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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2008, or



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

For the transition period from  to
.

001-31770

(Commission File Number)





Digital Lightwave, Inc.

(Exact name of Registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-4313013                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|5775 Rio Vista Drive Clearwater, Florida |  | 33760     
|(Address of principal executive offices) |  | (Zip Code)

(727) 442-6677

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)





Indicate by check mark whether the 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  x    NO   ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                                                                          |  |                              |  | 
|------------------------------------------------------------------------- |  | ---------------------------- |  | 
|Large Accelerated Filer   ̈                                                |  | Accelerated Filer   ̈        
|Non-Accelerated Filer     ̈    (Do not check if smaller reporting company) |  | Smaller Reporting Company  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    YES   ̈    NO  x



The number of shares outstanding of the Registrant's Common Stock as of May 2, 2008, was 255,485,347.









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DIGITAL LIGHTWAVE, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Period Ended March 31, 2008

INDEX



|                              |  |                                                                                                          |  |     
|----------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                          |  | Page
|PART I. FINANCIAL INFORMATION
|                              |  |                                                                                                         
|Item 1.                       |  | Financial Statements:                                                                                    |  |     
|                              |  |                                                                                                         
|                              |  | Consolidated Balance Sheets  March 31, 2008 (Unaudited) and December 31, 2007                           |  | 1   
|                              |  |                                                                                                         
|                              |  | Consolidated Statements of Operations (Unaudited)  Three Months Ended March 31, 2008 and March 31, 2007 |  | 2   
|                              |  |                                                                                                         
|                              |  | Consolidated Statements of Cash Flows (Unaudited)  Three Months Ended March 31, 2008 and March 31, 2007 |  | 3   
|                              |  |                                                                                                         
|                              |  | Notes to Consolidated Financial Statements (Unaudited)                                                   |  | 4   
|                              |  |                                                                                                         
|Item 2.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                    |  | 8   
|                              |  |                                                                                                         
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  | 14  
|                              |  |                                                                                                         
|Item 4.                       |  | Controls and Procedures                                                                                  |  | 14  
|                             
|PART II. OTHER INFORMATION   
|                              |  |                                                                                                         
|Item 1.                       |  | Legal Proceedings                                                                                        |  | 15  
|                              |  |                                                                                                         
|Item 1A.                      |  | Risk Factors                                                                                             |  | 15  
|                              |  |                                                                                                         
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                              |  | 15  
|                              |  |                                                                                                         
|Item 3.                       |  | Defaults Upon Senior Securities                                                                          |  | 15  
|                              |  |                                                                                                         
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                      |  | 15  
|                              |  |                                                                                                         
|Item 5.                       |  | Other Information                                                                                        |  | 15  
|                              |  |                                                                                                         
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                         |  | 15  
|                              | 
|SIGNATURES                    |  | 15                                                                                                      
|                              | 
|EXHIBIT INDEX                 |  | 16                                                                                                      



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##### Table of Contents

PART I

FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

DIGITAL LIGHTWAVE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                        |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                        |  | March 31,2008 |          |   | December 31,2007 |  
|                                                                                                                                                        |  | (Unaudited)   |          |   |                  |  
|ASSETS                                                                                                                                                  |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                         |  |               |          |   |                  |   |          |  
|Cash                                                                                                                                                    |  | $             | 551      |   |                  | $ | 12       |  
|Accounts receivable, less allowance of $77 in 2008 and 2007                                                                                             |  |               | 2,168    |   |                  |   | 3,871    |  
|Inventories, net                                                                                                                                        |  |               | 3,296    |   |                  |   | 2,840    |  
|Prepaid expenses and other current assets                                                                                                               |  |               | 535      |   |                  |   | 184      |  
|                                                                                                                                                        |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                    |  |               | 6,550    |   |                  |   | 6,907    |  
|Other assets, net                                                                                                                                       |  |               | 204      |   |                  |   | 204      |  
|                                                                                                                                                        |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                            |  | $             | 6,754    |   |                  | $ | 7,111    |  
|                                                                                                                                                        |  |               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                   |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                    |  |               |          |   |                  |   |          |  
|Accounts payable and accrued liabilities                                                                                                                |  | $             | 2,985    |   |                  | $ | 1,729    |  
|Current portion of notes payable to related party                                                                                                       |  |               |         |   |                  |   | 530      |  
|                                                                                                                                                        |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                               |  |               | 2,985    |   |                  |   | 2,259    |  
|Other long-term liabilities                                                                                                                             |  |               | 351      |   |                  |   | 355      |  
|                                                                                                                                                        |  |              
|Notes payable to related party                                                                                                                          |  |               | 34,797   |   |                  |   | 34,797   |  
|                                                                                                                                                        |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                                       |  |               | 38,133   |   |                  |   | 37,411   |  
|                                                                                                                                                        |  |               |          |   |                  |   |          |  
|Stockholders' equity (deficit):                                                                                                                         |  |               |          |   |                  |   |          |  
|Preferred stock, $.0001 par value; authorized 20,000,000 shares; no shares issued or outstanding                                                        |  |               |         |   |                  |   |         |  
|Common stock, $.0001 par value; authorized 300,000,000 shares; issued and outstanding 255,485,347 and 255,480,847 shares in 2008 and 2007,
respectively |  |               | 26       |   |                  |   | 26       |  
|Additional paid-in capital                                                                                                                              |  |               | 123,113  |   |                  |   | 123,088  |  
|Accumulated deficit                                                                                                                                     |  |               | (154,518 | ) |                  |   | (153,414 | )
|                                                                                                                                                        |  |               |          |   |                  |   |          |  
|Total stockholders' deficit                                                                                                                             |  |               | (31,379  | ) |                  |   | (30,300  | )
|                                                                                                                                                        |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders' deficit                                                                                                             |  | $             | 6,754    |   |                  | $ | 7,111    |  
|                                                                                                                                                        |  |               |          |   |                  |   |          |  

