protocols" are required for encoding and transmitting information across these
networks, including, for example, the T-Carrier protocol, Synchronous Optical
Network Technology, or SONET, Synchronous Digital Hierarchy, or SDH, and
asynchronous transfer mode, or ATM. New fiber optic networks must be compatible
with existing legacy networks and protocols as well as with wireless networks
used in cellular technologies. The T-Carrier protocol is insulated copper wire
cables which carry electrically transmitted digital signals. The SONET protocol
is an electronics and network architecture and protocol utilized primarily in
North America for variable optical bandwidth products which enables transmission
of voice, video and data at very high speeds, while SDH is the equivalent
protocol in the European marketplace. 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.

     The increasing demand for communications capabilities, together with
worldwide deregulation of the communications industry, has led to an increase in
the number of service providers entering the industry. These conditions have
heightened the need to provide uninterrupted service while creating new
competitive pressures to increase operational efficiencies.

     As the network environment becomes increasingly complex and the
communications industry becomes more competitive, network communications
diagnostic equipment is required for quality assurance during network
installation and to monitor and maintain the integrity of existing networks.
During the installation of new networks, portable test equipment is required to
qualify and verify the communications infrastructure,

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including transmission lines, signal generators, switches and other network
equipment. Once the network is deployed, real-time simultaneous and independent
analysis is required to monitor network performance and reduce the possibility
of network interruptions or system failures to improve overall operational
efficiency.

THE DIGITAL LIGHTWAVE SOLUTION

     Through our products, we provide communications service providers and
equipment manufacturers with capabilities to cost-effectively deploy and manage
fiber optic networks to address the rapidly increasing demand for bandwidth.
Characterized by their ease of use, Digital Lightwave's products qualify the
product during the manufacturing process, verify service during optical network
installation and provide ongoing quality assurance after new equipment is
deployed.

     We believe that our Network Information Computers and Network Access Agents
offer a broad range of features and capabilities that provide distinct
competitive advantages over the traditional network test equipment offered by
our competitors. We designed our Network Information Computers to provide
technicians with a more compact, easy-to-use, lightweight product with increased
functionality compared to other products currently available. The Network
Information Computer (i) is an integrated product that is capable of
independently and simultaneously testing multiple protocols; (ii) utilizes an
intuitive windows-based graphical user interface 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.

     Utilizing the technology of the Network Information Computer, in 1998, we
introduced our first Network Access Agent. Network Access Agents are
software-controlled performance monitoring and diagnostic equipment, permanently
installed at multiple access points within optical networks to provide real-time
analysis and network management from a centralized location. Using the real-time
analysis provided by the Network Access Agent, a network operator is able to
monitor signal degradation and respond immediately in order to prevent potential
network interruptions or failures.

     Our products are based on advanced technologies, including modular and
scaleable hardware and software platforms and a flexible architecture that
allows customers to easily upgrade existing systems to accommodate new
technologies. We plan to utilize the core technology of our Network Information
Computer and our Network Access Agents to continue to develop portable and
embedded products that address the evolving needs of the optical networking
industry.

PRODUCTS

     Our current family of products is organized into two product lines: Network
Information Computers and Network Access Agents.

     Network Information Computers.  Our portable Network Information Computers
enable users to verify, qualify and monitor the performance of communications
networks and transmission equipment. We designed the Network Information
Computer to replace existing network test instruments by incorporating their
functions into a software-based information processing system, adding additional
functions and improving performance while maintaining competitive pricing. With
the Network Information Computer, communications service providers and equipment
manufacturers are able to plan for and implement fiber optic network expansion
more cost-effectively and verify and manage information concerning the
transmission of voice, data, image and video traffic. Communications equipment
manufacturers also use the Network Information Computer in designing,
engineering and manufacturing their products, installing their products in the
networks of their customers and providing ongoing customer support.

     The Network Information Computer generates, transmits, receives,
multiplexes and processes legacy and lightwave signals and provides network
analysis. The Network Information Computer's easy-to-use graphical user
interface is a touch sensor over a large color display which provides simple and
intuitive windowed graphics and menus. The Network Information Computer may be
accessed and operated remotely by modem or through direct connection to an
ethernet local area network or LAN. A LAN is a group of computers and

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other devices dispersed over a relatively limited area and connected by a
communications link that enables any device to interact with any other on a
network. An ethernet is a protocol commonly used on LANs.

     The following table sets forth certain features of the Network Information
Computer that we believe provide superior performance over competitive devices:

<TABLE>
<CAPTION>
FEATURE                                                CUSTOMER BENEFIT
-------                                                ----------------
<S>                                        <C>
Software-based...........................  Provides for custom features and field
                                           upgrades
One simple menu format for all             Easy to learn and set up
  protocols..............................
Touch sensor over full color windowed      Easy to use by personnel of all levels of
  graphics...............................    aptitude
Intuitive graphic user interface.........  Clear display of data
Transmitting and receiving of signals      Simultaneous review of multiple protocols
  through all protocols simultaneously...  reduces overall task time
Switch matrix............................  Facilitates configuration of the product
                                           for dropping and inserting traffic from,
                                             into and between different protocols
Remote operation capability..............  Provides complete, direct and identical
                                             operation of the product at a remote
                                             site
Ethernet interface.......................  Provides operation of the product via LAN
Laptop profile/lightweight...............  Truly portable
PCMCIA card for expanded memory..........  Can display long-term history graphs;
                                           provides recallable setups and can store
                                             significant amounts of data
Non-volatile memory......................  Saves data when turned off
Software calibration.....................  Allows calibration by the customer which
                                             reduces cost and down-time
</TABLE>

     The following core technologies are used in the Network Information
Computer and provide a basis for certain of our products in development: (1) a
software operating environment which runs over a windows or a MS-DOS platform;
(2) programs which operate our firmware and hardware; (3) graphical user
interface programs, written in object-oriented code, running in a windowed
environment; (4) network protocol translators, which logically process discrete
network information from signals at specific bandwidths and specific protocols;
and (5) Network Protocol Processors(TM), which process information encoded in a
specific protocol over a range of bandwidth.

     To allow our customers to work simultaneously with different bandwidths and
protocols, we have developed a non-blocking switch matrix and applications
software that allow our customers to "frame up" on a given signal, multiplex or
demultiplex the signal into different transmission speeds and 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 congestion internally in the switch. Demuliplex 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.

     Network Access Agent.  Network Access Agents are unattended, software
controlled performance monitoring and diagnostic equipment embedded within
optical networks for analysis, installation and management of a communications
network from a remote or centralized location. We recently commenced sales of
our Network Access Agent which is a modular hardware/software platform designed
to provide network operators with real-time information concerning performance
of the network segments where a Network Access Agent has been installed.
Installation of Network Access Agents at multiple access points throughout
networks provides the capability for end-to-end monitoring, maintenance and
management of fiber

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optic networks. Network Access Agents provide performance and quality data to
the network operator through a standard operations interface. Network Access
Agents incorporate technology that we developed for the Network Information
Computer, that includes advanced hardware and software technology that accesses
bits in lightwave and legacy communications transmissions, a non-blocking switch
matrix that maps signals into different transmission speeds and protocols, and
object-oriented software that controls selectable features accessible through
Windows operating system or other user environments. A Bit is a contraction of
the term binary digit which represents a single digit of information expressed
as a 0 or a 1, high or low, yes or no.

     The following table sets forth certain features of the Network Access
Agent:

<TABLE>
<CAPTION>
FEATURE                                                CUSTOMER BENEFIT
-------                                    -----------------------------------------
<S>                                        <C>
Remote ATM service level testing.........  Verification of "Quality of Service" and
                                           proper ATM operations
Interoperability with Network Information
  Computer...............................  Single platform for analysis throughout
                                           the network
Hardware and software based..............  Field reprogrammable and upgradeable
Centralized management of remote testing
  capabilities...........................  Reduced time to install service and
                                           maintain networks Utilizes senior level
                                           technicians to perform testing
Non-intrusive test capabilities..........  Qualify circuits without service
                                           interruption
Similar graphical user interface to
  Network Information Computer...........  Decrease learning curve associated with
                                           new test equipment
Industry standard interface..............  Integrates into existing operating system
Enhanced digital cross connects and
  routing testing........................  Increased return on investment through
                                           grooming testing
</TABLE>

     Future Products and Enhancements.  On January 18, 2000, we announced the
NIC 10G, the industry's first portable computer for OC-192 fiber optic network
testing, which commenced shipping to customers during second quarter of 2000 and
generated over 30% of our revenues for the year. We plan to leverage the core
technologies of our Network Information Computer and Network Access Agent to
continue to develop a family of advanced portable and embedded products and
enhancements that address the evolving needs of the optical networking industry.

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<PAGE>   7

CUSTOMERS

     Through December 31, 2000, we have sold approximately 3,700 units of the
Network Information Computer and approximately 90 Network Access Agents to
approximately 220 customers. Set forth below is a representative list of
purchasers of our products:

REGIONAL BELL OPERATING COMPANIES
Ameritech Corporation
BellSouth Corporation
Verizon

EQUIPMENT MANUFACTURERS
Alcatel Network Systems, Inc.
CIENA
Cisco Systems, Inc.
Fujitsu
Lucent Technologies, Inc.
Nortel Networks
ONI Systems
Tellabs Operations, Inc.

COMPETITIVE LOCAL EXCHANGE CARRIERS
AT&T Local Service

EQUIPMENT LEASING COMPANIES
Continental Resources
ElectroRent
McGrath Rentelco
Technology Rental Services or TRS
Telogy

INTER-EXCHANGE CARRIERS
Enron Corporation
Level 3 Communications, Inc.
MetroMedia Fiber Networks
MCI WorldCom, Inc.
Progress TeleCOM Corporation
Qwest Communications
360 Networks

WIRELESS SERVICE PROVIDERS
AT&T Wireless

INTERNATIONAL DISTRIBUTORS
Allen Crawford Associates
Conformance Standards Limited

     We also sell our products to other segments of the communications industry,
such as 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. Because our
products have flexible designs, 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, 2000, the Company's largest customer,
Telogy, accounted for approximately 15% of total revenues. For the year ended
December 31, 1999, our two largest customers accounted for approximately 39% of
total revenue, with Telogy accounting for 21% of total sales and Technology
Rental Services for 18% of total sales. Both Telogy and TRS purchase our
products for lease to end users in the communications industry. We believe that
a significant portion of the equipment purchased by Telogy and TRS is deployed
at Nortel Networks. For the year ended December 31, 1998, our four largest
customers accounted for approximately 57% of total revenues, with Qwest, MCI
WorldCom, Tellabs, and GTE accounting for approximately 17%, 16%, 13% and 11% of
total sales, respectively. No other customers accounted for sales of 10% or more
during those years. Some of the customers highlighted in years prior to 2000 as
accounting for more than 10% of total sales continued to purchase at similar
dollar levels in 2000 although those levels did not surpass the 10% threshold of
this record sales year. There can be no assurance regarding the amount or timing
of purchases by any customer in any future period. See "Factors That May Affect
Operating Results -- We are dependent on a limited number of major customers."

SALES, MARKETING AND CUSTOMER SUPPORT

     Sales.  Domestically, we sell our products to communications service
providers and network equipment manufacturers through a sales organization of 40
employees, including managers, sales engineers and sales administrative staff
based at our principal executive offices and across two geographic regions,
divided into multiple territories throughout the U.S. The primary functions of
our direct sales force are (i) to ensure that existing and potential customers
in each territory are being regularly contacted, (ii) to differentiate the
features and capabilities of our products from competitive offerings, (iii) to
assist customers with the

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implementation of our products and (iv) to serve as a direct link to assure
quality and timely customer support. In addition, we believe that our direct
sales staff helps us to monitor changing customer requirements, as well as the
development of industry standards. We sell to international markets through
international distributor channels with some direct sales and sales support.

     Marketing.  In marketing the Network Information Computer, we focus on the
divisions of communications service providers that are responsible for planning
and installing extensions of the network, as well as the quality assurance
divisions of communications equipment manufacturers. In marketing the Network
Access Agents, we have directed our preliminary efforts towards the strategic
planning divisions of communications 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 and conferences and direct mailings to targeted
customers.

     Customer Support.  We offer technical support to our customers 24 hours a
day, seven days a week, via a toll-free hotline to reach on-site or on-call
personnel. Our customer support organization is comprised of 11 employees. We
perform all service and repair at our Clearwater, Florida facility by a factory
repair group which is accounted for within our manufacturing functional area. We
provide technical support through our toll-free hotline, or through five remote
sales/customer support sites. Our technical support engineers are trained in the
hardware and software incorporated in our products, as well as the networks and
transmission equipment operated by our customers. We offer between a one-year
and a three-year limited warranty on our products.

PRODUCTION

     Our production operations consist primarily of material planning and
procurement, final assembly, software loading, testing and quality assurance.
Our operational strategy relies on outsourcing of manufacturing to reduce fixed
costs and to provide flexibility in meeting market demand. We subcontract 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 perform final assembly and program the products
with our software. We have implemented strict quality control procedures
throughout each stage of the manufacturing process, and test the boards and
subassemblies at various stages in the process, including final test and
qualification of the product. We are ISO 9001 certified. ISO 9001 is an
international standard for quality management and assurance. To further enhance
quality and efficiency, in October 1999, we centralized all of our production in
one location by transferring all operations to our headquarters facility in
Clearwater, Florida.

     Although we generally use standard parts and components for our products,
we currently purchase several key components used in the manufacture of our
products from a sole-source or limited sources, the loss of which could
seriously disrupt our operations. We purchase 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 contractors. In
addition, for the Network Access Agent, we purchase a filter, a controller board
and an interface board from a single or limited number of contractors. We do not
have long-term agreements with any of these sole or limited sources of supply.
Also, some component manufacturers were not able to produce enough parts and
components to meet industry demand in the year 2000. Any interruption in the
component supply, or in our inability to procure these components from alternate
sources at acceptable prices and within a reasonable time, could materially
adversely effect our business, financial condition and results of operations. We
are currently attempting to qualify certain additional suppliers for certain of
the sole-sourced components. However, qualifying additional suppliers is time
consuming and expensive and the likelihood of errors could be greater with new
suppliers.

     In connection with our outsourcing strategy, we are seeking to identify and
secure additional sources of supply, including additional contract subassembly
and component manufacturers. We have experienced in the past, and may in the
future experience, problems with our contract manufacturers, in areas such as
quality,

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quantity and on-time delivery. In addition, we may in the future experience
pricing pressure from our contract manufacturers.

     We forecast product demand on a quarterly basis, based on anticipated
product sales 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. If actual orders vary significantly from forecasts,
we may have excess or inadequate inventory of certain materials and components.

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 and our facility in Wall
Township, New Jersey. We expect to significantly grow our engineering resources
and are considering opening additional development centers in the United States.

     As of March 29, 2001, our engineering and development department consisted
of 48 full time employees and a number of contractors. During fiscal years 2000,
1999 and 1998 we spent approximately $14.1 million, $10.2 million, and $14.3
million, on sponsored engineering and development activities, respectively.

INTELLECTUAL PROPERTY

     Our success and our ability to compete depends in part upon our proprietary
technology, which we protect through a combination of patent, copyright, trade
secret and trademark law. As of March 29, 2001, in the United States, we have
four issued patents relating to the Network Information Computer and Network
Access Agent. We have filed continuation applications for each of these issued
patents. Currently we have five 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. In
addition, our growth strategy includes a plan to enter 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.

     As part of our confidentiality procedures, 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. Despite these precautions, it may be possible for third
parties to copy or otherwise obtain and use our technology without
authorization.

     From time to time we may either license our proprietary rights to
third-parties or in-license certain technologies from third-parties for use in
our products. The communications 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 which 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

     Our backlog at December 31, 2000 was approximately $12.4 million.
Variations in the size and delivery schedule of purchase orders we receive, as
well as changes in customers' delivery requirements, may result in

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substantial fluctuations in backlog from period to period. Accordingly, we
believe that our backlog cannot be considered a meaningful indicator of future
financial results.

SEASONALITY

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

COMPETITION

     The market for our products is intensely competitive and is subject to
rapid technological change, frequent product introductions with improved
performance, competitive pricing ratios and shifting industry standards. We
believe that the principal competitive factors in our markets are product
capabilities and design, price, customer service and support, ease of operation
and reliability, length of operating history, industry experience and name
recognition, and extent and maturity of sales and distribution relationships.

     We believe that there are five principal competitors that currently offer
products that compete with the Network Information Computer, including Agilent
which was formerly a part of Hewlett-Packard, Acterna, the merged company of
Telecommunications Techniques Corporation or TTC, and Wavetek Wandel Goltermann,
or WWG, Anritsu, Tektronix, and ANDO. However, the companies that offer test
instruments in competition with the Network Information Computer do not provide
an integrated, comprehensive solution to performance monitoring transmission
speeds from DS-0 through OC-48 simultaneously in a single, lightweight,
upgradeable, portable unit. Also, our NIC 10G is better than similar products
offered by our competitors in the areas of price, portability and functionality.
Although there are several companies that offer network monitoring and test
instruments, including Hekimian Laboratories, Inc., a division of Spirent,
Acterna and Sage Instruments, none of these companies offer lightwave network
monitoring products in direct competition with our latest Network Access Agents.
Accordingly, we believe that there are currently no competitors that provide
optical network monitoring capability which cover the full range of features
offered by the Network Access Agent. We are aware of certain companies that are
also developing equipment to monitor lightwave transmissions. 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 than we do. In addition, a number of these competitors have long
established relationships with our customers and potential customers. We believe
it is likely that competitors will enter the market for most, if not all, of the
products which we will offer. See "Risk Factors -- Our industry is extremely
competitive and such competition may negatively affect our business."

