<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, 1999

                                       OR

    [  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES EXCHANGE ACT OF 1934

               FOR THE TRANSITION PERIOD FROM ________ TO ________

                        COMMISSION FILE NUMBER: 0-21669
                            DIGITAL LIGHTWAVE, INC.
             (Exact name of Registrant as specified in its charter)

<TABLE>
     <S>                                                            <C>
                     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)
</TABLE>

      Registrant's telephone number, including area code)  (727) 442-6677

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

                                      NONE

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

                   COMMON STOCK, $0.0001 PAR VALUE PER SHARE

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

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

     The aggregate market value of Registrant's voting stock, held by
non-affiliates, computed by reference to the average of the closing bid and
asked prices of the Common Stock as reported by Nasdaq on March 29, 2000:
$799,422,690.

     The number of shares of Registrant's Common Stock issued and outstanding as
of March 29, 2000: 28,941,136.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None.
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<PAGE>   2

                                     PART I

     Certain statements contained in this report on Form 10-K including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Digital Lightwave, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in Item 1 under the heading "Factors That May Affect Operating Results." Given
these risks and uncertainties, readers are cautioned not to place undue reliance
on such forward-looking statements.

     A glossary of terms used in this Report appears at the end of this Item 1.

ITEM 1.  BUSINESS

GENERAL

     Digital Lightwave designs, develops, markets and supports diagnostic
products for monitoring, maintaining and managing fiber optic networks.
Telecommunications service providers utilize fiber optics to provide increased
network bandwidth to transmit Internet, voice, data, and multimedia video
traffic. Our products provide telecommunications 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
current customers include telecommunications service providers, such as GTE, MCI
WorldCom, Qwest Communications, Level 3 Communications, and Ameritech, and
telecommunications equipment manufacturers, such as Alcatel Network Systems,
Tellabs, Nortel Networks and Cisco Systems, and equipment leasing companies such
as Telogy and Technology Rental Services, formerly Newcourt Financial.

     Our products are used to qualify and verify service during network
installation and to provide ongoing real-time quality assurance for deployed
networks. In contrast to most existing telecommunications test equipment, our
products are based on modular and scaleable hardware and software platforms with
a flexible architecture that allows customers to readily upgrade existing
systems to accommodate new technologies.

     Our ASA 312 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 1998, we introduced our initial
Network Access Agent, which incorporates the technology developed for the
Network Information Computer and is an unattended, software-controlled
performance monitoring and diagnostic product permanently installed within
optical-based networks for management from a central location.

     In May 1999, we entered into an original equipment manufacturer agreement
with Lucent Technologies to provide dense wave division multiplexing optical
analysis and performance monitoring for advanced fiber optic networks. Under
this agreement, we will incorporate our network analysis technology into an
optical monitoring system, the WaveAgent, designed for integration with lucent
Technologies' next generation optical transmission system, the WaveStar OLS
400-G. Lucent Technologies' placement of orders is conditional upon Digital
Lightwave achieving certain development objectives and Lucent Technologies'
customer demand. In January 2000, we announced that we had received an order for
four WaveAgents from Lucent for the initiation of customer lab trials.

     The Company was 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.
<PAGE>   3

INDUSTRY

     Over the past several years, the telecommunications industry has undergone
fundamental changes. The volume of traffic carried over telecommunications
networks has increased significantly, principally as the result of the rapid
growth of data traffic as well as steady growth of voice traffic. Data traffic
has increased substantially due to a variety of factors, including the Internet,
e-commerce, fax, video and a proliferation of bandwidth intensive applications.

     The telecommunications industry has addressed the demand for increased
network capacity by installing new fiber optic transmission lines, increasing
transmission rates and employing new technologies such as Dense Wave Division
Multiplexing (DWDM), a process that increases the carrying capacity of existing
fiber. Faster transmission speeds and new technologies magnify the complexity of
telecommunications 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 the T-Carrier protocol, SONET and 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 increasing demand for telecommunications capabilities, together with
worldwide deregulation of the telecommunications 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
telecommunications industry becomes more competitive, network communications
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, test equipment is required to qualify and verify the
communications infrastructure, 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

     Our products provide telecommunications 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 and
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. Our Network Information Computers were designed 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

                                        2
<PAGE>   4

and our Network Access Agents to continue to develop 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
telecommunications networks and transmission equipment. The Network Information
Computer was designed 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, telecommunications
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.
Telecommunications 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.

     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>

                                        3
<PAGE>   5

     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, 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. 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 installed within
optical networks for analysis and management of a telecommunications network
from a 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 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 telecommunications 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.

     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>

                                        4
<PAGE>   6

     Future Products and Enhancements.  On January 18, 2000, we announced the
industry's first portable computer for OC-192 fiber optic network testing. We
plan to leverage the core technologies of our Network Information Computer and
Network Access Agents to continue to develop a family of advanced products and
enhancements that address the evolving needs of the optical networking industry.

CUSTOMERS

     Through December 31, 1999, we have sold over 2,300 units of the Network
Information Computer and approximately 20 Network Access Agents to over 140
customers. Set forth below is a representative list of purchasers of our
products:

REGIONAL BELL OPERATING COMPANIES
Ameritech Corporation
Bell Atlantic Communications, Inc.
Pacific Telesis Group
SBC Communications, Inc.
US West Communications, Inc.

EQUIPMENT MANUFACTURERS
ADC Telecommunications
Alcatel Network Systems, Inc.
CIENA
Cisco Systems, Inc.
Fujitsu
Hitachi Telecom Technologies Co., Ltd. (USA)
Lucent Technologies, Inc.
NEC America, Inc.
Nortel Networks
QUALCOMM
Tellabs Operations, Inc.

COMPETITIVE LOCAL EXCHANGE CARRIERS
AT&T Local Service (TCG)
Electric Lightwave
GST
Hyperion Communications
ICG Communications
MFS WorldCom
WorldxChange Communications

INDEPENDENT TELEPHONE COMPANIES
Frontier Communications
GTE Corp.

EQUIPMENT LEASING COMPANIES
GE Capital
McGrath Rentelco
Technology Rental Services
Telogy

INTEREXCHANGE CARRIERS
AT&T Corp.
IXC Communications, Inc.
Level 3 Communications, Inc.
MCI WorldCom, Inc.
Qwest Communications

WIRELESS SERVICE PROVIDERS
AT&T Wireless
GTE Mobilnet
Pacific Bell Mobile Services

PRIVATE NETWORK OPERATORS
Bear Stearns & Co., Inc.
IBM Global Services
Time Warner
U.S. Department of Defense

     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, 1999, our two largest customers accounted
for approximately 39% of total revenue, with Telogy and Technology Rental
Services, or "TRS" that was formerly Newcourt Financial, accounting for 21% and
18% of total sales, respectively. Both Telogy and TRS purchase our products for
lease to end users in the telecommunications 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. For the year ended December 31, 1997, sales to our
five largest customers comprised 69% of our total revenues, with WorldCom, Inc.,
prior to its acquisition of MCI Communications Corporation, and its subsidiaries
accounting for 42% of our total sales. No other customers accounted for sales of
10% or more during those years. Some of the customers highlighted in years prior
to 1999 as accounting for more than 10% continued to purchase at similar dollar
levels in 1999 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.

                                        5
<PAGE>   7

See "Factors That May Affect Operating Results -- We are dependent on a limited
number of major customers."

SALES, MARKETING AND CUSTOMER SUPPORT

     Sales.  We sell our products to telecommunications service providers and
network equipment manufacturers through a sales organization of 30 employees,
including managers, sales engineers and sales administrative staff based at our
principal executive offices and across 14 regions 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 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.

     Marketing.  In marketing the Network Information Computer, we focus on the
divisions of telecommunications service providers that are responsible for
planning and installing extensions of the network, as well as the quality
assurance divisions of telecommunications equipment manufacturers. In marketing
the Network Access Agents, we have directed our preliminary efforts towards the
strategic planning divisions of telecommunications service providers and private
network operators in order to define customer requirements. We seek to build
awareness of our products through a variety of marketing channels and
methodologies, including industry trade shows 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 12 employees. All
service and repair is performed at our Clearwater, Florida facility by a factory
repair group which is accounted for within our manufacturing functional area.
Technical support is provided through our toll-free hotline, or through 5 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 a three-year limited
warranty on all components of our products other than the laser transmitter
unit, which has a one-year limited warranty.

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. 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,
several key components used in the manufacture of our products are currently
purchased only 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 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 components, or our inability 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 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.
                                        6
<PAGE>   8

     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, 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, currently ranging in size from three to eleven engineers. The
teams are organized around the development of a particular product, and are
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.

     As of February 14, 2000, our engineering and development department
consisted of 50 individuals, 41 of whom are full time employees and the
remainder of whom are contractors. During fiscal years 1999, 1998 and 1997, we
spent approximately $10.2, $14.3 million and $5.3 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, 2000, in the United States, we have
three issued patents relating to the Network Information Computer and Network
Access Agent. We have filed continuation applications for each of these issued
patents. We have applied and may apply for additional patents for our Network
Access Agent 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 a
third party 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 telecommunications industry is characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. We have no reason to believe that our technology infringes
on the proprietary rights of others and we have not received any notice of
claimed infringements. Nonetheless, third parties may assert infringement claims
against us in the future that may or may not be successful. If we must defend
ourselves or our customers against such claims, we could incur substantial costs
regardless of the merits of the claims. Parties making such claims may be able
to obtain injunctive or other equitable relief 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.

                                        7
<PAGE>   9

BACKLOG

     Our backlog at December 31, 1999 was approximately $7.9 million. Variations
in the size and delivery schedule of purchase orders we receive, as well as
changes in customers' delivery requirements, may result in 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 telecommunications 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 six principal competitors that currently offer
products that compete with the Network Information Computer, including Agilent
that was formerly Hewlett-Packard, Telecommunications Techniques Corporation or
"TTC," a subsidiary of Dynatech, Anritsu, Tektronix, Wavetek Wandel Goltermann,
or "WWG", and ANDO. TTC and WWG announced plans to merge on February 14, 2000.
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 in a
single, upgradeable, portable unit. Although there are several companies that
offer network monitoring and test instruments, including Hekimian Laboratories,
Inc., TTC, Applied Digital Access, which merged with TTC on November 1, 1999,
and Sage Instruments, none of these companies offer lightwave network monitoring
products in competition with our 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. In the event we sell
our products in international markets, it will be necessary for our products to
comply with standards established by telecommunications 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.

                                        8
<PAGE>   10

EMPLOYEES

     As of February 14, 2000, we employed a full-time staff of 163 employees, of
which 82 were engineering and production personnel, and the remainder were sales
and marketing staff and administrative personnel. We believe that our
relationship with our employees is good.

                   FACTORS THAT MAY AFFECT OPERATING RESULTS

     We are uncertain about the future of our business and, in preparing this
Annual Report, have made a number of assumptions and projections. We generally
use words like "expect," "believe" and "intend" to indicate these assumptions
and projections. Our assumptions and projections could be wrong for many
reasons, including the reasons discussed below.

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 ASA
312 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 a sales and marketing group; and

     - Build an administrative organization.

     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
year ended December 31, 1999. As a result or our 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, 1999, our accumulated net losses totaled approximately $40.7
million. We anticipate that our costs will continue to increase for the
foreseeable future as we create and introduce new products and technologies and
develop additional distribution channels. We expect that any related increases
in revenues will lag behind these cost increases for the foreseeable future. If
we cannot sustain operating profitability or positive cash flow from operations,
we may not be able to meet our 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 early stage companies, particularly
companies in intensely competitive and rapidly evolving markets such as the
telecommunications 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;

     - Establish, maintain and enhance the Digital Lightwave brand; 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.

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<PAGE>   11

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:

     - 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 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;

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

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

     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.

     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. 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 Network Access Agents, our ability to

                                       10
<PAGE>   12

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.

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 in order to expand our product lines and offer
our products and services to a larger customer base. For example, we recently
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 never sold products on an original equipment
manufacturer basis before. 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;

     - 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.

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;

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

                                       11
<PAGE>   13

     - Increase market acceptance of our products.

     We cannot assure you that we will be able to meet these objectives. If we
fail to adapt to changing market conditions or customer requirements, our
business, financial condition and operating results would be materially
adversely affected.

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 that was formerly Hewlett Packard, Telecommunications Techniques
Corporation or "TTC" and a subsidiary of Dynatech, Tektronix, Anritsu, Wavetek
Wandel Goltermann or "WWG", ANDO Corporation and other companies which offer
network monitoring products. TTC and WWG announced plans to merge on February
14, 2000. Our principal competitors with respect to our Network Access Agents
are Hekimian Laboratories, Inc., TTC, Applied Digital Access, which merged with
TTC on November 1, 1999, and Sage Instruments, although these companies have
designed products primarily for copper-based legacy networks. We are a relative
newcomer to the telecommunications 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.

