<PAGE>   1

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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, 2001

                                       OR

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

               FOR THE TRANSITION PERIOD FROM ________ TO ________

                        COMMISSION FILE NUMBER 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 incorporation      (I.R.S. Employer Identification No.)
              or organization)
</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 [X]       NO [ ]

     The number of shares outstanding of the Registrant's Common Stock as of May
11, 2001 was 30,775,327.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                            DIGITAL LIGHTWAVE, INC.

                         QUARTERLY REPORT ON FORM 10-Q
                      FOR THE PERIOD ENDED MARCH 31, 2001

                                     INDEX

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----
<S>      <C>                                                           <C>
                      PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Condensed Financial Statements:

                                                                         1
         Consolidated Condensed Balance Sheets -- March 31, 2001 and
         December 31, 2000...........................................

                                                                         2
         Consolidated Condensed Statements of Operations -- Three
         Months Ended March 31, 2001 and March 31, 2000..............

                                                                         3
         Consolidated Condensed Statements of Cash Flows -- Three
         Months Ended March 31, 2001 and March 31, 2000..............

                                                                         4
         Notes to Consolidated Condensed Financial Statements........

Item 2.  Management's Discussion and Analysis of Financial Condition     8
         and Results of Operations...................................

                        PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings...........................................   13

Item 6.  Exhibits and Reports on Form 8-K............................   13

SIGNATURES...........................................................   14
</TABLE>
<PAGE>   3

                                     PART I

                             FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

                            DIGITAL LIGHTWAVE, INC.

                     CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               MARCH 31,    DECEMBER 31,
                                                                 2001           2000
                                                              -----------   ------------
                                                              (UNAUDITED)
<S>                                                           <C>           <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents.................................    $38,823       $30,481
  Accounts receivable, less allowance of $350 and $250,
     respectively...........................................     27,036        25,301
  Inventories...............................................     15,910        13,048
  Prepaid expenses and other current assets.................      1,532           757
                                                                -------       -------
          Total current assets..............................     83,301        69,587
Property and equipment, net.................................      8,861         8,910
Other assets................................................        243           336
                                                                -------       -------
          Total assets......................................    $92,405       $78,833
                                                                =======       =======
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................    $ 9,459       $10,610
                                                                -------       -------
          Total current liabilities.........................      9,459        10,610
  Long-term liabilities.....................................        911           854
                                                                -------       -------
          Total liabilities.................................     10,370        11,464
                                                                -------       -------
Stockholders' equity:
  Common stock..............................................          3             3
  Additional paid-in capital................................     78,307        76,620
  Accumulated earnings (deficit)............................      3,725        (9,254)
                                                                -------       -------
          Total stockholders' equity........................     82,035        67,369
                                                                -------       -------
          Total liabilities and stockholders' equity........    $92,405       $78,833
                                                                =======       =======
</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
                                                                      MARCH 31,
                                                              --------------------------
                                                                 2001           2000
                                                              -----------    -----------
<S>                                                           <C>            <C>
Sales.......................................................  $    34,418    $    18,558
Cost of goods sold..........................................       10,499          6,566
                                                              -----------    -----------
  Gross profit..............................................       23,919         11,992
                                                              -----------    -----------
Operating expenses:
  Engineering and development...............................        3,638          3,360
  Sales and marketing.......................................        5,025          3,124
  General and administrative................................        1,560          1,316
                                                              -----------    -----------
          Total operating expenses..........................       10,223          7,800
                                                              -----------    -----------
Operating income............................................       13,696          4,192
Other income, net...........................................          410             81
                                                              -----------    -----------
Income before provision for income taxes....................       14,106          4,273
Provision for income taxes..................................        1,127             --
                                                              -----------    -----------
          Net income........................................  $    12,979    $     4,273
                                                              ===========    ===========
Per share of common stock:
  Basic net income per share................................  $      0.43    $      0.15
                                                              ===========    ===========
  Diluted net income per share..............................  $      0.40    $      0.14
                                                              ===========    ===========
  Weighted average common shares outstanding................   30,530,827     28,405,400
                                                              ===========    ===========
  Weighted average common and common equivalent shares
     outstanding............................................   32,204,030     31,349,165
                                                              ===========    ===========
</TABLE>

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

                                        2
<PAGE>   5

                            DIGITAL LIGHTWAVE, INC.

