<PAGE>   1


============================================================================== 
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                             ---------------------
 
                                   FORM 10-Q
 
<TABLE>
<C>                   <S>
      (MARK ONE)
         [X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF TH  E
                      SECURITIES EXCHANGE ACT OF 1934

                      FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
 
                                                   OR
 
         [  ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF T  HE
                      SECURITIES EXCHANGE ACT OF 1934

                      FOR THE TRANSITION PERIOD FROM ---------------
                      TO ---------------
</TABLE>
 
                         COMMISSION FILE NO.: 000-21669
 
                            DIGITAL LIGHTWAVE, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                            <C>
                DELAWARE                               95-4313013
     (State or other jurisdiction of      (I.R.S. Employer Identification No.)
     incorporation or organization)
</TABLE>
 
                       601 CLEVELAND STREET, FIFTH FLOOR
                           CLEARWATER, FLORIDA 33755
                                 (813) 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
August 13, 1998 was 26,479,824.

==============================================================================
<PAGE>   2
 
                            DIGITAL LIGHTWAVE, INC.
 
                         QUARTERLY REPORT ON FORM 10-Q
                       FOR THE PERIOD ENDED JUNE 30, 1998
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>         <C>                                                           <C>
                         PART I FINANCIAL INFORMATION
Item 1.     Financial Statements:
            Comparative Consolidated Balance Sheets -- June 30, 1998 and
              December 31, 1997.........................................    1
            Comparative Consolidated Statements of Operations -- Three
              Months Ended June 30, 1998 and June 30, 1997..............    2
            Comparative Consolidated Statements of Operations -- Six
              Months Ended June 30, 1998 and June 30, 1997..............    3
            Comparative Consolidated Statements of Cash Flows -- Six
              Months Ended June 30, 1998 and June 30, 1997..............    4
            Notes to Comparative Consolidated Financial Statements......    5
            Management's Discussion and Analysis of Financial Condition
Item 2.       and Results of Operations.................................    7
 
                          PART II OTHER INFORMATION
Item 1.     Legal Proceedings...........................................   13
Item 4.     Submission of Matters to a Vote of Security Holders.........   13
Item 6.     Exhibits and Reports on Form 8-K............................   14
 
SIGNATURES..............................................................   15
</TABLE>
<PAGE>   3
 
                         PART I   FINANCIAL INFORMATION
 
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS
 
                            DIGITAL LIGHTWAVE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               JUNE 30,     DECEMBER 31,
                                                                 1998           1997
                                                              -----------   ------------
                                                              (UNAUDITED)
<S>                                                           <C>           <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents.................................    $10,068       $24,031
  Accounts receivable.......................................      4,992         4,780
  Inventories...............................................      9,206         8,120
  Prepaid expenses and other current assets.................      1,093           481
                                                                -------       -------
          Total current assets..............................     25,359        37,412
  Property and equipment, net...............................      7,651         6,785
  Other assets..............................................        207           164
                                                                -------       -------
          Total assets......................................    $33,217       $44,361
                                                                =======       =======
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................    $ 4,257       $ 4,917
  Accrued litigation settlement charges.....................      8,500            --
                                                                -------       -------
          Total current liabilities.........................     12,757         4,917
Long-term liabilities.......................................         55            25
                                                                -------       -------
          Total liabilities.................................     12,812         4,942
                                                                -------       -------
Stockholders' equity:
  Common stock..............................................          3             3
  Additional paid-in capital................................     55,327        55,201
  Accumulated deficit.......................................    (34,925)      (15,785)
                                                                -------       -------
          Total stockholders' equity........................     20,405        39,419
                                                                -------       -------
          Total liabilities and stockholders' equity........    $33,217       $44,361
                                                                =======       =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                        1
<PAGE>   4
 
                            DIGITAL LIGHTWAVE, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                (IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                                                      JUNE 30,
                                                              -------------------------
                                                                 1998          1997
                                                              -----------   -----------
<S>                                                           <C>           <C>
Sales.......................................................  $     3,517   $     2,601
Cost of goods sold..........................................        1,334           795
                                                              -----------   -----------
  Gross profit..............................................        2,183         1,806
Operating expenses:
  Engineering and development...............................        3,692           948
  Sales and marketing.......................................        3,094         1,179
  General and administrative................................        1,644           795
  Reorganization charges....................................           --            --
  Litigation settlement.....................................        8,500            --
                                                              -----------   -----------
          Total operating expenses..........................       16,930         2,922
                                                              -----------   -----------
Operating loss..............................................      (14,747)       (1,116)
Other income................................................          167           539
                                                              -----------   -----------
Loss before income tax......................................      (14,580)         (577)
Provision for income taxes..................................           --            --
                                                              -----------   -----------
          Net loss..........................................  $   (14,580)  $      (577)
                                                              ===========   ===========
Per share of common stock:
          Net loss per share (basic and diluted)............  $     (0.55)  $     (0.02)
                                                              ===========   ===========
Weighted average common and common equivalent shares
  outstanding...............................................   26,461,151    26,177,777
                                                              ===========   ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                        2
<PAGE>   5
 
