<PAGE>   1

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

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

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

                                   FORM 10-Q

<TABLE>
<C>                  <S>
    (MARK ONE)
        [X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                     THE SECURITIES EXCHANGE ACT OF 1934

                     FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

                                                  OR

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

                     FOR THE TRANSITION PERIOD FROM __________ TO __________
</TABLE>

                        COMMISSION FILE NUMBER 000-21669

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

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

<TABLE>
<S>                                            <C>
                  DELAWARE                                      95-4313013
       (State or other jurisdiction of                       (I.R.S. Employer
       incorporation or organization)                       Identification No.)
</TABLE>

                             15550 LIGHTWAVE DRIVE
                           CLEARWATER, FLORIDA 33760
                                 (727) 442-6677
        (Address, including zip code, of principal executive offices and
              Registrant's telephone number, including area code)

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

     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 period that the
Registrant was required to file such report (s)), and (2) has been subject to
such filing requirements for the past 90 days.

                             YES  [ ]       NO  [ ]

     The number of shares outstanding of the Registrant's Common Stock as of
November 11, 1999 was 27,018,319.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                            DIGITAL LIGHTWAVE, INC.

                         QUARTERLY REPORT ON FORM 10-Q
                    FOR THE PERIOD ENDED SEPTEMBER 30, 1999

                                     INDEX

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----
<S>      <C>                                                           <C>
                       PART I FINANCIAL INFORMATION
Item 1.  Financial Statements:
         Consolidated Condensed Balance Sheets -- September 30, 1999
         and December 31, 1998.......................................    1
         Consolidated Condensed Statements of Operations -- Three
         Months Ended September 30, 1999 and September 30, 1998......    2
         Consolidated Condensed Statements of Operations -- Nine
         Months Ended September 30, 1999 and September 30, 1998......    3
         Consolidated Condensed Statements of Cash Flows -- Nine
         Months Ended September 30, 1999 and September 30, 1998......    4
         Notes to Consolidated Condensed Financial Statements........    5
         Management's Discussion and Analysis of Financial Condition
Item 2.  and Results of Operations...................................    9

                         PART II OTHER INFORMATION
Item 1.  Legal Proceedings...........................................   18
Item 6.  Exhibits and Reports on Form 8-K............................   19
SIGNATURES...........................................................   20
</TABLE>
<PAGE>   3

                                     PART I

                             FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

                            DIGITAL LIGHTWAVE, INC.

                     CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  1999            1998
                                                              -------------   ------------
                                                               (UNAUDITED)
<S>                                                           <C>             <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents.................................     $ 4,779        $ 3,848
  Accounts receivable, net..................................      11,533          7,152
  Inventories...............................................       5,396          5,476
  Prepaid expenses and other current assets.................       1,720            748
                                                                 -------        -------
          Total current assets..............................      23,428         17,224
Property and equipment, net.................................       8,938          9,274
Other assets................................................         925          1,060
                                                                 -------        -------
          Total assets......................................     $33,291        $27,558
                                                                 =======        =======
                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................     $ 8,506        $ 6,468
  Notes payable, net of discount............................       2,996             --
  Interest payable..........................................         132             --
  Accrued settlement charges................................       6,305          8,489
                                                                 -------        -------
          Total current liabilities.........................      17,939         14,957
Long-term liabilities.......................................         189            281
                                                                 -------        -------
          Total liabilities.................................      18,128         15,238
                                                                 -------        -------
Stockholders' equity:
  Common stock..............................................           3              3
  Additional paid-in capital................................      59,697         57,927
  Accumulated deficit.......................................     (44,537)       (45,610)
                                                                 -------        -------
          Total stockholders' equity........................      15,163         12,320
                                                                 -------        -------
          Total liabilities and stockholders' equity........     $33,291        $27,558
                                                                 =======        =======
</TABLE>

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

                                        1
<PAGE>   4

                            DIGITAL LIGHTWAVE, INC.

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

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                              --------------------------
                                                                 1999           1998
                                                              -----------    -----------
<S>                                                           <C>            <C>
Sales.......................................................  $    14,162    $     6,915
Cost of goods sold..........................................        4,851          2,620
                                                              -----------    -----------
  Gross profit..............................................        9,311          4,295
Operating expenses:
  Engineering and development...............................        2,325          4,290
  Sales and marketing.......................................        3,147          3,526
  General and administrative................................        1,187          1,096
                                                              -----------    -----------
          Total operating expenses..........................        6,659          8,912
                                                              -----------    -----------
Operating income (loss).....................................        2,652         (4,617)
Other income (expense)......................................          (11)           102
                                                              -----------    -----------
Income (loss) before income tax.............................        2,641         (4,515)
Provision for income taxes..................................           --             --
                                                              -----------    -----------
       Net income (loss)....................................  $     2,641    $    (4,515)
                                                              ===========    ===========
Per share of common stock:
       Net income (loss) per share..........................  $      0.10    $     (0.17)
                                                              ===========    ===========
       Diluted net income (loss) per share..................  $      0.09    $     (0.17)
                                                              ===========    ===========
Weighted average common shares outstanding..................   26,863,115     26,484,670
                                                              ===========    ===========
Weighted average common and common equivalent shares
  outstanding...............................................   28,590,833     26,484,670
                                                              ===========    ===========
</TABLE>

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

                                        2
<PAGE>   5

                            DIGITAL LIGHTWAVE, INC.