REGULATORY MATTERS

     Our products must meet industry standards and, in the United States, our
products must comply with various regulations promulgated by the Federal
Communications Commission and Underwriters Laboratories. We sell our products in
international markets, and believe our products comply with standards
established by communications authorities in various 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.
Any inability to obtain on a timely basis or retain domestic or foreign
regulatory approvals or certifications that may be required in the future or to
comply with existing or evolving industry standards could have a material
adverse effect on our business, financial condition and results of operations.

EMPLOYEES

     As of March 29, 2001, we employed a full-time staff of 181 employees, of
which 97 were engineering, quality and production personnel, and the remainder
were sales and marketing staff and administrative personnel. We believe that our
relationship with our employees is good.

                                        9
<PAGE>   11

                   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 Risk Factors) 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.

     Although forward-looking statements in this report reflect the good faith
judgment of our management, such statements can only be based on facts and
factors we currently know about. Consequently, forward-looking statements are
inherently 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 AND OUR SALES ARE SEASONAL

     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, many of which are outside our control. Factors that could affect our
quarterly operating results include:

     - Announced capital expenditure cutbacks by customers within the
       communications industry;

     - General economic conditions, including inflationary or recessionary
       pressures, as well as those specific to the communications and related
       industries.

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

     - The long sales cycle for obtaining new orders;

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

     - Our ability to obtain critical components;

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

     - The timing of introduction and market acceptance of new products by us,
       our competitors or our suppliers;

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

     - Pricing increases or decreases by us or our competitors;

     - Changes in costs of materials, labor and overhead; and

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

     Because of these factors, among others, our operating results for any
particular quarter may not be indicative of future operating results. These
factors have historically been, and are likely to continue to be, difficult to
forecast. Any unfavorable changes in these or other factors could negatively
affect our business, financial condition and operating results.
                                        10
<PAGE>   12

     Our revenues and operating results generally depend on the volume and
timing of the orders we receive from customers, as well as our ability to
fulfill the orders received. Most of our expenses, particularly employee
compensation and rent, are relatively fixed and cannot be reduced in response to
decreases in revenues. As a result, variations in the timing of revenues could
cause significant variations in results of operations from quarter to quarter
and could result in continuing quarterly losses. The deferral of any large order
from one quarter to another would negatively affect our results of operations
for the earlier quarter. To achieve our revenue objectives, we must obtain
orders during each quarter for shipment in that quarter. If we fail to do this,
we may be unable to sustain profitability on a quarterly basis.

     Quarterly fluctuations in operating results may result in volatility in the
market prices of our common stock. We have experienced and expect to continue to
experience seasonality in our business. Historically, our sales have been
affected by a seasonal decrease in demand in the first quarter of each calendar
year due to the budgeting processes of our customers. We expect this trend to
continue, which 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 PRODUCTS AND OUR PLANNED PRODUCTS

     We derive the vast majority of our sales 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. In 1998, we started shipping a commercial version of our
Network Access Agent, based on the same core technology as the Network
Information Computer. In 2000, Network Access Agents accounted for approximately
5% 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. Because the market for our products is
evolving and subject to rapid technological change, 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. 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), market acceptance of our products and our
credibility with our customers might be diminished. This could have a material
adverse affect on our business, financial condition and results of operations.

OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE ARE DEPENDENT ON
NEW PRODUCT INTRODUCTIONS

     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, in part, 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;

                                        11
<PAGE>   13

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

     - Increase market acceptance of our products.

     If we fail meet these objectives or to adapt to changing market conditions
or customer requirements, our business, financial condition and operating
results would be materially adversely affected.

OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET

     A significant portion of our revenues comes from communications carriers,
communications equipment manufacturers and other customers that rely upon or are
driven by the Internet. As a result, 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. Furthermore,
the growth and development of the market for Internet-based services may prompt
the introduction of new laws and regulations. Laws, which impose additional
burdens on those companies that conduct business online, 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 and increase our cost of
doing business, or otherwise harm our business.

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 capabilities and design;

     - Price;

     - Customer service and support;

     - Ease of operation and reliability of products;

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

     - Extent and maturity of sales and distribution relationships.

     Our principal competitors with respect to our Network Information Computers
are Agilent, Acterna, the merged company of Telecommunications Techniques
Corporation or TTC and Wavetek Wandel Goltermann or WWG, Tektronix, Anritsu,
ANDO Corporation and other companies which offer network monitoring products.
Our principal competitors with respect to our Network Access Agents are Hekimian
Laboratories, Inc., Acterna and Sage Instruments, although these companies have
designed products primarily for copper-based legacy networks. We are a relative
newcomer to the communications equipment market, and many of these competitors
have significantly longer operating histories, greater name recognition, and
greater technical, financial, manufacturing and marketing resources than we
have. A number of our competitors have long-established relationships with our
current and potential customers. Furthermore, many of our large competitors may
offer customers a broader product line than we currently offer or anticipate
offering in the near future. These companies may have a competitive advantage
over us in sales of similar products or alternative lightwave management
solutions. 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.

                                        12
<PAGE>   14

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, 2000, our largest customer, Telogy,
accounted for approximately 15% of total revenues. For the year ended December
31, 1999, our two largest customers accounted for approximately 39% of total
revenue, with Telogy and TRS, accounting for 21% and 18% of total sales,
respectively. Both Telogy and TRS purchase our products for lease to end users
in the communications industry. We believe that a significant portion of the
equipment purchased by Telogy and TRS is deployed at Nortel Networks. For the
year ended December 31, 1998, our four largest customers accounted for
approximately 57% of total revenues, with Qwest, MCI WorldCom, Tellabs, and GTE
accounting for approximately 17%, 16%, 13% and 11% of total sales, respectively.
We cannot predict the amount or timing of purchases by any customer in any
future period.

     Our success is dependent upon our ability to broaden our customer base to
increase our level of sales. None of our customers has a written agreement with
us that obligates it to purchase additional products. If one or more of our
major customers decide not to purchase additional products, or cancel orders
previously placed, our revenues will decrease. In order to increase our revenues
we must retain our largest customers and attract additional major customers. If
we lose one or more of our major customers or if we fail to broaden our customer
base, our revenues will not increase, and could decrease, which would have a
material adverse effect on our business, financial condition and results of
operations.

FLUCTUATIONS IN OUR CUSTOMERS' BUSINESS COULD CAUSE OUR BUSINESS AND STOCK PRICE
TO SUFFER

     Our business is dependent upon product sales to communications network
system providers, who in turn are dependent for their business upon orders for
fiber-optic systems from communications carriers. Business fluctuations
affecting our system provider customers or their communication carrier customers
have affected and will continue to affect our business. Moreover, our sales
often reflect orders shipped in the same quarter in which they are received,
which makes our sales vulnerable to short-term fluctuations in customer demand
and difficult to predict. In general, customer orders may be cancelled, modified
or rescheduled after receipt. Consequently, the timing of these orders and any
subsequent cancellation, modification or rescheduling of these orders have
affected and will in the future affect our results of operations from quarter to
quarter. Also, as our customers typically order in large quantities, any
subsequent cancellation, modification or rescheduling of an individual order may
alone affect our results of operations. In this regard, we have experienced
rescheduling of orders by customers and may experience similar rescheduling in
the future, which we believe reflects reductions in carrier capital spending and
inventory adjustments by our customers in response to less certain carrier
demand.

FAILURE TO EXPAND OR ENTER INTO ADDITIONAL ORIGINAL EQUIPMENT MANUFACTURER
RELATIONSHIPS MAY ADVERSELY AFFECT OUR RESULTS

     An important component of our growth strategy is to enter into original
equipment manufacturer agreements that incorporate our customized technology in
order to expand our product lines and offer our products and services to a
larger customer base. For example, in 1999 we entered into an original equipment
manufacturer agreement with Lucent Technologies to market our products and
technology and we are seeking additional similar relationships to market our
products on an original equipment manufacturer basis. We have limited sales of
products on an original equipment manufacturer basis. We may not be able to
successfully enter into such additional arrangements or we may be unable to
capitalize on the relationships we do establish.

     Factors that could affect our ability to enter into original equipment
manufacturer agreements or our success in the relationships we do establish
include:

     - Insufficient working capital;

     - Interruptions or delays in product manufacturing;

     - Competition;

                                        13
<PAGE>   15

     - Changing customer requirements; and

     - Failure of our original equipment manufacturer partners to achieve market
       acceptance of their products.

     If we do enter into relationships, we may become overly dependent on our
strategic partners. In addition, we anticipate that the prices we charge to
strategic partners would be less than the prices we charge for direct sales,
resulting in lower gross margins in connection with these arrangements. Either
development could have a material adverse effect on our business, operating
results and financial condition.

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

     Contract Manufacturers.  Our operational strategy is to outsource component
manufacturing. We subcontract the manufacture of computer system boards, plastic
molds and metal chassis and certain subassemblies and components. We do not
maintain large inventories of components for building our products. From time to
time, our suppliers have failed to meet component delivery schedules, have
failed to provide us with sufficient quantities of components and have failed to
meet our component quality standards. We expect that these or other difficulties
may occur in the future. These difficulties may be magnified as we introduce new
products and product enhancements over the next twelve months. If demand for our
products increases, we will need to coordinate our efforts with our contract
manufacturers in order to achieve sufficient production levels. We do not know
whether we will be able to manage our contract manufacturers effectively or
whether the manufacturers will be able to supply us with the quantity and
quality of products on the delivery schedule that we require. We are attempting
to identify additional potential component manufacturers, but do not have enough
qualified manufacturers to guaranty that we will consistently have sufficient
quantities of quality components. If our contract manufacturers are unable to
provide us with adequate supplies of high-quality products or if we lose any of
our contract manufacturers without qualifying others, our ability to meet orders
may be diminished. Such delays could have a material adverse effect on our
business, financial condition and results of operations.

     Sole and Limited Source Suppliers.  Several key components used in the
manufacture of our products are currently purchased from a sole-source or
limited sources, the loss of which could seriously disrupt our operations. We
purchase 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 contractors. In addition, for the Network Access
Agent, we purchase a filter, a controller board, and an interface board from a
single or limited number of contractors. We do not have long-term agreements
with any of these sole or limited sources of supply. Any interruption in the
supply of any of these components, or in our ability to procure these components
from alternate sources at acceptable prices and within a reasonable time, could
have a material adverse effect upon our business, financial condition and
results of operations. We have not yet successfully qualified additional
suppliers for certain of the sole-sourced components. Qualifying additional
suppliers is time consuming and expensive and the likelihood of errors could be
greater with new suppliers. Any delay in or cancellation of a shipment of our
components could have a material adverse effect on our business, financial
condition and results of operations.

INDUSTRY-WIDE SHORTAGES OF SEVERAL OF OUR KEY COMPONENTS COULD DISRUPT OUR
OPERATIONS AND HARM OUR BUSINESS

     We are dependent on third-party manufacturers for the components used in
our products. 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 materials on the schedule we require, if at all. These
shortages could lead to delays in shipping our products to our customers.
Delayed shipments to our customers could significantly harm our business. If
prices of these components increase significantly, our margins on our products
will decrease.

                                        14
<PAGE>   16

FAILURE TO EFFECTIVELY MANAGE OUR GROWTH MAY AFFECT OUR RESULTS

     Successful implementation of our business strategy in the rapidly evolving
fiber optic equipment market will require effective planning and management. We
are continuing to expand our product lines and introduce new products and
features and extending our operations internationally. We have expanded our
operations over the past year and our success depends upon continued expansion.
Our growth has placed, and we expect future growth to continue to place, a
significant strain on our management, operational and financial resources. To
manage our growth, we will need to continue to:

     - Improve our financial and managerial controls, reporting systems and
       procedures;

     - Attract and retain qualified management staff;

     - Increase, train and manage our work force;

     - Develop our sales and marketing network;

     - Develop our international business strategy;

     - Expand our corporate infrastructure; and

     - Expand our manufacturing, production and assembly capacity.

     Currently we are pursuing strategic relationships as part of our growth
strategy, and we cannot forecast the impact that any strategic relationships
will have upon our growth. If we experience difficulty in managing our growth,
our business, financial condition and operating results could be materially
adversely affected.

WE HAVE A LIMITED OPERATING HISTORY AND CUMULATIVE LOSSES, AND WE MAY NOT BE
ABLE TO ACHIEVE SUSTAINED OPERATING PROFITABILITY

     We have a limited operating history. 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. To date, we have
incurred substantial costs, including costs to:

     - Develop and enhance our technology and products;

     - Establish our engineering, production and quality assurance operations;

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

     - Build administrative and operational support organizations.

     As a result of these costs, we have incurred operating losses in each
fiscal year through December 31, 1998 and became profitable on an operating
basis for the first time in the three months ended June 30, 1999 and for the
years ended December 31, 1999 and December 31, 2000. As a result of our
historical operating losses, combined with $11.5 million in charges and
settlement amounts recorded in connection with the settlement of certain
lawsuits and a $1.0 million reorganization charge, as of December 31, 2000, our
accumulated net losses totaled approximately $9.3 million. We anticipate that
our costs will continue to increase for the foreseeable future as we create and
introduce new products and technologies, develop additional distribution
channels and hire additional employees. 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 working capital requirements. This would have a
material adverse effect on our business, financial condition and results of
operations.

     An investor in our common stock must consider the risks, challenges and
difficulties frequently encountered by companies in intensely competitive and
rapidly evolving markets such as the communications and fiber optic equipment
markets. To address these risks, we must, among other things:

     - Respond to competitive and technological developments;

     - Continue to attract, retain and motivate qualified personnel;
                                        15
<PAGE>   17

     - Establish, maintain and enhance the Digital Lightwave brand;

     - Maintain and increase market penetration in existing markets; and

     - Increase the scope of our product and technology offerings.

     We may be unsuccessful in addressing these risks, which could have a
material adverse affect 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, engineering, sales and marketing, finance and
product assembly personnel, some of whom would be difficult to replace. We do
not intend to maintain key man life insurance covering our key personnel. Our
success will depend on the performance of our officers, our ability to retain
and motivate our executive officers, our ability to integrate new officers into
our operations and the ability of all personnel to work together effectively as
a team.

OUR PRINCIPAL STOCKHOLDER HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY

     As of March 29, 2001, Dr. Bryan J. Zwan, together with entities affiliated
with him, beneficially owned approximately 59% of the outstanding shares of our
common stock (including approximately 6.5 million shares, or 21%, which are
subject to forward sales agreements). Accordingly, 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.
Similarly, Dr. Zwan has the voting power to 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
Digital Lightwave.

     On October 14, 1999, we entered into an agreement with Dr. Zwan which
provides that (i) the size of the Board of Directors ("Board") will be increased
from four to five members, (ii) two new outside directors will be appointed to
the Board upon the approval of Dr. Zwan and a majority of the current Board and
one current outside director will step down, (iii) the newly formed Board will
stay in place at least until our annual meeting in 2001 and (iv) we will enter
into arrangements containing certain provisions with respect to change of
control, severance and non-compete with current senior management. During 2000,
Dr. Zwan resigned as a director and William Seifer, an outside director, opted
not to stand for re-election to the Board. Two new outside directors, Robert F.
Hussey and Peter A. Guglielmi, were appointed to the Board in August 2000. They
were subsequently re-elected along with Gerald A. Fallon, a new outside
director, at the 2000 Annual Meeting held September 29, 2000. Following the 2000
Annual Meeting, the Board consisted of five members, one inside and four outside
directors. These actions satisfied (i) and (ii) above. On October 19, 2000, we
entered into arrangements containing certain provisions with respect to change
of control, severance and non-compete with current senior management pursuant to
requirement (iv) above. Any action our majority stockholder takes to influence
our board or management could disrupt our operations and affect our financial
results.

WE ARE DEPENDENT ON PROPRIETARY TECHNOLOGY AND SUBJECT TO RISKS OF INFRINGEMENT

     Our success and our ability to compete depends in part upon our proprietary
technology, which we protect through a combination of patent, copyright, trade
secret and trademark law. As of March 29, 2001, in the United States, we have
four issued patents relating to the Network Information Computer and Network
Access Agent. We have filed continuation applications for each of these issued
patents. Currently we have five 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. In
addition, we sell our products 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

                                        16
<PAGE>   18

United States. If our protective measures are not successful, our business,
financial condition and operating results could be materially and adversely
affected.

     As part of our confidentiality procedures, 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. Despite those precautions, it may be possible for a
third party to copy or otherwise obtain and use our technology without
authorization. Accordingly, there can be no assurance that we will be successful
in protecting our intellectual property or that our rights will preclude
competitors from developing products or technology equivalent or superior to
ours.

     The communications 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 which 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. If we were unable to
obtain any such licenses on terms acceptable to us, or at all, we may not be
able to continue to produce our products.

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;

     - 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;

     - Sales or issuances of common stock or other securities;

     - Changes in federal, state or foreign regulations affecting the
       communications industry; and

     - General market and economic conditions.

     In addition, the stock markets in general, and the stocks of technology
companies in particular, have experienced extreme price and volume fluctuations
recently. 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. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation often has been initiated against that company.
Litigation like this, if initiated, could result in substantial costs and divert
attention and resources of our management personnel.

A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR FUTURE SALE AND THEIR SALE COULD
DEPRESS OUR STOCK PRICE

     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 29, 2001, 30,587,076 shares of
common stock were outstanding. Of these shares, 19,124,277 were eligible for
sale in the public market without restriction (including 6,495,000 million held
by Dr. Zwan which are subject to forward
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<PAGE>   19

sales agreements). The remaining 11,462,799 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.