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

<TABLE>
<CAPTION>
                                                                   FOR THE
                                                              THREE MONTHS ENDED
                                                                  MARCH 31,
                                                              ------------------
                                                               2001       2000
                                                              -------    -------
<S>                                                           <C>        <C>
Cash flows from operating activities:
  Net income................................................  $12,979    $ 4,273
  Adjustments to reconcile net income to cash provided
     (used) by operating activities:
     Depreciation and amortization..........................      779        679
     Provision for uncollectible accounts...................      100        (45)
     Income tax benefit from stock options..................    1,127         --
  Changes in operating assets and liabilities:
     Increase in accounts receivable........................   (1,859)    (3,755)
     Increase in inventories................................   (3,289)    (1,107)
     Increase in prepaid expenses and other assets..........     (503)      (811)
     Increase (decrease) in accounts payable and accrued
      expenses..............................................   (1,062)      (423)
                                                              -------    -------
          Net cash provided (used) by operating
           activities.......................................    8,272     (1,189)
                                                              -------    -------
Cash flows from investing activities:
  Purchase of property and equipment........................     (169)      (132)
  (Increase) decrease in notes receivable...................     (200)       182
                                                              -------    -------
          Net cash (used) provided by investing
           activities.......................................     (369)        50
                                                              -------    -------
Cash flows from financing activities:
  Principal payments on notes payable.......................       --     (3,000)
  Proceeds from sale of common stock, net of expense........      561      4,194
  Payments received, lease receivables......................       23         34
  Principal payments, capital lease obligations.............     (145)       (67)
                                                              -------    -------
          Net cash provided by financing activities.........      439      1,161
                                                              -------    -------
Net increase in cash and cash equivalents...................    8,342         22
Cash and cash equivalents at beginning of period............   30,481      7,466
                                                              -------    -------
Cash and cash equivalents at end of period..................  $38,823    $ 7,488
                                                              =======    =======
Other supplemental disclosures:
  Cash paid for interest....................................  $    18    $    90
Noncash investing and financing activities:
  Capital lease obligations incurred........................       --        214
  Fixed asset additions included in accounts payable........      112         82
  Issuance of common stock pursuant to litigation
     settlement.............................................       --        662
</TABLE>

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

                                        3
<PAGE>   6

                            DIGITAL LIGHTWAVE, INC.

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     The accompanying unaudited consolidated condensed financial statements of
Digital Lightwave, Inc. and its subsidiary ("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 month period ended March 31, 2001 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, 2000, File No.
000-21669.

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

2. INVENTORIES

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

<TABLE>
<CAPTION>
                                                              MARCH 31,   DECEMBER 31,
                                                                2001          2000
                                                              ---------   ------------
                                                                   (IN THOUSANDS)
<S>                                                           <C>         <C>
Raw materials...............................................   $ 7,856      $ 8,598
Work-in-process.............................................     6,218        4,229
Finished goods..............................................     1,836          221
                                                               -------      -------
                                                               $15,910      $13,048
                                                               =======      =======
</TABLE>

3. COMPUTATION OF NET INCOME PER SHARE

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

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                                     MARCH 31,
                                                              -----------------------
                                                                 2001         2000
                                                              ----------   ----------
<S>                                                           <C>          <C>
Basic:
  Weighted average common shares outstanding................  30,530,827   28,405,400
                                                              ----------   ----------
          Total basic.......................................  30,530,827   28,405,400
Diluted:
  Incremental shares for common stock equivalents...........   1,673,203    2,943,765
                                                              ----------   ----------
          Total dilutive....................................  32,204,030   31,349,165
                                                              ==========   ==========
</TABLE>

4. LEGAL PROCEEDINGS

     On July 23, 1998, the Company entered into a memorandum of understanding
for the settlement of a consolidated securities class action lawsuit. 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 consisted 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

                                        4
<PAGE>   7
                            DIGITAL LIGHTWAVE, INC.