WE ARE DEPENDENT ON A LIMITED NUMBER OF MAJOR CUSTOMERS

     For the year ended December 31, 1999, our two largest customers accounted
for approximately 39% of total revenue, with Telogy and Technology Rental
Services or "TRS" that was formerly Newcourt Financial, accounting for 21% and
18% of total sales, respectively. Both Telogy and TRS purchase our products for
lease to end users in the telecommunications 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. For the year ended December 31, 1997, sales to our
five largest customers comprised 69% of our total revenues, with WorldCom, Inc.,
prior to its acquisition of MCI Communications Corporation, and its subsidiaries
accounting for 42% of our total sales. Some of the customers highlighted in
years prior to 1999 as accounting for more than 10% continued to purchase at
similar dollar levels in 1999 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.

                                       12
<PAGE>   14

     Our success is dependent upon our ability to broaden our customer base to
increase the level of sales. None of our customers has a written agreement with
us that obligates it to purchase additional products, and we cannot assure you
that our customers will purchase additional products. We also cannot assure you
that we will be able to retain our largest customers or to attract additional
major customers. If we lose one or more of our major customers or if we fail to
broaden our customer base, it could have a material adverse effect on our
business, financial condition and results of operations.

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

     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. Although we are
attempting to identify additional potential component manufacturers, we cannot
assure you that we will be able to obtain 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, 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 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.

OUR PRINCIPAL STOCKHOLDER HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY

     As of March 29, 2000, Dr. Bryan J. Zwan, a director of Digital Lightwave,
together with entities affiliated with him, beneficially owned approximately
63.7% of the outstanding shares of our common stock (including approximately 3.4
million shares, or 11.6%, 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.
                                       13
<PAGE>   15

FAILURE TO 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 intend to extend 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;

     - Increase, train and manage our work force;

     - Develop our sales and marketing network; 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 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, 2000, in the United States, we have
three issued patents relating to the Network Information Computer and Network
Access Agent. We have filed continuation applications for each of these issued
patents. We have applied and may apply for additional patents for our Network
Access Agent 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. 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 telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. We have no reason to believe that our technology infringes on the
proprietary rights of others and we have not received any notice of claimed
infringements. Nonetheless, third parties may assert infringement claims against
us in the future that may or may not be successful. If we must defend ourselves
or our customers against such claims, we could incur substantial costs
regardless of the merits of the claims. Parties making such claims may be able
to obtain injunctive or other equitable relief 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. We cannot assure you that
any such licenses would be available on terms acceptable to us, if at all.

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, one of our
                                       14
<PAGE>   16

directors and 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. We believe that we have fulfilled our
obligations under the settlement agreement and that the claims made by Plaintiff
against us in this action are without merit. Accordingly, in response to this
action, we filed a motion to dismiss for failure to state a claim against
Digital Lightwave. However, there can be no assurance that our motion will be
granted, or if the motion is denied, that we will succeed in defending or
settling this action. Additionally, we cannot assure you that the action will
not have a material adverse effect on Digital Lightwave.

     On November 23, 1999, Seth P. Joseph, a former officer of Digital
Lightwave, filed a demand for arbitration against us. While the exact scope and
nature of Mr. Joseph's claims are unclear at this time, according to his demand,
he is alleging breach of his employment agreement, 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. On December 17,
1999, we filed our answer denying Mr. Joseph's allegations and alleging multiple
affirmative defenses. We intend to vigorously oppose Mr. Joseph's claim.
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.

     On March 29, 2000, the Commission filed a complaint in the United States
District Court for the Middle District of Florida alleging that Dr. Zwan, our
director and former Chairman and Chief Executive Officer, violated Sections
17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of
the Securities Exchange Act of 1934, and Rules 10b-5 and 13b2-2 thereunder, and
that he aided and abetted the Company's alleged violations of Sections 13(a) and
13(b)(2) of the Exchange Act, and Rules 13a-13 and 12b-20 thereunder. The
allegations arise from the Commission's investigation regarding the Company's
restatement of its financial results for certain periods during 1997. We cannot
assure you that the action will not have a material adverse effect on Digital
Lightwave.

     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 prospectus, we were not aware of any
additional litigation, claims or assessments that were pending that could have a
material adverse effect on our business, financial condition and operating
results.

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, 2000,

                                       15
<PAGE>   17

28,941,136 shares of common stock were outstanding. Of these shares, 13,864,386
were eligible for sale in the public market without restriction (including
approximately 3.4 million by Dr. Zwan which are subject to forward sales
agreements). The remaining 15,076,750 shares of outstanding common stock were
held by Dr. Zwan, one of our directors. 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. In addition, in connection with the settlement
of the class action litigation against us, we expect to issue up to 1.8 million
shares of common stock, all of which will be freely tradable immediately upon
issuance. As of March 29, 2000, 423,624 shares of common stock have been issued
in partial satisfaction of this settlement.

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.

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; and

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

     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.

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.
                                       16
<PAGE>   18

WE MAY EXPERIENCE "YEAR 2000" PROBLEMS

     Many currently installed computer systems and software products are coded
to accept only two digit entries for the year in the date code field and, as a
result, cannot distinguish 21st century dates from 20th century dates. Failure
to distinguish 21st century dates from 20th century dates could result in
systems failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.

     Now that the Company has entered the Year 2000, we have continued testing
our product, internal IT and non-IT systems and, to date, we have not
experienced any material Year 2000 disruptions or failures, nor have we been
notified of any disruptions or failures by any of our third party customers,
vendors and others with whom the Company does business. However, there is an
ongoing risk that Year 2000 related problems could still occur and we will
continue to monitor Year 2000 issues as they relate to our internal systems, our
products, third parties with whom we interact, and industry trends. We cannot
assure that our Year 2000 compliance program, or similar programs by third
parties with whom we do business, will be successful. We may incur significant
costs in resolving any Year 2000 issues that may arise in the future. If not
resolved, these issues could have a significant adverse impact on our business,
operating results, and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000
Disclosure".

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. In the event we sell our products in
international markets, it will be necessary for our products to comply with
standards established by telecommunications 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.

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<PAGE>   19

                                    GLOSSARY

     Asynchronous -- Signals that are not generated from the same timing
reference and are therefore not identical in frequency.

     ATM (asynchronous transfer mode) -- An information transfer standard that
is one of a general class of technologies that relay traffic by way of an
address contained within the first five Bytes of a standard 53-Byte-long packet
or cell. The ATM format can be used by many different information systems,
including the public telecommunications network, WANs and LANs, to deliver
traffic at varying rates, permitting the efficient delivery of enhanced data
services and multimedia, which is a mix of voice, video and data.

     Bandwidth -- The range of frequencies that can be transmitted through a
medium, such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium.

     Bit -- A contraction of the term binary digit which represents a single
digit of information expressed as a 0 or 1, high or low, or yes or no.

     Byte -- Abbreviation for binary term. A unit of information consisting of 8
bits. In computer processing, equivalent of a single character such as a letter
of the alphabet, a numeral or punctuation mark.

     CAP (Competitive Access Provider) -- A company that provides its customers
with an alternative to the Regional Bell Operating Companies for local transport
of private line, special access and interstate transport of telecommunications
service.

     Cladding -- Welding of one substance over another.

     Competitive Local Exchange Carriers (CLECs) -- Category of telephone
service provider (carrier) that offers local exchange services, as allowed by
recent changes in telecommunications law and regulation. A Competitive Local
Exchange Carrier may also provide other types of service such as long distance,
Internet access, and entertainment.

     Cross-connect equipment -- Distribution system equipment used to terminate
and administer communication circuits. In a wire cross connect, jumper wires or
patch cords are used to make circuit connections. In an electronic cross
connect, signals are electronically switched to make circuit connections.

     Demultiplex -- The process of separating two or more signals that were
previously multiplexed.

     Dense Wave Division Multiplexing (DWDM) -- A technology that permits the
transmission of multiple lightwave signals over a single optical fiber.

     Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies (both
fiber and microwave) employ a sequence of these pulses to represent information
as opposed to the continuously variable analog signal.

     DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 Kbps and can
transmit one voice conversation. DS-1 service has a bit rate of 1.544 Mbps and
can transmit 24 simultaneous voice conversations. DS-3 service has a bit rate of
45 Mbps and can transmit 672 simultaneous voice conversations.

     Ethernet -- A protocol commonly used on LANs.

     Enhanced data services -- Products and services designed for the transport
and delivery of integrated information to include voice, data and video and any
combination thereof.

     Fiber optics -- A transmission medium consisting of a core of glass or
plastic surrounded by a protective cladding of similar material, strengthening
material and an outer jacket which guides light pulses introduced into the fiber
by a light source.

                                       18
<PAGE>   20

     Firmware -- Software that is contained semi-permanently in a hardware
device or memory and which can be rewritten.

     Gate array -- A circuit that has a number of logical circuits arranged in
an array, or regular pattern, normally customized to suit a specific
application.

     Gigabit per second (Gbps) -- One billion bits of information per second.
The information carrying capacity (i.e., bandwidth) of a circuit may be measured
in "gigabits per second."

     Graphical user interface -- A type of display format that enables the user
to choose commands, start programs and see lists of files and other options by
pointing to pictorial representations and lists of menu items on the screen.

     Integrated circuit (microprocessor) -- A series of miniaturized
interconnected electronic circuits inseparably associated within a
semi-conductor substrate.

     Internet -- The name used to refer to the world's largest interconnected
network, consisting of thousands of networks which interchange information
through a common communications protocol.

     ISO 9001 -- An international standard for quality management and assurance.

     IXC (InterExchange Carrier) -- A company providing long distance services
or service within local access and transport areas on an intrastate or
interstate basis.

     Kilobit per second (Kbps) -- One thousand bits of information per second.
The information-carrying capacity (i.e., bandwidth) of a circuit may be measured
in "kilobits per second."

     LAN (Local Area Network) -- A group of computers and other devices
dispersed over a relatively limited area and connected by a communications link
that enables any device to interact with any other on the network.

     Legacy -- Older generations of transmission or other technologies which
continue to be utilized in telecommunications networks.

     Lightwave -- Light as a communication signal over fiber-optic cable
traveling as discrete pulses, each representing one bit of digital information.

     Lightwave Management -- The intelligent termination, integration and
switching of lightwave communications.

     Megabit per second (Mbps) -- One million bits of information per second.
The information-carrying capacity (i.e., bandwidth) of a circuit may be measured
in "megabits per second."

     Multiplex -- The process of combining two or more signals for transmission
over the same circuit or channel at the same time.

     Network Access Agent -- A product of the Company designed to be distributed
throughout a network to provide network operators with real-time information
concerning the network segments where the Network Access Agent has been
installed. This product can be centrally monitored and administered.

     Network element -- A functional entity in a network, such as a multiplexer,
a switch interface or a digital cross-connect.

Network Information Computer -- A portable product of the Company designed to
allow users to access and process real time information concerning the
performance of telecommunications networks and transmission equipment.

     Network Protocol Processors (NPPs) -- Modular electronic assemblies
containing hardware, firmware and software for the processing of information
encoded in a specific protocol over a range of bandwidth.

     Network Protocol Translators (NPTs) -- Modular gate arrays or field
programmable gate arrays which logically process discrete network information
from signals at specific bandwidths and specific protocols.

                                       19
<PAGE>   21

     Non-blocking switch matrix -- 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.

     OC-1, OC-3, OC-12, OC-48, OC-192 -- Optical carrier signaling rates,
measured in bits transmitted per second. The basic rate for OC-1 is 51.840 Mbps.
All higher levels are direct multiples of OC-1 (e.g., OC-12 = 12 times 51.840
Mbps).

     OEM (Original Equipment Manufacturer) -- The maker of equipment marketed by
another vendor, usually under the name of the reseller.

     Overhead -- Information carried in network transmissions, other than
payload, including routing information, error-checking characters and status and
operational information.

     Packet -- A bundle of data organized for transmission which includes
control information, the data to be transmitted, and error detection bits.

     Payload -- User transmitted data, including voice, data and/or video
content, which may include network management and accounting information.

     PDH (Plesiochronous Digital Hierarchy) -- Two or more signals that are not
generated from the same timing reference but are nominally at the same frequency
to a defined degree of precision.

     Protocol -- A specific set of rules, procedures or conventions relating to
the format and timing of data transmission between two devices.

     RAM -- Random access memory. The primary memory in a computer which can be
overwritten with new information. Any bit in memory can be located in the same
amount of time, hence random access.

     Regional Bell Operating Companies (RBOCs) -- The seven original local
telephone companies (formerly part of AT&T) established by court decree in 1982.

     SDH (Synchronous Digital Hierarchy) -- An electronics and network
architecture and protocol utilized on most continents other than North America
for variable optical bandwidth products which enables transmission of voice,
video and data (multimedia) at very high speeds.