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



1



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DIGITAL LIGHTWAVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except
share and per-share data)



|                                                                 |  |                             |             |   |      |   |             |  
|---------------------------------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                 |  | Three Months EndedMarch 31, |            
|                                                                 |  | 2008                        |             |   | 2007 |  
|Net sales                                                        |  | $                           | 2,596       |   |      | $ | 2,491       |  
|Cost of goods sold                                               |  |                             | 1,491       |   |      |   | 1,130       |  
|                                                                 |  |                             |             |   |      |   |             |  
|Gross profit                                                     |  |                             | 1,105       |   |      |   | 1,361       |  
|                                                                 |  |                             |             |   |      |   |             |  
|Operating expenses:                                              |  |                             |             |   |      |   |             |  
|Engineering and development                                      |  |                             | 510         |   |      |   | 519         |  
|Sales and marketing                                              |  |                             | 604         |   |      |   | 605         |  
|General and administrative                                       |  |                             | 250         |   |      |   | 305         |  
|Gain on sale of property and equipment                           |  |                             |            |   |      |   | (265        | )
|                                                                 |  |                             |             |   |      |   |             |  
|Total operating expenses                                         |  |                             | 1,364       |   |      |   | 1,164       |  
|                                                                 |  |                             |             |   |      |   |             |  
|Operating profit (loss)                                          |  |                             | (259        | ) |      |   | 197         |  
|Other expense, net                                               |  |                             | (845        | ) |      |   | (800        | )
|                                                                 |  |                             |             |   |      |   |             |  
|Loss before income taxes                                         |  |                             | (1,104      | ) |      |   | (603        | )
|Provision for income taxes                                       |  |                             |            |   |      |   |            |  
|                                                                 |  |                             |             |   |      |   |             |  
|Net loss                                                         |  | $                           | (1,104      | ) |      | $ | (603        | )
|                                                                 |  |                             |             |   |      |   |             |  
|Per share of common stock:                                       |  |                             |             |   |      |   |             |  
|Basic net loss per share                                         |  | $                           | (0.00       | ) |      | $ | (0.00       | )
|                                                                 |  |                             |             |   |      |   |             |  
|Diluted net loss per share                                       |  | $                           | (0.00       | ) |      | $ | (0.00       | )
|                                                                 |  |                             |             |   |      |   |             |  
|Weighted average common shares outstanding                       |  |                             | 255,484,160 |   |      |   | 248,124,730 |  
|                                                                 |  |                             |             |   |      |   |             |  
|Weighted average common and common equivalent shares outstanding |  |                             | 255,484,160 |   |      |   | 248,124,730 |  
|                                                                 |  |                             |             |   |      |   |             |  

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



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DIGITAL LIGHTWAVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                        |  |                             |        |   |      |   |         |  
|----------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                        |  | Three Months EndedMarch 31, |       
|                                                                        |  | 2008                        |        |   | 2007 |  
|Cash flows from operating activities:                                   |  |                             |        |   |      |   |         |  
|Net loss                                                                |  | $                           | (1,104 | ) |      | $ | (603    | )
|Adjustments to reconcile net loss to cash used in operating activities: |  |                             |        |   |      |   |         |  
|Compensation expense for stock option grants                            |  |                             | 1      |   |      |   | 50      |  
|Contributed services from related party                                 |  |                             | 23     |   |      |   | 87      |  
|Gain on sale of property and equipment                                  |  |                             |       |   |      |   | (265    | )
|Changes in operating assets and liabilities:                            |  |                             |        |   |      |   |         |  
|Accounts receivable                                                     |  |                             | 1,703  |   |      |   | 470     |  
|Inventories                                                             |  |                             | (456   | ) |      |   | 80      |  
|Prepaid expenses and other assets                                       |  |                             | (351   | ) |      |   | (102    | )
|Accounts payable, accrued expenses and other liabilities                |  |                             | 1,252  |   |      |   | (91     | )
|                                                                        |  |                             |        |   |      |   |         |  
|Net cash provided by operating activities                               |  |                             | 1,068  |   |      |   | (374    | )
|                                                                        |  |                             |        |   |      |   |         |  
|Cash flows from investing activities:                                   |  |                             |        |   |      |   |         |  
|Proceeds from sale of property and equipment                            |  |                             |       |   |      |   | 265     |  
|                                                                        |  |                             |        |   |      |   |         |  
|Net cash provided by (used in) investing activities                     |  |                             |       |   |      |   | 265     |  
|                                                                        |  |                             |        |   |      |   |         |  
|Cash flows from financing activities:                                   |  |                             |        |   |      |   |         |  
|Principal payments on notes payable  other                             |  |                             |       |   |      |   | (50     | )
|Principal payments on notes payable  related party                     |  |                             | (530   | ) |      |   |        |  
|Proceeds from sale of common stock, net of expense                      |  |                             | 1      |   |      |   |        |  
|                                                                        |  |                             |        |   |      |   |         |  
|Net cash used in financing activities                                   |  |                             | (529   | ) |      |   | (50     | )
|                                                                        |  |                             |        |   |      |   |         |  
|Net decrease in cash and cash equivalents                               |  |                             | 539    |   |      |   | (159    | )
|Cash and cash equivalents at beginning of period                        |  |                             | 12     |   |      |   | 425     |  
|                                                                        |  |                             |        |   |      |   |         |  
|Cash and cash equivalents at end of period                              |  | $                           | 551    |   |      | $ | 266     |  
|                                                                        |  |                             |        |   |      |   |         |  
|Supplemental disclosures of non cash activities  related party:        |  |                             |        |   |      |   |         |  
|Debt and accrued interest converted into common stock                   |  | $                           |       |   |      | $ | (34,774 | )
|Reduction of interest payable from sale of property and equipment       |  | $                           |       |   |      | $ | (55     | )
|                                                                        |  |                            
|Supplemental disclosures of cash flow information:                      |  |                             |        |   |      |   |         |  
|Cash paid for interest                                                  |  | $                           |       |   |      | $ | (265    | )