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

Company recorded a one-time charge of $8.5 million during 1998 as a result of
the settlement. On April 30, 1999, the court entered a final judgment approving
the settlement of the actions. The final order was subject to appeal. On July
21, 1999, the Company issued 289,350 shares of Common Stock in partial
satisfaction of the total shares required under this settlement. Those shares
were not to be distributed, sold or hypothecated until after the appeal of the
settlement, discussed below, is fully resolved.

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

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

     On April 21, 1999, plaintiff Hugh Brian Haney filed an action in the United
States District Court for the Southern District of Ohio against the Company and
its former Chairman of the Board and Chief Executive Officer, Dr. Bryan J. Zwan,
alleging that the terms of a settlement agreement entered into between the
parties to settle prior litigation had been breached and requesting that the
settlement agreement be specifically enforced and that damages in excess of
$75,000 be awarded or, alternatively, that the settlement agreement be set
aside. In response to this action, the Company filed a motion to dismiss for
failure to state a claim against the Company. On August 24, 2000, the Court
granted the Company's motion for summary judgment in its entirety. Subsequently,
Dr. Zwan and plaintiffs entered into a settlement agreement and have dismissed
the matter as to each other only. On March 23, 2001, the Court entered judgment
in the Company's favor. Plaintiffs did not appeal and the judgment in the
Company's favor now is final.

     On November 23, 1999, Seth P. Joseph, a former officer and director of
Digital Lightwave, commenced an arbitration proceeding against the Company
alleging breach of his employment agreement and stock option agreements,
violation of the Florida Whistleblower statute, and breach of an indemnification
agreement and the Company bylaws. As relief, Mr. Joseph seeks $500,000, attorney
fees, interest and stock options exercisable for 656,666 shares of the Company's
Common Stock. The Company has filed its answer denying Mr. Joseph's allegations,
and alleging multiple affirmative defenses and counterclaims. The Company's
counterclaims against Mr. Joseph seek repayment of loans totaling approximately
$113,000, plus interest. In March, 2001, Mr. Joseph voluntarily dismissed three
of his claims against the Company without prejudice. The two remaining claims
seek recovery for alleged violation of the state whistleblower statute and
breach of Mr. Joseph's stock option agreements. The arbitration hearing is
scheduled to occur in July, 2001. The Company believes that there are
meritorious defenses to these claims and thus no provision for any liability has
been made in the financial statements.

     The Company from time to time is involved in lawsuits and actions by third
parties arising in the ordinary course of business. With respect to these
matters, management believes that it has adequate legal defenses and/or provided
adequate accruals for related costs. The Company is not aware of any additional
litigation,

                                        5
<PAGE>   8
                            DIGITAL LIGHTWAVE, INC.

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

claims or assessments that were pending that could have a material adverse
effect on the Company's business, financial condition and results of operations.

5. FINANCING TRANSACTIONS

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

     On March 31, 1999, the Company entered into a financing agreement with
certain investors pursuant to which the Company issued $3.0 million of 9%
Secured Bridge Notes due January 17, 2000. They were collateralized by all of
the Company's assets and were subordinated to the accounts receivable agreement
with EAB. In connection with the financing agreement, the Company issued
warrants to purchase an aggregate of 550,000 shares of the Company's common
stock at an exercise price of $2.75 per share, the market price of the stock on
the date prior to the issuance of the warrants. The warrants had a term of five
years from the date of issuance. In January 2000, such warrants were exercised.
The Secured Bridge Notes and related interest were repaid in full on the due
date.

     On October 10, 2000, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Congress Financial Corporation ("Congress") pursuant
to which Congress provided the Company with a $10.0 million line of credit at
prime plus three-quarters of one percent (.75%). The Loan Agreement has an
initial term of two years. All indebtedness outstanding under the Loan Agreement
is collateralized by substantially all of the Company's assets. Approximately
$2.3 million of the $10.0 million available under the credit facility secures a
letter of credit required by a lease for office space. A fee for this letter of
credit accommodation is assessed at one and one quarter percent (1.25%) per
annum. At March 31, 2001, the Company was in compliance with all loan covenants.