WE ARE DEFENDING SIGNIFICANT LITIGATION

     On November 5, 1997, Hugh Brian Haney ("Plaintiff"), an early stage
investor, commenced an action in the United States District Court for the
Southern District of Ohio against Dr. Bryan J. Zwan, our former Chairman of the
Board and Chief Executive Officer, and Digital Lightwave ("Defendants"). An
amended complaint filed December 15, 1997 alleged violations of Section 10(b) of
the Securities Exchange Act, violations of state corporation statutes, and
various common law violations by Defendants in connection with Plaintiff's sale
to our predecessor in November 1995, pursuant to a previously granted option
exercisable by Dr. Zwan and/or our predecessor, of 4,900 shares of stock in our
predecessor, an amount equivalent to 19,215,686 shares of our common stock. The
amended complaint sought, among other things, (1) rescission of the sale of the
shares transferred by Plaintiff and (2) damages of $235 million together with
interest. On October 20, 1998, Digital Lightwave and Dr. Zwan entered into an
agreement with Plaintiff to settle the action. The settlement agreement
provided, among other things, for dismissal of the action with prejudice, for a
$500,000 payment by us to Plaintiff for his attorneys' fees and granted
Plaintiff an option, for 10 years, to purchase for $1 per share 2.0 million
shares of Dr. Zwan's Digital Lightwave stock. Pursuant to that agreement, the
action was dismissed with prejudice on November 13, 1998. We recorded a $3.0
million charge to earnings consisting of the cash payment and the valuation of
the options upon settlement.

     On April 21, 1999, Plaintiff filed an action in the United States District
Court for the Southern District of Ohio against the Defendants alleging that the
terms of the settlement agreement entered into between the parties had been
breached and requesting that the settlement agreement be specifically enforced
and that damages in excess of $75,000 be awarded or, alternatively, that the
settlement agreement be set aside. In response to this action, the Company filed
a motion to dismiss for failure to state a claim against the Company. On March
30, 2000, the Court granted in part and denied in part the Company's motion to
dismiss. On May 1, 2000, Plaintiff filed an amended complaint alleging two
breach of contract claims against the Company. The Company believes it has
fulfilled its obligations under the settlement agreement and that the claims
against it are without merit. Accordingly, on June 30, 2000, the Company filed a
motion seeking summary judgment in its favor. On August 24, 2000, the Court
granted the Company's motion for summary judgment in its entirety. Subsequently,
Dr. Zwan and plaintiffs entered into a settlement agreement and have dismissed
the matter as to each other only. On March 23, 2001, the Court entered judgment
in the Company's favor. There can be no assurance that plaintiffs will not
successfully appeal the judgment or that, if successfully appealed, that the
action will not have a material adverse effect on us.

     On November 23, 1999, Seth P. Joseph, a former officer and director of
Digital Lightwave, commenced an arbitration proceeding 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 our Company bylaws. As relief, Mr. Joseph seeks $500,000, attorney
fees, interest and stock options exercisable for 656,666 shares of our Common
Stock. The Company has filed its 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. In March, 2001, Mr. Joseph voluntarily dismissed three
of his claims against the Company without prejudice. The two remaining claims
seek recovery for alleged violation of the state whistleblower statute and
breach of Mr. Joseph's stock option agreements. The arbitration hearing is
scheduled to occur in July, 2001. We intend to vigorously oppose Mr. Joseph's
claims. However, there can be no assurance that we will succeed in defending
this action. Additionally, we cannot assure you that the action will not have a
material adverse effect on the Company.

     We are from time to time involved in other lawsuits and actions by third
parties arising in the ordinary course of business. Our management believes that
we have adequate legal defenses and/or adequate reserves for related costs for
these lawsuits. As of the date of this document, we were not aware of any
additional
                                        18
<PAGE>   20

litigation, claims or assessments that were pending that could have a material
adverse effect on our business, financial condition and operating results.

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.

CERTAIN OF OUR PRODUCTS MUST MEET REGULATORY REQUIREMENTS BEFORE WE CAN SELL
THEM

     In the United States, our products must meet industry standards and comply
with various regulations promulgated by the Federal Communications Commission,
Underwriters Laboratories and Bellcore. Because we sell our products in
international markets, our products must comply with standards established by
communications authorities in various foreign countries, as well as with
recommendations of the Consultative Committee on International Telegraph and
Telephony. If we fail to meet industry standards or regulatory requirements, or
if in the future we have difficulty obtaining regulatory approvals or
certifications, our business, financial condition and results of operations
could be materially adversely affected.

ITEM 2.  PROPERTIES

     In November 1998, we relocated our operations, other than our production
operations, into our corporate headquarters facility of 92,225 square feet in
Clearwater, Florida. The production operations were relocated to this facility
in October 1999. We also lease space for our software development operations in
Wall Township, New Jersey.

     The lease for our Clearwater, Florida headquarters expires in November 2008
and the Wall Township, New Jersey lease expires in December 2002. A lease for
the space previously occupied by the production facility in St. Petersburg,
Florida expired in July 2000.

ITEM 3.  LEGAL PROCEEDINGS

     As of April 9, 1998, 23 class action complaints (which were subsequently
consolidated into a single action) alleging violations of the Federal Securities
Laws during certain periods in 1997 and 1998 had been filed in the United States
District Court for the Middle District of Florida, on behalf of purchasers of
our Common Stock. The complaints named as defendants the Company, Steven H.
Grant, the Company's Executive Vice President, Finance, Chief Financial Officer
and Secretary, and other former corporate officers and directors. The complaints
alleged that the Company and certain officers during the relevant time period
violated Sections 10(b) and 20(a) of the Securities Exchange Act by, among other
things, issuing to the investing public false and misleading financial
statements and press releases concerning the Company's revenues, income and
earnings, which artificially inflated the price of our Common Stock.

     On July 23, 1998, we entered into a memorandum of understanding for the
settlement of these class action complaints. In late October 1998, a Stipulation
of Settlement was filed with the court and on December 21, 1998, the court
preliminarily approved the settlement. On April 30, 1999, the District Court
entered a final judgement approving the settlement. The settlement consists of
$4.25 million in cash, to be paid to plaintiffs primarily by a claim on the
Company's directors and officers liability insurance policy, and the issuance of
up to 1.8 million shares of Common Stock. We recorded a charge of $8.5 million
during 1998 as a result of the settlement.

                                        19
<PAGE>   21

     On May 20, 1999, a lead plaintiff in the class action suit filed a notice
of appeal with the Eleventh Circuit Court of Appeals. On March 16, 2000, all
parts of the appeal that pertain to the Company were dismissed with prejudice.
The District Court's judgment approving settlement of the securities class
actions now is final. Following the dismissal of the appeal, Company issued
substantially all remaining shares of Common Stock in satisfaction of the total
shares required under this settlement.

     On August 5, 1999, as a complete settlement of an investigation of us being
conducted by the U.S. Securities and Exchange Commission relating to the
circumstances underlying the restatement of our financial results, we agreed
voluntarily to consent to the entry of a permanent injunction enjoining us from
violations of Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act
of 1934, and Rules 10b-5, 12b-20 and 13a-13 thereunder. The Commission's
complaint and the settlement with the Company were filed with the United States
District Court for the Middle District of Florida on March 29, 2000. In
connection with the same investigation, the Commission concurrently settled
administrative proceedings against Steven H. Grant, the Company's Executive Vice
President, Finance, Chief Financial Officer and Secretary. Mr. Grant, without
admitting or denying the Commission's findings, consented to the entry of an
order that he cease and desist from committing or causing any violation or
future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange
Act, and Rules 12b-20 and 13a-13 thereunder.

     On November 5, 1997, Hugh Brian Haney ("Plaintiff"), an early stage
investor, commenced an action in the United States District Court for the
Southern District of Ohio against Dr. Bryan J. Zwan, our former Chairman of the
Board and Chief Executive Officer, and Digital Lightwave ("Defendants"). An
amended complaint filed December 15, 1997 alleged violations of Section 10(b) of
the Securities Exchange Act, violations of state corporation statutes, and
various common law violations by Defendants in connection with Plaintiff's sale
to our predecessor in November 1995, pursuant to a previously granted option
exercisable by Dr. Zwan and/or our predecessor, of 4,900 shares of stock in our
predecessor, an amount equivalent to 19,215,686 shares of our common stock. The
amended complaint sought, among other things, (1) rescission of the sale of the
shares transferred by Plaintiff and (2) damages of $235 million together with
interest. On October 20, 1998, Digital Lightwave and Dr. Zwan entered into an
agreement with Plaintiff to settle the action. The settlement agreement
provided, among other things, for dismissal of the action with prejudice, for a
$500,000 payment by us to Plaintiff for his attorneys' fees and granted
Plaintiff an option, for 10 years, to purchase for $1 per share 2.0 million
shares of Dr. Zwan's Digital Lightwave stock. Pursuant to that agreement, the
action was dismissed with prejudice on November 13, 1998. We recorded a $3.0
million charge to earnings consisting of the cash payment and the valuation of
the options upon settlement.

     On April 21, 1999, Plaintiff filed an action in the United States District
Court for the Southern District of Ohio against the Defendants alleging that the
terms of the settlement agreement entered into between the parties had been
breached and requesting that the settlement agreement be specifically enforced
and that damages in excess of $75,000 be awarded or, alternatively, that the
settlement agreement be set aside. In response to this action, the Company filed
a motion to dismiss for failure to state a claim against the Company. On March
30, 2000, the Court granted in part and denied in part the Company's motion to
dismiss. On May 1, 2000, Plaintiff filed an amended complaint alleging two
breach of contract claims against the Company. The Company believes it has
fulfilled its obligations under the settlement agreement and that the claims
against it are without merit. Accordingly, on June 30, 2000, the Company filed a
motion seeking summary judgment in its favor. On August 24, 2000, the Court
granted the Company's motion for summary judgment in its entirety. Subsequently,
Dr. Zwan and plaintiffs entered into a settlement agreement and have dismissed
the matter as to each other only. On March 23, 2001, the Court entered judgment
in the Company's favor. There can be no assurance that plaintiffs will not
successfully appeal the judgment or that, if successfully appealed, that the
action will not have a material adverse effect on us.

     On November 23, 1999, Seth P. Joseph, a former officer and director of
Digital Lightwave, commenced an arbitration proceeding 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 our Company bylaws. As relief, Mr. Joseph seeks $500,000, attorney
fees, interest and stock options exercisable for 656,666 shares of our Common
Stock. The Company has filed its answer denying Mr. Joseph's allegations, and
alleging multiple affirmative defenses and counterclaims. The Company's
counterclaims
                                        20
<PAGE>   22

against Mr. Joseph seek repayment of loans totaling approximately $113,000, plus
interest. In March, 2001, Mr. Joseph voluntarily dismissed three of his claims
against the Company without prejudice. The two remaining claims seek recovery
for alleged violation of the state whistleblower statute and breach of Mr.
Joseph's stock option agreements. The arbitration hearing is scheduled to occur
in July, 2001. We intend to vigorously oppose Mr. Joseph's claims. However,
there can be no assurance that we will succeed in defending this action.
Additionally, we cannot assure you that the action will not have a material
adverse effect on Digital Lightwave.

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

     During the fourth quarter of 2000, no matters were submitted to a vote of
stockholders through the solicitation of proxies or otherwise.

                                        21
<PAGE>   23

                                    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
                                                              ------------------
                                                                HIGH       LOW
                                                              --------   -------
<S>                                                           <C>        <C>
1998
1st Quarter.................................................  $ 16.813   $ 2.000
2nd Quarter.................................................  $  6.469   $ 3.000
3rd Quarter.................................................  $  4.500   $ 1.281
4th Quarter.................................................  $  4.375   $ 1.156
1999
1st Quarter.................................................  $  5.000   $ 2.312
2nd Quarter.................................................  $  8.062   $ 2.500
3rd Quarter.................................................  $  9.937   $ 5.562
4th Quarter.................................................  $ 69.250   $ 6.000
2000
1st Quarter.................................................  $150.000   $44.500
2nd Quarter.................................................  $104.875   $26.187
3rd Quarter.................................................  $125.000   $63.000
4th Quarter.................................................  $ 76.375   $25.437
</TABLE>

     On March 29, 2001, the closing bid and ask prices of the Company's Common
Stock were $18.125 and $18.1875, respectively. As of March 29, 2000, there were
approximately 617 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

     On March 31, 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,
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.

     During the fiscal year ended December 31, 2000, there were no other sales
of unregistered securities.

                                        22
<PAGE>   24

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>
                                                         YEARS ENDED DECEMBER 31,
                                   ---------------------------------------------------------------------
                                      2000          1999          1998           1997           1996
                                   -----------   -----------   -----------    -----------    -----------
<S>                                <C>           <C>           <C>            <C>            <C>
Consolidated Statement of
  Operations:
  Sales..........................  $   100,675   $    50,474   $    24,191    $     9,081    $     6,044
  Cost of goods sold.............       33,237        17,431         9,219          3,124          2,079
                                   -----------   -----------   -----------    -----------    -----------
         Gross profit............       67,438        33,043        14,972          5,957          3,965
Operating expenses:
  Engineering and development....       14,092        10,204        14,335          5,342          2,403
  Selling and marketing..........       15,628        12,724        11,363          5,260          1,706
  General and administrative.....        7,085         5,240         7,223          3,812          1,380
  Reorganization charges(1)......           --            --         1,018             --             --
  Litigation settlements(2)......           --            --        11,500             --             --
                                   -----------   -----------   -----------    -----------    -----------
         Total operating
           expenses..............       36,805        28,168        45,439         14,414          5,489
                                   -----------   -----------   -----------    -----------    -----------
Income (loss) from operations....       30,633         4,875       (30,467)        (8,457)        (1,524)
Other income (expense)...........          770            78           642          1,767           (584)
                                   -----------   -----------   -----------    -----------    -----------
         Net income (loss).......  $    31,403   $     4,953   $   (29,825)   $    (6,690)   $    (2,108)
                                   ===========   ===========   ===========    ===========    ===========
Income (loss) per share..........  $      1.06   $       .18   $     (1.13)   $      (.25)   $      (.10)
                                   ===========   ===========   ===========    ===========    ===========
Diluted income (loss) per
  share..........................  $       .98   $       .17   $       n/a(3) $       n/a(3) $       n/a(3)
                                   ===========   ===========   ===========    ===========    ===========
Weighted average shares..........   29,548,905    26,808,158    26,475,749     26,084,208     21,375,584
Weighted average shares and
  common equivalent shares.......   31,946,416    29,151,628    26,494,439     27,060,221     21,829,235
Consolidated Balance Sheet Data:
  Working capital................  $    58,977   $    12,913   $     2,267    $    32,495    $     2,349
  Total assets...................       78,833        39,998        27,558         44,361          6,374
  Total long-term debt...........          854           498           281             25            983
  Stockholders' equity...........       67,369        22,153        12,320         39,419          3,449
</TABLE>

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

(1) Includes a one-time expense of $1.0 million for reorganization charges as
    described under "Management's Discussion and Analysis of Financial Condition
    and Results of Operations -- Overview" and Note 13 of the Consolidated
    Financial Statements -- Reorganization Charges.
(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 the Haney litigation as described under
    Note 14 of the Consolidated Financial Statements -- Legal Proceedings.
(3) Incremental shares for common stock equivalents are not included in the loss
    per share calculations due to the anti-dilutive effect.

                                        23
<PAGE>   25

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

     This report contains certain statements of a forward-looking nature
relating to future events or the future performance of the Company. Prospective
and current investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements as well as the future prospects of the Company generally, such
investors should specifically consider various factors identified in this Report
on Form 10-K, including the matters set forth therein under the caption "Factors
That May Affect Operating Results," which could cause actual results to differ
materially from those indicated by such forward-looking statements. Factors that
may affect the Company's results of operations include but are not limited to
the Company's anticipated fluctuations in operating results and seasonal sales,
dependence on limited products, uncertain market acceptance of planned products,
rapid technological change, dependence on new product introductions, dependence
on the continued growth of the Internet, competition, dependence on a limited
number of customers, expansion into additional original equipment manufacturer
relationships, dependence on contract manufacturing and sole or limited source
suppliers, industry-wide shortages of key components, management of growth,
limited operating history and cumulative losses, dependence on key personnel,
substantial influence of principal stockholder, dependence on proprietary
technology, possible volatility of stock price, shares eligible for future sale,
success in defending significant litigation, factors inhibiting takeover, and
government regulations. The Company participates in a highly concentrated
industry, and has limited visibility with regard to customer orders and the
timing of such orders. The Company may also encounter difficulty obtaining
sufficient supplies to staff and meet production schedules. As a result,
quarter-to-quarter and year-to-year financial performance is highly dependent
upon the timely receipt of orders from its customers during fiscal periods.

OVERVIEW

     Digital Lightwave designs, develops and markets a portfolio of portable and
embedded products and technologies for monitoring, maintaining and installing
fiber optic circuits and managing fiber optic networks. Network operators and
other communications 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's products
provide communications service providers and equipment manufacturers with
capabilities to cost-effectively deploy and manage fiber optic networks to
address the rapidly increasing demand for bandwidth.

     From inception in 1990 through 1996, the Company focused its primary
activities on developing the necessary technology and infrastructure required to
launch its first product, the Network Information Computer. The Company had no
sales until February 1996, when it began shipping the Network Information
Computer. As of December 31, 2000, the Company had sold approximately 3,700
Network Information Computers to approximately 220 customers such as 360
Networks, Ameritech Corporation, Cisco, Level 3 Communications, Lucent, MCI
WorldCom, Nortel Networks, Qwest Communications, Tellabs and Verizon. In 1998,
the Company commenced limited sales of the Network Access Agent. Net sales for
the Company were approximately $100,675,000, $50,474,000 and $24,191,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.