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

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                              --------------------------
                                                                 1999           1998
                                                              -----------    -----------
<S>                                                           <C>            <C>
Sales.......................................................  $    33,002    $    15,864
Cost of goods sold..........................................       11,729          6,057
                                                              -----------    -----------
  Gross profit..............................................       21,273          9,807
Operating expenses:
  Engineering and development...............................        7,746         11,291
  Sales and marketing.......................................        9,006          8,562
  General and administrative................................        3,511          4,639
  Reorganization charges....................................           --          1,018
  Litigation settlement.....................................           --          8,500
                                                              -----------    -----------
          Total operating expenses..........................       20,263         34,010
                                                              -----------    -----------
Operating income (loss).....................................        1,010        (24,203)
Other income................................................           63            547
                                                              -----------    -----------
Income (loss) before income tax.............................        1,073        (23,656)
Provision for income taxes..................................           --             --
                                                              -----------    -----------
     Net income (loss)......................................  $     1,073    $   (23,656)
                                                              ===========    ===========
Per share of common stock:
     Net income (loss) per share............................  $      0.04    $     (0.89)
                                                              ===========    ===========
     Diluted net income (loss) per share....................  $      0.04    $     (0.89)
                                                              ===========    ===========
Weighted average common shares outstanding..................   26,656,797     26,463,408
                                                              ===========    ===========
Weighted average common and common equivalent shares
  outstanding...............................................   27,517,832     26,463,408
                                                              ===========    ===========
</TABLE>

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

                                        3
<PAGE>   6

                            DIGITAL LIGHTWAVE, INC.

                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   FOR THE
                                                              NINE MONTHS ENDED
                                                                SEPTEMBER 30,
                                                              ------------------
                                                               1999       1998
                                                              -------   --------
<S>                                                           <C>       <C>
Cash flows from operating activities:
  Net income (loss).........................................  $ 1,073   $(23,656)
  Adjustments to reconcile net income (loss) due to cash
     used by operating activities:
     Depreciation and amortization..........................    1,825      1,671
     Loss on disposal of property...........................       13         --
  Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable.............   (4,776)       163
     Decrease in inventories................................      149        983
     Increase in prepaid expenses and other current
      assets................................................     (837)      (927)
     Increase (decrease) in accounts payable and accrued
      expenses..............................................    1,970     (2,001)
     (Decrease) increase in accrued settlement charges......     (990)     8,454
                                                              -------   --------
       Net cash used in operating activities................   (1,572)   (15,313)
                                                              -------   --------
Cash flows from investing activities:
  Purchase of property and equipment........................   (1,224)    (2,878)
                                                              -------   --------
       Net cash used in investing activities................   (1,224)    (2,878)
                                                              -------   --------
Cash flows from financing activities:
  Proceeds from notes payable...............................    3,000         --
  Proceeds from sale of common stock, net of expense........      574        175
  Payments received -- lease receivables....................      395         48
  Principal payments--capital lease obligations.............     (242)       (51)
                                                              -------   --------
       Net cash provided by financing activities............    3,727        172
                                                              -------   --------
Net increase (decrease) in cash and cash equivalents........      931    (18,019)
Cash and cash equivalents at beginning of period............    3,848     24,031
                                                              -------   --------
Cash and cash equivalents at end of period..................  $ 4,779   $  6,012
                                                              =======   ========
Other supplemental disclosures:
  Cash paid for interest....................................       39         21
Noncash investing and financing activities:
  Capital lease obligations incurred........................  $   194   $    287
  Fixed asset additions included in accounts payable........  $   155   $     39
  Accounts receivable related to capital leases.............  $   270   $    297
</TABLE>

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

                                        4
<PAGE>   7

                            DIGITAL LIGHTWAVE, INC.

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     The accompanying unaudited consolidated condensed financial statements of
Digital Lightwave, Inc. ("the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, these statements include all adjustments,
consisting of normal and recurring adjustments, considered necessary for a fair
presentation of results for such periods. The results of operations for the
three and nine month periods ended September 30, 1999, are not necessarily
indicative of results which may be achieved for the full fiscal year or for any
future period. The unaudited interim financial statements should be read in
conjunction with the financial statements and notes thereto contained in Digital
Lightwave's Form 10-K for the period ended December 31, 1998, File No. 000-
21669.