6. RELATED PARTY TRANSACTION

     On February 13, 2001, a member of senior management borrowed $200,000 from
the Company. This note accrues interest at the prime rate plus one percent
(1.0%) with the principal sum and accrued interest thereon payable on demand or,
if earlier, on the date of termination of the borrower's employment with the
Company. This note is collateralized by the borrower's stock holdings in the
Company and future cash bonuses which may become payable.

7. STOCK OPTION PLAN

     The stockholders of the Company approved the 2001 Stock Option Plan (the
"2001 Option Plan") at a special meeting held February 27, 2001. Under the 2001
Option Plan, 3,000,000 shares, plus (i) the number of shares remaining for
issuance under the 1996 Option Plan as of the date of stockholder approval of
the 2001 Option Plan and (ii) the number of shares subject to options
outstanding under the 1996 Option Plan as of the date of stockholder approval of
the 2001 Plan to the extent that such options expire or terminate for any reason
prior to exercise in full, were reserved for issuance (with the sum of (i) and
(ii) not to exceed 2,735,872 shares). The 2001 Option Plan differs from the 1996
Option Plan primarily by: (i) limiting the number of option shares which may be
granted to a single individual in a fiscal year to 250,000 shares, except with
respect to individuals first hired by the Company who may receive an additional
grant of up to 250,000 shares; (ii) authorizing the transfer of awards to
certain family members and family trusts; (iii) eliminating or modifying certain
restrictions as permitted by amendments to Rule 16b-3 issued by the Securities
and Exchange Commission under Section 16(b) of the Securities and Exchange Act
of 1934; and (iv) modifying

                                        6
<PAGE>   9
                            DIGITAL LIGHTWAVE, INC.

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

the provisions governing the options in the event of a change in control of the
Company. The 2001 Option Plan superseded the 1996 Option Plan with respect to
future grants.

                                        7
<PAGE>   10

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, 2000,
including the matters set forth therein under the caption "Factors That May
Affect Operating Results," which could cause actual results to differ materially
from those indicated by such forward-looking statements. Factors that may affect
the Company's results of operations include but are not limited to the Company's
anticipated fluctuations in operating results and seasonal sales, dependence on
limited products, uncertain market acceptance of planned products, rapid
technological change, dependence on new product introductions, dependence on the
continued growth of the Internet, competition, dependence on a limited number of
customers, expansion into additional original equipment manufacturer
relationships, dependence on contract manufacturing and sole or limited source
suppliers, industry-wide shortages of key components, management of growth,
limited operating history, dependence on key personnel, substantial influence of
principal stockholder, dependence on proprietary technology, possible volatility
of stock price, shares eligible for future sale, success in defending
significant litigation, factors inhibiting takeover and government regulations.
In addition, 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 of the foregoing factors or announce publicly revisions to any of the
foregoing statements to reflect events or developments.

OVERVIEW

     Digital Lightwave designs, develops and markets a portfolio of portable and
embedded products and technologies for monitoring, maintaining and installing
fiber optic circuits and managing fiber optic networks. Network operators and
other communications service providers use fiber optics to provide increased
network bandwidth to transmit voice, and other non-voice traffic such as
Internet, data, and multimedia video transmissions. The Company's products
provide 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 ("NIC"). In 1998, the
Company commenced limited sales of the Network Access Agent ("NAA").

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

     The Company primarily sells its products through a direct sales force to
telecommunications service providers and equipment manufacturers. Distributors
are used for international sales. 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.

     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.

                                        8
<PAGE>   11

Lucent's placement of orders for this product (the "Wave Agent") is conditional
upon the Company achieving certain milestone events defined in the contract. In
January 2000, the Company announced that it had received an order for four
WaveAgents from Lucent for the initiation of customer lab trials. These units
were shipped in the first quarter of 2000.

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

     Until fiscal year 1999, the Company incurred substantial net operating
losses as a result of significant investment in research and development, sales
and marketing and administrative expenses. In the quarter ended June 30, 1999,
the Company showed its first profitable quarter. Profitability has been
sustained through the quarter ended March 31, 2001. The Company intends to
continue to build its organization in anticipation of growth and believes that
its operating expenses will continue to increase accordingly due to a variety of
factors including: (1) increased research and development expenses associated
with the completion of the products in development and the continued enhancement
of existing products; and (2) increased selling, general and administrative
expenses associated with continued expansion of sales and marketing
capabilities, product advertising and promotion. There can be no assurance that
the Company will sustain profitability.