     SONET (Synchronous Optical Network Technology) -- 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 (multimedia) at very high speeds.

     Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.

     Switch matrix -- A series of gate arrays or switches which provide for the
routing of signals from one circuit path to another. T-Carrier or T-1 or
T-3 -- Insulated copper wire cables which carry electrically transmitted digital
signals. A T-1 cable carries a DS-1 signal (1.544 Mbps), and a T-3 cable carries
a DS-3 signal (45 Mbps). Also, a generic name for any of several digitally
multiplexed carrier systems originally designed to carry digitalized voice
signals.

     Test instruments -- Equipment that indicates the state or condition of a
signal, such as on a fiber or metallic cable, primarily measuring level,
frequencies and faults and other conformal signal information.

     Web or World Wide Web or WWW -- An Internet network that links documents by
providing hypertext links from server to server. It allows a user to jump from
document to related document no matter where it is stored on the Internet. World
Wide Web client programs, or Web browsers, allow users to "browse" the Web.

     Wide Area Network (WAN) -- A network typically extending a LAN outside the
building over common carrier telephone lines connecting other LANs possibly in
different cities.

                                       20
<PAGE>   22

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 expires 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, Bryan J. Zwan,
a current director of the Company and our former Chairman and Chief Executive
Officer, Steven H. Grant, the Company's Executive Vice President, Finance, Chief
Financial Officer and Secretary, and other former corporate officers. The
complaints allege 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.

     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 is now final.

     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, on March 29, 2000, the Commission's
complaint filed in the District Court also alleges that Dr. Zwan, a director and
former Chairman and Chief Executive Officer of the Company, violated Sections
17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of
the Securities Exchange Act of 1934, and Rules 10b-5 and 13b2-2 thereunder, and
that he aided and abetted the Company's alleged violations of Sections 13(a) and
13(b)(2) of the Exchange Act, and Rules 13a-13 and 12b-20 thereunder. In
addition, the Commission concurrently 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 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

                                       21
<PAGE>   23

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 its 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. We believe that we have fulfilled our
obligations under the settlement agreement and that the claims made by Plaintiff
against us in this action are without merit. Accordingly, in response to this
action, we filed a motion to dismiss for failure to state a claim against
Digital Lightwave. However, there can be no assurance that our motion will be
granted, or if the motion is denied, that we will succeed in defending or
settling this action. Additionally, we cannot assure you that the action will
not have a material adverse effect on Digital Lightwave.

     On November 23, 1999, Seth P. Joseph, a former officer of Digital
Lightwave, filed a demand for arbitration against us. While the exact scope and
nature of Mr. Joseph's claims are unclear at this time, according to his demand,
he is alleging breach of his employment agreement, 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. On December 17,
1999, we filed our answer denying Mr. Joseph's allegations and alleging multiple
affirmative defenses. We intend to vigorously oppose Mr. Joseph's claim.
However, there can be no assurance that we will succeed in defending this
action.

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

     During the fourth quarter of 1999, no matters were submitted to a vote of
stockholders through the solicitation of proxies or otherwise.

                                       22
<PAGE>   24

                                    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>
1997
1st Quarter (from February 7, 1997).........................  $12.875   $ 7.125
2nd Quarter.................................................    9.250     3.250
3rd Quarter.................................................   17.750     7.875
4th Quarter.................................................   23.750    12.000
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
</TABLE>

     On March 29, 2000, the closing bid and ask prices of the Company's Common
Stock were $76.00 and $76.50, respectively. As of March 29, 2000, there were
approximately 120 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 from 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, 1999, there were no other sales
of unregistered securities.

                                       23
<PAGE>   25

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,
                                   -------------------------------------------------------------------------
                                      1999          1998            1997            1996            1995
                                   -----------   -----------     -----------     -----------     -----------
<S>                                <C>           <C>             <C>             <C>             <C>
Consolidated Statement of
  Operations:
  Sales..........................  $    50,474   $    24,191     $     9,081     $     6,044     $        --
  Cost of goods sold.............       17,431         9,219           3,124           2,079              --
                                   -----------   -----------     -----------     -----------     -----------
         Gross Profit............       33,043        14,972           5,957           3,965              --
Operating expenses:
  Engineering and development....       10,204        14,335           5,342           2,403           1,509
  Selling and marketing..........       12,724        11,363           5,260           1,706             199
  General and administrative.....        5,240         7,223           3,812           1,380           1,017
  Reorganization charges(1)......           --         1,018              --              --              --
  Litigation settlements(2)......           --        11,500              --              --              --
                                   -----------   -----------     -----------     -----------     -----------
         Total operating
           expenses..............       28,168        45,439          14,414           5,489           2,725
                                   -----------   -----------     -----------     -----------     -----------
Income (loss)from operations.....        4,875       (30,467)         (8,457)         (1,524)         (2,725)
Other income (expense)...........           78           642           1,767            (584)           (609)
                                   -----------   -----------     -----------     -----------     -----------
         Net income (loss).......  $     4,953   $   (29,825)    $    (6,690)    $    (2,108)    $    (3,334)
                                   ===========   ===========     ===========     ===========     ===========
Income (loss)per share...........  $       .18   $     (1.13)    $      (.25)    $      (.10)    $      (.08)
                                   ===========   ===========     ===========     ===========     ===========
Diluted income (loss) per
  share..........................  $       .17   $       n/a(4)  $       n/a(4)  $       n/a(4)  $       n/a(4)
                                   ===========   ===========     ===========     ===========     ===========
Weighted average shares(3).......   26,808,158    26,475,749      26,084,208      21,375,584      38,989,963
Weighted average shares and
  common equivalent shares.......   29,151,628    26,494,439      27,060,221      21,829,235      39,443,614
Consolidated Balance Sheet Data:
  Working capital (deficit)......  $    12,913   $     2,267     $    32,495     $     2,349     $    (8,595)
  Total assets...................       39,998        27,558          44,361           6,374           1,277
  Total long-term debt...........          498           281              25             983           7,985
  Stockholders' equity
    (deficit)....................       22,153        12,320          39,419           3,449          (8,163)
</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 14 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 15 of the Consolidated Financial Statements -- Legal Proceedings.
(3) On November 30, 1995, the Company purchased 19,215,686 shares of Common
    Stock from a former stockholder pursuant to an option granted to the Company
    by the former stockholder in February 1995. See "Factors That May Affect
    Operating Results -- We are defending significant litigation," "Item 3 --
    Legal Proceedings" and Notes 9 and 15 of the Consolidated Financial
    Statements -- Related Party Transactions and Legal Proceedings.
(4) Incremental shares for common stock equivalents are not included in the loss
    per share calculations due to the anti-dilutive effect.

                                       24
<PAGE>   26

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 limited operating history and cumulative losses, anticipated
fluctuations in operating results and seasonal sales, dependence on limited
products, uncertain market acceptance of planned products, uncertainty regarding
our ability to enter into OEM agreements, rapid technological change, dependence
on new product introductions, competition, dependence on a limited number of
customers, dependence on contract manufacturing and sole or limited source
suppliers, substantial influence of principal stockholder, dependence on key
personnel, management of growth, anticipated fluctuations in operating results,
dependence on proprietary technology, success in defending significant
litigation, shares eligible for future sale, possible volatility of stock price,
factors inhibiting takeover, potential year 2000 problems 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, markets and supports diagnostic
products that monitor, maintain and manage fiber optic-based networks. The
Company's products provide telecommunications 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, 1999, the Company had sold approximately 2,300
Network Information Computers to approximately 140 customers such as MCI
WorldCom, Ameritech Corporation, Tellabs, Qwest, GTE and Level 3 Communications.
In 1998, the Company commenced limited sales of the Network Access Agent. Net
sales for the Company were approximately $50,474,000, $24,191,000 and $9,081,000
for the years ended December 31, 1999, 1998 and 1997, 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 gross of the return accrual was approximately $41,507,
$31,232 and $32,642 for the years ended December 31, 1999, 1998, and 1997,
respectively. The average sales price ("ASP") of the Network Access Agent gross
of the return accrual was approximately $29,595 and $39,679 for the years ended
December 31, 1999 and 1998, 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.

     The Company sells its products through a direct sales force to
telecommunications service providers and equipment manufacturers. The sales
cycle for new customers tends to be long. In addition, the telecommunications
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, 1999, the
Company's

                                       25
<PAGE>   27

two largest customers accounted for approximately 39% of total revenues, with
Telogy and Technology Rental Services ("TRS", formerly, Newcourt Financial)
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. For the year
ended December 31, 1997, the Company's five largest customers comprised 69% of
total revenues, with WorldCom, Inc. (prior to its acquisition of MCI
Communications Corporation) and its subsidiaries accounting for 42% of total
sales. No other customers accounted for sales of 10% or more during such
periods. Many of the customers highlighted in years prior to 1999 as accounting
for more than 10% continued to purchase at similar dollar levels in 1999
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
product 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 trails.

     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 reduced in
response to decreased revenues, quarterly fluctuations in sales have a
significant effect on net income.

     Since inception the Company had incurred substantial net operating losses
as a result of significant investment in research and development, sales and
marketing and administrative expenses until the quarter ended June 30, 1999 when
the Company showed its first profitable quarter. Profitability was sustained
through the end of 1999 with earnings of approximately $5.0 million on a
year-to-date basis. As of December 31, 1999, the Company had an accumulated
deficit of approximately $41 million and net operating loss carryforwards of
approximately $54 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.

     In January 1998, the Company restated its revenues from the second and
third quarters of fiscal 1997. The Company's decision to restate the 1997
results of operations resulted from the discovery of certain errors in the
timing of revenue recognition and a review of related accounting policies and
procedures. A committee consisting of the outside members of the Company's board
of directors was established to review the policies, procedures and
circumstances which may have been factors in the restatement of revenue and made
recommendations regarding the adoption of appropriate revenue recognition
policies and procedures. In April 1998, 23 class action lawsuits (which were
subsequently consolidated into a single action) were filed against the Company
arising out of such restatement and alleged violations of the federal securities
laws. The Company settled the class action and recorded a charge of $8.5 million
in the second quarter of 1998 as a result of the settlement. Pursuant to the
terms of the settlement, the Company will pay $4.25 million in cash, which
payment will be primarily funded by the Company's directors' and officers'
liability insurance policy, and issue 1.8 million shares of Common Stock of the
Company, all of which may be freely tradable. In late
                                       26
<PAGE>   28

October 1998, a Stipulation of Settlement was filed with the court and on
December 21, 1998, the court preliminarily approved the settlement. The Court
entered a final judgment approving the settlement on April 30, 1999.

     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. The District
Court's judgment approving settlement of the class action is now final.

     During February 1995, the Company entered into a Stock Purchase Option (the
"Option") with a former stockholder to repurchase the 19,215,686 shares of the
then outstanding class of common stock held by the former stockholder for a
purchase price of $2.5 million. The purchase price was subsequently reduced to
$800,522. On November 30, 1995, the Company exercised the Option and retired the
shares of treasury stock acquired. In November 1997, the former stockholder
commenced an action in the United States District Court alleging violations of
Section 10(b) of the Securities Exchange Act, violations of state corporation
statutes, and various common law violations in connection with the exercise of
the Option. On October 20, 1998, the Company and Dr. Zwan entered into an
agreement with Plaintiff to settle the action. The settlement agreement
provides, 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 grants
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. See "Factors That May Affect Operating
Results -- We are defending significant litigation" and Note 15 of the
Consolidated Financial Statements and "Item 3 -- Legal Proceedings."

     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. We believe that we have fulfilled our
obligations under the settlement agreement and that the claims made by the
Plaintiff against us in this action are without merit. Accordingly, in response
to this action, we filed a motion to dismiss for failure to state a claim
against Digital Lightwave. However, there can be no assurance that our motion
will be granted, or if the motion is denied, that we will succeed in defending
or settling this action. Additionally, we cannot assure you that the action will
not have a material adverse effect on Digital Lightwave.

     In order to decrease costs and improve operating efficiencies, the Company
began streamlining its management and operating structure in February 1998 and
eliminated 20 full time positions resulting in a one-time charge of $1.0 million
in connection with this restructuring. Additionally, the Company eliminated
approximately 55 full time positions in August 1998 which did not result in a
significant charge to earnings. During 1998, the Company also significantly
enhanced its management team by hiring new executives, including a new President
and Chief Executive Officer hired at the end of the year.

     On October 14, 1999, the Company and Dr. Bryan J. Zwan, the Company's
majority stockholder and a director, entered into an agreement 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 resign, (iii) the newly formed Board will serve at
least until the Company's annual meeting in 2001 and (iv) the Company will enter
into arrangements containing certain provisions with respect to change of
control, severance and non-competition with current senior management.