                            DIGITAL LIGHTWAVE, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                (IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                  SIX MONTHS ENDED
                                                                      JUNE 30,
                                                              -------------------------
                                                                 1998          1997
                                                              -----------   -----------
<S>                                                           <C>           <C>
Sales.......................................................  $     8,949   $     4,099
Cost of goods sold..........................................        3,437         1,362
                                                              -----------   -----------
  Gross profit..............................................        5,512         2,737
Operating expenses:
  Engineering and development...............................        7,001         1,826
  Sales and marketing.......................................        5,037         2,058
  General and administrative................................        3,542         1,574
  Reorganization charges....................................        1,018            --
  Litigation settlement.....................................        8,500            --
                                                              -----------   -----------
          Total operating expenses..........................       25,098         5,458
                                                              -----------   -----------
Operating loss..............................................      (19,586)       (2,721)
Other income................................................          446           832
                                                              -----------   -----------
Loss before income tax......................................      (19,140)       (1,889)
Provision for income taxes..................................           --            --
                                                              -----------   -----------
          Net loss..........................................  $   (19,140)  $    (1,889)
                                                              ===========   ===========
Per share of common stock:
          Net loss per share (basic and diluted)............  $     (0.72)  $     (0.07)
                                                              ===========   ===========
Weighted average common and common equivalent shares
  outstanding...............................................   26,452,601    25,429,833
                                                              ===========   ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                        3
<PAGE>   6
 
                            DIGITAL LIGHTWAVE, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   FOR THE
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              ------------------
                                                                1998      1997
                                                              --------   -------
<S>                                                           <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(19,140)  $(1,889)
  Adjustments to reconcile net loss due to cash used by
     operating activities:
     Depreciation and amortization..........................     1,085       250
  Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable.............      (212)    1,115
     Increase in inventories................................    (1,086)   (1,671)
     Decrease in deferred offering expenses.................        --       427
     Increase in prepaid expenses and other current
      assets................................................      (655)     (152)
     Increase (decrease) in accounts payable and accrued
      expenses..............................................      (653)       46
     Increase in accrued settlement charges.................     8,500        --
                                                              --------   -------
          Net cash used in operating activities.............   (12,161)   (1,874)
                                                              --------   -------
Cash flows from investing activities:
  Purchase of property and equipment........................    (1,952)   (1,487)
                                                              --------   -------
          Net cash used in investing activities.............    (1,952)   (1,487)
                                                              --------   -------
Cash flows from financing activities:
  Principal payments on notes payable.......................        --      (750)
  Proceeds from sale of common stock, net of expense........       126    39,314
  Execution of capital lease obligations....................        48        --
  Principal payments -- capital lease obligations...........       (24)     (141)
                                                              --------   -------
          Net cash provided by financing activities.........       150    38,423
                                                              --------   -------
Net increase (decrease) in cash and cash equivalents........   (13,963)   35,062
Cash and cash equivalents at beginning of period............    24,031     1,165
                                                              --------   -------
Cash and cash equivalents at end of period..................  $ 10,068   $36,227
                                                              ========   =======
Other supplemental disclosures:
  Noncash investing and financing activities:
     Fixed asset additions included in accounts payable.....  $     46   $    90
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                        4
<PAGE>   7
 
                            DIGITAL LIGHTWAVE, INC.
 
             NOTES TO COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
 
BASIS OF PRESENTATION
 
     The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these statements include all
adjustments, consisting of normal and recurring adjustments, considered
necessary for a fair presentation of results for such periods. The results of
operations for the three and six month periods ended June 30, 1998 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, 1997, File No.
000-21669.
 
     On January 22, 1998, the Company issued a press release and related Form
8-K indicating that the Company would restate its financial results for the
quarters ending June 30, 1997 and September 30, 1997. On April 16, 1998, the
Company filed the restated Form 10-Q's for these periods. The Company's
accompanying financial statements give effect to such restatement for the period
ending June 30, 1997.
 