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



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DIGITAL LIGHTWAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Business and Basis of Presentation

Digital Lightwave, Inc. provides the global fiber-optic communications industry with products and technology used to develop, install, maintain, monitor and manage fiber-optic communication networks. Telecommunications service providers,
owners of private networks (utilities, government and large enterprises) and equipment manufacturers deploy the Companys products to provide quality assurance and ensure optimum performance of advanced optical communications networks and
network equipment. The Companys products are sold worldwide to telecommunications service providers, owners of private networks (utilities, government and large enterprises), telecommunications equipment manufacturers, equipment leasing
companies and international distributors. The Company's wholly-owned subsidiaries are Digital Lightwave (UK) Limited (DLL), Digital Lightwave Asia Pacific Pty, Ltd. (DLAP), and Digital Lightwave Latino Americana Ltda.
(DLLA). DLL, DLAP, and DLLA provided international sales support, but are currently inactive. All significant intercompany transactions and balances are eliminated in consolidation.

The accompanying unaudited consolidated condensed financial statements of Digital Lightwave, Inc. and its subsidiaries (the Company, Digital
Lightwave, us, we, our, etc.) 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 months ended March 31, 2008, is 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 the Companys Annual Report
on Form 10-K for the year ended December 31, 2007.

Operational Matters

On April 4, 2008, the Company and Optel Capital, LLC (Optel) entered into a Credit and Restructuring Agreement (the Credit Agreement) pursuant to which (a) the Companys existing
indebtedness owed to Optel, consisting of approximately $28.0 million of principal, which bore interest at 10% per annum, and accrued interest thereon of approximately $7.7 million, all of which was due and payable upon demand by Optel, was
restructured and (b) Optel agreed to make a $2.5 million revolving credit facility available to the Company. The Credit Agreement was approved by the Companys board of directors upon the unanimous recommendation of a special committee of
the board comprised solely of independent directors.

Pursuant to the Credit Agreement, the restructured indebtedness is evidenced by a new secured
convertible promissory note in the principal amount of approximately $35.7 million (the Restated Note), and the revolving credit facility is evidenced by an additional secured convertible promissory note in the principal amount of $2.5
million (the New Commitment Note and, together with the Restated Note, the Notes). The Notes bear interest at a rate equal to LIBOR plus 1.0% per annum and are secured by substantially all the Companys assets
pursuant to an amended and restated security agreement (the Security Agreement). Each of the Notes requires quarterly payments of interest commencing on June 30, 2008, and matures on March 31, 2010.

All the indebtedness evidenced by the Notes is convertible into common stock of the Company at the option of Optel at any time following approval of the conversion
feature by the disinterested stockholders at a conversion price based on the average trading price of the stock during the five-day period preceding the date of any conversion. The Company and Optel have made it a condition to the indebtedness
evidenced by the Notes becoming convertible, that the conversion feature be approved by the holders of a majority of the outstanding shares of common stock of the Company who are not affiliated with Optel or any of its affiliates at the
Companys 2009 annual meeting of stockholders. If such holders do not approve the conversion feature, the outstanding debt and accrued interest would immediately become due and payable in full upon demand by Optel at any time after the
stockholders meeting.



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Accrued Warranty

The
Company provides the customer a warranty with each product sold. The Companys policy for product warranties is to review the warranty reserve on a quarterly basis for specifically identified or new matters and review the reserve for estimated
future costs associated with any open warranty years. The reserve is an estimate based on historical trends, the number of products under warranty, the costs of replacement parts and the expected reliability of the Companys products. A change
in these factors could result in a change in the reserve balance. Warranty costs are charged against the accrual when incurred. The reconciliation of the warranty reserve is as follows:



|                   |  |                             |     |   |      |   |     |  
|------------------ |  | --------------------------- | --- | - | ---- | - | --- | -
|                   |  | Three Months EndedMarch 31, |    
|                   |  | 2008                        |     |   | 2007 |  
|                   |  | (In thousands)              |    
|Beginning balance  |  | $                           | 471 |   |      | $ | 487 |  
|Warranty provision |  |                             | 50  |   |      |   | 31  |  
|Warranty costs     |  |                             | (77 | ) |      |   | (17 | )
|                   |  |                             |     |   |      |   |     |  
|Ending balance     |  | $                           | 444 |   |      | $ | 501 |  
|                   |  |                             |     |   |      |   |     |  

Revenue Recognition

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

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

For domestic sales, delivery generally occurs when product is delivered to a common carrier. Demonstration units sold to international distributors are considered
delivered when the units are delivered to a common carrier. An allowance is provided for sales returns based on historical experience.