     On November 23, 1999, Seth P. Joseph, a former officer of Digital
Lightwave, filed a demand for arbitration against us. While the exact scope and
nature of Mr. Joseph's claims are unclear at this time, according to his demand,
he is alleging breach of his employment agreement, 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. On December 17,
1999, we filed our answer denying Mr. Joseph's allegations and alleging
                                       27
<PAGE>   29

multiple affirmative defenses. We intend to vigorously oppose Mr. Joseph's
claim. However, there can be no assurance that we will succeed in defending this
action.

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,
                                                              --------------------
                                                              1999    1998    1997
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Net sales...................................................  100%     100%   100%
Cost of goods sold..........................................   34       38     34
                                                              ---     ----    ---
Gross profit................................................   66       62     66
Operating expenses:
  Engineering and development expenses......................   20       59     58
  Sales and marketing expenses..............................   25       47     58
  General and administrative expenses.......................   11       30     42
  Reorganization and litigation charges.....................   --       52     --
                                                              ---     ----    ---
          Total operating expenses..........................   56      188    158
                                                              ---     ----    ---
Operating income (loss).....................................   10     (126)   (92)
Other income (expense), net.................................   --        3     19
                                                              ---     ----    ---
Net income (loss)...........................................   10%    (123)%  (73)%
                                                              ===     ====    ===
</TABLE>

  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 $41,363 compared with 723 units (including 6 NAA's) at an ASP of
$31,302 for fiscal 1998. The primary increase in ASP (which is shown gross of
the accrual for product returns) 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 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, 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.

                                       28
<PAGE>   30

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 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.

                                       29
<PAGE>   31

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.

  YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

     Net Sales

     Net sales for the year ended December 31, 1998 increased by $15.1 million,
or 166%, to $24.2 million from $9.1 million in fiscal 1997. Sales to existing
customers for the year represented 77% of sales, or $18.6 million as compared to
55% of sales, or $5.0 million for fiscal 1997. During fiscal 1998, the Company
shipped 723 total units (including 6 NAA's) at an ASP (which is shown gross of
the accrual for product returns) of $31,302 compared with 275 units at an ASP of
$32,642 for fiscal 1997. Additionally, during 1998, the Company recognized $1.8
million of revenue from upgrades compared to $0.1 million in 1997. The
significant upgrade revenue in 1998 was related to the conversion of NIC's to
OC-48 speeds.

     Cost of Goods Sold

     Cost of goods sold for the year ended December 31, 1998 increased by $6.1
million to $9.2 million, or 38% of net sales, from $3.1 million, or 34% of net
sales in fiscal 1997. The primary reason for the increase in cost of goods sold
is the increase in the volume of units sold.

     Gross Profit

     Gross profit for the year ended December 31, 1998 increased by $9.0 million
to $15.0 million from $6.0 million last year. As a percentage of sales, gross
margin for the year ended December 31, 1998 decreased to 62% from 66% in 1997.

     The increase in gross profit is directly related to the increase in sales
for the year ended December 31, 1998. Despite the increase in sales, gross
margin percentages have decreased for the year. The primary reason for the
decline is the relatively flat ASP burdened with a higher average cost per unit
in 1998. The higher average cost per unit was affected by the introduction of
the new OC-48 configuration which costs more to produce than the lower speed
optical configurations and the sale of units produced in previous periods
requiring additional labor and overhead costs in order to provide the customer
with the most current configuration available.

Engineering and Development

     Engineering and development expenses for the year ended December 31, 1998
increased by $9.0 million to $14.3 million, or 59% of net sales, from $5.3
million, or 58% of net sales, last year.

     The increase was primarily related to the ongoing development efforts on
products, and enhancements to the Company's Network Information Computers (most
significantly, the OC-48 option). In addition, during the last two quarters of
1998, the Company incurred a significant level of overhead costs that could not
be absorbed into inventory production due to a lower level of production
activity during the last six months.

                                       30
<PAGE>   32

Sales and Marketing

     Sales and marketing expenses for the year ended December 31, 1998 increased
by $6.1 million to $11.4 million from $5.3 million in 1997. As a percentage of
net sales, sales and marketing expenses in the year ended December 31, 1998
declined to 47%, from 58% in 1997. The dollar increase was directly related to a
larger sales force, higher commissions resulting from the increased sales
activity, and an increase in marketing related expenses.

General and Administrative

     General and administrative expenses for the year ended December 31, 1998
increased by $3.4 million to $7.2 million from $3.8 million last year. As a
percentage of net sales, general and administrative expenses declined to 30%,
from 42% in 1997. The dollar increase is primarily due to a $3.3 million
increase in professional fees associated with outstanding litigation and various
legal matters.

Reorganization Charges

     During the year ended December 31, 1998, the Company actively pursued
streamlining its management and operating structure. During the first quarter,
the Company focused on its management structure and eliminated 20 positions
which resulted in a one-time charge of approximately $1.0 million. In August
1998, the Company streamlined its operating structure by eliminating
approximately 55 full-time positions which did not result in a material charge
to earnings or materially affect the Company's ability to operate.

Litigation Settlements

     The Company has settled fully a securities class action that had been 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 recorded
during 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, 1998 decreased by $1.1 million
to $0.6 million from $1.7 million in 1997. 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.

Net Loss

     Net loss for the year ended December 31, 1998 increased by $23.1 million to
a net loss of $29.8 million or $1.13 per share, from a net loss of $6.7 million
or $.25 per share in 1997. The increase in 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, 1999, 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

                                       31
<PAGE>   33

additional manufacturing and administrative space and a significant increase in
engineering, production and financial management personnel to support the
Company's growth.

     Cash and cash equivalents at December 31, 1999 were approximately $7.5
million compared to approximately $3.8 million at December 31, 1998. As of
December 31, 1999, the Company's working capital was approximately $12.9 million
as compared to $2.3 million at December 31, 1998. The increase in working
capital was primarily the result of the growth in trade accounts receivable
caused by record sales in 1999. For the year ended December 31, 1999, capital
expenditures were approximately $1.9 million. Future capital expenditures will
depend on several factors including timing of introductions of new products and
enhancements to existing products as well as continued product development
efforts.

     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 can 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 has 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 is
the prime rate plus 1.5%. The agreement also provides 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 is
still subject to the aggregate maximum amount the Company can borrow at one time
of $2.9 million. As of March 30, 2000, there were no borrowings outstanding
under this agreement.

     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 and the proposed line
of credit agreement with Emergent Business Capital described in the following
paragraph. 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. This registration took place on January 7, 2000 and the warrants were
subsequently exercised. The Secured Bridge Notes and related interest were paid
in full by January 17, 2000.

     On March 31, 1999, the Company entered into a Letter of Commitment with
Emergent Business Capital pursuant to which Emergent Business Capital would
provide the Company with a $5.0 million line of credit. In December 1999, the
Company chose not to proceed with this agreement. The Company recorded charges
related to costs deferred in anticipation of the issuance of this debt totalling
approximately $63,000.

     On April 19, 1999, the Company filed a registration statement with the
Securities and Exchange Commission relating to a public offering of $20.0
million of Convertible Subordinated Notes. In November 1999, the Board decided
not to proceed with the public offering. The Company recorded a charge of
approximately $0.3 million related to costs deferred in anticipation of the
issuance of this debt during the fourth quarter of 1999.

     On March 14, 2000, the Company entered into a non-binding Letter of
Commitment with Congress Financial Corporation pursuant to which Congress
Financial Corporation would provide the Company with a $10.0 million line of
credit (the "Congress Line of Credit"). Under the Congress Line of Credit, the
Company would be entitled to borrow up to $10.0 million, subject to certain
borrowing limitations based on amounts of the Company's accounts receivable and
other assets. The Congress Line of Credit will have an initial term of two
years. All indebtedness outstanding under the Congress Line of Credit Agreement
will be collateralized by

                                       32
<PAGE>   34

substantially all of the Company's assets. The transaction is subject to certain
conditions of closing including the completion of due diligence, execution of a
definitive agreement, and other customary items.

     The Company continues to consider various financing alternatives, including
the existing accounts receivable agreement with EAB, the Congress Line of
Credit, and 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.

YEAR 2000 DISCLOSURE

     The Company is aware of the issues associated with existing
computer-controlled systems properly recognizing and processing information
relating to dates in and after the Year 2000. Systems that cannot adequately
process dates beyond the year 1999 could generate erroneous data or cause a
system to fail. The problem may affect internal information technology ("IT")
systems used by the Company for product development, accounting, distribution
and planning. The problem may also affect non-IT embedded systems such as
building security systems, machine controllers, and other equipment. During
1999, the Company completed its assessment of its Year 2000 readiness for its
operations relating to (1) the Company's software products, (2) the Company's
internal IT and non-IT systems and (3) third party customers, vendors and others
with whom the Company does business. Appropriate corrective actions were taken.
The cost of the Year 2000 preparedness effort was funded through operating cash
flows and was expensed by the Company. The Company did not incur significant
expense in becoming Year 2000 compliant as both the majority of our product
software and the infrastructure of our internal systems were developed after the
Year 2000 risks were realized.

     Now that the Company has entered the Year 2000, we have continued testing
our product, internal IT and non-IT systems and, to date, we have not
experienced any material Year 2000 disruptions or failures, nor have we been
notified of any disruptions or failures by any of our third party customers,
vendors and others with whom the Company does business.

     Trends in customer spending patterns as a result of resources expended on
Year 2000 compliance efforts and Year 2000 litigation throughout the computer
industry were also identified by the Company as risks associated with Year 2000.
To date, we have seen no significant changes in customer purchasing patterns nor
are we aware of any Year 2000 litigation which might be brought against the
Company.

     However, there is an ongoing risk that Year 2000 related problems could
still occur and we will continue to monitor Year 2000 issues as they relate to
our internal systems, our products, third parties with whom we interact, and
industry trends. We cannot assure that our Year 2000 compliance program, or
similar programs by third parties with whom we do business, will be successful.
We may incur significant costs in resolving any Year 2000 issues that may arise
in the future. If not resolved, these issues could have a significant adverse
impact on our business, operating results, and financial condition.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133". 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. SFAS 133
will be effective for
                                       33
<PAGE>   35

quarters beginning after June 15, 2000. The Company does not currently maintain
any derivative instruments nor does it conduct any hedging activities,
therefore, SFAS No. 133 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. The
SAB is required to be adopted for the quarter ended June 30, 2000. The Company
is evaluating SAB 101 and the effect it may have on the consolidated financial
statements. At this time, management believes that SAB 101 will not have a
material impact on the Company's financial position or results of operations.

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..........   35
Consolidated Balance Sheets.................................   36
Consolidated Statements of Operations.......................   37
Consolidated Statements of Stockholders' Equity (Deficit)...   38
Consolidated Statements of Cash Flows.......................   39
Notes to Consolidated Financial Statements..................   40
FINANCIAL STATEMENT SCHEDULE
Report of Independent Certified Public Accountants on
  Financial Statement Schedule..............................   66
Schedule II -- Valuation and qualifying accounts............   67
</TABLE>

                                       34
<PAGE>   36

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Digital Lightwave, Inc. (the "Company") at December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, 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 the opinion expressed above.

                                          PricewaterhouseCoopers LLP
Tampa, Florida
January 31, 2000, except for Note 17, as to
which the date is March 29, 2000

                                       35
<PAGE>   37

                            DIGITAL LIGHTWAVE, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1999           1998
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents, including restricted cash of
     $2,341 and $2,422 in 1999 and 1998, respectively.......    $  7,466       $  3,848
  Accounts receivable, less allowance of $215 in 1999.......      15,397          7,152
  Inventories...............................................       6,407          5,476
  Prepaid expenses and other current assets.................         990            748
                                                                --------       --------
          Total current assets..............................      30,260         17,224
Property and equipment, net.................................       9,424          9,274
Other assets................................................         314          1,060
                                                                --------       --------
          Total assets......................................    $ 39,998       $ 27,558
                                                                ========       ========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................    $  8,048       $  6,468
  Accrued settlement charges................................       6,231          8,489
  Notes payable.............................................       3,000             --
  Interest payable..........................................          68             --
                                                                --------       --------
          Total current liabilities.........................      17,347         14,957
Long-term liabilities.......................................         498            281
                                                                --------       --------
          Total liabilities.................................      17,845         15,238
                                                                --------       --------
Commitments and contingencies (Notes 7, 8, 10 and 15)
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 27,656,103 and
     26,535,332 shares, respectively........................           3              3
  Additional paid-in capital................................      62,807         57,927
  Accumulated deficit.......................................     (40,657)       (45,610)
                                                                --------       --------
          Total stockholders' equity........................      22,153         12,320
                                                                --------       --------
          Total liabilities and stockholders' equity........    $ 39,998       $ 27,558
                                                                ========       ========
</TABLE>

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

                                       36
<PAGE>   38

                            DIGITAL LIGHTWAVE, INC.