RESULTS OF OPERATIONS

     The following is a discussion of significant changes in the results of
operations of the Company which occurred in the quarter ended March 31, 2001
compared to the quarter ended March 31, 2000. The following table summarizes the
approximate changes in selected operating items and includes dollar changes,
percentage changes and percent of net sales to facilitate the discussions that
follow.

<TABLE>
<CAPTION>
                                                     QUARTER ENDED
                                                 ---------------------   AMOUNT    PERCENT   PERCENT OF
                                                                         CHANGE    CHANGE     NET SALES
                                                 MARCH 31,   MARCH 31,    FAV/      FAV/     -----------
                                                   2001        2000      (UNFAV)   (UNFAV)   2001   2000
                                                 ---------   ---------   -------   -------   ----   ----
                                                                 (IN MILLIONS, EXCEPT %)
<S>                                              <C>         <C>         <C>       <C>       <C>    <C>
Net sales......................................   $ 34.4       $18.6      $15.8       85%    100%   100%
Cost of goods sold.............................    (10.5)       (6.6)      (3.9)     (59)     30     35
                                                  ------       -----      -----              ---    ---
Gross profit...................................     23.9        12.0       11.9       99      70     65
Engineering and development expenses...........     (3.6)       (3.4)      (0.2)      (7)     11     18
Sales and marketing expenses...................     (5.0)       (3.1)      (1.9)     (62)     15     17
General and administrative expenses............     (1.6)       (1.3)      (0.3)     (19)      4      7
                                                  ------       -----      -----              ---    ---
          Total operating expenses.............    (10.2)       (7.8)      (2.4)     (31)     30     42
                                                  ------       -----      -----              ---    ---
Operating income...............................     13.7         4.2        9.5      226      40     23
Other income, net..............................      0.4         0.1        0.3      408       1     --
                                                  ------       -----      -----              ---    ---
Pre-tax income.................................     14.1         4.3        9.8      228      41     23
Income taxes...................................     (1.1)         --       (1.1)      --      (3)    --
                                                  ------       -----      -----              ---    ---
Net income.....................................   $ 13.0       $ 4.3      $ 8.7      202%     38%    23%
                                                  ======       =====      =====              ===    ===
</TABLE>

  Net Sales

     Net sales include total revenues from customer purchases of Network
Information Computers (NIC's) and Network Access Agents (NAA's), net of accrual
for product returns. Net sales for the quarter ended March 31, 2001 increased
$15.8 million, or 85%, to $34.4 million from $18.6 million in the year ago
quarter.
                                        9
<PAGE>   12

Sales to existing customers during the quarter represented 97% of sales, or
$33.2 million as compared to 91% of sales, or $17.1 million in the year ago
quarter. During the quarter, the Company shipped 395 total units (including 15
NAA's) at an ASP of $85,087, as compared to 349 total units (including 14 NAA's)
at an ASP of $49,831 in the year ago quarter.

     The primary increase in ASP (which is shown gross of the estimate for
product returns) is related to a shift in customer demand to higher speed
configurations, particularly the OC-192 product which began shipment in the
second quarter of 2000. Additionally, in both of the quarter ended March 31,
2001 and the prior year quarter, the Company recognized $1.5 million of revenue
from upgrades. In each of these quarters, the majority of the upgrades were to
provide OC-48 functionality to portable products.

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

  Cost of Goods Sold

     Cost of goods sold for the quarter ended March 31, 2001 increased by $3.9
million to $10.5 million as compared to $6.6 million in the year ago quarter.
Growth in cost of goods sold was directly related to the increase in the volume
of units sold.

  Gross Profit

     Gross profit for the quarter ended March 31, 2001 increased by $11.9
million to $23.9 million from $12.0 million in the year ago quarter. As a
percentage of sales, gross profit for the quarter increased to 69.5% from 64.6%
in the year ago quarter.

     The increase in gross margin between the quarters was related to increases
in ASP's and more efficient production methods.