     For comparative purposes, certain amounts previously disclosed in the
financial statements have been reclassified to conform to the current
presentation. These reclassifications had no effect on the results of operations
for the periods presented.

2. INVENTORIES

     Inventories at September 30, 1999 and December 31, 1998 are summarized as
follows:

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  1999            1998
                                                              -------------   ------------
                                                                     (IN THOUSANDS)
<S>                                                           <C>             <C>
Raw materials...............................................     $3,235          $2,166
Work-in-process.............................................      1,787           1,443
Finished goods..............................................        374           1,867
                                                                 ------          ------
                                                                 $5,396          $5,476
                                                                 ======          ======
</TABLE>

3. COMPUTATION OF NET 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 quarter and the
nine months ended September 30, 1998, diluted loss per share, which includes the
effect of incremental shares from common stock equivalents using the treasury
stock method, is not included in the calculation of net loss per share as the
inclusion of such equivalents would be anti-dilutive. The table below shows the
calculation of basic weighted average common shares outstanding and the
incremental number of shares arising from common stock equivalents under the
treasury stock method:

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED         NINE MONTHS ENDED
                                                       SEPTEMBER 30,             SEPTEMBER 30,
                                                  -----------------------   -----------------------
                                                     1999         1998         1999         1998
                                                  ----------   ----------   ----------   ----------
<S>                                               <C>          <C>          <C>          <C>
Weighted average common stock outstanding.......  26,863,115   26,484,670   26,656,797   26,463,408
Weighted average common stock equivalents
  outstanding...................................   1,727,718           --      861,035           --
                                                  ----------   ----------   ----------   ----------
Shares including effect of common stock
  equivalents outstanding.......................  28,590,833   26,484,670   27,517,832   26,463,408
                                                  ==========   ==========   ==========   ==========
</TABLE>

4. REORGANIZATION CHARGES

     The Company streamlined its management structure and eliminated 20
positions which resulted in a one-time charge of approximately $1.0 million
during the nine months ended September 30, 1998.

                                        5
<PAGE>   8
                            DIGITAL LIGHTWAVE, INC.

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

5. 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 (the "District Court"), on
behalf of purchasers of the Company's Common Stock. The complaints named as
defendants the Company, Bryan J. Zwan, the Company's then 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 March 12, 1999, the court
indicated that it would grant final approval of the settlement of the class
action complaints and on April 30, 1999, the court entered a final judgment
approving the settlement of the actions. The final order is subject to appeal.
On July 21, 1999, the Company issued to plaintiffs' counsel 289,350 shares of
Common Stock in partial satisfaction of the total shares required under this
settlement. Those shares are 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. Subsequently, plaintiffs
filed a motion in the District Court to require Mr. Chalmers to post a bond to
secure costs to be incurred in connection with the appeal. On August 9, 1999,
the District Court granted plaintiff's motion mandating that Mr. Chalmers post a
$12.5 million bond in support of his appeal. Mr. Chalmers did not post the bond
and, on August 26, 1999, he filed a Notice of Appeal regarding the bond order
with the Eleventh Circuit Court of Appeals. In addition, on August 9, 1999, the
Securities and Exchange Commission filed an amicus brief in partial support of
Mr. Chalmers' appeal of the settlement. On October 4, 1999, the Court of Appeals
denied the Company's emergency motion for an expedited decision dismissing the
appeal of the settlement. Briefing on the settlement appeal has been completed
and the Court has ordered an expedited briefing schedule for the bond appeal.
The Company intends to vigorously oppose the appeals. However, there can be no
assurance as to the outcome of the appeals. If the appeal of the settlement is
successful, the settlement of the class action could be set aside, and the
Company again could be required to defend or attempt to settle the class action
suit, which could have a negative effect on the Company and its results of
operations and financial condition.

     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

                                        6
<PAGE>   9
                            DIGITAL LIGHTWAVE, INC.

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

(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.

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

6. FINANCING TRANSACTIONS

     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 July 12, 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 receivables, 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 July 12, 1999, the accounts receivable agreement with EAB automatically
renewed for a six month period ending January 12, 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
September 30, 1999, 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 are collateralized by all of the Company's assets and are
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 have a term of five
years from the date of issuance. The Company has agreed to register the warrants
and the common stock issuable upon exercise thereof under the Securities Act of
1933. The Company expects to complete this registration during the fourth
quarter of 1999.

                                        7
<PAGE>   10
                            DIGITAL LIGHTWAVE, INC.

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

     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 (the "Emergent Line of
Credit"). Under the Emergent Line of Credit, the Company would be entitled to
borrow up to $5.0 million, subject to certain borrowing limitations based on
amounts of the Company's accounts receivable and other assets. The Emergent Line
of Credit would have a term of two years. All indebtedness outstanding under the
Emergent Line of Credit Agreement would be collateralized by substantially all
of the Company's assets.