INITIAL PUBLIC OFFERING
 
     On February 6, 1997, the Company consummated its initial public offering of
3,658,860 shares of common stock issued by the Company at a price of $12.00 per
share. Aggregate net proceeds to the Company were approximately $39.6 million.
On February 28, 1997, the Company paid off all the then outstanding notes
($750,000 principal amount) with proceeds from the initial public offering.
 
INVENTORIES
 
     Inventories at June 30, 1998 and December 31, 1997 are summarized as
follows:
 
<TABLE>
<CAPTION>
                                                              JUNE 30,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
                                                                  (IN THOUSANDS)
<S>                                                           <C>        <C>
Raw materials...............................................   $4,005       $1,278
Work-in-process.............................................      794        1,863
Finished goods..............................................    4,407        4,979
                                                               ------       ------
                                                               $9,206       $8,120
                                                               ======       ======
</TABLE>
 
COMPUTATION OF NET LOSS PER SHARE
 
     Net loss per common and common equivalent shares has been computed using
the weighted average number of common and common equivalent shares outstanding
using the treasury stock method for all periods presented. Common stock
equivalents have not been included in the calculation as their effect would be
anti-dilutive. Shares used in the net loss per share calculation are summarized
as follows:
 
<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED         SIX MONTHS ENDED
                                                 JUNE 30,                  JUNE 30,
                                          -----------------------   -----------------------
                                             1998         1997         1998         1997
                                          ----------   ----------   ----------   ----------
<S>                                       <C>          <C>          <C>          <C>
Weighted average common stock
  outstanding...........................  26,461,151   26,177,777   26,452,601   25,429,833
Weighted average common stock
  equivalents outstanding...............          --           --           --           --
                                          ----------   ----------   ----------   ----------
Shares used in net loss per share
  calculation...........................  26,461,151   26,177,777   26,452,601   25,429,833
                                          ==========   ==========   ==========   ==========
</TABLE>
 
                                        5
<PAGE>   8
                            DIGITAL LIGHTWAVE, INC.
 
     NOTES TO COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
COMMITMENTS AND CONTINGENCIES
 
     At June 30, 1998, the Company had outstanding purchase commitments to
purchase certain inventory items totaling $2.3 million.
 
REORGANIZATION CHARGES
 
     As previously announced on February 26, 1998, the Company streamlined its
management structure and eliminated 20 positions which resulted in a
non-recurring charge of $1.0 million during the six months ended June 30, 1998.
 
LEGAL PROCEEDINGS
 
     The Company from time to time is involved in legal actions 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 such that the ultimate outcome will not have a material adverse
effect on the Company's future financial position.
 
     As of April 9, 1998, 23 class action complaints for violations of the
Federal Securities Laws were filed in the United States District Court for the
Middle District of Florida, on behalf of purchasers of the Company's Common
Stock during certain periods in 1997 and 1998. The complaints named as
defendants the Company, Bryan J. Zwan, the Company's Chairman of the Board,
Chief Executive Officer and President, Beth A. Morris, the Company's Vice
President, Finance and Secretary from January, 1995 to July, 1997, Steven H.
Grant, the Company's Vice President, Finance and Chief Financial Officer, and
other current and former corporate officers. The complaints allege that the
Company and certain officers and directors of the Company during the relevant
time period violated Sections 10(b) and 20(a) of the Securities Exchange Act by,
among other things, issuing to the investing public false and misleading
financial statements and press releases concerning the Company's revenues,
income and earnings, which artificially inflated the price of the Company's
Common Stock.
 
     On July 23, 1998, the Company had entered into a memorandum of
understanding for the settlement of these class action complaints which is
subject to court approval. The settlement consists of $4.25 million in cash, to
be paid to plaintiffs primarily by a claim on the Company's directors and
officers liability insurance policy, and the issuance of no more than 1.8
million shares of common stock. The Company has recorded a non-recurring charge
of $8.5 million as a result of the settlement.
 