For sales made
under an OEM arrangement, delivery generally occurs when the product is delivered to a common carrier. OEM sales are defined as sales of the Companys products to a third party that will market the products under their brand.

For trade-in sales, including both Company and competitor products, that have a cash component of greater than 25% of the fair value of the sale, the Company recognizes
revenue based upon the fair value of what is sold or received, whichever is more readily determinable, if the Company has demonstrated the ability to sell its trade-in inventory for that particular product class. Otherwise, the Company accounts for
the trade-in sale as a non-monetary transaction and follows the guidance of Statement of Financial Accounting Standards No. 153 Exchanges of Non-monetary Assetsand Accounting Principles Board (APB) Opinion No. 29,
Accounting for Non-monetary Transactions and related interpretations. Revenue and cost of sales are recorded based upon the cash portion of the transaction.

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

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



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

Computation of Net
Loss Per Share

Basic net loss per share is based on the weighted average number of common shares outstanding during the periods presented. For the
three months ended March 31, 2008 and 2007, diluted loss per share does not include the effect of incremental shares from common stock equivalents using the treasury stock method, as the inclusion of such equivalents would be anti-dilutive. The
total incremental shares from common stock equivalents were zero for the three months ended March 31, 2008 and 2007. The total incremental shares from common stock equivalents at March 31, 2008, included zero from outstanding stock
options. 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:



|         |  |                                                 |  |                             |  |            
|-------- |  | ----------------------------------------------- |  | --------------------------- |  | -----------
|         |  |                                                 |  | Three Months EndedMarch 31,
|         |  |                                                 |  | 2008                        |  | 2007       
|Basic:   |  |                                                 |  |                             |  |            
|         |  | Weighted average common shares outstanding      |  | 255,484,160                 |  | 248,124,730
|         |  | Total basic                                     |  | 255,484,160                 |  | 248,124,730
|         |  |                                                 |  |                             |  |            
|Diluted: |  |                                                 |  |                             |  |            
|         |  | Incremental shares for common stock equivalents |  |                            |  |           
|         |  |                                                 |  |                             |  |            
|         |  | Total dilutive                                  |  | 255,484,160                 |  | 248,124,730
|         |  |                                                 |  |                             |  |            

Stock-Based Compensation

The Companys compensation cost for stock-based employee compensation was $1,000 and $50,000 for the three months ended March 31, 2008 and 2007, respectively. No tax benefits were recognized for these costs
due to recurring losses.

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The
risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of the Companys stock. The Company
has not historically paid any dividends on its common stock and does not expect to in the future.

Stock Option Plans

The Company has one stock option plan with shares available for grant as of March 31, 2008 as follows:



|                                                                             |  |                 
|---------------------------------------------------------------------------- |  | ----------------
|                                                                             |  | Plan2001        
|Minimum exercise price as a percentage of fair market value at date of grant |  | 100%            
|Plan termination date                                                        |  | December 31,2008

Options granted under the plan have a term of six years. Option grants generally vest in one-third annual
increments or quarterly over a three-year period, with the exception of certain option agreements that provide for various vesting schedules throughout the same three-year vesting period or options allowing vesting acceleration based on certain
performance milestones on each anniversary of the grant date, commencing with the first anniversary. The Company recognizes compensation costs for these awards on a straight-line basis over the service period.



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The following is a summary of the changes in outstanding options for the three months ended March 31, 2008:



|                                 |  |                      |   |  |                              |      |                                        |   |  
|-------------------------------- |  | -------------------- | - |  | ---------------------------- | ---- | -------------------------------------- | - | -
|                                 |  | Shares(In thousands) |   |  | WeightedAverageExercisePrice |      | AggregateIntrinsic Value(In thousands)
|Outstanding at December 31, 2007 |  | 2,509                |   |  | $                            | 1.54 |                                        | $ | 0
|Granted                          |  |                     |   |  |                              |     |                                        |   | 
|Exercised                        |  |                     |   |  |                              |     |                                        |   | 
|Forfeited and expired            |  | (3                   | ) |  | $                            | 1.00 |                                        | $ | 0
|                                 |  |                      |   |  |                              |      |                                        |   |  
|Outstanding at March 31, 2008    |  | 2,506                |   |  | $                            | 1.54 |                                        | $ | 0
|                                 |  |                      |   |  |                              |      |                                        |   |  
|Exercisable at end of period     |  | 2,489                |   |  | $                            | 1.55 |                                        | $ | 0
|                                 |  |                      |   |  |                              |      |                                        |   |  

There were no stock options exercised during the first three months of fiscal 2008 and 2007.

Income Taxes

The Company recognizes interest accrued related to
unrecognized tax benefits in interest expense and penalties in operating expenses for all periods presented. No interest or penalties have been recognized during the three months ended March 31, 2008 or 2007.