     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. The Convertible Subordinated Notes
would be convertible into shares of the Company's common stock. The Company
would grant the underwriter a 30-day option to purchase up to an additional $3.0
million of Convertible Subordinated Notes for the purpose of covering
over-allotments. C.E. Unterberg, Towbin is the underwriter of this offering.

7. COMMITMENTS

     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.

8. SUBSEQUENT EVENTS

     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 agreements containing provisions with respect to change
of control, severance and non-compete with current senior management.

     In November 1999, the Board decided not to proceed with the registration
statement with the Securities and Exchange Commission relating to a public
offering of $20.0 million of Convertible Subordinated Notes described in Note
6 -- Financing Transactions. The Company may record a charge related to costs
deferred in anticipation of the issuance of this debt during the fourth quarter.
The total of these costs at September 30, 1999 was $608,623. The Company
continues to consider various financing alternatives, including the existing
accounts receivable agreement with EAB, the Emergent Line of Credit, and other
asset based lending facilities. There can be no assurance that the Company will
be successful in obtaining alternative financing on a timely basis or, if
available, on terms acceptable to the Company.

                                        8
<PAGE>   11

ITEM 2.  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 the
Company's Annual Report on Form 10-K for the period ended December 31, 1998,
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, control by a majority
shareholder, dependence on a limited number of products, uncertain market
acceptance of planned products, rapid technological changes, dependence on new
product introductions, ability to compete effectively with other companies,
dependence on contract manufacturing and limited source suppliers, delays in
product development and delivery schedules, success of the original equipment
manufacturer ("OEM") agreement with Lucent Technologies, dependence on key
personnel, ability to manage our growth, ability to enter into strategic
relationships, quarterly fluctuations in operating results, dependence on
proprietary technology, dependence on a limited number of major customers,
product certifications, factors inhibiting takeover, shares eligible for future
sale, possible volatility of stock price, success in defending significant
litigation, liquidity risks and future capital needs, general business
conditions, 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. The Company disclaims any obligation to update
any such factors or announce publicly revisions to such statements to reflect
events or developments.

OVERVIEW

     The Company designs, develops, markets and supports network analysis
equipment for monitoring, maintaining and managing fiber optic 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. In 1998, the Company
commenced limited sales of the Network Access Agent.

     The Company's sales are generated from sales of its products, less an
estimate for customer returns. Sales are recognized when products are shipped to
a customer. The Company expects that the average selling price ("ASP") of its
Network Information Computers 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. 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.

     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-
                                        9
<PAGE>   12

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 has incurred substantial net operating losses
as a result of significant investment in research and development, sales and
marketing and administrative expenses. 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. The quarter ended September 30,
1999 marked the second consecutive quarter of profitability for the Company
rendering 1999 profitable on a year-to-date basis. There can be no assurance
that profitability will be sustained.

RESULTS OF OPERATIONS

     The following is a discussion of significant changes in the results of
operations of the Company which occurred in the quarter and nine months ended
September 30, 1999 compared to the quarter and nine months ended September 30,
1998. The following tables summarize the approximate changes in selected
operating items and include dollar changes, percentage changes and percent of
net sales to facilitate the discussions that follow.

<TABLE>
<CAPTION>
                                                     QUARTER ENDED                               PERCENT OF
                                             -----------------------------   AMOUNT    PERCENT       NET
                                                                             CHANGE    CHANGE       SALES
                                             SEPTEMBER 30,   SEPTEMBER 30,    FAV/      FAV/     -----------
                                                 1999            1998        (UNFAV)   (UNFAV)   1999   1998
                                             -------------   -------------   -------   -------   ----   ----
                                                                 (IN MILLIONS, EXCEPT %)
<S>                                          <C>             <C>             <C>       <C>       <C>    <C>
Net sales..................................      $14.2           $ 6.9        $7.3       105%    100%   100%
Cost of goods sold.........................       (4.9)           (2.6)       (2.3)      (87)     34     38
                                                 -----           -----        ----               ---    ---
Gross profit...............................        9.3             4.3         5.0       117      66     62
Engineering and development expenses.......       (2.3)           (4.3)        2.0        46      17     62
Sales and marketing expenses...............       (3.2)           (3.5)        0.3         7      22     51
General and administrative expenses........       (1.2)           (1.1)       (0.1)       (8)      8     16
                                                 -----           -----        ----               ---    ---
          Total operating expenses.........       (6.7)           (8.9)        2.2        25      47    129
Operating income (loss)....................        2.6            (4.6)        7.2       155      19    (67)
Other income, net..........................         --             0.1        (0.1)     (111)     --      1
                                                 -----           -----        ----               ---    ---
Pre-tax income (loss)......................        2.6            (4.5)        7.1       159      19    (66)
Income taxes...............................         --              --          --        --      --     --
                                                 -----           -----        ----               ---    ---
Net income (loss)..........................      $ 2.6           $(4.5)       $7.1       159%     19%   (66)%
                                                 =====           =====        ====               ===    ===
</TABLE>