     On November 5, 1997, Hugh Brian Haney ("Plaintiff") commenced an action in
the United States District Court for the Southern District of Ohio against Bryan
J. Zwan, the Company's Chief Executive Officer, and the Company ("Defendants").
The complaint alleges violations of Section 10(b) of the Securities Exchange Act
and various common law violations by Defendants in connection with Plaintiff's
sale to the Company's predecessor in November 1995, pursuant to a previously
granted option exercisable by Zwan and/or the Company's predecessor, of 4,900
shares of stock in the Company's predecessor, an amount equivalent to 19,215,686
shares of the Company's common stock. The complaint seeks alternative forms of
relief, including, among others, (1) rescission of the sale of the shares
transferred by Plaintiff or (2) damages of not less than $235 million, together
with interest. The Company believes that it has meritorious defenses to this
lawsuit and intends to defend it vigorously. There can be no assurance that the
Company will prevail in this lawsuit and any unfavorable ruling or judgment
against the Company in this lawsuit could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
     As of August 13, 1998, the Company was not aware of any additional lawsuits
that were pending that could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
                                        6
<PAGE>   9
                            DIGITAL LIGHTWAVE, INC.
 
     NOTES TO COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
SUBSEQUENT EVENTS
 
     On July 27, 1998, the Company signed a non-binding letter of intent for a
private placement of convertible securities with an aggregate value of up to
$15.5 million with VantagePoint Communications Partners, L.P. ("VantagePoint")
and an affiliated entity. One of the Company's directors, William Jefferson
Marshall, is a managing partner of VantagePoint. The transaction is subject to
certain conditions of closing including the completion of due diligence,
execution of a definitive agreement, and other customary items. The term sheet
allows for an initial tranche of $10.0 million which will be initially
structured as secured debt ("interim debt") convertible into Series A preferred
stock at a price of $2.7722 per share. The interim debt will have a maturity of
one year, will bear interest at a rate of 5.5% per annum, and will convert to
preferred shares upon the effective date of the Company's settlement of
outstanding securities litigation on terms equivalent to those outlined in the
memorandum of understanding executed on July 23, 1998 (see "Legal Proceedings"),
or upon the election of the holders of the interim debt. The interim debt is
subordinate to any financing provided by a bank or financial institution
collateralized by the Company's accounts receivable. The term sheet also allows
for a final tranche of $5.5 million which will be available to the Company for a
period beginning thirty days and ending one year from the funding of the initial
tranche. VantagePoint will have a ten day right to deny this funding. The
preferred stock issued in relation to these transactions is convertible to
common stock at a price defined in the term sheet. In accordance with the term
sheet, the Company is responsible for certain legal fees associated with the
financing. The Company plans to use the proceeds of the private placement to
fund working capital and for general corporate purposes. The Company and
VantagePoint have agreed to extend the due diligence period through September
15, 1998 with a closing by September 30, 1998. However, there can be no
assurance that the financing will close by this date. In any event, the Company
continues to pursue this transaction and explore other financing opportunities.
 
     On August 12 and 13, 1998, the Company streamlined its operating structure
and eliminated approximately 55 full-time positions. Management believes this
reduction in force will not result in a material charge to earnings and will not
affect the Company's ability to operate.
 
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, 1997,
including the matters set forth therein under the caption "Risk Factors," 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 limited operating history,
cumulative losses, liquidity risk, future capital needs and uncertainty of
additional financing, dependence on single product, uncertain market acceptance
of planned products, rapid technological change, dependence on new product
introductions, competition, substantial increase in manufacturing operations,
dependence on contract manufacturing and limited source suppliers, dependence on
key personnel, management of growth, anticipated fluctuations in operating
results, dependence on proprietary technology, customer concentration, product
certifications, control by principal stockholder, factors inhibiting takeover,
shares eligible for future sale, possible volatility of stock price, litigation,
potential year 2000 problems, and government regulations. The Company
participates in a highly concentrated industry, and has limited visibility with
regard to customer orders and the timing of such orders. The Company may also
encounter difficulty obtaining sufficient supplies to staff and meet production
schedules. As a result, quarter-to-quarter and year-to-year financial
performance is highly dependent upon the timely receipt of orders from its
customers during fiscal periods. The Company disclaims any obligation to update
any such factors or announce publicly revisions to such statements to reflect
future events or developments.
                                        7
<PAGE>   10
 
OVERVIEW
 
     The Company manufactures and sells Network Information Computers(TM), and
Remote Access Agents(TM) and has other products in design and development. The
Company's products are based on the Company's core software, firmware and
hardware technology which was developed over a five year period. In February
1996, the Company commenced sales of the ASA 312. 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. 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. While the Company believes it is properly positioned to garner
additional customers and market share for the ASA 312 and its derivative
products, there can be no assurance the Company will gain further product
acceptance or that additional revenue will materialize from current or future
customers.
 
     Gross profit may be affected in the future by the introduction of new
products which generate differing gross margins and by the sales mix during a
given period. The Company plans to pursue original equipment manufacturer
("OEM") relationships with respect to the sale of Remote Access Agents. The
Company has not negotiated any such arrangements but anticipates that its
pricing to OEMs would be less than with respect to direct sales resulting in
lower gross margins in connection with these arrangements. However, sales and
marketing expenses are generally lower in the case of sales to OEMs.
 