     The Company's net sales are generated from sales of its products, less an
estimate for customer returns. Net sales are recognized when products are
shipped to a customer. The average sales price ("ASP") of the Network
Information Computer was approximately $65,700, $41,500 and $31,200 for the
years ended December 31, 2000, 1999, and 1998, respectively. The average sales
price ("ASP") of the Network Access Agent was approximately $69,700 and $29,600
for the years ended December 31, 2000 and 1999, respectively. The Company
expects that the ASP of its Network Information Computers and Network Access
Agents 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
the Company's results of operations.

                                        24
<PAGE>   26

     The Company primarily sells its products through a direct sales force to
communications service providers and equipment manufacturers. Distributors are
used for international sales. The sales cycle for new customers tends to be
long. In addition, the communications industry historically has had a limited
number of competitors. Given long sales cycles and few industry participants,
sales of the Company's products have tended to be concentrated, and the Company
expects that sales will continue to be concentrated in the future. For the year
ended December 31, 2000, the Company's largest customer, Telogy, accounted for
approximately 15% of total revenues. For the year ended December 31, 1999, the
Company's two largest customers accounted for approximately 39% of total
revenues, with Telogy and Technology Rental Services ("TRS") accounting for
approximately 21% and 18% of total sales, respectively. The Company believes
that a significant portion of the equipment purchased by Telogy and TRS is
deployed at Nortel Networks. For the year ended December 31, 1998, sales to the
Company's four largest customers comprised 57% of its total revenues, with
Qwest, MCI WorldCom, Tellabs, and GTE accounting for approximately 17%, 16%, 13%
and 11% of total sales, respectively. No other customers accounted for sales of
10% or more during such periods. Many of the customers highlighted in years
prior to 2000 as accounting for more than 10% continued to purchase at similar
dollar levels in 2000 although they did not surpass the 10% threshold for this
year. There can be no assurance regarding the amount or timing of purchases by
any customer in any future period. See "Factors That May Affect Operating
Results -- We are dependent on a limited number of major customers."

     In May 1999, the Company signed an original equipment manufacturer contract
to provide integrated performance monitoring and diagnostic capabilities for a
product marketed by Lucent Technologies, Inc. Lucent's placement of orders for
this product (the "Wave Agent") is conditional upon the Company achieving
certain milestone events defined in the contract. In January 2000, the Company
announced that it had received an order for four WaveAgents from Lucent for the
initiation of customer lab trials. These units were shipped in the first quarter
of 2000.

     To date, the Company has not entered into long-term agreements or blanket
purchase orders for the sale of its products, but generally obtains purchase
orders for immediate shipment and other cancelable purchase commitments. As a
result, the Company does not expect to carry substantial quarterly backlog from
quarter to quarter in the future. The Company's sales during a particular
quarter are, therefore, highly dependent upon orders placed by customers during
the quarter. Consequently, sales may fluctuate significantly from quarter-
to-quarter and year-to-year due to the timing and amount of orders from
customers, among other factors. Because most of our expenses, particularly
employee compensation and rent, are relatively fixed and cannot be easily
reduced in response to decreased revenues, quarterly fluctuations in sales may
have a significant effect on net income.

     During fiscal year 1998, the Company incurred charges of $8.5 million
related primarily to the issuance of 1.8 million shares of common stock as part
of a legal settlement, $3.0 million (of which $2.5 million is non-cash) as part
of a legal settlement with a former stockholder, $1.4 million in related legal
expenses, and $0.3 million in other special charges. See "Factors That May
Affect Operating Results -- We are defending significant litigation", "Item
3 -- Legal Proceedings" and Notes 13 and 14 of the Consolidated Financial
Statements.

     Until fiscal year 1999, the Company incurred substantial net operating
losses as a result of significant investment in research and development, sales
and marketing and administrative expenses. In the quarter ended June 30, 1999,
the Company showed its first profitable quarter. Profitability has been
sustained through the end of 2000. As of December 31, 2000, the Company had an
accumulated deficit of approximately $9 million and net operating loss
carryforwards of approximately $116.3 million for tax purposes. The Company
intends to continue to build its organization in anticipation of growth and
believes that its operating expenses will continue to increase accordingly due
to a variety of factors including: (1) increased research and development
expenses associated with the completion of the products in development and the
continued enhancement of existing products; and (2) increased selling, general
and administrative expenses associated with continued expansion of sales and
marketing capabilities, product advertising and promotion. There can be no
assurance that the Company will sustain profitability.

                                        25
<PAGE>   27

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain
financial data expressed as a percentage of net sales.

<TABLE>
<CAPTION>
                                                                  FISCAL YEAR
                                                               ENDED DECEMBER 31,
                                                              --------------------
                                                              2000    1999    1998
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Net sales...................................................  100%    100%     100%
Cost of goods sold..........................................   33      34       38
                                                              ---     ---     ----
Gross profit................................................   67      66       62
Operating expenses:
  Engineering and development expenses......................   14      20       59
  Sales and marketing expenses..............................   16      25       47
  General and administrative expenses.......................    7      11       30
  Reorganization and litigation charges.....................   --      --       52
                                                              ---     ---     ----
          Total operating expenses..........................   37      56      188
                                                              ---     ---     ----
Operating income (loss).....................................   30      10     (126)
Other income (expense), net.................................    1      --        3
                                                              ---     ---     ----
Net income (loss)...........................................   31%     10%    (123)%
                                                              ===     ===     ====
</TABLE>

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

  Net Sales

     Net sales include total revenues from customer purchases of Network
Information Computers and, to a limited extent, Network Access Agents, net of
accrual for product returns. Net sales for the year ended December 31, 2000
increased by $50.2 million, or 99%, to $100.7 million from $50.5 million in
fiscal 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 fiscal 1999.
During fiscal 2000, the Company shipped 1,463 total units (including 70
NAA(TM)'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 fiscal 1999.

     The primary increase in ASP (which is shown gross of the estimate for
product returns) is related to a shift in customer demand to higher speed
configurations, particularly the new OC-192 product which began shipment in the
second quarter of 2000. Additionally, during 2000, the Company recognized $5.1
million of revenue from upgrades compared to $3.0 million in 1999. In each of
the years, the majority of the upgrades were related to the conversion of
NIC(TM)'s to OC-48 speeds.

     Sales to existing customers continue to represent a large portion of the
Company's net sales. The Company believes repeat sales to an existing customer
are an important measure of growing product acceptance in the highly
concentrated telecommunications industry. While this longer-term trend may not
continue, management believes that new product offerings including upgrades of
existing products offer the Company's existing customers an opportunity to
continue to extend the life of their initial investment in the Company's
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. Growth in cost of
goods sold was directly related to the increase in the volume of units sold.

                                        26
<PAGE>   28

  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. As a percentage
of sales, gross margin for year increased to 67.0% from 65.5% in 1999.

     The increase in gross profit between 2000 and 1999 was related to increases
in ASPs, more efficient production methods, and the addition of the new OC-192
product, shipments of which began in the second quarter of 2000.

  Engineering and Development

     Engineering and development expenses principally include compensation
attributable to 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 primarily due to development efforts centered around
the Company's new products within the NIC and NAA product lines. In addition,
the Company incurred certain other employee benefits expenses during 2000. These
increases were partially offset as increased production levels in 2000 allowed
for a more proportionate share of overhead expenses to be capitalized as a part
of inventory costs.

  Sales and Marketing

     Sales and marketing expenses principally include salaries and commissions
paid on sales of products, travel expenses, tradeshow costs, and costs of
promotional materials and customer incentives. 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 directly related to higher commissions resulting
from the increased sales activity, increased costs associated with international
travel, an increase in marketing and investor relations expenses and other
employee benefit expenses.

  General and Administrative

     General and administrative expenses principally include 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 primarily reflects increased professional fees relating to the
Company's various legal matters including the final dismissal of the Company
from the class action settlement in March 2000, increased rental expense, and
other employee benefit expenses. These items were partially offset by certain
salary and related savings accompanied by a reduction in the use of certain
consulting services.

  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 partially offset by interest expense
related to borrowings.

  Net Income

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

                                        27
<PAGE>   29

YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998

  Net Sales

     Net sales include total revenues from customer purchases of Network
Information Computers and, to a limited extent, Network Access Agents, net of
accrual for product returns. Net sales for the year ended December 31, 1999
increased by $26.3 million, or 109%, to $50.5 million from $24.2 million in
fiscal 1998. Sales to existing customers for the year represented 85% of sales,
or $43.0 million as compared to 77% of sales, or $18.6 million for fiscal 1998.
During fiscal 1999, the Company shipped 1158 total units (including 14 NAA's) at
an ASP of approximately $41,400 compared with 723 units (including 6 NAA's) at
an ASP of approximately $31,300 for fiscal 1998. The primary increase in ASP is
related to a shift in demand to higher speed configurations. Additionally,
during 1999, the Company recognized $3.0 million of revenue from upgrades
compared to $1.8 million in 1998. In each of the years, the majority of the
upgrades were related to the conversion of NIC's to OC-48 speeds.

     Sales to existing customers continue to represent a large portion of the
Company's net sales. The Company believes repeat sales to an existing customer
are an important measure of growing product acceptance in the highly
concentrated communications industry. While this longer-term trend may not
continue, management believes that new product offerings including upgrades of
existing products offer the Company's existing customers an opportunity to
continue to extend the life of their initial investment in the Company's
products.

  Cost of Goods Sold

     Cost of goods sold for the year ended December 31, 1999 increased by $8.2
million to $17.4 million as compared to $9.2 million in 1998. Growth in cost of
goods sold was directly related to the increase in the volume of units sold.

  Gross Profit

     Gross profit for the year ended December 31, 1999 increased by $18.0
million to $33.0 million as compared to $15.0 million in 1998. The increase in
gross profit was directly related to the increase in net sales. Along with the
increase in net sales, gross profit margins increased 3.6% to 65.5 percent in
1999 from 61.9 percent in 1998.

     The increase in gross margin between 1999 and 1998 was related to increases
in ASPs, more efficient production methods and better inventory management.

  Engineering and Development

     Engineering and development expenses principally include compensation
attributable to engineering and development personnel, depreciation of
production assets, outside consulting fees and other development expenses.
Engineering and development expenses for the year ended December 31, 1999
decreased by $4.1 million to $10.2 million, or 20% of net sales, from $14.3
million, or 59% of net sales, last year.

     The decrease is primarily due to the Company's efforts to lower overhead
costs and streamline its operating structure by eliminating certain full time
and consultant positions resulting in a savings of approximately $3.0 million.
In addition, engineering and development expenses were lower in 1999 as a
greater portion of production overhead expenses were capitalized as part of
inventory costs due to the higher production activity.

  Sales and Marketing

     Sales and marketing expenses principally include salaries and commissions
paid on sales of products, travel expenses, tradeshow costs, and costs of
promotional materials and customer incentives. Sales and marketing expenses for
the year ended December 31, 1999 increased by $1.3 million to $12.7 million from
$11.4 million last year. As a percentage of net sales, sales and marketing
expenses in the year ended

                                        28
<PAGE>   30

December 31, 1999 declined to 25%, from 47% in 1998. The dollar increase is
directly related to higher commissions resulting from the increased sales
activity partially offset by salary and benefits savings from certain
eliminations in full-time positions previously discussed.

  General and Administrative

     General and administrative expenses principally include professional fees,
facility rentals, compensation, and information systems related to general
management functions. General and administrative expenses for the year ended
December 31, 1999 decreased by $2.0 million to $5.2 million from $7.2 million
last year. As a percentage of net sales, general and administrative expenses
declined to 11% from 30% in 1998. The decrease primarily reflects higher
professional fees related to legal costs in 1998.

  Reorganization Charges

     During the year ended December 31, 1998, the Company streamlined its
management structure and eliminated 20 positions which resulted in a one-time
charge of $1.0 million.

  Litigation Settlement

     During the year ended December 31, 1998, the Company signed a memorandum of
understanding and a Stipulation of Settlement for the settlement of class action
complaints filed against it in U.S. District Court for alleged violations of
federal securities laws. The settlement resulted in a charge of approximately
$8.5 million which was recorded in the second quarter of 1998. In addition, Dr.
Bryan Zwan and the Company entered into an agreement to settle an action
commenced by Hugh Brian Haney. Pursuant to that agreement, the action was
dismissed with prejudice on November 13, 1998. The Company recorded a non-cash
charge to earnings of approximately $2.5 million and a $0.5 million accrual of
related legal expenses during the fourth quarter of 1998.

  Other Income (Expense)

     Other income for the year ended December 31, 1999 decreased by $0.5 million
to $0.1 million from $0.6 million last year. The decrease is the result of the
utilization of cash reserves to fund the Company's operations which caused a
decrease in interest earned on invested cash balances. This change is also a
result of increased interest expense related to the Company's debt issued in the
second quarter of 1999.

  Net Income

     Net income for the year ended December 31, 1999 increased by $34.8 million
to $5.0 million or $0.17 per share (diluted), from a net loss of $29.8 million
or $1.13 per share in 1998. The net loss for the year ended December 31, 1998
was adversely impacted by the charges of approximately $12.8 million in charges
related to various legal matters, $1.0 million to record the reorganization, and
$0.3 million of other special charges. Without these charges, the pro-forma net
loss would have been $15.7 million or a loss of $.59 per share.

  Liquidity and Capital Resources

     From its inception through December 31, 2000, the Company has financed its
operations primarily through private sales of its Common Stock, cash from
operations and the initial public offering of 4,600,000 shares of its Common
Stock. The Company completed its IPO in February 1997, resulting in net proceeds
to the Company of $39.6 million. During 1997, the Company used the net proceeds
to fund the repayment of notes payable for approximately $0.8 million, to
purchase computer equipment, software, test equipment and other assets for
approximately $6.0 million and to fund product research and development for
approximately $5.3 million. In addition, approximately $3.5 million was used to
fund the Company's expansion in the form of additional manufacturing and
administrative space and a significant increase in engineering, production and
financial management personnel to support the Company's growth.

                                        29
<PAGE>   31

     Cash and cash equivalents at December 31, 2000 were approximately $30.5
million, an increase of $23.0 million from December 31, 1999. As of December 31,
2000, the Company's working capital was approximately $59.0 million as compared
to $12.9 million at December 31, 1999. The increase was primarily associated
with the increase in cash reserves due to record sales levels, profitability,
and proceeds from stock option and warrant exercises, which were partially
offset by the repayment of the Secured Bridge Notes. The sales levels also
resulted in a record level of trade receivables. In addition, the shares have
been issued in settlement of the shareholder class action litigation eliminating
that liability. See the Company's Consolidated Condensed Statements of Cash
Flows for additional detail. For the year ended December 31, 2000, capital
expenditures were approximately $1.3 million. Future capital expenditures will
depend on several factors including timing of introductions of new products and
enhancements to existing products, continued product development efforts, and
facilities expansion to support growth.

     The Company entered into an accounts receivable agreement dated December
28, 1998 with EAB Leasing Corp. ("EAB") providing for the sale of the Company's
accounts receivable to EAB. The aggregate maximum amount the Company could
borrow at one time under this agreement was $2.9 million through June 28, 1999,
with a maximum of $2.0 million available on a monthly basis. In connection with
this agreement, the Company granted EAB a security interest in its accounts,
accounts receivable, contract rights, equipment, chattel paper, general
intangibles, instruments, inventory and all proceeds of the foregoing. The
annual interest rate equivalent charged to the Company under this agreement was
the prime rate plus 1.5%. The agreement also provided that the Company pay a
minimum monthly service fee in the amount of $10,000.

     On June 28, 1999 and December 28, 1999, the accounts receivable agreement
with EAB automatically renewed for six month periods, the latter ending June 28,
2000 under the same terms and conditions as the previous agreement except the
$2.0 million maximum available on a monthly basis was waived. The agreement was
still subject to the aggregate maximum amount the Company could borrow at one
time of $2.9 million. On May 1, 2000, the Company notified EAB of its intent not
to renew the accounts receivable agreement and the agreement terminated
accordingly.

     On March 31, 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. These notes were issued on April
6, 1999. They were collateralized by all of the Company's assets and were
subordinated to the accounts receivable agreement with EAB. 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.

     On October 10, 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 three-quarters of one percent (.75%), subject to
certain borrowing limitations based on amounts of the Company's accounts
receivable and inventories. The interest rate will decrease to prime plus
one-half of one percent (.5%) if the Company's net income for the year ended
December 31, 2000 meets or exceeds $15,000,000 as evidenced by audited financial
statements. The Loan Agreement has an initial term of two years. 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. At December
31, 2000, the Loan Agreement was still subject to certain customary post-closing
items, there were no borrowings outstanding, and the Company was in compliance
with all loan covenants. In January 2001, the Company and Congress Financial
Corporation completed the post-closing items associated with the Loan Agreement.
As of January 25, 2001, $2.25 million of the $10.0
                                        30
<PAGE>   32

million available under the credit facility secures 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.

     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 12 months. The anticipated cash flow from
operations assumes the Company achieves a level of sales that is higher than
those of earlier quarters. In the event that these sales levels are not
attained, the Company may be required to supplement its working capital with
additional funding in order to meet shorter or longer term liquidity needs.
There can be no assurance, however, that the Company will achieve the assumed or
increased 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 June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
subsequently amended by SFAS 137 and SFAS 138. These statements require
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. These statements are effective
for quarters beginning after December 31, 2000. The Company does not currently
maintain any derivative instruments nor does it conduct any hedging activities,
therefore, the adoption of these statements is not expected to impact the
Company.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", as subsequently amended by SAB No. 101A. This statement summarizes
certain staff views in applying generally accepted accounting principles to
revenue recognition in financial statements. The SAB provides additional
guidance regarding when revenue is realized, earned and properly recognized.
During the fourth quarter of 2000, the Company performed a review of its revenue
recognition policies and determined that they are in compliance with SAB 101.