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

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------------
                                                             1999          1998          1997
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
Sales...................................................  $    50,474   $    24,191   $     9,081
Cost of goods sold......................................       17,431         9,219         3,124
                                                          -----------   -----------   -----------
Gross profit............................................       33,043        14,972         5,957
                                                          -----------   -----------   -----------
Operating expenses:
  Engineering and development...........................       10,204        14,335         5,342
  Sales and marketing...................................       12,724        11,363         5,260
  General and administrative............................        5,240         7,223         3,812
  Reorganization charges................................           --         1,018            --
  Litigation settlement.................................           --        11,500            --
                                                          -----------   -----------   -----------
          Total operating expenses......................       28,168        45,439        14,414
                                                          -----------   -----------   -----------
Operating income (loss).................................        4,875       (30,467)       (8,457)
                                                          -----------   -----------   -----------
Other income (expense):
  Interest income.......................................          341           649         1,826
  Interest expense......................................         (252)          (37)          (66)
  Other income (expense), net...........................          (11)           30             7
                                                          -----------   -----------   -----------
          Total other income............................           78           642         1,767
                                                          -----------   -----------   -----------
Income (loss) before income taxes.......................        4,953       (29,825)       (6,690)
Provision for income taxes..............................           --            --            --
                                                          -----------   -----------   -----------
       Net income (loss)................................  $     4,953   $   (29,825)  $    (6,690)
                                                          ===========   ===========   ===========
Per share of common stock:
  Net income (loss) per share...........................  $      0.18   $     (1.13)  $     (0.25)
                                                          ===========   ===========   ===========
  Diluted income (loss) per share.......................  $      0.17           n/a           n/a
                                                          ===========   ===========   ===========
  Weighted average common shares outstanding............   26,808,158    26,475,749    26,084,208
                                                          ===========   ===========   ===========
  Weighted average common and common equivalent shares
     outstanding........................................   29,151,628    26,494,439    27,060,221
                                                          ===========   ===========   ===========
</TABLE>

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

                                       37
<PAGE>   39

                            DIGITAL LIGHTWAVE, INC.

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                        NOTE
                                       COMMON STOCK       ADDITIONAL                 RECEIVABLE
                                    -------------------    PAID-IN     ACCUMULATED      FROM
                                      SHARES     AMOUNT    CAPITAL       DEFICIT     STOCKHOLDER    TOTAL
                                    ----------   ------   ----------   -----------   -----------   --------
<S>                                 <C>          <C>      <C>          <C>           <C>           <C>
Balance, January 1, 1997..........  22,518,917     $2      $14,242      $ (9,095)      $(1,700)    $  3,449
  Issuance of common stock from
     Initial Public Offering,
     net..........................   3,658,860      1       39,591            --            --       39,592
  Issuance of common stock........     263,101     --        1,368            --            --        1,368
  Repayment of note receivable
     from stockholder.............          --     --           --            --         1,700        1,700
          Net loss................          --     --           --        (6,690)           --       (6,690)
                                    ----------     --      -------      --------       -------     --------
Balance, December 31, 1997........  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
                                    ==========     ==      =======      ========       =======     ========
</TABLE>

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

                                       38
<PAGE>   40

                            DIGITAL LIGHTWAVE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                1999        1998         1997
                                                              --------    ---------    --------
<S>                                                           <C>         <C>          <C>
Cash flows from operating activities:
  Net income (loss).........................................  $ 4,953     $(29,825)    $(6,690)
  Adjustments to reconcile net income (loss) to cash used by
     operating activities:
     Depreciation and amortization..........................    2,524        2,254         778
     Loss on disposal of property...........................       19           33          --
     Litigation settlement..................................       --        9,925          --
  Changes in operating assets and liabilities:
     Increase in accounts receivable........................   (8,953)      (2,452)     (2,270)
     (Increase) decrease in inventories.....................     (849)       1,832      (8,166)
     (Increase) decrease in prepaid expenses and other
       assets...............................................      424       (1,163)        (37)
     Increase in accounts payable and accrued liabilities...    1,364        1,386       2,647
     (Decrease) increase in accrued settlement charges......   (1,064)       1,064          --
                                                              -------     --------     -------
          Net cash used by operating activities.............   (1,582)     (16,946)    (13,738)
                                                              -------     --------     -------
Cash flows from investing activities:
  Purchases of property and equipment.......................   (1,888)      (3,500)     (5,098)
                                                              -------     --------     -------
          Net cash used by investing activities.............   (1,888)      (3,500)     (5,098)
                                                              -------     --------     -------
Cash flows from financing activities:
  Repayment of stockholder receivable.......................       --           --       1,700
  Proceeds from notes payable...............................    3,000           --          --
  Principal payments on notes payable.......................       --           --        (750)
  Principal payments, capital lease obligations.............     (307)         (43)       (208)
  Payments received, lease receivables......................      708           80          --
  Proceeds from sale of common stock, net of expense........    3,687          226      40,960
                                                              -------     --------     -------
          Net cash provided by financing activities.........    7,088          263      41,702
                                                              -------     --------     -------
Net increase (decrease) in cash and cash equivalents........    3,618      (20,183)     22,866
Cash and cash equivalents at beginning of period............    3,848       24,031       1,165
                                                              -------     --------     -------
Cash and cash equivalents at end of period..................  $ 7,466     $  3,848     $24,031
                                                              =======     ========     =======
Other supplemental disclosures:
  Cash paid for interest....................................  $   183     $     37     $    66
Non-cash investing and financing activities:
  Capital lease obligations incurred........................      722          382          --
  Fixed asset additions included in accounts payable at year
     end....................................................       87           82         327
  Accounts receivable related to capital leases.............      270          847          --
</TABLE>

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

                                       39
<PAGE>   41

                            DIGITAL LIGHTWAVE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

     Digital Lightwave, Inc. (the "Company") was incorporated on October 12,
1990 in the state of California, and subsequently reincorporated in Delaware on
March 18, 1996 through a merger into a newly formed Delaware corporation. The
Company commenced business on February 15, 1991 and manufactures and sells
advanced computer systems that provide information concerning the performance of
fiberoptic (or "lightwave") telecommunications networks and transmission
equipment. The Company's major product, the ASA 312, is a portable
software-based network information computer that is lightweight, compact and
easily operated through a touch sensor over a full color display. The ASA 312
enables users to understand and process information, simultaneously and without
interruption, from telecommunications networks utilizing legacy T-Carrier
protocol, lightwave SONET protocol and lightwave ATM protocol. In 1998, the
Company introduced a second product line known as the network access agent or
"NAA." The NAA is unattended, software controlled performance monitoring and
diagnostic equipment installed within optical networks for analysis and
management of telecommunications network from a centralized location. The
Company sells its products to InterExchange Carriers ("IXCs"), Regional Bell
Operating Companies ("RBOCs"), Competitive Access Providers ("CAPs"),
independent telephone companies, network equipment manufacturers, equipment
leasing companies and private network operators.

     On January 6, 1998, Digital Lightwave Leasing Corporation ("DLLC") was
incorporated in the State of Delaware. The Company commenced business
immediately and 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. DLLC is a wholly-owned subsidiary of the Company and 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. By December 31, 1999, the remaining balance of the New Jersey
letter of credit and related certificate of deposit had been reduced to $41,025.
These items 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.

                                       40
<PAGE>   42
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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. Returns from individual customers are recorded as a
reduction in sales during the period in which the return was made. To date, the
Company has not experienced a significant amount of product returns.

     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. Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed," requires the capitalization of certain software
development costs 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 accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
recognition of 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. Under this method, 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.

                                       41
<PAGE>   43
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 years ended
December 31, 1998 and 1997, 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,
                                                     ------------------------------------
                                                        1999         1998         1997
                                                     ----------   ----------   ----------
<S>                                                  <C>          <C>          <C>
Basic:
  Weighted average common shares outstanding.......  26,808,158   26,475,749   26,084,208
                                                     ----------   ----------   ----------
          Total basic..............................  26,808,158   26,475,749   26,084,208
Diluted:
  Incremental shares for common stock
     equivalents...................................   2,343,470       18,690*     976,013*
                                                     ----------   ----------   ----------
          Total dilutive...........................  29,151,628   26,494,439   27,060,221
                                                     ==========   ==========   ==========
</TABLE>

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

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

CONCENTRATIONS OF CREDIT RISK

     Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and receivables. As of December 31, 1999, 1998 and 1997, 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.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133". 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. SFAS 133
will be effective for quarters beginning after June 15, 2000. The Company does
not currently maintain any derivative instruments nor does it conduct any
hedging activities, therefore, SFAS No. 133 is not expected to impact the
Company.

RECLASSIFICATIONS

     Certain prior year amounts have been reclassified to conform with the 1999
presentation.

                                       42
<PAGE>   44
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. INVENTORIES

     Inventories at December 31, 1999 and 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                                               1999     1998
                                                              ------   ------
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Raw materials...............................................  $3,404   $2,166
Work-in progress............................................   2,454    1,443
Finished goods..............................................     549    1,867
                                                              ------   ------
                                                              $6,407   $5,476
                                                              ======   ======
</TABLE>

3. PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 1999 and 1998 are summarized as
follows:

<TABLE>
<CAPTION>
                                                               1999      1998
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Test equipment..............................................  $ 5,116   $ 4,418
Computer equipment and software.............................    4,179     3,555
Tooling.....................................................      529       487
Tradeshow fixtures and equipment............................      266       242
Office furniture, fixtures and equipment....................    2,683     2,255
Leasehold improvements......................................    1,878     1,214
                                                              -------   -------
                                                               14,651    12,171
Less accumulated depreciation...............................   (5,227)   (2,897)
                                                              -------   -------
                                                              $ 9,424   $ 9,274
                                                              =======   =======
</TABLE>

     Depreciation expense was approximately $2,463,000, $2,254,000 and $778,000
for the years ended December 31, 1999, 1998 and 1997, respectively.

     Equipment under capital lease and related accumulated amortization,
included above at December 31, 1999 and 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                                               1999     1998
                                                              -------   -----
                                                              (IN THOUSANDS)
<S>                                                           <C>       <C>
Test equipment..............................................  $  947    $425
Computer equipment and software.............................      70     117
                                                              ------    ----
                                                               1,017     542
Less accumulated amortization...............................    (161)    (96)
                                                              ------    ----
                                                              $  856    $446
                                                              ======    ====
</TABLE>

                                       43
<PAGE>   45
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     Accounts payable and accrued liabilities at December 31, 1999 and 1998 are
summarized as follows:

<TABLE>
<CAPTION>
                                                               1999     1998
                                                              ------   ------
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Accounts payable............................................  $5,023   $3,594
Deferred revenue............................................     143      124
Current portion of capital lease obligations................     332      153
Accrued expenses and other..................................   2,550    2,597
                                                              ------   ------
                                                              $8,048   $6,468
                                                              ======   ======
</TABLE>

5. INCOME TAXES

     The provision (benefit) for income taxes for the year ending December 31,
1999 is summarized as follows:

<TABLE>
<S>                                                           <C>
Current:
  Federal...................................................  $ 1,637
  State.....................................................      267
                                                              -------
     Sub-total..............................................    1,904
                                                              -------
Deferred:
  Federal...................................................   (1,637)
  State.....................................................     (267)
                                                              -------
     Sub-total..............................................   (1,904)
                                                              -------
Total.......................................................  $     0
                                                              =======
</TABLE>

     The tax effected amounts of temporary differences at December 31, 1999 and
1998 are summarized as follows:

<TABLE>
<CAPTION>
                                                                1999      1998
                                                              --------   -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Current:
  Deferred tax asset:
     Deferred compensation..................................  $    232   $    64
     Accrued liabilities....................................     2,345     3,194
     Other..................................................       569       774
     Valuation allowance....................................    (3,049)   (3,869)
                                                              --------   -------
          Total current deferred tax asset..................        97       163
                                                              --------   -------
          Net current deferred tax asset....................  $     97   $   163
                                                              --------   -------
Non-current:
  Deferred tax asset:
     Net operating loss carry forward.......................  $ 18,783   $14,686
     Other..................................................        --        --
     Research and experimentation credit....................     1,368       549
     Valuation allowance....................................   (19,533)  (14,621)
                                                              --------   -------
          Total non-current deferred tax asset..............       618       614
                                                              --------   -------
</TABLE>

                                       44
<PAGE>   46
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                1999      1998
                                                              --------   -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
  Deferred tax liability:
     Fixed assets...........................................  $   (715)  $  (777)
          Total non-current deferred tax liability..........      (715)     (777)
                                                              --------   -------
          Net deferred tax asset............................  $      0   $     0
                                                              ========   =======
</TABLE>

     Management believes that it is more likely than not that the tax benefit
associated with these deferred tax assets will not be realized and, therefore as
of December 31, 1999, the Company has established a valuation allowance of
approximately $22.6 million. The result is an increase in the valuation
allowance from December 31, 1998 of approximately $4.1 million.