RESULTS OF OPERATIONS
 
     The following is a discussion of significant changes in the results of
operations of the Company which occurred in the quarter and six months ended
June 30, 1998 compared to the quarter and six months ended June 30, 1997. The
following tables summarize the approximate changes in selected operating items
and include dollar changes, percentage changes and percent of net sales to
facilitate the discussions that follow. The tables compare the quarter ended
June 30, 1998 to the quarter ended June 30, 1997 and the six months ended June
30, 1998 to the six months ended June 30, 1997, respectively:
 
<TABLE>
<CAPTION>
                                      QUARTER ENDED
                                   -------------------                               PERCENT OF NET
                                                           AMOUNT        PERCENT         SALES
                                   JUNE 30,   JUNE 30,     CHANGE        CHANGE      --------------
                                     1998       1997     FAV/(UNFAV)   FAV/(UNFAV)   1998     1997
                                   --------   --------   -----------   -----------   -----    -----
                                                       (IN MILLIONS, EXCEPT %)
<S>                                <C>        <C>        <C>           <C>           <C>      <C>
Net sales........................   $  3.5     $ 2.6       $  0.9            35%      100%     100%
Cost of goods sold...............     (1.3)     (0.8)        (0.5)          (67)       38       31
                                   --------   --------   -----------                 -----    -----
Gross profit.....................      2.2       1.8          0.4            21        62       69
Engineering and development
  expenses.......................      3.7       0.9         (2.8)         (310)      105       35
Sales and marketing expenses.....      3.1       1.2         (1.9)         (158)       88       46
General and administrative
  expenses.......................      1.6       0.8         (0.8)         (105)       47       31
Reorganization charges...........       --        --           --            --        --       --
Litigation settlement............      8.5        --         (8.5)           --       242       --
                                   --------   --------   -----------                 -----    -----
          Total operating
            expenses.............     16.9       2.9        (14.0)         (484)      482      112
                                   --------   --------   -----------                 -----    -----
Operating loss...................    (14.7)     (1.1)       (13.6)       (1,241)     (420)     (43)
Other income, net................      0.1       0.5         (0.4)          (87)        2       19
                                   --------   --------   -----------                 -----    -----
Pre-tax income...................    (14.6)     (0.6)       (14.0)       (2,330)     (418)     (24)
Income taxes.....................       --        --           --            --        --       --
                                   --------   --------   -----------                 -----    -----
          Net loss...............   $(14.6)    $(0.6)      $(14.0)       (2,330)%    (418)%    (24)%
                                   ========   ========   ===========                 =====    =====
</TABLE>
 
                                        8
<PAGE>   11
 
<TABLE>
<CAPTION>
                                    SIX MONTHS ENDED
                                   -------------------                               PERCENT OF NET
                                                           AMOUNT        PERCENT         SALES
                                   JUNE 30,   JUNE 30,     CHANGE        CHANGE      --------------
                                     1998       1997     FAV/(UNFAV)   FAV/(UNFAV)   1998     1997
                                   --------   --------   -----------   -----------   -----    -----
                                                       (IN MILLIONS, EXCEPT %)
<S>                                <C>        <C>        <C>           <C>           <C>      <C>
Net sales........................   $  8.9     $ 4.1       $  4.8           118%      100%     100%
Cost of goods sold...............     (3.4)     (1.4)        (2.0)         (145)       38       34
                                   --------   --------   -----------                 -----    -----
Gross profit.....................      5.5       2.7          2.8           104        62       66
Engineering and development
  expenses.......................      7.0       1.8         (5.2)         (289)       78       44
Sales and marketing expenses.....      5.0       2.0         (3.0)         (152)       56       49
General and administrative
  expenses.......................      3.6       1.6         (2.0)         (128)       41       39
Reorganization charges...........      1.0        --         (1.0)           --        11       --
Litigation settlement............      8.5        --         (8.5)           --        95       --
                                   --------   --------   -----------                 -----    -----
          Total operating
            expenses.............     25.1       5.4        (19.7)         (365)      281      132
                                   --------   --------   -----------                 -----    -----
Operating loss...................    (19.6)     (2.7)       (16.9)         (625)     (219)     (66)
Other income, net................      0.5       0.8         (0.3)          (32)        6       20
                                   --------   --------   -----------                 -----    -----
Pre-tax income...................    (19.1)     (1.9)       (17.2)         (907)     (213)     (46)
Income taxes.....................       --        --           --            --        --       --
                                   --------   --------   -----------                 -----    -----
          Net loss...............   $(19.1)    $(1.9)      $(17.2)         (907)%    (213)%    (46)%
                                   ========   ========   ===========                 =====    =====
</TABLE>
 