     In September 2000, the FASB issued SFAS No. 140, "Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to the securitization transactions and collateral for
fiscal years ending after December 15, 2000. SFAS No. 140 is not expected to
impact the Company.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.

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..........   32
Consolidated Balance Sheets.................................   33
Consolidated Statements of Operations.......................   34
Consolidated Statements of Stockholders' Equity.............   35
Consolidated Statements of Cash Flows.......................   36
Notes to Consolidated Financial Statements..................   37
FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and qualifying accounts............   61
</TABLE>

                                        31
<PAGE>   33

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

     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 subsidiary (the "Company") at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 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.

                                          PricewaterhouseCoopers LLP

Tampa, Florida
January 29, 2001

                                        32
<PAGE>   34

                            DIGITAL LIGHTWAVE, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  2000           1999
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents, including restricted cash of $0
     and $2,341 in 2000 and 1999, respectively..............    $30,481        $  7,466
  Accounts receivable, less allowance of $250 and $215 in
     2000 and 1999, respectively............................     25,301          15,397
  Inventories...............................................     13,048           6,407
  Prepaid expenses and other current assets.................        757             990
                                                                -------        --------
          Total current assets..............................     69,587          30,260
Property and equipment, net.................................      8,910           9,424
Other assets................................................        336             314
                                                                -------        --------
          Total assets......................................    $78,833        $ 39,998
                                                                =======        ========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................    $10,610        $  8,048
  Accrued settlement charges................................         --           6,231
  Notes payable.............................................         --           3,000
  Interest payable..........................................         --              68
                                                                -------        --------
          Total current liabilities.........................     10,610          17,347
Long-term liabilities.......................................        854             498
                                                                -------        --------
          Total liabilities.................................     11,464          17,845
                                                                -------        --------
Commitments and contingencies (Notes 7, 8, 10 and 14)
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 30,476,211 and
     27,656,103 shares in 2000 and 1999, respectively.......          3               3
  Additional paid-in capital................................     76,620          62,807
  Accumulated deficit.......................................     (9,254)        (40,657)
                                                                -------        --------
          Total stockholders' equity........................     67,369          22,153
                                                                -------        --------
          Total liabilities and stockholders' equity........    $78,833        $ 39,998
                                                                =======        ========
</TABLE>

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

                                        33
<PAGE>   35

                            DIGITAL LIGHTWAVE, INC.

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

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------------
                                                             2000          1999          1998
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
Sales...................................................  $   100,675   $    50,474   $    24,191
Cost of goods sold......................................       33,237        17,431         9,219
                                                          -----------   -----------   -----------
Gross profit............................................       67,438        33,043        14,972
                                                          -----------   -----------   -----------
Operating expenses:
  Engineering and development...........................       14,092        10,204        14,335
  Sales and marketing...................................       15,628        12,724        11,363
  General and administrative............................        7,085         5,240         7,223
  Reorganization charges................................           --            --         1,018
  Litigation settlement.................................           --            --        11,500
                                                          -----------   -----------   -----------
          Total operating expenses......................       36,805        28,168        45,439
                                                          -----------   -----------   -----------
Operating income (loss).................................       30,633         4,875       (30,467)
                                                          -----------   -----------   -----------
Other income (expense):
  Interest income.......................................        1,093           341           649
  Interest expense......................................         (112)         (252)          (37)
  Other income (expense), net...........................         (211)          (11)           30
                                                          -----------   -----------   -----------
          Total other income............................          770            78           642
                                                          -----------   -----------   -----------
Income (loss) before income taxes.......................       31,403         4,953       (29,825)
Provision for income taxes..............................           --            --            --
                                                          -----------   -----------   -----------
          Net income (loss).............................  $    31,403   $     4,953   $   (29,825)
                                                          ===========   ===========   ===========
Per share of common stock:
  Net income (loss) per share...........................  $      1.06   $      0.18   $     (1.13)
                                                          ===========   ===========   ===========
  Diluted income (loss) per share.......................  $      0.98   $      0.17           n/a
                                                          ===========   ===========   ===========
  Weighted average common shares outstanding............   29,548,905    26,808,158    26,475,749
                                                          ===========   ===========   ===========
  Weighted average common and common equivalent shares
     outstanding........................................   31,946,416    29,151,628    26,494,439
                                                          ===========   ===========   ===========
</TABLE>

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

                                        34
<PAGE>   36

                            DIGITAL LIGHTWAVE, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                 COMMON STOCK       ADDITIONAL
                                              -------------------    PAID-IN     ACCUMULATED
                                                SHARES     AMOUNT    CAPITAL       DEFICIT      TOTAL
                                              ----------   ------   ----------   -----------   --------
<S>                                           <C>          <C>      <C>          <C>           <C>
Balance, January 1, 1998....................  26,440,878     $3      $55,201      $(15,785)    $ 39,419
  Issuance of common stock..................      94,454     --          226            --          226
  Settlement of Haney litigation............          --     --        2,500            --        2,500
       Net loss.............................          --     --           --       (29,825)     (29,825)
                                              ----------     --      -------      --------     --------
Balance, December 31, 1998..................  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
                                              ==========     ==      =======      ========     ========
</TABLE>

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

                                        35
<PAGE>   37

                            DIGITAL LIGHTWAVE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                2000        1999       1998
                                                              ---------   --------   ---------
<S>                                                           <C>         <C>        <C>
Cash flows from operating activities:
  Net income (loss).........................................  $ 31,403    $ 4,953    $(29,825)
  Adjustments to reconcile net income (loss) to cash
     provided (used) by operating activities:
     Depreciation and amortization..........................     2,877      2,524       2,254
     Loss on disposal of property...........................       168         19          33
     Provision for uncollectible accounts...................       161        215          --
     Litigation settlement..................................        --         --       9,925
  Changes in operating assets and liabilities:
     Increase in accounts receivable........................   (10,315)    (9,168)     (2,452)
     (Increase) decrease in inventories.....................    (7,261)      (849)      1,832
     (Increase) decrease in prepaid expenses and other
       assets...............................................      (100)       424      (1,163)
     Increase in accounts payable and accrued liabilities...     2,860      1,364       1,386
     (Decrease) increase in accrued settlement charges......        --     (1,064)      1,064
                                                              --------    -------    --------
          Net cash provided (used) by operating
            activities......................................    19,793     (1,582)    (16,946)
                                                              --------    -------    --------
Cash flows from investing activities:
  Purchases of property and equipment.......................    (1,326)    (1,888)     (3,500)
                                                              --------    -------    --------
          Net cash used by investing activities.............    (1,326)    (1,888)     (3,500)
                                                              --------    -------    --------
Cash flows from financing activities:
  Proceeds from notes payable...............................        --      3,000          --
  Principal payments on notes payable.......................    (3,000)        --          --
  Principal payments on capital lease obligations...........      (547)      (307)        (43)
  Payments received from lease receivables..................       249        708          80
  Proceeds from sale of common stock, net of expense........     7,846      3,687         226
                                                              --------    -------    --------
          Net cash provided by financing activities.........     4,548      7,088         263
                                                              --------    -------    --------
Net increase (decrease) in cash and cash equivalents........    23,015      3,618     (20,183)
Cash and cash equivalents at beginning of period............     7,466      3,848      24,031
                                                              --------    -------    --------
Cash and cash equivalents at end of period..................  $ 30,481    $ 7,466    $  3,848
                                                              ========    =======    ========
Other supplemental disclosures:
  Cash paid for interest....................................  $    181    $   183    $     37
Non-cash investing and financing activities:
  Capital lease obligations incurred........................       461        722         382
  Fixed asset additions included in accounts payable at year
     end....................................................        75         87          82
  Accounts receivable related to capital leases.............        --        270         847
  Issuance of common stock pursuant to litigation
     settlement.............................................     6,231      1,194          --
</TABLE>

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

                                        36
<PAGE>   38

                            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 embedded products and technologies for monitoring,
maintaining and installing fiber optic circuits and managing fiber optic
networks. Network operators and other communications 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's products provide communications service providers and equipment
manufacturers with capabilities to cost-effectively deploy and manage fiber
optic networks to address the rapidly increasing demand for bandwidth. The
Company's wholly-owned subsidiary, Digital Lightwave Leasing Corporation
("DLLC"), provides 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.
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.

RESTRICTED CASH

     In February 1998, $2,300,000 of cash in the form of a certificate of
deposit was pledged as collateral on an outstanding letter of credit related to
the lease on the Company's office building in Clearwater, Florida. In December
1997, $122,000 was similarly pledged related to the lease on the Company's New
Jersey facility. The remaining balance of the New Jersey letter of credit and
related certificate of deposit had been reduced to $0 and $41,025 at December
31, 2000 and 1999, respectively. In November 2000, the $2,300,000 certificate of
deposit related to the Clearwater facility matured and was not renewed. This
letter of credit is now secured by borrowing availability under the Company's
$10.0 million credit facility with Congress Financial Corporation described at
Note 8 -- Commitments. At December 31, 1999, the pledged certificates of deposit
are classified as restricted cash on the balance sheet.

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 betterments are capitalized. Upon the sale or
retirement of property and equipment, the accounts are relieved of the cost and
the related accumulated depreciation and amortization, and any resulting gain or
loss is included in the results of operations.

ACCRUED WARRANTY

     The Company provides the customer a warranty with each product sold and
accrues warranty expense based upon historical data. Actual warranty costs
incurred are charged against the accrual when paid. In 2000, the Company began
selling extended warranty plans for which no revenue is recognized until the
original warranty period has ended at which point the revenue is recognized
proportionately over the life of the extension.

                                        37
<PAGE>   39

REVENUE RECOGNITION

     Revenue is recognized when a purchase order or contract has been received
from the customer, and the product has been shipped to the Company's customer
or, in the case of sales to a distributor, when the product is shipped to the
distributor's end user because distributors generally have a right of return on
any product that does not sell within time periods specified in the agreement
with the distributor. The Company provides an allowance for sales returns based
on historical experience.

     Revenue representing interest income on leasing transactions is recognized
over the life of the lease as the payments become due.

DEFERRED REVENUE

     Deferred revenue, which represents amounts billed and collected from
customers in advance of shipment or amounts billed and collected from
distributors prior to the distributors sale of the goods, is recorded at the
date of billing. 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, therefore, 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 bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.

COMPUTATION OF NET INCOME (LOSS) PER SHARE

     Basic income (loss) per share is based on the weighted average number of
common shares outstanding during the periods presented. For the year ended
December 31, 1998, diluted loss per share, which includes the effect of
incremental shares from common stock equivalents using the treasury stock
method, is not included in the calculation of net loss per share as the
inclusion of such equivalents would be anti-dilutive. 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,
                                                     ------------------------------------
                                                        2000         1999         1998
                                                     ----------   ----------   ----------
<S>                                                  <C>          <C>          <C>
Basic:
  Weighted average common shares outstanding.......  29,548,905   26,808,158   26,475,749
                                                     ----------   ----------   ----------
          Total basic..............................  29,548,905   26,808,158   26,475,749
Diluted:
  Incremental shares for common stock
     equivalents...................................   2,397,511    2,343,470       18,690*
                                                     ----------   ----------   ----------
          Total dilutive...........................  31,946,416   29,151,628   26,494,439
                                                     ==========   ==========   ==========
</TABLE>

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

* not included in loss per share calculations due to anti-dilutive effect

                                        38
<PAGE>   40

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, 2000, 1999 and 1998, substantially
all of the Company's cash balances, including amounts representing outstanding
checks, were deposited with what management believes to be 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.

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 those estimates.

SEGMENT REPORTING

     As of December 31, 2000, 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 June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
subsequently amended by SFAS 137 and SFAS 138. These statements require
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. These statements are effective
for quarters beginning after December 31, 2000. The Company does not currently
maintain any derivative instruments nor does it conduct any hedging activities,
therefore, the adoption of these statements is not expected to impact the
Company.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", as subsequently amended by SAB No. 101A. This statement summarizes
certain staff views in applying generally accepted accounting principles to
revenue recognition in financial statements. The SAB provides additional
guidance regarding when revenue is realized, earned and properly recognized.
During 2000, the Company performed a review of its revenue recognition policies
and determined that they are in compliance with SAB 101.

     In September 2000, the FASB issued SFAS No. 140, "Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to the securitization transactions and collateral for
fiscal years ending after December 15, 2000. SFAS No. 140 is not expected to
impact the Company.

RECLASSIFICATIONS

     Certain prior year amounts have been reclassified to conform with the 2000
presentation.

                                        39
<PAGE>   41

2. INVENTORIES

     Inventories at December 31, 2000 and 1999 are summarized as follows:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   ------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Raw materials...............................................  $ 8,598   $3,404
Work-in progress............................................    4,229    2,454
Finished goods..............................................      221      549
                                                              -------   ------
                                                              $13,048   $6,407
                                                              =======   ======
</TABLE>

3. PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 2000 and 1999 are summarized as
follows:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Test equipment..............................................  $ 6,666   $ 5,116
Computer equipment and software.............................    4,586     4,179
Tooling.....................................................      553       529
Tradeshow fixtures and equipment............................      289       266
Office furniture, fixtures and equipment....................    2,730     2,683
Leasehold improvements......................................    1,893     1,878
                                                              -------   -------
                                                               16,717    14,651
Less accumulated depreciation...............................   (7,807)   (5,227)
                                                              -------   -------
                                                              $ 8,910   $ 9,424
                                                              =======   =======
</TABLE>

     Depreciation expense was approximately $2,829,000, $2,463,000 and
$2,254,000 for the years ended December 31, 2000, 1999 and 1998, respectively.

     Equipment under capital lease and related accumulated amortization,
included above at December 31, 2000 and 1999 are summarized as follows:

<TABLE>
<CAPTION>
                                                               2000     1999
                                                              ------   ------
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Test equipment..............................................  $1,572   $  947
Computer equipment and software.............................      29       70
                                                              ------   ------
                                                               1,601    1,017
Less accumulated amortization...............................    (490)    (161)
                                                              ------   ------
                                                              $1,111   $  856
                                                              ======   ======
</TABLE>

4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     Accounts payable and accrued liabilities at December 31, 2000 and 1999 are
summarized as follows:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   ------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Accounts payable............................................  $ 6,482   $4,426
Sales commissions...........................................      842      618
Accrued returns and allowances..............................      761      453
Employee related accruals...................................      754      597
Deferred revenue............................................      566      143
Accrued warranty............................................      472      484
Current portion of capital lease obligations................      427      332
Accrued expenses and other..................................      306      995
                                                              -------   ------
                                                              $10,610   $8,048
                                                              =======   ======
</TABLE>

                                        40
<PAGE>   42

5. INCOME TAXES

     The provision (benefit) for income taxes for the year ending December 31,
2000, 1999 and 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                                                2000      1999       1998
                                                              --------   -------   --------
                                                                     (IN THOUSANDS)
<S>                                                           <C>        <C>       <C>
Current:
  Federal...................................................  $ 10,302   $ 1,637   $(10,844)
  State.....................................................     1,677       267     (1,765)
                                                              --------   -------   --------
     Sub-total..............................................    11,979     1,904    (12,609)
                                                              --------   -------   --------
Deferred:
  Federal...................................................   (10,302)   (1,637)    10,844
  State.....................................................    (1,677)     (267)     1,765
                                                              --------   -------   --------
     Sub-total..............................................   (11,979)   (1,904)    12,609
                                                              --------   -------   --------
          Total.............................................  $      0   $     0   $      0
                                                              ========   =======   ========
</TABLE>

     The tax effected amounts of temporary differences at December 31, 2000 and
1999 are summarized as follows:

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Current:
  Deferred tax asset:
     Deferred compensation..................................  $    317   $    232
     Accrued liabilities....................................       817      2,345
     Other..................................................       798        569
     Valuation allowance....................................    (1,932)    (3,049)
                                                              --------   --------
          Total current deferred tax asset..................         0         97
                                                              --------   --------
          Net current deferred tax asset....................  $      0   $     97
                                                              --------   --------
Non-current:
  Deferred tax asset:
     Net operating loss carry forward.......................  $ 43,757   $ 18,783
     Other..................................................        --         --
     Research and experimentation credit....................     1,576      1,368
     Valuation allowance....................................   (44,325)   (19,533)
                                                              --------   --------
          Total non-current deferred tax asset..............     1,008        618
                                                              --------   --------
  Deferred tax liability:
     Fixed assets...........................................  $ (1,008)  $   (715)
                                                              --------   --------
          Total non-current deferred tax liability..........    (1,008)      (715)
                                                              --------   --------
          Net deferred tax asset............................  $      0   $      0
                                                              ========   ========
</TABLE>

     The Company has recorded a valuation allowance at December 31, 2000 and
1999 with respect to the deferred tax asset due to the uncertainty of its
ultimate realization. As of December 31, 2000, the Company has established a
valuation allowance of approximately $46.2 million. The result is an increase in
the valuation allowance from December 31, 1999 of approximately $23.6 million.

     As of December 31, 2000, the Company had net operating loss carry forwards
of approximately $116.3 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

                                        41
<PAGE>   43

available being limited to approximately $115.4 million. Loss carryforwards will
expire between the years 2009 and 2020.

     As of December 31, 2000, the Company also had general business credit
carryforwards of approximately $1.6 million which expire between the years 2008
and 2020. 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 statement of operations.