     As of December 31, 1999, the Company had net operating loss carry forwards
of approximately $50.0 million for tax purposes. Due to certain change of
ownership requirements of Section 382 of the Internal Revenue Code ("IRC"),
utilization of the Company's net operating losses incurred prior to July 1, 1993
is expected to be limited to approximately $7,500 per year. This limitation in
conjunction with the expiration period for these pre-July 1, 1993 net operating
losses results in the Company's total net operating losses available being
limited to approximately $49.1 million. Loss carry forwards will expire between
the years 2009 and 2019.

     As of December 31, 1999, the Company also had general business credit carry
forwards of approximately $1.4 million which expire between the years 2008 and
2011. 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,
                                                         -------------------------------
                                                           1999       1998        1997
                                                         --------   ---------   --------
                                                                 (IN THOUSANDS)
<S>                                                      <C>        <C>         <C>
Tax provision (benefit) at U.S. Federal income tax
  rate................................................   $ 1,684    $(10,140)   $(2,275)
State income tax provision (benefit) net of Federal...       180      (1,083)      (243)
Other, net............................................        40        (979)      (410)
Valuation allowance increase (decrease)...............    (1,904)     12,609      2,928
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,
1999, 1998, and 1997, the income tax benefit of $5.1 million, none, and $1.1
million, respectively, would have been allocated to additional paid in capital
for the tax benefits associated with the exercise of non-qualified stock
options. However, due to the 100% valuation allowance against deferred tax
assets, these amounts have not been recognized.

     Section 162(m) of the IRC limits the Company's deduction in any one fiscal
year for federal income tax purposes to $1 million per person with respect to
the Company's Chief Executive Officer and its four (4) other highest paid
executive officers who are employed on the last day of the fiscal year unless
the compensation was not otherwise subject to the deduction limit. Certain
performance-based compensation is not included in this $1 million limitation.
Stock options may qualify for exclusion from this limitation if the plan under
which they are granted meets certain conditions. At present, the Option Plan may
not satisfy these conditions. Accordingly, the Company may not be able to claim
a tax deduction for certain exercises of NSOs (non-qualified stock options) or
disqualifying dispositions of ISOs (incentive stock options) by the CEO (should
it

                                       45
<PAGE>   47
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

grant any in the future) and its four (4) other highest paid executive officers
to the extent that the income from such exercises or dispositions, combined with
such executive's other taxable compensation for the year, exceeds $1 million.

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. 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 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.

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, 1999:

<TABLE>
<CAPTION>
                                                              CAPITAL   OPERATING
                                                              LEASES     LEASES
                                                              -------   ---------
                                                                (IN THOUSANDS)
<S>                                                           <C>       <C>
2000........................................................   $409      $ 1,852
2001........................................................    331        1,724
2002........................................................    207        1,614
2003........................................................     --        1,541
2004........................................................     --        1,580
Thereafter..................................................     --        6,428
                                                               ----      -------
                                                                947      $14,739
                                                               ----      =======
Less: Amount representing interest..........................    127
                                                               ----
Present value of minimum lease payments.....................    820
Less: Current portion.......................................    332
                                                               ----
                                                               $488
                                                               ====
</TABLE>

     Total rental expense was approximately $1,420,100, $1,162,900 and $506,000
for the years ended December 31, 1999, 1998, and 1997, respectively.

8. COMMITMENTS

     On January 13, 1998, the Company entered into a ten year lease agreement
for its main office site in Clearwater, Florida. Total rental expense was
approximately $1,000,000 and $140,000 for 1999 and 1998, respectively. The
Company may terminate the lease after seven years, subject to certain
termination expenses.

     As required by the lease agreement, the Company has put in place a standby
letter of credit to the benefit of the landlord in the amount of $2,300,000,
which is collateralized by a three month certificate of deposit with a financial
institution. The lease agreement calls for a declining letter of credit over the
life of the lease.

     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

                                       46
<PAGE>   48
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

maximum amount the Company can 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 has 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 is the prime rate plus 1.5%. The agreement also
provides 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 is
still subject to the aggregate maximum amount the Company can borrow at one time
of $2.9 million. As of December 31, 1999, there were no borrowings outstanding
under this agreement.

     On April 19, 1999, the Company filed a registration statement with the
Securities and Exchange Commission relating to a public offering of $20.0
million of Convertible Subordinated Notes. In November 1999, the Board decided
not to proceed with the registration statement with the Securities and Exchange
Commission. The Company recorded a charge related to costs deferred in
anticipation of the issuance of this debt totalling approximately $300,000.

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. This note was still outstanding
at December 31, 1999. (See Note 17 -- Subsequent Events.)

     In 1998, a director received $12,750 for services performed as a consultant
to the Company.

10. COMMON STOCK, STOCK OPTIONS, AND WARRANTS

EMPLOYEE STOCK OPTION PLAN

     The Company's 1996 Stock Option Plan (the "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 Option Plan. Transactions related to
the Option Plan during 1999, 1998 and 1997 are summarized as follows:

<TABLE>
<CAPTION>
                                                                             WEIGHTED
                                                                             AVERAGE
                                                                SHARES     OPTION PRICE
                                                              ----------   ------------
<S>                                                           <C>          <C>
Outstanding at 1/1/97.......................................   1,169,497      $5.16
  Granted...................................................   1,221,015       8.72
  Exercised.................................................    (257,843)      5.03
  Forfeited.................................................     (81,884)      5.37
                                                              ----------
Outstanding at 12/31/97.....................................   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
                                                              ==========
</TABLE>

                                       47
<PAGE>   49
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about stock options outstanding
to employees and directors at December 31, 1999:

<TABLE>
<CAPTION>
                                                   NUMBER         WEIGHTED         NUMBER
                                                 OUTSTANDING       AVERAGE       EXERCISABLE
                                                     AT           REMAINING          AT
EXERCISE PRICE PER SHARE                      DECEMBER 31, 1999     LIFE      DECEMBER 31, 1999
------------------------                      -----------------   ---------   -----------------
<S>                                           <C>                 <C>         <C>
$ 2.3130....................................        500,000         5.00                 0
  2.3750....................................            750         4.99               250
  2.4375....................................            690         4.99               230
  2.5630....................................        399,997         4.88           116,341
  2.7500....................................            630         5.26                 0
  3.0310....................................        144,726         5.25             5,650
  3.0312....................................          4,350         5.24                 0
  3.0625....................................            750         5.24                 0
  3.2500....................................            900         5.23                 0
  3.4380....................................         15,334         5.59                 0
  3.6250....................................          3,000         5.15                 0
  3.6875....................................          3,000         5.13                 0
  3.8125....................................          4,440         5.16                 0
  3.8438....................................          1,140         5.32                 0
  3.9375....................................            690         5.34                 0
  4.0625....................................          3,000         5.36                 0
  4.0938....................................            600         5.13                 0
  4.1250....................................         21,000         5.36                 0
  4.4375....................................        235,484         4.38            75,083
  4.6875....................................        410,168         4.23            62,674
  5.0000....................................          5,567         2.18             5,567
  5.2500....................................        142,779         3.69            56,323
  5.6875....................................        661,300         5.22            44,000
  5.8750....................................         22,370         5.49                 0
  6.0000....................................          4,380         5.60                 0
  6.1250....................................          1,890         5.62                 0
  6.2500....................................          1,650         5.61                 0
  6.6875....................................          1,400         5.44                 0
  6.8125....................................          1,650         5.39                 0
  6.8750....................................        613,000         5.59                 0
  6.9375....................................          1,800         5.67                 0
  7.0000....................................            749         5.59                 0
  7.1250....................................          6,250         5.65                 0
  7.2500....................................         15,686         5.98             3,332
  7.5000....................................            500         5.72                 0
  7.6250....................................         50,000         5.78                 0
  7.8125....................................          1,950         5.68                 0
  8.2500....................................            749         5.56                 0
  9.0000....................................         25,000         6.10            16,666
 13.1250....................................          8,930         3.78             5,950
 14.6250....................................            687         5.82                 0
 19.2500....................................          1,770         5.84                 0
 30.8750....................................          4,800         5.87                 0
</TABLE>

                                       48
<PAGE>   50
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                   NUMBER         WEIGHTED         NUMBER
                                                 OUTSTANDING       AVERAGE       EXERCISABLE
                                                     AT           REMAINING          AT
EXERCISE PRICE PER SHARE                      DECEMBER 31, 1999     LIFE      DECEMBER 31, 1999
------------------------                      -----------------   ---------   -----------------
<S>                                           <C>                 <C>         <C>
 33.6250....................................          2,460         5.85                 0
 33.9375....................................            749         5.86                 0
 43.2500....................................         20,000         5.97                 0
 45.3750....................................            749         5.94                 0
 46.3750....................................          2,190         5.93                 0
 49.0000....................................          1,140         5.94                 0
$62.3750....................................          2,220         5.99                 0
                                                  ---------                        -------
          Total.............................      3,355,014                        392,066
                                                  =========                        =======
</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 392,066, 385,933 and
421,566 as of December 31, 1999, 1998 and 1997, respectively.

     In 1995, the Financial Accounting Standards Board issued FAS 123,
"Accounting for Stock -- Based Compensation" ("FAS 123"), effective for fiscal
years beginning after December 15, 1995. The Company continues to apply the
prior accounting rules under "APB No. 25, Accounting for Stock Issued to
Employees," in recognizing expense for stock-based compensation, and therefore,
no compensation expense has been recognized for the stock options granted under
the Option Plan. Had compensation cost for the Company's stock options granted
been determined based on the Black-Scholes option pricing model at the date of
grant, consistent with the method of FAS 123, the Company's net income (loss)
and income (loss) per share would have been adjusted to the pro forma amounts
shown below:

<TABLE>
<CAPTION>
                                                            1999       1998      1997
                                                           -------   --------   -------
                                                                  (IN THOUSANDS)
<S>                                                        <C>       <C>        <C>
Pro forma net income (loss):
  As reported............................................  $ 4,953   $(29,825)  $(6,690)
  As adjusted (unaudited)................................   (2,704)   (35,502)   (8,769)
Pro forma basic income (loss) per share:
  As reported............................................  $  0.18   $  (1.13)  $ (0.25)
  As adjusted (unaudited)................................    (0.10)     (1.34)    (0.34)
</TABLE>

     No options were granted prior to 1996.

     These pro forma amounts were determined using the Black-Scholes valuation
model with the following key assumptions: (a) a discount rate of 5.61%, 4.86%,
and 5.84% for December 31, 1999, 1998 and 1997, 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, 4.0 and 4.2 years for
December 31, 1999, 1998 and 1997, respectively; (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 became effective on August
25, 1997 in order to provide employees with the opportunity to purchase shares
of the Company's Common Stock. An aggregate of

                                       49
<PAGE>   51
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

300,000 shares of the Company's Common Stock was reserved for issuance under the
Plan. At December 31, 1999 a total of 172,042 shares had been purchased by
employees participating in the plan at a weighted average price per share of
$3.29.

SUBSCRIPTION AGREEMENTS

     During 1995, the Company entered into subscription agreements (the
Agreements) with certain noteholders for the issuance of an aggregate of 782,898
shares of common stock for the surrender of the outstanding balance on the notes
(excluding certain accrued interest) of an aggregate of $4,074,000. Pursuant to
the Agreements, the Company issued warrants to purchase 1,050,000 and 18,747
shares of common stock at an exercise price of $5.00 and $9.00 per share,
respectively. The warrants expire on the earlier of: (i) three years from their
respective dates of issuance; (ii) thirty (30) days following the filing of a
registration statement for an underwritten initial public offering of the common
stock of the Company; or (iii) a change of control of the Company. During the
year ended December 31, 1996, 1,050,000 and 1,667 shares of Common Stock were
issued upon the exercise of warrants at a price of $5.00 and $9.00 per share,
respectively. The remaining 17,080 warrants expired in connection with the
initial public offering. (See Note 13 -- Initial Public Offering). On May 29,
1996, the Company entered into a subscription agreement with an institutional
investor for the issuance of 66,667 shares of common stock at a price of $18.00
per share. In the event that on or before May 23, 1997 the Company completed an
Initial Public Offering of its Common Stock, then the price of the shares would
be adjusted by: (i) payment by the stockholder to the Company in the amount
equal to the excess, if any, over $18.00 per share of the price to the public
per share times 75% (the 75% price), or by (ii) a payment by the Company to the
stockholder equal to the excess, if any, of $18.00 per share over the 75% price.
The Company recorded a liability of $400,000 as of December 31, 1996, based upon
management's estimate of the expected payment to the institutional investor. In
February 1997 the Company completed its Initial Public Offering at a price of
$12.00 per share. Accordingly, the Company has made payment to the institutional
investor as required by the terms of the subscription agreement.