                                       10
<PAGE>   13

<TABLE>
<CAPTION>
                                                  NINE MONTHS ENDED                             PERCENT OF
                                            -----------------------------   AMOUNT    PERCENT       NET
                                                                            CHANGE    CHANGE       SALES
                                            SEPTEMBER 30,   SEPTEMBER 30,    FAV/      FAV/     -----------
                                                1999            1998        (UNFAV)   (UNFAV)   1999   1998
                                            -------------   -------------   -------   -------   ----   ----
                                                                (IN MILLIONS, EXCEPT %)
<S>                                         <C>             <C>             <C>       <C>       <C>    <C>
Net sales.................................      $33.0          $ 15.9        $17.1      108%    100%    100%
Cost of goods sold........................      (11.7)           (6.1)        (5.6)     (92)     36      38
                                                -----          ------        -----              ---    ----
Gross profit..............................       21.3             9.8         11.5      117      64      62
Engineering and development expenses......       (7.8)          (11.3)         3.5       31      23      71
Sales and marketing expenses..............       (9.0)           (8.6)        (0.4)      (5)     27      54
General and administrative expenses.......       (3.5)           (4.6)         1.1       24      11      29
Reorganization charges....................         --            (1.0)         1.0      100      --       6
Litigation settlement.....................         --            (8.5)         8.5      100      --      54
                                                -----          ------        -----              ---    ----
          Total operating expenses........      (20.3)          (34.0)        13.7       40      61     214
Operating income (loss)...................        1.0           (24.2)        25.2      104       3    (152)
Other income, net.........................        0.1             0.5         (0.4)     (87)     --       3
                                                -----          ------        -----              ---    ----
Pre-tax income (loss).....................        1.1           (23.7)        24.8      105       3    (149)
Income taxes..............................         --              --           --       --      --      --
                                                -----          ------        -----              ---    ----
Net income (loss).........................      $ 1.1          $(23.7)       $24.8      105%      3%   (149)%
                                                =====          ======        =====              ===    ====
</TABLE>

  Sales

     Sales include total revenues from customer purchases of Network Information
Computers (NIC) and Network Access Agents (NAA), net of accrual for product
returns. Net sales for the quarter increased $7.3 million to $14.2 million from
$6.9 million in the year ago quarter. Sales to existing customers during the
quarter represented 93% of sales, or $13.3 million as compared to 83% of sales,
or $5.7 million in the year ago quarter. During the quarter, the Company shipped
299 units in varying configurations of the NIC and 4 NAA units to a total of 49
customers (including 17 new customers) at an ASP of $46,740 as compared to 251
NIC units to a total of 36 customers (including 14 new customers) at an ASP of
$27,550 in the year ago quarter.

     Sales for the nine months ended September 30, 1999, increased $17.1 million
to $33.0 million from $15.9 million in the year ago period. Sales to existing
customers for the period represented 89% of sales, or $29.5 million as compared
to 71% of sales, or $11.3 million for the same period last year. During the
period, the Company shipped 800 units in varying configurations of the NIC and
10 NAA at an ASP of $40,744 as compared to 539 NIC units at an ASP of $29,432 in
the year ago period.

     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.

     The increase in ASP for the quarter and nine months ended September 30,
1999 as compared to the year ago periods is primarily due to the higher selling
price associated with the Company's higher speed optical configuration, OC-48,
which was not available until September of 1998.

  Cost of Goods Sold

     Costs of goods sold principally includes inventory, labor and overhead,
management costs, facility rental and depreciation of equipment. Cost of goods
sold for the quarter increased by $2.3 million to $4.9 million from $2.6 million
in the year ago quarter.

     Cost of goods sold for the nine months ended September 30, 1999 increased
by $5.6 million to $11.7 million from $6.1 million in the year ago period.

                                       11
<PAGE>   14

     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 quarter increased by $5.0 million to $9.3 million from
$4.3 million in the year ago quarter. As a percentage of sales, gross margin for
the quarter ended September 30, 1999 increased to 65.7% from 62.1%.

     Gross profit for the nine months ended September 30, 1999 increased by
$11.5 million to $21.3 million from $9.8 million in the year ago period. As a
percentage of sales, gross margin for the nine months ended September, 30, 1999
increased to 64.5% from 61.8%.

     The increase in gross profit is directly related to the increase in sales
for the quarter and nine months ended September 30, 1999. Along with the
increase in sales, gross margin percentages have also increased. The primary
reasons for this were increased margins on higher speed optical configured units
at OC12 and above, particularly OC-48 which has significantly impacted margins
in 1999 on both a quarterly and year to date basis.