  Sales
 
     Sales for the quarter increased $0.9 million to $3.5 million from $2.6
million in the year ago quarter. Sales to existing customers during the quarter
represented 74% of sales, or $2.7 million, as compared to 88% of sales, or $2.3
million in the year ago quarter. During the quarter, the Company shipped 113
units in varying configurations of the ASA 312 to a total of 26 customers
(including 9 new customers) at an average selling price ("ASP") of $31,117, as
compared to 76 units to a total of 14 customers (including 4 new customers) at
an ASP of $34,223 in the year ago quarter.
 
     Sales for the six months ended June 30, 1998, increased by $4.8 million to
$8.9 million from $4.1 million in the same period last year. Sales to existing
customers for the period represented 61% of sales, or $5.6 million as compared
to 69% of sales, or $2.8 million for the same period last year. During the
period, the Company shipped 287 units in varying configurations at an ASP of
$31,178 compared with 117 units at an ASP of $35,035 for the same period last
year. The primary reason for the year-to-date decline in the ASP relates to
lower selling prices associated with certain lower speed optical configurations.
 
     The Company believes repeat sales to an existing customer is an important
measure of growing product acceptance in the highly concentrated
telecommunication industry. While there can be no assurance that this
longer-term trend will 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 increased by $0.5 million to $1.3
million from $0.8 million in the year ago quarter.
 
     Cost of goods sold for the six months ended June 30, 1998, increased by
$2.0 million to $3.4 million from $1.4 million in the year ago period.
 
     The primary reasons for the increase in cost of goods sold is the increase
in the volume of units produced and the increased infrastructure and
manufacturing costs incurred in support of these efforts. These costs include
management, indirect labor, facility rental, depreciation of equipment, and
other operating expenses. The average cost of goods sold per unit has increased
as a result of additional labor and overhead costs
 
                                        9
<PAGE>   12
 
incurred in implementing upgrades to existing units in order to provide the
customer with the most current configuration available prior to sale.
 
  Gross Profit
 
     Gross profit for the quarter increased by $0.4 million to $2.2 million from
$1.8 million in the year ago quarter. As a percentage of sales, gross margin for
the quarter decreased to 62.1% from 69.4%.
 
     Gross profit for the six months ended June 30, 1998, increased by $2.8
million to $5.5 million from $2.7 million in the year ago period. As a
percentage of sales, gross margin for the six months ended June 30, 1998
decreased to 61.6% from 66.8%.
 
     As highlighted above, the increase in gross profit is directly related to
the increase in sales during the quarter and for the six months ended June 30,
1998. Despite the increase in sales, gross margin percentage decreased due to a
decline in the average selling price associated with certain lower speed optical
configurations and as a result of additional labor and overhead costs incurred
in implementing upgrades to existing units in order to provide the customer with
the most current configuration available prior to sale.
 
  Engineering and Development
 
     Engineering and development expenses for the quarter increased by $2.8
million to $3.7 million from $.9 million in the year ago quarter.
 
     Engineering and development expenses for the six months ended June 30,
1998, increased by $5.2 million to $7.0 million from $1.8 million in the year
ago period.
 
     The increase in both periods is primarily related to the addition of
engineering, and quality control personnel and the other expenses associated
with the Company's ongoing engineering and development efforts on products like
the Remote Access Agents, and enhancements to the Company's Network Information
Computers.
 
  Sales and Marketing
 
     Sales and marketing expenses for the quarter increased by $1.9 million to
$3.1 million from $1.2 million in the year ago quarter.
 
     Sales and marketing expenses for the six months ended June 30, 1998
increased by $3.0 million to $5.0 million from $2.0 million in the year ago
period.
 
     The increase in both periods is related to the addition of personnel for
the Company's direct sales force and marketing functions, an increase in
commissions related to the increase in sales activity, an increase in trade show
appearances, and other customer incentives.
 
  General and Administrative
 
     General and administrative expenses for the quarter increased by $.8
million to $1.6 million from $.8 million in the year ago quarter.
 
     General and administrative expenses for the six months ended June 30, 1998,
increased by $2.0 million to $3.6 million from $1.6 million in the year ago
period.
 