<TABLE>
<CAPTION>
                                                          FOR THE YEAR ENDED DECEMBER 31,
                                                          --------------------------------
                                                            2000        1999       1998
                                                          ---------   --------   ---------
                                                                   (IN THOUSANDS)
<S>                                                       <C>         <C>        <C>
Tax provision (benefit) at U.S. federal income tax
  rate..................................................  $ 10,677    $ 1,684    $(10,140)
State income tax provision (benefit) net of federal.....     1,156        180      (1,083)
Other, net..............................................       146         40        (979)
Valuation allowance increase (decrease).................   (11,979)    (1,904)     12,609
Research and experimentation credit.....................        --         --        (407)
                                                          --------    -------    --------
Provision (benefit) for income taxes....................  $      0    $     0    $      0
                                                          ========    =======    ========
</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 which are
directly reflected in stockholders' equity. For the years ended December 31,
2000, 1999, and 1998, the income tax benefit of $36.4 million, $5.1 million, and
none, respectively, would have been allocated to additional paid in capital for
the tax benefits associated with the exercise of non-qualified stock options.
However, due to the 100% valuation allowance against deferred tax assets, these
amounts have not been recognized.

     The Company has a pending ruling with the Internal Revenue Service
regarding an additional deduction related to securities litigation costs. A
favorable ruling would result in a significant increase to the Company's net
operating loss carryforward.

6. NOTES PAYABLE

     In April, 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 in Note 8 -- Commitments. 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.

                                        42
<PAGE>   44

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, 2000:

<TABLE>
<CAPTION>
                                                              CAPITAL   OPERATING
                                                              LEASES     LEASES
                                                              -------   ---------
                                                                (IN THOUSANDS)
<S>                                                           <C>       <C>
2001........................................................   $484      $ 1,972
2002........................................................    317        1,787
2003........................................................     11        1,711
2004........................................................     --        1,749
2005........................................................     --        1,788
Thereafter..................................................     --        5,281
                                                               ----      -------
                                                                812      $14,288
                                                               ----      =======
Less: Amount representing interest..........................     77
                                                               ----
Present value of minimum lease payments.....................    735
Less: Current portion.......................................    427
                                                               ----
                                                               $308
                                                               ====
</TABLE>

     Total rental expense was approximately $2,122,000, $1,420,000 and
$1,163,000 for the years ended December 31, 2000, 1999, and 1998, respectively.

8. COMMITMENTS

     The Company has a letter of credit securing a lease agreement. The amount
of the letter of credit was $2,250,000 and $2,300,000 at December 31, 2000 and
1999, respectively.

     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 which was terminated by
the Company in May 2000. All advances, interest and fees were repaid in full
prior to termination.

     On October 10, 2000, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Congress Financial Corporation ("Congress") pursuant
to which Congress provided the Company with a $10.0 million line of credit at
prime plus three-quarters of one percent (.75%). The Loan Agreement has an
initial term of two years. All indebtedness outstanding under the Loan Agreement
is collateralized by substantially all of the Company's assets. At December 31,
2000, there were no borrowings outstanding, and the Company was in compliance
with all loan covenants.

     At December 31, 2000, the Company had outstanding non-cancellable purchase
order commitments to purchase certain inventory items totaling approximately
$5.3 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 1998, a director received $12,750 for services performed as a consultant
to the Company.

                                        43
<PAGE>   45

10. COMMON STOCK, STOCK OPTIONS, AND WARRANTS

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.
Transactions related to the 1996 Option Plan during 2000, 1999 and 1998 are
summarized as follows:

<TABLE>
<CAPTION>
                                                                             WEIGHTED
                                                                             AVERAGE
                                                                SHARES     OPTION PRICE
                                                              ----------   ------------
<S>                                                           <C>          <C>
Outstanding at 1/1/98.......................................   2,050,785      $ 7.29
  Granted...................................................   2,362,643        3.62
  Exercised.................................................          --          --
  Forfeited.................................................  (1,723,282)       7.39
                                                              ----------
Outstanding at 12/31/98.....................................   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
                                                              ==========
</TABLE>

     The following table summarizes information about stock options outstanding
to employees and directors at December 31, 2000:

<TABLE>
<CAPTION>
                                        NUMBER      OUTSTANDING   OUTSTANDING      NUMBER      EXERCISABLE
                                     OUTSTANDING     WEIGHTED      WEIGHTED     EXERCISABLE     WEIGHTED
                                          AT          AVERAGE       AVERAGE          AT          AVERAGE
                                     DECEMBER 31,    REMAINING     EXERCISE     DECEMBER 31,    EXERCISE
RANGE OF EXERCISE PRICE                  2000          LIFE          PRICE          2000          PRICE
-----------------------              ------------   -----------   -----------   ------------   -----------
<S>                                  <C>            <C>           <C>           <C>            <C>
$  2.313-3.9375....................     714,688        4.02        $  2.572       123,982        $ 2.575
$  4.0625-5.875....................     714,503        3.96           5.254        80,928          5.325
$  6.000-14.625....................     604,337        4.60           7.111       150,520          7.637
$ 28.000-58.875....................     209,451        5.12          53.891        21,879         51.816
$ 60.500-77.750....................     201,095        5.40          65.831           740         62.375
$ 82.000-97.750....................     254,680        5.60          92.985            --             --
$103.250-139.125...................      38,050        5.53         111.435            --             --
                                      ---------                                   -------
                                      2,736,804                                   378,049
                                      =========                                   =======
</TABLE>

     Generally, options issued vest in one-third increments over a three year
period, with the exception of certain option agreements which 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. Total shares exercisable were 378,049, 392,066 and
385,933 as of December 31, 2000, 1999 and 1998, 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

                                        44
<PAGE>   46

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>
                                                            2000      1999       1998
                                                           -------   -------   --------
                                                                  (IN THOUSANDS)
<S>                                                        <C>       <C>       <C>
Pro forma net income (loss):
  As reported............................................  $31,403   $ 4,953   $(29,825)
  As adjusted (unaudited)................................  $21,540   $(2,704)  $(35,502)
Pro forma basic income (loss) per share:
  As reported............................................  $  1.06   $  0.18   $  (1.13)
  As adjusted (unaudited)................................  $  0.73   $ (0.10)  $  (1.34)
</TABLE>

     These pro forma amounts were determined using the Black-Scholes valuation
model with the following key assumptions: (a) a discount rate of 6.23%, 5.61%,
and 4.86% for December 31, 2000, 1999 and 1998, respectively; (b) 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; (c) an average expected option life of 4.0 years for December 31, 2000,
1999 and 1998; (d) there have been no options that have expired; and (e) 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, 2000 a total of 185,269 shares had been purchased by
employees participating in the plan at a weighted average price per share of
$6.19.

WARRANTS

     As described in Note 6 -- Notes Payable, on March 31, 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, the market price of the stock on the date
prior to the issuance of the warrants, with a term of five years. The warrants
were subsequently exercised.

11. DEFINED CONTRIBUTION PLAN

     The Company offers a defined contribution plan which 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 does not make
unmatched contributions. For the years ended December 31, 2000, 1999 and 1998,
total Company contributions to the plan were approximately $273,000, $206,000
and $141,000, respectively.

12. SIGNIFICANT CUSTOMERS

     For the year ended December 31, 2000, the Company's largest customer,
Telogy, accounted for approximately 15% of total revenues. For the year ended
December 31, 1999, the Company's two largest customers accounted for
approximately 39% of total revenues, with Telogy and Technology Rental Services
("TRS") accounting for approximately 21% and 18% of total sales, respectively.
Both Telogy and TRS purchase the Company's products for lease to end users in
the telecommunications industry. For the year ended December 31, 1998, the
Company's four largest customers accounted for approximately 57% of total
revenues, with Qwest, MCI WorldCom, Tellabs, and GTE accounting for
approximately 17%, 16%, 13%, and 11% of total sales, respectively. No other
customers accounted for sales of 10% or more during such periods.

                                        45
<PAGE>   47

13. REORGANIZATION CHARGES

     In February 1998, the Company eliminated 20 full-time positions resulting
in a one-time charge to earnings of $1.0 million in connection with this
restructuring. Additionally, the Company eliminated 55 full-time positions in
August 1998 which did not result in a significant charge to earnings. Notes and
related interest receivable from employees terminated in the restructurings
totaling approximately $280,000 were deemed uncollectible and were included in
the $1.0 million restructuring charge.

14. LEGAL PROCEEDINGS

     As of April 9, 1998, 23 class action complaints (which were subsequently
consolidated into a single action) for violations of the Federal Securities Laws
during certain periods in 1997 and 1998 had been filed in the United States
District Court for the Middle District of Florida, on behalf of purchasers of
the Company's Common Stock. The complaints named as defendants the Company,
Steven H. Grant, the Company's Executive Vice President, Finance, Chief
Financial Officer and Secretary, and other former corporate officers and
directors. The complaints alleged that the Company and certain officers during
the relevant time period violated Sections 10(b) and 20(a) of the Securities
Exchange Act by, among other things, issuing to the investing public false and
misleading financial statements and press releases concerning the Company's
revenues, income and earnings, which artificially inflated the price of the
Company's Common Stock.

     On July 23, 1998, the Company entered into a memorandum of understanding
for the settlement of these class action complaints. In late October 1998, a
Stipulation of Settlement was filed with the court and on December 21, 1998, the
court preliminarily approved the settlement. The settlement consists of $4.3
million in cash, to be paid to plaintiffs primarily by a claim on the Company's
directors and officers liability insurance policy, and the issuance of up to 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 actions. The final
order was subject to appeal. On July 21, 1999, the Company issued 289,350 shares
of Common Stock in partial satisfaction of the total shares required under this
settlement. Those shares were not to be distributed, sold or hypothecated until
after the appeal of the settlement, discussed below, is fully resolved.

     On May 20, 1999, a lead plaintiff in the class action suit filed a notice
of appeal with the Eleventh Circuit Court of Appeals. On March 16, 2000, all
parts of the appeal that pertain to the Company were dismissed with prejudice.
The District Court's judgment approving settlement of the securities class
actions now is final. Following the dismissal of the appeal, Company issued
substantially all remaining shares of Common Stock in satisfaction of the total
shares required under this settlement.

     On August 5, 1999, as a complete settlement of an investigation of the
Company being conducted by the U.S. Securities and Exchange Commission
(Commission) relating to the circumstances underlying the restatement of the
Company's financial results, the Company agreed voluntarily to consent to the
entry of a permanent injunction enjoining it from violations of Sections 10(b),
13(a) and 13(b)(2) of the Securities Exchange Act of 1934, and Rules 10b-5,
12b-20 and 13a-13 thereunder. On March 29, 2000, the Company's settlement with
the Commission was filed with the U.S. District Court for the Middle District of
Florida. Concurrently, the Commission settled administrative proceedings against
Steven H. Grant, the Company's Executive Vice President, Finance, Chief
Financial Officer and Secretary, and two other former officers of the Company.
Mr. Grant, without admitting or denying the Commission's findings, consented to
the entry of an order that he cease and desist from committing or causing any
violation or future violation of various sections of the Exchange Act.

     On November 5, 1997, Hugh Brian Haney ("Plaintiff"), an early stage
investor, commenced an action in the United States District Court for the
Southern District of Ohio against Dr. Bryan J. Zwan, the Company's then Chairman
of the Board and Chief Executive Officer, and the Company ("Defendants"). An
amended complaint filed December 15, 1997 alleged violations of Section 10(b) of
the Securities Exchange Act, violations of state corporation statutes, and
various common law violations by Defendants in connection with Plaintiff's sale
to the Company's predecessor in November 1995, pursuant to a previously granted
option exercisable by Dr. Zwan and/or the Company's predecessor, of 4,900 shares
of stock in the Company's

                                        46
<PAGE>   48

predecessor, an amount equivalent to 19,215,686 shares of the Company's common
stock. The amended complaint sought, among other things, (1) rescission of the
sale of the shares transferred by Plaintiff and (2) damages of $235 million,
together with interest. On October 20, 1998, the Company and Dr. Zwan entered
into an agreement with Plaintiff to settle the action. The settlement agreement
provided, among other things, for dismissal of the action with prejudice, for a
$500,000 payment by the Company to Plaintiff for his attorneys' fees and granted
Plaintiff an option, for 10 years, to purchase for $1 per share 2 million shares
of Dr. Zwan's stock in the Company. Pursuant to that agreement, the action was
dismissed with prejudice on November 13, 1998. The Company recorded a $3.0
million charge to earnings consisting of the cash payment and the valuation of
the options upon settlement.

     On April 21, 1999, Plaintiff filed an action in the United States District
Court for the Southern District of Ohio against the Defendants alleging that the
terms of the settlement agreement entered into between the parties had been
breached and requesting that the settlement agreement be specifically enforced
and that damages in excess of $75,000 be awarded or, alternatively, that the
settlement agreement be set aside. In response to this action, the Company filed
a motion to dismiss for failure to state a claim against the Company. On March
30, 2000, the Court granted in part and denied in part the Company's motion to
dismiss. On May 1, 2000, Plaintiff filed an amended complaint alleging two
breach of contract claims against the Company. The Company believes it has
fulfilled its obligations under the settlement agreement and that the claims
against it are without merit. Accordingly, on June 30, 2000, the Company filed a
motion seeking summary judgment in its favor. On August 24, 2000, the Court
granted the Company's motion for summary judgment in its entirety. Subsequently,
Dr. Zwan and Plaintiff entered into a settlement agreement and have dismissed
the matter as to each other only.

     The Company intends to seek and expects to obtain entry of a judgment in
its favor based upon the summary judgment order. Although there can be no
assurance that judgment ultimately will be entered in the Company's favor or
that, even if judgment is entered, Plaintiff will not successfully appeal the
judgment, the Company believes it has meritorious defenses to Plaintiff's claims
and thus no provision for any liability has been made in the financial
statements.

     On November 23, 1999, Seth P. Joseph, a former officer and director of
Digital Lightwave, commenced an arbitration proceeding 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 seeks $500,000, attorney
fees, interest and stock options exercisable for 656,666 shares of our Common
Stock. The Company has filed its 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. In March, 2001, Mr. Joseph voluntarily dismissed three
of his claims against the Company without prejudice. The two remaining claims
seek recovery for alleged violation of the state whistleblower statute and
breach of Mr. Joseph's stock option agreements. The arbitration hearing is
scheduled to occur in July, 2001. The Company believes that there are
meritorious defenses to these claims and thus no provision for any liability has
been made in the financial statements.

     The Company from time to time is involved in lawsuits and actions by third
parties arising in the ordinary course of business. With respect to these
matters, management believes that it has adequate legal defenses and/or provided
adequate accruals for related costs. The Company is not aware of any additional
litigation, claims or assessments that were pending that could have a material
adverse effect on the Company's business, financial condition and results of
operations.

15. 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.

                                        47
<PAGE>   49

<TABLE>
<CAPTION>
                                                                   QUARTER ENDED
                                              --------------------------------------------------------
                                               MARCH 31,     JUNE 30,     SEPTEMBER 30,   DECEMBER 31,
                                                 2000          2000           2000            2000
                                              -----------   -----------   -------------   ------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>           <C>           <C>             <C>
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)...................          .15           .21            .26            .43
Diluted income per share(1).................          .14           .20            .25            .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>

<TABLE>
<CAPTION>
                                                                   QUARTER ENDED
                                              --------------------------------------------------------
                                               MARCH 31,     JUNE 30,     SEPTEMBER 30,   DECEMBER 31,
                                                 1999          1999           1999            1999
                                              -----------   -----------   -------------   ------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>           <C>           <C>             <C>
Sales.......................................  $     8,112   $    10,728    $    14,162    $    17,471
Gross profit................................        4,926         7,036          9,311         11,769
Operating income (loss).....................       (1,679)           36          2,652          3,864
Net income (loss)...........................       (1,634)           65          2,641          3,879
Basic income (loss) per share(1)............         (.06)          .00            .10            .14
Diluted income (loss) per share(1)..........          n/a           .00            .09            .13
Weighted average shares outstanding.........   26,539,760    26,563,964     26,863,115     27,257,303
Weighted average shares and equivalents
  outstanding...............................   26,914,618    27,423,386     28,590,833     30,877,372
</TABLE>

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

(1) Earnings per share were calculated for each three month and twelve month
    period on a stand-alone basis. Earnings per share for the quarter ended
    March 31, 1999 does not include the impact of common stock equivalents as it
    would be anti-dilutive.

     It is anticipated that as the Company matures, the Company's sales and
operating results may fluctuate from quarter-to-quarter and from year-to-year
due to a combination of factors, certain of which are outside the control of the
Company, including, among others (i) the timing and amount of significant orders
from the Company's customers, (ii) the ability to obtain sufficient supplies of
sole or limited source components for the Company's products, (iii) the ability
to attain and maintain production volumes and quality levels for its products,
(iv) the mix of distribution channels and products, (v) new product
introductions by the Company's competitors, (vi) the Company's success in
developing, introducing and shipping product enhancements and new products,
(vii) pricing actions by the Company or its competitors, (viii) changes in
material costs and (ix) general economic conditions. 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. 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. See "Item 1. Factors That May Affect Operating Results -- We
experience fluctuations in our operating results and our sales are seasonal."

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

     None.

                                        48
<PAGE>   50

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

     The executive officers and directors of the Company and their ages as of
the date of this report are as follows:

<TABLE>
<CAPTION>
NAME                                     AGE                  POSITION
----                                     ---                  --------
<S>                                      <C>   <C>
Gerry Chastelet(4).....................  54    Chairman, President and Chief Executive
                                                 Officer
Steven H. Grant........................  41    Executive Vice President, Finance,
                                               Chief Financial Officer and Secretary
George Matz............................  51    Executive Vice President and General
                                                 Manager, Portable Products Division
James Green............................  50    Executive Vice President, Operations
Dr. William F. Hamilton(1)(3)(4).......  61    Director
Gerald A. Fallon(1)(2).................  51    Director
Robert F. Hussey(2)(4).................  51    Director
Peter A. Guglielmi(1)(2)...............  57    Director
</TABLE>

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

(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating Committee
(4) Member of the Executive Committee

     Following is a description of the background of each of the Company's
executive officers and directors:

     Mr. Chastelet joined Digital Lightwave on December 31, 1998 as President
and Chief Executive Officer, and was named Chairman of the Board in July 1999.
Prior to joining the Company, Mr. Chastelet served as President, Chief Executive
Officer of Wandel & Goltermann Technologies, Inc., a global supplier of
communications test and measurement equipment, from December 1995 to October
1998. From June 1993 to November 1995, he served as Vice President Sales,
Marketing and Service-Americas and Asia Pacific for Network Systems Corporation,
a supplier of channel-attached communications solutions for large mainframe
computers. From 1989 to 1993, he was Vice President Sales, Marketing and Service
for Gandalf Systems Corporation. Mr. Chastelet holds a degree in Electronics
Engineering from Devry Institute of Technology and is a graduate of the
University of Toronto Executive MBA Program. He also serves as a director of
Wave Rider Communications, Inc. and Technology Research Corporation.