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. 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.

11. DEFINED CONTRIBUTION PLAN

     During 1997, the Company implemented 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, 1999, 1998 and 1997, total Company contributions to the plan were
approximately $206,000, $141,000 and $27,000, respectively.

                                       50
<PAGE>   52
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. SIGNIFICANT CUSTOMERS

     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", formerly, Newcourt Financial) accounting for
approximately 21% and 18% of total sales, respectively. Both Telogy and TRS
purchase our products for lease to end users in the telecommunications industry.
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, 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. For the year
ended December 31, 1997, sales to the Company's five largest customers comprised
69% of its total revenues, with WorldCom, Inc. (prior to its acquisition of MCI
Communications Corporation) and its subsidiaries accounting for 42% of total
sales. No other customers accounted for sales of 10% or more during such
periods. Some of the customers highlighted in years prior to 1999 as accounting
for more than 10% continued to purchase at similar dollar levels in 1999
although those levels did not surpass the 10% threshold. There can be no
assurance that these buying patterns will continue.

13. INITIAL PUBLIC OFFERING

     Effective February 5, 1997, the Company sold 3,658,860 shares of common
stock, $.0001 par value, in connection with an Initial Public Offering. Gross
proceeds to the Company approximated $40,800,000.

14. REORGANIZATION CHARGES

     In order to reduce costs and improve operating efficiencies, the Company
began streamlining its management and operating structure in February 1998 and
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
forgiven and are included in the $1.0 million restructuring charge.

15. 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,
Bryan J. Zwan, the Company's director and former Chairman, Steven H. Grant, the
Company's Executive Vice President, Finance, Chief Financial Officer and
Secretary, and other former corporate officers. The complaints allege 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

                                       51
<PAGE>   53
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, Charles Chalmers, a lead plaintiff and class
representative in the class action suit, filed a notice of appeal of the final
judgment with the Eleventh Circuit Court of Appeals. (See Note 17 -- Subsequent
Events).

     On August 5, 1999, as a complete settlement of an investigation of the
Company being conducted by the U.S. Securities and Exchange 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. (See Note 17 -- Subsequent Events).

     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 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. The Company believes that it has fulfilled
its obligations under the settlement agreement and that the claims made by
Plaintiff against the Company in this action are without merit. Accordingly, in
response to this action, the Company filed a motion to dismiss for failure to
state a claim against the Company, which is pending before the Court. However,
there can be no assurance that the Company's motion will be granted, or if the
motion is denied, that the Company will succeed in defending or settling this
action. Additionally, there can be no assurance that the action will not have a
material adverse effect on the Company.

     On November 23, 1999, Seth P. Joseph, a former officer of Digital
Lightwave, filed a demand for arbitration against the Company. While the exact
scope and nature of Mr. Joseph's claims are unclear at this time, according to
his demand, he is alleging breach of his employment agreement, violation of the
Florida Whistleblower statue and breach of an indemnification agreement and the
Company's company bylaws. As a relief, Mr. Joseph seeks $500,000, attorney fees,
interest and stock options exercisable for 656,666 shares of the Company's
common stock. On December 17, 1999, the Company filed its answer denying Mr.
Joseph's allegations and alleging multiple affirmative defenses, the Company
intends to vigorously oppose Mr. Joseph's claim. However, there can be no
assurance that the Company will succeed in defending this action.

     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

                                       52
<PAGE>   54
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

16. OTHER MATTERS

     On October 14, 1999, the Company and Dr. Bryan J. Zwan, the Company's
majority stockholder and a director, entered into an agreement 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 the Company's annual meeting in 2001 and (iv) the
Company will enter into arrangements containing certain provisions with respect
to change of control, severance and non-compete with current senior management.

17. SUBSEQUENT EVENTS

     On February 26, 2000, Dr. Bryan J. Zwan repaid his loan outstanding in
full, including accrued interest of approximately $10,000.

     On March 16, 2000 all parts of the appeal of the securities class action
that pertain to the Company were dismissed by the Eleventh Circuit. The District
Court's judgment approving settlement of the securities class actions is now
final.

     On March 29, 2000, the Company's settlement with the U.S. Securities and
Exchange Commission (Commission) was filed with the U.S. District Court for the
Middle District of Florida. The Company consented to the entry of a permanent
injunction enjoining it from violations of various sections of the Securities
Exchange Act of 1934. Concurrently, the Commission filed a complaint in the
District Court against Dr. Zwan, a director and former Chairman and Chief
Executive Officer of the Company, alleging violations of various sections of the
Securities Act of 1933 and 1934, and that he aided and abetted the Company's
alleged violations of the Exchange Act. In addition, the Commission concurrently
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.

18. QUARTERLY OPERATING RESULTS (UNAUDITED)

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

<TABLE>
<CAPTION>
                                                                   QUARTER ENDED
                                              --------------------------------------------------------
                                               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
</TABLE>

                                       53
<PAGE>   55
                            DIGITAL LIGHTWAVE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<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>
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>

<TABLE>
<CAPTION>
                                                                   QUARTER ENDED
                                              --------------------------------------------------------
                                               MARCH 31,     JUNE 30,     SEPTEMBER 30,   DECEMBER 31,
                                                 1998          1998           1998            1998
                                              -----------   -----------   -------------   ------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>           <C>           <C>             <C>
Sales.......................................  $     5,432   $     3,517    $     6,915    $     8,327
Gross Profit................................        3,329         2,183          4,295          5,165
Operating loss..............................       (4,839)      (14,747)        (4,617)        (6,264)
Net loss....................................       (4,560)      (14,580)        (4,515)        (6,169)
Loss per share(1)...........................         (.17)         (.55)          (.17)          (.23)
Weighted average shares outstanding.........   26,441,775    26,461,151     26,484,670     26,512,397
</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 and each quarter in 1998 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.

                                       54
<PAGE>   56

                                    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............................  53    Chairman, President and Chief Executive
                                                   Officer
Steven H. Grant............................  40    Executive Vice President, Finance, Chief
                                                     Financial Officer and Secretary
George Matz................................  50    Executive Vice President, Global Sales
Ali Haider.................................  49    Executive Vice President, Engineering
Joe Fuchs..................................  49    Vice President, Quality Management
Dr. Bryan J. Zwan..........................  51    Director
Dr. William F. Hamilton(1)(2)(3)...........  60    Director
William Seifert(1)(2)(3)...................  50    Director
</TABLE>

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

(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating 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 and a director 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 Infotron/ Gandalf Systems Corporation. Mr. Chastelet serves as a
director of Wave Rider Communications, Inc. and Technology Research 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.

     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, Global Sales 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
Executive Director of Global Sales at

                                       55
<PAGE>   57

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. Haider currently serves as Executive Vice President, Engineering and
joined the Company in September 1997. Prior to joining the Company, Mr. Haider
was a Director, Technical Support Center at AT&T/Paradyne Corporation from May
1996 to September 1997, Director, Engineering from May 1991 to May 1996, and
Engineering Manager from July 1984 through May 1991. Mr. Haider holds a Masters
Degree in Electrical Engineering from the University of Houston, a B.S. in
Electrical Engineering from the University of Engineering and Technology,
Lahore, Pakistan, and a B.S. in Physics and Math from Gordon College, University
of Punjab.

     Mr. Fuchs currently serves as Vice President, Quality Management and joined
the Company in January 1997. Prior to joining the Company, Mr. Fuchs was a
System Test Lead and Project Manager at AT&T/ Paradyne from May 1992 through
December 1996. Mr. Fuchs also worked at AT&T Bell Laboratories as a member of
technical staff in the Transmission Center and the Quality Assurances Center
from 1981 though 1992. Mr. Fuchs holds a B.S. in Electrical Engineering from the
Pratt Institute and a M.S. in Electrical Engineering from Columbia University.

     Dr. Zwan, a director of Digital Lightwave since its inception, founded the
Company in October 1990 and has served as Chairman of the Board from its
inception until July 1999. In addition, Dr. Zwan served as the Company's Chief
Executive Officer from the Company's inception until December 1998 and served as
its President from inception until March 1996 and from October 1996 until
December 1998. From 1987 to 1991, Dr. Zwan was Chief Executive Officer of
Digital Photonics, Inc. ("DPI"), a SONET multiplexer manufacturer which he
founded in 1987. DPI was purchased in December 1990 by Digital Transmission
Systems, Inc., a manufacturer of digital cross-connect equipment and DS1 modems.
From 1985 to 1987, Dr. Zwan was Vice President, Optical Products at DSC
Communications Corporation, a global provider of telecommunication transmission,
cross-connect and network access equipment. Dr. Zwan was a member of the
Research Facility Staff at the Massachusetts Institute of Technology for two
years, and holds a Ph.D. in Space Physics from Rice University and B.S. degrees
in Physics and Chemistry from the University of Houston.

     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
Manufacturing Co., Marlton Technologies, Inc. and Neose Technologies, Inc.

     Mr. Seifert has served as a Director since 1997. He is currently a General
Partner at Prism Venture Partners of Westwood, Massachusetts. From 1991 to 1997,
he served as Chief Executive Officer of Agile Networks, Inc., a wholly owned
subsidiary of Lucent Technologies, Inc. from 1991 to 1997. Prior to founding
Agile Networks, Inc. in 1991, Mr. Seifert was also a founder of Wellfleet
Communications, now Bay Networks. Mr. Seifert serves as a director of DSL.net, a
provider of digital subscriber services.

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 four (4) members, Messrs. Chastelet, Zwan, Hamilton and Seifert. 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.

     On October 14, 1999, the Company and Dr. Bryan J. Zwan, the Company's
majority stockholder and a director, entered into an agreement 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 resign, and (iii) the newly formed Board will
serve at least until the Company's annual meeting in 2001.

                                       56
<PAGE>   58

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 COMMITTEES

     The Board of Directors of Digital Lightwave has established an audit
committee, a compensation committee and a nominating committee. The audit
committee, composed of Messrs. Hamilton and Seifert, 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 compensation committee, composed of Messrs. Hamilton and Seifert, is
responsible for reviewing and approving, within its authority, compensation,
benefits, training and other human resource policies. In 1999, the Board formed
a nominating committee to select nominees to the Board of Directors. The
nominating committee consists of Messrs. Hamilton and Seifert.

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 inadvertently failed to file a Form 4 for one
transaction in March 1999. Dr. Zwan filed a Form 5 reporting the transaction in
February, 2000.

ITEM 11.  EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

     The following table shows, for the year ended December 31, 1999, the cash
and other compensation awarded to those individuals who served as Chief
Executive Officer during 1999 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
                                                                          ----------------------------
                                           ANNUAL COMPENSATION                 RESTRICTED AWARDS           PAYOUTS
                                    ----------------------------------    ----------------------------   ------------
                                                          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............  1999   $256,566   $100,000    $2,924,065(1)   --      225,000       --        $24,500(2)(3)
  Chairman of the Board      1998      1,060         --            --      --      600,000       --             --
  President and Chief        1997         --         --            --      --           --       --             --
  Executive Officer
Steven H. Grant............  1999    201,541         --     1,890,312(1)   --      100,000       --          5,000(2)
  Executive Vice President,  1998    193,333     40,000            --      --      200,000       --          1,800(2)
  Finance, Chief Financial   1997     40,615         --            --      --       75,000(4)    --            500(2)
  Officer and Secretary
George Matz................  1999    208,822     95,000     2,018,835(1)   --      102,500       --         17,000(2)(3)
  Executive Vice President,  1998    148,415     50,000            --      --      300,000       --          8,000(3)
  Global Sales               1997         --         --            --      --           --       --             --
</TABLE>

                                       57
<PAGE>   59

<TABLE>
<CAPTION>
                                                                             LONG-TERM COMPENSATION
                                                                          ----------------------------
                                           ANNUAL COMPENSATION                 RESTRICTED AWARDS           PAYOUTS
                                    ----------------------------------    ----------------------------   ------------
                                                          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>
Ali Haider.................  1999    174,253         --       646,400(1)   --      142,500       --          2,125(2)
  Executive Vice President,  1998    149,443     22,275            --      --       48,000       --          1,963(2)
  Engineering                1997     34,788     25,000            --      --       33,000(4)    --             --
Joe Fuchs..................  1999    146,245     10,000       269,556(1)   --       50,000       --             45(2)
  Vice President,            1998    117,878         --            --      --       30,000       --             --
  Quality Management         1997     86,018      1,000            --      --       10,000(4)    --             --
</TABLE>

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

(1) Reflects proceeds from stock options exercised, gross of income taxes.
(2) Reflects 401(k) matching contributions.
(3) Reflects automobile allowance.
(4) Represents options which were cancelled and reissued in 1998 and which are
    included in the 1998 grants list in this table.