     The increase in both periods is due to the expansion of facilities,
personnel, and information systems to support the growth of the Company's
business. Additionally, as a result of the Company's various legal matters,
professional fees increased approximately $0.6 million and $1.2 million for the
quarter and six months ended June 30, 1998, respectively. The Company believes
these expenses will decrease over time as a result of the settlement of certain
outstanding litigation.
 
                                       10
<PAGE>   13
 
  Reorganization Charges
 
     As previously announced on February 26, 1998, the Company streamlined its
management structure and eliminated 20 positions which resulted in a one-time
charge of $1.0 million during the six months ended June 30, 1998.
 
  Litigation Settlement
 
     As previously discussed in the accompanying notes to consolidated financial
statements, the Company signed a memorandum of understanding for the settlement
of class action complaints filed against it in U.S. District Court for alleged
violations of federal securities laws. The settlement has resulted in a one-time
charge of $8.5 million recorded during the quarter.
 
  Other Income or Expense
 
     Other income for the quarter decreased by $0.4 million to $0.1 million from
$0.5 million in the year ago quarter.
 
     Other income for the six months ended June 30, 1998 decreased by $0.3
million to an income of $0.5 million from $0.8 million in the year ago period.
 
     The decrease in both periods is the result of the utilization of cash
reserves to fund the Company's operations.
 
  Net Income or Loss
 
     Net loss for the quarter increased $14.0 million to a net loss of $14.6
million or $.55 per share, from a net loss of $0.6 million or $.02 per share in
the year ago quarter.
 
     Net loss for the six months ended June 30, 1998 increased $17.2 million to
a net loss of $19.1 million or $.72 per share, from a net loss of $1.9 million
or $.07 per share.
 
     The increase in net loss in the current quarter was adversely impacted by
the one-time charge of $8.5 million to record the settlement of outstanding
securities litigation. Without this charge, the net loss would have been $6.1
million or a loss of $.23 per share for the quarter ended June 30, 1998. For the
six months ended June 30, 1998, the loss would have been $10.6 million or a loss
of $.40 per share.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Cash and cash equivalents at June 30, 1998 were approximately $10.1 million
compared to approximately $24.0 million at December 31, 1997. As of June 30,
1998, the Company's working capital was approximately $12.6 million as compared
to $32.5 million at December 31, 1997. The decrease in working capital was
primarily associated with cash used in operations during the six months ended
June 30, 1998, as detailed in the Company's Consolidated Statements of Cash
Flows and the settlement of the litigation previously discussed. For the six
months ended June 30, 1998, capital expenditures were approximately $2.0
million. Future capital expenditures will depend on several factors including
timing of introductions of new products and enhancements to existing products as
well as continued product development efforts.
 
     On July 27, 1998, the Company signed a non-binding letter of intent to
provide $15.5 million in cash through the issuance of convertible securities.
For a more detailed discussion of the financing, see the notes to consolidated
financial statements.
 
     The Company anticipates that its existing cash and cash equivalents and
anticipated cash flow from operations together with funds provided from the
proposed financing will be sufficient to fund the Company's working capital and
capital expenditure requirements for at least the next 12 months. While the
Company expects to receive certain benefits from its recent reduction in force,
the Company continues to have significant ongoing uses of capital including
expenses associated with new product development, inventory, and other working
capital requirements. The anticipated cash flow from operations assumes that the
Company will
 
                                       11
<PAGE>   14
 
achieve a level of sales that is significantly higher than those of earlier
quarters. Whether or not these sales levels are attained, the Company will 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 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
 
     The Company from time to time is involved in legal actions 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 such that the ultimate outcome will not have a material adverse
effect on the Company's future financial position.
 
     As of April 9, 1998, 23 class action complaints for violations of the
Federal Securities Laws were filed in the United States District Court for the
Middle District of Florida, on behalf of purchasers of the Company's Common
Stock during certain periods in 1997 and 1998. The complaints named as
defendants the Company, Bryan J. Zwan, the Company's Chairman of the Board,
Chief Executive Officer and President, Beth A. Morris, the Company's Vice
President, Finance and Secretary from January, 1995 to July, 1997, Steven H.
Grant, the Company's Vice President, Finance and Chief Financial Officer, and
other current and former corporate officers. The complaints allege that the
Company and certain officers and directors of the Company during the relevant
time period violated Sections 10(b) and 20(a) of the Securities Exchange Act by,
among other things, issuing to the investing public false and misleading
financial statements and press releases concerning the Company's revenues,
income and earnings, which artificially inflated the price of the Company's
Common Stock.
 