  Engineering and Development

     Engineering and development expenses principally include compensation
attributable to engineering and development personnel, depreciation of fixed
assets, outside consulting fees and other development expenses. Engineering and
development expenses for the quarter decreased by $2.0 million to $2.3 million
from $4.3 million in the year ago quarter.

     Engineering and development expenses for the nine months ended September
30, 1999 decreased by $3.5 million to $7.8 million from $11.3 million in the
year ago period.

     The decrease for both the quarter and the nine months 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. This
resulted in a savings of $1.0 and $3.1 million in salaries and related benefits
for the quarter and nine months, respectively, over the same periods last year.
In addition, engineering and development for the quarter were lower in 1999 as a
greater portion of overhead expenses were capitalized as part of inventory costs
due to higher production activity. Also, product development spending in the
1998 quarter was higher as the development of the OC-48 product was completed
and the product was brought to market in September of 1998.

  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 quarter decreased $0.3 million to $3.2 million from $3.5 million in the year
ago quarter. This decrease is the result of the elimination of the International
Sales organization and normal attrition for which replacements were not sought.
In addition, in 3rd quarter 1998, customer incentives were granted in the form
of free customer upgrades resulting in a $0.3 million expense. These items were
partially offset by higher commissions resulting from the increased sales
activity.

     Sales and marketing expenses for the nine months ending September 30, 1999
increased $0.4 million to $9.0 million compared to $8.6 million in the year ago
period. The increase is directly related to higher commissions resulting from
the increased sales activity partially offset by the salary and benefits savings
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 quarter
increased by $0.1 million to $1.2 million from $1.1 million in the year ago
quarter.

                                       12
<PAGE>   15

     General and administrative expenses for the nine months ended September 30,
1999 decreased by $1.1 million to $3.5 million from $4.6 million in the year ago
period.

     The decrease for the year-to-date period primarily reflects higher
professional fees related to legal costs in 1998.

  Reorganization Charges

     During the nine months ended September 30, 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 nine months ended September 30, 1998, the Company signed a
memorandum of understanding 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 one-time charge of $8.5 million.

  Other Income or Expense

     Other expense for the quarter ended September 30, 1999, represents a
unfavorable change of $0.1 million to $0.0 million in expense from $0.1 million
in income in the same quarter last year.

     Other income for the nine months ended September 30, 1999 decreased by $0.4
million to $0.1 million from $0.5 million in the same period last year.

     The change in both the quarter and the nine months 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
2nd quarter of 1999.

  Net Income or Loss

     Net income for the quarter increased by $7.1 million to $2.6 million or
$.09 per share (diluted), from a net loss of $4.5 million or $.17 per share in
the year ago quarter.

     Net income for the nine months ended September 30, 1999 increased by $24.8
million to $1.1 million or $.04 per share (diluted), from a net loss of $23.7
million or $.89 per share in the year ago period.

     The net loss for the nine months ended September 30, 1998 was adversely
impacted by the one-time charges of $8.5 million to record the settlement of
outstanding securities litigation and $1.0 million to record the reorganization.
Without these charges, the net loss would been $14.1 million or a loss of $.53
per share.

LIQUIDITY AND CAPITAL RESOURCES

     From its inception through December 31, 1998, the Company has financed its
operations primarily through private sales of its Common Stock, cash from
operations and the initial public offering of 3,658,860 shares of its Common
Stock. The Company completed its IPO in February 1997, resulting in net proceeds
to the Company of $39.6 million. During 1997, the Company used the net proceeds
to fund the repayment of notes payable for approximately $0.8 million, to
purchase computer equipment, software, test equipment and other assets for
approximately $6.0 million and to fund product research and development for
approximately $5.3 million. In addition, approximately $3.5 million was used to
fund the Company's expansion in the form of additional manufacturing and
administrative space and a significant increase in engineering, production and
financial management personnel to support the Company's growth.

     Cash and cash equivalents at September 30, 1999 were approximately $4.8
million as compared to approximately $3.8 million at December 31, 1998. As of
September 30, 1999, the Company's working capital was approximately $5.5 million
as compared to $2.3 million at December 31, 1998. The increase was primarily the
result of the growth in trade accounts receivable caused by record sales in
1999. For the nine months ended September 30, 1999, capital expenditures were
approximately $1.2 million. Future capital expenditures

                                       13
<PAGE>   16

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 is $2.9 million through July 12, 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 July 12, 1999, the accounts receivable agreement with EAB automatically
renewed for a six month period ending January 12, 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
September 30, 1999, 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 are collateralized by all of the Company's assets and are
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 have a term of five
years from the date of issuance. The Company has agreed to register the warrants
and the common stock issuable upon exercise thereof under the Securities Act of
1933. The Company expects to complete this registration during the fourth
quarter of 1999.