     Mr. Grant currently serves as Executive Vice President, Finance, Chief
Financial Officer and Secretary and joined the Company in September 1997. Prior
to joining the Company, Mr. Grant served as Executive Vice President, Chief
Financial Officer, Treasurer and Corporate Secretary at Precision Systems Inc.
from July 1996 through September 1997. Mr. Grant also served as Executive Vice
President, Chief Financial/Administrative Officer and Treasurer for Silver King
Communications Inc. from December 1992 through July 1996, and as Director of
Corporate Finance, Investor Relations and Assistant Treasurer at Home Shopping
Network from February 1989 through December 1992. Mr. Grant holds a Bachelor's
Degree in Accounting from the University of Alabama and holds an MBA in Finance
from the University of South Florida. On March 29, 2000, Mr. Grant settled
administrative proceedings with the Securities and Exchange Commission. Mr.
Grant, without admitting or denying the Commission's findings, consented to the
entry of an order that he cease and desist from committing or causing any
violation or future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of
the Exchange Act, and Rules 12b-20 and 13a-13 thereunder.

     Mr. Matz currently serves as Executive Vice President and General Manager,
Portable Products Division and joined the Company in May 1998. Prior to joining
the Company, Mr. Matz served as Vice President of Global Sales at Boston
Technology, Inc., a supplier of systems, software and services to
telecommunications companies, from December 1995 to May 1998. From August 1994
to December 1995, Mr. Matz served as

                                        49
<PAGE>   51

Executive Director of Global Sales at Dale, Gesek, McWilliams and Sheridan,
Inc., an international supplier of telecommunications products and services.
From March 1990 to August 1994, Mr. Matz served as Director of North American
Sales at Summa Four, Inc. Mr. Matz holds a B.S. degree from Wilkes University.

     Mr. Green currently serves as Executive Vice President, Operations and
joined the Company in August 1999 as a consultant. Prior to joining the Company,
Mr. Green also 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.

     Dr. Hamilton has served as a Director since 1997. He is the Landau
Professor of Management and Technology at the Wharton School of the University
of Pennsylvania and has been a professor at the University of Pennsylvania since
July 1967. He is also a director of the following public companies: Hunt
Corporation., Marlton Technologies, Inc. and Neose Technologies, Inc.

     Mr. Fallon was nominated and elected to the Board to serve as a director by
Dr. Bryan J. Zwan, the Company's majority stockholder, at the 2000 Annual
Meeting. Mr. Fallon is Executive Vice President and Manager of Capital Markets
for KeyBank, NA and Senior Managing Director of Capital Markets for McDonald
Investments, Inc.

     Mr. Hussey was appointed by the Board to serve as a director on August 23,
2000. Mr. Hussey was President and CEO of MetroVision of North America, Inc., a
niche cable television company, from February 1991 until April 1997, when it
merged with York Hannover Health Care, Inc. Mr. Hussey is a director of IVEX
Corporation, Digital Data, Inc. and Nur Macroprinters Ltd., as well as on the
board of advisors for Kaufmann Fund, Argentum Capital Partners, I and II, and
Josephthal & Company, Inc..

     Mr. Guglielmi was appointed by the Board to serve as a director on August
28, 2000. Mr. Guglielmi is Executive Vice President of Tellabs, Inc. He served
as the Executive Vice President, Chief Financial Officer of Tellabs, Inc. from
1988 until 2000. From 1993 to 1997, he was President of Tellabs International,
Inc. Prior to joining Tellabs, Mr. Guglielmi was Vice President of Finance and
Treasurer of Paradyne Corporation for five years. Mr. Guglielmi presently serves
on the boards of Tellabs, Inc., and JDS Uniphase Corporation.

BOARD OF DIRECTORS

     Our Bylaws provide that the board can fix the authorized number of
directors from time to time between one and nine. The Board currently consists
of five (5) members, Messrs. Chastelet, Hamilton, Fallon, Hussey, and Guglielmi.
Each director serves for a one year term or until their successors have been
duly elected and qualified. There are no family relationships among any of our
directors or executive officers.

EXECUTIVE OFFICERS

     Digital Lightwave's executive officers are elected by the Board of
Directors on an annual basis and serve until the next annual meeting of the
Board of Directors or until their successors have been duly elected and
qualified. There are no family relationships among any of our directors or
executive officers.

BOARD MEETINGS AND COMMITTEES

     During the fiscal year ended December 31, 2000, the Board held 13 regular
meetings and 1 special meeting. Each director attended at least 75% of the
aggregate number of Board meetings and meetings of committees on which he served
which occurred on or after the initiation of his term.

     The Board of Directors of Digital Lightwave has established an audit
committee, a compensation committee, a nominating committee, and an executive
committee. The audit committee, composed of Messrs. Fallon, Guglielmi, and
Hamilton is responsible for reviewing financial statements, accounting and
financial policies and internal controls and reviewing the scope of the
independent auditor's activities and fees. The audit committee held 4 meetings
during 2000. The compensation committee, composed of Messrs. Hussey, Guglielmi
and Fallon, is responsible for reviewing and approving, within its authority,
compensation, benefits, training and other human resource policies. The
compensation committee held 7

                                        50
<PAGE>   52

meetings during 2000. The nominating committee, composed of Mr. Hamilton, is
responsible for selecting nominees to the Board of Directors. In 2000, the Board
formed an executive committee to act on matters when the full Board of Directors
was unable to convene. The executive committee consists of Messrs. Chastelet,
Hamilton and Hussey.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) under the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten (10) percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than ten-percent stockholders are required by
regulations of the SEC to furnish the Company with copies of all Section 16(a)
forms that they file. To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company and written representation that
no other reports were required, the Company's officers, directors and greater
than ten percent stockholders complied with all applicable Section 16(a) filing
requirements, except that Dr. Zwan filed one late Form 4.

ITEM 11.   EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

     The following table shows, for the year ended December 31, 2000, the cash
and other compensation awarded to, earned by or paid to Mr. Chastelet and each
other executive officer who earned in excess of $100,000 for all services in all
capacities (the "Named Executive Officers"):

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                            LONG TERM COMPENSATION
                                                                                  ------------------------------------------
                                                                                       AWARDS
                                                                                     RESTRICTED       PAYOUTS
                                             ANNUAL COMPENSATION                  -----------------   -------
                                             -------------------   OTHER ANNUAL   STOCK    OPTIONS/    LTIP      ALL OTHER
                                              SALARY     BONUS     COMPENSATION   AWARDS     SARS     PAYOUTS   COMPENSATION
NAME AND PRINCIPAL POSITION           YEAR     ($)        ($)          ($)         ($)       (#)        ($)         ($)
---------------------------           ----   --------   --------   ------------   ------   --------   -------   ------------
<S>                                   <C>    <C>        <C>        <C>            <C>      <C>        <C>       <C>
Gerry Chastelet.....................  2000   $293,574   $ 50,000   $19,217,175(1)   $--     25,000      $--       $23,250(2)(3)
 Chairman of the Board,               1999    276,066    100,000     2,924,065(1)   --     225,000      --         24,500(2)(3)
 President and Chief Executive
   Officer                            1998      1,060         --            --      --     600,000      --             --
Steven H. Grant.....................  2000    207,508         --     9,105,948(1)   --      16,750      --          5,188(2)
 Executive Vice President,            1999    201,541         --     1,890,312(1)   --     100,000      --          5,000(2)
 Finance, Chief Financial             1998    193,333     40,000            --      --     200,000      --          1,800(2)
 Officer and Secretary
George Matz.........................  2000    243,740     50,000    13,590,171(1)   --      16,750      --         17,250(2)(3)
 Executive Vice President and         1999    220,822     95,000     2,018,835(1)   --     102,500      --         17,000(2)(3)
 General Manager,                     1998    148,415     50,000            --      --     300,000      --          8,000(3)
 Portable Products Division
Ali Haider(4).......................  2000    187,643     20,833     4,501,857(1)   --      13,500      --          4,349(2)
 Executive Vice President,            1999    174,253         --       646,400(1)   --     142,000      --          2,125(2)
 Research and Development             1998    149,443     22,275            --      --      48,000      --          1,963(2)
James Green.........................  2000    137,513      5,000       496,253(1)   --      13,500      --             --
 Executive Vice President,
   Operations                         1999     28,584(5)       --       15,000(6)   --      50,000      --             --
</TABLE>

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

(1) Reflects proceeds from stock options exercised, gross of income taxes.
(2) Reflects 401(k) matching contributions.
(3) Reflects Automobile Allowance.
(4) Resigned effective December 31, 2000.
(5) Began full time employment with the Company as the Vice President,
    Production, on October 13, 1999.
(6) Reflects fees paid for consulting services prior to joining Company as a
    full time employee.

                                        51
<PAGE>   53

1996 STOCK OPTION PLAN

     The Company's 1996 Stock Option Plan, or the 1996 Option Plan, became
effective on March 5, 1996. The purpose of the 1996 Option Plan is to attract
and retain qualified personnel, to provide additional incentives to employees,
officers, directors and consultants of the Company and to promote the success of
the Company's business. A reserve of 5,000,000 shares of Common Stock has been
established for issuance under the 1996 Option Plan. The 1996 Option Plan is
administered by the Board who may delegate the administration of the plan to a
committee of the Board. The Board now has, and such committee would have,
complete discretion to determine which eligible individuals are to receive
option grants, the number of shares subject to each such grant, the status of
any granted option as either an incentive stock option or a non-statutory
option, the vesting schedule to be in effect for the option grant and the
maximum term for which any granted option is to remain outstanding.

     Each option granted under the 1996 Option Plan has a maximum term of ten
years, subject to earlier termination following the optionee's cessation of
service with the Company. Options granted under the 1996 Option Plan may be
exercised only for fully vested shares. The exercise price of incentive stock
options and non-statutory stock options granted under the 1996 Option Plan must
be at least 100% and 85%, respectively, of the fair market value of the stock
subject to the option on the date of grant (or 110% with respect to holders of
more than 10% of the voting power of the Company's outstanding stock). The Board
or, when appointed, such committee, has the authority to determine the fair
market value of the stock. The purchase price is payable immediately upon the
exercise of the option. Such payment may be made in cash, in outstanding shares
of Common Stock held by the participant, through a promissory note payable in
installments over a period of years or any combination of the foregoing.

     The Board may amend or modify the 1996 Option Plan at any time, provided
that no such amendment or modification may adversely affect the rights and
obligations of the participants with respect to their outstanding options or
vested shares without their consent. In addition, no amendment of the 1996
Option Plan may, without the approval of the Company's stockholders (i) modify
the class of individuals eligible for participation, (ii) increase the number of
shares available for issuance, except in the event of certain changes to the
Company's capital structure, or (iii) extend the term of the 1996 Option Plan.
The 1996 Option Plan will terminate on March 4, 2006, unless sooner terminated
by the Board.

     As of December 31, 2000, the Company had outstanding options under the 1996
Option Plan totaling 2,736,804 shares of common stock of which 378,049 shares
were exercisable.

2001 STOCK OPTION PLAN

     The Company's stockholders approved the 2001 Stock Option Plan, or the 2001
Plan, at the Special Meeting of Stockholders held on February 27, 2001, pursuant
to which 3,000,000 shares, plus (i) the number of shares available for grant as
of the date of stockholder approval of the 2001 Plan and (ii) the number of
shares subject to options outstanding under the 1996 Option Plan as of the date
of stockholder approval of the 2001 Plan to the extent that such options expire
or terminate for any reason prior to exercise in full, will be reserved for
issuance (with the sum of (i) and (ii) not to exceed 2,735,872 shares). The 2001
Plan supersedes the 1996 Option Plan with respect to future grants.

     The 2001 Plan differs from the original plan adopted in 1996 primarily by:
(i) limiting the number of option shares which may be granted to a single
individual in a fiscal year to 250,000 shares, except with respect to
individuals first hired by the Company who may receive an additional grant of up
to 250,000 shares; (ii) authorizing the transfer of awards to certain family
members and family trusts; (iii) eliminating or modifying certain restrictions
as permitted by amendments to Rule 16b-3 issued by the Securities and Exchange
Commission under Section 16(b) of the Securities and Exchange Act of 1934; and
(iv) modifying the provisions governing the options in the event of a change in
control of the Company.

                                        52
<PAGE>   54

STOCK OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR

     The following table sets forth information concerning stock options awarded
to each of the Named Executive Officers during 2000. All such options were
awarded under the Company's 1996 Stock Option Plan.

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                % OF TOTAL                           POTENTIAL REALIZABLE
                                                 OPTIONS                               VALUE AT ASSUMED
                                                 GRANTED                             ANNUAL RATES OF STOCK
                                     SHARES         TO                                PRICE APPRECIATION
                                   UNDERLYING   EMPLOYEES    EXERCISE                 FOR OPTION TERM(1)
                                    OPTIONS     IN FISCAL     PRICE     EXPIRATION   ---------------------
                                    GRANTED        YEAR       ($/SH)       DATE         5%         10%
                                   ----------   ----------   --------   ----------   --------   ----------
<S>                                <C>          <C>          <C>        <C>          <C>        <C>
Gerry Chastelet..................    25,000(2)     3.43%     $56.0000    01/30/06    $476,134   $1,080,185
Steven H. Grant..................    16,750(2)     2.30       56.0000    01/30/06     319,010      723,724
George Matz......................    16,750(2)     2.30       56.0000    01/30/06     319,010      723,724
Ali Haider(3)....................    13,500(2)     1.85       56.0000    01/30/06     257,112      583,300
James Green......................    13,500(2)     1.85       56.0000    01/30/06     257,112      583,300
</TABLE>

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

(1) Potential realizable value is based on the assumption that the Common Stock
    appreciates at the annual rate shown (compounded annually) from the date of
    grant until the expiration of the option term. These numbers are calculated
    based on the requirements of the SEC and do not reflect the Company's
    estimate of future price growth.
(2) The option shares vested on an accelerated basis upon the achievement of
    specified revenue and net income targets.
(3) Mr. Haider resigned effective December 31, 2000.

     The following table sets forth certain information regarding options to
purchase shares of Common Stock held as of December 31, 2000 by each of the
Named Executive Officers.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                       VALUE OF UNEXERCISED
                                                        NUMBER OF UNEXERCISED          IN-THE-MONEY OPTIONS
                           SHARES                       OPTIONS AT FY-END(#)             AT FY-END($)(1)
                         ACQUIRED ON      VALUE      ---------------------------   ----------------------------
                         EXERCISE(#)   REALIZED($)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE    UNEXERCISABLE
                         -----------   -----------   -----------   -------------   -----------    -------------
<S>                      <C>           <C>           <C>           <C>             <C>            <C>
Gerry Chastelet........    221,625     $19,217,175     60,458         467,917      $1,512,533      $12,409,442
Steven H. Grant........    103,525       9,105,948     19,529         128,696         487,963        2,921,012
George Matz............    159,225      13,590,171     28,829         156,196         729,763        3,686,403
Ali Haider(2)..........     56,755       4,501,857     14,169         109,390          16,620        2,926,792
James Green............     11,666         496,253      5,000          46,834         120,313          802,099
</TABLE>

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

(1) Values shown in these columns reflect the difference between the closing
    price of $31.6875 on December 31, 2000 and the exercise price of the options
    and does not include the federal and state taxes due upon exercise.
(2) Mr. Haider resigned effective December 31, 2000.

STOCK PURCHASE PLAN

     On August 25, 1997, the Board approved the Stock Purchase Plan whereby
300,000 shares of Common Stock were reserved for issuance and purchase by
employees of the Company to assist them in acquiring a stock ownership interest
in the Company and to encourage them to remain employees of the Company. The
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code and permits eligible employees to purchase shares of Common Stock
at a discount through payroll deductions during specified three month offering
periods. No employee may purchase more than $25,000 worth of stock in any
calendar year or 1,500 shares of Common Stock in any one offering period. The
Stock Purchase Plan is

                                        53
<PAGE>   55

administered by an Administrative Committee appointed by the Board and provides
generally that the purchase price must not be less than 85% of the fair market
value of the Common Stock on the first or last day of the offering period,
whichever is lower. As of March 29, 2001, 196,084 shares have been purchased
under the Stock Purchase Plan.

EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS

     The Company entered into a letter agreement dated as of December 31, 1998
(the "Chastelet Agreement"), with Gerry Chastelet, the Company's Chairman of the
Board, Chief Executive Officer and President. The Chastelet Agreement provides
for: (1) employment at will; (2) an annual salary of $275,000; (3) a $150,000
signing bonus payable over two years; and (4) a performance bonus of up to 50%
of his base salary to be paid based on 80% quantitative and 20% qualitative
criteria to be established by the Company's board of directors. In addition, the
Company granted to Mr. Chastelet stock options to purchase 600,000 shares of
Common Stock at an exercise price of $2.313 per share, of which 100,000 stock
options vest after each six months of employment. In the event of a "change in
control" (as such term is defined in the Chastelet Agreement), Mr. Chastelet's
unvested options will vest.