1996 STOCK OPTION PLAN

     The Company's 1996 Stock Option Plan (the "Option Plan") became effective
on March 5, 1996. The purpose of the 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 Option Plan. The 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 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 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 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 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 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 Option Plan. The Option Plan will
terminate on March 4, 2006, unless sooner terminated by the Board.

     Section 162(m) of the IRC limits the Company's deduction in any one fiscal
year for federal income tax purposes to $1 million per person with respect to
the Company's Chief Executive Officer and its four (4) other highest paid
executive officers who are employed on the last day of the fiscal year unless
the compensation was not otherwise subject to the deduction limit. Certain
performance-based compensation is not included in this $1 million limitation.
Stock options may qualify for exclusion from this limitation if the plan under
which they are granted meets certain conditions. At present, the Option Plan
does not satisfy these conditions.

                                       58
<PAGE>   60

Accordingly, the Company will not be able to claim a tax deduction for certain
exercises of NSOs or disqualifying dispositions of ISOs by the CEO (should it
grant any in the future) and its four (4) other highest paid executive officers
to the extent that the income from such exercises or dispositions, combined with
such executive's other taxable compensation for the year, exceeds $1 million.

     As of December 31, 1999, the Company had outstanding options under the
Option Plan totaling 3,355,014 shares of common stock of which 392,066 shares
were exercisable.

     The following table sets forth information concerning stock options awarded
to each of the Named Executive Officers during 1999. All such options were
awarded under the Option Plan.

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                           POTENTIAL
                                                                                       REALIZABLE VALUE
                                                % OF TOTAL                             AT ASSUMED ANNUAL
                                                 OPTIONS                                RATES OF STOCK
                                     SHARES     GRANTED TO                            PRICE APPRECIATION
                                   UNDERLYING   EMPLOYEES     EXERCISE                FOR OPTION TERM(1)
                                    OPTIONS     IN FISCAL      PRICE     EXPIRATION   -------------------
DATE                                GRANTED        YEAR        ($/SH)       DATE         5%        10%
----                               ----------   ----------    --------   ----------   --------   --------
<S>                                <C>          <C>           <C>        <C>          <C>        <C>
Gerry Chastelet..................    75,000        3.36%      $5.6875     06/02/05    $145,072   $329,119
                                    150,000        6.73        6.8750     08/03/05     350,724    795,672
Steven H. Grant..................    50,000        2.24        5.6875     06/02/05      96,715    219,413
                                     50,000        2.24        6.8750     08/03/05     116,908    265,224
George Matz......................     2,500        0.11        3.0310     03/31/05       1,636      4,602
                                     50,000        2.24        5.6875     06/02/05      96,715    219,413
                                     50,000        2.24        6.8750     08/03/05     116,908    265,224
Ali Haider.......................    29,500        1.32        3.0310     03/31/05      19,301     54,303
                                     40,000        1.80        5.6875     06/02/05      77,372    175,530
                                     50,000        2.24        6.8750     08/03/05     116,908    265,224
                                     23,000        1.03        3.3480     08/04/05      26,449     62,340
Joe Fuchs........................    30,000        1.35        5.6875     06/02/05      58,029    131,648
                                     20,000        0.90        6.8750     08/03/05      46,763    106,090
</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.

     The following table sets forth certain information regarding options to
purchase shares of Common stock held as of December 31, 1999 by each of the
Named Executive Officers.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                              VALUE OF
                                                             NUMBER OF                      UNEXERCISED
                                                            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......    100,000     $2,924,065           --           725,000              --      $43,785,688
Steven H. Grant......     65,000      1,890,312       35,000           200,000       2,075,938       11,703,125
George Matz..........     75,000      2,018,835       75,000           252,500       4,467,188       14,858,673
Ali Haider...........     23,666        646,400           --           166,834              --        9,835,238
Joe Fuchs............     13,332        269,556        5,000            71,668         302,706        4,190,285
</TABLE>

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

(1) Values shown in these columns reflect the difference between the closing
    price of $64.00 on December 31, 1999 and the exercise price of the options
    and does not include the federal and state taxes due upon exercise.

                                       59
<PAGE>   61

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 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 30, 2000, 176,428 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 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" Mr.
Chastelet's unvested options will accelerate.

     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,
Global Marketing and Sales. 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 vest 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" Mr. Matz's unvested options will accelerate.

     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 vest 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."

                                       60
<PAGE>   62

     The Company entered into a letter agreement dated as of September 8, 1997
as modified by letters dated July 27, 1998 and August 4, 1998 with Ali Haider
(the "Haider Agreements"), the Company's Senior Vice President, Engineering. 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 date of any termination of employment or as of July 27, 1998.

     On October 18, 1999, the Company entered into an addendum to the existing
employment agreements with Messrs. Chastelet, Grant, Matz and Haider. Each
agreement contains 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 of base salary and bonus and acceleration
of all stock options following an 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 ($10,000 in 1999) 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 1999, the compensation committee of the Board consisted of Messrs.
Hamilton and Seifert. 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 1999.
Additionally, no member of the Compensation Committee is currently or was
formally 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. Directors are also reimbursed for travel and
other expenses relating to attendance at meetings of the Board or committees.

     Under the Option Plan, non-employee directors are also eligible to receive
stock options in consideration for their services. Each non-employee director
receives and option for 25,000 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 1999, each non-employee director received an
option for 10,000 shares of common stock as a result of the 1999 Annual Meeting
of Stockholders. During 1999, Mr. Hamilton exercised 10,000 shares of common
stock resulting in proceeds of $271,250. Mr. Seifert exercised 30,000 shares of
common stock resulting in proceeds of $727,082.

                                       61
<PAGE>   63

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, 2000 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,
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, and such persons may be contacted at 15550
Lightwave Drive, Clearwater, Florida 33760.

<TABLE>
<CAPTION>
                                                              SHARES BENEFICIALLY
                                                                    OWNED(1)
                                                              --------------------
NAME                                                            NUMBER     PERCENT
----                                                          ----------   -------
<S>                                                           <C>          <C>
Bryan J. Zwan(2)(3).........................................  18,441,750    63.7%
HBH Assets, Ltd.(4).........................................   2,000,000     6.9%
Gerry Chastelet(5)..........................................      13,030     *
Steven H. Grant(6)..........................................      70,707     *
George Matz(7)..............................................      83,833     *
Ali Haider(8)...............................................      11,017     *
Joe Fuchs(9)................................................       8,333     *
William F. Hamilton(10).....................................      33,333     *
William M. Seifert(11)......................................       3,333     *
All executive officers and directors as a group (8) persons
  (12)......................................................  18,665,336
</TABLE>

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

  *  Less than one percent

 (1) Based on 28,941,136 shares of Common Stock outstanding as of March 29,
     2000. 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, 2000 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 2,000,000 shares for which an option has been granted to Hugh
     Brian Haney, pursuant to a litigation settlement and 16,441,750 shares held
     directly by Bryan J. Zwan or through affiliates controlled by Dr. Zwan,
     principally, ZG Nevada, Inc. and ZG Nevada, LLP.
 (3) Includes 3,365,000 shares which are subject to forward sales agreements and
     pledge agreements with CSFB SAILS Corporation.
 (4) Represents 2,000,000 shares for which an option has been granted by Bryan
     J. Zwan to Hugh Brian Haney, pursuant to a litigation settlement. Mr. Haney
     assigned the option to HBH Assets, Ltd., whose address is P.O. Box 09770,
     Columbus, Ohio 43209-0770.
 (5) Consists of 4,280 shares of Common Stock and 8,750 shares issuable upon
     exercise of options that are currently exercisable or exercisable within 60
     days of March 29, 2000.
 (6) Consists of 10,874 shares of common stock and 59,833 shares issuable upon
     exercise of options that are currently exercisable or exercisable within 60
     days of March 29, 2000.
 (7) Consists of 83,833 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of March 29, 2000.
 (8) Consists of 11,017 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of March 29, 2000.

                                       62
<PAGE>   64

 (9) Consists of 8,333 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of March 29, 2000.
(10) Consists of 33,333 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of March 29, 2000.
(11) Consists of 3,333 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of March 29, 2000.
(12) Consists of 18,456,904 shares of Common Stock and 208,432 shares issuable
     upon exercise of options that are currently exercisable or exercisable
     within 60 days of March 29, 2000.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On December 15, 1998, the Company loaned $100,000 to Dr. Zwan, the
Company's then Chairman of the Board. The loan had a simple interest rate of 9%
per annum, was 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 32.

     (b) Reports on Form 8-K.  No reports on Form 8-K were filed during the
fourth quarter of the period covered by this Report.

     (c) Exhibits.

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

                                       63
<PAGE>   65

<TABLE>
<S>        <C>        <C>
    10.12(3)        -- First Lease Amendment, dated September 25, 1997, between the Company and Monmouth/ Atlantic Realty
                      Associates L.P.
    10.13(3)        -- Second Lease Amendment, dated February 23, 1998, between the Company and Monmouth/ Atlantic Realty
                      Associates L.P.
    10.14(3)        -- Executive Employment Agreement, dated February 27, 1998, between the Company and Steven H. Grant.
    10.15(4)        -- Accounts Receivable Agreement dated December 28, 1998 between the Company and Bankers Capital.
    10.16(4)        -- Stock Option Agreement dated November 13, 1998 among the Company, Dr. Brian J. Zwan and Hugh Brian
                      Haney.
    10.17(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.
    10.18(4)        -- Settlement Agreement dated November 13, 1998 by and among Hugh Brian Haney, Dr. Bryan J. Zwan and the
                      Company.
    10.19(4)        -- Letter Agreement dated as of December 31, 1998 between the Company and Gerry Chastelet.
    10.20(4)        -- Letter Agreement dated April 13, 1998 and addendum thereto dated February 9, 1999 between the Company
                      and George J. Matz.
    10.21(4)        -- Form of Stock Purchase Agreement, dated March 31, 1999, between the Company and certain Purchasers,
                      with exhibits thereto.
    10.22(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.
    10.23(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.
    10.24         --  Form of Addenda to Employment Agreements of certain employees dated October 18, 1999
    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)
    27.01         --  Financial Data Schedule
</TABLE>

---------------
(1) Incorporated by reference to the similarly described exhibits filed in
    connection with the Registrant's Registration Statement on Form S-1, File
    No. 333-09457, declared effective by the Securities and Exchange Commission
    on February 5, 1997.

(2) Incorporated by reference to the exhibit filed in connection with the
    Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
    September 30, 1997.

(3) Incorporated by reference to the similarly described exhibits filed in
    connection with the Registrant's Annual Report on Form 10-K for the fiscal
    year ended December 31, 1997.

(4) Incorporated by reference to the similarly described exhibits filed in
    connection with the Registrant's Annual Report on Form 10-K for the fiscal
    year ended December 31, 1998.

                                       64
<PAGE>   66

                                   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
                                            ------------------------------------
                                            Chairman of the Board,
                                            President and Chief Executive
                                              Officer

Date: March 30, 2000

                               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
                       ----                                        -----                     ----
<C>                                                  <S>                                <C>

                /s/ GERRY CHASTELET                  Chairman of the Board, President   March 30, 2000
---------------------------------------------------  andChief Executive
                  Gerry Chastelet                    Officer(Principal Executive
                                                     Officer)

                /s/ STEVEN H. GRANT                  Executive Vice President,          March 30, 2000
---------------------------------------------------  FinanceChief Financial Officer
                  Steven H. Grant                    and Secretary(Principal Financial
                                                     Officer)

                 /s/ BRYAN J. ZWAN                   Director                           March 30, 2000
---------------------------------------------------
                   Bryan J. Zwan

              /s/ WILLIAM F. HAMILTON                Director                           March 30, 2000
---------------------------------------------------
                William F. Hamilton

                /s/ WILLIAM SEIFERT                  Director                           March 30, 2000
---------------------------------------------------
                  William Seifert
</TABLE>

                                       65
<PAGE>   67

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

     Our report on the consolidated financial statements of Digital Lightwave,
Inc. is included on page 34 of this Form 10-K. In connection with our audit of
such consolidated financial statements, we have also audited the related
financial statement schedule as of December 31, 1998 and 1999, and for the years
then ended listed in the index on page 67 of this Form 10-K.

     In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

                                          PricewaterhouseCoopers LLP

Tampa, Florida
January 31, 2000

                                       66
<PAGE>   68

                            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 1999
Allowance for doubtful accounts............     $  0          $215           $0          $ 0         $215
Inventory valuation........................       10           397            0           85(a)       322

Year 1998
Inventory valuation........................       10             0            0            0           10

Year 1997
Inventory valuation........................        0            10            0            0           10
</TABLE>

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

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

                                       67