     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 (the "Emergent Line of
Credit"). Under the Emergent Line of Credit, the Company would be entitled to
borrow up to $5.0 million, subject to certain borrowing limitations based on
amounts of the Company's accounts receivable and other assets. The Emergent Line
of Credit would have a term of two years. All indebtedness outstanding under the
Emergent Line of Credit Agreement would be collateralized by substantially all
of the Company's assets.

     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. The Convertible Subordinated Notes
would be convertible into shares of the Company's common stock. The Company
would grant the underwriter a 30-day option to purchase up to an additional $3.0
million of Convertible Subordinated Notes for the purpose of covering
over-allotments. C.E. Unterberg, Towbin is the underwriter of this offering.

     In November 1999, the Board decided not to proceed with the registration
statement with the Securities and Exchange Commission relating to a public
offering of $20.0 million of Convertible Subordinated Notes. The Company may
record a charge related to costs deferred in anticipation of the issuance of
this debt during the fourth quarter. The total of these costs at September 30,
1999 was $608,623.

     The Company continues to consider various financing alternatives, including
the existing accounts receivable agreement with EAB, the Emergent Line of
Credit, and other asset based lending facilities (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
significantly higher than those of earlier quarters. In the event that these
sales levels are not attained, the Company will be required to supplement its
working capital with additional funding in order to meet shorter or longer term

                                       14
<PAGE>   17

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 READINESS DISCLOSURE

  Year 2000 Issues and State of Readiness

     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. The Company
has made an 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.

     The Company believes that the current versions of its products (ASA 312
Network Information Computer software versions 3.500 and later and Network
Access Agents) are Year 2000 compliant. The Company's products use time and
dates only as a "time stamp" for data-logging events, for file dates, for
display of elapsed time, and setting the test duration. The products' internal
system calendar years are entered as a 2-digit number in the range of "95" (for
1995) through "94" (for 2094). Since there is never a reason for "back dating,"
this provides an unambiguous means of entry for the year. The date is displayed
in a 4-digit year format (e.g., 01-Jan-1998) to enhance understandability. Based
on the foregoing, it is not expected that the Company's current products will be
adversely affected by date changes in the Year 2000.

     Certain customers of the Company may be running earlier versions of the
Company's products that are not Year 2000 compliant. These earlier software
versions, like the compliant versions, rely on time and dates only as a "time
stamp" for data-logging events, for file dates, for display of elapsed time, and
setting the test duration and do not prohibit function of the equipment. The
Company has made its policy statement regarding its product line available on
the Internet as well as providing written copies at customer request. This
alerts customers to the noncompliance of earlier versions of the ASA 312
software. Of these earlier versions, 3.100 through prior to 3.500 partially
comply, although if allowed to run past 1999 and into January 1, 2000, the date
after power-down will be incorrectly set to 1980. Instructions regarding
correcting this are provided both on the Internet and via customer inquiry. This
leaves only versions lower than 3.100 which are truly non-compliant. The
suggested solution for these products is an upgrade to a more recent, compliant
version of the software at the cost of the Company. The Company has evaluated
the number of customers still operating with these non-compliant versions. Of
these customers, it is estimated that approximately half have already received
the desired upgrades. The cost to upgrade the remaining units is estimated to
total $36,000 which would not have a material adverse impact on the Company's
business, operating results or financial condition.

     With respect to IT systems, the Company has inventoried its internal
software and electronic hardware devices currently in use to determine which of
these devices rely on a valid date in order to function. Of these, certain
operating, accounting, and telephony systems were identified as critical.
Resources required to make these systems Year 2000 compliant were evaluated
based on availability and cost of the related upgrade. In general, the Company
has obtained Year 2000 compliant versions from third party software vendors and
modified these systems. A portion of the telephony system still requires such
upgrade and the Company expects to complete this during November 1999. Total
costs of the remaining remediation, when complete, are estimated at
approximately $15,000. Non-IT embedded systems, consisting primarily of security
systems, the emergency power generator, HVAC controls and elevators have also
been reviewed. These systems were found to be year 2000 compliant.

     The Company also has certain key relationships with suppliers and
subcontractors. We have contacted certain third-party suppliers of key
components or services regarding their Year 2000 readiness. We have

                                       15
<PAGE>   18

received confirmation of their Year 2000 readiness and/or documentation
concerning their efforts to achieve compliance.

  Risks Associated with Year 2000 and Contingency Plan

     Based on information currently available to the Company, the Company
believes that the most reasonably likely worst case Year 2000 scenarios with
respect to the Company relate to the potential failure of third party suppliers,
subcontractors and customers to become Year 2000 compliant. The inability of
suppliers and subcontractors to complete their Year 2000 remediation processes
in a timely fashion could result in delays in introducing new products, reduced
sales of new or existing products and disruptions in any future strategic
relationships. The failure of these entities to become Year 2000 compliant could
in turn have a material and adverse effect on the Company's results of
operations and financial condition. The effect of non-compliance by suppliers,
subcontractors and customers is not reasonably quantifiable.