     The Company entered into a letter agreement dated as of April 13, 1998 and
an addendum to the letter agreement dated February 9, 1999 (the "Matz
Agreements"), with George J. Matz, the Company's Executive Vice President and
General Manager, Portable Products Division. The Matz Agreements provide for:
(1) employment at will; (2) an annual salary of $225,000; (3) a $150,000 sign-on
bonus payable over three years; and (4) a performance bonus of 20% for the first
year. In addition, the Company granted to Mr. Matz stock options to purchase
300,000 shares of Common Stock at an exercise price of $4.4375 per share, of
which 75,000 stock options vested each on November 19, 1998 and on December 31,
1999, and 75,000 vest on each of the second and third of his employment
anniversary dates. In the event of a "change in control" (as such term is
defined in the Matz Agreement), Mr. Matz's unvested options will vest.

     The Company entered into an employment agreement effective as of February
27, 1998 (the "Grant Agreement"), with Steven H. Grant, the Company's Executive
Vice President, Finance, Chief Financial Officer and Secretary. The Grant
Agreement provides for: (1) an employment term of three years which
automatically renews for an additional two years unless either Mr. Grant or the
Company provides reasonable notice of non-renewal prior to expiration; (2) an
annual salary of $200,000; and (3) a $40,000 bonus (which is primarily an
acceleration of a deferred sign-on bonus) to be paid upon completion of the
Company's filings with the SEC for the year ended December 31, 1997. The Grant
Agreement also provides that the Company will provide to Mr. Grant on an annual
basis sufficient funds to purchase a term life insurance policy payable to his
heirs and a disability insurance policy to provide comparable compensation,
including benefits over the life of the agreement. In addition, the Company
granted to Mr. Grant stock options to purchase 200,000 shares of Common Stock at
an exercise price of $4.6875 per share, of which 50,000 stock options vested on
the date of grant and 50,000 stock options vest on each of the three
anniversaries following the date of grant. As a result of this new option grant,
the previously issued grant for 75,000 shares was canceled. In the event that
Mr. Grant's employment with the Company terminates, all stock options that have
not yet vested will continue to vest except in the event of a "change in
control" whereby the unvested options will accelerate. In the event of his
termination without "cause", including due to a "change in control" or a "change
in duties" (as such terms are defined in the Grant Agreement), Mr. Grant will be
entitled to severance compensation, including all benefits, for a period of 18
to 24 months. The Company is not obligated to pay compensation and benefits
under the Grant Agreement if Mr. Grant's employment is terminated for "cause."

     The Company entered into a letter agreement dated as of September 8, 1997
as modified by letters dated July 2, 1998 and August 4, 1998 with Ali Haider
(the "Haider Agreements"), the Company's former Executive Vice President,
Research and Development. The Haider Agreements provide for: (1) an annual
salary of $170,000; and (2) a performance bonus of $22,275 for positive first
and second quarter 1998 performance. In addition, the Company agreed to grant to
Mr. Haider certain stock options. In the event of the termination of Mr.
Haider's employment for any reason (other than a criminal act), Mr. Haider is
entitled to severance pay in the amount of six months base salary at the greater
of Mr. Haider's base salary as of the

                                        54
<PAGE>   56

date of any termination of employment or as of July 27, 1998. Mr. Haider
resigned effective December 31, 2000.

     The Company entered into a letter agreement dated as of October 13, 1999
and an addendum to the letter dated February 18, 2000 (the "Green Agreements")
with James Green, the Company's Executive Vice President, Operations. The Green
Agreements provide for: (1) an annual salary of $130,000; (2) a performance
bonus of $5,000 based on fourth quarter 1999 revenues; and (3) relocation
expenses for up to one (1) year of temporary living expenses and realtor costs
not to exceed $20,000. In addition, the Company granted to Mr. Green stock
options to purchase 50,000 shares of Common Stock at an exercise price of $7.625
per share of which one-third vests on each of the three anniversaries following
the date of grant.

     On October 18, 1999, the Company entered into an addendum to the existing
employment agreements with Messrs. Chastelet, Grant, Matz and Haider. On June 9,
2000, the Company entered into an addendum to the existing employment agreement
with Mr. Green. Each agreement contains a non-compete clause that is more
restrictive than any provision previously applicable to such executives. The
addenda also provide for severance payments of up to two years base salary and
bonus and acceleration of all stock options following involuntary termination
upon a change of control.

SECTION 401(K) PLAN

     In 1997, the Company adopted a 401(k) Salary Savings Plan (the "401(k)
Plan") covering the Company's full-time employees located in the United States.
The 401(k) Plan is intended to qualify under Section 401(k) of the Internal
Revenue Code, so that contributions to the 401(k) Plan by employees or by the
Company, and the investment earnings thereon, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by the Company, if
any, will be deductible by the Company when made. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit ($10,500 in 2000) and to have the amount of
such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does
not require, additional matching contributions to the 401(k) Plan by the Company
on behalf of all participants in the 401(k) Plan. Currently, the Company matches
the first 6% of such voluntary contributions at 50% of the amount contributed by
the employee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     In August, 2000, the Board appointed Messrs. Guglielmi and Hussey to the
Compensation Committee. Subsequently, in December, 2000, the Board appointed Mr.
Fallon to the Compensation Committee and appointed Mr. Hussey as Compensation
Committee Chairman. Prior to this, the Compensation Committee of the Board
consisted of Messrs. Hamilton and Seifert, a former director. No executive
officer of the Company served on the compensation committee of another entity or
on any other committee of the board of directors of another entity performing
similar functions during 2000. Additionally, no member of the Compensation
Committee is currently or was formerly an officer or employee of the Company.

COMPENSATION OF DIRECTORS

     Directors of the Company who are not officers or employees of the Company
receive an annual fee of $10,000 and a per meeting fee consisting of $1,000 per
in-person meeting and $500 per telephone meeting. Directors are also reimbursed
for travel and other expenses relating to attendance at meetings of the Board or
committees. Under the 1996 Option Plan, independent directors are also eligible
to receive stock options in consideration for their services. Each independent
director receives an option for 50,000 shares of common stock upon joining the
Board of Directors and receives an option for 10,000 shares of common stock upon
each annual meeting thereafter. During 2000, Dr. Hamilton received an option for
10,000 shares of common stock as a result of the 2000 annual meeting of
stockholders. Messrs. Guglielmi, Hussey and Fallon each received an option for
50,000 shares of common stock as a result of their appointment or election to
the Board. During 2000, Mr. Seifert, a former director, exercised 23,333 shares
of common stock resulting in proceeds of $1,741,116. Dr. Hamilton exercised
10,000 shares of common stock resulting in proceeds of $801,607.

                                        55
<PAGE>   57

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of March 29, 2001 by (i) each person who is
known by the Company to own beneficially more than five percent (5%) of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii) all
of the executive officers including executive officers named in the Summary
Compensation Table (the "Named Executive Officers"), and (iv) all directors and
executive officers of the Company as a group. To the knowledge of the Company,
except as noted in the footnotes below, all persons listed below have sole
voting and investing power with respect to their shares of Common Stock, except
to the extent authority is shared by spouses under applicable law.

<TABLE>
<CAPTION>
                                                              SHARES BENEFICIALLY
                                                                    OWNED(1)
                                                              --------------------
NAME                                                            NUMBER     PERCENT
----                                                          ----------   -------
<S>                                                           <C>          <C>
Dr. Bryan J. Zwan(2)(3).....................................  17,941,750   58.7%
Gerry Chastelet(4)..........................................     172,190       *
Steven H. Grant(5)..........................................      95,193       *
George Matz(6)..............................................     118,329       *
Ali Haider(7)...............................................           0       *
James Green(8)..............................................      13,653       *
Dr. William F. Hamilton(9)..................................      36,666       *
Gerald A. Fallon............................................           0       *
Robert F. Hussey............................................           0       *
Peter A. Guglielmi..........................................           0       *
All executive officers and directors as a group (9
  persons)(10)..............................................     436,091    1.4%
</TABLE>

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

  *  Less than one percent

 (1) Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission (the "SEC") that deem shares to be
     beneficially owned by any person who has or shares voting or investment
     power with respect to such shares. Unless otherwise indicated below, the
     persons and entities named in the table have sole voting and sole
     investment power with respect to all shares beneficially owned, subject to
     community property laws where applicable. Shares of Common Stock subject to
     options that are currently exercisable or exercisable within 60 days of
     March 29, 2001 are deemed to be outstanding and to be beneficially owned by
     the person holding such options for the purpose of computing the percentage
     ownership of such person but are not treated as outstanding for the purpose
     of computing the percentage ownership of any other person.
 (2) Includes 17,941,750 shares held by Dr. Bryan J. Zwan or through affiliates
     controlled by Dr. Zwan, principally, ZG Nevada Limited Partnership. Dr.
     Zwan's address is c/o Orrick, Herrington & Sutcliffe LLP, 1020 Marsh Road,
     Menlo Park, California 94025, Attn: Robert E. Freitas. Includes 2,000,000
     shares that were formerly claimed by Hugh Bryan Haney pursuant to a
     litigation settlement.
 (3) Includes 6,495,000 shares that are subject to forward sale agreements and
     pledge agreements with CSFB SAILS Corp.
 (4) Consists of 4,732 shares of Common Stock and 167,458 shares issuable upon
     exercise of options that are currently exercisable or exercisable within 60
     days of March 29, 2001.
 (5) Consists of 11,164 shares of Common Stock and 84,029 shares issuable upon
     exercise of options that are currently exercisable or exercisable within 60
     days of March 29, 2001.
 (6) Consists of 118,329 issuable upon the exercise of options that are
     currently exercisable or exercisable within 60 days of February 1, 2001.
 (7) Mr. Haider resigned from the Company effective December 31, 2000.
 (8) Consists of 153 shares of Common Stock and 13,500 shares issuable upon
     exercise of options that are currently exercisable or exercisable within 60
     days of March 29, 2001.
 (9) Consists of 36,666 shares of Common Stock issuable upon exercise of options
     that are currently exercisable or exercisable within 60 days of March 29,
     2001.

                                        56
<PAGE>   58

(10) Consists of 16,049 shares of Common Stock and 419,982 shares issuable upon
     exercise of options that are currently exercisable or exercisable within 60
     days of March 29, 2001.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On December 15, 1998, the Company loaned $100,000 to Dr. Zwan, a former
director. The loan has a simple interest rate of 9% per annum, is evidenced by
an unsecured promissory note and was due December 14, 1999. On February 23,
2000, the loan was paid in full, including accrued interest of approximately
$10,000. In accordance with the Company's policy on related party transactions,
the loan was approved by the independent members of the Audit Committee of the
Board of Directors.

                                    PART IV

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

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

          Index to consolidated financial statements appears on 31.

     (b) Reports on Form 8-K.

          The Company filed a report on Form 8 on October 3, 2000 announcing the
     results of the annual meeting held on September 29, 2000.

     (c) Exhibits.

<TABLE>
<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)     --  Lease Agreement dated October 7, 1994, between the Company
                 and Atrium at Clearwater, Limited
10.02(1)     --  First Lease Agreement Amendment dated February 16, 1996,
                 between the Company and Atrium at Clearwater, Limited
10.03(1)*    --  Form of Indemnification Agreement between the Company and
                 officers and directors of the Company
10.04(1)     --  Digital Lightwave, Inc. 1996 Stock Option Plan
10.05(3)     --  Digital Lightwave, Inc. Employee Stock Purchase Plan
10.06(2)     --  Second Lease Amendment, dated September 10, 1997, between
                 the Company and Atrium At Clearwater, Limited
10.07(2)     --  Lease Agreement, dated June 30, 1997, between the Company
                 and Pinellas Business Center, Inc.
10.08(2)     --  Lease Agreement, dated September 26, 1997, between the
                 Company and Monmouth/Atlantic Realty Associates
10.09(3)     --  L.P. Lease Agreement, dated January 9, 1998, between the
                 Company and Orix Hogan-Burt Pinellas Venture.
10.10(3)     --  First Lease Amendment, dated February 18, 1998, between the
                 Company and Orix Hogan-Burt Pinellas Venture.
10.11(3)     --  First Lease Amendment, dated September 25, 1997, between the
                 Company and Monmouth/Atlantic Realty Associates L.P.
</TABLE>

                                        57
<PAGE>   59
<TABLE>
<S>          <C> <C>
10.12(3)     --  Second Lease Amendment, dated February 23, 1998, between the
                 Company and Monmouth/Atlantic Realty Associates L.P.
10.13(3)*    --  Executive Employment Agreement, dated February 27, 1998,
                 between the Company and Steven H. Grant
10.14(4)     --  Accounts Receivable Agreement dated December 28, 1998
                 between the Company and Bankers Capital
10.15(4)     --  Stock Option Agreement dated November 13, 1998 among the
                 Company, Dr. Brian J. Zwan and Hugh Brian Haney
10.16(4)     --  Mutual General Release dated November 13, 1998, by and among
                 Hugh Brian Haney, Great American Fun Corp., Great American
                 Fun (HK) Ltd., Dr. Bryan J. Zwan, the Company and Logical
                 Magic, Inc.
10.17(4)     --  Settlement Agreement dated November 13, 1998 by and among
                 Hugh Brian Haney, Dr. Bryan J. Zwan and the Company
10.18(4)*    --  Letter Agreement dated as of December 31, 1998 between the
                 Company and Gerry Chastelet
10.19(4)*    --  Letter Agreement dated April 13, 1998 and addendum thereto
                 dated February 9, 1999 between the Company and George J.
                 Matz
10.20(4)     --  Form of Stock Purchase Agreement, dated March 31, 1999,
                 between the Company and certain Purchasers, with exhibits
                 thereto
10.21(4)     --  Letter of Commitment between the Company and Emergent Asset
                 Based Lending, L.L.C. d/b/a Emergent Business Capital, dated
                 March 31, 1999
10.22(4)*    --  Letter Agreement dated as of September 8, 1997 between the
                 Company and Ali Haider as amended and supplemented by the
                 Letter Agreements dated July 27, 1998 and August 4, 1998
10.23(6)*    --  Form of Addenda to Employment Agreements of certain
                 employees dated October 18, 1999 and June 9, 2000
10.25(5)     --  Memorandum of Understanding between Dr. Bryan J. Zwan and
                 the Company
10.27(7)*    --  2001 Stock Option Plan
10.28*       --  Promissory Note issued to the Company by James Green
10.29        --  Form of Distributor Agreement
10.30*       --  Form of Letter Agreement entered into on February 27, 2001
                 with executive officers with respect to certain stock
                 options
10.31*       --  Letter Agreement between the Company and James Green dated
                 October 13, 1999
10.32*       --  Addendum to Letter Agreement between the Company and James
                 Green dated February 18, 2000
10.33        --  Loan and Security Agreement by and between Congress
                 Financial Corporation (Florida) and the Company
21.01(4)     --  Subsidiaries of the Registrant
23.01        --  Consent of PricewaterhouseCoopers LLP
24.01        --  Power of Attorney (included on the signature page to this
                 Report)
</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.

                                        58
<PAGE>   60

(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.

                                        59
<PAGE>   61

                                   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/ GERRY CHASTELET
                                            ------------------------------------
                                                      Gerry Chastelet
                                                   Chairman of the Board,
                                               President and Chief Executive
                                                           Officer

Date: March 30, 2001

                               POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gerry Chastelet and Steven H. Grant, jointly and
severally, as his or her attorney-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this Report
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.

     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>

                 /s/ GERRY CHASTELET                   Chairman of the Board,           March 30, 2001
-----------------------------------------------------    President and Chief Executive
                   Gerry Chastelet                       Officer (Principal Executive
                                                         Officer)

                 /s/ STEVEN H. GRANT                   Executive Vice President,        March 30, 2001
-----------------------------------------------------    Finance Chief Financial
                   Steven H. Grant                       Officer and Secretary
                                                         (Principal Financial Officer)

               /s/ WILLIAM F. HAMILTON                 Director                         March 30, 2001
-----------------------------------------------------
                 William F. Hamilton

                /s/ GERALD A. FALLON                   Director                         March 30, 2001
-----------------------------------------------------
                  Gerald A. Fallon

                /s/ ROBERT F. HUSSEY                   Director                         March 30, 2001
-----------------------------------------------------
                  Robert F. Hussey

               /s/ PETER A. GUGLIELMI                  Director                         March 30, 2001
-----------------------------------------------------
                 Peter A. Guglielmi
</TABLE>

                                        60
<PAGE>   62

                            DIGITAL LIGHTWAVE, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                              DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                  COL. A                       COL. B             COL. C               COL. D      COL. E
                  ------                     ----------   -----------------------    ----------   ---------
                                                                 ADDITIONS
                                                          -----------------------
                                                             (1)          (2)
                                             BALANCE AT   CHARGED TO   CHARGED TO                  BALANCE
                                             BEGINNING    COSTS AND      OTHER                     AT END
DESCRIPTION                                  OF PERIOD     EXPENSES     ACCOUNTS     DEDUCTIONS   OF PERIOD
-----------                                  ----------   ----------   ----------    ----------   ---------
<S>                                          <C>          <C>          <C>           <C>          <C>
Year 2000
  Allowance for doubtful accounts..........     $215         $161          $0           $126(a)     $250
  Inventory valuation......................      322          700           0            594(b)      428
Year 1999
  Allowance for doubtful accounts..........        0          215           0              0         215
  Inventory valuation......................       10          397           0             85(b)      322
Year 1998
  Inventory valuation......................       10            0           0              0          10
</TABLE>

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

(a) Amounts written off as uncollectible, payments or recoveries.

(b) Amounts written off at disposal of related inventory.

                                        61