  Engineering and Development

     Engineering and development expenses principally include compensation
attributable to engineering and development personnel, depreciation of
production assets, outside consulting fees and other development expenses.
Engineering and development expenses for the quarter ended March 31, 2001
increased by $0.2 million to $3.6 million, or 11% of net sales, from $3.4
million, or 18% of net sales, in the year ago quarter.

     The dollar increase is primarily due to development efforts centered around
the Company's new products within the NIC and NAA product lines. These increases
were partially offset by decreases in certain employee related costs incurred in
the quarter ended March 31, 2001.

  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 ended March 31, 2001 increased by $1.9 million to $5.0 million, or
15% of net sales, from $3.1 million, or 17% of net sales, in the year ago
quarter.

     The dollar increase is directly related to higher commissions resulting
from the increased sales activity, an increase in warranty related accruals, and
additional allowance for potentially uncollectible receivables. These increases
were partially offset by decreases in certain employee related costs incurred in
the quarter ended March 31, 2001.

                                        10
<PAGE>   13

  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 ended
March 31, 2001 increased by $0.3 million to $1.6 million, or 5% of net sales,
from $1.3 million, or 7% of net sales, in the year ago quarter.

     The dollar increase primarily reflects increased legal fees relating to
ongoing matters and increased insurance costs. These items were partially offset
by decreases in certain employee related costs incurred in the quarter ended
March 31, 2001.

  Other Income, net

     Other income for the quarter ended March 31, 2001 increased by $0.3 million
to $0.4 million from $0.1 million last year. This primarily represents interest
earned on invested cash balances partially offset by fees related to a credit
facility and interest expense on capital lease obligations.

  Provision for Income Taxes

     The provisions for income taxes for both quarters reflect income taxes due
at federal statutory rates and state income taxes, net of federal benefit. The
effective income tax rate was 8% for the first quarter of 2001 and 0% for the
first quarter of 2000. The effective rates differ from the federal and state
statutory rates (net of federal benefit) due to the recognition of deferred tax
assets previously not recognized due to management's uncertainty as to their
realization. As of the first quarter of 2001, the remaining deferred tax asset
was recognized resulting in a benefit of $4.3 million which offset the otherwise
recognized tax expense of $5.4 million resulting in a net tax expense of $1.1
million or 8%.

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

  Net Income or Loss

     Net income for the quarter increased by $8.7 million to $13.0 million or
$.40 per share (diluted) from $4.3 million or $.14 per share (diluted) in the
year ago quarter.

LIQUIDITY AND CAPITAL RESOURCES

     From its inception through March 31, 2001, the Company has financed its
operations primarily through private sales of its Common Stock, cash from
operations and the initial public offering of 4,600,000 shares of its Common
Stock. Cash and cash equivalents at March 31, 2001 were approximately $38.8
million, an increase of $8.3 million from December 31, 2000. As of March 31,
2001, the Company's working capital was approximately $72.7 million as compared
to $59.0 million at December 31, 2000. The increase was primarily associated
with the increase in cash reserves due to record sales levels and profitability.
The sales levels also resulted in a record level of trade receivables and the
inventory level grew to support new products expected to commence more
meaningful shipments in the second quarter of 2001. See the Company's
Consolidated Condensed Statements of Cash Flows for additional detail. For the
quarter ended March 31, 2001, capital expenditures were approximately $0.2
million. Future capital expenditures will depend on several factors including
timing of introductions of new products and enhancements to existing products,
continued product development efforts, and facilities expansion to support
growth.

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

                                        11
<PAGE>   14

     On March 31, 1999, the Company entered into a financing agreement with
certain investors pursuant to which the Company issued $3.0 million of 9%
Secured Bridge Notes due January 17, 2000. They were collateralized by all of
the Company's assets and were subordinated to the accounts receivable agreement
with EAB. In connection with the financing agreement, the Company issued
warrants to purchase an aggregate of 550,000 shares of the Company's common
stock at an exercise price of $2.75 per share, the market price of the stock on
the date prior to the issuance of the warrants. The warrants had a term of five
years from the date of issuance. In January 2000, such warrants were exercised.
The Secured Bridge Notes and related interest were repaid in full on the due
date.