     The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues. Many companies are
expending significant resources to correct or upgrade their current systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase testing products such as those offered by the Company. This could
have a material adverse effect upon the Company's business, operating results
and financial condition.

     The Company anticipates that generally throughout the computer industry
substantial litigation may be brought against software vendors of non-compliant
operating environments. The Company believes that any such claims against the
Company, with or without merit, could have a material adverse effect on the
Company's business, operating results and financial condition.

     The most significant aspect of a Year 2000 contingency plan would involve
the ability of the Company to identify alternative vendors if the need arose. As
an element of the Company's normal business planning and analysis, multiple
sources for key components and services are continually being evaluated.
Therefore, the Company believes it has that ability.

     The Company is not aware of any Year 2000 compliance problems relating to
its current products or its IT or non-IT systems that would have a material
adverse effect on the Company's business, results of operations and financial
condition. However, the Company may discover Year 2000 problems in its products
that will require substantial revisions. In addition, third-party software or
hardware incorporated into the Company's products and material IT and non-IT
systems may need to be revised or replaced, all of which could be time consuming
and expensive. If material Year 2000 problems are discovered, the failure of the
Company to fix its products or fix or replace third-party software, third party
software incorporated into its products and in its IT systems could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on the
Company's business, results of operations and financial conditions.

                                       16
<PAGE>   19

  Expenses Related to Year 2000 Compliance

     The total cost of the Year 2000 preparedness effort is funded through
operating cash flows and the Company is expensing these costs. The Company has
not established any specific reserves for these costs. The Company has not
incurred 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. Future costs related to
Year 2000 compliance are not expected to have a material adverse effect on the
Company's results of operations or financial condition. However, the Company may
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems, which are composed predominantly of third party software and hardware
technology with embedded software, and the Company's own products.

                                       17
<PAGE>   20

                                    PART II

                               OTHER INFORMATION

ITEM 1.  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 then 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 March 12, 1999, the court
indicated that it would grant final approval of the settlement of the class
action complaints and on April 30, 1999, the court entered a final judgment
approving the settlement of the actions. The final order is subject to appeal.
On July 21, 1999, the Company issued to plaintiffs' counsel 289,350 shares of
Common Stock in partial satisfaction of the total shares required under this
settlement. Those shares are 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. Subsequently, plaintiffs
filed a motion in the District Court to require Mr. Chalmers to post a bond to
secure costs to be incurred in connection with the appeal. On August 9, 1999,
the District Court granted plaintiff's motion mandating that Mr. Chalmers post a
$12.5 million bond in support of his appeal. Mr. Chalmers did not post the bond
and, on August 26, 1999, he filed a Notice of Appeal regarding the bond order
with the Eleventh Circuit Court of Appeals. In addition, on August 9, 1999, the
Securities and Exchange Commission filed an amicus brief in partial support of
Mr. Chalmers' appeal of the settlement. On October 4, 1999, the Court of Appeals
denied the Company's emergency motion for an expedited decision dismissing the
appeal of the settlement. Briefing on the settlement appeal has been completed
and the Court has ordered an expedited briefing schedule for the bond appeal.
The Company intends to vigorously oppose the appeals. However, there can be no
assurance as to the outcome of the appeals. If the appeal of the settlement is
successful, the settlement of the class action could be set aside, and the
Company again could be required to defend or attempt to settle the class action
suit, which could have a negative effect on the Company and its results of
operations and financial condition.

     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 its financial results, the
Company agreed to voluntarily 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.
The settlement is subject to approval by the Commission and the United States
District Court. There can be no assurance that the settlement will be approved
or if it is not approved, that the Company will succeed in defending or settling
any subsequent action that might be brought against it by the Commission. In
addition, it is the Company's understanding that several current and former
officers and directors of the Company are also the subjects of this
investigation, which is ongoing.

                                       18
<PAGE>   21

     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.

ITEM 6.  EXHIBIT AND REPORTS ON FORM 8-K

     (a) Exhibit

EXHIBIT   DESCRIPTION

10.1 -- Memorandum of Understanding between the Company and Dr. Bryan J. Zwan
        dated October 14, 1999.

27   -- Financial Data Schedule (for SEC use only).

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

                                       19
<PAGE>   22

                                   SIGNATURES

     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.

                                          Digital Lightwave, Inc.

                                          By:      /s/ GERRY CHASTELET
                                            ------------------------------------
                                            Gerry Chastelet
                                            Chairman, Chief Executive Officer
                                              And President
                                            (Principal Executive Officer)

                                            Date: November 15, 1999

                                          By:      /s/ STEVEN H. GRANT
                                            ------------------------------------
                                            Steven H. Grant
                                            Executive Vice President -- Finance,
                                            Chief Financial Officer and
                                              Secretary
                                            (Principal Financial and Accounting
                                              Officer)

                                            Date: November 15, 1999

                                       20