     On July 23, 1998, the Company had entered into a memorandum of
understanding for the settlement of these class action complaints which is
subject to court approval and other contingencies. The settlement consists of
$4.25 million in cash, to be paid to plaintiffs primarily by a claim on the
Company's directors and officers liability insurance policy, and the issuance of
no more than 1.8 million shares of common stock. The Company has recorded a
non-recurring charge of $8.5 million as a result of the settlement.
 
     On November 5, 1997, Hugh Brian Haney ("Plaintiff") commenced an action in
the United States District Court for the Southern District of Ohio against Bryan
J. Zwan, the Company's Chief Executive Officer, and the Company ("Defendants").
The complaint alleges violations of Section 10(b) of the Securities Exchange Act
and various common law violations by Defendants in connection with Plaintiff's
sale to the Company's predecessor in November 1995, pursuant to a previously
granted option exercisable by Zwan and/or the Company's predecessor, of 4,900
shares of stock in the Company's predecessor, an amount equivalent to 19,215,686
shares of the Company's common stock. The complaint seeks alternative forms of
relief, including, among others, (1) rescission of the sale of the shares
transferred by Plaintiff or (2) damages of not less than $235 million, together
with interest. The Company believes that it has meritorious defenses to this
lawsuit and intends to defend it vigorously. There can be no assurance that the
Company will prevail in this lawsuit and any unfavorable ruling or judgment
against the Company in this lawsuit could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
     As of August 13, 1998, the Company was not aware of any additional lawsuits
that were pending that could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     At the annual meeting of stockholders of Digital Lightwave, Inc. on May 15,
1998, the stockholders voted on two proposals. The first was a proposal to elect
Dr. Bryan J. Zwan, Dr. William F. Hamilton, William Jefferson Marshall, and
William Seifert as directors of the Company. The following table sets forth the
votes in such election:
 
<TABLE>
<CAPTION>
DIRECTOR                                                      VOTES FOR    VOTES WITHHELD
--------                                                      ----------   --------------
<S>                                                           <C>          <C>
Dr. Bryan J. Zwan...........................................  24,828,055       74,990
Dr. William F. Hamilton.....................................  24,830,055       72,990
William Jefferson Marshall..................................  24,830,055       72,990
William Seifert.............................................  24,830,055       72,990
</TABLE>
 
                                       13
<PAGE>   16
 
     The shareholders also voted on a proposal to approve the 1997 Employee
Stock Purchase Plan. The following table sets forth the votes in such election:
 
<TABLE>
<S>                                                           <C>
Number of Shares:
  Voted For.................................................  24,581,430
  Voted Against.............................................     294,449
  Abstentions...............................................      27,166
</TABLE>
 
ITEM 6.  EXHIBIT AND REPORTS ON FORM 8-K
 
     (a) Exhibit
 
<TABLE>
<CAPTION>
EXHIBIT        DESCRIPTION
-------        -----------
<C>       <C>  <S>
 27            Financial Data Schedule (for SEC use only).
</TABLE>
 
     (b) Reports on Form 8-K
 
     On April 1, 1998, the Registrant filed with the SEC a Current Report on
Form 8-K reporting, among other items, its actual results for its fiscal year
ended December 31, 1997; an extension for filing the Form 10-K; and preliminary
sales estimates for the first quarter of 1998.
 
     On July 23, 1998, the Registrant filed with the SEC a Current Report on
Form 8-K reporting that the Company had entered into a memorandum of
understanding with respect to the proposed settlement of the consolidated class
action complaints filed in the United States District Court for the Middle
District of Florida against the Company and certain other defendants as well as
the signing of a non-binding letter of intent with respect to the private
placement of up to $15.5 million of convertible securities to be issued by the
Company.
 
                                       14
<PAGE>   17
 
                                   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.
 
<TABLE>
<S>                                            <C>
                                                               DIGITAL LIGHTWAVE, INC.
 
Date: August 14, 1998                         By:               /s/ BRYAN J. ZWAN
                                                 ----------------------------------------------------
                                                                    Bryan J. Zwan
                                                   Chairman, Chief Executive Officer and President
                                                            (Principal Executive Officer)
 
Date: August 14, 1998                         By:              /s/ STEVEN H. GRANT
                                                 ----------------------------------------------------
                                                                   Steven H. Grant
                                                         Executive Vice President -- Finance,
                                                        Chief Financial Officer and Secretary
                                                     (Principal Financial and Accounting Officer)
</TABLE>
 
                                       15