On January 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"), an interpretation of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes ("FASB 109"). FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is more-likely-than-not that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured
to determine the amount of benefit to recognize in the financial statements. FIN 48 applies to all tax positions related to income taxes subject to FASB 109. Based on the analysis performed, the Company did not record any unrecognized tax
positions as of March 31, 2008. There is a possibility that a limitation on the Companys net operating loss carryforwards may have come into effect under Section 382 of the Internal Revenue Code as a result of cumulative stock
ownership changes. As of March 31, 2008, the impact of such a limitation has no impact on the accompanying financial statements since all net operating losses have a full valuation allowance; however, such a limitation could impact
substantially the reported gross asset related to the net operating loss carryforwards.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 creates a fair value hierarchy, which prioritizes the inputs that should be used in determining fair value. Under this pronouncement, companies must
provide disclosures containing relevant information in the financial statements, allowing users to assess inputs used to measure fair value, as well as the effect of those measurements on earnings for the periods presented, including a
reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. In February 2008, the FASB issued Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), which defers the effective date of SFAS No. 157 for certain nonfinancial
assets and liabilities, that are not recorded at fair value on a recurring basis until periods beginning after November 15, 2008. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities
only. As of March 31, 2008, the Company did not hold any assets or liabilities that are required to be measured at fair value on a recurring basis, and therefore the adoption of the respective provisions of SFAS 157 did not have a material
impact on the Companys consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of Statement of Financial Accounting Standards Statement No. 115 (SFAS 159), which permits



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entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to
report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. SFAS 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 159 did not have a significant impact on the financial statements for the three months ended
March 31, 2008.

2. INVENTORIES

Inventories are
summarized as follows:



|               |  |                             |       |                                |   |      
|-------------- |  | --------------------------- | ----- | ------------------------------ | - | -----
|               |  | March 31,2008(In thousands) |       | December 31,2007(In thousands)
|Raw materials  |  | $                           | 3,060 |                                | $ | 2,706
|Finished goods |  |                             | 236   |                                |   | 134  
|               |  |                             |       |                                |   |      
|               |  | $                           | 3,296 |                                | $ | 2,840
|               |  |                             |       |                                |   |      

The Company has established reserves for excess and obsolete inventory based upon current and expected sales
trends, the amount of parts on-hand, the market value of parts on-hand and the viability and technical obsolescence of products and components. As of March 31, 2008, inventory reserves were approximately $13.9 million.

3. LEGAL PROCEEDINGS

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

4. COMMITMENTS

At March 31, 2008, the Company had outstanding non-cancelable purchase order commitments to purchase certain inventory items totaling approximately $1.3 million.

5. RELATED PARTY TRANSACTIONS

Services Rendered

During the three months ended March 31, 2008, Optel provided the Company with approximately $23,000 in services associated with information technology and accounting. These services are shown as a contribution of
capital and are expensed within general and administration expenses.



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

FORWARD LOOKING STATEMENTS

The following discussion contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases,
you can identify forward-looking statements by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential or continue, the negative of terms like these or other comparable terminology. Additionally,
statements concerning future matters such as the development of new products, enhancements or technologies, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements, except as
required by law. These statements are only predictions. These statements involve known and unknown risks and uncertainties and other factors that may cause actual events or results to differ materially from the results and outcomes discussed in the
forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date of filing, and we assume no obligation to update any such forward-looking statements. In evaluating these
statements, you should specifically consider various factors, including the risks outlined under the caption Risk Factors set forth in Item 1A of Part I of our Annual Report on Form 10-K and those contained from time to time in our
other filings with the SEC. We caution you that our business and financial performance are subject to substantial risks and uncertainties.



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This information should be read in conjunction with (i) the consolidated condensed financial statements and notes
thereto included in Item 1 of Part I of this quarterly report on Form 10-Q, and (ii) the consolidated financial statements and notes thereto, as well as the accompanying Managements Discussion and Analysis of Results of Operations,
for the years ended December 31, 2007 and 2006 included in our Annual Reports on Form 10-K.

OVERVIEW

Executive Summary

On April 4, 2008, the Company and Optel
entered into a Credit and Restructuring Agreement (the Credit Agreement) pursuant to which (a) the Companys existing indebtedness owed to Optel, consisting of approximately $28.0 million of principal, that bore interest at
10% per annum, and accrued interest thereon of approximately $7.7 million, all of which was due and payable upon demand by Optel, was restructured and (b) Optel agreed to make a $2.5 million revolving credit facility available to the
Company. The Credit Agreement was approved by the Companys board of directors upon the unanimous recommendation of a special committee of the board comprised solely of independent directors.

Pursuant to the Credit Agreement, the restructured indebtedness is evidenced by a new secured convertible promissory note in the principal amount of approximately $35.7
million (the Restated Note), and the revolving credit facility is evidenced by an additional secured convertible promissory note in the principal amount of $2.5 million (the New Commitment Note and, together with the Restated
Note, the Notes). The Notes bear interest at a rate equal to LIBOR plus 1.0% per annum and are secured by substantially all the Companys assets pursuant to an amended and restated security agreement. Each of the Notes requires
quarterly payments of interest commencing on June 30, 2008, and matures on March 31, 2010.

The Company designs, develops and markets a portfolio
of portable and network-based products for installing, maintaining and monitoring fiber optic circuits and networks. Network operators and telecommunications service providers use fiber optics to provide increased network bandwidth to transmit voice
and other non-voice traffic such as internet, data and multimedia video transmissions. The Company provides telecommunications service providers and equipment manufacturers with product capabilities to cost-effectively deploy and manage fiber optic
networks. The Companys product lines include Network Information Computers (NIC), Network Access Agents (NAA), Optical Test Systems (OTS), and Optical Wavelength Managers (OWM). The
Companys products are sold worldwide to leading and emerging telecommunications service providers, telecommunications equipment manufacturers, equipment leasing companies and international distributors.