     On October 10, 2000, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Congress Financial Corporation ("Congress") pursuant
to which Congress provided the Company with a $10.0 million line of credit at
prime plus three-quarters of one percent (.75%). The Loan Agreement has an
initial term of two years. All indebtedness outstanding under the Loan Agreement
is collateralized by substantially all of the Company's assets. Approximately
$2.3 million of the $10.0 million available under the credit facility secures a
letter of credit required by a lease for office space. A fee for this letter of
credit accommodation is assessed at one and one quarter percent (1.25%) per
annum.

     The Company continues to consider various financing alternatives, including
other equity or debt issuances (the "Financing Sources"). The Company
anticipates that its existing cash and cash equivalents and anticipated cash
flow from operations together with funds provided from the Financing Sources
will be sufficient to fund the Company's working capital and capital expenditure
requirements for at least the next 12 months. The anticipated cash flow from
operations assumes the Company achieves a level of sales that is higher than
those of earlier quarters. In the event that these sales levels are not
attained, the Company may be required to supplement its working capital with
additional funding in order to meet shorter or longer term liquidity needs.
There can be no assurance, however, that the Company will achieve the assumed or
increased sales levels or that adequate additional financing will be available
when needed or, if available, on terms acceptable to the Company.

                                        12
<PAGE>   15

                                    PART II

                               OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     As described more fully in the Company's Form 10-K for the year ended
December 31, 2000, on April 21, 1999, plaintiff Hugh Brian Haney filed an action
in the United States District Court for the Southern District of Ohio against
the Company and its former Chairman of the Board and Chief Executive Officer,
Dr. Bryan J. Zwan, alleging that the terms of a settlement agreement entered
into between the parties to settle prior litigation had been breached and
requesting that the settlement agreement be specifically enforced and that
damages in excess of $75,000 be awarded or, alternatively, that the settlement
agreement be set aside. In response to this action, the Company filed a motion
to dismiss for failure to state a claim against the Company. On August 24, 2000,
the Court granted the Company's motion for summary judgment in its entirety.
Subsequently, Dr. Zwan and plaintiffs entered into a settlement agreement and
dismissed the matter as to each other only. On March 23, 2001, the Court entered
judgment in the Company's favor. Plaintiffs did not appeal and the judgment in
the Company's favor now is final.

     On November 23, 1999, Seth P. Joseph, a former officer and director of
Digital Lightwave, commenced an arbitration proceeding against the Company
alleging breach of his employment agreement and stock option agreements,
violation of the Florida Whistleblower statute, and breach of an indemnification
agreement and our Company bylaws. As relief, Mr. Joseph seeks $500,000, attorney
fees, interest and stock options exercisable for 656,666 shares of our Common
Stock. The Company has filed its answer denying Mr. Joseph's allegations, and
alleging multiple affirmative defenses and counterclaims. The Company's
counterclaims against Mr. Joseph seek repayment of loans totaling approximately
$113,000, plus interest. In March, 2001, Mr. Joseph voluntarily dismissed three
of his claims against the Company without prejudice. The two remaining claims
seek recovery for alleged violation of the state whistleblower statute and
breach of Mr. Joseph's stock option agreements. The arbitration hearing is
scheduled to occur in July, 2001. We intend to vigorously oppose Mr. Joseph's
claims. However, there can be no assurance that we will succeed in defending
this action. Additionally, we cannot assure you that the action will not have a
material adverse effect on Digital Lightwave.

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

     At special meeting of stockholders of Digital Lightwave, Inc. on February
27, 2001, the stockholders voted on a proposal to approve the 2001 Stock Option
Plan. The following table sets forth the votes regarding this proposal:

<TABLE>
<CAPTION>
NUMBER OF SHARES:
-----------------
<S>                                                           <C>
Voted For...................................................  16,742,305
Voted Against...............................................   3,723,977
Abstentions.................................................      13,307
</TABLE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits

<TABLE>
<C>        <C>  <S>
10.25       --  Form of Senior Executive Agreement
10.26       --  Form of Executive Severance Agreement
</TABLE>

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

                                        13
<PAGE>   16

                                   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 of the Board,
                                            Chief Executive Officer and
                                              President
                                            (Principal Executive Officer)

                                            Date: May 15, 2001

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

                                            Date: May 15, 2001

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