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

For the three months ended March 31, 2008, two customers accounted for approximately 25% of total net sales. No other customers accounted for more than 10% of net
sales.

The Company recognizes revenue from the sale of products when persuasive evidence of an arrangement exists, the product has been delivered, the
price is fixed and determinable and collection of the resulting receivable is reasonably assured. When selling through a distributor to an end-user customer, we either obtain an end-user purchase order documenting the order placed with the
distributor or proof of delivery to the end-user as evidence that a sales arrangement exists. No revenue is recognized on products shipped on a trial basis. We believe that our accrued warranty reserve is sufficient to meet our responsibilities for
potential future warranty work on products sold.

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



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In order to maintain our market share, we are focused on maintaining technological leadership with our product lines. We
have evaluated our sales efforts to identify opportunities where our account presence can be improved and are working to exploit those opportunities. Subject to resolution of our working capital constraints, we are seeking new applications for our
installed product base to be realized with use of new modular add-ons and enhancements. We also established channel partners such as independent sales representatives and distributors to complement our sales force.

We are concentrating on the products and technologies that we believe are most important to our customers. We plan to introduce enhancements to our product lines to
support the telecommunications network evolution of the next generation protocols and services. These plans include the introduction of enhancements that support the convergence of the telecommunications and data communications networks and enhance
our data communications network analysis capabilities. These enhancements will position us to meet growing global needs including global high-speed data service requirements.

Critical Accounting Estimates

We believe that estimating valuation allowances and accrued liabilities are critical
in that they are important to the portrayal of our financial condition and results of operations and they require difficult, subjective and complex judgments that are often the result of estimates that are inherently uncertain. Specifically, we
believe the following estimates to be critical:



| |  |  | sales returns and other allowances;
| | - |  | -----------------------------------



| |  |  | reserve for uncollectible accounts;
| | - |  | -----------------------------------



| |  |  | reserve for excess and obsolete inventory;
| | - |  | ------------------------------------------



| |  |  | assessments of uncertain tax positions
| | - |  | --------------------------------------



| |  |  | impairment of long-lived assets;
| | - |  | --------------------------------



| |  |  | deferred tax valuation allowance;
| | - |  | ---------------------------------



| |  |  | warranty reserve; and
| | - |  | ---------------------



| |  |  | pending litigation.
| | - |  | -------------------

We make significant judgments,
estimates and assumptions in connection with establishing the above-mentioned valuation allowances. If we made different judgments or used different estimates or assumptions for establishing such amounts, it is likely that the amount and timing of
our revenue or operating expenses for any period would be materially different.

We derive our revenues principally from product sales. We recognize
revenue from the sale of products when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. We estimate the amount of
potential future product returns related to current period product revenue. We consider many factors when making our estimates, including analyzing historical returns, current economic trends, changes in customer demand and acceptance of our
products to evaluate the adequacy of the sales returns and other allowances. Our estimate for the provision for sales returns and other allowances as of March 31, 2008 was approximately $54,000.

We also estimate the collectibility of our accounts receivables. We consider many factors when making our estimates, including analyzing accounts receivable and
historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the reserve for uncollectible accounts. Our accounts receivable balance as
of March 31, 2008, was $2.2 million, net of our estimated reserve for uncollectible accounts of approximately $77,000.

We estimate the amount of
excess and obsolete inventory. When evaluating the reserve for excess and obsolete inventory, we consider many factors, including analyzing current and expected sales trends, the amount of current parts on hand, the current market value of parts on
hand and the viability and technical obsolescence of our products. The assumptions made relative to expected sales trends are subjective in nature and have a material impact on the estimate of the reserve requirement. Should future sales trends, in
total or by product line, fluctuate from that used in our estimates, this reserve could be overstated or understated. Our inventory balance was $3.3 million as of March 31, 2008, net of our estimated reserve for excess and obsolete inventory of
$13.9 million.

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



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We estimate the impairment of long-lived assets. We monitor events and changes in circumstances that could indicate
whether carrying amounts of long-lived assets may not be recoverable. These events and circumstances include any decrease in the market price of a long-lived asset, changes in the manner in which a long-lived asset is used, changes in legal factors
and a current-period operating loss or cash flow loss combined with a history of operating losses or cash flow losses or a forecast that demonstrates continuing losses associated with the use of long-lived assets. When such an event or changes in
circumstance occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. We recognize impairments when there is an excess of the
assets carrying value over the fair value as estimated using a discounted expected future cash flows model. In estimating undiscounted expected future cash flows, we must make judgments and estimates related to future sales and profitability. Should
future sales trends or profitability be significantly less than that forecasted, our impairment could be understated. We could be required to take an additional impairment charge in the future should our actual cash flows be less than forecasted. As
of March 31, 2008 a review of the carrying value of our long-lived assets and the probability of recovering such value indicated that no additional impairment charge was required.

We estimate the amount of our warranty reserve. We consider many factors when making our estimate, including historical trends, the number of products under warranty, the costs of replacement parts and the expected
reliability of our products. We believe that our accrued warranty reserve is sufficient to meet our responsibilities for potential future warranty work on products sold. Our accrued warranty reserve as of March 31, 2008 was approximately
$444,000.

We estimate the amount of liability the Company may incur as a result of pending litigation. As of March 31, 2008, the Company was not
aware of any pending litigation, claims or assessments. Accordingly, there is no accrual for pending litigation at March 31, 2008.



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RESULTS OF OPERATIONS

The following is a discussion of significant changes in the results of operations of the Company, which occurred in the three months ended March 31, 2008, compared to the three months ended March 31, 2007. The following sets forth
certain financial data as a percentage of net sales:



|                                       |  |                                                         |    |  |      |   
|-------------------------------------- |  | ------------------------------------------------------- | -- |  | ---- | --
|                                       |  | Percent ofNet Sales for theThree Months Ended March 31, |   
|                                       |  | 2008                                                    |    |  | 2007 |   
|Net sales                              |  | 100                                                     | %  |  | 100  | % 
|Cost of goods sold                     |  | 57                                                      |    |  | 45   |   
|                                       |  |                                                         |    |  |      |   
|Gross profit (loss)                    |  | 43                                                      |    |  | 55   |   
|                                       |  |                                                        
|Operating expenses:                    |  |                                                         |    |  |      |   
|Engineering and development            |  | 20                                                      |    |  | 21   |   
|Sales and marketing                    |  | 23                                                      |    |  | 25   |   
|General and administrative             |  | 10                                                      |    |  | 12   |   
|Gain on sale of property and equipment |  |                                                        |    |  | (11  | ) 
|                                       |  |                                                         |    |  |      |   
|Total operating expenses               |  | 53                                                      |    |  | 47   |   
|                                       |  |                                                         |    |  |      |   
|Operating income (loss)                |  | (10                                                     | )  |  | 8    |   
|Other income (loss), net               |  | (33                                                     | )  |  | (32  | ) 
|                                       |  |                                                         |    |  |      |   
|Loss before income taxes               |  | (43                                                     | )  |  | (24  | ) 
|Benefit from income taxes              |  |                                                        |    |  |     |   
|                                       |  |                                                         |    |  |      |   
|Net Loss                               |  | (43                                                     | )% |  | (24  | )%
|                                       |  |                                                         |    |  |      |   

Net Sales

Net
sales for the quarter ended March 31, 2008, increased $105,000, or 4%, to $2.6 million from $2.5 million for the quarter ended March 31, 2007. International net sales for the quarter ended March 31, 2008, were approximately $790,000,
or 30% of net sales, as compared to approximately $929,000, or 37% of net sales, for the quarter ended March 31, 2007.

Cost of Goods Sold

Cost of goods sold for the quarter ended March 31, 2008, totaled approximately $1.5 million, or 57% of net sales, as compared to $1.1 million, or 45%
of net sales, for the quarter ended March 31, 2007. For the quarter ended March 31, 2008, cost of goods sold was higher due to an increase in NIC sales which have higher parts cost than repair and calibration services.

Gross Profit

Gross profit for the quarter ended March 31, 2008,
decreased by approximately $256,000 to approximately $1.1 million, or 43% of net sales, from $1.4 million, or 55% of net sales, for the quarter ended March 31, 2007. The decrease in gross profit is attributable to the increase in cost of goods
sold resulting from increased NIC sales.

Engineering and Development

Engineering and development expenses principally include salaries for engineering and development personnel, outside consulting fees and other development expenses. Engineering and development expenses for the quarter
ended March 31, 2008, decreased by approximately $9,000 to $510,000 from approximately $519,000 for the quarter ended March 31, 2007.



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Sales and Marketing

Sales and marketing expenses principally include salaries, commissions, travel, tradeshows and promotional materials and warranty expenses. Sales and marketing expenses for the quarter ended March 31, 2008, were $604,000, a decrease of
approximately $1,000 over the quarter ended March 31, 2007 of $605,000.

General and Administrative

General and administrative expenses principally include salaries, other compensation, professional fees, facility rentals and information systems related to general
management functions. General and administrative expenses for the quarter ended March 31, 2008, decreased by approximately $55,000 to $250,000 from approximately $305,000 for the quarter ended March 31, 2007

Other Income and Expense, net

Other expense, net for the quarter
ended March 31, 2008 was approximately $845,000, an increase of $45,000 as compared to other expense, net of approximately $800,000 for the quarter ended March 31, 2007. The increase was primarily attributable to interest expense on higher
outstanding debt owed to Optel.

Provision for Income Taxes

No provision for income taxes was made for the three-month periods ending March 31, 2008 and 2007 due to the Companys expected annual net losses. Any tax benefits resulting from the Companys net loss have not been
recognized due to a full valuation allowance for deferred tax assets being recorded as a result of managements belief it is more likely than not that future tax benefits will not be realized as a result of future income.

Net Loss

Net loss for the quarter ended March 31, 2008
was approximately $1.1 million, or $0.00 per diluted share, compared with net loss of approximately $603,000, or $0.00 per diluted share, for the quarter ended March 31, 2007, for the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

On April 4, 2008, the Company
and Optel entered into a Credit and Restructuring Agreement (the Credit Agreement) pursuant to which (a) the Companys existing indebtedness owed to Optel, consisting of approximately $28.0 million of principal, which bore
interest at 10% per annum, and accrued interest thereon of approximately $7.7 million, all of which was due and payable upon demand by Optel, was restructured and (b) Optel agreed to make a $2.5 million revolving credit facility available
to the Company.

Pursuant to the Credit Agreement, the restructured indebtedness is evidenced by a new secured convertible promissory note in the principal
amount of approximately $35.7 million (the Restated Note), and the revolving credit facility is evidenced by an additional secured convertible promissory note in the principal amount of $2.5 million (the New Commitment Note and,
together with the Restated Note, the Notes). The Notes bear interest at a rate equal to LIBOR plus 1.0% per annum and are secured by substantially all the Companys assets pursuant to an amended and restated security agreement.
Each of the Notes requires quarterly payments of interest commencing on June 30, 2008, and matures on March 31, 2010.

All the indebtedness
evidenced by the Notes is convertible into common stock of the Company at the option of Optel at any time following approval of the conversion feature by the disinterested stockholders at a conversion price based on the average trading price of the
stock during the five-day period preceding the date of any conversion. The Company and Optel have made it a condition to the indebtedness evidenced by the Notes becoming convertible, that the conversion feature be approved by the holders of a
majority of the outstanding shares of common stock of the Company who are not affiliated with Optel or any of its affiliates at the Companys 2009 annual meeting of stockholders. If such holders do not approve the conversion feature, the
outstanding debt and accrued interest would immediately become due and payable in full upon demand by Optel at any time after the stockholders meeting.

Pursuant to a Registration Rights Agreement entered into in connection with the Credit Agreement, the Company has agreed to file, upon written demand by Optel, a registration statement covering the resale by Optel of the shares of common
stock issuable upon conversion of the Notes.



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##### Table of Contents

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2008 was approximately $1.1 million. This was primarily the result of the increase in accounts payable of approximately $1.3 million offset by a decrease in
accounts receivable of $1.7 million.

Off Balance Sheet Arrangements

There were no off balance sheet arrangements for the three months ended March 31, 2008.

Investing Activities

No net cash was used by investing activities for the three months ended March 31, 2008.

Financing Activities

The Company used $529,0000 of net cash in financing activities for the three months ended
March 31, 2008 to repay related-party notes payable.

Legal Proceedings

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



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

We are not exposed to material fluctuations in currency exchange rates because the majority of our sales and expenses are denominated in U.S. dollars. As of March 31, 2008, the related party notes have a fixed
interest rate, so there is no market risk related to interest.



|Item 4. | Controls and Procedures.
|------- | ------------------------

Our principal
executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of December 31, 2007. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2008, (1) our disclosure controls and procedures are
not sufficiently effective pursuant to the requirements of the Sarbanes-Oxley Act of 2002 for companies our size, (2) information to be disclosed in reports we file under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the rules and forms promulgated under the Exchange Act, and (3) information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to the principal executive officer and
principal financial officer as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Companys internal control over financial reporting that occurred during the Companys last fiscal quarter
that have materially affected or are reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II

OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

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



|Item 1A. | Risk Factors.
|-------- | -------------

There have been no material
changes from the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2007 in response to Item 1A to Part 1 of Form 10-K.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

None.



|Item 5. | Other Information.
|------- | ------------------

None.



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

A list
of exhibits is set forth in the Exhibit Index found on page 16 of this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.



Digital Lightwave, Inc.(Registrant)By:

/s/ KENNETH T. MYERSPresident and Chief Executive Officer(Principal Executive Officer)Date: May 14, 2008By:

/s/ KENNETH T. MYERSInterim Chief Accounting Officer(Principal Financial Officer)Date: May 14, 2008




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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                   
|3.1*           |  | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.02 to the Quarterly Report on Form 10-Q filed by the Company on August 14, 2002).                                                                                   
|               | 
|3.2*           |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Company on February 16,
2004).                                                         
|               | 
|3.3*           |  | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.03 to the Quarterly Report on Form 10-Q filed by the Company on August 14, 2002).                                                                                                         
|               | 
|4.1*           |  | Specimen Certificate for Common Stock (incorporated by reference to Exhibit 4.01 to the Companys Registration Statement on Form S-1 (File No. 333-09457), declared effective by the
Securities and Exchange Commission on February 5, 1997).                 
|               | 
|10.1*          |  | Credit and Restructuring Agreement, between the Digital Lightwave, Inc. and Optel Capital, LLC. dated April 4, 2008 (incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed by the Company on April 10, 2008).                     
|               | 
|10.2*          |  | Secured Convertible Promissory Noted (Restated Noted), issued by Digital Lightwave, Inc. to Optel. Capital, LLC dated April 4, 2008 (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K filed by the Company on April 10, 2008).     
|               | 
|10.3*          |  | Secured Convertible Promissory Noted (New Commitment Loans) issued by Digital Lightwave, Inc. to Optel Captial, LLC dated April 4, 2008, (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K filed by the Company on April 10, 2008).
|               | 
|10.4*          |  | Amended and Restated Security Agreement, between Digital Lightwave, Inc. and Optel Capital, LLC dated April 4, 2008 (incorporated by reference to Exhibit 10.4 to the Current Report on Form
8-K filed by the Company on April 10, 2008).                     
|               | 
|10.5*          |  | Registration Rights Agreement, between Digital Lightwave, Inc. and Optel Capital, LLC. dated April 4, 2008 (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed
by the Company on April 10, 2008).                              
|               | 
|31.1+          |  | Certification by the Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002.                                                                                                                                                       
|               | 
|31.2+          |  | Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes  Oxley Act of 2002.                                                                                                                                                 
|               | 
|32.1+          |  | Certification by the Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the SarbanesOxley Act of 2002.                                                                                                                       



|* | Such exhibits are incorporated by reference.
|- | --------------------------------------------

|+ | Filed herewithin.
|- | -----------------



16